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. There has been a continuation of the movement noted in the previous year, when—in response to an expansion of the volume of world trade and a movement toward a more satisfactory balance in the payments positions of many countries—steps were taken, both in Western Europe and elsewhere, to relax the restrictions previously imposed for balance of payments reasons on imports, on currency transfers, and on dealings in foreign exchange. Some of these measures were of no great significance if they were considered in isolation, but their result in the aggregate contributed to a substantial improvement in international economic and financial relations.

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. There has been a continuation of the movement noted in the previous year, when—in response to an expansion of the volume of world trade and a movement toward a more satisfactory balance in the payments positions of many countries—steps were taken, both in Western Europe and elsewhere, to relax the restrictions previously imposed for balance of payments reasons on imports, on currency transfers, and on dealings in foreign exchange. Some of these measures were of no great significance if they were considered in isolation, but their result in the aggregate contributed to a substantial improvement in international economic and financial relations.

Already during the last year benefits have accrued from the widening freedom in international payments recorded in the previous year. The increases in imports, including imports from the dollar area, which liberalization measures have permitted have, in general, not created balance of payments difficulties. Many countries have shown a determination to advance further step by step toward the liberation of trade and currency convertibility, and the environment created by the international payments situation described later in this Report has been favorable for these advances. Because of the persistence of favorable payments balances throughout 1953 and 1954, many countries, and especially the European industrial countries, have found it possible to reduce their use of restrictions, or even in a few cases virtually to abandon them. But even countries whose own payments situations are not yet such as to encourage them to dismantle restrictions are finding it more difficult to obtain from their trading partners that reciprocity without which bilateral or regional arrangements based on inconvertibility lose many of their advantages.

Within the framework of the OEEC liberalization program West European countries have undertaken to free from restrictions agreed proportions of their mutual trade. Such liberalization has frequently been extended to imports from other non-dollar sources. Since the setback of 1951-52, OEEC countries have gradually liberalized an increasing proportion of their mutual trade. Progress in this direction continued in 1954 and 1955, and this progressive removal of import restrictions must be regarded as one of the factors which, along with the rapid expansion in European production, have helped to account for the sharp increase in intra-European trade.

The point has probably now been reached where the obstacles to further progress in the removal of quantitative restrictions in Europe lie as much in the desire to protect individual industries, especially in the agricultural sphere where social and strategic considerations play an important role, as in the continuance of payments difficulties. It is noteworthy that, with very few exceptions, such European countries as experienced adverse trends, mostly of a minor sort, in their balance of payments in 1954 and 1955 have not reintroduced or intensified their import restrictions.

Outside Europe, where policy on import restrictions has not in general been the subject of joint agreement, the relaxation of such restrictions played an important part in the expansion of imports in many primary producing countries in 1954. However, while some countries, such as Canada and some Latin American countries, eschew the use of restrictions for balance of payments purposes, and others, such as South Africa, are moving in this direction, these countries are still the exception, and the weakening of the reserves of several primary producing countries in the second half of 1954 has already led, notably in Australia and Thailand, to an increase in import restrictions.

Not only has general reliance on import restrictions for balance of payments reasons been declining in most parts of the world, but there has also been a tendency to give more equal treatment to imports from different sources or paid for in different currencies, i.e., to reduce the degree of discrimination. In some countries, particularly in Europe, rising gold and dollar reserves have led to a reduction to a low level of restrictions imposed for balance of payments reasons on imports from any source. In these circumstances, any reduction in restrictions by these countries must apply to a considerable extent to restrictions against hard currency imports and, since these restrictions are usually the most severe, this automatically tends to reduce the degree of discrimination practised. In addition, there has been, both in Europe and in the sterling area, an increasing desire to enjoy the competitive advantage of buying in the cheapest market and a weakening of apprehensions that nondiscrimination on a world-wide basis would endanger trade within a smaller area. Finally, there have been developments in payments arrangements, in the relative scarcities of different currencies, and in transit trade which tend to diminish the importance of the choice of the currency in which imports are paid for and of the source from which they are bought.

The existence of the multilateral offsetting arrangements of the European Payments Union has for several years removed any incentive for most of its member countries to discriminate in their mutual trade, and the principle of nondiscrimination in this trade has been adopted as an integral feature of the OEEC liberalization program. Though the obligations of this program do not extend to the dependent territories of OEEC members, the institution of the EPU has probably led to a diminution of discrimination in these territories as between imports from the mother country and imports from other member countries. In the independent members of the sterling area, there has, in recent years, been little discrimination for payments reasons against imports from continental OEEC countries.

Modifications introduced in the spring of 1954 into the exchange control systems of the United Kingdom and the Federal Republic of Germany reduced the incentive for trading partners outside the EPU monetary area to discriminate in favor of these countries as against other non-dollar countries. Practically all sterling balances held by nonresidents, other than registered accounts, balances held by residents in dollar countries, and those held in blocked accounts, were unified into a single category of Transferable Sterling, which is freely transferable between account holders outside the dollar area. Previously such transfers had been subject to conditions or to special permission. This category of sterling has always been freely transferable to residents in the sterling area. In the Federal Republic of Germany, traders were similarly permitted to make payments to and, subject to certain reservations, accept receipts from all non-dollar countries in a new type of mark, the partly convertible deutsche mark, freely transferable between such countries. The transferability of sterling and of the new deutsche mark has been made more effective by the increased willingness of many countries to accept these currencies in their trade with other countries. Apart from these rather general measures, in some countries the use of administrative transferability has also been extended, under which particular transactions between bilateral partners are settled through the payments agreements of both with a third country.

The exports of the countries of the dollar area suffer most from discrimination on currency grounds elsewhere; these countries are excluded from the general measure of transferability discussed above, and their currencies are those into which the conversion of other currencies is most reluctantly accorded. Nevertheless, here too progress has been made in the past year toward convertibility and nondiscrimination. Some of the OEEC countries, e.g., Belgium-Luxembourg, Greece, the Netherlands, and Switzerland, which have felt able largely to dispense with import restrictions on balance of payments grounds, have extended liberalization equally to dollar and to non-dollar imports. Belgium-Luxembourg and the Netherlands made further substantial advances in 1954 in the liberalization of imports from the dollar area. In the United Kingdom and Western Germany, too, a large proportion of dollar imports has been liberalized. The OEEC has also undertaken as one of its regular functions to review and foster dollar liberalization.

A similar change of attitude has been evident within the sterling area, where the monetary authorities of the members have generally always had the right to convert their sterling into dollars; discrimination against dollar imports has been applied by the members of the sterling area on the basis of a cooperative understanding. In recent years, however, there has been a trend toward nondiscrimination, and South Africa and Pakistan have ceased to discriminate between dollar and non-dollar imports.

The increasing competitive strength of European manufacturers in world markets and the increased scarcity of some European currencies relative to the U. S. dollar have also tended to reduce the degree of discrimination against dollar imports in countries outside the EPU currency areas, as well as to bring about a measure of de facto convertibility for these currencies.

During and after the war, many Latin American countries acquired substantial balances in European currencies, especially sterling, and their inability to convert these currencies gave them a strong incentive to discriminate against dollar imports. In more recent years, the balance has swung the other way and accumulations of sterling have been used up. Some countries have had to buy sterling either against dollars in world markets, or from the Fund. The United Kingdom has been reluctant to grant bilateral credits outside Europe. Though Germany has granted substantial credits of this kind, their amount has been reduced since 1953. In general, there is a limit to the amount of bilateral credit that surplus countries are willing to grant and, when this limit is reached, bilateral partners either have to restrict imports under the agreement or to pay in an acceptable currency, e.g., dollars. When bilateral credit margins have been exhausted and settlements with the bilateral partner are being made in dollars, the incentive to discriminate is greatly reduced and tends to disappear altogether. Examples of this are provided by the reduction in Japan and Brazil of the discrimination favoring sterling over dollar imports that followed sterling shortages in these countries.

While there has been no formal extension in 1954 and 1955 of the convertibility into dollars of private balances of non-dollar currencies, various forms of de facto convertibility have been extended, or operations have been undertaken which have some of the effects of convertibility. Reference is sometimes made to “commodity convertibility,” which means that a country with an inconvertible currency permits its traders to buy certain commodities from countries with convertible currencies against payment in convertible currency, for resale to other countries against payment in its own or other inconvertible currencies, with no obligation to receive the convertible currency through a reverse transaction. This type of convertibility has thus far been particularly important in the United Kingdom, which in 1954 extended it to raw sugar and copra, having previously applied it to coffee, cocoa, and the nonferrous metals.

Another form of de facto convertibility operates through the free markets, especially in Zürich and New York, where currencies which are not convertible into dollars through official channels, principally transferable sterling, can be sold at a discount against dollars. Such conversions are usually brought about by the willingness of the import authorities in some countries to admit imports originating in the dollar area more liberally if paid for in inconvertible currency than if paid for in dollars. The rate at which such conversions can take place has, until recently, been sustained partly by transactions under which goods or services bought with the currencies in question, ostensibly for the use of other inconvertible countries, are in reality diverted to the dollar area and sold for dollars.

In 1954 and 1955 several developments have tended to increase the substantive importance of this type of unofficial convertibility. The extension of sterling transferability in March 1954 to practically all non-dollar countries involved the abandonment of the attempt previously made by the United Kingdom to restrict such transfers to current transactions between the countries participating in the transfer. Transferable sterling became easily salable against dollars, and the same is true of the partly convertible deutsche mark.

Other factors have tended to make a larger amount of conversion possible at a smaller discount against the dollar. When sterling is wanted to meet sterling deficits or to reduce bilateral positions in advance of monthly EPU settlements, some countries have preferred to purchase sterling on the free market, rather than purchase it with gold or dollars at the official rate. For a time, commodity switch operations, involving the diversion to the dollar area of goods consigned to a non-dollar country, served to sustain the free market rate, while putting pressure on the official rate. Finally, in February 1955 a new element entered in the form of official intervention by the U. K. authorities in foreign markets that deal in transferable sterling.

As a result of all these factors, there is a high degree of effective convertibility of sterling and of the deutsche mark into dollars at discounts which at the time of writing this Report were approximately 1 per cent below the official rates, and to some extent this was also true of other currencies.

Despite the extension of nondiscrimination and multilateralism in trade and payments, there is still a great network of bilateral trade and payments agreements which links the inconvertible countries of the world. However, some of the payments agreements, such as those between OEEC countries and those of the United Kingdom, have practically lost such tendency as they once had to force trade into an artificial bilateral balance.

Insofar as the purpose of bilateralism is to balance trade by exchanging preferences, it becomes more and more difficult for countries with a favorable payments position to justify on balance of payments grounds the retention of restrictions that permit them to offer such preferences. For the same reason, it becomes more and more difficult for their bilateral partners to secure any real advantages from the agreements. Bilateral arrangements in some manufacturing countries now tend increasingly to be motivated by the desire to safeguard the interests of sections of the population engaged in export industries rather than by balance of payments considerations. Sometimes bilateral agreements are maintained at the cost of providing increasing amounts of credit from the industrial to the primary producing partner. As the extension of bilateral credit ceases, the question of the extent to which the retention of such bilateral arrangements will continue to serve the interests of the parties concerned will increasingly present itself.

After due account has been taken of all the factors that have either accelerated or checked the movement toward liberalization and convertibility during the year under review, the record can be regarded as fairly satisfactory. Though the advances have been less rapid than in the previous year, they have still been of considerable significance. The moment at which liberalization measures are actually taken is not necessarily the most important point in a movement toward convertibility. More important may be the stage where national economies are being adjusted to the competitive conditions implied in measures taken earlier. Success in making these adjustments will demonstrate that earlier moves in the direction of liberalization were not premature and will make it possible to consolidate the gains resulting from earlier efforts and to make further progress.

It may be concluded from the developments of the past year or two that, should the trend of international payments continue to be favorable, this, even apart from formal moves in the direction of de jure convertibility, should bring about an extension of nondiscrimination, and a weakening of the structure of bilateralism, and thus a further extension of de facto convertibility.

Prospects for continued improvement in the immediate future in the international payments situation are, in general, good. Economic trends in the United States inevitably continue to be a matter of outstanding interest to the rest of the world. The role of the United States in the world economy is no doubt more important than that of any other single country. The relations between the United States and the rest of the world have, however, always been relations of interdependence, events elsewhere often having a substantial impact upon the United States. The experience of the last year has shown that many countries have been able to adjust themselves without great difficulty to moderate fluctuations in U. S. activity. On the other hand, the strong domestic position maintained by other countries had some importance—apart from the relaxation of their import controls—for the maintenance of effective demand for goods and services in the United States, and therefore for restraining fluctuations in the U. S. economy within modest limits. Industrial production in the United States had by May 1955 recovered to its previous maximum and was advancing to higher levels. By its effects on U. S. import demand, a high level of industrial activity in the United States should assure an increasing supply of dollars to the world and, in particular, an improvement in the position of many primary producing countries.

Nevertheless, the world payments situation is still subject to elements of uncertainty which may place some countries in a precarious position. 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), and some countries are heavily dependent on these expenditures. Moreover, the tendency for supply to outrun demand, as evidenced by the accumulation of surplus stocks, may seriously affect the prospects for exporters of certain primary products, notably coffee, but also cotton and perhaps wheat. In this connection, the policies widely adopted in many countries for supporting farm incomes continue to present problems that render difficult the attainment of a satisfactory pattern of international trade. Several governments have been particularly concerned by the possible impact upon their trade of the U. S. Government’s measures for the disposal of agricultural surpluses that have accumulated as a result of these policies. A waiver of certain Articles of the General Agreement on Tariffs and Trade granted by the Contracting Parties at their Ninth Session permits the application of certain restrictions on agricultural imports by certain countries. An intensified use of such restrictions may also increase the payments difficulties of agricultural exporting countries and make it more difficult for some of them to abandon their bilateral arrangements.

Many countries still find the restrictions upon the entry of goods into important markets an impediment to the establishment of a strong balance of payments position, and in this connection the policy of the United States is regarded as having special importance because of the predominant position of that country as a world producer and world trader. In pursuance of the trade program formulated by the U. S. Administration, the Trade Agreements Act has been extended and amended so as to provide increased authority for tariff negotiations. The U. S. Congress has been asked to approve participation in the Organization for Trade Cooperation, whose principal function will be to administer the GATT, and the Congress is also considering legislation to carry out the Administration’s request for a further simplification of customs procedures. Although the effect of these measures cannot be determined at the time of writing this Report, it appears that there will be a further lowering of tariffs and other barriers to trade.

Even if developments are such as to ensure the continuance of an adequate supply of dollars to the rest of the world, it will, of course, still be necessary to give constant attention to the national and international policies upon which the establishment and maintenance of strong domestic economies depend. Although in several countries the curbing of inflation still presents a problem for which no solution has yet been found, there is now in general a much clearer understanding of the value of the instruments of monetary and fiscal policy for ensuring stability. There is also an increasing willingness to use these instruments quickly and flexibly, as changes in circumstances may require, either to relax or to strengthen monetary restraint. The problem of ensuring that, at satisfactory levels of employment, wages will be adequately related to productivity so as to diminish the risks of price instability also has yet to be solved.

In discussions of the conditions of convertibility, the emphasis is usually and naturally placed on the actions of the more highly developed countries, whose currencies are widely used in world trade, and whose financial situation makes possible a degree of initiative that may not be possible elsewhere. It is indeed largely upon these countries that the responsibility for action mainly falls. Convertibility, however, has been accepted as one of the purposes of the Fund because its attainment would be in the best interests of all the members of the Fund, both the underdeveloped countries and the more highly developed countries alike. The widespread attainment of convertibility would be an indication of the growing strength of the world economy; at the same time it would be an important means for consolidating and increasing that strength, with consequent benefits for all Fund members. Many countries, including most of the main importers, are no longer willing to pay prices for raw materials and foodstuffs in non-dollar currencies that are higher than prices in dollar currencies. This means that underdeveloped countries have to meet price competition in world markets, and therefore need the freedom to use the proceeds of their exports to every country in payment for their imports from any country. It is in their interests to purchase in the best markets the capital equipment that they need. If the underdeveloped countries were able to establish and maintain convertibility, this would itself be a positive element encouraging foreign investment.

In the further development of the favorable trends that have been apparent during the last two years, the Fund has an important part to play. As indicated in later sections of this Report, its practices, particularly with regard to the use of its resources, have now been developed to the point where, in association with its members, it can actively promote the attainment of their common objectives. These practices are constantly under review in order to increase their efficiency and usefulness.