I should like to join our Chairman in welcoming the Governors of Argentina and Viet-Nam, which have become members of the Fund.
I should like to join our Chairman in welcoming the Governors of Argentina and Viet-Nam, which have become members of the Fund.
In presenting the Annual Report, I should like to supplement what the Executive Directors have said there with my own discussion of the work of the Fund—not only what it has already done in the first 10 years of its operations, but what it can still do to help its members to meet the problems that confront them. In a dynamic world economy, these problems cannot be the same now as they were 10 years ago; they will not be the same 10 years hence as they are today.
For a great part of the past 10 years, many members of the Fund have been primarily concerned with problems of reconstruction and recovery. The early postwar economic difficulties arose from the fact that production in countries adversely affected by the war was not adequate to maintain a tolerable standard of living and at the same time to provide the real resources necessary for reconstruction. The attempt to meet such expectations of increased consumption and investment inevitably led to inflationary pressures, intensified by the easy money policy which was a remnant of war finance. The additional resources necessary for reconstruction were acquired through the large excess of imports in the early postwar years. The balance of payments deficits that this entailed were met by drawing down reserves and by aid from the United States and other countries.
While it is not possible to set any precise time for the completion of reconstruction, a significant change in the world economic situation was evident by 1950. By that time, many countries were more and more placing development in the forefront of their economic programs. In most of Europe, both production and trade were greater than before the war. It was more difficult and took longer to restore the economy of countries in the Far East. In a few countries, production and trade are still below the prewar level; but this deficiency is being rapidly remedied. Even in countries outside the areas of active warfare, as in Latin America, the attempt to offset quickly the investment deficiencies of the war period resulted in inflation and large payments deficits. Inflationary pressures were greatly reduced with the restoration of production, the moderation of investment, and the revival of flexible monetary policy. Countries found that they could deal with their payments difficulties as ordinary economic problems that could be met through fiscal and credit policy.
An important objective of the Fund during the reconstruction period was to minimize exchange disorders in a world of large payments deficits, inconvertible currencies, and persistent inflation. In the field of monetary policy, the Fund was among the first to present the payments problem as one aspect of the economic disorder that grows out of inflation. As the period of reconstruction was drawing to an end, our Annual Report for 1949 discussed the need for devaluation as part of a program to strengthen international payments and to restore international balance. In September 1949, countries accounting for two thirds of world trade devalued their currencies to reflect the far-reaching changes that had taken place in the world economy during and after the war. On this and on other occasions, the Fund has made it clear that it does not stand for rigid exchange rates, but for orderly changes in parities when they become necessary.
The Fund began exchange operations very early in the reconstruction period. The Executive Directors were aware that this involved risks; but they believed that it was necessary for the Fund to assume these risks. The nearly $800 million of exchange provided by the Fund from 1947 to 1949 was small compared with either the problems to be met or the aid provided by the United States and other countries. The Fund’s help came, however, at an opportune time, after reserves had been drawn down to very low levels and before aid on a massive scale became available through the Marshall Plan in 1948 and later in other forms.
Recovery and Development
The mere attainment of the prewar volume of production and trade could not be regarded as satisfactory. A great expansion in production and exports was necessary to enable the industrial countries to put their economies on a self-sustaining basis and to establish a better balanced payments position. For many less developed countries, the basic problem was even more difficult. For them, a large increase in output was necessary to maintain minimum consumption standards for their growing populations and to provide savings to develop the economy. In this task of recovery and development, great progress has been made, despite the handicaps imposed by sporadic war and large defense expenditures.
In the past few years, production has expanded rapidly. Most industrial countries have overcome the adverse effects on production which had been left by war. In many less developed countries, the economy has begun to acquire a momentum that should facilitate future growth. There has also been a striking recovery in trade and in the reserves of many countries. The value of world trade has increased by about 60 per cent since 1950. For several years, the payments of the rest of the world with the United States have been in surplus if receipts from U.S. aid are included. Since 1950, the gold and dollar reserves of the rest of the world have increased by more than $10 billion. It should be borne in mind, however, that extraordinary U.S. Government financing may not continue indefinitely and that, despite the increase in gold and dollar holdings, the reserves of some countries are still inadequate.
Much of the improvement in world payments has been the result of financial policies that have minimized but not entirely removed the danger of inflation. In some countries in all parts of the world, government and private expenditures on investment are still in excess of their own savings and the capital inflow from other countries. In many countries, the increase in wages has been exceeding the increase in productivity. Nevertheless, the problem of inflation is of a different order from that of the early postwar years. The danger now is not one of runaway inflation, but of a persistent rise in prices and costs. There may continue to be pressure for more investment or more consumption, but the solution of these basic problems cannot be found in inflation.
The Fund has always placed great stress on the role of a flexible financial policy in dealing with payments difficulties as they emerge. The Fund has made special efforts to encourage a policy of development with stability. Although aware of the need for sound financial policies, many less developed countries seem unable to resist the temptation to finance development with bank credit when their own savings and the flow of capital from abroad are not adequate for urgent requirements. Such a policy is self-destructive. It destroys the incentive to save and the ability to attract foreign capital, both of which ultimately depend upon the adoption of policies that create confidence.
Current Economic Problems
This brief survey of the postwar period is intended to emphasize the vast changes that have taken place during the last 10 years. The economic problems with which members of the Fund are confronted are, with few exceptions, no longer those arising from the destruction and disruption caused by the war. Economic growth and development in the next decade may be far beyond the hopes of the last generation if a peaceful environment can be created and arms expenditure reduced. Even under present conditions, production will probably grow at a satisfactory rate in the industrial countries and may be accelerated in many of the less developed countries.
While the expansion of production and trade has been interrupted for brief periods from time to time, the danger of deep and prolonged depression has so far been averted. At the end of last year, there was a pause in the growth of industrial production in the United States and Canada and in nearly all countries in Western Europe. There has been no recession in any of these countries and, in several, the expansion of industrial production has been resumed. World trade has not been affected by the slowing down of industrial production. In fact, the expansion of world trade has been an important element of economic strength during recent months. It is, however, regrettable that in many countries there has recently been increasing group pressure for protection in various forms, and that the tendency toward free trade is not so strong as it was some years ago.
The effect of economic fluctuations on international payments is especially significant to raw materials exporting countries. Generally speaking, changes in industrial production are accompanied by changes in the volume of raw materials exports and in their prices. For countries whose foreign exchange receipts depend upon exports of a few sensitive raw materials, sharp fluctuations in world markets for their products may impede their efforts to secure orderly development of the economy and a rise in the standard of living.
The disposal of surplus commodities by one country may disturb the normal markets of other countries. Similarly, sudden changes in the stockpiling of strategic materials are, of course, unsettling to commodity markets.
Fluctuations in international markets for raw materials would subside to some extent if international tensions were reduced. In any case, much can be done to alleviate the effects of fluctuations in the exchange receipts of raw materials exporting countries without entering into commodity stabilization agreements. This would involve the accumulation of gold and foreign exchange reserves during periods of high export earnings, to be drawn upon when prices are low and the export proceeds of a country are falling. In such situations, it is reasonable for the Fund to be liberal with drawings, provided the member is following good policies, and thus will be able to repay the Fund and rebuild its reserves when commodity markets improve. This is not the whole solution to the problems arising from fluctuation in raw materials markets, but the Fund could be of material assistance in minimizing the adverse effects of a sudden fall in foreign exchange receipts. The tendency in some countries to import certain commodities as a reserve against crop failures or shortages should also prove to be a step in the direction of greater stability.
The real threat to the payments position of most countries at present does not arise, however, from economic fluctuations abroad. It arises rather from tendencies toward a persistent price and cost inflation which originate in excessive public and private expenditure for consumption and investment, and in an increase in money incomes that exceeds the increase in productivity. This threat to monetary stability is not necessarily confined to countries with payments difficulties. The world is confronted with a challenging problem—to reconcile development and full employment with monetary stability in a political environment which is still uncertain. The solution of this problem calls for statesmanship of a high order in all sectors of economic and financial policy.
There is one field in which current practice has not always been sufficiently adjusted to changes in economic conditions. The Fund Agreement provides that five years after the Fund begins operations and in each year thereafter any member still retaining restrictions under the provisions of the transitional period must consult with the Fund as to their further retention. Since 1952, the Fund has accordingly been holding annual consultations on the exchange restrictions still maintained under the provisions of the transitional period. In these consultations, the Fund has stressed the importance of the relaxation of exchange restrictions as the payments positions of its members improve.
In fact, there has been a considerable relaxation of exchange restrictions in recent years. Even where the legislation authorizing exchange controls has not been modified to any great extent, the actual restrictiveness of the controls has been reduced by more liberal licensing policies. In some countries, exchange controls are now more or less nominal, retained for possible need in the future. The experience nearly everywhere has been that, once restrictions are relaxed, the exchange authorities are reluctant to reimpose them.
The ultimate elimination of all restrictions and discriminations involves the establishment of convertibility, particularly of the currencies of the great trading countries. The convertibility of sterling, one of the two principal reserve currencies, is clearly of strategic importance. Although their currencies remain inconvertible, the United Kingdom and most of the countries in Western Europe have made them transferable over a wide area. This extension of transferability is still going on and it has resulted in a steady approach toward the equivalence of these currencies and dollars.
As a consequence of wider transferability, some of the practices associated with inconvertibility are being moderated. Bilateralism has been substantially reduced during the past year or two. As progress in this direction continues, the patterns of multilateral trade that evolve will more nearly approximate those that would prevail under convertible currencies. Progress has also been made toward reducing the dollar import discriminations, which are a practical consequence of inconvertibility. In some countries, dollar discrimination is now negligible or nonexistent. What remains today is relatively small in comparison with such discrimination five years ago.
The problem of convertibility is not merely a legal problem. What matters most is that countries earning any currency should be able to use their receipts to buy imports from any country and to make payments in any currency. The practical problem is to find the means to move gradually from the transitional arrangements under inconvertibility to full-scale convertibility without risking the progress already made in strengthening the pattern of world payments.
The Task of the Fund
The Fund is prepared to help its members to deal with the payments problems that will arise in an expanding world economy. Although temporary setbacks may be unavoidable from time to time, progress in relaxing restrictions and discriminations should be accelerated as exports become large and deficits become relatively small. The Fund Agreement recognizes that the general use of exchange restrictions may be necessary at a time of world-wide payments difficulties. Once these difficulties have been met, it is contemplated that members will secure Fund approval for the temporary retention or imposition of such specific restrictions as are or may become necessary. Restrictions and discriminations cannot be regarded as a substitute for financial policy in dealing with underlying payments problems, or as a substitute for use of reserves and credits from the Fund in dealing with temporary payments difficulties.
Our members have shown that they regard drawings on the Fund as equivalent to the use of their own reserves—to be drawn as needed and to be replenished when the need has passed. Progress has been made in recent years in giving members greater assurance that they can count on help from the Fund to meet temporary balance of payments difficulties. Our members have, as you know, practically complete freedom to draw the equivalent of their gold subscription to the Fund, what we call the gold tranche. As has been said in the Annual Reports for 1955 and 1956, our attitude is liberal toward drawings in the first credit tranche, that is where a drawing would increase the Fund’s holdings of a currency to between 100 per cent and 125 per cent of the quota. Members should have no doubt that, given the need and justification, drawings on subsequent tranches will be permitted.
During the past three years, eight exchange transactions and four stand-by agreements have been for amounts in excess of the 25 per cent of quota originally mentioned in the Articles of Agreement as the normal limit; the Fund has waived this limitation in each of these cases. The comparatively frequent use of the waiver has shown that drawings in excess of quota limitations are not to be regarded as something so exceptional as to be of little practical importance to members. The Fund and its members understand now much better the manner in which assistance from the Fund can be integrated with the use of their own reserves. I am confident that the resources of the Fund will be used to an increasing extent and that they thus will become an even more important addition to the reserves available to its members than they have been in the past.
I believe that there has been a steady strengthening of the mutual confidence between the Fund and its members. An increasing number of our members have come, and will probably continue to come, to us for advice and assistance on a whole range of problems. It is the hope of the Fund that more determined efforts will be made by its members to stabilize their economies and to put into effect the fair exchange practices for which the Fund stands. Members, in turn, will need and will be able to obtain more assistance from the Fund, both technical and financial. If they were to approach the Fund confidentially and in good time, it would often be easier to work out a reasonable and helpful solution to their problems. The Fund has sometimes been confronted with measures on which a decision had to be taken within a few days, without sufficient information and to which, therefore, the Fund could not give adequate consideration.
The objectives of the Fund will be achieved only if its members are prepared to pursue financial policies that are consistent with the maintenance of a balanced payments position. Even large reserves and generous assistance from the Fund and others cannot, in the end, prevent balance of payments difficulties in a country that does not act effectively to prevent price and cost inflation. On the other hand, a country that pursues sound policies will find that it can deal with the payments difficulties that arise, relying on the use of its own reserves and assistance from the Fund. The greatest contribution that members can make to their own well-being is to direct their financial and monetary policies to internal stability and external balance.
With this Annual Meeting, I bring to a close my five years of service in the Fund. It has been a stimulating experience to work with the officials of our members and the distinguished men on the Board of Governors. I want to express my appreciation for the loyal and devoted efforts of my associates on the Executive Board and my colleagues on the staff. I welcome my successor, my fellow countryman and friend, Mr. Per Jacobsson, and I leave the Fund with my best wishes for all who will guide it in the years to come. I have faith in the efficacy of international monetary cooperation and in the successful collaboration of the Fund and its members.