May I offer my congratulations to the Managing Director for the excellent report he placed before us of the operation of monetary policies in the member countries. I would also like to take this opportunity to extend my welcome to these four countries which are becoming members in the Fund.
Statement by the Governor for India1—T. T. Krishnamachari
May I offer my congratulations to the Managing Director for the excellent report he placed before us of the operation of monetary policies in the member countries. I would also like to take this opportunity to extend my welcome to these four countries which are becoming members in the Fund.
The Managing Director toward the end of his speech said that he felt embarrassed because much of what he said in his speech was telling member countries “how not to do it.” He need not have been so modest. We are meeting today against the background of a year of the most intense activity on the part of the Fund. The Annual Report for 1957 bears testimony to the wide variety of problems which the Fund has had to deal with and, in dealing with them, the Fund has shown an understanding and a flexibility of approach of which it can be justly proud.
As many as 16 member countries, including India, had recourse to the Fund during the year, and I want to take this opportunity of expressing my appreciation of the promptness and sympathy with which our request for accommodation from the Fund was attended to.
In a way the promptness of the Fund’s decisions in 1956–57 is a tribute to the ground that was carefully laid in earlier years and I am glad to note that the Executive Directors have drawn attention to this fact in their Report. Over the years, the Fund has adapted its procedures to suit changing needs and has evolved new rules for the use of its resources—rules regarding the gold tranche, stand-by arrangements and waivers—and there is now general appreciation of the new pattern of Fund assistance that is emerging. As the Annual Report2 of the Executive Directors points out, the Fund has used its right to grant the waiver required to permit a member to draw more than 25 per cent of its quota during a twelve-month period sufficiently often to make it clear that this is not to be regarded as an extraordinary procedure. I am glad the Managing Director has drawn our attention to this fact. It is equally clear now that drawings beyond the first credit tranche would be permitted whenever there is substantial justification for such drawings and whenever a member is itself making reasonable efforts to solve its problems. All this marks a substantial progress in evolving a policy which is both prudent and effective.
If we are meeting today against the background of a year of fruitful and intense activity on the part of the Fund, it is equally true that we are meeting at a time when the economies of many member countries are under considerable pressure. The Fund is essentially, as has been pointed out by the Managing Director, like a first-aid unit and a great deal of activity of such a unit is also indicative of a great many accidents and dislocations. The malady which afflicts so many members of the Fund today springs essentially from the same cause—an excess of demand over supply. In this respect, what we witness today in several industrially advanced countries is not very different perhaps from what is also happening in many so-called underdeveloped countries. I think I am right in saying that the basic objectives of policy today are also more or less the same in most countries, irrespective of the stage of development. Our common objective is to bring demand and supply into greater balance.
We in India are seeking development with stability. To ignore stability would be to ignore the verdict of experience that inflation and economic development go ill together. More than anything else, the psychological damage and mutual ill will that inflation engenders among different groups within the country make it impossible to have any concerted economic policy. In this respect, the countries in the process of development are no different from economically advanced countries, although the comparative lack of resilience which characterizes underdeveloped countries makes it even more necessary for such countries to pay the utmost heed to the claims and principles of financial stability, which were enumerated by the Managing Director in his statement.
What distinguishes the situation in the less advanced countries from that obtaining in the more advanced countries is not so much the objective in view as the over-all framework of policies within which the objective of financial stability has to be achieved. Countries with high levels of financial stability and investment and a reasonable level of economic prosperity can afford to curtail investment in order to bring demand into greater balance with supply. But countries such as India which are trying to break through the initial barrier of low savings, low investment and extreme poverty cannot afford to curtail demand by cutting back investment to any significant extent. To do so would be to slide back inevitably into the groove of stagnation. In such cases, the objective of better balance between demand and supply must be satisfied by a steady and intensive effort to raise resources rather than by giving up the game even before the battle is joined. Reasonable financial stability is necessary for development, but may I say more: mere stability is not enough. While we want stability, we do not want stagnation.
I am aware that, in suggesting that any temporary disequilibrium or disturbance in comparatively poorer countries should be corrected essentially in terms of enlarging resources, I am in fact saying that the accent of policy should be on increasing productivity and on restraining consumption. I am equally aware that, in the short run, there are definite limits to an increase in productivity and that restraining consumption is by no means an easy task in countries where current levels of living or consumption are abysmally low. But there is hardly any underdeveloped country where productivity cannot be increased even in the short run by intensive organizational and other efforts. And even a poor country has to meet the challenge of higher savings and higher tempo of development.
I would certainly not deny that there are limits to this approach of enlarging resources—of raising savings and productivity. But the limits to the enlargement of resources can be ascertained only by making the maximum effort in this direction. A policy of stretching resources to the maximum is bound at times to give rise to certain stresses and strains—and it is here that institutions like the Fund can play a valuable part in providing, as the Managing Director indicated, the necessary breathing time. More often than not, developing countries come up against the balance of payments barrier even before they reach the inflation barrier so that the enlargement of resources necessarily implies that their internal resources have to be supplemented by an inflow of capital from other countries.
This general thesis is well illustrated by the difficulties into which India has run, despite what I might submit is a careful husbanding of its resources. The Indian economy has been under considerable pressure in recent months—a pressure which has manifested itself partly in rising prices but mainly in declining reserves. As I indicated earlier, we have had recourse to the Fund to the extent of half our quota during the past 12 months. Our difficulties stem essentially from our developmental efforts—and I think the management’s characterization applies fully, because our pains are the pains of growth. Whatever the reasons, however, for the pressures that have arisen, the important thing is to deal with them effectively so as to restore a greater degree of balance to our economy.
We have taken the view that, in the light of recent trends in the economy, we should reduce deficit financing to below the levels originally contemplated in our second Five-Year Plan. That means correspondingly greater effort to raise resources through taxation, small savings, and public borrowing. I am mentioning our experiment in dealing with this situation because I think the governments of various countries will be interested to know what an underdeveloped country does in relation to the problem as stated by the Managing Director in his introductory speech. The additional taxation we have levied at the Center, together with the contribution made by the States, is expected to yield during the plan period some $1,600 to $1,800 million as against the plan target of about $900 million. Thus, in the very first 14 months of the plan, we have made a substantial upward revision in our taxation target and in our taxation effort. Taxation of many commodities, like sugar and cloth, which are in common consumption, a tax on railway fares and more especially the lowering of the income-tax exemption limit, new taxes such as a capital gains tax, a wealth tax, and an expenditure tax have all been attempted and are all indicative of the determination of the Government to make the tax structure at once broad based, flexible, and progressive. Whatever the modifications we may need here in the light of experience, I think we can reasonably claim that the tax effort we have made so far is sizable by any standards.
Simultaneously, we are pursuing our efforts to mobilize savings—and with this end in view we have raised the yield on small savings and market loans. The efforts to ensure the greatest economy in public expenditure have been intensified.
In the field of monetary policy, we have steadily improved on our selective controls so as to minimize undesirable investments and have also made upward adjustments in the interest-rate structure. Since this matter is to be discussed in detail at another session1 where the Governor of our Central Bank will participate, I do not wish to say anything more on this subject at present.
Together with efforts to mobilize resources, we are intensifying our drive to raise production, particularly agricultural production, by means of greater organizational and other effort. On the whole, we are reasonably confident, on the basis of what we have already done, that we shall be able to enlist the support of the people for such additional measures as may be required to augment internal resources.
We have taken no less determined steps for the conservation of our foreign exchange resources. We have had to restrict our imports drastically and are not permitting any new imports of capital goods—whether for public or for private projects—for expansion and establishment of new units except on the basis of sound deferred-payment terms, foreign participation, or foreign credits or similar means. To facilitate foreign credits, we have exempted interest earned by foreigners from our income tax in approved cases. Efforts to promote exports are being intensified. We shall, of course, need to keep a very careful watch on our payments situation in the months to come. As I indicated a moment ago, we are limiting all further commitments in regard to new investment to the availability of foreign credits. Since we have not entered into foreign exchange commitments in regard to a significant part of our plan, our policy now implies that the implementation of the plan is strictly conditional on improvement in our payments position.
I do expect the Governors and members will realize the truth of the statement made by the Managing Director that the present situation is not all of one pattern. The pattern that India represents is perhaps slightly different, but of great relevance and value, I suspect, to other countries similarly placed.
Before I conclude, may I take this opportunity of paying my tribute to the new Managing Director of the Fund, Mr. Jacobsson, and his able colleagues in the management. As has been so amply demonstrated as we heard him speak this morning, it is extremely fortunate that the Fund has at the helm of affairs a financial expert of Mr. Jacobsson’s eminence, particularly at a time when its activities are expanding so rapidly. We in India look forward to Mr. Jacobsson’s taking an increasing interest in our affairs. The staff have had to work very hard during the year, and the ability and understanding with which they have handled the complex variety of problems entrusted to them deserve our highest praise.
Statement by the Alternate Governor for Bolivia1—Santiago Sologuren
The Bolivian Delegation to the International Monetary Fund takes great pleasure in expressing to the Managing Director and to the Executive Board the cordial greetings of the Bolivian Government, and congratulations to the staff for the magnificent work undertaken in the presentation of the most important monetary and exchange developments during last year.
After having maintained for a quarter century an exchange control system and currency inconvertibility, on December 15 of last year, Bolivia put into effect a radically different monetary policy. Export and import licenses were completely abolished and all exchange transactions, regardless of origin or purpose excepting those of the official agencies, were declared free.
Instead of multiple rates which existed in effect, a single rate was established when the new exchange system was adopted at a level which corresponded to the real factors of our economy. The new exchange rate can fluctuate in accordance with the development of basic forces or of factors in the economy which determine the value of money, and which, in the final analysis, become translated into the law of supply and demand. The value of the Bolivian currency in the exchange market will then be a reflection of the economy.
Fiscal measures were adopted to avoid the disequilibrium in the government budget and to restrain inflation, and the freezing of wages and salaries was decreed for a year. In this manner, Bolivia has carried into practice the fundamental principles of monetary and exchange policy embodied in the Bretton Woods Agreements.
As a consequence of these measures, the free market exchange rate improved in a radical manner. Queues for the purchase of rationed articles disappeared, and there was a considerable abundance of domestic, agricultural, manufactured, and imported articles in the commodity market. Public confidence in the value of money returned and the flight from the boliviano disappeared, a factor which had become increasingly critical during the closing months of 1956, when inflation was becoming more acute month by month.
The experience obtained by the Bolivian people in the last 25 years in monetary matters has been painful but instructive. We personally experienced the pernicious effects of inflation and currency depreciation, as well as the negative influence of exchange control and multiple rates on the national economy.
We have seen how, through the destructive effects of inflation and exchange control, the accumulating domestic savings, instead of remaining in the country for investment in the creation or expansion of new enterprises dedicated to the production of goods or services, migrated abroad, weakening our economy, and strengthening the economies of other countries. We have likewise seen the reluctance of foreign capital in flowing toward Bolivia deterred by the fear of exchange instability and of the exchange control measures, thereby losing for our country the opportunity that our great natural resources, both agricultural and mineral, offer for our benefit and that of all democratic countries.
Having sanctioned a petroleum code in the previous year which treats the interest of the country and of foreign investors in an equitable manner, important American and European companies have begun to request exploration concessions and some for direct exploitation with favorable perspectives for the development of the petroleum industry.
The monetary and economic reform measures carried out since December have resulted in obscuring to some extent the good results obtained in the monetary field, the contraction in general consumption and the appearance of unemployment, particularly in the textile factories, whose exports were artificially stimulated by the inflation and the consequent modification in the official exchange rate. The Government of Bolivia will shortly put into effect a plan for the transfer of dismissed workers to the country so that they may engage in agricultural pursuits.
With regard to the manner of increasing the consumption of the people in order to raise their standard of living, we hold the conviction that the only adequate means consists in increasing productivity of both enterprises, workers and employees. For this purpose, we urgently need capital and the application of the most modern techniques.
We consider that the reform of our monetary system through the abolishment of exchange controls and import permits, the adoption of a single rate for all imports and exports, and the halting of the inflationary process is not an end in itself but only the most efficient means of promoting the economic development of the country and the diversification of our industries.
Bolivia cannot continue living only from the exportation of tin, nor can the development of its economic activity remain subordinated to the mining industry which is so vulnerable and susceptible to economic cycles. Monoproduction has been and continues to be the cause of our economic weakness and, for this reason, it is absolutely indispensable that we develop other export industries, such as agricultural and forest products, so that the country can produce at least the basic food articles.
To lay the monetary and exchange foundations on which to develop the diversification of our economy, we have received the important cooperation of the International Monetary Fund as well as its technical assistance. Our cordial thanks for such invaluable assistance.
Undoubtedly the financial, economic, monetary and exchange measures which we are putting into practice applied to an underdeveloped economy such as ours are causing those deep disturbances which arise in deflationary periods. To overcome such difficulties which could endanger the good results achieved up to the present time, we trust that the Fund will continue to provide us with its valuable cooperation.
Statement by the Governor for Greece1—Xenophon Zolotas
I would like to congratulate the Executive Board and the staff of the International Monetary Fund for the interesting Report which they prepared. I also wish to express our thanks and high appreciation to Mr. Jacobsson for his lucid and penetrating statement.
The last fiscal year has been indeed a very busy one for the Fund. The hitherto stagnant reserves of the Fund have been to a very large extent activated. This sudden change, although quite within the framework of the functions and tasks of the Fund, does create certain problems which are from many aspects discussed in the Report. These questions are quite serious and of direct relevance to the role assigned to the Fund and you will permit me to make a few comments on them.
Since the last Annual Report and until September 20 of this year, the Fund has made available to member countries a total amount of US$1,566 million. During the same period, repurchases of currencies reached US$116 million. These operations led to a corresponding substantial reduction of the Fund’s assets in gold and convertible currencies. In addition, account must be taken also of the fact that, during the same period, stand-by arrangements granted or extended reached a total amount of $1,311 million. In this way, the aggregate of new advances plus stand-by arrangements is a total of $2,877 million. This vastly increased activity of the Fund raises mainly the following two questions:
1. What principles should govern the extension of such advances and other Fund facilities; and
2. Are the reserves of the Fund adequate for the continuation of such an extended activity as the one developed during this last fiscal year?
I need not emphasize before this assembly that the ultimate goal of the Fund is the achievement of multilateralism in international trade and payments and currency convertibility in all member countries. The Fund, however, is not a supernational organization exercising authoritative powers over the member countries. Consequently, the objective of convertibility and multilateralism can be pursued by the Fund mainly in two ways: First, through consultations and collaboration as provided by the Agreement, and, second, by the conditions which are imposed on member countries when facilities of the Fund are extended to them. The practice of consultations has been well developed already by the Fund primarily with countries which have still in force exchange restrictions, and those are perhaps the more numerous. Advice and technical assistance also have been provided by the Fund to a number of countries and have been most valuable in the management of their financial affairs. But, of course, the power of the Fund becomes particularly effective in supporting sound monetary practices when member countries are submitting applications to the Fund for financial assistance. On those occasions, the Fund has the opportunity to provide specific advice and make constructive recommendations for the use of its reserves in a manner which would contribute to the internal and external monetary equilibrium of the applicant country. Such a policy would not only provide good services to the country concerned, which, in many cases, would feel hesitant in applying painful measures for the re-establishment of its financial stability, but also secure the timely repurchase of the currencies sold. It would be most regrettable if advances of the Fund, instead of being used in connection with corrective measures, were utilized for the perpetuation of unsound financial situations. In the past the Executive Board of the Fund has studied precisely these questions and has established certain rules for the use of drawings above 50 per cent of a country’s quota. It has provided that, in the case of such drawings, there should be justifications supporting the use of funds in connection with policies leading toward sound financial practices. This year’s Annual Report1 explicitly states:
In the conditions of today, the general principles set forth in recent Annual Reports as governing the use of Fund resources beyond the first credit tranche mean that members’ requests for such drawings or stand-by arrangements are likely to be favorably received where they are intended to support well-balanced and adequate programs which are aimed at establishing or maintaining the enduring stability of the currencies concerned at realistic rates of exchange, and may therefore reasonably be regarded as establishing the conditions for substantial progress toward convertibility.
As Mr. Jacobsson said this morning in his very comprehensive and inspiring statement:
… requests for drawings within the next 25 per cent are also treated liberally but, even so, such requests will only be approved if the country asking for assistance can show that it is making reasonable efforts to solve its own problems. For drawings beyond that tranche, substantial justification is required, and among the justifications foreseen are transactions in support of the establishment or maintenance of convertibility.
I believe that the management of the Fund in this respect is on the right track. I also think that, in order to make its policies more effective, we, in the assembly, should give full support to the management of the Fund in any action aiming at the application of sound fiscal and financial measures and policies by the member countries requesting the Fund’s financial assistance.
The functions of the Fund under these conditions could develop and exert a more effective influence. This matter needs, of course, serious study by the Executive Board and the staff, as well as careful and balanced application in order to avoid interference with the sovereignty of member countries. And, of course, uniform treatment of all countries should be ensured. Such a policy would also act as a check to applications for drawings not adequately justified and would accordingly secure the reserves to be used in cases where member countries are genuinely willing to pursue sound and corrective policies. I think that, unless the Fund is strengthened in its policies and supervisory responsibilities, we shall continue speaking about those principles and desirable goals of convertibility and multilateralism without reaching them in practice.
My second point concerns the adequacy of the reserves in connection with the better fulfillment of the Fund’s tasks which is also linked with the Fund’s ability to influence monetary policies in the member countries. Its recent operations have shown that the use of the Fund’s reserves at the same pace might rapidly exhaust its resources. I, therefore, propose again that the matter of increasing the Fund’s reserves be examined. In the light of the economic and financial developments since the time of the initial determination of quotas certain readjustments seem to be necessary.
The International Monetary Fund is, in fact, an international reserve bank for central banks and treasuries. All member countries are entitled to use the Fund’s facilities as a second line of reserves. Therefore, the strengthening of the Fund’s resources could substantially contribute in a world of so many uncertainties to the achievement of the ultimate goal of convertibility and multilateralism. The awareness that adequate reserves are available with the Fund and that they can be used at any moment for the support of sound financial policies would effectively facilitate the establishment of more normal international monetary conditions. It is for this reason that we should give careful thought to the proposal for increasing the Fund’s resources. One possibility would be a revision of the quotas with a view to increasing particularly those of the surplus countries. Another possibility would be to permit the Fund to establish standby arrangements with creditor countries whereby the Fund could at any time draw additional resources from these countries for the purpose of making corresponding advances to deficit countries. A certain relationship between stand-by arrangements with the creditor countries and stand-by arrangements with the debtor countries could be established. And, of course, the policy of selling nondollar currencies to countries which are in deficit should be consistently pursued in order to avoid a rapid exhaustion of the Fund’s dollar reserves.
I am confident that decisions along these lines would substantially strengthen the International Monetary Fund as an international reserve bank and would enhance its authority in supporting sound monetary policies by member countries as well as in promoting the achievement of convertibility and multilateralism in trade and payments.
Statement by the Governor for the United Kingdom1—Peter Thorneycroft
I would like to congratulate Mr. Jacobsson on the speech which he has made to us this morning. I would also like to congratulate him, the Executive Board, and the staff on the Annual Report for 1957. It is a lucid and a vigorous document. It is, of course, a photograph of a moving picture; but it is a good photograph of the economic conditions prevailing in the world when it was written. And I think the first thing I would say about it is this. It reflects a period of formidable strain engendered by the Suez crisis. The fact that we have all of us recovered from that strain is a remarkable demonstration of our underlying basic strength. It should encourage us in the tasks we face today.
There is, perhaps, no such thing as normality either in public affairs or in international finance. We move from one set of problems to another. We are living in the midst of a period of strain today—strain arising from circumstances not referred to in the Report, since they came upon us since the time when it was written. I refer to the sudden worsening of the imbalance in Europe which has been the main concern of European countries in the last two months. In August, France took certain measures in the field of exchange. These events gave rise to rumors that changes in the parity of sterling and the deutsche mark were imminent and speculation became widespread.
Let me say this about sterling straightaway. I have not come here even to discuss the exchange rate parity of the pound. It stays at $2.80. Nor shall we allow the margins to widen. I stated this before I left London, and I repeat it now.
The German Government have been equally emphatic that the existing exchange rate of the deutsche mark will be held where it now is. Thus, the policy on the exchange rate of Germany and the United Kingdom is definitely determined and that is that.
This Meeting of the Fund presents me with an opportunity of elaborating a little upon three matters. First, the measures which my Government has taken internally; secondly, our resources for dealing with speculation; and thirdly, our prospects for external trade. These provide a powerful reinforcement to the policy which I have just declared.
First then as to internal measures. I take them first because, as I said in a statement which I made before I left London, “The value of our money cannot be sustained unless we as a nation pursue the right policies at home.” Inflation in one form or another has been a continuing threat since the war to most of the member countries of the Fund. The checking of inflation is a prerequisite to any steady advance in the growth of real wealth. Before leaving the United Kingdom, I announced certain action which we propose to take. Economists on both sides of the Atlantic debate as to whether the inflation which they see here in America or elsewhere is caused by the pressure of wages or the pressure of demand. For my own part, I believe that these distinctions can be academic and even dangerous. In practice, the two forms of inflation march forward together. Each serves to feed the other.
The purpose of the measures which I announced before leaving London has been to go to what I conceive to be the root of any inflation—namely, the supply of money. Let me repeat what I said: “There can be no remedy for inflation and the steadily rising prices which go with it which does not include, and indeed is not founded upon, a control of the money supply. So long as it is generally believed that the Government are prepared to see the necessary finance produced to match the upward spiral of costs, inflation will continue and prices will go up.” What is needed to bring it to a halt is for the Government to be prepared to deny the extra cash, whatever other painful consequences may follow.
Our purpose then is to limit the money supply. The raising of the bank rate from 5 per cent to 7 per cent was a step—an important step but only one step—in the process. If you wish to make money scarcer, it is reasonable and proper to make it more expensive. But we did not stop at that. The sharp change in the bank rate has perhaps distracted attention from the full force and purpose of the policy as a whole.
We have already taken steps to limit the Government’s expenditure, but this is by itself not enough. Under the recent measures, we have fixed in money terms for a period ahead the total available for public investment on such things as housing, schools, railways, electricity and so forth. We have taken similar action to restrain expenditure in the private sector by limiting the level of bank advances. Thus we have put ourselves in a position effectively to restrict the money supply over a wide field. Against this background, if an attempt were made to take out of the system in money income more than is put in by new effort and production, the only result would be a reduction in activity and the employment of fewer men.
The only other thing I would say about these measures is that I am confident that they will be effective. They will, indeed, be pushed to the lengths necessary for that purpose. If inflationary pressures grow inside the economy, other things may alter, other aspects of policy may have to be adjusted, but the strain will not be placed upon the value of the pound sterling. So much for our internal measures.
Next as to speculation. Our difficulties in recent weeks have been due not to lack of competitive ability as a trader, but to speculation. This continued during the month, and will be reflected in the next published figures of our reserves and of our position in the European Payments Union, although it is right to mention that our reserves and European Payments Union position are in any case seasonally under pressure at this time of the year. The clear statements already made on the question of exchange parities, coupled with what I have said about internal measures in the United Kingdom and am about to say upon external trade, will, I hope, bring this speculative pressure to an end. Let me make it clear, however, that we have ample resources to deal with it, should it continue, and we shall not hesitate to use them.
First, we have gold and dollar reserves of about $2 billion. Then there is the stand-by of about $750 million approved by the Fund. We also have the line of credit of $500 million with the Export-Import Bank. I am now making arrangements to draw, over the coming weeks, the funds available under this export-import line of credit.
Finally, as to our trading position. It is a strong position. It demonstrates why the present parity of sterling is the right one. When we looked at our prospects last December, we said publicly that at best we would be in external balance over the year to June 1957. We had no thought then that we should be able in the disturbed conditions to earn the surplus on our external trading which is so essential to us. Later on, it looked as though our prospects might improve, and I told Parliament that we could hope for a surplus of about £125 million, say $350 million. Actually, the final figure will be just over £200 million, say $600 million. A surplus of $600 million is, on any reckoning, a solid achievement. Looking forward, the trends in our economy suggest that we shall have a bigger surplus in the 12 months ending June 1958. Our exports have risen and continue to rise. Over the last three years, our exports to the United States have risen by as much as two thirds. This is not the picture of a declining currency. Our current trading balance, therefore, shows clearly that our parity is right.
So much for our own activities and intentions. A few words as to the problems and activities of others—I will refer to only two.
First, as to Europe. The postwar development of Europe has been an inspiring and, indeed, romantic achievement. Erstwhile friends and foes have combined in order to contrive it. In the process, there has been established a more lasting basis for friendship than ever before. Perhaps these opportunities could never have been seized—and certainly we would not have got so near to the even greater opportunities which lie ahead—without the unselfish and indeed generous assistance of the United States, inspired in the first instance by that great American, General Marshall. The main threat to these achievements is the imbalance in Europe, which has been greatly aggravated in recent months by speculation on the exchanges. As a result of the statements made, the questions of exchange rates can be regarded as definitely dealt with. I hope, therefore, that future consideration of these problems of European imbalance and cooperation will take place in a calmer atmosphere and without the burden of recurrent exchange speculation. I wish to emphasize that the question of exchange rates must now be regarded as settled and will not be reopened in any discussions of these matters.
Second, the problem of the reserves of the free world—what the experts inelegantly call “international illiquidity.” Since World War II, there has been a remarkable expansion in world trade. Year by year we have been selling more to one another. Many factors have assisted in these processes, among them the system of multilateral trade and payments. It has been a great and for the whole world a rewarding experience. A prerequisite of this system is adequate reserves to cushion fluctuations in the balance of payments of the member countries. In no other way can corrective measures be taken smoothly and effectively. The increase in reserves has not kept pace with the increase in world trade. Since 1937, the value of world trade has increased fourfold, whereas reserves have barely doubled. There are seeds of danger in all this.
All of us have our role to play in this matter, debtors as well as creditors, but the policy of the United States is, because of its very size, crucial to these issues. In the five years since 1952, the United States had a surplus on visible trade of around $14 billion. The important point, however, was that this surplus was more than offset by Government expenditure abroad, private capital investment and aid. The net result then was not an inflow of dollars, but an outflow of gold and dollars of nearly $7 billion.
That is the contribution of the United States. Its size and importance is in direct proportion to our concern about the future today. About a year ago the tide turned and began to run the other way. The gold and dollars began to flow in instead of flowing out. It is a short period to form a judgment—certainly very short compared with the years over which there was a net outflow of dollars. I mention the fact, however, not in order to complain but because the U.S. position is dominant in the economic development of the free world. It must always be a major factor in our thoughts. The outward flow of money in one form or another and by one means or another from creditor countries is an absolute prerequisite to the continuation of liberal trading policies in the world outside.
We in the United Kingdom have also made our contribution to the expansion of world trade since the war. Our currency finances more of the world’s trade and payments than any other. It is a world interest that it should continue to do so. We have also provided over £900 million, or over $2.5 billion, for overseas investment during the past five years. No country in relation to its wealth has done more.
These, then, are our policies. We intend to stand by them. As to the problems which remain, none of them are insoluble if we continue to show the resolution and cooperation which in the past has been characteristic of the members of the Fund.
Statement by the Alternate Governor for the Federal Republic of Germany1—Hans Karl von Mangoldt-Reiboldt
When we met last year, there was some heart searching in our midst as to the reasons for the relative inactivity in the use of the Fund’s resources, as some of you may remember. Today, we are faced with an entirely different situation. Since our last meeting 12 months ago, the Fund’s financial activity was greater than during the whole of the preceding ten years of its existence. And it is not without some gratification that Mr. Jacobsson has dwelt on that record of the Fund’s lending activity.
The Fund, indeed, has never had a better opportunity to show its wide scope as an international reserve pool than during that period. The Fund is, however, not simply a lending agency whose usefulness can be measured in terms of its expanding loan activity and business profits. Have the drawings and credit lines which were granted to more than a dozen member countries been put to good use? Have they not aggravated the international inflationary pressures which, as the Annual Report points out, were still the main problem confronting the world economy during the past year?
In looking back over the recent past, I think we may be satisfied at the record of the Fund in this respect, too. The Fund, under the able guidance of its Managing Director, has not only lent its financial help but has given effective advice to the member countries as to the elimination of the root causes of payment disequilibria. It has not only maintained its sound lending standards, but also increased its world-wide authority. It is gratifying to see that the Executive Directors have stressed in their Annual Report particularly the importance of the advisory role of the Fund and its interest and efforts in promoting sound economic policies in member countries.
As concerns the Fund’s lending activity, we seem to be faced with a new set of problems today. The question is no longer, as in former years, how to make the Fund a normal secondary reserve for its members, how to familiarize them with its use and with its requirements. The question now is: How best to apportion the remaining limited resources, and how to achieve with them the maximum results, both for single member countries and for the world economy. My general feeling is that the Fund should not hesitate, even with the limited means at its disposal, to give its financial support for really sound stabilization programs based on realistic exchange rates; for, in such cases, the money may return quickly to the Fund again, and may in that way really constitute the revolving fund as it should be. But, on the other hand, the Fund should continue to be careful not to tie up its limited resources with insufficient or half-hearted programs on the part of its members. I think this is in full agreement with what has been said in the Annual Report and what is being suggested in the opening address of the Managing Director.
It seems to me that the vastly increased lending activity of the Fund during the past 12 months is not only a cause for gratification, for it reflects, in part at least, a worsening in the payments position of a number of member countries.
What were the reasons for this deterioration? The Directors’ Annual Report points out two main causes: first, the Suez crisis and, second, overspending in relation to available resources in many parts of the world. After the experience of the last few months we would have to add, I feel, a third reason, namely, currency speculation.
The Suez crisis, as the Annual Report points out, fortunately had not so prolonged or far-reaching repercussions as had been feared originally. The danger of inflationary overspending, however, is still very much in evidence in many parts of the world; but there are some signs that effective countermeasures are being taken here and there. If our Managing Director is right in his opinion that more and more governments and people are becoming aware of the dangers of prolonged creeping inflation, we may feel confident that this disruptive source of payments pressures will gradually be eliminated.
It seems, however, that for the moment our most acute and pressing problem is currency speculation. I need not, in this gathering of financial experts, go into the details of what has happened during the last few months. But it may interest you to know what the impact of the various speculative waves has been on the foreign exchange situation of Germany. During the first eight months of this year, actually more than one half of the foreign exchange surplus accruing to the German central bank was due to speculative influences of one sort or another, be it shifts in bank balances, the impact of forward transactions in foreign exchange, leads and lags in the payments for exports and imports, and the like. In August, these influences accounted probably for two thirds or more of the very large foreign exchange surplus accruing to our central bank. Excluding the effects of these speculative influences, our genuine payments surplus in the first seven months of this year was sizably lower than in the corresponding time of last year. I suppose that there are some Governors here who could tell an analogous story of the effects of speculation on the current deficits in their foreign payments. As a result of all this, the monthly foreign exchange surpluses and deficits of some countries, including my own, have reached very extreme figures during the past few months, and speculation has been feeding on these published figures again, thus creating a sort of vicious circle of speculation feeding upon its own results.
We are here in a meeting on which the eyes of the whole financial and trading community of the world are set. We should not miss this opportunity to clear away, once and for all, the fog and distorted pictures which a misled and misleading speculation and distrust of currency values have spread over a large sector of international financial relations. The German Government, together with the German central bank, issued on August 20, when the speculation on the revaluation of the German mark had reached a first peak, a categorical denial of any intention to alter the dollar value of the German currency. They said:
It is known that the external value of the D-mark, as well as that of most other currencies, is determined by its relationship to the U.S. dollar. As evidenced by all economic data, no change is required in the relationship between the D-mark and the U.S. dollar. Any rumors concerning an intended revaluation of the D-mark are without foundation. The Federal Government and the Deutsche Bundesbank will further maintain the stability of the German currency, a stability which is held in such high regard both within the Federal Republic and in foreign countries.
I am able to state here that this policy remains unchanged. Thus, there is no intention whatsoever in any way to contemplate a change in the dollar value of the deutsche mark, or any change in the margins. We have heard with great interest the statement which the Chancellor of the Exchequer has just made, and we are like him of the opinion that now the question of the exchange rates is definitely settled for our two countries. To get rid of the present speculative distortions in the international payments picture is the very first goal we have to set ourselves. But what about the remaining underlying imbalances? Is there a reasonable prospect of an early return to a better equilibrium in international payments? I think there is, provided there is the right kind of policy on all sides. The Annual Report1 before us stresses that the maintenance of international payments equilibrium is a responsibility not only of deficit countries but also of surplus countries. I may add to this that both surplus and deficit countries have also an equally strong interest in the removal of extreme payments positions. We, at any rate, are very much aware of the drawbacks and dangers of our present surplus position. The impact of foreign surpluses on the German economy and the German banking system has created new and difficult problems for monetary management and has brought with it quite some inflationary dangers. We had to restrain domestic investment demand and thus internal development in order to accommodate the booming demand from abroad without an excessive strain on our economy, in an effort to maintain over-all internal stability.
What now can a surplus country do in order to contribute to a better international payments equilibrium? Certainly an essential contribution would be to maintain and increase its effective demand—within the limits set by internal stability, of course—and to open the door to foreign goods by a very liberal import policy in order to give other countries an increasing possibility of earning the creditor’s currency. There are facts and figures to show that this is exactly what we in Germany have been doing to a very large degree. Let me give you some figures: in the three years from 1953 to 1956, we have increased our purchases from abroad by no less than 74 per cent (while imports in the world as a whole had increased by only 28 per cent during that period); and, in the current year, up to now, our imports are running again nearly 16 per cent higher than in the same period of 1956 in spite of the fact that recently our importers for several reasons, not least among them expectations of currency changes, have tended to delay imports as much as possible. In spite of these distortions and obstacles, foreign countries are earning in 1957 about twice as many deutsche marks by their exports to Germany as they did four years ago. There can be no question, therefore, of the scarcity of the supply of deutsche marks for other countries except in the sense that in a number of countries their demand for foreign currencies, and for deutsche marks in particular, has been inflated even more since 1953.
A further fact worth mentioning is that, during the period since 1953, the rise in Germany’s demand for foreign goods was more than twice as fast as the increase in our domestic demand. One of the reasons for this astonishing phenomenon is, of course, the very liberal import policy followed by our Government. We have, indeed, over the past few years not only abolished to a very large degree the remaining quantitative restrictions on our imports, but also made drastic reductions in import tariffs, and this unilaterally, that is to say, without asking for any equivalent concessions from our trade partners. Including a considerable reduction made only a few weeks ago, import duties on industrial goods have on an average been cut by no less than 45 per cent; and also, vis-à-vis agricultural imports, our import policy has become much more liberal (witness an increase of over 75 per cent in our agricultural imports from the first half of 1953 to the first half of 1957).
So much for the recent past. But what of the future? I think we can be reasonably sure that the general level of demand in Germany and especially the level of import demand will go on increasing. I cannot go here into a detailed analysis of all the various factors that lead us to this judgment. Suffice it to mention two of them: first, the continuous increase in income levels in Germany based on a very large upward movement in wages, salaries, social security payments and the like; and, second, the complete change in our government’s budgetary position from the former cash surpluses to current cash deficits, due to growing social and other public expenditures and not least to the financial repercussions of our incipient rearmament.
While we are pretty sure that our imports will continue their steep upward trend in the future as well, the same is not so likely for our exports. True, export deliveries are still increasing substantially at the moment. But the flow of new orders from abroad has shown, over the last six months, definite signs of leveling off, perhaps as a first reaction to the measures taken by some other countries to restrain excessive demand.
If one takes into account, furthermore, our increasing outlays on foreign military material and on a number of capital and other “invisible” items, it is quite clear that—as concerns our side of the picture—the stage seems to be set for a return to a better equilibrium. This is not a mere hope but has already been confirmed by recent trends; for, as I mentioned earlier, our surplus balance of known foreign transactions—apart from the effects of speculation and currency fears—has this year already shown a declining tendency as compared with last year.
I have dwelt at some length on our balance of trade and on import developments because here, I think, is one of the decisive factors for a future normalization of our payments structure. I know, of course, that many people, especially in other countries, expect an important contribution to that end also from an increase in capital exports by Germany. I would not deny that, viewed mainly from the foreign exchange side, there is much to be said for widening the capital flow from Germany to other countries, which up to now has been comparatively small. But even on very optimistic assumptions, capital exports could not even approach in size the contributions to a better equilibrium which can be expected from rising imports. After all, the increase in our imports to which we have become accustomed over the last few years and which seems to continue at present has added annually an amount of no less than DM4-5 billion to the foreign exchange earnings of our trading partners.
Moreover, our internal German situation has, up to now, not been particularly favorable to a resumption of capital exports. There is in Germany an internal capital shortage due to large development needs, and our interest rates are on the high side. Our Government considers it as one of its main objectives to improve the functioning of our capital markets. I may add that recently interest rates in Germany have slowly been falling—in contrast to the tendency everywhere else—and only a week ago our central bank was able to reduce the rediscount rate for the third time in succession since the autumn of 1956. As concerns the possibility of large-scale capital exports I do not want, however, to raise exaggerated hopes. It will take quite some time before there is a real chance of normal commercial capital exports from Germany appearing feasible and likely on a larger scale.
Our authorities have in the meantime done a good deal in the way of public capital exports. We have released the remaining part of our local currency subscription to the World Bank and, besides that, our central bank has recently lent to the World Bank no less than a total of $175 million. Moreover, apart from some advance payments on future deliveries of armament goods, we have made important anticipatory payments on our public foreign debt. All these measures have worked also in the direction of diminishing the present strain on the international payments situation, and I have no doubt that our authorities will endeavor to find similar ways of working in that direction in the future also.
There is no possibility, however, of bridging in whatever way, by balance of payments credits or otherwise, imbalances of the magnitude that have of late arisen from speculation and currency fears. Moreover, such balance of payments credits can only be a short-term or at the most a medium-term stopgap measure, in order to buy time until the efforts to bring about a real equilibrium in the basic payments situations have produced results. They will, therefore, be no lasting cure. They have to be accompanied by effective remedial action, that is to say, by combating inflationary pressures and overspending. If this is done by common and continuous efforts—and I see good prospects for that in various parts of the world—there is no reason why the payments situation should not in time straighten itself out. The Fund, by giving a helpful hand in the necessary coordination of national policies, will no doubt play a useful role in this context, and we shall be glad to make our full contribution to this effort.
Statement by the Governor for Canada1—Donald M. Fleming
I speak as the newest recruit to that group of virtuous men commonly called ministers of finance who, in due course, become round-shouldered from bearing many burdens and taking responsibility for everything that goes wrong at home and abroad. My remarks will have brevity, if nothing else, to commend them.
There has been a change of Government recently in Canada. I am sure it is not necessary for me to do so but, on behalf of the new Government, I should like to reassert the firm attachment of Canada to the principles of international cooperation embodied in the Fund and the Bank Agreements. The Annual Reports before us, the interesting remarks of the Managing Director of the Fund and the President of the Bank, and the comments which have been made by many of our colleagues at these Meetings provide impressive evidence of the usefulness of these institutions and the high importance of the functions which they perform.
The Managing Director has made reference to the proposals put forward at the Annual Meeting a year ago by my predecessor concerning the organization of the work of the Executive Board. I am pleased that Mr. Jacobsson has found some merit in these suggestions and that he has taken some steps and indicates that he will be taking further steps to bring the Fund into closer and more continuous touch with operating officials concerned with monetary and exchange problems in the member countries. I have no doubt that the desire of all Governors is to make the Fund in ever-increasing measure an effective and vital institution. Our ideas concerning organization, as well as other subjects, cannot be fixed, static or immutable. I am confident that we shall all feel free to raise from time to time questions pertaining to organization when experience has been gained with the proposals put forward by the Managing Director in response to the Canadian suggestions.
The other subject upon which I wish to make a brief comment relates to the important matter of international liquidity. During the past year, a number of members of the Fund have, for one reason or another, suffered exchange difficulties and the Fund has been helpful in providing time, as the Managing Director said, to overcome the causes of their difficulties. It has been a source of great satisfaction to the Canadian Government that most of the countries concerned did not have recourse to new exchange or import restrictions to deal with their difficulties but, instead, attacked those difficulties at the root. We in Canada have, in a sense, a personal interest in this matter, as we would no doubt have been adversely affected by any fresh wave of import restrictions. But apart from our own particular interest, the history of the postwar period, much of it embodied in the Annual Reports of the Fund, provides impressive evidence that exchange restrictions create as many problems as they solve for the countries applying them.
The Fund and the Bank and all member countries can fully depend at all times upon the cooperation of Canada and its desire to make these institutions fruitful and beneficent in contributing to stability, order and prosperity among nations.
Statement by the Temporary Alternate Governor for the United States1—W. Randolph Burgess
Let me join with others in expressing great satisfaction with the Report of the Fund which we have before us, with its completeness and the quality of its analysis of the problems with which we are faced.
Let me particularly express our appreciation for the brilliant address given this morning by Per Jacobsson at the conclusion of his first year with the Fund. I think we all will carry home with us a new understanding of the problems we have faced and a new faith in our power to solve them.
I was particularly impressed by his analysis of the European situation, and, for my country, let me also express very great satisfaction at the very firm statement that has been made by the representative of the United Kingdom and the correspondingly very helpful statement by the representative of the Republic of Germany.
This has been, as has been said, a very active year for the Fund, as the Report and the address of the Managing Director have amply set forth. The Fund’s actual transactions have reached an all-time high and it has also increased the amount of its stand-by arrangements to a record level. If there were any doubts before, certainly now the Fund has amply demonstrated its great value to the member countries. It has shown its capacity to support confidence in currencies at crucial moments, and to meet difficult situations swiftly, effectively, and quietly.
That the Fund could meet the challenge of the events of the past 12 months is not an accident. It is due to three main facts. The first is that the Fund established a body of principles to guide it and the members both in the devising of policies and in the use of its resources. The second is that the Fund patiently acquired experience during the quieter years of its existence. The third is that through analysis and through consultation with members, the Fund has assisted members in devising sound policies and programs of action.
First, a word about consultations. The Fund’s consultations with its members during the past year have carried missions to many countries. On the occasion of these visits, either as part of the annual consultation or as the result of special requests, the Fund has had an opportunity for frank discussions with the responsible officials of the member countries. It has given sound advice, which in a great many cases has been followed with good results.
A number of countries have undertaken general programs of financial stabilization or exchange reform with the Fund’s advice. Others have taken less conspicuous, but nonetheless significant, steps to improve their international position by domestic measures or by simplification of exchange structures. Stand-by arrangements with the Fund have given several of these countries effective support.
The Fund Report ably summarizes the financial situation of the member countries. It notes the general increase in gold and dollar reserves on the part of members, and also shows that this accretion of monetary reserves has not been uniform, and that some countries have lost reserves. The Fund Report1 notes that, in 1956, other countries gained $545 million in gold and official dollar assets in transactions with the United States, compared with over a billion in the preceding year. I should like to point out, however, that, by making the comparison in terms of official holdings, the Report does not include the dollar holdings of foreign private banks, businesses and individuals. These private holdings, in the form of bank balances or short-term investments, are available for purchasing goods and services from the United States. As exchange restrictions are relaxed, presumably a larger share of dollar holdings will appear in private accounts. This factor should be given its proper weight in surveying changes in the world balance of payments picture, particularly as they relate to dollar reserves.
If private holdings are included, total foreign holdings of gold and liquid dollar assets increased in 1956 by about $1 billion. In addition, foreign direct and portfolio investment in the United States increased by over a half billion dollars, without taking into account unrecorded capital movements that form a part of the sizable residual item in our international accounts. Since the overall figures reflect reduced holdings of about $600 million by international institutions, it would appear that foreign countries actually increased their total gold and dollar assets in 1956 by more than $2 billion.
Now just a word about the world economic situation. Increased production and high levels of employment of resources in labor and materials are the principal means of improving living conditions throughout the world, a fundamental purpose of the free nations as well as of the International Monetary Fund. But, as we all have discovered, prosperity brings difficult problems as do periods of industrial stagnation. The most challenging present task is to reconcile the benefits of prosperity through high levels of production and employment with monetary and price stability, without which many of these benefits will be dissipated through a shrinking value of money. Inflation, as has been said many times in these Meetings, destroys confidence in the future value of currencies, which is the essential basis of all savings. Even now, savings have lagged behind the demand for capital. That every country should strive to push economic development as rapidly as practicable is fully understandable, but what is needed is a steady economic growth based upon noninflationary finance.
The United States is resolved to preserve its economy on a sound basis. This is not for us alone, but for the rest of the world, which needs to know that this country will continue operating at a high level and with financial stability. It is our judgment that there is no contradiction between these two objectives. We have tried to deal with our inflationary trend by those well-known devices of a budgetary surplus, or a small one, and a tightening of credit rates and interest rates, in response to the increasing demand for borrowed capital.
The United States is resolved to check inflationary pressures existing in its economy. We are equally committed to the preservation of our international gold bullion standard. The dollar has traditionally been firmly linked to gold, and it is our policy to keep it firmly linked to gold at $35 an ounce.
Now, a word as to the use of the Fund. In the past year, there have been balance of payments deficits on the part of some of our members related in part to the underlying inflationary trends which have been discussed so well in the Fund Report and in part to unusual events. At this juncture, the use of the Fund’s resources provided an important support to the reserves of these countries which were in difficulty.
As noted by the Managing Director, the Fund’s capacity to meet the requirements of this past year depended in part on repurchases of drawings of previous years. The Fund has been a revolving fund, and its future vitality depends on its continuing to have that character. The Fund and its members may properly take pride in the record of Fund repurchases. By 1956, most of the drawings which had been outstanding from previous years had been reversed. The results showed that the Fund’s resources were revolving.
Vital to the Fund’s success has been the establishment of agreed policies regarding currency purchases and repurchases. The so-called gold tranche is freely available, and the Fund has been liberal in extending to members the use of the first credit tranche, if they are taking reasonable steps to deal with imbalance. But the Fund has rightly insisted that larger drawings require substantial justification in the form of decisive programs of action. The Fund’s resources are thus available to assist countries to take those measures which are necessary to bring about an effective equilibrium in their international accounts, particularly countries undertaking comprehensive programs of financial and exchange reform.
We look back with satisfaction at the development of the Fund over the past few years. We are sure that the Fund will continue to make an effective and important contribution to international economic cooperation.
May I add a personal word. This is the fifth Meeting that I have sat here when the Fund Report was being discussed. This is the last in which I shall sit here representing the Treasury, for I am going in a few days to Europe to be the representative of my country on NATO and the European Economic Organizations. Let me say that I have appreciated enormously the meeting with this group of people representing this wide range of countries, and with the cooperative point of view which I am sure means a great deal in the future of monetary and economic affairs in the world. I believe that one can go to a new type of economic cooperation greatly strengthened by the experience of the Fund and the Bank, which has demonstrated, as I believe never before, the effectiveness of international cooperation.
Statement by the Governor for Japan1—Hisato Ichimada
First of all, I wish to pay my highest compliments to Mr. Per Jacobsson, Managing Director of the Fund. In the first year since he took office, the Fund has made remarkable achievements and greatly contributed to the progress of world economy.
During the past few years, the economy of the world, too, has made rapid progress. It is a matter for congratulations that many countries have succeeded in promoting their economic development greatly and have come to enjoy prosperity. However, it is also significant that this rapid economic development has caused some difficulties to several countries in their balance of international payments, but the Fund has promptly and with timely action responded by extending its pertinent assistance. Our trust and confidence in the Fund have indeed deepened as a result.
In this connection, attention must be drawn to the fact that the imbalance between those countries which suffer from a shortage of foreign exchange and those which have plenty of foreign exchange has been growing greater. This widening disparity will be one of the most serious obstacles to the economic progress of the world. Unless this undesirable situation is ameliorated, no significant progress in world economy can ever be expected.
It goes without saying that those countries which are short of foreign exchange should first take appropriate domestic measures to eliminate the causes of such a situation. Japan has not been an exception. Since the beginning of this year, Japan’s economy has been afflicted with a rapid loss of foreign exchange holdings; but her strenuous efforts to improve the balance of international payments together with assistance from the Fund will soon restore the equilibrium in the balance of international payments.
However, it cannot be expected that balanced expansion of the world economy will be achieved solely by domestic measures in those countries which are short of foreign exchange. There may be occasions in which world trade shrinks in scale. The most basic measure for the amelioration of such a situation is that those countries with plenty of foreign exchange should at this time make up their minds to increase their imports considerably so that the shortage of foreign exchange in other countries may be eliminated. For this purpose, it will be necessary to lower tariff rates and remove import restrictions so that trade among nations may be expanded. However, we understand even if those countries which have plenty of foreign exchange make every effort in behalf of a balanced expansion of the world economy, it will not be easy to eliminate promptly the present imbalance among nations.
Therefore, I should like to emphasize that it is time for the Fund to promote further its function in achieving the major objective of the Fund, namely, to facilitate the expansion and balanced growth of world trade. In order to have the Fund discharge fully its function, I should like to express my viewpoint. The scale of world trade has greatly expanded since the establishment of the Fund. In view of this expanded volume of the world trade, working funds presently available to the Fund seem to be somewhat out of proportion. I believe this is the time to increase the quotas of member countries in order to augment the amount of the working funds available to the Fund. Especially those countries which have plenty of foreign exchange should increase their quotas. In this connection, I may mention that Japan is willing to cooperate with the Fund to the extent Japan is able.
I conclude my speech with the hope that an increase in the working funds of the Fund and greater cooperation with and among member countries will promote a balanced expansion of world trade to their mutual benefit.
Statement by the Temporary Alternate Governor for Argentina1—Carlos Coll Benegas
It is with great pleasure that the Argentine Delegation attends this Meeting where so many brilliant statesmen, bankers and economists from all over the world are gathered to discuss the problems of international monetary stability with which the International Monetary Fund is intimately concerned. The several speeches which we have already heard—and I have especially in mind the impressive address by the Managing Director, Mr. Jacobsson—are a token of the very high standard of this Meeting, but they also prove the deep human preoccupation that underlies our discussions.
After every crisis the world seems to recover with new optimism in the future and with new ideas intended to rebuild with more success the old structures which have been partially destroyed. Thus, after World War II, great hopes were placed on the functioning of two new international organizations—the International Monetary Fund and the International Bank for Reconstruction and Development. As we all know, the reasons for creating these two institutions were the necessity of re-establishing a sound flow of short- and long-term capital among the nations of the world. We can be very satisfied with the results. Hopes are becoming a reality.
Argentina has joined these great institutions with the deep conviction that they fulfill a very important role in the international field. We fully agree with their aims and wish to benefit through their help; we expect to share the experience of others, and to offer others our own experience.
Argentina has recently emerged from a very serious crisis and we are now in the stage of reconstructing our economy with the same optimism that permeated the world after World War II.
The problems of reconstruction that confront my country are being tackled with great determination by my Government. The difficulties we have to face explain the absence at this Meeting of Dr. Krieger Vasena, our Finance Minister, who has asked me to publicly express his regrets for not being present and to convey to the Fund our sincere appreciation for the timely and useful help that we received during the first half of this year. We would also like to express our satisfaction for the understanding and sympathy with which the staff and the Board of Executive Directors of the Fund have viewed the efforts made by my Government to overcome the basic economic problems that we have inherited from the critical period which we have suffered. This is meant also for all the countries represented here.
The basic problems of Argentina are, on the one side, to obtain the necessary domestic and foreign capital to reconstruct our economy and expand production and, on the other side, to achieve domestic monetary stability and attain equilibrium in our balance of payments with the rest of the world.
During the last two years, a lot has been accomplished, but we are aware that a great deal is still to be done. Our Government has been intent on freeing our economy from controls in order to provoke a natural readjustment. But the task has been made more difficult by some aspects of the present world economic situation which the Annual Report of the Fund so ably points out—the lack of capital, which in banking jargon is called “tightness of money,” the international price structure, which is to the disadvantage of some of our export products, and the fact that convertibility has not yet been fully restored to the world, which has very profound consequences for Argentina.
Argentina has reacted to these problems in the following ways. We have restored complete freedom for capital through the exchange market. We are curbing inflationary tendencies in the internal market through a reorganization of our financial structure and through persistent efforts to achieve a sound fiscal policy. We have eliminated state trading and re-established the principles of the free market built on private initiative. We have given incentive to agricultural production by re-establishing a realistic relationship between internal and external prices and by eliminating most subsidies. And, in connection with the problem of convertibility, we have abandoned bilateralism as a policy and have joined with profound conviction those trends which are favoring multilateralism by means of regional arrangements. We have, furthermore, consolidated our foreign debt and we have successfully applied for public capital in this great country, the United States, and, as I mentioned before, for financial help from the Fund.
But I must stress the point that the momentum of Argentina’s economic recovery is directly linked with the amount of capital, private and public, that she may receive, and, in this respect, Argentina’s problems are of the nature of a recovery. Argentina has developed in the past and, given the necessary basic impulse, will enjoy a rapid progress. Our history shows an extensive record of fine achievements and great responsibility.
We are conscious that by helping ourselves, we are also helping others, and we are certain that, in this world of interdependence, by helping others, every country, no matter how great it may be, is helping itself.
Our own experience, which I have tried to explain in these few words, shows us that the problems of short- and long-term capital movements among the countries of the world are still of paramount importance, because they represent the most efficient means by which economic progress can be spread all over the world in an orderly way and without creating frictions or causing undue strain.
People all over the world, all over the free world, are placing great stress, as most speakers have pointed out, on improving their standard of living, and standards of living are measured by comparison. But, in order to increase wealth, it is necessary to invest capital. Therefore, lack of capital creates great tensions and gives rise to the temptation to take recourse to forced savings as a means of creating capital. And, of course, forced savings are achieved by way of inflation—that very dangerous economic ill of our times. Whether we like it or not, and that is also our own experience, even the masses that will suffer from inflation put pressure on governments to promote inflation and thus gain a temporary and illusory impression that they have improved their living standards.
If we want to combat inflation, we must also regain the optimistic spirit that gave birth to the Fund and the Bank, and we must insist on bringing about a greater volume of international movements of capital. I know that the amounts available are limited, but we must find ways and means to increase those amounts in order to enhance progress, and we must also try to do away with the impediments that put a barrier to the free flow of capital on both sides.
In this world of great interrelation, the Bank and the Fund are performing a very important task and, under their guidance, every country can work for the common good without affecting its self-determination. The difficulties that we have encountered, the lack of confidence that is sometimes evident, even the mistakes we make, should not deter us from this path. On the contrary, the challenge we have to face should give us courage and strength to work out adequate solutions. The fact that this has been the underlying attitude of almost every speaker should give us great hopes. Furthermore, I am certain that we have, both in the Fund and in the Bank, and in the brilliant men that run these institutions, the instruments needed in order to attain our goal. And when I speak of the very brilliant men that run the Fund, I am thinking in particular of its new Managing Director, Mr. Jacobsson, who made an extraordinary impression in Buenos Aires on his recent and most welcome visit to Latin America.
Statement by the Governor for the Dominican Republic1—Jose Ernesto Garcia Aybar
The Delegation of the Dominican Republic takes pleasure in expressing the great appreciation of its Government for the fruitful activities of the International Monetary Fund. The ardent hopes that accompanied the beginning of the work of the Fund, which had arisen—like its sister organization, the International Bank for Reconstruction and Development—from a world devastated by World War II, have become reality in the form of an instrument capable of contributing to the establishment of firmer bases for the economies of member countries.
The Fund’s Annual Report for the period ended April 30, 1957, expresses hopes for a return to the system of multilateral trade free from controls and restrictions, which have been gradually relaxed or abolished during the last ten years, and states the expectation that the Fund will be able to play an effective part in this movement, since it has shown that it can act promptly and efficiently when its members have a need for ensuring or restoring balance of payments equilibrium.
In connection with another aspect of world conditions, reference is made to a general and growing demand for capital, the causes of which are complex and include the need for new investment as a consequence of new techniques in production, both agricultural and manufacturing. Here we should like to state that our country is pledged to follow the economic orientations of our time. As an example, we might cite one of its present objectives which consists in extending the use of electric power on a vast scale for industrial and domestic purposes.
The Dominican Republic joined the Fund and the Bank as soon as the founding of a central bank and the issue of an independent currency in 1947 had created the conditions for our membership in those organizations. Here it might be pointed out that Dominican banks have been in operation almost exactly as long as the Fund and the Bank, which are now holding their Twelfth Annual Meeting.
When our central bank began activity as institute of issue of the currency on the basis of free convertibility and parity with the U.S. dollar—the external public debt having been paid off in full in the preceding months—there fortunately no longer existed in the Dominican Republic the precarious situation of destructive internal discords and changing external contingencies which in the past had created a feeling of pessimism based on belief in a supposed historical fate. Under the stimulus of regulations inspired by Generalissimo Trujillo, the creator of the Dominican banking system, our country has had to face the urgent need for a more rapid rate of development, maintaining high levels of employment and keeping inflationary pressure under control with a rapidly growing population. Our banking structure, with exclusively internal resources, has thus had to form an essential element in the expansion of an economy in a state of chronic stagnation which was tied almost entirely, as in the other Caribbean islands, to sugar production, but which has now expanded with the intensification and incorporation of all tropical crops in such a way as to fill greater foreign demand and supply basic local food requirements. At the same time, a broad program of industrialization covering important manufactures has eliminated a number of items in the import tables, and, with the exploitation of underground riches now under way, our economy is achieving integration with all of its potential elements.
As a result of the circumstances described above, Dominican exports have nearly doubled, rising from US$67 million in 1946 to US$125 million in 1956 and imports have also increased, last year amounting to over US$109 million. There is a favorable trade balance of over US$16 million. Recognition of these facts is evident in the doubling of the Dominican Republic’s quota in the International Monetary Fund, the original US$5 million being raised to US$10 million last year, and in the International Bank for Reconstruction and Development, where the increase was from US$2 million to US$4 million.
To express this economic growth in a single figure, within the time limits necessitated by the representation at this Meeting of Delegations from 64 countries, suffice it to note that the Dominican Republic has had one of the highest indexes of increase of the gross national product, more than 10 per cent annually, over a period extending back beyond the past ten years. An orderly and dynamic administration has been a basic factor in this progress, which is reflected in greater collective well-being, as shown by better conditions of health, education, and standards of living in general. It is obvious, however, that the closer economic ties existing in a world in perennial renewal and transformation, as stated in the Fund’s Annual Report, make it necessary to use international cooperation and assistance in solving problems of continued development, flow of capital, and elimination of restrictions and privileges. With faith in the efficacy of these principles and joining with the other congratulations expressed at this Meeting, we ask the Executive Board of the Fund to accept the sincere compliments of our Delegation for its outstanding work.
Statement by the Governor for Yugoslavia1—Nenad D. Popovic
It is with feelings of honor and satisfaction that we welcome the new members of the International Bank and the International Monetary Fund.
I would like also to greet the new Managing Director of the International Monetary Fund, Mr. Jacobsson, and I cannot help but congratulate him on his statement this morning.
The Report of the Fund puts before us the attitude of the Board of the Fund regarding the basic problems of international monetary relations and the conditions under which they develop. The emphasis is laid on the necessity of establishing and maintaining economic stability as one of the preconditions for achieving equilibrium in balance of payments. In this connection, the Fund draws attention to the elements which are slowing down the existing, more or less general, economic expansion and to the possible dangers which further expansion may bring.
The Fund has been able to report on its activities in enabling members to use the Fund’s resources as their supplementary reserves. The Report does not only speak about increases, but also points out that the volume of drawings surpasses the records of all previous years since the beginning of its existence.
We are in a position today to give an appraisal of the consequences of this new policy of the Fund. It is very important to note the general international effects of this policy. It appears that they are positive.
I believe that it can be maintained that in the last year the resources of the Fund have represented a part of the active monetary reserves of the world. And this is just the purpose for which these resources should be used.
The more or less high economic activity last year was nevertheless characterized by many difficulties. It is emphasized in the Report of the Fund that national economies were able to withstand these difficulties. This ability was also greatly strengthened by the active utilization of the resources of the Fund.
In spite of the economic expansion in the world, existing conditions are not such as to exclude anxiety. We should be worried today especially in connection with the fact that the needs for long-term resources in the world are greater than can be met. These needs are due not only to the resolution of the underdeveloped countries to develop their economies, but also, and perhaps to a greater extent, to the fact that technical progress, together with a high level of employment, imposes a tendency toward substantially greater investments. On the other hand, the available long-term resources are limited by the larger share of defense expenditures in the distribution of national incomes. We have today a peace economy, but it is still bound within the limited framework imposed by the inheritance of the last war or by fears of the next.
The policy of economic expansion—in other words, of full employment and development—has created conditions for the gradual solution of difficulties. The last few years afford clear testimony of the progress achieved. Although these economic movements are slow, nevertheless they exist. There is no doubt today about the advantages of multilateralism over bilateralism. Convertibility remains the goal. If we speak more of “de facto” convertibility than of its classical form, it is surely because new conditions require appropriate new forms.
It is certain that internal economic stability represents the basis for these processes of adjustment and improvement. These tendencies depend also on the external possibilities. This means that on those countries, which have been able to achieve a favorable balance of payments, there is an obligation to take a leading part in removing all their remaining and existing restrictions in the field of international payments and trade.
But let us speak about ourselves in this respect. I would like to point out that my Government, in spite of a deficit in the balance of payments, has, within the general policy of expanding production and increasing stability, made substantial efforts in the direction mentioned above. Fluctuating exchange rates have been practically eliminated, retention quotas have been abolished, the number and range of multiple rates were cut down last May, and at the same time, the scope of broken cross rates has been essentially narrowed, and bilateral arrangements have in certain cases been replaced by multilateral. What has already been done shows clearly the direction and purpose of the policy of the Yugoslav Government.
It is one thing to maintain attained freedom in international trade and payments; it is another, and much more difficult, to reach this stage and move along farther. This process does not include only the efforts necessary to achieve stability and equilibrium in the balance of payments. It requires also considerable investment in monetary reserves. As foreign trade is growing so is the need for higher monetary reserves. This implies also the repayment of accumulated short-term clearing debts. The latter is important in dismantling the bilateral mechanism.
Countries which are moving in the directions indicated by the Fund—and we agree with the Fund on the merits of such movements—are brought into a position where they are disproportionately burdened by the divergent effects of their need for larger monetary reserves on the one hand and of the obligation which they have assumed to cover increased current payments on the other. In such a situation the Fund’s resources have increased significance as constituting, in effect, a joint world monetary reserve.
I would like to close my remarks by quoting from the excellent statement given this morning by Mr. Jacobsson, namely, that the use of the Fund’s resources is essentially of short-term character, that they must be regarded by the countries concerned as a temporary addition to their reserves permitting them to adopt and carry out, within a limited period of time, a constructive program to restore stability and balance in their economies.
Statement by the Governor for Australia1—Sir Arthur Fadden
Every year, we who have come to this Meeting have good reason to congratulate the Managing Director and the Executive Directors of the Fund upon their Report, but it seems to me that, this year more than ever, as I turn the leaves of the 200-page document, I find time and again penetrating analysis and well-balanced comment. I hope I am forgiven when I say I detect therein the hand of one who, over the years, made the publication of the Report of the Bank for International Settlements such an outstanding annual event. After the illuminating address we heard this morning, there can be no doubt about it.
It has been repeated over and over again that Governors look forward eagerly to attending these Meetings, and this is certainly true in my case. I am sure that most Governors come to these Meetings, as I do, with a sense of thankfulness that the depression which, to use the words of the Annual Report, “so many prophesied for the postwar decade,” has not so far come about. Yet I think each one of us also comes here with some measure of anxiety, for, while the Annual Report is able to speak of the continuation during 1956 of boom conditions, every Finance Minister when he hears the word “boom” feels an inclination to look over his shoulder to see if he can discern signs of an impending crash.
In this, we Finance Ministers and others responsible for policy are probably much alike. Each of us looks at the world through a different window, and it is appropriate that we should take special notice of the Fund’s Annual Report for, since they look out over the whole world, the window through which the authors of the Report get their view gives them a wider horizon than is given to us who must necessarily concern ourselves more directly with the affairs of a single country.
And here, Mr. Chairman, I should like to pay tribute to your own able and eloquent speech, although I must say it was no surprise to me to hear you call for a more sympathetic understanding of the problems of the less developed countries, for this is a theme that you and I have had in common at previous Annual Meetings. As you indicated, the world economy is, of course, the sum of the economies of the various countries of the world and, while I do not overlook the fact that the national component of the economic ills of a country is generally greater than the international component, it is true that the policies of a country that is important in world trade must have a strong bearing upon the economies of other countries.
Perhaps this is most applicable in the case of countries with large and persistent surpluses and I echo, Mr. Chairman, much of what you and the Fund Report have had to say on this subject. Your comment that the raw materials producing countries feel concern about the preferential position that might be given the overseas territories of the common market nations springs from an apprehension that is widely shared although, in saying this, I would like to emphasize my own conviction of the great importance of European economic integration in its wider implications.
Unhappily for many of us, international agreements have usually laid more stress upon regulation of trade in the products of secondary industry than upon the regulation of trade in the products of primary industry. Therefore, while I am glad to see the Fund Report make early reference to some of the long-range factors which hamper the efforts of some primary producing countries to establish a strong international payments position, I would have thought it appropriate that the Fund should give more prominence to some of these questions and, perhaps, especially to the baneful effects of agricultural subsidies.
I do not underestimate the size of the problem faced by some countries with huge agricultural surpluses or the difficulty of changing traditional practices. Nevertheless, it is a sorry state of affairs, to say the least, when a country that does not pay crop subsidies finds itself in danger of losing long-standing markets to subsidized grain that is carried in subsidized shipping. No country can be expected to stand idly by when it is losing markets to subsidized exports, whether those subsidies are direct or take the form of special exchange rates. So long as exports from some countries are subsidized, there will be pressure for the subsidizing of The products from other countries and, in touching on this subject, I should like also to say how pleased I am to see the Board direct attention again to the problem of multiple currency practices.
Where a country has multiple exchange rates, it is usually within that country’s own power to make progress toward a unitary rate. To make such progress might, of course, require an adjustment of fiscal and monetary policy but, in general, this is something in which the countries concerned can help themselves and we must not overlook the old adage—“The Lord helps those who help themselves.” It is true there are difficulties in obtaining agreement within a government—no one knows that better than a Finance Minister—for there are many who resist change unless they can see an advantage in the short run and, generally speaking, it takes time—more time than most people think—for fiscal and monetary policy to become effective.
And this brings me to another point, for when we speak of the adoption of sound fiscal and monetary policies as a means of correcting an imbalance, our minds necessarily turn to the strenuous efforts—indeed, the dramatic efforts—that the United Kingdom Government has made in the face of the efforts of speculators. And there are other governments similarly placed. At great cost to themselves, they have taken measures that might be unpopular politically, but they have not retreated behind the barricade of exchange restrictions. In fact, the activities of speculators in exchange markets are reflected in the use that has been made of the resources of the Fund and, as has been noted by the Governor for the United States, it is salutary to consider the position that could have arisen had the Fund not been in existence. To demonstrate its support of a sound currency is one of the greatest contributions the Fund can make to world welfare.
But, while I am glad to see the readiness with which the Fund has met the needs of countries in an emergency, it is pleasing also to see the continued use of the Fund’s resources as a backing for stabilization programs. If such programs are successful, the Fund’s contribution will have been so much the greater, and there would seem to be considerable scope for the Fund to assist countries to design suitable programs and to provide temporary finance while the programs are carried through. Nevertheless, it is imperative to recognize that it is not sufficient for a country to be told what are the right measures to take for it is useless for a government to know the right measures if it has not the willingness and the capacity to insure they can be put into effect. That is what impresses me with the use of the Fund’s resources in respect of some of the countries listed in the Report; these countries have demonstrated an understanding of the problems they face and they have shown a determination to overcome those problems, but, above all, they have demonstrated their capacity to carry the measures through.
In closing, I should like to echo the tribute paid in the Report to Mr. Rooth and to say how pleased he must be to see the Fund operating so actively and successfully. In his retirement, he is seeing the fruits of his labors in the Fund and he must be content in the knowledge that the Fund continues to go forward under the distinguished guidance of one of his fellow countrymen.
Statement by the Governor for Italy1—Giuseppe Medici
As a newcomer to these international gatherings, I feel it is a great privilege to enjoy the hospitality of the capital of the United States and to be able to take part in a debate which derives unusual interest in the year under review. It is in fact a year during which the activity of our institution acquired new momentum under the leadership of the outstanding economist who now presides over the fortunes of the Fund.
I have closely followed the debates which have been taking place up to now on subjects of common interest. The Report of the Executive Directors has given us a penetrating analysis of the problems which are being faced by so many countries.
I have also appreciated the statement of the Managing Director, whose leadership has been of great advantage for our organization.
As the Report indicates, the Fund transactions have very much increased during the last year, and I want to express my appreciation for the careful consideration and speedy action demonstrated in developing such activity.
I feel sure that the very effective action taken in the presence of important and urgent problems, besides contributing to maintaining economic order in a wide area of common interest, constitutes a pledge for all of us to fully attain the aims which preside over our institution.
I venture to say that my country has contributed to some extent to the progress toward the complete fulfillment of those aims.
Looking with confidence at our country’s general economic development, my Government has established, along the lines followed by other countries, a system of transferable lira which is being gradually implemented through the termination of all bilateral payments agreements.
We are fully aware that by giving up what remained of bilateralism in our system we have to face adverse effects in some sectors of our economy. However, we thought it useful and proper to pursue a sound economic policy based on free competition in view of its more beneficial long-term effect. There is hardly need to say that this policy has been carried out in accordance with the relevant Fund recommendations.
I was gratified to notice that the problem of multiple exchange rates has been adequately stressed both in the Fund Report and in the opening address of the Managing Director. There is no doubt that in this field an appreciable degree of simplification has been realized. I certainly attach much value to this progress; however, let me express the sincere hope that these arrangements retain a really transitional character. They are to be considered as a phase which should give way to unified exchange rates as soon as possible.
As to the big problem of discrimination, I may be allowed to recall that my country has recently increased substantially its liberalization of dollar imports to a point which compares favorably with the almost complete liberalization in the OEEC area.
Statement by the Governor for Indonesia1—Sjafruddin Prawiranegara
The Report which was transmitted to us and the oral explanation to which we have listened have been most helpful indeed for our understanding of the complicated situation of our economy at the present time. I would like to associate myself with my colleagues in praising Mr. Per Jacobsson for the valuable work he has done.
If I am not mistaken, monetary instability has been the main characteristic of the economy of the world in the year behind us. This instability is still prevalent and it is the most urgent task of every one of us, gathered together once again here in this great and hospitable country, to restore the lost equilibrium. Prices are soaring, rates of exchange are becoming distorted, production is lagging, and unemployment, banished from the economy of the industrialized countries for many years, is, fortunately, not manifest yet, but somewhere it is hovering like a dark and threatening cloud.
We all know that expenditures on behalf of military actions are inflationary. I do not wish to dwell on this matter because this category of inflationary causes has a noneconomic character.
As far as the economically underdeveloped countries are concerned, I think that the cause of their inflationary situation is rather obvious. Being underdeveloped, they desire to be developed, especially so if political freedom has been newly won. Development needs savings and savings are low if the national income is low, because the marginal propensity to consume, in such a case, is practically equal to unity. As long as this hurdle has not yet been overcome, there is always the danger of financing development with inflationary means.
My country, for one, has again gone through a most difficult period in its process of development. After a brief spell of relative progress from the last quarter of 1955 until the first months of 1956, when prices of our exports went up, a decline started from which we have not yet recovered. Decreasing export revenues made it necessary to use our monetary reserves in order to keep our economic machinery going. The deficit in our balance of payments was alleviated in 1956 by the delivery of American surplus agricultural commodities and later by the readiness of the International Monetary Fund to agree to a purchase of U.S. dollars against rupiahs. We are grateful to the U.S. Government and the Fund for their most welcome aid.
The relief which we received could not prevent conditions from deteriorating further. Export markets continued to be weak and a heavy pressure was put on our economy to which internal factors were added when political tensions began to arise. Eventually, our monetary stability and balance of payments position became so precarious that new measures were necessary. In this respect, I would like to thank the Fund for its understanding of our worsened position and for its approval of the measures which we took on June 20th of this year in order to create more favorable conditions. We know that the system of fluctuating rates of exchange, which we have introduced, does not meet the basic ideals of the Fund nor ours, but we did and do need a breathing space allowing us to restore order in our battered economy. However, it should be realized that such a process is asking heavy sacrifices from us. We are an economically underdeveloped country with a narrow margin of reserves. The level of our consumption is still low as is also that of our production. And yet we have to cut down expenditures in both fields in order to achieve a more balanced situation from which we may move upward again in an orderly manner. Our Government is ready to narrow the budgetary gap, one of the main sources of inflation, and we have introduced measures which put the credit expansion by the banking system under control. We feel, however, that our sacrifices and measures might be ineffective if our terms of trade, due to external factors, do not improve. If the exchange rate of the rupiah continues to depreciate, in spite of the internal measures being taken because export markets are declining, we would be in a desperate position indeed. I most fervently hope that the Fund will see fit to act in a speedy and effective manner in such a case, which I think is not restricted to my country alone.
There is an interplay between external and internal factors affecting the economy of underdeveloped countries. I am the last to say that national governments are blameless in the field of monetary instability. But the external odds are very often against us. Declining export markets put a heavy burden on the internal stability and the balance of payments. They often lead right away to budget deficits and rising prices. I believe that the Fund could render a valuable service to the solution of this problem of the short-run fluctuations of the prices of primary products, without which the measures of national governments, sometimes taken with the help of the Fund or financial aid given by it, might be reduced in effectiveness or even nullified.
There was a time when monetary instability was considered to be the doubtful privilege of the economically underdeveloped countries. Given stable conditions in the industrialized countries, so the reasoning went, it is up to the national governments of the less privileged states to put order in their own houses and to take advantage of the favorable business cycle. Facts have proved that a stable and even a growing business cycle could not prevent prices of primary products from falling. The situation has worsened since then, for the business cycle itself is now showing signs of a downturn, and monetary instability is prevailing in the industrialized countries as well, so that we now are all in the same boat faring on a swollen sea of inflation. Due to waves of optimism and/or wage increases, the business cycle in the industrialized countries seems to outgrow its potentiality. In other words, expenditures are neither financed by savings nor met by productivity.
Due to the fact that inflation is being felt in the industrialized countries as well, I do hope that better understanding will follow from their side for the fate of the underdeveloped countries. In fact, the time seems to have come when some form of international cooperation might be established with a view to jointly achieving our common goal, namely, the control of the economic process in the world. National measures, however necessary and useful, seem to be insufficient to obtain stability. With remarkable skill, for example, a country like Germany has managed to neutralize the inflationary effects of its export surpluses. And yet, the problem of the European payments situation remains unsolved.
The economies of all countries have become so interwoven with each other that, in addition to national action, international consultations are absolutely necessary. We in the underdeveloped countries are as much interested in the course of the business cycles as in the related countries; it should be the other way around also. Cutting overspending, for instance, is an appropriate measure but doing so without discretion will affect our exports and hence our terms of trade already put under pressure by rising prices in the industrialized countries. Establishing a common market in West Europe is another praiseworthy venture to strengthen business activity but, if such a market leads to a regional protection and hampers the export of our countries, a further worsening of the latter countries’ terms of trade will follow.
I cannot think of a world in which one part is taking action and steps without realizing the effects of their deeds on their neighbors. The monetary instability which we are now undergoing might be a good reason for joining hands for international cooperation in the field of the control of the business cycle.
Statement by the Governor for Iran1—Ebrahim Kashani
It is a pleasure as well as a privilege for me to participate for the first time in the Governors’ Meeting of the Bank and the Fund and to express my admiration for the vigilance, supreme ability and understanding brought by the President of the Bank and the Managing Director of the Fund and their colleagues to the conduct of the affairs of these two sister institutions.
Particularly I wish to congratulate Mr. Jacobsson, the new Managing Director of the Fund, and his excellent statement.
For those of us who have watched the growth and expansion of these two institutions since their inception, although there have been disappointments and notwithstanding the recent nervousness in European exchanges, this Twelfth Annual Meeting is indeed a matter of pride, for we can look back to a history of great achievements which have helped to change the chaotic aftermath of the World War and to move toward a new international economic order in which stability and the implementation of long-term plans for reconstruction have a predominant place and are gradually producing important results in every corner of the world.
It has been in the context of this general progress toward order and stability that my country has also been able to take still more important steps toward the principal goals of the International Monetary Fund. Since last May, complete unification of exchange rates has been achieved by changing, with the concurrence of the Fund, the par value of the rial. At present, only one rate exists for all purposes. The advice of the Fund, not only on the matter of revaluation itself, but also on the significant question of the use of the funds released by the revaluation was most welcome and appreciated, as were the counsels of the Bank.
Along with the unification of rates, we have also greatly liberalized both our foreign exchange regulations and our foreign trade. Insofar as imports are concerned, but for some prohibited items of no great importance, there are practically no restrictions. And I should like to add that, except in certain few cases where maintenance of bilateral agreements is necessitated by the special conditions of trade between Iran and the countries concerned, we believe bilateral agreements are no longer essential to our economy.
May I take this opportunity to say how grateful we are to the Fund for the stand-by credit granted to us last year which, by its timeliness and practicability, proved of immense value to us at a difficult time in the progress of our development.
I should also like to welcome heartily Ghana, Ireland, Saudi Arabia and Sudan to our midst, and I look forward to seeing with us here soon Governors for Libya, Malaya, Morocco and Tunisia.
Statement by the Governor for Paraguay1—Manuel Gill Morlis
Paraguay wishes to associate itself with the several statements which have been made at this Meeting on the fundamental importance of a stable currency to economic growth. After many years of considerable inflation, Paraguay, realizing the destructive force of inflation, has embarked on a policy to end inflation and establish a stable currency.
At last year’s Meeting, Paraguay was able to show significant progress toward these objectives. Trade was freed from the damaging distortions of multiple exchange rates and a policy of ending reliance on bilateral trade and payments agreements was adopted. Substantial progress had also been made toward the achievement of fiscal and credit policies appropriate to stable monetary conditions.
This year I take pleasure in reporting that Paraguay has made further progress toward free multilateral trade and stable monetary conditions. On August 12, a new exchange system was put into effect, based on a free market. With the establishment of the new system, all restrictions on imports, exports and the movement of capital have been abolished.
The Paraguayan Delegation wishes to express its gratitude for the invaluable technical assistance rendered by the staff of the Fund and for the financial assistance which provided the backing needed to permit the introduction of the free exchange market. My Delegation also wants to express its deepest appreciation to the Treasury of the United States of America which lent substantial financial support for the assumption of these burdens. The Paraguayan authorities intend to carry out fully their responsibilities under the Articles of Agreement. Efforts are now being made to eliminate, where feasible, the remaining payments agreements which do not permit full multilateral trade and payments.
In conclusion, we would wish to record again our thanks to Mr. Jacobsson, the Executive Board, and the staff of the Fund for their invaluable assistance in the stabilization of the Paraguayan economy.
Statement by the Alternate Governor for Ceylon1—Sir Arthur Ranasinha
I should like to begin by taking a liberty—the liberty of expressing on behalf of my country—our deep sense of relief at the reiteration this morning at this august assembly by the representatives of the great countries, with currencies in world-wide use, of their determination to maintain the existing parities of exchange. In our present circumstances, we should have felt very unhappy, to put it mildly, at any general instability in exchange rates.
I next desire to associate myself with the expressions of appreciation that have been made in regard to the achievements of the Fund in the past year. It was indeed a heavy responsibility that was laid upon Mr. Per Jacobsson in the very first year of office, and the expedition and efficiency with which he discharged it at a time of grave crisis is now a chapter of history.
It has also demonstrated to us who have hitherto been diffident to approach the Fund for assistance that we have a friend in need whom we may depend upon for quick help in times of temporary crisis.
Ceylon is now very actively and enthusiastically engaged in preparing for planned progress in the field of economic development in every sector. It is not intended that our plan should be so ambitious as to attempt to reach for the impossible—the moon. We aspire only to something to which we may reasonably aspire as being within our capacity. We too aim, as the Governor for our great neighbor India expressed it, at development with stability, or, to put it in other words, at expansion without inflation. The successful accomplishment of such a plan obviously demands not only careful thought and enthusiastic devotion, but adequate financial resources.
In a country like ours where the volume of domestic savings is relatively small, foreign exchange costs of a development plan render external aid absolutely necessary. And it is with the confidence engendered by the prompt and effective action taken by the Fund authorities in recent instances that my country, too, is approaching its task of formulating its schemes for raising with all speed possible the material well-being of its growing population.
Our quota is small, and, as the Governor for Mexico remarked, aid in absolute terms to countries with small quotas is necessarily small, relative to their needs. It is open to us, of course, to exercise our option and apply for a revision of our quota, but the initial payment of the percentage of the increased subscription makes us, poor as we are, hesitant to make the approach. Nonetheless, the time may arrive when access to the Fund, at least to tide over balance of payments difficulties experienced in the short run in our endeavors to ameliorate our economic condition in the long run will become a necessity. It is to be hoped that, when such time arrives, the Fund’s resources will have become sufficiently replenished for us too to be assisted with the same generosity and on the same principles as in recent precedents.
Statement by the Governor for Pakistan1—Abdul Qadir
I am happy to associate myself with my fellow Governors in congratulating the management and staff of the Fund on their excellent Report. I must also congratulate the Managing Director on his brilliant address this morning.
The year that has passed since we met last has been one of great activity for the Fund. The strains generated by political events and inflationary developments have caused a severe pressure on the international payments position and have severely tested the effectiveness of the international monetary cooperation as symbolized in the Fund.
It has been in no small measure due to the flexible attitude and prompt action of the Fund that its members were able to tide over their payments difficulties in many cases without reverting to the restrictions on trade and payments. In fact, as the Report states, there has been some further relaxation in exchange restrictions and discrimination. Thus, the Fund’s role in sustaining the growth in world production and trade cannot be overemphasized.
I hope it would not be detracting from the achievement of the past years if I sound a note of caution for the future. Though disturbances of the last year in the field of international finance have, in general, been successfully met, the outlook remains clouded. Despite the fact that considerable assistance has been provided by the Fund and anti-inflationary policies have been widely pursued, the sharp divergences between the payments positions of leading countries have tended to persist. It is my fear that, unless the situation is remedied soon, direct cuts in imports and spending abroad will become general. I have in mind, in particular, the alarming trend, visible for some time, toward a steady increase in the reserves of countries whose holdings of foreign exchange are already adequate. I am glad that the Report has again drawn attention to the responsibilities not only of deficit countries but also of surplus countries toward the maintenance of general monetary equilibrium. I would suggest a fresh and comprehensive study of this problem with a view to taking appropriate action at the international level. This is imperative if the progress achieved in building up a system of multilateral exchange and payments is not to be undermined. Moreover, in order to preserve the revolving character of the Fund’s resources, it is essential that large currency purchases during the year should not remain outstanding for long. This will be possible only if the present trend toward widening gaps in the balance of international payments is checked and reversed.
From the general uncertainty in the over-all world payments situation, I wish to turn to the specific problem of trade and payments of primary producing countries. The problem of the declining share of nonindustrial countries in the volume and value of world trade engaged the Fund’s attention last year. The present Report indicates that there has been a further deterioration in this respect. While the exports of industrial countries advanced by 14 per cent between 1955 and 1956, the exports of nonindustrial countries moved up only by 5 per cent. At the same time, there was a further deterioration of 4 to 5 per cent in terms of trade of primary producers due to a general increase in the export prices of manufacturing countries and the increase in transportation costs. The over-all improvement in payments balance of nonindustrial countries during the year under report should not also obscure the fact that 1956 was the first year in which the trade of primary producing areas recorded a large deficit. During the past few years, it has been possible to finance deficits from reserves accumulated during the war and the Korean boom. As a result, the reserves have already reached a dangerously low level. Should these tendencies persist, the import surplus would eventually reach such proportions as to cause a serious strain on the international facilities available to finance it. Thus quite apart from the fluctuations in export proceeds of individual commodities which continue to be the source of difficulty for most primary producing countries, the high prosperity in industrially advanced countries in the last few years has not resulted in material benefit for underdeveloped areas. We view with anxiety the movement underlined in the Report toward the expansion of trade between industrial countries at the expense of exports from nonindustrial countries.
The fact that exports of nonindustrial countries to industrial countries have not risen as fast as industrial production in the latter countries has aggravated the problem of foreign exchange resources for development in underdeveloped countries. I mention this because it is our general feeling that no lasting progress toward removing exchange restrictions and discrimination may be possible without stepping up the rate of development in less developed countries and reducing the fundamental imbalance in world economy. Indeed, the achievement of the ultimate objectives of the Fund and the expectation that it would be able to play an increasingly effective part in the movement toward the re-establishment of a fully multilateral world trading system may be said to hinge on this issue.
Finally, I wish once again to refer to the matter of adequacy of quotas. The increased use of the Fund’s resources during the year has enhanced the confidence of members in its flexible policies. Nevertheless, the fact that almost all purchases and stand-by arrangements in the last two years have involved a waiver under Article V clearly suggests the inadequacy of the assistance limited to 25 per cent of quota in a single year. This appears to be sufficient ground for revising the quotas of those countries in which trade “swings” have been particularly large.
Statement by the Governor for the Netherlands1—M. W. Holtrop
After the very lucid introduction to today’s discussion by Mr. Jacobsson and the important statements made by the Governors for the United Kingdom and the Federal Republic of Germany, it seems to me that it has been made sufficiently clear that there is no basis for any expectations of changes in parity in the spread of the major European currencies.
I have missed, however, in these statements one observation which I think is very important in connection with the present problem of surpluses and deficits and which I think ought to be made in this Meeting. In my opinion, there is a tendency in public discussions of currency problems to talk much too lightheartedly of a presumed overvaluation or undervaluation of currencies just on the basis of temporarily-existing balance of payments deficits or surpluses.
Balance of payments deficits of the type we are presently experiencing are mostly the consequence of a tendency to overspending, an overspending that is made possible by the use of inflationary methods of financing. In an open economy with no restrictions on current trade, such overspending will seldom lead to internal price developments that create a gap between internal and external price levels.
The way to correct such balance of payments deficits is to put an end to overspending by preventing further inflationary financing. If that be timely done, there is no possibility even of the temporary situation of overspending leading to independent price developments that could bring about a situation of overvaluation of the currency.
The deficits and surpluses with which some European countries presently have to cope—insofar as they are not caused by purely speculative movements which have no fundamental meaning at all—seem to me to be clearly of such a temporary nature. If appropriate internal measures are taken in time—and I can assure you that in my own country such measures are indeed being taken—the deficits on the one hand and the surpluses on the other are bound to disappear. In that case, the problem of overvaluation or undervaluation of currency will never present itself at all.