Articles appearing in Finance and Development may be quoted or reprinted in their entirety, provided that due acknowledgment is made. The Editor would be glad to receive two copies of publications containing such reprints or quotations.

Abstract

Articles appearing in Finance and Development may be quoted or reprinted in their entirety, provided that due acknowledgment is made. The Editor would be glad to receive two copies of publications containing such reprints or quotations.

Alexander G.C. Mountford

THE Annual Meetings of the International Monetary Fund and of the World Bank and its affiliates, the International Development Association (IDA) and the International Finance Corporation (IFC) were held in September in Washington.

THE discussions on international liquidity at the Fund Meeting reflected the fact that, in the period following the previous Annual Meeting, there had developed a growing convergence of views on a number of points of substance. Most important, countries had agreed that the distribution of any newly created international reserves should be to all Fund members, and several plans for reserve creation, including two alternative proposals by the Managing Director of the Fund, had been initially discussed. Mr. Schweitzer suggested in his opening address to the Annual Meeting that “there are no technical reasons why concentrated work could not provide Governors with fully developed suggestions for arrangements for reserve creation in time for next year’s Annual Meeting.” Accordingly, the discussion concentrated mainly on the procedural aspects of the next stage of the liquidity talks, and on the links between the liquidity question and the balance of payments adjustment process, the need for development financing, and the problem of inflation.

THE slowdown in development assistance together with the heavy inroads of debt service obligations on the resources available to the developing countries were cited as disappointments of the hopes raised by the goals of the Development Decade. The difficulties experienced by the industrialized countries were recognized but the hope was expressed that these would prove short-term constraints on the resumption of justifiable increases in the flow of development funds.

THE widespread shortage of capital and rising interest rates were described as posing problems for the Bank’s own borrowings as well as for the developing countries, and Mr. George D. Woods, the President, stressed the allied problem of the urgent need for a substantial replenishment of the resources available to IDA.

THE articles by Alexander G.C. Mountford and Martin Shivnan in this issue reflect the wide range of contributions by Governors to these discussions. Fuller details of the speeches will be published in the Summary Proceedings of the Fund and of the Bank at a later date.

The Fund Meeting

Alexander G.C. Mountford

In their discussions on international liquidity the Governors were virtually unanimous in recognizing that all countries, developed and developing alike, had a legitimate interest in the creation of reserves, and that any additional created reserves should be distributed among all Fund members. The consensus on this subject was expressed by Mr. Sachindra Chaudhuri, the Governor for India, when he noted that “it is generally realized that in any scheme of deliberate reserve creation, the needs and interests of all members of the international community must be recognized.”

There was not the same degree of agreement about the urgency of creating additional liquidity. Most Governors agreed that even though there was no immediate shortage it would be a wise precaution to prepare a contingency plan for the future creation of additional reserves; the Governors for many developing countries believed that there might already be a shortage. Mr. Takeo Fukuda, the Governor for Japan, thought that it would be “a matter of great regret if the absence of a clear picture about the future concerning international liquidity should produce unnecessary lack of confidence and anxiety with regard to the present international monetary system and lead various countries to timid management of their economic policies, and to drifting toward protectionism and restrictions.” Mr. H.R. Lake, the Governor for New Zealand, stressed that “the less developed countries live under a constant fear that a shortage of international liquidity will inhibit the expansion of markets for their exports. It is important that this fear be removed as soon as possible.” The Governor for the Syrian Arab Republic, Mr. Ahmad Mourad, considered that although there was no shortage of international reserves for the world as a whole, such a shortage already existed in the less developed countries.

A small number of Governors, particularly the Governor of the Bank for France, Mr. Michel Debré, felt not only that there was no need for additional reserves but that there was, on the contrary, at present an actual surplus of liquidity. Relatively few Governors spoke at any length on the form in which new reserves should be created, although some expressed a preference for a new monetary unit, rather than a drawing right. Mr. James Callaghan, the Governor for the United Kingdom, pointed out that although the two forms could be made virtually identical in practice, “to the ordinary man, a drawing right conveys a right to borrow, not a basic international asset to be held in a country’s reserves,” and Mr. John Lynch, the Governor for Ireland, noted that “an increase in owned reserves tends to give national authorities the feeling of security which they need to conduct their affairs without premature resort to restrictions.” Mr. Emilio Colombo, the Governor for Italy, stressed that whichever form was chosen, what would be involved in substance was “a reciprocal granting of credits between countries worthy of it, not so much because they can offer a sound collateral in the form of strong currency holdings, but because they have as a rule demonstrated their political willingness to make such adjustments as are necessary to eliminate external imbalances.”

There was a clear rejection, by virtually all Governors who addressed themselves to the matter, of the possibility of an increase in the price of gold as a solution to the liquidity problem, as this would not be compatible with the requirement of a gradual and balanced increase in the world’s liquidity reserves. However, Mr. G.W.G. Browne, the Alternate Governor for South Africa, noting that the main objection to an increase in the price of gold was that it would primarily benefit those countries that held or produced it in large quantities, affirmed that “there is no reason why a part of the book profits on the revaluation of gold reserves should not be applied to development aid & my country would be prepared to give very sympathetic consideration to the principle of such a proposal.” The Governor of the Bank for France, Mr. Debre, was alone in vigorously propounding the thesis that “no international monetary system can be based on anything but gold, supplemented by the operations of an international monetary fund.” Mr. Xenophon Zolotas, the Governor for Greece, hoped that agreement on a mechanism for reserve creation would in itself, by adding to confidence in the international monetary system, discourage gold speculation and reduce gold hoarding.

The Next Steps

There was a wide measure of agreement on what the next steps should be in the liquidity discussions. A majority of speakers felt that all members should participate, that final decisions should be made within the framework of the Fund, and that distribution of any reserves created should be related to Fund quotas or some similar objective criterion, but the special situations and requirements both of the developing countries and of the major industrialized countries were recognized. Mr. William McMahon, the Governor for Australia, observed “as a fact of life, that a new system of reserves creation must have the willing support of the major industrial countries. Equally, a new international system must be acceptable to Fund members generally. Implicitly this recognizes—and I would agree—that there should now be talks between the Executive Directors of the Fund and the Deputies of the Ten.” 1 In this, he joined several speakers in welcoming the suggestion in the Managing Director’s opening address that “it would be very useful if the efforts of the Fund and the Deputies of the Group of Ten could be directed toward a common view on desirable lines of action in the field of reserve creation. In my view, these efforts might now be helped by informal meetings between the Fund’s Executive Directors and the Deputies. & It may well be that informal discussions with other groups would also appear useful during the year&.” Others, particularly the Governor for Mexico, Mr. Antonio Ortiz Mena, speaking on behalf of 19 Latin American countries and the Philippines, emphasized the desirability of informal meetings with other interested groups, such as UNCTAD. A number of Governors, however, stressed the special role of the industrialized countries. As Mr. Hubert Ansiaux, the Governor for Belgium, put it “it is essential that any decision on the creation of new liquidities be the result of a consensus between the international community that is the beneficiary of the liquidity creation, represented by the International Monetary Fund, and the collectivity of the countries which may be called upon to provide these resources and which will have to assume the heavy responsibilities inherent in their contributions.”

Mr. Colombo, the Governor for Italy, expressing his conviction that the countries associated with the General Arrangements to Borrow (the Group of Ten) had never meant to arrogate to themselves the right to decide the future of the international monetary system, regretted that, perhaps because the studies by the Group of Ten Deputies had been conducted in closed groups, they had ended by generating mutual misunderstandings, however unjustified these may have been. He hoped that “a joint debate on questions which, after all, are the common concern of the world economy as a whole may quickly dispel such misunderstandings.” A number of Governors joined Mr. J. S. Gichuru, the Governor for Kenya, in expressing a wish that, as a result of the further studies, a specific proposal would be presented for consideration at the next annual meeting of the Board of Governors. Mr. Pierre-Paul Schweitzer, the Managing Director, said in his closing remarks that he was confident the Fund’s Executive Directors would be ready to consult with other groups where this promised to be productive. His impression was that Governors had indicated a clear desire for the Executive Directors promptly to set about further studies of methods of deliberate reserve creation. Similarly, the Ministers and central bank Governors of the Group of Ten, in a communiqué issued during the Annual Meeting, recommended “a series of joint meetings in which their Deputies would take part together with the Executive Directors of the Fund in order to have a wider framework in which to consider the questions that affect the world economy as a whole.”

World Economic Problems

Problems of the world economy as a whole were mentioned by most speakers, often in connection with the liquidity question. In his opening address, Mr. Schweitzer highlighted the difficulty of maintaining price stability in the world economy in view of the strain on resources that was associated with the high levels of employment and activity currently prevailing in nearly all the industrial countries. He thought that the increases in the domestic prices of many industrial countries should not be taken as a sign of overabundant international liquidity; they were attributable rather, to the difficulties encountered by economic management when employment was very high and structural factors came into play. Indicating the possible disadvantages associated with high interest rates, he called for a better balance between fiscal and monetary policies. Many Governors similarly stressed the importance of avoiding excessive reliance on monetary policy, and Mr. D.B. Sangster, the Governor for Jamaica, regretted that it was necessary once again to draw attention to the adverse effects that high interest rates, and the shortage of capital prevailing in the world’s markets, could have on small underdeveloped countries.

However, the Governor for Germany, Mr. Karl Blessing, while agreeing that monetary policy would be facilitated if budgetary and fiscal policies were to share the burden, pointed out that German experience showed that internal and external disequilibria could in fact be overcome by merely monetary measures, provided that the countries concerned were courageous enough to apply these severely and in good time. He thought that one of two things must become more elastic, either the adjustment process or the exchange rate, and he expressed a strong preference for an improvement in the adjustment process. He placed particular emphasis on the need to restore equilibrium in the balances of payments of the reserve currency countries.

Mr. Ortiz Mena, the Governor for Mexico, while acknowledging the urgent need that existed in some of the developed countries to correct disequilibria in their balances of payments, stressed the overriding need to prevent the ensuing adjustments from impeding the flows of world trade and curtailing the flow of development finance to the less industrialized countries. The relative responsibilities of surplus and deficit countries in the adjustment process were also discussed. Mr. Henry H. Fowler, Governor for the United States, while stating that deficit countries must make full efforts to balance their payments positions through appropriate policy mixes, called on the surplus countries to employ their surpluses or hold them in forms that were consonant with the international interest, and to adopt measures which would permit the adjustment policies undertaken by deficit countries to work. Mr. Gichuru, the Governor for Kenya, feared that “the present trend toward anti-inflationary policies in the industrial countries suggested that, in spite of the present high level of prosperity, the world could quickly tip over toward more general deflation, with countries once again endeavoring to protect their own economies without regard to the effects their measures might have on others.” The Governor for Ireland, Mr. Lynch, voiced a common fear when, drawing attention to the fact that world interest rates were rising to unprecedented heights, he attributed this in part to the restrictions which the traditional capital-exporting countries had had to impose on the outflow of investment funds in order to reduce their external deficits. This had resulted in difficulties for the smaller nations which needed○oto supplement their domestic resources by some inflow of long-term foreign capital. The present difficulties would be accentuated as the two reserve currency countries brought their external payments closer to balance.

Numerous other themes were touched upon during the Meeting. Governors from the developing countries were especially disturbed at the trend of world commodity prices and the failure of the developed countries to adopt measures to help to expand the international trade of the developing countries. It was particularly in this context that several Governors welcomed the recent enlargement of the Fund’s compensatory financing facility, though a few regretted that the terms of the arrangement had not been made more liberal. (A brief account of this enlarged facility is given on p. 307.)

1

Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the United States, and the United Kingdom.