Statement by the Chairman of the Board of Governors of the International Monetary Fund

Abdel Moneim El Kaissouni

The purpose of this meeting is to promote an exchange of views among the Governors and Executive Directors and the management on the work of the Fund. The Annual Report of the Executive Directors has given a detailed account of the Fund’s activities for the past year, and the Managing Director’s statement which we heard yesterday brought the Report up to date. I hope that the discussion this morning can be rather informal and that the Governors will feel free to participate.

I would like, if I may, to start the general discussion on the Fund’s Annual Report by making a few introductory observations.

I would like first to extend my sincere congratulations to the Executive Directors for the excellent Annual Report they have presented to us. We owe a debt of gratitude to Mr. Ivar Rooth, the Managing Director of the Fund, for the good work he has done during the year. We are also particularly grateful to the staff of the Fund for their unselfish and continuous efforts and their devotion to the service of this international cause. I have had the privilege of being a member of the staff a few years ago, and I would like on this occasion to express to them my admiration of their work and my best wishes for their continued success.

Both the Annual Report of the Fund and the address of the Managing Director point to many encouraging developments and raise a number of interesting issues which I am sure will provide food for thought and discussion. There has been a continued high level of economic activity in most countries with a corresponding high level of international trade. The ability demonstrated by many countries to adjust themselves without great difficulty to the moderate fluctuation in business activity that took place in the United States last year is welcome evidence of the growing strength of their economies. The pace of recovery has, on the whole, been substantially accelerated, and a number of countries have been able to improve their international payments and do away with many of their exchange restrictions.

The remarkable improvement in international payments that has taken place in recent years has, in a large part, been the result of the sounder monetary policies pursued in many member countries. It must be gratifying to the Fund that the measures that were taken by a large number of members were in conformity with the policies advocated by the Fund.

The Annual Report points to the steady progress that has been made in reducing restrictions and discriminations in international payments and the steps that have progressively been taken in widening the convertibility of currencies. The host of individual liberalizing steps taken by member countries during the last two years represent, together, considerable progress. Here I may especially mention the steps taken by the Benelux, Germany, and the United Kingdom to increase the transferability of their currencies, since progress toward convertibility by these countries is important to all of us. The adoption of these liberalizing steps, along with the progressive reduction of restrictions and discriminations by many countries, is evidence of a cautious but steady approach to convertibility.

Despite some recent setbacks, it seems that the need for an early return to a multilateral system of payments is now more clearly and widely recognized. I have no doubt that the International Monetary Fund will exercise its great influence toward the attainment of this objective and will facilitate the process and create the necessary confidence by suitably placing its resources at the disposal of members needing such assistance. Basically, however, the viewpoint of the major countries concerned, that the final step should be taken only at the time when the intrinsic situation is strong enough to warrant it, needs in my view to be appreciated.

The progress to which I have alluded has not, however, been uniform, and in the formulation of future policies in the International Monetary Fund it will be necessary to recognize this situation. It may seem, at first sight, to be unreasonable that some countries should lag behind. However, we should ask ourselves, coolly and objectively: Why do these countries have difficulties, and what can they reasonably be expected to do? In many cases the causes either are due to external circumstances beyond their control or stem from difficulties which cannot be completely resolved except with considerable sacrifice and over a long period of time. The country with difficulties is frequently no less eager than others to fulfill its obligations under the Articles of Agreement; but it is more conscious of the obstacles which it must overcome to achieve its goals.

It is easy to refer these lagging countries to the example of other countries with similar resources or of a similar size that have overcome difficulties and achieved a desired internal and external equilibrium. It is, however, necessary to remember that in many such cases recovery may have been due to extraordinary and large doses of foreign assistance or to other special advantages and circumstances. To those fortunate countries, the transitional period under Article XIV may be thought to be a thing of the past. But to many other countries still faced with trade and payments difficulties and with a long way yet to go to develop their economies, the continuation of discrimination and restrictions under Article XIV is still necessary. A closer examination of the problems faced by member countries will reveal major and profound differences between them—not in objectives or desires, nor in a sense of responsibility, but rather in the difficulties they have to deal with and in the available practical remedies. The Annual Report has recognized this fact when dealing with the different problems, such as those arising from bilateral arrangements and in general from discriminations and restrictions under Article XIV or Article VIII. I hope that the Fund will continue to take a realistic view of things in the formulation of its future policies.

It is gratifying to note a further liberalization of the Fund’s policy in applying the waiver clause to help small quota countries overcome their temporary payments difficulties, and I welcome the Fund’s preparedness to help member countries, large and small, with its resources, financial and technical, in an effort to enable them to move closer to the objectives of the Fund.

The Fund’s rules and policy are practical and flexible without being weak or ineffective and, while I plead that strong countries should help the other members in a common effort to consolidate the progress so far achieved, I make a similar plea for all members to continue their close cooperation with this useful institution for the attainment of objectives which are of common interest to all of us.

Statement by the Governor for the Union of South Africa—E. H. Louw

At the outset I would like to associate myself with those of my fellow Governors who have expressed their appreciation of the invitation extended to us by the Government of the Turkish Republic to hold our Tenth Annual Meeting in the historic city of Istanbul. It is perhaps of some significance that the second decade in the history of these twin organizations should start in this city, which is situated on two continents—at the point where East meets West. I trust that this is an augury of greater cooperation in the future between the countries of East and West in the promotion of worldwide financial stability and a freer system of international trade and payments.

I should like to associate myself with what has just been said by our Chairman. I think that the Managing Director of the Fund, Mr. Rooth, is to be congratulated not only on his statement but also on the work and achievements of the Fund during the past year.

It is with some diffidence that I, as a newcomer to this illustrious gathering, am participating in the discussions on the comprehensive and lucid Report which Mr. Rooth, the Managing Director, yesterday presented to us.

In my previous capacity as Minister of Economic Affairs, I was closely associated with the General Agreement on Tariffs and Trade, and that association convinced me that, without a sound international monetary system, lasting multilateralism in international trade cannot be achieved. I was then also keenly interested in the activities of of the Fund in the important field of international monetary co-operation.

The Report which is before us records that “In the course of 1954 and the first half of 1955, further considerable progress has been made in the direction of freer and less discriminatory trade, on the basis of freer and more multilateral payments arrangements.” A number of countries have relaxed their restrictions and though a disappointingly large number of them are unfortunately still maintaining bilateral arrangements, the tendency toward bilateralism seems to be declining. The Fund deserves credit for the active part which it is playing in promoting the attainment of our common objectives.

Recently, there have been signs of a revival of the strain in the economies of various countries but, as was pointed out in the Report, there is an increasing willingness to use the instruments of monetary and fiscal policies for ensuring stability, and this is, perhaps, one of the most promising developments in the postwar period. One can only hope that these measures will be actively used to maintain the gratifying progress that has been made during the past year.

On an occasion such as this we should, however, ask ourselves what progress has been made along the road toward our ultimate goal. Ten years after the cessation of hostilities, we find (a) that 47 of the 58 members of the Fund still avail themselves of the so-called transitional arrangements under Article XIV and that restrictions on trade and payments are still the rule rather than the exception to the rule; (b) that trade is continuing to be diverted into artificial channels by a network of bilateral trade and payments arrangements; and (c) that the gold and dollar reserves of most non-dollar countries are as yet far from satisfactory and, what is more, that their current balance of payments with the dollar area is likely to remain precarious without the artificial props of import restrictions and American aid.

The precariousness of our achievements is, in fact, stressed by the Fund itself, in its Report, which points out that “The balance of payments of the rest of the world is still supported by some $4 billion of U.S. Government expenditures (other than the provision of military supplies and equipment which represent a grant in kind).”

I would, therefore, suggest that such results as have been achieved rest on an insecure foundation, and that the need to seek a more fundamental solution of the problem of international disequilibrium has not diminished.

The Fund is intended to provide a forum for the dispassionate exchange of views on these fundamental problems. I, therefore, make no apologies for again raising the issue of the price of gold. I do so because I am convinced that the price of gold, while of importance to the world’s largest gold producing country, is also of basic importance to the ultimate success of both the Contracting Parties to the General Agreement on Tariffs and Trade and the Fund.

The question which I particularly desire to pose is whether we are likely to achieve, and thereafter to maintain, our dual objectives of freer multilateral trade and currency convertibility on the basis of a gold price which is frozen in terms of a dollar which has lost half of its purchasing power, as a result of the vast inflation that has taken place in the United States since 1939.

Some of my fellow Governors may question the wisdom of once more raising an issue in regard to which there is a wide divergence of views between certain member countries, and more particularly between the United States and the gold producing countries. It has even been suggested in certain quarters that the plea for an increase in the dollar price of gold might be interpreted as an unwarranted interference in the internal affairs of the United States.

Nothing is further from my mind and, in order to avoid any possible misunderstanding, I wish to stress at the outset that the South African Government does not for a moment question the right of any member, subject to the Fund’s Articles of Agreement, to act as final arbiter in the determination of the par value of its currency. But, at the same time, we do feel that this right should be exercised by each member in the light of the important changes that have taken place since the prewar days. At that time, every country enjoyed a great measure of freedom to protect its own industries and to regulate its balance of payments by import licensing and exchange control. Since then, we have evolved an international code of behavior in the sphere of trade and monetary policy. On the one hand, we have the General Agreement on Tariffs and Trade which substitutes international cooperation for unilateral action in the field of international trade; on the other hand, we have the Fund which seeks to achieve the same object in the field of international monetary policy. Members of these organizations have voluntarily accepted restrictions on their freedom of action in this field and they can, therefore, in fairness expect that the leading countries should determine their policies with due regard to the common objectives.

As far as the Fund is concerned, the prime object of cooperation between member countries is to ensure exchange stability, combined with a multilateral payments system, by linking their currencies to a common measure, namely, gold. It will not, I think, be denied that the undervaluation of gold in terms of a key currency, such as the dollar, may be as much a threat to exchange stability as an over-or undervaluation of a major currency in relation to other important currencies, and that both types of disequilibrium are equally matters of international concern.

By virtue of her relatively large gold reserves, her strong balance of payments position, and the fact that the dollar is not convertible into gold for her own citizens, it would appear that there are no compelling internal reasons for the United States of America to revise the dollar price of gold. But, as Roy Harrod shows in his Sir George Watson Lecture, The Dollar, the fact remains that the fixed dollar price has lowered the goods value of gold by half, and that the part played by gold as a medium of international settlement has, thereby, been seriously impaired.

Firstly, I would like to illustrate the adverse effects of the fixed dollar price on the balance of payments position of gold producing countries by showing what has happened in my own country, which is the world’s largest gold producer.

South Africa is a strong champion of the restoration of multilateralism in trade and payments, as I showed when I headed the South African Delegation to the GATT conference in Geneva last year. Thus did we not only abolish discrimination some two years ago, but we are also progressively dismantling import control. However, last year we were still faced with a deficit on current account amounting to £30 million, notwithstanding the fact that the new gold fields, which we have developed since the war at a capital cost of £180 million, contributed 2.2 million ounces of gold toward the settlement of our external accounts.

Gold represents 40 per cent of South Africa’s total exports and, in passing, I may mention that even the United States would have been faced with a considerable deficit on her goods and services account if the price of 40 per cent of her exports had remained pegged at the 1938 level. Her surplus for 1954 of approximately $1.6 billion would have been converted into a deficit of about $1 billion. A continuing deficit of this magnitude would not only have precluded foreign aid and external capital investment, but would ultimately have compelled the United States of America to take steps in order to protect her balance of payments.

To revert to the position of my own country, if the dollar price of gold had been raised by, say, only 50 per cent, our £30 million deficit would have been converted into a surplus of at least £50 million. The necessity for import control would probably never have arisen in South Africa and, by reason of our increased imports, the benefits of the higher price of gold would also have relieved the pressure on the balance of payments of a number of exporting countries.

To illustrate the difficult position in which the older mines find themselves, I might mention that 23 gold mining companies, which are responsible for 37 per cent of our total gold output, contribute only 3 per cent toward the total profits of the gold mining industry. In fact, a considerable number of the older mines will probably have to close down during the next ten years if the present gold-commodity price relationship is maintained. This premature closing down of mines, you will no doubt appreciate, would represent a permanent and serious loss to the country, quite apart from the dislocation which it would cause in local communities. The difficulties facing the gold mining industry, as the result of an insufficient price for gold, are referred to in the Fund’s Annual Report.

The other gold producing countries are, however, considerably less fortunate than South Africa. At least four of these countries were compelled to introduce subsidies in order to support their gold producers. Nevertheless, the value of total world gold production declined from $1,034 million in 1937 to $895 million in 1954. This represents a decrease of more than 13 per cent in the volume of gold production at a time when the large majority of countries urgently require increased gold reserves.

I have, so far, dealt with the gold price question merely from the point of view of the interests of the gold producing countries. I have done so for three reasons. In the first place, I strongly deny that the mere fact that South Africa’s own interests are involved in any way detracts from the soundness of our case. In the second place, concrete examples are, as a rule, far more convincing than volumes of theoretical arguments. The figures which I have quoted should settle any doubts as to the serious effect which the fixed dollar price is having on the economies and on the balances of payments of the gold producing countries. Thirdly, I do not believe that the interest of one group of countries can be ignored indefinitely, without endangering future international cooperation to the detriment of world trade as a whole.

And this brings me to the international aspect of the gold price question which has previously been stressed by my predecessor, as well as by economists of international repute.

There are certain facts which, I believe, nobody can deny. As I see the position, these facts are (1) that, if the available quantity of monetary gold is to serve as a satisfactory medium of reserve and settlement, its commodity value must be such as to ensure sufficient international liquidity; (2) that, by virtue of the great economic strength of the United States and its predominating position in international trade, the commodity value of gold for the purpose of international settlement is in effect determined by the official dollar price of gold. Consequently, by maintaining the price at $35 per ounce, the commodity value of gold has been reduced by 50 per cent since the late 1930’s; (3) that, with a few exceptions, the gold reserves of all major trading countries are still inadequate to maintain currency convertibility under conditions of unrestricted multilateral trade; and (4) that an increase in the dollar price of gold will contribute very materially toward restoring that measure of international liquidity which is essential for lasting equilibrium in international payments.

A few figures will serve to illustrate the points I have made, and I propose to take 1938 as a basis for comparison.

In that year, world gold reserves covered 107 per cent of world imports (c.i.f.) but, as a result of the decline in the commodity value of gold, to which I have already referred, the ratio fell to 46 per cent in 1954. The ratio has declined very considerably in the case of all countries, except Canada. There are only two countries whose reserves at present cover more than six months’ imports, namely, the United States of America and Switzerland. In the case of the United Kingdom, gold and dollar reserves covered nine months’ imports in 1938, but only three months’ imports in 1954. The gold reserves of the United States covered 71 months’ imports in 1938, compared with 24 months’ in 1954. This may seem ample, but if it is borne in mind that $11 billion of the reserves is locked up by statutory requirements and that the short-term foreign liabilities amount to over $7 billion, then even the United States of America’s reserves of $22 billion do not appear to be excessive.

The gold reserves of the United States of America, therefore, appear to be large only when viewed against the background of the inadequacy of the reserves of most other countries. Unless the reserves of such countries are built up to a much higher level, few of them could take the risk of experimenting on an appreciable scale with the liberalization of their import trade. The importance of this factor is perhaps not sufficiently appreciated by those countries which were fortunate enough to escape the necessity of imposing import control.

After years of control, it is extremely difficult to gauge to what extent imported goods can be absorbed by a particular market if import restrictions should be abolished. Countries with limited reserves are, therefore, in practice, compelled either to be overcautious in the relaxation of control, or to reimpose restrictions at the first signs of an unfavorable turn in their balance of payments before sufficient time has lapsed to test the long-term effects of relaxation.

It must be obvious, therefore, that the inadequacy of reserves plays an important part in the perpetuation of exchange and import restrictions.

It has been contended that 1938 is not a satisfactory basis for purposes of comparison because, it is claimed, both the gold-commodity price relationship and international liquidity were then still exceptionally favorable as a result of the world-wide increase in the price of gold in the early 1930’s. On these grounds, some critics have gone back more than a quarter century for a base year in order to disprove (or attempt to disprove) the case of the gold producing countries! But I claim that, in view of the far-reaching changes that have taken place in international economic relations, it is unrealistic to go so far back in history in search of a suitable base year.

Leaving aside for the moment the questions of the base year and whether or not there is justification for a 100 per cent increase, I would like to illustrate the beneficial results which would flow from an upward readjustment of the price of gold. For that purpose, I will base my calculations on an increase of only 50 per cent.

I believe with others that no other single factor could make a greater contribution toward the strengthening of the reserves of the non-dollar world than an increase in the dollar price of gold. A 50 per cent increase, for instance, would immediately add $6 billion to the reserves of the rest of the world. This is substantially more than the total amount which these countries have been able to add to their reserves during the three years 1952, 1953, and 1954, with the assistance of American aid in its various forms.

In view of the necessity of permanently strengthening the reserves of non-dollar countries, it is not suggested that this gain in reserves should, or would, be dissipated by the premature and general abolition of import restrictions. But the increase in reserves, together with the increased value of the current gold production, would give a tremendous impetus to the movement of freeing world trade from the shackles of import and payments restrictions.

The importance of securing a substantial increase in the dollar value of the gold reserves of the non-dollar countries cannot be overemphasized. As a result of the structural changes which have taken place in the world economy since 1939, it is not unlikely that there will be wider temporary swings in the trade of individual countries, and that a greater measure of international liquidity will, therefore, be required than in the prewar years. The staff of the Fund itself, in its study on the Adequacy of Monetary Reserves, also came to the conclusion that “a larger amount of reserves relative to trade may be necessary now than would have been the case in 1938, in order to provide the same degree of relative adequacy.” But, as I have pointed out, international liquidity, as measured by gold reserves in relation to imports, has not increased, but has, in fact, declined by more than 50 per cent.

The extent to which international liquidity has been reduced is brought out even more clearly in the statement made by the Managing Director when he presented the Annual Report to this Meeting. Mr. Rooth pointed out that, while the value of world trade is at present nearly four times the prewar amount, there has been only a modest increase in the gold and dollar reserves of many countries outside the United States. The fact that he envisages that even countries with sound financial policies may, from time to time, need the help of the Fund bears eloquent testimony to the need for a general increase in gold reserves. Unless one believes in miracles, I cannot see how this position could be rectified without a substantial increase in the price of gold.

There is another factor which stresses the urgency of increased liquidity. We all welcome the efforts which are being made to restore currency convertibility, but, I would ask, is anybody at this Meeting so optimistic as to believe that, with the present state of gold reserves, convertibility could be maintained without the continuing support of import restrictions? I believe in convertibility, and I am strongly in favor of convertibility being restored even if it has to be temporarily supported by import restrictions. But in the long run, convertibility loses much of its significance, if it is not accompanied by the liberalization of international trade. I can foresee circumstances arising where, without a very substantial increase in reserves, convertibility may, in fact, necessitate an intensification of restrictions.

In this connection, it must be remembered that world economy and international trade have up to the present been sustained to a considerable extent by the heavy demand flowing first from the accumulated wartime backlogs and, thereafter, from rearmament. If the peace offensive which is now under way should be successful, as we all hope it will, world demand will, for the first time since 1939, revert to normal peacetime proportions. It is difficult to predict how this will affect international trade, but it would appear that the uncertainty of the situation further emphasizes the need for increased international liquidity in order to avoid a large-scale revival of exchange and import restrictions.

I note from the Report that the Fund is prepared to support members who desire to make their currencies convertible. This was repeated by the Managing Director of the Fund in his address yesterday. I welcome this positive attitude, but the question arises whether members should take the risk of having to contract substantial debts with the Fund for the purpose of meeting a situation that obviously calls, in the first place, for the strengthening of their first line of defense, namely, their gold reserves.

I am not suggesting that an increase in the price of gold will suddenly solve all the economic and financial problems with which the world is faced. I also appreciate that the reluctance of the United States to take action is due to a fear that an increase in the price of gold might not only have serious internal repercussions but might also jeopardize the substantial degree of international economic and financial stability which has been achieved, largely as a result of the magnanimity of the American taxpayer.

It is more particularly the fear of a revival of world-wide inflation that haunts responsible authorities, not only in the United States, but also elsewhere. This fear is perhaps understandable in the light of the phase of inflationary spending through which the world passed during the period of postwar reconstruction.

But this phase of reconstruction is now over and, while it is true that, as happened in prewar days, there is the possibility of inflation from time to time in individual countries, the leading countries have reached a degree of stability which enables them to curb inflationary tendencies by means of monetary and fiscal measures without causing any serious dislocation in their economies. Since the beginning of this year, several countries have shown that they are prepared to take even drastic steps in order to keep their economies on an even keel.

In any case, under present-day conditions, inflation arises mainly from domestic monetary and fiscal policies which are in no way related to the supply or price of gold. This is shown by the inflation that has taken place in the United States, notwithstanding the fact that the dollar price of gold has remained pegged at $35 per ounce. The contention of the gold producing countries is that the price of gold should be readjusted for the very reason that vast inflation has already taken place, and that the failure to effect such readjustment is one of the important causes of the continuing international disequilibrium. In other words, we do not plead for recurring adjustments of the price of gold in accordance with changes in commodity prices, but rather we regard the proposed adjustment as a major surgical operation which has been necessitated by the financial disturbances caused by a costly war. To argue that this operation should not be performed because some countries might use it as an excuse to resort to renewed inflation is tantamount to suggesting that a particular remedy should not be applied to a patient because the basic improvement in his health might induce him to indulge in further excesses.

I do not deny the possibility that a few countries may, temporarily at least, have to sterilize part of their gold reserves in order to avoid possible inflationary effects of an increase in the price of gold. But this would not be the first time in the financial history of the world that a policy of sterilization has had to be applied. It is a policy that certain countries may be obliged to follow, from time to time, in order to preserve a stable system of international settlement, without which the idea of a world free from trade and payments restrictions becomes an empty and idle dream.

I have tried to show that the dollar price of gold is a matter of vital importance for international economic equilibrium and that it is consequently a legitimate subject for consideration by the Fund. I believe that I have shown that an increase in the gold price would be of inestimable benefit to all countries (not only gold producers), and that it may be a necessary prerequisite for maintaining a system of unrestricted multilateral trade and payments. If the price of gold is not increased in terms of dollars, then it may become unrealistic to continue to press for the elimination of restrictions; indeed, the non-dollar countries may be forced to seek an amendment of the Fund Agreement in order to allow much greater scope for discrimination than is permissible at present. I sincerely hope that we shall not be driven to such negative measures while there are positive ways of easing the world trade and payments situation.

The case that I have put forward in support of an increase in the price of gold has in the past been advanced by my predecessor, and also by prominent economists, some of whom do not hail from gold producing countries and who cannot, therefore, be regarded as biased.

I wish to appeal particularly to my fellow Governor from the United States to examine this matter afresh and to bear in mind that probably the majority of the countries represented at this conference share the South African view that an increase in the price of gold will lay the foundation for a real advance toward our common goal of liberalization of world trade and payments.

Statement by the Temporary Alternate Governor for India—H. M. Patel

May I at the outset associate myself with the sentiments expressed by the earlier speakers and say on behalf of the Indian Delegation how grateful we are to the Government of Turkey for their kind invitation to hold the Annual Meeting here and for all the sincere and thoughtful arrangements made by them to ensure the success of the Meeting.

I should like to pay my tribute to the clarity and lucidity of Mr. Rooth’s presentation of the Report which is matched only by the ability with which, during the year, he has presided over the Fund’s operations. We recall also with great pleasure Mr. Rooth’s visit to India early this year. We had during this visit many informal and valuable exchanges of views with him. These, together with Mr. Rooth’s sincerity and cordiality, have left behind a deep impression.

It also gives me great pleasure to congratulate the Executive Board and the staff for their vigilant and careful study of the problems in their charge and the formulation of policies with a constant concern for the promotion of international cooperation and exchange stability.

I welcome the clarification made in this year’s Annual Report of the Fund’s attitude toward applications for drawings beyond the first credit tranche. This represents an advance toward a more flexible policy in regard to the use of the Fund’s resources, and I hope that this will bring about greater operational success for the Fund and wider use of its resources by the member countries. So, also, do I welcome the exertions of the Fund’s Board, on the one hand in constantly urging members to reduce, and eventually to eliminate, their reliance on bilateral practices in international trade, and on the other in urging the more advanced countries to adopt more appropriate commercial policies designed to achieve a world payments balance.

While these changes are very welcome, we feel that there are aspects of the Fund’s policies which need further careful study at the hands of its experts. There are, for example, complicated questions of procedure relating to the maintenance of transitional arrangements following the introduction of convertibility to which a reference was made in Mr. Rooth’s presentation of the Report, as well as questions about the adequacy or otherwise of the quotas, the appropriateness of the present level of charges on the use of the Fund’s resources, etc.

As regards charges, for instance, during the last four years the schedule has been revised upward twice. The combined result of these two revisions has been to raise the level of charges as a whole to a higher plane than that agreed upon at Bretton Woods. It is not my intention to discuss in detail the principles underlying an appropriate schedule of charges for the use of the Fund’s resources; I am content for the moment with the assurance that the Fund’s attitude toward this matter remains flexible and that policy on this subject is constantly under review. I hope that this question will be considered again by the Board in the light of the wider objectives of the Fund and not just as a simple matter of fixing an appropriate interest rate on the assumption that a drawing on the Fund represents just another variety of short-term credit accommodation. To my mind, members’ transactions with the Fund are far more of the nature of exchange transactions than of straightforward short-term loan transactions, and, if you accept that to be the correct view, you must inevitably modify your approach toward the policy regarding the Fund’s charges.

Then again, considering the changes in the structure and patterns of trade that have taken place since the inception of the Fund and the uncertain prospect that still surrounds the question of convertibility, it might be necessary for the Fund to examine the desirability of modifying the provisions regarding repurchases which require such repurchases to be made only in gold or convertible currencies.

I would also suggest that the Fund continue its valuable studies on the Fund’s policies and attitudes toward the somewhat special characteristics and problems of the underdeveloped areas. Although opposed to restrictionism in principle, the Fund has in practice rightly distinguished between situations where restrictions are imposed so as to ensure a steady and careful utilization of exchange resources—in other words, where there is real planning—and situations in which restrictions are no more than haphazard and ad hoc remedies against balance of payments deficits. While thus the Fund is inclined to be more patient with an orderly restrictive system than with an erratic one, we do hope that its over-all attitude toward exchange restrictions in the underdeveloped countries will not tend to become too exacting. I mention this here because the Fund’s policy in this matter would assume special importance when new rules more appropriate for convertibility are being devised. In this connection, we are happy to note that the Fund has in some ways recognized the distinction between countries whose financial situation places them in a position of special responsibility and under-developed countries that cannot be expected to show the same degree of initiative. Without questioning the advantages which general convertibility might bring to underdeveloped countries, such as freedom to purchase in the cheapest markets following the termination of discriminatory policies, I should like to make the point which has already been recognized by GATT in connection with quantitative restrictions, that there might still be need in the under-developed areas with low standards of living for some over-all exchange restrictions imposed as part of a planned program of development; for, I submit, in the special circumstances affecting underdeveloped areas such restrictions have a definite role to play in promoting stable and steady economic growth.

If I have ventured to put forth these suggestions, it is only to emphasize their importance; for all these, I have no doubt, are already engaging the attention of the Fund’s staff and the management, who, judging from this and other reports made available to us, have been unremittingly devoting their expert knowledge with sympathy and understanding to evolving policies designed to attain the Fund’s important objectives.

Statement by the Governor for the United Kingdom—Richard Austen Butler

I should like to join in congratulating Mr. Rooth upon the preparation of another excellent Report, which is full of valuable information about world economic development as well as about the activities of the Fund during the past year. The Report reveals that for the world as a whole it has been a good year, although particular countries have encountered difficulties of one kind or another. For example, in the United Kingdom a too buoyant economy has called for measures to control the surge of expansion. In 1953 and 1954, we were able to remove a large number of restrictions upon imports into the United Kingdom from both dollar and non-dollar sources. The effects of such a removal are cumulative, but they are not always immediately apparent.

We can recognize positive improvements, but, at the same time, some problems have been created. The removal of our restrictions has released human energies and increased human freedom. It has stimulated competition and initiative and helped to open up prospects. Thus, instead of looking back to prewar standards, we look forward to improving our standard of living. This is the human reality underlying our technical talk of development or its antithesis—restriction.

So much for the improvements; now for the problems.

Obviously we have to move step by step to the goal of freedom in trade and payments, but, though we have moved only step by step, the immediate result of the relaxations of 1954 was to bring about an increase in our imports, especially from the dollar area. This gathered momentum and such imports—both total as well as from dollar sources—were very considerable in the first half of 1955.

The U.K. economy, from its special nature, depends on a high level of imports both of food and of raw materials if we are to maintain a rising standard of living and a stable level of employment; but every U.K. Chancellor must keep a close eye on the import bill, especially when it reaches so high a figure as for the first half of 1955. It is true that we have considerably increased our exports, and that must not be forgotten, but, on examination of all the facts and figures, we are dissatisfied with the share of increase in world trade which we have gained and with the way our balance of payments has been moving, and so we are taking firm steps to remedy this situation by taking all necessary measures on the home front.

Since 1951, the U.K. Government has never shown any hesitation in taking strong and appropriate measures, whenever necessary, to curb home demand and restrict inflation, to rectify the balance of payments situation, and to maintain confidence in the pound. Monetary measures do not yield quick results, but we are now seeing the first results of some stringent measures to restrict credit which were introduced some months ago. Besides this, we are engaged in examining the whole field of public expenditure (central government, local government and nationalized industries) with a view to limiting the demands on our labor and resources. We shall also take whatever steps are necessary to free goods to meet export demands.

It is not by physical controls that we intend to solve our difficulties; nor shall we go back on our policy of widening trade and moving to a system of freer payments. We shall deal with the disease, rather than the symptoms, by getting to the heart of the matter—the balance of supply and demand for labor and materials at home. And so our future policy will continue to be on these fundamental lines.

In our overseas economic policy we have two great aims: to secure a stable balance of payments for the United Kingdom—indeed, for the sterling area—and to strengthen sterling as a world-wide international currency. The present must be a period of consolidation and strengthening on the home front before we make any further moves forward on the trade or the exchange front. Meanwhile we stand by the oft-repeated statement of the conditions the fulfillment of which will make further advances possible. These are, in short, the achievement of strong internal economies within our area and the prospect of adequate credit facilities and trade opportunities.

There has been some discussion recently in various quarters about the nature of the U.K. views on rate policy, so let me repeat what I said in the House of Commons on 26th July of this year. This is what I said:

There is no doubt about the policy of the Government in relation to the exchange value of the pound sterling, and I can give this policy in one sentence. It has been, and will continue to be, the maintenance of exchange parity of $2.80 to the pound, either in existing circumstances or when sterling is convertible. In the long run this must depend upon our efforts. Nothing else can replace these.

I have made it clear that we do not contemplate any early move on any—and I repeat any—aspects of the exchange front. We must, first, go through the arduous process of strengthening our internal and competitive position. My Government has taken no decision on the timing of the convertibility of sterling or on the nature of the exchange arrangements after that date.

It will thus be seen that all discussions and rumors about impending changes of the parity of, or margins for, sterling are unrealistic and irrelevant.

I hope henceforth that the efforts we shall make in the United Kingdom to strengthen sterling and prepare the way for the future will not be hampered by false impressions or by inaccurate reports.

Other countries, too, have their problems. There are signs of inflation elsewhere, and it is to be noted that even countries which have no trouble with their balance of payments—such as Germany, Belgium, and the United States—have taken steps designed to restrict the expansion of credit. This is clearly a time when we must watch inflation and the measures being taken to curb it.

In many respects, world monetary equilibrium today is by no means soundly based, and it is not a time for taking risks which cannot be calculated. World conditions are still largely dominated by the economy of the United States of America; much depends for all of us on the world dollar supply and we all watch the U.S. balance of payments with interest.

Here we note that after a long period, during which foreign-held dollar balances rose, they turned down in the first quarter of the year. Although this movement has again been reversed, the long-term decline in the U.S. gold stock has also slowed down in a marked fashion.

Some years ago now I said that “trade, not aid” was the way in which the world dollar problem would have to be solved. U.S. exports still, however, run steadily far above U.S. imports. Only trade measures will secure a permanent and dependable balance.

We acknowledge the initiatives of the President of the United States to promote liberal trade policies. Nevertheless, progress in U.S. “good creditor” policies has not yet yielded the results which give other countries the assurance of a continuing trade balance between the dollar and non-dollar worlds. Really, in recent weeks, there have been a number of signs of back-pedaling. Yet now should be the time surely to abandon the metaphor and the speed of the velocipede and hope for a more up-to-date propulsion toward wider trade opportunities.

We hope that Congress will act next session on legislation which was before it this session to deal with the Organization for Trade Cooperation, customs classification, and so forth.

The ability of the non-dollar world to make further advances is intimately bound up with further progress in “good creditor” policies, more especially as the trade gap with the dollar area is at present filled up by methods which are generous and which yet may not be permanent. Aid and overseas military expenditure are, in the nature of things, likely to decline—the former perhaps more quickly than the latter.

U.S. overseas investment falls far short of filling the gap. We shall discuss some aspects of this in Sessions of the International Bank for Reconstruction and Development, but the fundamental difficulty is the attractive opportunities for investment in the United States itself. Developments in U.S. policies, therefore, are all-important in bringing about an expansion of trade. The policies of the non-dollar world may well be rigorous insofar as their own internal problems are concerned; but only imaginative advances on the other side will ensure that we can all go forward together.

Against this background, what is the role of the Fund? It should encourage members to get rid of restrictions with, on the one hand, a realistic assessment of the limits imposed by the existing world situation and, on the other, an appreciation of the interdependence of the restrictions applied by one country with those applied by another.

At the last Meeting, I suggested that there might be danger in continuing too long a transitional provision such as Article XIV of the Fund. Executive Directors have examined the problems involved in moving from Article XIV to Article VIII and have found that the difficulties are considerable. It would be a mistake to underestimate the intricacy of the problem or to reach a rushed decision. We need much further thought, as also on the subject of ways and means of tying closer links between the International Monetary Fund and the Contracting Parties to the General Agreement on Tariffs and Trade in supervising restrictions.

We must also start now to consider the relationship between the International Monetary Fund and the European Fund when the latter comes into being. I hope that staff discussions can take place, and be brought to a successful conclusion, without the need of a formal resolution. But if Governors of other countries, members of or associated with the Organization for European Economic Cooperation wish it, I am ready to move such a resolution.

The International Monetary Fund can also help members to get rid of or avoid restrictions by making its resources available. The Executive Directors have formulated for us in the Annual Report the policy they are now following. This is a sound policy appropriate to the present situation, and we should endorse it. The Fund, however, is a developing institution, and we would all recognize that this statement of policy is not necessarily unalterable for all time.

My South African colleague, whom I am sure we all welcome, who has taken on the mantle of our old friend, Mr. Havenga—and wears it, if I may say so, with great distinction—has referred to the substantial advantages to the stability of the world balance of payments to be derived from an increase in the monetary price of gold.

I do not underestimate the importance of the issues which he raised or the need to choose the right moment for action. Provided we choose the right moment, an increase in the value of existing gold reserves would make it easier for the world to ensure that temporary balance of payments fluctuations are dealt with without recourse to restrictive measures.

During the past year, the United Kingdom has experienced some setbacks in the balance of payments position. As I have explained, we are dealing with them by classic and fundamental methods which do not involve withdrawing such freedoms in trade and payments as we have been so far able to achieve. We shall go forward again as soon as the necessary conditions for progress are fulfilled, namely, satisfactory internal policies, an enduring level of world trade, and adequate finance.

We are doing what is necessary to put the internal position right, for on this all other things depend. The other conditions depend on both the good will of our friends in other countries and on their ability to carry appropriate policies into effect. And on our success depends, in the end, the prosperity and peace of all our countries. But I know, of course, that the perfect moment never comes. In deciding when to go forward, I shall not forget what was written at the end of the last century by a young British cavalry officer who has only recently retired from the office of Prime Minister of my country. This is what he wrote: “… while the historian may easily mark what would have been the best possible moment for any great undertaking, the good moment must content the administrator.”

Statement by the Governor for Thailand—H. H. Prince Viwat

It is always a pleasure to be able to congratulate the Fund upon the quality and the clarity of its Annual Report, and I am happy to have this opportunity of doing so.

As I see it, this Report is pervaded with the blithe spirit of progress toward convertibility. In urging members in this direction, the Fund seems to say, with Shakespeare, that “There is a tide in the affairs of men which, taken at the flood, leads on to fortune.” I hasten to add that I do not question the wisdom of Shakespeare and the Fund. But I would ask to be allowed to draw attention to the existing payments difficulty and the consequent restrictions in an underdeveloped area.

In a simple agricultural economy like that of my country, maintenance of budgetary equilibrium will normally prevent payments difficulties from appearing; and if they do appear, by reason of budgetary disequilibrium or otherwise, fiscal measures are the only instrument for overcoming them.

The existing budget deficits in some of the underdeveloped countries are said, in the Report, to be due to substantial development expenditure. But, in the case of my country—and it may well be in some other countries too—geography and other factors combine to impose a heavy burden of military as well as development expenditure, for these are the two essential elements of national defense. It is this heavyweight twin, military and economic, that fiscal measures have to overpower. Time is unavoidably necessary. And perhaps I may add here that, unlike the more developed countries, we cannot wield the monetary weapon. If we were to do so, few if any heads would fall, because a well-developed credit system does not exist.

Pending the result of the fiscal offensive, there seems to be no other course than to employ, for the time being, purely defensive tactics in the form of restrictions, if the payments position is not to deteriorate.

I am full of admiration for those members who can display their powerful physique by shedding pieces of their restrictive garment. But I would ask for sympathy for a weaker member that still finds it necessary to wrap itself in protective clothing.

Statement by the Alternate Governor for Ceylon—Sir Arthur Ranasinha

I am glad to be able to associate myself in the tributes that are being made to Mr. Rooth and his staff. I have, I believe, been sufficiently long in my present position to appreciate with warmth the sympathy and understanding with which the Executive Directors and the other officials of the Fund have examined points of view expressed by us in Ceylon on the many matters arising for discussion from time to time. I recall that Mr. Rooth himself, whilst yet not wholly recovered from a major physical operation, undertook a strenuous tour to my country and other countries in Asia to acquaint himself at first hand with their economic conditions. Leadership of such character creates good will and confidence, and I think we may well look forward to continued progress under his guidance toward the attainment of the ideal of the International Monetary Fund.

In the excellent summary of international monetary conditions with which he presented the Annual Report, there are many topics which no doubt arise for comment. It is, of course, impracticable for each of us to take up all these matters, and I propose, therefore, to confine my remarks to a few of special interest to us in Ceylon. But before doing so, may I say that we have noted with much pleasure the general trend among member countries toward the relaxation of restrictions and discriminations in trade and payments that have been reported to us.

Mr. Rooth observed in his address, almost as an axiom, that in an underdeveloped country the balanced development of the economy must be the central objective of economic policy. I am glad to say that we in Ceylon have had this constantly in our minds, and a happy relationship between the Government and the Central Bank has rendered possible the coordination of fiscal and monetary policies which has effected an improvement in our economic position which we trust we shall be able to maintain. I am particularly gratified to note that recognition of this achievement has been accorded on page 72 of the Annual Report where the success of Ceylon’s budgetary policy, aiming at economic development with financial stability, has been expressly noted.

Mr. Rooth has referred to the discussions, to be continued in the coming months, on the subject of the termination of the transitional arrangements under Article XIV, and the universal application of the rules of Article VIII. Whilst keeping the matter open for further discussion, I should like to point out that the need for underdeveloped countries to maintain some form of exchange control and payments restrictions to enable them to develop their own resources fully had not, perhaps, been sufficiently realized. In the field of trade restrictions, this need has now been recognized and due provision has been made during the recent review of the Contracting Parties to the General Agreement on Tariffs and Trade. I suggest that in the field of payments restrictions, too, the need is no less compelling, and that underdeveloped countries should not be forced by sanctions to assume responsibilities which may hinder the achievement of a rapid development of resources. It seems to me that the position of under-developed countries as such, and not as victims of the last war, should be examined afresh as one that had not been specifically provided for in the Articles of Agreement of the Fund.

I like also to refer to the matter of the review of quotas which is still under discussion. It seems advisable in any quota revision to adopt some principle on the basis of which adjustments could be made of each member’s quota. Perhaps weightage to members’ international transactions and the resulting balance of payments situation is the best principle to work upon as tending to bring the quotas closer to existing economic conditions, but in any formula that ultimately emerges I trust it will be possible to reduce existing inadequacies and disparities, and to place no unduly severe burden upon the smaller members.

It remains for me to add my personal thanks to our kind Turkish hosts for their generous hospitality.

Statement by the Temporary Alternate Governor for the United States—W. Randolph Burgess

I should like to add our voice to the swelling volume of appreciation of the work and the Report of Mr. Rooth and his associates. They have set us a high standard, but a realistic one.

In reflecting on the Annual Report and the wise remarks of our distinguished Chairman and of the Managing Director, it seems to me that this year might be characterized as a year of increasing understanding. Certainly it has been a period of active negotiation. In the Monetary Fund, there have been long and earnest sessions, in which the representatives of various countries have reached more and more understanding of each other’s problems and a clearer concept of what, as a practical matter, can and cannot be done. They have achieved useful results and provide a backdrop for many decisions by individual countries.

The free world as a whole has made progress in production and trade in the past year. Indeed, in several areas, the problem has been to keep the boom under control and to avoid inflation.

In the United States, as you know, we are currently enjoying what promises to be our most prosperous year in history. We not only met successfully the readjustment last year to lower levels of government spending, as well as an inventory adjustment, but our economy has been moving forward on a broad front.

Our gross national product reached a new high annual rate of $385 billion in the second quarter of 1955, up $27 billion above the low second quarter of last year. Personal income of $300 billion is $14 billion higher than a year earlier. This current prosperity in the United States represents growth in real terms, as the purchasing power of our dollar has remained virtually unchanged for three years.

Recently we, as well as other countries, have been concerned with pressures toward inflation, and our monetary authorities have been moving to keep the use of credit within healthy limits.

Contributing also to the stability of the dollar is progress in getting the federal budget under control. The estimated federal deficit of $1.7 billion, or less than 3 per cent, in the current fiscal year is the lowest in five years. In view of the place of the dollar in the world economy, we think soundness in the dollar’s value, based on a strong and growing economy, is perhaps the greatest long-run contribution we can make to world economic stability and growth.

It was, perhaps, to be expected that continued economic growth in many countries in 1954–55 would be accompanied by growing optimism, some speculation, and imbalances, and that this would lead to precautionary steps by many countries in fiscal and monetary policy. This is encouraging and demonstrates the awareness of the corrosive internal and the throttling external effects of inflation and of the supreme importance of dealing with inflationary threats before they become serious.

In this light, I should like to comment briefly on proposals which have been made that the United States should pay a higher price for gold. The United States cannot agree with these proposals. We continue to believe that a change in the par value of the dollar, or in the official dollar price which we pay for gold, would be inflationary. Moreover, an increase in the price of gold would be in sharp conflict with our objective, which is to maintain a sound currency as the basis for economic health, not only in the United States but also wherever the dollar is important.

From a long-range point of view, as many countries have strengthened their economies and as the flood tide of inflations of the earlier postwar years receded, the financial grounds for trade and exchange restrictions have tended to disappear. The gold and dollar reserves of the countries other than the United States have continued to improve, and a vast redistribution of the world’s liquid reserves has taken place. In the six years since June 1949, countries other than the United States have added $11 billion to their gold and dollar holdings, both official and private. In the year ended June 30, 1955, they added $1.7 billion. Conversely, the net reserves of the United States have been substantially reduced. Much the larger part of this redistribution in reserves has gone to Western Europe. These gains in reserves will not serve their purpose if they do not lead the accumulating countries to expand their trade by reducing restrictions, particularly discriminatory restrictions.

It is encouraging that the Fund has been able to report considerable progress toward de facto convertibility during the past year. The recent shift to harder gold payments in the European Payments Union is evidence of progress and should open the door to further opportunities for trade with the dollar area.

We are glad to note that the Fund has devoted much of its energy during the year to various aspects of convertibility and the reduction in discrimination, which still constitute a major task in the field of international finance. Let me enumerate the activities in this field which have impressed me particularly.

First, the Fund has continued its quiet consultations with members respecting exchange restrictions and ways of achieving or maintaining the domestic monetary stability which is essential to stable and convertible currencies. The Fund is precluded from directing much public attention to these consultations, but I believe sincerely that, over a period of years, they are of great benefit to member countries.

Second, the Fund has considered the problem of bilateralism and has taken a decision which usefully focuses attention on the importance of diligent efforts by all members to reduce discriminatory arrangements. We believe effective convertibility, as it comes, ought to bring with it the end of discrimination.

Third, the Fund is currently engaged in an examination of policy respecting Articles VIII and XIV. It would be premature to anticipate the outcome of this examination. But it is encouraging to know that the close relationship between convertibility of currency and appropriate policy respecting these important Articles is fully recognized. Each passing year makes it more essential to arrive at a procedure to bring to an end the so-called postwar transitional period under Article XIV.

Fourth, the Annual Report contains a careful and agreed statement on policy relating to the use of the Fund’s resources,¹ which should enable members to judge the circumstances under which they may expect to draw on the Fund.

The International Monetary Fund works in an immensely difficult field. Its Articles embody a code of fair practice which is not easy for the members fully to observe. The advice which the Fund must give to its members is often severe and not very palatable. But after ten years of persistent work, the Fund has established a sure place for itself. We have only to look back ten years to realize the great progress from the dislocations and distress of a decade ago. This should give us courage to look forward with faith.

Statement by the Governor for Australia—Sir Arthur Fadden

I should first like to congratulate Mr. Rooth and the Executive Directors upon their heartening and informative Report. Very rightly they have given pride of place to an examination of the prospects for convertibility, and it is to this subject that I propose to direct my main remarks.

The quest for convertibility has unfortunately proved most elusive so far, although it is pleasing that the Executive Directors are able to report that in the course of 1954 and the first half of 1955 further progress was made toward freer and less discriminatory trade, on the basis of freer and more multilateral payments arrangements. The key to convertibility is, of course, the balance of payments position of the United States with the rest of the world, and I listened with interest as the Governor for the United States recalled the basic facts in this connection during his opening speech. The favorable balance of payments with the United States which the rest of the world has enjoyed for some time past has at least enabled the rest of us to reduce trade discrimination. Although it depends in part upon generous aid to other countries, it is, nevertheless, real. If it continues and some of our other problems are solved, this surplus should eventually make it possible for most countries which pursue sound internal policies to make their currencies convertible. The recent upsurge of inflationary forces in a number of important countries may impede and delay the movement to convertibility, but if adequate measures are taken in time considerable further progress should be possible by the time we meet next year.

Unfortunately, however, there are several other respects in which the prospect for convertibility has been retarded rather than advanced by the events of recent months. Convertibility can only come as the by-product of stability. An important part of world trade still consists essentially in the exchange of food and raw materials for manufactured goods, and, without a large measure of stability in the price relationship between the two, it is impossible to have stable and satisfactory international economic relations.

In the vital sphere of commodity policy, we have made little progress. Ugly problems confront us. Unless some solution is found, the world payments situation may become worse instead of better. Even though the severe postwar dollar shortage may have largely melted away, the difficulties of primary producing countries could well replace it as the major obstacle to the attainment of a sound pattern of world trade and payments.

Not very long ago, countries like Australia were exhorted to do everything possible to increase the output of essential foodstuffs, like wheat, meat, and butter. We responded accordingly and expanded our production. In many cases, in the interests of world recovery, we accepted lower prices than would have resulted from the free play of market forces. Now, however, our producers are suffering from their previous efforts and face serious difficulties in marketing their products. If these difficulties are not overcome, industrial countries will find, in turn, that their own markets will shrink.

The international agreements which have been reached during and since the war to regulate economic relations have, quite naturally, been conceived mainly to meet the interests of the leading industrial countries. The treatment of manufactured goods in international trade has to a considerable extent become regulated by an agreed pattern of rules. No such safeguard has yet been evolved for primary producing countries which continue to be largely defenseless against the heavy price fluctuations to which their exports are subject. These price difficulties are intensified by uneconomic practices in big industrial countries. Subsidies, quota restrictions, and bilateral trade deals continue to plague the prospects of primary producers and to bar the way to the most economic use of the world’s resources.

In the course of my remarks last year, I dwelt upon the huge farm surpluses accumulated by the United States, the existence and disposal of which has such an unsettling effect on some of the world’s key commodity markets, and which potentially could be disastrous. I will do no more now, therefore, than note that, in the meantime, this situation has grown not better but worse, despite the efforts which have been made by the U.S. Administration to cope with it.

I should like particularly to draw attention to the harmful effects of excessive agricultural protection in Europe. When current international agreements were being drafted after the war, it did not seem unreasonable to hope that the rigid protection of agriculture in Europe might gradually give place to more enlightened policies pursued for the benefit of their whole population and the rest of the world. But recent experience has been disappointing. Even where the general level of nutrition is low relative to that of North America, big urban populations have been largely denied access to meat, fruit, dairy products, and grain from other countries at world prices. In some countries, moreover, the food which is imported is largely subject to special arrangements and manipulation instead of free market forces. Frequently, food products feature in bilateral deals designed to foster industrial exports. Such deals lead to the wasteful use of resources and operate to exclude the exports of countries which follow faithfully the multilateral principles of the Fund and the Contracting Parties to the General Agreement on Tariffs and Trade. If the world generally, and primary producing countries in particular, are to move toward convertibility and nondiscrimination, it is most important that Europe should begin to adopt active policies designed to scale down their present barriers. I do not underrate their difficulties in doing so, but even some indication of good intentions in this respect would be most heartening to the rest of the world.

Another aspect of the current international scene which is undoubtedly contributing toward the balance of payments difficulties of countries like Australia is the extent to which, in one form or another, the governments of a great many countries have been attempting to promote their exports by schemes involving the extension or guaranteeing of export credits. As the President of the Bank pointed out in his Annual Report on Monday,¹ there has been a tendency, under the goad of export competition, for such practices to be pushed beyond proper bounds. Countries receiving excessive credits become overcommitted and run into difficulties not only in meeting their obligations under the credits but also in meeting their current cash commitments. Countries like Australia, which are in no position to extend lavish credits to sustain their export trade, have been placed at a disadvantage in marketing their exports and have also suffered in some instances by defaults on the part of purchasing countries. There can be no doubt that excessive extension and acceptance of credits has been at the root of the difficulties in which certain countries have found themselves in providing the foreign exchange required to meet commitments incurred by their importers.

It is to be hoped that the experimental information service to which Mr. Black referred will do something to check the growth of unsound governmental schemes for pushing exports by excessive credit extension. It is obvious that unless such practices can be kept within proper limits, the governments of other countries, the marketing of whose exports is adversely affected, must come under increasing pressure to engage on their part in competitive export credit schemes. Such cutthroat competition in the credit field must in the end intensify, rather than ease, the payments difficulties which are currently impeding progress toward the goal of convertibility and a freer system of trade and payments.

I should like to turn now to another key subject for the success of convertibility—an increase in the price of gold—and express agreement on this point with our South African colleague. Even when inflation has been generally suppressed and the other necessary conditions have been established, convertibility will rest on a precarious footing if the reserves of non-dollar countries are no higher than at present. Although countries outside the United States have been able to add $4.7 billion to their gold and short-term dollar assets in the last three years, these assets are still small relative to turnover. In the case of the sterling area, the gold and dollar reserves held by the United Kingdom in mid-1955 were only about one-fifth higher than at the end of 1939, while the volume of sterling area trade trebled. This illustrates both the inadequacy of present reserves and the extent to which the price of gold has been held back relative to that of other commodities. The continued low price for gold has, in fact, prevented gold production from playing anything like its prewar role in international financial settlement. It has forced the non-dollar world to make yet another onerous adjustment before the prewar pattern of currency convertibility can be restored.

The timing of an increase in the price of gold should, of course, be a matter for most careful consideration. As soon as sufficient progress toward convertibility has been achieved on other fronts, the enlargement of reserves and the reinforcement of earning power by an increase in the price of gold may well be the final stroke that will crown our efforts with success.

Finally, I should like to congratulate Mr. Rooth, Mr. Cochran, and the Executive Directors for their excellent work during the year. The fact that drawings have been small reflects the general improvement in international payments, not lack of activity on the part of the Fund. As Mr. Saad indicated in his eloquent and interesting opening address, a very great deal has been achieved by the Fund in other directions. Initiative has been exercised in guiding us all on some very vital questions. The high quality and devotion of the Fund staff under the genial leadership of Mr. Rooth and Mr. Cochran are manifest to all, and I have complete confidence that they will do even better in the coming year.

Statement by the Governor for Japan—Hisato Ichimada

It is my great pleasure and privilege to have this opportunity to speak to you at this Tenth Annual Meeting of the Fund. It would be amiss if I failed to say a few words congratulating Mr. Rooth, Mr. Cochran, and other staff members of the Fund upon their distinguished accomplishments during the past year. I am pleased to note that many of the industrially advanced countries have made further progress toward convertibility and liberalization of trade. Less developed countries have also improved their economic position. The contribution of the Fund to such progress and improvement can never be overemphasized. Of course, a wider convertibility is the goal of the Fund, and every member is endeavoring to attain this target. However, the approach to this target should be cautiously made by the members concerned, as well as the Fund, in the light of similar experiences in the 1920’s and the 1930’s.

The wider convertibility expected requires of the Fund a new policy to be set up for the application of Article VIII. This policy will naturally apply to those members that will become newly convertible; it should aim at the elimination of their restrictions, especially those of a discriminatory nature, on payments for current transactions with every member of the Fund.

Other members whose currencies are still inconvertible should also collaborate with the Fund for an early achievement of universal convertibility. However, the Fund should give due consideration to different economic situations of such member countries and should apply the new policy in such a manner as to give fair and reasonable treatment to each member according to its balance of payments and other external economic situations.

In this connection, I would like to draw special attention to such problems of less developed member countries as may be related to the wider convertibility. The Fund should accord full consideration to those problems and render necessary assistance to enable such countries to tide over difficulties peculiar to them.

As a member of the Fund, Japan is eager to cooperate in realizing the purpose of this organization. To reach the goal, we must face various difficulties and obstacles. One of the distressing obstacles to the accomplishment of free convertiblity is, of course, the existence of trade barriers. In this respect, I am glad that my country has now been allowed to join the General Agreement on Tariffs and Trade. I regret, however, that many countries invoked Article XXXV of the General Agreement, diminishing to no small extent the membership benefits of the GATT. This will tend to make difficult the over-all removal of foreign exchange restrictions. It goes without saying that convertibility will mean little if it is not accompanied by trade liberalization. It is my belief that the efforts under the GATT to remove trade restrictions should be well coordinated with the efforts of the Fund to lift foreign exchange restrictions.

During the past year, Japan has made several attempts to ease foreign exchange restrictions. Import licenses were given on a more flexible basis so that importers might exercise wider discretion as to countries from which they wish to buy and as to how to pay for the goods imported. However, it must be noted that prerequisite to the removal of foreign exchange restrictions is the maintenance of a stable exchange rate which, in turn, depends upon soundness of internal economy.

The sound money and balanced budget policy of my country has achieved considerable success during the past 18 months, resulting in a remarkable improvement in the balance of international payments and the normalization of domestic economy. This policy will be continued with even greater vigor in the coming months. We firmly believe that the continuation of this basic policy will result in the lowering of rates of interest, rationalization of industries, and promotion of productivity so that the expansion of both trade and domestic economy may be attained without causing inflation. The fact that Japan is still unable to settle all foreign claims arising out of the war and that her balance of international payments depends much upon such temporary sources of income as procurement and spending of the U.S. Forces compels her to be cautious in liberalization of foreign exchange transactions at the present stage. My country is approaching steadily, if not rapidly, the target set forth in the Agreement of the Fund.

In this connection, I am glad to say that we are endeavoring to discontinue some of our bilateral arrangements. We have also eliminated most of the linked trade practices. The circumstances which will allow the replacement of such bilateral arrangements by a multilateral system will come eventually. But at this moment, it is neither feasible nor realistic to discard bilateral arrangements all at once. Gradual shift, rather than sudden change, is necessary, since it is not so much the desire of the participating countries as the prevailing economic situation which has brought about bilateral arrangements. The Fund’s assistance to countries with foreign exchange difficulties will help facilitate a speedy reduction of dependence on bilateral arrangements. Further, I would like to point out that some practices under the regional multilateral agreements have the same discriminatory effects on outside countries as bilateral arrangements have on the third parties. Such discriminatory practices should also be eliminated in the light of the Fund’s purposes.

Before concluding my remarks, I would like to express my appreciation for the helpful advice which the Fund has given to my country. Japan is recovering from the aftermath of the war. With the assistance of the Fund and with cooperation and understanding of fellow member countries, I am certain that my country will be able to contribute to the prosperity and welfare of the world.

Statement by the Governor for Peru—Andres F. Dasso

On behalf of the Peruvian Delegation to the Fund, I take this opportunity to thank the authorities of this historic country of Turkey and the people of this beautiful city of Istanbul for all the courtesies which they have kindly extended to us.

I congratulate Mr. Rooth and his associates on the excellent Annual Report they have presented, which shows that in the year under review the tendency to a greater liberalization of trade and international payments has continued, improving the economic relations and making the re-establishment of convertibility more feasible.

On the basis of the experience gained by my country in recent years in the adjustment of the fundamental disequilibrium in the balance of payments, may I be permitted to make some brief comments on this problem.

It is well known that to reach convertibility is more complex in those countries or areas of major importance in the international economy than in those less developed, although in both cases this problem lies basically in the capacity for restoring, in a real and not an artificial manner, the equilibrium in the balance of payments, which will make it possible to bring about and maintain an effective stability in the external and internal value of the monetary unit. Success in full or partial convertibility will thus depend on the degree of balance that has been attained, both in the internal and external aspects, taking into account their interdependence. Full convertibility does not require direct controls or restrictions to maintain an internal or external equilibrium in the economy, whilst partial convertibility relies mainly on restrictions and controls.

Full convertibility implies a free play in the supply and demand of exchange with its complement of free trade, or, in other words, a situation where a chronic or permanent disequilibrium has disappeared and temporary fluctuations can be curbed only by the action of monetary and fiscal policies and the normal use of reserves. A restricted convertibility, while it may be considered a step forward, reveals, however, that a true level of equilibrium has not yet been reached.

Let us now consider which are the factors that bring about a permanent disequilibrium in the balance of payments, which is, in the long run, the basic problem of convertibility. We can summarize them into the following main three factors: the lack of stability in the internal economy, the disturbing action of external factors, and the existence, or nonexistence, of adequate monetary reserves.

In order to achieve full convertibility, it would thus be required, as an internal prerequisite, to curb, through monetary and fiscal policies, the permanent inflationary and deflationary trends which, while affecting the internal supply and demand by its action upon the balance of payments and the external markets, generate permanent unbalanced conditions. Domestic economic stability on a proper level is, thus, a prerequisite to obtain, in debtor and creditor countries, a balance of payments equilibrium and a full convertibility.

Insofar as the external factors are concerned, a coordinated action would also be required in the main financial centers to keep demand at an appropriate level, and to supplement the removal of payments restrictions and controls with a strong free trade policy that would eliminate restrictions and prohibitive and discriminatory quotas or customs duties, which are hindering the normal development of international trade, especially between industrial countries and those producing raw materials.

Likewise, a flexible exchange policy should be adopted to allow a gradual readjustment in the balance of payments, find a real level of equilibrium in the exchange market, and help those countries with scarce reserves to reach these aims.

A sound domestic monetary and fiscal policy with a view to restoring the equilibrium in the balance of payments and maintaining stability, far from being a handicap to economic development, can be, as has been the case in Peru and in some European countries, an essential prerequisite and a powerful incentive to secure equilibrium in the balance of payments and a considerable and solid development in the economy. Such a policy has also made it possible to concentrate national efforts toward an effective increase in investment and production.

Statement by the Governor for Indonesia—Sjafruddin Prawiranegara

I have read the Annual Report of the Fund and I have listened to the speech of the Chairman of the Executive Board with very great interest. I would like to convey to Mr. Rooth and his staff my warmest congratulations for the work they have done. Since our last Meeting in Washington, the world in general has changed in a decidedly favorable sense, politically as well as economically.

A word which was well-nigh forgotten during the first postwar years came to the foreground, and able economists of various countries are analyzing the many aspects of currency convertibility. Convertibility is a token of economic strength, and it is gratifying to note that we dare to think again of restoring this monetary practice. I am glad that, in considering the possibility of the introduction of convertibility, the parties concerned proceed cautiously. I note that so far no full convertibility is aimed at. Restrictions will be maintained as far as capital movements are concerned, and it is still a point of consideration whether convertibility will be applied to both nonresidents and residents or to nonresidents only. Next to this, ways and means are being explored to overcome any temporary difficulties once convertibility has been introduced. This cautious attitude is understandable if one realizes that American dollars are still pouring into Europe via noncommercial channels, and that without them balance of payments difficulties might arise.

The underdeveloped countries closely watch the course of the more developed countries. The fact that most underdeveloped countries are still far away from convertibility of their national currencies does not prevent them from taking part in existing possibilities or possibilities to come. By invoicing their trade transactions in foreign currency, they will have access to any convertibility in the future. For the present, the European Payments Union gives possibilities of profiting from the intra-European convertibility. Countries like India, Pakistan, Ceylon, and Burma, for example, are in a position like Indonesia. I might note that, from a purely monetary point of view, my country’s position will not change much if European currencies become convertible into dollars, since our trade pattern does not press us to convert European currencies into dollars. My country, in fact, abandoned any specific discrimination against imports from dollar areas earlier than European countries. We try to dispose of our goods in markets where we can find the highest prices. On the other side, we buy from the suppliers who quote the lowest prices for the goods we need. We believe, therefore, that, generally speaking, our best course is to foster direct trade between us and our buyers and sellers.

Even though not much may change immediately after convertibility, we, and I believe the other underdeveloped countries, are much interested in it. If convertibility is to be introduced and maintained by means of trade restrictions, if only a technical convertibility would be the aim, then I foresee unfortunate results indeed. We are glad to know that the parties concerned have agreed to maintain the trade liberalization so far attained. An expanding trade is the essential condition for an ever fuller convertibility. We are interested in this trade liberalization and expansion. So far, all member countries of the European Payments Union have in practice applied their trade liberalization to countries producing primary products. If the European Payments Union is to be superseded by the introduction of convertibility, it is of the utmost importance that the same trade liberalization be continued with respect to the underdeveloped countries. Easier access to the markets of the industrialized countries is essential if the producers of primary products are to enhance their foreign exchange position and gradually to abandon their own import restrictions. It would be unwise for the industrialized countries, after convertibility has become a fact, to resort to restrictions against us. If they give the underdeveloped countries the opportunity to sell more to them, they can sell more to us. They will find, as in the case of my own country, that every improvement of our foreign exchange position nearly automatically leads to increasing imports. Our latest decisions about the importation of goods follow the same pattern.

Underdeveloped countries have a high propensity to import since they must develop, and development needs capital goods and raw materials, as well as qualified labor. Provide them with ample opportunities to dispose of their products, and the high propensity to import will play its natural role.

I would like to plead also for other measures to improve the buying capacity of the underdeveloped countries. I am sorry to say that stabilization of the export markets seems recently to be a forgotten target. And yet it is still of the utmost importance. A country like the United States is in a position to hold large quantities of unsold goods without seriously affecting their general state of affairs. But weaker countries, like the underdeveloped ones, will be practically ruined if they have to do the same thing. Prosperity in itself is indeed a guarantee for a stable demand, and the prices of several raw materials have risen recently. But amidst the present prosperity, there is the problem of the unsaleable and unsold surpluses. I think the underdeveloped countries are more interested in stable prices than in rising prices, which then result in declines. If prosperity provides one defense against crumbling demand for primary products, why not provide the world with a second, if necessary a third, protection? Even now, responsible people must be thinking of methods and means with which to fight any serious setback. I would like to recommend to the Fund’s attention this problem of the stabilization of export markets for such products.

Finally, I would observe that the Fund is holding rather substantial unused reserves. This is due to the fact that in prosperity fewer countries are in need of the Fund’s help, but there are still countries which are suffering balance of payments difficulties, due to internal and external causes. I have no concrete proposal in mind, but I do see, on the one hand, unused means, on the other, unfilled wants. I wonder if some help could not be given by the Fund, of course with all the necessary precautions being taken. I feel that, if the Fund could make available more of its presently liquid assets, it would contribute to a more stable flow of goods and benefit itself from those dealings.

May I end with an appeal to all of us gathered here in our present surroundings to pay particular attention to the needs of the under-developed countries, in order that all parts of the world may share in the blessings of prosperity and ever higher standards of living.

Statement by the Alternate Governor for Pakistan—Abdul Qadir

I associate myself with the various speakers in thanking our Turkish friends for the excellent arrangements made for the conference, and for extending their traditional hospitality to all of us.

I know it is not necessary to add another voice to the chorus of favorable comment which the Fund’s Report has already drawn from other Delegates, but as a representative of an underdeveloped country I must place on record our special appreciation of the innovation made in the Report this year of dealing with the “payments developments” and “monetary and fiscal developments” in underdeveloped countries in separate sections. This manner of presentation, it seems to us, shows a growing awareness by the Fund of the special problems of these countries, which is welcome to us, for it has been our conviction that the problems are too different in character from those of more developed countries to allow for the application of uniform prescriptions of policy in all cases. We have particularly in mind some of the issues that we shall discuss in this Meeting: issues such as the termination of the transitional arrangements under Article XIV, bilateral practices, and the revision of quotas.

May we also record our gratification at the visit of Mr. Ivar Rooth, the able Managing Director of the Fund, to our part of the world last year. We are sure that the exchange of views on that occasion was mutually profitable and conducive to a clearer understanding of the difficult nature of problems that we are contending with today in our efforts to develop our economies.

While describing the over-all progress in the world economy during the year, the Report has taken due note of the deterioration in the balance of payments of primary producing countries. Though their export earnings were on the whole somewhat higher, there were wide fluctuations in individual commodities and a marked weakening of markets for textile raw materials. A major factor in the deterioration was said to be the rise in imports, due in some measure to an accelerating rate of development in the face of a steady or much smaller rise in export earnings. It would perhaps not be justified to conclude from this that the pace of development was excessive, or to prescribe that it must necessarily be slowed down; nor would it be fair to throw the entire burden of adjustment on the developing countries, for those more fortunately placed have some responsibility as well. This is not to suggest that this has not been recognized; indeed, some of the advanced nations of the world were willing to help, and countries which received assistance by way of credits or aid should be only too willing to acknowledge the generous sympathy which inspired such assistance. But other means, in some ways more substantial, were needed if the payments position of developing raw material producers was to be sufficiently fortified to bear the burden of development.

An important factor in the situation was the movement of the terms of trade as between manufacturing and raw material producing countries. It is encouraging that the terms of trade of primary producing countries had probably somewhat improved. However, the improvement was in fact limited to some commodities, and some countries did not in any case restore the relationship that existed in the years immediately prior to the Korean war. In our case, for example, the terms of trade were still kept at a level well below the base year, April 1948 to March 1949. Any measure of assistance from the advanced countries is in a sense absorbed to compensate for this maldistribution of benefits in the world economy. Likewise, even a higher level of economic assistance by advanced countries could be nullified by a further adverse movement of the terms of trade of primary producers. This probably occurred last year in the case of countries producing textile raw materials and cereals. To some extent, this was attributable to the pressure exerted by the accumulation of large surpluses of cotton and wheat in advanced countries, where price supports induced a production in excess of demand. These surpluses also caused uncertainty regarding the policies to be adopted for their disposal. Even if disposal policies were framed with due regard to the interests of underdeveloped countries producing the same or similar commodities, the large accumulation of stocks led to a general feeling of uncertainty regarding the long-term stability of the market. It is to be hoped that the mention made in the Report of the problem of disposal of agricultural surpluses will be followed by a systematic analysis of the implications of this problem for the terms of trade, payments relationships, and trade practices of affected member countries.

As an example of these implications, I might draw attention to the relations between certain bilateral arrangements used by primary producers and the policies for disposal of surpluses in advanced countries. The offer of generous credit facilities by advanced countries with a view to disposing of surpluses would necessarily compel other producers to offer competitive forms of inducement to customers. The incentives might include the acceptance of payment in the local currency of the buyer or the willingness to import certain commodities exclusively from the consuming country. Such bilateral arrangements could thus be traced to pressure originating elsewhere. This would have to be kept in view in discussing the removal of bilateral practices adopted by some primary producing countries.

Turning to the question of transitional arrangements under Article XIV, the problem deserves again to be viewed somewhat differently, if account is taken of the special requirements of underdeveloped countries. It is understandable that the Fund should not wish the postwar transitional period to continue indefinitely into the future, but it would be necessary simultaneously to define the attitude toward the retention of any restrictions that are necessitated by the imperative requirements of economic development.

As we have had occasion to emphasize in preceding years, such restrictions in underdeveloped countries are, in most cases, directly related to the overriding problem of mobilizing the maximum resources in terms of foreign exchange for our development programs. In a real sense, the underdeveloped countries need a transitional period, and of much longer duration, because it is not only the damage of a world war which has to be repaired. They have to restore the loss caused by centuries of neglect, stagnation, and decay. The maintenance of exchange restrictions need not, therefore, automatically mean that the development programs being executed by these countries were necessarily in excess of their real resources.

Finally, a word on the utilization of the Fund’s resources and the need for a review of quotas. During the year, purchases by members at $48.75 million contrasted with repurchases of more than $275 million. The Fund’s apparent disappointment at this expressed in the Report can be well appreciated. The Report also speaks of the expectation that during the past year members would have made more use of the Fund’s facilities on account of the inadequacy of their own resources. It is for consideration, however, whether the inadequacy of drawing limits based on quotas fixed many years ago may not have deterred certain members from approaching the Fund. The Fund has sought to adopt a flexible approach in this matter. It has expressed willingness to permit almost free drawing up to the member’s gold tranche, and it has assured liberal treatment of applications for drawings within the first credit tranche. Similarly, it has granted a number of waivers so as to permit certain members to draw more than 25 per cent of the quota normally permitted during any 12-month period. If, despite all this, some of the members suffering from temporary balance of payments difficulties have not approached the Fund, the explanation may lie in the size of the quotas of several members, which may be so small in relation to “swings” in their trade as to render even the maximum facilities from the Fund to appear inadequate. I would, therefore, suggest that the review of quotas, in accordance with Article III, Section 2, of the Fund Articles, in 1956 may include an examination of the problem also from this standpoint.

Statement by the Governor for Afghanistan—Abdul Malik

My Delegation would like to associate itself with those Delegations who have spoken before me, and express our appreciation of Mr. Rooth’s excellent analysis of the Fund’s activities and operations. I do not want to take up much of your time. However, I deem it necessary to express my viewpoint on certain important matters.

Afghanistan accepts in principle a growing and expanding international trade. I agree that a multilateral system of free trade and free convertibility is desirable, and that restrictive practices do not help regional or world economy. However, shortage of foreign capital for the purpose of economic development and chronic payments difficulties somehow justify certain practices. Lack of foreign exchange and fluctuating raw material prices necessitate temporary recourse to exchange control and bilateral trade.

We hope that the main causes of the shortage of foreign exchange will be eliminated by providing countries which are faced with such difficulties with low interest loans, necessary assistance, and consultation, which could easily expand production and encourage free trade and free convertibility.

Statement by the Governor for Turkey¹—Hasan Polatkan

We have studied with appreciation and pleasure the Tenth Annual Report of the International Monetary Fund which, as in previous years, this year also contains comprehensive and valuable information on world economic trends. As has been pointed out in this Report and also in Mr. Rooth’s statement, noteworthy progress has been made, to our great pleasure, toward the realization of the Fund’s objectives. However, my Delegation finds it useful to stress once again that the expansion of world trade on a sound and satisfactory basis, the achievement of a high level of equilibrium in international payments, and progress toward an enduring convertibility of currencies as well as elimination of various restrictive practices depend on a rapid development of production, exports, and purchasing power in underdeveloped countries and in countries in a state of economic development.

Accordingly, it is required that special attention should be given to the solution of problems confronting the countries that are in a state of economic development and that are expending great efforts to develop rapidly their human and material resources.

In this connection, I would like to express the pleasure we had in receiving the visits of Mr. Cochran and his competent assistants in June in Ankara, and in the consultations we had with them there. There is no doubt that such meetings and consultations are of great value to the Fund and to the member countries concerned.

Concluding Remarks, Ivar Rooth¹

The discussion of the Annual Report by the Board of Governors has been extremely helpful in bringing to the attention of the Executive Board and the staff of the Fund the problems and policies with which our members are concerned. Many of the points made in this discussion deserve special emphasis and further consideration. You may be sure that they will be carefully studied.

Before I comment on the discussion of the Governors, I should like to express our deep gratitude for the appreciative statements you have made regarding the work of the Fund. In particular, we are deeply moved by the kind words of the Chairman of the Board of Governors, who knows the Fund so intimately from his earlier association as a member of the staff. We are happy to see him filling so ably his high post as Minister of Finance of Egypt. We wish him continued success in his difficult task.

As the Governor for the United States said, this year can be characterized as a year of increasing understanding. The Fund works in a difficult field. The problems of our members differ almost from country to country, and the recommendations of the Fund must be suited to their needs and their capacities. On the whole, there has been a continued strengthening of international payments and significant improvement in exchange practices during the past year. Several Governors indicated in their statements that their countries are determined to continue to reduce, and ultimately to remove, restrictions and discriminations to match the improvement in their payments position.

We are all aware of the great role of the United States in the world economy and of the basic importance of an adequate American demand for imports. It is encouraging for this reason to hear from the Governor for the United States of the very high level of economic activity in that country. Under such conditions, particularly if they are reinforced by liberalization of U.S. trade policy, as we hope they will be, countries with sound domestic policies should be able to continue their progress in bringing their payments into balance and in relaxing their restrictions on dollar imports.

While most countries have strengthened their payments during the past year, in the United Kingdom too much expansion has resulted in a loss of reserves. The Governor for the United Kingdom has told us how his country proposes to deal with this temporary setback. Credit is being restrained and the whole field of public expenditure—that of the national Government, the local Governments, and the nationalized enterprises—will be reviewed. Such measures should have favorable effects on the balance of payments in the coming year. In the meantime, it is gratifying to know that the United Kingdom will not go back on their policy of increasing trade and moving to a system of freer payments.

The Governors for the United States and the United Kingdom called attention to the fact that, in this period of widespread boom, greater care is necessary in the formulation of financial policy. All must watch out for inflation, even countries without balance of payments problems. The most effective policy is to deal with inflationary threats before they become serious, and we have heard that the United States is moving to keep the use of credit within healthy limits. I should like to add my voice to theirs in pleading for greater caution in monetary and fiscal policy at this time. A serious inflation can wipe out quickly the progress made over a period of years.

The Governor for South Africa expressed the view that world payments, though improved, are still on an insecure foundation. He believes that this is the consequence of the maintenance of the present price for gold in U.S. dollars. He pointed out that the reserves of major trading countries are still inadequate for convertibility. He expressed the view that the price of gold should be raised to ensure sufficient international liquidity. The Governor for Australia supported his South African colleague. He called attention to the sharp difference between the large expansion of the sterling area’s trade and the insignificant increase in their gold and dollar reserves.

The Governor for the United States stated that his country cannot agree with proposals that the United States should pay a higher price for gold. He emphasized that such a change would be inflationary. It is important that the problem of gold reserves should be seen in proper perspective. No wave of a wand—not even a wand of gold—can give the world a strong and balanced pattern of international payments, free of restrictions and discriminations. That can come only from sound financial and trade policies applied by each country in a world of expanding trade. There will, from time to time, be a need to supplement the reserves of some members, and this need will become greater as world trade continues to grow. The Fund is designed to provide such supplementary reserves, and I have no doubt that it will provide them in all appropriate cases.

The Governors for Pakistan and Indonesia called attention to the uncertainties in world agricultural markets and the problems of agricultural exporting countries. Their real need is stable prices, rather than rising prices. The Governor for Australia emphasized that much of the difficulty arises from excessive agricultural protection in many countries. In some cases, bilateral deals are made to import food products in order to foster industrial exports. Such deals operate to exclude the exports of countries which follow the non-discrimination principles of the Fund.

A number of Governors have expressed appreciation of the efforts the Fund is making to achieve freer trade and payments through our Article XIV and other consultations. This is gratifying, especially, as the Governor for the United States noted, because much of our work is necessarily conducted quietly. We are glad that our members are finding these consultations a useful mechanism for international collaboration and technical advice. Various Governors have mentioned the problems of bilateralism and of Articles VIII and XIV to which I referred in my opening remarks. We will, as I said the other day, continue to study the questions involved, with appropriate attention to their changing significance in an ever changing world, and in close collaboration with the monetary and financial authorities of the members concerned.

A number of Governors—including those of Japan, Egypt, Thailand, and Ceylon—noted that the underdeveloped countries face special problems and that it will be difficult for them to avoid restrictions even after the industrial countries establish convertibility of their currencies. The Governor for India generously expressed the appreciation of his country for our studies of the special problems of the underdeveloped countries and suggested that these studies be continued. I can assure you that we are constantly concerned with the analysis of the financial and payments problems of these countries. Our objective is to help them to apply sound policies which should contribute to their development and enable them to participate in world trade on a wider basis.

Several Governors have called attention to other problems with which the Fund should deal. The Governor for India welcomed the flexibility in the Fund’s attitude toward the schedule of charges. The staff is working on this problem, and later this year the Executive Board will consider the advisability of modifying the charges. The Governors for India and for Pakistan referred to the revision of quotas, stressing that small quotas for some countries make even maximum assistance, within the quota limits, insignificant. We have, as I said the other day, begun but not yet completed our review of quotas.

The Governor for the United Kingdom asked for closer collaboration with the Contracting Parties to the General Agreement on Tariffs and Trade in supervising restrictions. He also asked us to work closely with the European Fund. That we will, of course, do.

There have been frequent references to the progress made by the Fund in developing a practical policy for drawings on the Fund and for stand-by credits. We shall continue to work along these lines to enable members to use the Fund’s resources with greater assurance in order to carry out the objectives of the Fund.

We all welcome the opinion of the Governor for the United States that the Fund has established a sure place for itself in the field of international financial cooperation. The task of the Fund is to help our members to establish and to maintain fair exchange practices, and to provide them with temporary assistance while they put into effect the policies necessary to put their payments in order. We recognize that the very foundation for a strong and balanced pattern of international payments is sound internal policy. The progress made so far is largely a reflection of the wiser policies our members have been pursuing. Further progress will depend on an extension and intensification of such policies. We are confident that you, the Governors who make the monetary and fiscal policies of your countries, will meet your responsibilities with courage and ability. For our part, we shall continue our work with greater confidence, heartened by your support of our efforts.