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.
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.
International Monetary Fund, Summary Proceedings, Annual Meeting, 1968 (Washington, 1963), p. 60.
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.
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.
See the statement in the Economic Report of the President (Washington, 1964), p. 136.
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.
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.”
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.
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.
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.
As a general matter, the deficits of local governments are financed with genuine savings.
See, for example, its latest study of “Bank Credit and Money in 1963,” Federal Reserve Bulletin, February 1964, p. 145.
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.
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.
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.
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).
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.
O. L. Altman, “Professor Triffin on International Liquidity and the Role of the Fund,” Staff Papers, Vol. VIII (1960-61), pp. 151-91.
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.
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.
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).
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.
Repayments by repurchases plus repayments by drawings of other countries.
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.
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.
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.
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.
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.
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.
Article IV, Section 8(b).
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.
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.
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.
The alternative to this is to monetize existing assets, but this would not affect the level of demand unless it increased spending.
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.
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).
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.
Article I (v).
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….”
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.
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.