IN HIS RECENT BOOK, Gold and the Dollar Crisis (New Haven, 1960), Professor Robert Triffin of Yale University draws a bold picture of the dangerous state of, and prospects for, international liquidity, and suggests expanding the role and changing the character of the International Monetary Fund to cope with these problems
1. The main part of this book (pp. 17–145) consists of reprints, with only minor changes, of two long articles published in 1959 in the Quarterly Review of the Banca Nazionale del Lavoro: “The Return to Convertibility: or Convertibility and the Morning After” and “Tomorrow’s Convertibility: Aims and Means of International Policy” (March and June issues, respectively). These articles drew upon his previous writings, notably Europe and the Money Muddle (New Haven, 1957) and his Wicksell Lecture for 1958, The Future of the European Payments System (Stockholm 1958, especially pp. 34–43). The book also contains a reprint of Triffin’s statement to the Joint Economic Committee of the Congress* of the United States in October 1959 and most of the questions and answers from the Committee’s Hearings (pp. 1–17 and 167–91, respectively). The few remaining pages of the book are devoted to comments from other sources, including the Report of the Radcliffe Committee.
The general thesis of these several studies was also treated in a paper, “The Gold Shortage, the Dollar Glut, and the Future of Convertibility,” delivered at the August 1959 meeting of the International Economic Association, and an article, “Improving World Liquidity,” in The Banker (January 1960). The most recent statements of Triffin’s position are given in his paper, “Le Crépuscle de L’ Etalon de Change-Or,” presented to the Belgian Royal Economic Society in June 1960 and in his testimony before the Joint Economic Committee in December I960.1 The printed record of both occasions includes his statement and the questions and discussion that followed.
2. Section I of this paper2 is an exposition of Triffin’s diagnosis of present and prospective difficulties in the international financial area and of his prescriptions for dealing with these difficulties. Section II is an analysis of five questions that are basic to Triffin’s proposals: first, the problems involved in obtaining a stable structure of international reserves; second, the need for changing the character of the International Monetary Fund (IMF) to provide additional international liquidity; third, the characteristics of the reserve structure contemplated by the Triffin Plan, including the role played by gold and by exchange guarantees; fourth, the operational and policy problems that an expanded IMF would have faced in recent years in assessing and managing the state of international liquidity; and fifth, some political and international implications of an expanded IMF.
It should be noted at the outset that Triffin has focused attention upon some major problems of international liquidity and international financial organization. His diagnosis of present and prospective difficulties, and his recommendations for meeting these difficulties, are acute and thought provoking. They reflect his extensive knowledge of financial history and his working contributions to the solution of postwar problems. His diagnosis and his prescription are, nevertheless, highly controversial. His proposals involve a number of far-reaching changes in financial structure and operation, and in working controls over them. They deserve intensive and systematic examination. The present article tries to do this, but it does not attempt, except in passing, to discuss other suggestions of a less comprehensive character. Neither does it deal systematically with the increasingly important role of the International Monetary Fund, and of adjustments in its operating policy—past, present, and potential—designed to make it even more useful. These self-imposed limitations have given this article a more unrelieved critical cast than was originally intended. To modify this, however, would make an overlong article even longer.
I. Rate of Growth of Trade as a Guide to XIMF Operations
The rate of growth of trade may be used in three ways: as an ex ante indicator of reserve requirements, as an ex post measure of the adequacy of the growth of reserves, and as a current guide to the operations policy to be followed by an expanded IMF.
Triffin clearly uses the rate of growth of trade as an ex ante indicator of future reserve requirements. The conclusion that the prospective rate of growth of reserves in the next decade will be inadequate rests on this base. He uses trade as an ex post measure much less clearly. His judgment that the present level of international liquidity is inadequate because reserves have failed to increase in the postwar period as rapidly as trade is not clear-cut. Such a judgment inevitably must rest on a number of elements, including the base line from which calculations should start. This difficulty will also be present a decade hence if an attempt is then made to measure the adequacy of reserves solely with respect to growth rates.
The use of the rate of growth of trade as a current guide to the operations policy of the XIMF, though perhaps clear at first thought, becomes increasingly cloudy on further reflection. Triffin proposes50 to expand the IMF into a central bank for central banks, so that it can be concerned with the adequate growth of international reserves and with the stability of the structure of reserves. The adequate growth of reserves is consistently taken to be growth at the same rate as the volume of trade, and all calculations of reserve requirements and shortfalls are based upon this definition. It might, therefore, be expected that he would set up the growth of trade as the guide to, and the determinant of, the operations policy of the expanded Fund. But this is not the case. Triffin nowhere lays upon the XIMF the responsibility of increasing international liquidity pari passu with trade. In fact, he does not explicitly lay upon the XIMF the responsibility of increasing international liquidity at an adequate rate. On the contrary, the growth of trade is used only as a limit to XIMF lending. Though “a reasonably conservative solution would be to retain a 3 per cent figure as definitely noninflationary,” 51 the appropriate rate of expansion of XIMF deposits is left to the judgment of the Executive Directors; rates of expansion greater than 3 per cent a year would require progressively larger majorities.
It may be interesting to speculate why it is necessary to read Triffin so carefully on this question of using the rate of growth of trade as a guide to, and determinant of, the operations policy of the expanded Fund. The path of his argument through prospective reserve requirements and the imminent reserve deficiency is so straightforward that it is easy to conclude that the operations policy of the XIMF should be directed toward achieving an adequate rate of growth of reserves, one equal to the rate of growth of trade. Many commentators have done this. For example, The Economist (London) stated that the expanded IMF would “arrange that its net lending in a period of twelve months, together with current increases in the supply of gold, would increase total world reserves by say 3–5 per cent a year. Thus world liquidity would keep up automatically with world trade.” 52 An article in The Banker (London) speaks of “the Fund’s basic lending, the amount of which would be determined on an arithmetical basis linked to world trade. Thus the Fund’s basic lending over any twelve months might be fixed at such an amount as would, together with current increases in stocks of monetary gold, increase world reserves by 3–5 per cent a year.” 53 One highly qualified European observer put the matter this way:
The Fund shall so handle its lending operations that international monetary reserves can grow at the necessary rate. A growth of total reserves, including gold, of around 3 per cent annually should be regarded as normal. But in case of need the Fund, with a qualified majority, shall be able to bring about a growth of world currency reserves in excess of this rate.
Professor Brian Tew described the operations policy of the XIMF as follows:
The aim would be to increase the total amount of Bancor in existence at a rate sufficient to ensure that the world’s stock of Bancor plus gold should grow pari passu with legitimate requirements for international liquidity in an expanding world economy. In order to meet the “inflationary bias” danger raised against Keynes’s proposals, Triffin suggests very simply that a presumptive ceiling on the Fund’s loans and investments be agreed to in advance, and that qualified majority votes (⅔, ¾, or even ⅘ of the total voting power) be required to exceed this ceiling… .54
The writer’s initial impression, while reading Triffin, was that the expanded Fund would, without question, direct its lending and investment operations to assure an adequate rate of growth of the world’s reserves, and that a 3 per cent rate was a self-evident policy target. This is strongly implied on many occasions, but nowhere stated in so many words. The expanded Fund is nowhere clearly directed to provide an adequate rate of growth of reserves, the prospective inadequacy of which is responsible for its being, nor is it told what an adequate rate of growth would be. The reader has to conclude that Triffin proposes to expand the functions of the IMF and give it a full armory of central bank instruments, but that he is unwilling to provide it with an explicit statement of policy objective, let alone any specific guides to operations policy.
II. Adequacy of Reserves in the United Kingdom
The balanced and carefully considered views expressed by the Radcliffe Committee55 are very suggestive on this point. The Committee does not come down on the side of increasing reserves unequivocally or as a grave matter of overriding priority. Its views are contained in a number of separate observations, of which the most important are indicated here. The world total of international reserves is scarce—certainly no more than barely adequate—but it should not be augmented by an increase in the price of gold.56 The resources of the Fund should be augmented and its scale of activities enlarged.57 It is impossible to “to disentangle the problem of international liquidity from the problem of international balance… . So long as no one country is a large and persistent debtor or creditor, a succession of deficits and surpluses can be handled with remarkably small liquid reserves.”58 These remarks, in addition to those bearing on the responsibilities of the United Kingdom to provide liquidity for, and capital exports to, the sterling area, provide the context for evaluating the following two most important paragraphs bearing on the desirable level of reserves:
662. We regard the right course of action as one calculated to add to reserves or reduce liabilities out of a current surplus sufficiently large to leave room also for long-term investment abroad. We do not suggest that the improvement in reserves and liabilities should be brought about precipitately. Repayment of sterling balances, so far as they constitute the central reserves of other countries or the working balances of overseas commercial banks, would tend to reduce the liquidity of overseas monetary systems. If sterling outgoings were restricted in order to force these countries to draw on their sterling resources, some of them might be faced with a sterling shortage and a general contraction of activity would be precipitated in a group of countries which includes some of the United Kingdom’s principal export markets. The same kind of situation might arise in other markets if the United Kingdom tried to restrict imports in order to add to the reserves. Quite apart from the fact that such action would be inappropriate in a period of trade recession, efforts by the United Kingdom to improve her own liquidity are bound to reduce the liquidity of other countries and aggravate any shortage of international liquidity. We should therefore refrain from seizing too eagerly on the opportunity of extinguishing short-term debts as a means of strengthening, if only temporarily, the pound sterling.
663. So long as there is no special danger of a general shortage of international liquidity, an increase in reserves should, in our view, have priority. No doubt the United Kingdom has not much freedom of choice as to whether to strengthen her position by increasing reserves or reducing liabilities; the decision is largely governed by the willingness of other countries to hold sterling. An increase in reserves, however, marks more unambiguously than a decline in sterling balances a strengthening of the position of sterling and would be so interpreted by financial opinion. If the decline were in the balances of sterling countries it would do little to reinforce the liquidity of the sterling area as a whole, although it would improve the position of the United Kingdom. What the United Kingdom can do to add to her reserves depends, however, on the state of international liquidity, and this also has a direct bearing on the reserves which she requires.
Mr. Altman, Advisor in the Research and Statistics Department, is a graduate of Cornell University and the University of Chicago. He taught economics at Ohio State University and was on the staff of the National Resources Planning Board and of the French Supply Council. He was Director of Administration of the Fund until 1954. He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals.
Comptes Rendus des Travaux de la Société Royale D’Economie Politique de Belgique, No. 272; and Current Economic Situation and Short Run Outlook, Hearings Before the Joint Economic Committee of the Congress of the United States (86th Congress, Second Session, December 7 and 8, 1960). The latter will hereafter be referred to as Hearings, 1960.
An earlier and somewhat differently arranged version of this article was published in Hearings, 1960, pp. 175–207.
Gold and the Dollar Crisis, p. 100.
Ibid., pp. 49–50.
Reserves of the United Kingdom and France at the end of 1957 were $3.1 billion; reserves equal to 40 per cent of their imports in 1957 would be $7.0 billion, leaving an initial shortfall of $3.9 billion. Reserves of the United Kingdom alone at the end of 1957 were $2.4 billion. Reserves corresponding to 40 per cent of imports would be $4.6 billion; and if growth at the rate of 3 per cent a year is assumed, they would in 1967 be $6.1 billion. Under the same assumptions, French reserves in 1967 would be $3.3 billion.
The illustration of the world’s reserve deficiency for a decade in the Wicksell Lecture was that “world trade and production are estimated to have increased in volume, over the last ten years, at a pace of about 6 per cent a year. A parallel rate of increase of the world’s monetary reserves ($62 billion at the end of last year ) would require their expansion by $3.7 billion annually.” As for a low rate of growth, he stated that “the 3 per cent rate assumed by the Fund [in International Reserves and Liquidity] becomes plausible only when ‘normal’ peacetime experience is diluted with the abnormally low, and in fact predominantly negative, growth rates of wartime years and of the 1930’s world depression” (Gold and the Dollar Crisis, p. 48).
By the end of 1960, the “net” reserve position of the United States, as measured by gold reserves in relation to short-term foreign official and private dollar holdings, was negative. If short-term dollar liabilities are understood to include U.S. Government bonds and notes with an original maturity of more than one year, the deficit in “net” reserves was more than $2 billion. This is the basis for the comparison made by Triffin in Hearings, 1960, p. 224.
Employment, Growth, and Price Levels, Hearings Before the Joint Economic Committee of the Congress of the United States (86th Congress, First Session, October 26–30, 1959), Part 9A, p. 2931 (hereafter this will be referred to as Hearings, 1959); Gold and the Dollar Crisis, p. 9.
Hearings, 1959, Part 9A, p. 2911. The same statement is in Gold and the Dollar Crisis, p. 89.
Hearings, 1959, Part 9A, p. 2911.
Gold and the Dollar Crisis, p. 9. The same point is referred to on pp. 88–89 in terms of “the policies adopted to readjust the country’s balance of payments and arrest the gold outflow.” Success of these policies entails the cessation of the current contributions of the key currency countries “to the solution of the international liquidity problem. Their failure, on the other hand, may have far worse consequences still by stimulating large-scale liquidation of outstanding foreign held balances, and triggering an international financial panic involving other currencies as well. This is precisely what happened in 1931… .”
Ibid., pp. 113–14.
Ibid., p. 107. The meaning of the term “semi-liquid” is not spelled out, but it could hardly include balances under payments agreements, holdings of inconvertible currencies, or the $2.5 billion of foreign currencies obtained by the United States in connection with the sale of agricultural surpluses.
Hearings, 1959, Part 9A, p. 2911; cf. Gold and the Dollar Crisis, p. 117.
Gold and the Dollar Crisis, p. 105.
Gold and the Dollar Crisis, p. 104, footnote 1.
Hearings, 1959, Part 9A, p. 2912; cf. Gold and the Dollar Crisis, p. 115.
Gold and the Dollar Crisis, p. 115.
Ibid., p. 103
Hearings, 1959, Part 9A, pp. 2938–39
At the end of 1956, approximately 40 per cent of sterling liabilities was held in the form of bank deposits and Treasury bills. The remainder (60 per cent) was held in the form of government securities, and of this, half had maturities longer than five years.
Total exchange assets held officially are estimated at $19.2 billion as of the end of 1958 (International Monetary Fund, International Financial Statistics, September 1960).
Gold and the Dollar Crisis, pp. 113–14. It is not clear why the same consideration does not apply to official balances at the present time.
Under the present Articles of Agreement, the Fund can sell gold, or borrow, to replenish its currency holdings. It may be prudent, as E. M. Bernstein has suggested, to arrange for borrowing in advance of need by issuing to a small number of countries debentures which could be called for payment to meet large emergencies; see International Effects of U.S. Economic Policy, (Joint Economic Committee of the Congress of the United States [86th Congress, Second Session], Study Paper No. 16, January 25, 1960), pp. 84–86.
On this point, Triffin has generally approved the estimates in Oscar L. Altman, “A Note on Gold Production and Additions to International Gold Reserves,” Staff Papers, Vol. VI (1957–58), pp. 258–88.
Gold and the Dollar Crisis, p. 43.
Ibid., p. 50. For purposes of calculating reserve requirements, Triffin assumes a figure of $4.6 billion as of the end of 1957 (ibid., p. 50). For the views of the Radcliffe Committee on the U.K. reserves, see Appendix II, below.
The Future of the European Payments System (Stockholm, 1958), p. 34.
These data were taken from International Financial Statistics, October 1959.
Gold and the Dollar Crisis, p. 110.
Ibid., p. 114
Gold and the Dollar Crisis, p. 104.
Ibid., p. 115.
Ibid., p. 110. The Economist (London) commented that “Professor Triffin proposes an orderly liquidation of such balances, say by 5 per cent a year …” (January 9, 1960, p. 134), and a number of other commentators drew the same unqualified inference. Triffin replied in a letter (The Economist, January 23, 1960, pp. 304–05) describing the proposal stated here. In this letter he also wrote, “I would indeed expect the Fund to accumulate instead additional sterling and dollar balances in the initial years… .” This expectation does not appear in Gold and the Dollar Crisis, nor in earlier writings.
Gold and the Dollar Crisis, pp. 117–18; Hearings, 1959, Part 9A, p. 2912.
“Altman on Triffin: A Rebuttal,” in Hearings, 1960, p. 212.
Cf. Hearings, I960, p. 212.
This was the arrangement suggested for the International Clearing Union; see Proceedings and Documents of the United Nations Monetary and Financial Conference, (Washington, 1948), Volume II, p. 1565, par. 29.
As is evident from Table 2, in 1957–59 imports by North America and Western Europe increased at almost the same rate. Rates of increase based upon export data tell a very different story, since they were affected by the events at Suez. World exports in 1957–59 increased by 3.8 per cent a year. Exports by regions increased as follows: 3.4 per cent for developed areas including North America (– 2.8 per cent) and Western Europe (7.0 per cent); 3.6 per cent for less developed areas.
As already noted, country holdings of exchange reserves were affected by the elimination of $1.3 billion of claims on EPU after the end of 1958. If adjustment is made for this nonrecurrent event, world gold plus country exchange reserves increased by $3 billion from 1956 to 1959, or by 1.7 per cent a year.
In 1957–59, the volume of imports for the whole world increased by 4.3 per cent a year. Imports for the world excluding North America increased by 4 per cent. (The corresponding increases for exports were 3.8 per cent and 6 per cent, respectively.) Reserves of all countries other than the United States, including the contribution to reserves made by the balance of payments deficit of the United States, increased by 3.8 per cent a year.
On the basis of world reserves (Table 4), the growth of reserves required to match world imports increasing at a compound rate of 4.3 per cent a year would have totaled $8 billion.
When the United Kingdom made advance repayments to the Fund in 1960, Treasury officials are reported to have observed that these repayments did not in any way weaken the United Kingdom’s reserve position. The repayments were considered to be merely a transfer from front-line reserves to secondary reserves, since they enlarged U.K. drawing rights on the Fund (The Wall Street Journal, September 6, 1960). Governor Cobbold of the Bank of England stated in a speech in October 1960, “I hope that we shall all get more used to regarding the International Monetary Fund as a second line of reserves. Too little importance has been attached to the very large increase in their facilities which was arranged last year, and to the part they can play in offsetting these [short-term money] movements… . I should like to see countries draw on these facilities as a matter of ordinary business when they need to reinforce reserves, and repay when reserves are rising… .”
“The Twilight of the Gold Exchange Standard and the World Dollar Crisis,” in Hearings, 1960, p. 238.
It may be noted, by way of comparison, that the Federal Reserve System owns $27 billion of U.S. Government securities and all commercial member banks another $27 billion (data are for November 1960, from the Federal Reserve Bulletin, December 1960).
Hearings, 1959, Part 9A, p. 2938; Hearings, 1960, p. 238.
Gold and the Dollar Crisis, p. 103. In a later statement, this point was made as follows: “One could, for instance, adopt a highly conservative estimate of such needs—allowing, let us say, for a maximum reserve increase of 3 or 4 per cent annually—provided that additional lending be made permissible, in case of need, by special voting majorities assuring a proper control of such decisions by the major creditor countries in the Fund” (Hearings, 1960, p. 238).
January 9, 1960, p. 134.
Fred Hirsch, “Development Aid and World Reserves,” The Banker, March 1960, p. 148.
International Monetary Cooperation, 1945–60, (London, 5th ed., 1960), p. 184.
Committee on the Working of the Monetary System, Report, (Cmnd. 827, London, 1959).
Ibid., pars. 672–75.
Ibid., pars. 675–78.
Ibid., par. 680.