This is the text of a talk delivered at an Economics Department seminar at the University of Toronto and at a staff seminar of the International Monetary Fund. The views expressed are personal, and are not necessarily those of the International Monetary Fund. THIS PAPER describes a number of the problems and issues involved in the management of international liquidity. It does not pretend to suggest whether international liquidity should be managed, or how it can be managed, or who is to manage it. It is not a manual for a prospective manager of international liquidity, and it does not recommend policies or courses of action. It is rather an examination of some of the issues that would have to be considered and decided by the manager of an international central bank. From this point of view, Section II of this paper addresses itself to four issues: (1) what is to be managed; (2) what are the means or instruments of management; (3) what are the objectives of management; and (4) what problems arise in measuring targets and results involved in the management of international liquidity. Section I sets the stage for this discussion by describing several important elements of the nature of management.

Abstract

This is the text of a talk delivered at an Economics Department seminar at the University of Toronto and at a staff seminar of the International Monetary Fund. The views expressed are personal, and are not necessarily those of the International Monetary Fund. THIS PAPER describes a number of the problems and issues involved in the management of international liquidity. It does not pretend to suggest whether international liquidity should be managed, or how it can be managed, or who is to manage it. It is not a manual for a prospective manager of international liquidity, and it does not recommend policies or courses of action. It is rather an examination of some of the issues that would have to be considered and decided by the manager of an international central bank. From this point of view, Section II of this paper addresses itself to four issues: (1) what is to be managed; (2) what are the means or instruments of management; (3) what are the objectives of management; and (4) what problems arise in measuring targets and results involved in the management of international liquidity. Section I sets the stage for this discussion by describing several important elements of the nature of management.

Oscar L. Altman*

I. The Setting for Management of International Liquidity

National Interests and International Systems

The international monetary system consists of a number of attitudes, objectives, practices, and institutions.1 Some of these components are not well suited to each other, while others function in divergent or contradictory ways. The present system is not logical, if by this is meant a system in which all parts work together and support each other in rational fashion. It is a product of history rather than logic. It is a product of personal and national interests and of the conflict and resolution of those interests. It is a mixture of the old and the new. Some of its components are static; some are developing; others are contracting. The system as a whole represents a set of compromises of divergent monetary interests within the context of broader national economic and political interests.

A set of compromises may be accepted as the best that imperfect human beings and selfish nations can agree on, but it can never be described as logical or rational. Clearly, anyone bold enough to devise a new and better monetary system from scratch would not advocate anything that remotely resembled the present one. Practically anyone can, with a little effort, imagine a far better system for creating and managing international liquidity. But the real question is: better for whom? Any international monetary system reflects a balance of national advantages and disadvantages, and of responsibilities and power. To be negotiable, the balance of advantages and disadvantages must be regarded by countries as appropriate. If something that looks like a better and more rational system in the quiet of the study cannot be negotiated around the conference table, the explanation is not that the political negotiators are ignorant and that they do not know what the score is. They know the score only too well.

Most proposals for more and better international monetary management basically rest upon the assumption that conflicts of interest are less important than they really are. Such an assumption makes it difficult to understand why the world’s major financial powers do not proceed forthwith to replace an international monetary system that periodically runs into crises, and that always needs patching up, with one that is sound and forward looking. The fact is, however, that existing monetary arrangements are firmly rooted because they grew by negotiation and experiment. In the process, many conflicts of interest, some of which were very serious, were resolved. It follows that virtually no issue in the management of international liquidity can be discussed apart from national conflicts of interest. And in the background there is always the realization, even among the advocates of modification or reform, that the present system has some good things to its credit. As the French Minister of Finance stated in September 1963:

… One must indeed stress the fact that the present world monetary system has made it possible to restore convertibility of the main currencies, a result which, between 1945 and 1950, appeared unattainable. This system then provided credit mechanisms to cope with the crises, both severe and temporary, which affected certain currencies.

I wish to emphasize that these results have been secured while maintaining a relatively high level of employment in the world, an outstanding contrast to the situation that prevailed in years when the world monetary system was based on different principles.2

National central banks and an international central bank

The last few years have seen many proposals for creating an international central bank or for transforming the International Monetary Fund (IMF) into such a bank. Many of these proposals rest upon the analogy between a national central bank and an international central bank.

Practically every country has found it desirable to establish its own central bank to act as a lender of last resort, to supervise the domestic monetary system, and to manage domestic monetary and credit policy to achieve full employment, economic development, and stable prices. Each central bank is provided with an armory of instruments, including the authority to prescribe reserve ratios for commercial banks, to hold these reserves in the form of deposits, and to operate with rediscounts, open market operations, moral suasion, and the like.

All of this has suggested to many that the world community of nations (outside the communist bloc) needs an international central bank to hold the deposits of central banks, presumably in some international unit of account, to make loans and investments, and, generally speaking, to manage the international monetary system and international liquidity. Such an international central bank would do for member countries and their central banks what each central bank now does for its own country and its commercial banks.3

It is understandable that proposals for creating an international central bank have attracted a good deal of attention. This attention has been strengthened by inadequate appreciation of the virtues of, and recent developments in, the existing system, and of the present and potential role of the IMF. The analogy between a national and an international central bank has a good deal of support, and this is increased by pointing out some rather obvious limitations of the present monetary system. It is said that this system does not appear to contain any calculated or managed way of expanding international liquidity in accordance with need, and that it is unstable because it uses national currencies as media for accumulating and holding international reserves.4 Moreover, it is said to be unstable because it rests upon gold—too little gold for a full gold standard and too much gold if gold is viewed as a barbarous relic of the past.

Management and managers

Discussions of international monetary management in recent years have concentrated more and more upon one particular kind of management, namely, that based on a formal institutional structure operating with a managing board and a permanent staff. This is the only kind of structure which many consider to have the necessary qualities of continuity, staff work, and built-in international cooperation. Increasingly, management is considered to be a process in which individuals sit around a table at periodic intervals making decisions based upon staff work.

Though this view has a great deal of validity, the many other kinds of management should not be overlooked. There can be management through the price mechanism, the voting mechanism, tradition, and accepted standards and modes of behavior. The allocation of resources within free enterprise economies and the decisions as to what to produce and in what quantities are to a large extent based upon the consensus of the market place. The gold standard of the nineteenth century, based on London, was not a completely unmanaged, unpredictable system. Part of it was managed through the rules of the game; part of it was managed by the United Kingdom. No international body decided what part of the gold standard should be managed in one way or the other, and no body decided what part should be unmanaged. No international body selected the United Kingdom to play the most important managerial role. Assignment of key currency status to sterling, and later to the dollar, were important developments. These developments in their time were just as important as would be the decision, now advocated by many, to replace key currencies by an international unit. Yet, sterling and the dollar became key currencies without the decision of any international board or monetary conference. To a surprising extent, sterling and the dollar became key currencies without the decision of the United Kingdom and the United States. They became key currencies through the actions of tens of countries, hundreds of business enterprises, and millions of individuals who found it convenient to hold some of their liquidity in these forms.5 To many, the virtue of a sterling exchange standard was precisely that it did not centralize monetary power in Great Britain or elsewhere and that it was based on a distribution of power. To be sure, the United Kingdom and the United States might have tried to prevent their currencies from assuming a key status—and in the process, from developing large international capital markets. They could have tried to discourage all nonresidents, including foreign central banks, from holding their currencies—as Switzerland today discourages such holdings of Swiss francs. It is not clear, however, that the United Kingdom and the United States, given their international importance and interests, could have prevented their currencies from achieving a key status.6

In the last years, many students in the United Kingdom have tried to strike a balance between the advantages and the disadvantages of keeping sterling as a key currency, and a few have tried to do the same thing for the dollar. These students appear to assume that sterling, which became a key currency without international management, could easily be transformed into a non-key currency with management.7 The United Kingdom could, of course, transform sterling into a non-key currency, but this would involve major political and economic issues for the United Kingdom. Such a transformation could hardly be done unilaterally without inviting reprisal. It would require a good deal of hard negotiation between the United Kingdom, the sterling area, and the rest of the world, and would necessarily involve many questions other than the technical role of sterling.

There is also the question as to who should be the managers of a managed international monetary system. Economists generally imagine themselves as the managers, and if not the managers, as the indispensable advisors of the managers. This makes it easier to imagine that the managers are wise and well trained, with a clear understanding of the past and a good view of the future. This in turn makes it easier to think that managers have the additional attribute of international objectivity, and that they can see beyond, and rise above, the selfish needs of the individual countries of which they are citizens.

This description, though somewhat overdrawn, is more pervasive than might appear at first glance. It is useful to recall the long controversy during the conferences at Bretton Woods and at Savannah about the role of Executive Directors in the Fund. Keynes conceived of Executive Directors as high officials in their governments, serving in a part-time capacity, acting for the international good as they thought best, and gradually in their periods at home converting their governments to internationalism. Opposed to this was the view, spearheaded by the United States, that Executive Directors were in fact political representatives of the countries which elected them. Executive Directors had to be responsive to the interests of their countries, and they were selected to represent and fight for them within the provisions of the Fund’s Articles of Agreement. In this view, the interests of each country were to be frankly recognized in an Executive Board consisting of full-time Directors, along with the reality that the interests of member countries might often be in conflict and that these conflicts would have to be negotiated to a settlement.8

Keynes pushed his views vigorously at the Savannah meeting in 1946, and his views seemed to have some support at the time. In retrospect, his support was weaker than it appeared to be, and often rested upon arguments and associated political considerations quite different from those he himself relied on. It would now appear that virtually everybody believed, even at that time, that Executive Directors were and had to be political representatives of their governments.9 This is the general view today. This does not make the Fund’s Executive Directors less able to deal with the Fund’s problems. When experience and training are brought to the position, as they very often have been, this status has made Executive Directors more able—and often more realistic.

Many issues are involved in the question of what kind of management an international central bank might have, and who the managers would be. The present situation offers many possibilities, and the future will undoubtedly offer many new ones. This is an important point to consider in a long-lived organization, where members have responsibilities as well as rights. For example, would the prospect of managing international liquidity look more or less attractive, and to which countries, if voting were always on a weighted basis? Would such management be more or less attractive if the members of the Common Market cast one joint (weighted) vote rather than if they acted independently? What would be the effect upon the management of international liquidity if a political detente were reached and the Soviet Union, Poland, Hungary, Czechoslovakia, Bulgaria, Rumania, and Albania—not to mention Mainland China—joined the managing institution and were represented on the managing board? What would be the effect upon the management of international liquidity if a substantial number of Executive Directors were members of the communist party and/or trained in Marxian economics? It is not unrealistic to raise these last questions. The members of the Soviet bloc, with the exception of communist China, are after all members of the United Nations, the Soviet Union played an active part in the Bretton Woods Conference, and Poland, Czechoslovakia, and Cuba were once members of the Fund.

National and international monetary action

In considering the readjustment between any country’s balance of advantages and disadvantages in the present monetary system and in any prospective one, it is worthwhile to note several major differences between the role of a national central bank and that of an international central bank.

First, a national central bank operates within the sovereign authority of one government, while an international central bank would operate as the creature of many sovereign governments.10 A national central bank deals overwhelmingly in obligations of the national government, which are of uniform quality and which involve only one currency. The deficits of the central government can be and often are financed with credits obtained from the central bank.11 This role of central banks in providing central governments with bank credit is intensified during periods of war, depression, and other events which require large-scale spending. On the other hand, an international central bank would necessarily, or at least probably, reduce the ability of any one country to act unilaterally. It is true that no country can act internationally without taking account of the repercussions of its actions. Yet there is a considerable difference between any one country’s adjusting itself to all other countries acting individually and adjusting itself to all other countries acting collectively, i.e., through an international central bank.

Second, within any one country, action in the monetary sphere goes along with governmental action with respect to taxes, spending, public investment, and governmental influence on labor, capital, incomes policy, and the like. For example, the effects of a restrictive monetary policy may be mitigated, or compensated for, by subsidies, grants-in-aid, or tax relief. Monetary policy is only one of many policies, all of which can be coordinated by the national government and its agencies. The decisions of a national central bank, moreover, are never completely independent. To a greater or lesser extent, they are subject to review by the government.

An international central bank, on the other hand, would have a different position. International trade, tariff, investment, and labor policies would be determined in other international agencies, if they were determined at all; and the national distribution of power varies from one international agency to another. There would be no international government to coordinate, offset, mitigate, or intensify international monetary policy and other kinds of international policy. Hence, the actions of an international central bank to make or to withdraw short-term loans to member countries, or to vary the volume of international investment, might strike particular member countries with great force. These actions would inevitably be viewed by the countries most affected as foreign support for good domestic policies or as foreign discipline for bad ones.

Third, the actions of a national central bank are more anonymous, and their results are more predictable, than would be those of an international central bank. Monetary control by a national central bank affects large numbers of business enterprises and individuals, but the bank has little if any contact with the inhabitants who are affected by changes in the volume of credit or in rediscount rates. Some of the bank actions take effect slowly, and all of them are diffused through the economy. The national central bank, in measuring the results of its past actions and in predicting the results of its future ones, has the advantage of dealing with the regularities inherent in the law of large numbers, and in the anonymity created by this. The responsibilities of a national central bank thus often appear to be more distant than they really are.

An international central bank would be in a different position. Its customers would sit on its board of directors, and be directly and immediately affected by its decisions. There would be no diffusion of responsibilities, and no way to “pass the buck.” The actions of a few countries might greatly affect any one decision and any previously observed statistical regularity. An international central bank would operate within an environment of small numbers. Decisions by a few countries might greatly modify the international environment, and thus the task of the bank. For example, the structure of exchange rates, or the adequacy of any given amount of international liquidity, might seriously be affected by the decision of a small number of countries, or even of one country, to accumulate excessive reserves or to continue to run a balance of payments deficit.

II. Major Management Issues

This section examines some of the major issues that would be faced by an international central bank, but without any assumption that one is in the offing or that it is indispensable.

What is to be managed

Suppose that an international central bank were to be instructed to manage international liquidity to achieve one or more stated objectives, on the assumption that there was some direct and demonstrable connection between the amount of international liquidity (or changes in this amount) and the volume of international trade or the world level of employment or other objectives (or changes in these). This would at once raise the question of what kind or kinds of international liquidity an international central bank would wish to manage.

The conception of international liquidity, never very precise, has expanded and become less precise in recent years. This development has improved the analysis of liquidity problems but increased the problems of would-be managers. It is useful to approach this development by looking at what national central banks manage when they regulate the domestic volume of money and credit.

The views of central banks, and of economists, about what constitutes money in any one country have changed a great deal. Each change has after a time—sometimes a long period of time—resulted in changes in methods of management. When money consisted only of metallic coinage, the nature of money was simple. Widespread use of paper money, however, raised the question whether paper money was money. If it was, the monetary authorities would have to manage the total of coins plus paper money. On the other hand, if paper money was not money—that is, if paper money was merely a representative money which increased the velocity of circulation of coins—the authorities could confine their management to coins. Out of this debate grew the compromise permitting unlimited coinage of gold or silver, or both, combined with fractional reserve requirements for paper money.

In time, the growth of commercial banking and bank deposits presented the monetary authorities with the question whether demand deposits were money and whether they also should be managed. The Bank Act of 1844 rested on the compromise, accepted at least in the United Kingdom, that monetary management could confine itself to metallic currency and banknotes and that the volume of demand deposits could be left to manage itself.

Later, the great expansion in time and savings deposits posed the question whether these should be considered money from the point of view of economics and of monetary management. The Federal Reserve System continues to treat the money supply as currency and demand deposits in the hands of the public.12 Some students have concluded that the time and savings deposits of commercial banks act so much like money that they should be considered money.13 Finally, in the last decade there has been increasing discussion of whether other types of financial assets should also be considered as money, and if not money, then domestic liquidity. General theories of liquidity preference have focused attention on various kinds of near-moneys, or rather, liquidities, and the growth of financial intermediaries has greatly accelerated this kind of analysis. These studies of money, quasi-money, and money substitutes, within a framework of liquidity preference, have reduced the clarity and the definiteness of monetary targets and therefore modified the task of the monetary authorities. Thus, the Radcliffe Committee reported that “though we do not regard the supply of money as an unimportant quantity, we view it as only part of the wider structure of liquidity in the economy. It is the whole liquidity position that is relevant to spending decisions, and our interest in the supply of money is due to its significance in the whole liquidity picture.14

Similarly, the conception of international liquidity has broadened in the last few years and has come to include much more than international reserves.15 International reserves, the narrower concept, consist of a number of different elements, and the total may change in many ways, some of which are erratic. Gold additions to official holdings may increase world reserves by that amount or by more than that amount. The world total of international reserves of gold and foreign exchange increases when a country draws currencies from the Fund and decreases when it pays back currency to reverse the transaction. A sterling or a French franc area country that deposits in London or Paris dollars that it draws from the Fund increases its reserves and those of the key currency country. From a broader point of view, of course, any country that draws on the Fund increases its unconditional liquidity but decreases its conditional liquidity. Both developments are important even though it may be impossible to summarize the change meaningfully with one number.16

The operations of the Euro-dollar market have greatly distorted the data on the world total of foreign exchange reserves, upsetting the measurement of changes from one period to another, changing the distribution of these holdings by country, and creating large unexplained residuals. As a result, the Fund no longer finds it worthwhile to attempt to publish a reconciliation of foreign exchange assets and liabilities.

Swap transactions contribute to international liquidity. It may seem strange to many that a swap arrangement between (say) the United States and Canada, even before it has been drawn upon, increases the international liquidity of both countries; and that after a swap has been made, the United States adds its newly acquired Canadian dollars to its reserves and Canada adds its newly acquired U.S. dollars to its reserves.

Finally, since October 1961, the United States has issued three quarters of a billion dollars of so-called Roosa bonds. These bonds have maturities of 15-24 months and are denominated in the currency of the owner rather than in dollars. Holders of these bonds differ on the question whether to include them in country reserves—they do not follow a uniform practice in this matter—but there is no question that these bonds add to international reserves and to international liquidity.17

These issues pose the difficult problem of what kind of reserves or liquidity an international central bank should attempt to manage. Given all these different measures, what should the bank manage in order to assure the world of an adequate stock of international reserves or international liquidity? The answer to this question affects, sometimes very greatly, estimates of the present adequacy of international liquidity and of future liquidity requirements.

Many answers have been given to this question. For example, Professor Triffin used three different totals of international reserves. Each of these was used to support the view that international liquidity was adequate, though each suggested different future liquidity requirements.18 The recent study by Salant and associates on The United States Balance of Payments in 1968 also uses three definitions of international liquidity, which differ among themselves even more widely. In Chapter I, international liquidity consists of the means that the United States used to finance its balance of payments deficit. This measure includes changes in gold and foreign exchange as well as changes in the gold tranche position of the United States in the Fund, implying that the gold tranche itself should be treated as a component of U.S. reserves. In Chapter VIII, international liquidity is the total of national holdings of gold and foreign exchange plus the Fund’s holdings of gold, but excluding gold tranche positions per se. This measure is used to determine the future requirements for international liquidity.19 This treatment of the Fund makes world international liquidity lower by $2 billion than does the conception used in Chapter I. Finally, in Chapter IX, the study examines the means of financing the prospective balance of payments deficit of the United States, and concludes that anything that is used to finance this deficit—even long-term bonds—may retrospectively be considered as liquidity. This conclusion considerably reduces the usefulness of any prospective liquidity requirement based on more limited definitions.

The management problem is considerably more complicated than that of having many numbers representing the total of international liquidity and many required rates of expansion of these totals. The significance of any particular total of international liquidity depends upon the distribution of these liquidities among countries, the composition of these liquidities, and the willingness of countries to use their liquidities to meet balance of payments deficits. The environment within which international liquidity is used also affects the demand for it. The environment includes such complex factors as whether the structure of exchange rates, at least among the major countries, is realistic, and the extent to which surplus as well as deficit countries cooperate to deal with payments imbalances. These many considerations raise the question whether any particular total of international liquidity has either theoretical or operational significance.20

Moreover, no total of international liquidity includes the amounts that members can draw from the Fund under appropriate conditions—excluding for this purpose the gold tranche, which members can draw virtually unconditionally—or the amounts that individual countries may make available as parallels or supplements to Fund drawings. No total of international liquidity can take account of international cooperation, although creditors will often finance the balance of payments deficits of debtors while both are putting their houses in order, simply because any other course involves excessively sharp adjustments and possible damage to them and to the international structure.

Finally, there are two quite different conceptions of what managing liquidity means. One of these, in effect, is that if individual countries can have prompt and adequate outside help in financing their balance of payments deficits on predictable and consistent terms (including repayment in relatively short periods), problems of the long-run level of liquidity cannot be serious and can be dealt with when and as they arise. The other view is that if international liquidity is increased systematically and steadily in accordance with the growth of world trade—a proposition which has been defined as increasing liquidity in accordance with the need for it—the short-run liquidity problem is minimized.21

It follows that the management of international liquidity involves great differences of opinion and wide areas for judgment. This conclusion does not suggest that it is impossible to have too much or too little liquidity, or that it is impossible for an international central bank to manage international liquidity. It does suggest, however, the enormous difficulty that would be involved in specifying in advance some specific liquidity target, and including this in the bank’s articles of agreement. Instructions to an international central bank to manage international liquidity would thus have to be of a general character. This would be a great advantage for conducting flexible operations in an unknown future; but, on the other hand, the more general the provisions, the more unpredictable would be their application to individual members, each of whom had assumed an unlimited commitment to react in real terms to the monetary actions of the bank.

Instruments of management

An international central bank charged with managing international liquidity might be expected to engage in both short-term lending and long-term lending (investment).22

Each of these instruments has its counterpart in the armory of national central banks. Nevertheless, domestic operations, which are conducted in one legal tender currency, differ fundamentally from international operations, which involve more than one currency and would therefore be subject to the hazards of balance of payments difficulties and of changes in exchange rates. International central banking operations would, therefore, be inherently more complicated than domestic ones, and might be expected to be conducted with exchange rate guarantees based on gold or an international unit of account. In the Fund, for example, a country may purchase any currency it needs with its own, but it will eventually have to repurchase its own currency (repay) with resources equal in gold value to the gold value of its purchase (borrowing). The country will necessarily repurchase with some foreign convertible currency or with gold; in either case, its own currency may fluctuate with respect to one or the other.

Short-term lending

The amount of short-term funds that countries are prepared to borrow on a gold equivalent basis, repayable in relatively short periods, is limited. Since the beginning of the Fund’s operations, drawings have totaled $7.1 billion, and repayments23 have totaled $5.4 billion, so that net drawings outstanding at the end of 1963 were $1.7 billion.24 Net drawings outstanding thus increased, on the average, by $100 million a year in the 17-year period, 1947-63. These results reflect the rapid postwar expansion, when the value of trade increased from $50 billion to $135 billion, Fund quotas increased from $9 billion to $15 billion, and there were several large Fund transactions. Annual net additions would, of course, depend upon the particular years chosen for analysis, since drawings and repurchases varied greatly from one year to the next. Nevertheless, the largest average annual increase in net outstanding drawings in any decade since the Fund began operations was $215 million.25

For the purpose of assisting member countries to meet their balance of payments deficits with short-term self-liquidating drawings, operations on this scale may be regarded as satisfactory, though the Fund had resources to finance even larger ones. Such drawings made credit available directly where it was needed. Moreover, in many cases, the Fund’s operations had a leverage effect, since they tended to certify the credit of the borrowing country. This made it easier for that country to obtain credit from other sources, at the same time as it encouraged residents to repatriate capital and nonresidents to invest new funds.

Nevertheless, such a volume of short-term lending is clearly unsatisfactory when measured against any of the proposed projections of international liquidity requirements. Net additions to reserves arising from the Fund’s short-term lending increased international reserves in 1947-63 by less than 1/5 of 1 per cent a year.26 Future annual net additions to outstanding short-term credit may be expected to be larger, since the world economy will grow and Fund quotas and drawings may also be expected to grow. It is hardly likely, however, that such additions will average a great deal more than $200 million a year in the next five years. Indeed, the need for reversing drawings in not more than three to five years makes it unlikely that there will be large annual increases in net outstanding Fund drawings over periods of five to ten years. Such net additions to international liquidity as may be expected would increase the world total of international reserves by not more than ⅓ of 1 per cent a year.

Currencies drawn from the Fund by deficit countries are reflected in reductions in the Fund’s holdings of the currencies of other (usually surplus) countries. Hence, a country whose currency is drawn will usually find that its gold tranche position has increased. This increase may and should be considered a reserve asset; and it is arithmetically so treated in the statistics on international liquidity in the Fund’s International Financial Statistics.27 Changes in gold tranche positions are usually in the same direction, but not of the same amount, as changes in net drawings outstanding.

In the past four years, as Table 1 indicates, the (positive) gold tranche positions of Fund members increased by $690 million, while net outstanding drawings increased by $399 million. Gold tranche positions thus increased international liquidity by almost $175 million a year in 1959-63. The contribution of net outstanding drawings to the increase in international liquidity was, however, undoubtedly less than the $399 million ($100 million a year) shown in the table. In line with the Fund’s policies on currencies to be used in drawings and repurchases, about 45 per cent of the drawings were made in dollars and sterling, while 75 per cent of repurchases were made in these currencies. Thus, Fund drawings increased country holdings of dollars and sterling by $1.7 billion while repurchases reduced them by $2.3 billion.28

Table 1.

Fund Member Countries: Gold Tranche Positions and Net Outstanding Drawings, End of Year, 1959-63

(In millions of U.S. dollars)

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Sources: International Monetary Fund, International Financial Statistics, February 1964, and Supplement to 1963/64 Issues.
Investment

An international central bank charged with expanding the total of international liquidity in accordance with the growth of trade—assuming that such a rate of expansion was required to maintain the adequacy of international liquidity—would thus have to supplement its short-term loans with long-term investment operations. These would consist of making loans repayable in five to ten years or more, or of purchasing long-term securities.29 Investment operations designed to expand international liquidity in (say) the next five years would have to average at least $1 billion a year, assuming that international reserves grew by 3 per cent a year, and that gold and reserve assets resulting from IMF operations grew at the rate of 1% per cent a year. Investment operations would have to average almost $2.5 billion a year if international reserves were to grow by 5 per cent a year. If, at the same time, official holdings of dollars and sterling were to be reduced and ultimately eliminated from international reserves, the investment program would have to be correspondingly larger.

Investment programs of this magnitude would present an international central bank with a number of management issues, which would be essentially the same whether the investments were made by an international central bank, or whether they were made by creating bank credit to buy the bonds of some other agency, such as the International Bank for Reconstruction and Development (IBRD) or the Inter-American Development Bank (IDB). These management issues would involve reaching an appropriate compromise among three elements: the creditworthiness of the borrower, the currency in which the investment is to be made, and the international liquidity target.

With or without a gold value guarantee, any government is more creditworthy with respect to obligations denominated in its own currency than in any other currency. Any government can supply unlimited amounts of its own money, since it can supplement the funds it can raise by taxation and by borrowing with those it can create. The functioning of the Fund’s Articles of Agreement illustrates this proposition. The Articles provide that, if the par value of a member’s currency is reduced, or the foreign exchange value of a member’s currency has depreciated to a significant extent within that member’s territories, “the member shall pay to the Fund within a reasonable time an amount of its own currency equal to the reduction in the gold value of its currency held by the Fund.”30 Many Fund members have depreciated their foreign exchange rates several times, some have been in external credit difficulties, and a few have suffered galloping inflation. Yet no member has ever been unable to pay to the Fund the additional amounts of its own currency required to maintain the gold value of the Fund’s holdings. Whatever domestic problems such payments created for the country concerned—and they appear to have been negligible—they clearly created no external problem. Hence, if the only test of a government’s creditworthiness was its ability to repay in its own currency, every government would enjoy a superlative rating.

Creditworthiness first becomes a problem when it is measured by a government’s ability to repay in some foreign currency, since this usually requires earning a balance of payments surplus. In most cases, this ability is even more limited when foreign obligations are stated in terms of a gold equivalent or an international unit of account.

There is no reason to assume that the amount of investment required to expand international liquidity to predetermined levels is consistent with the amount of investment that could be made with high and consistent standards of creditworthiness combined with undertakings to repay in convertible currency, gold, or an international unit of account. On the contrary, it is likely that a large and increasing investment program can be carried out only by relaxing, probably progressively, standards of creditworthiness and repayment requirements.

The history of the IBRD illustrates this point. The IBRD makes hard loans, almost exclusively in convertible currencies, to finance creditworthy projects; these loans are supported by government guarantees and are repayable in convertible foreign currency. These requirements are dictated by the fact that the IBRD itself has to raise the funds for these loans by selling its own securities, denominated in convertible currencies, in the world’s financial markets.

The IBRD loan program got off to a flying start after the war, but has shown no upward trend in the last few years. Since 1958, new loans have averaged about $500 million a year, but net outstanding loans (after repayments) have increased much less. The Bank’s lending ability has in no way been limited by available funds, which have constantly been replenished by repayments and by sales of parts of its holdings to private banks and other investors. Since it began operations, the IBRD has disbursed $5.6 billion in loans and received $3.1 billion in repayments and in the proceeds of loans sold to others. The IBRD portfolio of government or government-guaranteed obligations was $2.5 billion at the end of 1962. If all this portfolio, the results of 17 years of operations, were represented by additions to international liquidity—a rather unlikely assumption, since it would imply that no part of the foreign currencies borrowed from the Bank were paid over, in exchange for imports, to the countries which bought IBRD bonds—the net additions to international liquidity averaged $140 million a year. If it is assumed that the additions to international liquidity created by IBRD investments are measured by the increase in debt held by the IBRD, plus the increase in the hands of private banks and other investors to whom the IBRD resold part of this debt, the total outstanding at the end of 1962 was $4.2 billion. The net addition to international liquidity, under these assumptions, did not exceed $250 million a year in the period 1947-63.

These results reflect the Bank’s standards of creditworthiness and its insistence that borrowers amortize and pay off their loans. They also suggest how difficult it would be to expand international liquidity by large and growing amounts through investments made in accordance with such standards.

Targets for increasing international liquidity to predetermined levels of adequacy would require monetizing larger investment programs. It is possible, but not likely, that such investments could be confined to developed countries, with the objective of maintaining high standards of creditworthiness and using the capital markets of these countries to lend to the underdeveloped countries. But it is difficult to justify this on either economic or political grounds. The developed countries already have high rates of savings, and they should be exporting more capital than they do now. Yet IBRD loans to them would increase their liquid funds. If these loans were invested in developed countries, they would further increase the existing disparities between rich and poor countries; if they were not so invested, they would increase the volume of savings that developed countries had to export. There is no justification for enlarging the capital exporting role of developed countries (and perhaps their political influence) by lending them outside funds. Nor is there any reason to suppose that developed countries would welcome the responsibility of exporting larger amounts of capital or that they could do so more efficiently than the IBRD. On the contrary, there is every reason to believe that underdeveloped countries would prefer to receive their larger capital imports from international agencies, other things being equal, than from individual countries.

Under these conditions, it may be assumed that investments to expand international liquidity would be directed largely, if not wholly, to underdeveloped countries. It is clear that such investments would require significantly lower standards than those used by the IBRD. The IBRD, for its own part, has not wished to modify its own lending standards radically.31 In these circumstances, it became advisable to create new international lending agencies to operate with softer lending standards, including longer periods of repayment, initial grace periods without interest payments, lower rates of interest, and repayment partly or wholly in local currencies. Thus, in 1960, the IBRD set up an affiliate, the International Development Association (IDA),32 and the nations of the Americas set up the IDB.33 In the last fiscal year, which ended June 30, 1963, the IDA loaned $260 million; and in September 1963 it asked for $750 million of additional funds for 1963-66, implying future loans at the same annual rate. The IDB, in 1960-63, made loans at the rate of a little more than $200 million a year.

The annual increases in the outstanding loans of the IBRD, IDA, and IDB, assuming that they had all been monetized and reflected in international reserves, would have expanded international reserves by about 1 per cent a year on the basis of recent experience.

This analysis suggests that there is only one sure way to expand international liquidity by large and growing predetermined amounts, and that is to create new money and give it away.34 This is, indeed, the substance of the Stamp Plan,35 under which new money would be created and given to the countries that need it the most—the underdeveloped countries. These countries would buy more from developed countries, which would then have the option of adding this new money to their reserves or of spending it in turn. Under such an arrangement, all the industrial countries could have balance of payments surpluses and hold increasing amounts of newly created money in their reserves. The underdeveloped countries would not have larger balance of payments deficits, since they would receive their share of the newly created money as gifts. The additional goods and services exported by the industrial countries to the underdeveloped ones could come (hopefully) from the expansion of output and the elimination of unemployment. Even after these industrial countries reached full employment, they could still make available the required goods for export by appropriate fiscal policy. The Stamp Plan would, in short, serve to eliminate balance of payments deficits in the countries concerned with them, eliminate unemployment, speed development, and satisfy public morality in a useful way. Under such an arrangement, the appearance of inflation in industrial countries after they have all reached full employment would signify nothing more than that the industrial countries had not used fiscal policy vigorously enough to offset the expansionary international monetary policy of the international central bank.

Apart from the many economic and political problems raised by the Stamp Plan and similar proposals,36 there are three simple human problems which should not be overlooked. (1) Nations as well as people find it difficult to give away large amounts of their income and wealth to other nations and to other people which may need them more—especially to achieve such an abstract and hard-to-explain objective as increasing international liquidity to an adequate level and keeping it there as the world economy grows. They may even find it morally wrong, or ethically enervating, for them to give, or for others to receive, large amounts of something for nothing. These feelings are strengthened by the inevitable waste, misdirection, and graft inherent in large programs of this kind.37 (2) Even the industrial countries, whose populations on the average are wealthy compared with those of the underdeveloped countries, have substantial groups of people who are inadequately nourished, housed, and educated, i.e., their poor. Expensive programs to equalize economic conditions between rich and poor countries are limited by the domestic demands to equalize first conditions between rich and poor at home. (3) Standards of creditworthiness, requirements for repayment, and the payment of interest serve to determine how much some countries wish to invest and how much other countries wish to borrow. Easing any of these economic criteria uncovers ever larger amounts of demand for investment funds without increasing—and perhaps even reducing—the supply of such funds. Rationing the limited supply of investible funds through market criteria has obvious difficulties and inequities. For this reason, there are many national and international programs which operate on other criteria. Easing economic criteria, however, increases the need for noneconomic criteria, and transfers the basis for decision from the market place to the board room, from the economic sphere to the political, and from the impersonal to the personal. Every such easing presents more and more alternatives for action, creating new and more difficult problems for management.

Objectives of international monetary management

The best single statement of the purposes of the present international monetary system is probably to be found in the Articles of Agreement of the Fund. Article I (ii) states that the purpose of the Fund is “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.” To help achieve these purposes, the Fund was endowed with large financial resources, and it was designed to provide machinery for consultation and collaboration on international monetary problems. It was expected that the Fund would lend its resources to members under appropriate terms and conditions, and that its loans would enable its members “to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.”38

High employment and price stability

The Fund’s Articles of Agreement state a fairly general target which is much less exacting than the full employment targets set for the executive authorities in the United States and many other countries. The U.S. target, for example, is to promote maximum employment, production, and purchasing power in a manner calculated to foster and promote free competitive enterprise and the general welfare. A number of attempts have been made, without success, to add to this target the requirement to maintain a measure of price stability. Nevertheless, if the Fund were transformed into an international central bank, it would probably be charged with achieving some price objective. This is the reason why a price objective was included in recent statements of international financial objectives, one by the (U.S.) Secretary of the Treasury, speaking for the “Group of 10,” and the other by the (U.S.) Council of Economic Advisers:39

Statement of the Secretary of the Treasury

The Ministers and Governors reaffirmed the objective of reaching such balance [a better basic international equilibrium] at high levels of economic activity with a sustainable rate of economic growth and in a climate of price stability.

Statement of the Council of Economic Advisers

A properly functioning international system, like any monetary or financial arrangement, must be judged by its contribution to the basic economic objectives shared by all countries. These include: (1) full employment, (2) a satisfactory rate of economic growth, (3) mutually beneficial trade that reflects and contributes to efficient international allocation of resources through freedom of international transactions, and (4) reasonable stability of prices.

The problems of the Fund in carrying out the purposes stated in its Articles, and even in adding a price objective to them, are not bothersome as long as its members have modest expectations. To facilitate the expansion and balanced growth of trade and to contribute to high levels of employment, real income, and economic development is not difficult, since the Fund’s contributions can be large or small. Major problems would arise, however, as soon as the Fund, or an international central bank, was expected to achieve stated targets.

Level of international liquidity

Nothing in the Fund’s Articles of Agreement requires it to contribute to, or to maintain, an adequate level of international reserves or international liquidity.40 These terms do not appear in the Articles, either as an objective or as an instrument, even though the Fund is directed to concern itself with certain other ways and means of accomplishing its purposes, such as the promotion of exchange stability, the avoidance of competitive exchange depreciation, and the establishment of a multilateral system of payments for current transactions.41

The question whether liquidity is stated as an objective, or as an instrument to be used along with other instruments, is a very practical one. All the other objectives can, for management purposes, be assumed to be generally consistent with each other. Neither historically nor analytically, however, has it ever been demonstrated that specific liquidity targets are consistent with achieving the other stated objectives. On the contrary, a large and expanding volume of world trade can be conducted with many amounts of liquidity and with totals of many different compositions. For example, conditional liquidity may be a substitute for unconditional liquidity, though not necessarily on a one-for-one basis. Substitutability is important because, in general, it would be easier for countries to agree to a substantial increase of conditional liquidity, to be used when needed over a period of time, than to agree to the same increase of unconditional liquidity. Moreover, the significance of any total of international liquidity depends upon the efficiency of the international adjustment mechanism. Thus, a realistic set of exchange rates makes international liquidity more efficient, and action to put a larger share of the adjustment process on countries with balance of payments surpluses also makes international liquidity more efficient.

An international central bank would have a serious management problem at the present time in respect of these issues. The larger continental European countries have experienced substantial price increases; they fear inflation but some have substantial balance of payments surpluses; and far from wishing to increase their imports to check price increases, they have in the past few months increased some of their tariffs to protect some industries and to facilitate integration in the Common Market. The countries adversely affected by these tariff increases are in balance of payments deficit or in rough equilibrium. The United States, for example, has a large, though decreasing, deficit, and since the dollar is a key currency, its deficit adds to international liquidity. Nevertheless, these unwanted deficits have helped to increase international liquidity by only 2.1 per cent a year in the past two years, or by less than half the rate of increase of world trade in the same period. The major European countries have trouble enough assimilating the current increases in their reserves without adding to their domestic price pressures. A more rapid expansion of international liquidity would, from their point of view, undoubtedly make matters worse. Increases in the liquidity available to the United States and underdeveloped countries might both prolong their deficits and increase the surpluses earned by European countries.

These points have been stated briefly in order to indicate the kind of management issues an international central bank would have to deal with in the present circumstances, which are not unusual in reflecting strong national self-interests and pressures. In such cases, expanding liquidity would be inconsistent with other objectives.

Economic development

The number of countries that are members of the IMF is now more than 100, whereas only 45 countries were represented at Bretton Woods. All the newly created countries are underdeveloped, and encouraging economic development has assumed much greater political importance since 1944. It would be impossible to disregard these new underdeveloped countries in setting up the objectives for an international central bank. The Articles of Agreement for such a bank could hardly fail to deal more explicitly than do the Fund’s Articles with economic development, the relationships between developed and underdeveloped countries, and the roles of debtor and creditor countries. In particular, a charter which authorized or required an international central bank to conduct large investment programs could hardly fail to describe the kinds and directions of investment that would be considered appropriate in relation to economic development.

Interrelationship of objectives

Objectives such as a high level of trade, full employment, and stable prices may seem to be reasonably meaningful within any one country, but they are very vague in an international context. Full employment is a concept that applies most easily, and that can be measured most readily, in countries with an efficient industry and agriculture. A full employment objective for underdeveloped countries must face the fact that these countries have large amounts of unemployment or underemployment, which are of a structural character, and which cannot be cured quickly or even principally with money.

The objectives already described would present problems enough for any international central bank. The important point, however, is that the choice among these objectives is not a technical decision but rather a political one. Even if the stated objective of an international central bank were to manage the level and change of international liquidity, its activities would really deal with the world’s level of output and the distribution of that output. If an international central bank provided underdeveloped countries with additional funds, these countries would buy additional goods, principally from developed countries. The process of international credit creation would thus require the developed countries to buy with their real resources the funds created by a bank and turned over to underdeveloped ones. In the process, the developed countries might be expected to add to their reserves. This might be very useful if industrial countries suffered from depression or stagnation. But these countries have been at, or reasonably close to, full employment since the war; at the present time some have strong upward pressures on prices and costs. If an international central bank undertook to expand international liquidity in such circumstances, the margin for expansion would be relatively small. Once this margin was reached, the expansion of international liquidity through monetary action would have to be offset by the contraction of liquidity through fiscal action. This is difficult enough if the two actions are taken within national boundaries by one sovereign country. There are literally hundreds of instances where such efforts have failed in capitalist free enterprise countries, in totalitarian regimes, and in communist regimes. To succeed in such an effort internationally would require a much greater international consensus than now exists, particularly in developed countries. Alternatively, it would require the development of an international government with powers to tax, spend, and subsidize.

Targets and results

It may be useful to consider briefly how an international central bank would define its targets and how it could judge whether it was discharging its responsibilities appropriately.

An international central bank might define targets for long periods but must measure progress toward these targets during relatively short periods, such as six months or a year, and adjust its lending and investment programs accordingly. Over a period of five or ten years, for example, there should be a noticeable difference between increasing international liquidity at 2 per cent a year and at 5 per cent a year. Even crude measures of international liquidity having a substantial margin of error might serve to distinguish between two such results. But for a period of six months or a year, the difference between a 2 per cent rate and a 5 per cent rate of expansion might not be measurable, since the data might be, and often are, affected by distortions which cannot be traced.

Current and short-period measurements of prices and employment present even greater difficulties. Prices of raw materials, which are probably the most reliable of all prices, vary a great deal from year to year and are affected by production controls, subsidies, and the like. But no country appears to have an adequate index of the export prices of manufactured goods. General measures of employment are equally inadequate. These deficiencies would not be of major concern if an international central bank was not very much concerned with prices, or if its actions were on a modest scale. If it had large responsibilities in this field, and if its investment activities were also large, short-term measurements of price changes would become very important in evaluating past policies and in agreeing on future ones.

III. Conclusions

1. International liquidity can be managed in various ways. Management can be decentralized or centralized, limited or unlimited. Management through an international central bank is thus only one way of managing liquidity.

2. The present international financial system is based upon the existence and interests of sovereign countries, and it constitutes a complex network of national advantages and disadvantages and of national rights and responsibilities. This system is managed partly through the market place; partly through a network of operating practices, policies, and attitudes which have grown up historically; partly through national discussions, consultations, and confrontations, usually termed international monetary cooperation; and partly collectively through the Fund. This blend has changed a good deal in the postwar period, and further changes are in prospect. Proposals for an international central bank basically aim to concentrate a much greater part of the management function in an international agency and to institutionalize the decision-making process.

3. Existing policies and practices reflect the interests of individual countries or groups of countries; and changes in these policies and practices therefore affect the existing balance of national advantages and disadvantages. Thus, the question whether the Fund should create more unconditional liquidity is not a technical problem, but a political one that greatly affects the interests of member countries, in terms of balance of payments discipline, ownership of resources, and the like. In the same way, the question whether the Fund should supplement its short-term, self-liquidating loans with an investment program designed to increase the volume of international liquidity is basically a political problem relating to the level and distribution of world output.

4. The problems of central banking in a national context differ greatly from those in an international one. Within any one country the central bank is a creature of the national sovereignty. The national government can change bank policies; it can offset or modify them; or it can make them part of a more general policy. Few, if any, of these alternatives would apply to an international central bank. Hence, the problem of agreeing on an international central bank would be much greater than that on setting up a national central bank, while the problem of delegating limited and precise powers would assume much greater importance.

5. The management of an international central bank would face a very large and complicated number of alternatives in terms of what was to be managed, what objectives were to be pursued, and what instruments were to be used. This means that the charter of such a bank would have to be very flexible and general. However, these characteristics would create unknown and unspecified obligations at the same time as they created new rights and powers whose development would be unpredictable. It is basically these political problems, and this dichotomy, that would make negotiations and international agreement on an international central bank so difficult.

6. Much of the present discussion about the inadequacy of international liquidity, or projections of its future inadequacy, or about an international investment program to increase liquidity, disguise in technical dress problems of political balance and the use of resources. This creates anxiety without advancing the solution of the underlying real problems. The Bretton Woods Conference made progress because it recognized political problems and dealt with them as such. Any new solutions will have to take the same approach—and in a time of rather more complicated national crosscurrents and self-interests. All this suggests that much more progress is likely to be made by the undramatic processes of adaptation and experimentation than by the desire to strive for grand but irreversible institutional changes to meet problems which are only partially understood.

La gestion de la liquidité internationale

Résumé

Le système financier international comporte un ensemble complexe d’avantages et d’inconvénients nationaux, de responsabilités et de droits nationaux. Ce système fonctionne en partie par le jeu du marché; en partie par le truchement d’un réseau de pratiques, de politiques et d’attitudes qui se sont développées au cours de l’histoire; en partie par l’intermédiaire de discussions, consultations et confrontations nationales; et en partie par l’entremise du Fonds monétaire international. Les propositions qui visent à transformer le Fonds en une banque centrale internationale tendent à la centralisation bien plus poussée de la gestion de ce système aux mains d’un organisme international.

Les politiques et pratiques actuellement en vigueur reflétent les intérêts de pays particuliers ou de groupes de pays; et les changements qui interviennent dans ces politiques et ces pratiques influent par conséquent sur l’équilibre existant des avantages et inconvénients nationaux. De nombreuses discussions actuelles concernant l’insuffisance de la liquidité internationale et les programmes internationaux d’investissements visant à augmenter le volume de la liquidité traitent essentiellement de problèmes d’equilibre politique et d’utilisation des ressources déguisés sous une forme technique. A titre d’exemple, la question de savoir si le Fonds devrait ajouter à l’assistance financière qu’il accorde actuellement par des tirages un programme d’investissement visant à accroître le volume de la liquidité internationale constitue un probléme politique qui joue un rôle dans la détermination du niveau et la répartition de la production mondiale.

La direction d’une banque centrale internationale aurait à faire face à un grand nombre de choix très délicats portant sur l’objet de sa gestion, les objectifs à atteindre, et les moyens à utiliser. Ceci impliquerait que les statuts de cette banque devraient être extrêmement souples et généraux. Mais ces caractéristiques créeraient des obligations imprévisibles et imprécises, de sorte qu’il serait difficile aux divers pays de se mettre d’accord à leur sujet. Il est par conséquent vraisemblable, pour le proche avenir, que les efforts d’adaptation et d’expérimentation se réveèleront plus fructueux que les innovations institutionnelles ambitieuses mais irréversibles.

La administratión de la liquidez international

Resumen

El sistema financiero internacional es una compleja red de ventajas y desventajas así como de derechos y deberes para los países. Este sistema está regido en parte por los mercados; en parte por un conjunto de prácticas de operaciones, de políticas, y de actitudes que han surgido a través del tiempo; en parte mediante pláticas, consultas y debates nacionales; y en parte mediante el Fondo Monetario International. Las propuestas para transformar el Fondo en un banco central internacional tienen por objeto reconcentrar en un organismo international una parte mucho mayor de la función administrativa.

Las políticas y las prácticas actuales reflejan los intereses de los países en particular o de grupos de países, y los cambios que ocurren en esas políticas y prácticas afectan, por consiguiente, el equilibrio existente de las ventajas y desventajas nacionales. Muchas de las presentes discusiones acerca de la insuficiencia de la liquidez international y de los programas internacionales de inversión para aumentar la liquidez, son básicamente sobre problemas de equilibrio político y de utilizatión de recursos, encubiertos por ropaje técnico. Por ejemplo, la cuestión de si el Fondo debe complementar la ayuda financiera que actualmente proporciona mediante giros agregando a ésta un programa de inversiones que tenga por objeto aumentar la liquidez internacional, es un problema político que afecta el nivel y la distributión de la productión mundial.

La administration de un banco central internacional se encontraría ante varias complicadas alternativas respecto de lo que debe ser administrado, los objetivos que habrían de lograrse, y los instrumentos que habrían de usarse. Esto hace pensar que la carta constitutiva de semejante banco tendría que ser sumamente flexible y genérica. Sin embargo, estas características originan obligaciones desconocidas e indeterminadas, lo que hace difícil que los países se pongan de acuerdo sobre las mismas. De aquí que resulte probable lograr un mayor grado de progreso en un futuro próximo mediante procedimientos de adaptatión y experimentatión, en vez de la voluntad de esforzarse por conseguir grandes pero irrevocables cambios institucionales.

*

Mr. Altman, Deputy Director in the Research and Statistics Department of the Fund, and Fund Historian, is a graduate of Cornell University and of 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.

1

The nature and ruling conceptions of this system were well summarized by Irving S. Friedman, in “The International Monetary System: Part I, Mechanism and Operation,” Staff Papers, Vol. X (1963), pp. 219-45.

2

International Monetary Fund, Summary Proceedings, Annual Meeting, 1968 (Washington, 1963), p. 60.

3

Some proposals for an international central bank obviously go this far. See, for example, the following testimony of Professor Robert Triffin before the U.S. Joint Economic Committee (with Senator Paul H. Douglas presiding):

The Chairman…. I want to see if I understand your proposal.

Are you proposing that we have an international central bank whose relations with the national central banks shall be parallel to the relationship of the national central banks to their member banks?

Mr. Triffin. I think in essence you could describe it like that, and this is exactly the way my proposal was described by a journalist in Business Week some weeks ago.

But I do not like to put it that way for only one reason, that the use of such words is exactly what scares the hell out of central bankers. Those people are very conservative.

The Chairman. It does not frighten me at all and I am not as timid as the international bankers or as the international central bankers. I want to know if this is really what you are proposing.

Mr. Triffin. It is, essentially.

See 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. 2938.

4

This was one of the few points that the international conference of economists which met at Bellagio, Italy, on January 17-23, 1964, could agree on. See The New York Times, January 27, 1964, p. 35, and The Financial Times (London), January 27, 1964, p. 9.

5

See the statement in the Economic Report of the President (Washington, 1964), p. 136.

6

This leaves open the question of what effects such prevention would have had upon them as well as upon other countries and the international economy.

7

In his Sunshades in October (London, 1963), Norman Macrae argued that sterling should be allowed to float if the next sterling crisis could not be managed with higher interest rates but without domestic inflation. He welcomed the argument, usually made against a floating rate for sterling, that this would make the continuance of a key currency system very difficult. He explained (p. 132) that “this ‘disruptive’ case for setting the exchange rate of sterling free to float has always seemed very attractive to me.”

8

On this general point, see two excellent articles by former staff members of the Fund: Ervin P. Hexner, “The Executive Board of the International Monetary Fund: A Decision-Making Instrument,” International Organization, Vol. XVIII (1964), pp. 74-96; and Allan G. B. Fisher, “The Political Framework of an International Institution,” Manchester School of Economic and Social Studies, May 1962, pp. 121-51. Also, R. F. Harrod, The Life of John Maynard Keynes (New York and London, 1951), pp. 632-35.

9

Unlike the Managing Director and the staff, Executive Directors do not “owe their duty entirely to the Fund and to no other authority” (Article XII, Section 4(c), of the Fund’s Articles of Agreement). Executive Directors are subject to the instructions of the countries that appoint or elect them. The members of the Board of Governors are, of course, political representatives of their countries.

10

The three central banks for groups of the newly established African nations fall between these two extremes; they reflect the particular ties of the members with each other as well as with France. See “The CFA Franc System,” Staff Papers, Vol. X (1963), pp. 345-96.

11

As a general matter, the deficits of local governments are financed with genuine savings.

12

See, for example, its latest study of “Bank Credit and Money in 1963,” Federal Reserve Bulletin, February 1964, p. 145.

13

Milton Friedman and Anna Jacobson Schwartz, in their A Monetary History of the United States, 1867-1960 (Princeton, 1963), analyzed the relationship in 1867-1960 between money and prices, etc. Money for this purpose was defined as the total public holdings of metallic currency, paper money, and demand and time deposits of commercial banks. These totaled $206 billion in 1960 (pp. 1-5). This definition does not treat as money the $36 billion of time deposits in mutual savings banks and the postal savings system, nor the many kinds of near-moneys and money substitutes.

14

Committee on the Working of the Monetary System, Report (Cmnd. 827, London, 1959), par. 389. See also the review article, “The Radcliffe Report and Evidence,” by John G. Gurley, American Economic Review, Vol. L (1960), pp. 672-700. A similar view was expressed in the Report of the [Canadian] Royal Commission on Banking and Finance (Ottawa, 1964), esp. pp. 423-26.

15

Even the latter term does not lack complexity. In general, see Walther Lederer, The Balance on Foreign Transactions: Problems of Definition and Measurement (Princeton University, Special Papers in International Economics, No. 5, September 1963), pp. 23-48; and International Monetary Fund, International Reserves and Liquidity (Washington, 1958), current issues of its International Financial Statistics, and its Annual Report, 1963, pp. 39-46.

16

On the effect of the Fund’s operations, see J. M. Fleming, “The Fund and International Liquidity” (above, pp. 177-215, esp. pp. 180-85).

17

It may be noted parenthetically that these bonds have also presented the U.S. authorities with the question of whether or not they are to be considered liquid liabilities of the United States. If so, they increase the balance of payments deficit; if not, they should be treated as an inflow of long-term capital and thus not enter into the balance of payments deficit.

18

O. L. Altman, “Professor Triffin on International Liquidity and the Role of the Fund,” Staff Papers, Vol. VIII (1960-61), pp. 151-91.

19

This measure assumes, among other things, that Fund quotas should increase at the same rate as trade, that one fourth of all quotas will be subscribed in gold, and that the Fund has no way of reducing its gold holdings. The first proposition is highly doubtful and the third one is incorrect.

20

Tibor Scitovsky has written that “an adequate world supply of international reserves can be defined as the sum of what in each country is considered an adequate supply of that country’s reserves.” There is considerable question whether this definition has any operational significance. In any case, Scitovsky noted that this definition did not give any one number, since “there is bound to be quite a gap between the point below which reserves are considered inadequate and that above which they are considered excessive. An adequate world supply of reserves, therefore, cannot be defined as an exact level but is more likely to be a wide range.” See International Payments Imbalances and Need for Strengthening International Financial Arrangements, Hearings Before the Subcommittee on International Exchange and Payments, Joint Economic Committee of the Congress of the United States (87th Congress, First Session, May 16, June 19-21, 1961), p. 176 and fn. 1 on p. 176. See also the view of James Tobin that “the ‘right’ amount of aggregate international liquidity would give surplus countries as great an incentive to take actions to stem the inflow of reserves as deficit countries have to stem the outflow. The burden of adjustment to payments imbalances would be symmetrically shared. It is in this sense—that the burden falls disproportionately on deficit countries and forces them to take undesirable measures—that there is today and may well be tomorrow a shortage of international liquidity.” The United States Balance of Payments, Hearings Before the Joint Economic Committee of the Congress of the United States (88th Congress, First Session, November 12-15, 1963), pp. 554-55.

21

An analogous proposal for the money supply of the United States has been made by Milton Friedman in A Program for Monetary Stability (New York, 1959). His proposal is “to increase the money stock at a fixed rate month-in and month-out” (p. 93). And he explained that “there is little to be said in theory for the rule that the money supply should grow at a constant rate. The case for it is entirely that it would work in practice. There are persuasive theoretical grounds for desiring to vary the rate of growth to offset other factors. The difficulty is that, in practice, we do not know when to do so and by how much” (p. 98).

22

It might also be expected to act on the interest rates charged on borrowings by its members, presumably on countercyclical principles, and to vary its conditions of lending and repayment to facilitate repayment and encourage balance of payments discipline.

23

Repayments by repurchases plus repayments by drawings of other countries.

24

Drawings by themselves are not an appropriate measure of financial support extended by the Fund. Stand-by arrangements during the period totaled $2.4 billion, but countries drew only $1.8 billion of this amount. In addition, some members have felt freer to use their own resources because they had the opportunity of using the undrawn and uncommitted parts of their quotas.

25

In 1952-61. The lowest net addition, in 1950-59, was $76 million a year. It should be recalled that drawings are affected by the Fund’s policy on the use of its resources as well as by members’ needs for these resources. During the life of the Marshall Plan, the Fund curtailed the use of its resources by countries using Plan funds. The need for drawings was also reduced by the credits extended through the European Payments Union. On the other hand, the need for resources to finance short-term capital movements was increased when the major European currencies became convertible, de facto in 1958 and de jure (under Article VIII) in 1961.

26

Net additions to reserves created by Fund drawings will vary with both the amounts drawn and the currencies drawn. In general, drawings of key currencies will increase international reserves considerably more than drawings of other currencies. For example, if country A draws Spanish pesetas from the Fund, it very likely will ask Spain to convert these pesetas into dollars. This reduces Spain’s holdings of dollars and correspondingly increases country A’s holdings of dollars, leaving total dollar reserves unchanged.

27

The gold tranche is defined in International Financial Statistics as “the member’s quota minus the Fund’s holdings of the member’s currency, if this amount is positive and if the member has agreed an initial par value and paid its subscription.” The significance of the gold tranche, and the effect of Fund operations on it, are described in the Fund’s Annual Report, 1963, p. 40.

28

During this period, the United States paid out large amounts of dollars to finance its balance of payments deficits. It is possible that the United States might have taken sharper action to reduce its deficit if the Fund had not been absorbing dollars.

29

For purposes of this discussion, long-term investments have the important characteristic of remaining outstanding. Short-term paper that was always renewed would have the same characteristic—and would do just as well as long-term paper.

30

Article IV, Section 8(b).

31

At the Bank’s last Annual Meeting, President Woods suggested that lending terms could now be modified in appropriate cases, in particular by lengthening the period of repayment beyond 25 years and the grace period before interest payments begin. (International Bank for Reconstruction and Development, Summary Proceedings, Annual Meeting, 1963 [Washington, 1963], p. 12.) A loan to Colombia in February 1964 was made repayable in 35 years.

32

Loans are repayable in 50 years. There is a service charge of ¾ of 1 per cent on the amount outstanding at any time. There is no interest charge. The capital is repaid in installments of 1 per cent a year for the second 10 years and of 3 per cent for the last 30 years. Loans are repayable in foreign exchange.

33

The IDB administers three kinds of funds: its own capital, a Fund for Special Operations, and a Trust Fund set up by the United States to support the Alliance for Progress. Interest and principal are payable wholly or partly in local currency. Loans of all kinds totaled $875 million in 1960-63; some of these were made to local development banks, which then had to make loans for specific investment projects.

34

The alternative to this is to monetize existing assets, but this would not affect the level of demand unless it increased spending.

35

Version I (1960). Version II (described in 1962) was modified to be more acceptable to “established methods of thinking.” It provided that the IMF would create new money which it would lend to the IDA for 50 years; the IDA in turn would lend these funds in its normal way. In this scheme, as Stamp noted, “against the Fund liabilities [newly created money] there is an asset on the books, albeit an illiquid one.” Version II also set limits (somewhat reluctantly) both to what the Fund could create by way of new money and what a surplus country could be asked to absorb. See Sir Maxwell Stamp, “The Stamp Plan—1962 Version,” in World Monetary Reform: Plans and Issues, ed. by Herbert G. Grubel (Stanford, California, 1963), pp. 80-89.

36

For example, the proposal by Professor Robert Miller for an inconvertible development currency (DEVCUR) in his International Monetary Plans (1963; an unpublished dissertation prepared at Bryn Mawr College).

37

As well as by the large outflows of private capital from developing countries, which in Latin America alone must have been more than $2.5 billion in 1957-62.

38

Article I (v).

39

Statement on October 2, 1963, by Douglas Dillon, U.S. Secretary of the Treasury, on behalf of the “Group of 10” members of the International Monetary Fund (published in International Monetary Fund, Summary Proceedings, Annual Meeting, 1963, p. 285); Economic Report of the President (Washington, 1964), pp. 134-35. A recent article in The Economist (London), March 21, 1964, pp. 1126-27, entitled “The Monetary Solution,” argued for “the creation of a new world liquidity mechanism” which would “take the balance of payments out of aid.” It suggested that “the best starting point is some variant of the Stamp plan, under which contributions to IDA would be fed, not from grants in national currencies voted by suspicious parliaments, but by newly created certificates of the International Monetary Fund itself.” And it went on to say that “almost certainly some kind of formula for these annual issues would be needed, at least to set limits within which discretion could be exercised; and better probably than a flat ratio to the total volume of trade would be a link also to average commodity prices. This is probably the best way to accommodate the advantages of the Prebisch plan for terms of trade compensation while avoiding the great drawback of penalising the countries that do most of the commodity importing. And it would be greatly preferable to an extraordinarily complex plan for an International Commodity Reserve Currency….”

40

The requirement that the Fund should review the quotas of its members every five years, and propose such adjustments as it deems appropriate, may be regarded as contributing to international liquidity, though it is doubtful that increases in Fund quotas were considered in quite this light at Bretton Woods. Some of the pre-Bretton Woods drafts of the Articles provided for the automatic adjustment of quotas according to a prescribed formula, while Keynes’ proposals for a Clearing Union contemplated automatic expansion in keeping with the growth of trade.

41

Article I (iii) and I (iv). It is possible that the stated objectives of an international central bank would not include one with respect to international liquidity. It should be noted, however, that doubts about the adequacy of international liquidity, and about the ability of the monetary system to expand liquidity in accordance with requirements, would unquestionably play a large part in establishing an international central bank.