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Annual meeting of the International Monetary Fund

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The following cabled report has been received on the

opening session of the Annual Meeting of the International

Monetary Fund in Vienna on 18th September, 1961. ,

. "Fund Annual Report was presented this morning and

Jacobsson (Managing Director) delivered opening statement.

Extract from main body of the statement is attached.

The question of the adequacy of the Fund’s resources was

the main issue raised in the statement. The discussion on

Fund matters will begin on Wednesday 20th September.

2. In his introductory statement Jacobsson ,oaid that' the

growing freedom for the international movement of funds

as a result of increased convertibility of the main

currencies had created new problems. With differences in

interest rates in the United States and Europe, and with

free convertibility of the main currencies, there had been

a temporary outflow of funds from the United States to

Europe. There had also been some movement from currencies

into gold.

3» However the United States balance of payments position

had improved in the latter part of I960 and early 1961· The

U.S. trade balance had been helped by boom conditions in

Europe and Japan and, by early 1961, the United States was

able to cover long term private investments abroad and



Government expenditures abroad out of net income from

trade and services.

4. Jacobsson drew attention to the fact that there had

been an unusually large number of fund transactions over - -

the preceding year. This had been mainly due to the fact that

the general level of raw material prices had declined and a

number of countries had found themselves in balance of

payments difficulties and had turned to the fund for assistance.

In all 22 countries had received financial assistance from

fund during the last financial year.

5. « Jacobsson made a particular reference to the fund's

transaction with Australia and expressed his satisfaction that ,

Australia had been able to cancel its stand-by arrangement.

Following is the text of Jacobsson’s statement on this point -'The transaction with Australia in April,

which involved a drawing totalling the equivalent

Of 175 million U.S. dollars, in seven currencies

and a stand-by arrangement for an additional

100 million U.S. dollars, was made in support of

the Government's efforts to improve its foreign

payments position by means of fiscal, monetary,

and other measures. These efforts have been

most successful and I am happy to be able to

add that, in view of the improvement in the


position, the Australian authorities cancelled

the stand-by arrangement early this month after

. it had been in effect for only four months

instead of ,a year1. "

Canberra, A.C.T.

19th September, 1961» ·

Extract from Statement by the Managing Director in Presenting the Annual Report of the Executive Directors to the Board, of Governors of the Fund on September 18, 1$61

Drawings by the twenty-two countries during the year have totaled

the equivalent of $2,431 million. So large a use of Fund resources has

had a marked effect on the Fund’s holdings of currencies suitable for

use in transactions at the present time. Even after the replenishment

of these holdings by the sale of gold at the time of the drawing by the

United Kingdom, the Fund’s holdings of several convertible currencies

sire very low. In addition, we have to bear in mind that there are open

balances under stand-by arrangements equivalent to almost $1,200 million.

It had, indeed, become apparent at the end of last year, at the

time of the strong outflow of short-term funds from the United States,

that if the Fund were faced with substantial drawings by a number of

countries with large quotas, its available holdings of convertible cur­

rencies xvould in all probability be inadequate. This has been borne out

by the experience of the last few months. The Fund can of.course make

use of its gold holdings, but these are not necessarily revolving, and

once they have been used for the replenishment of currency holdings they

may not readily be restored by repurchases in gold. The Fund should

therefore generally be careful in the use of its gold and should take

into account other possibilities for replenishing its currency holdings,

for instance by the borrowing of particular currencies under Article

VII of the Fund Agreement.


However, borrowing of currencies is not a method of replenishment

that can suddenly be improvised. For this and other reasons, the whole

complex of problems connected with such borrowing needs to be closely

examined and brought to an effective solution. Consideration of these

problems should be set against the wider background of the international

monetary system. In the vivid discussions on the merits and demerits

of the present system which have taken place in recent years and months,

attention has largely been devoted to the tensions which may result

from the international flow of funds in a world of convertible currencies,

and, as you know, a number of suggestions have been put forward advocating

more or less radical changes in the existing monetary arrangements. It

has been valuable that these matters have been so vigorously discussed,

but what we have to ask ourselves now is whether the present system can

be regarded as operating in a sufficiently satisfactory manner to be

worth maintaining. If that question is answered in the affirmative,

then we must consider whether any particular measures should be taken to

strengthen the existing institutional arrangements so as to provide suf­

ficient safeguards against any dangerous tensions that may arise.

On the whole, I believe the system has worked well. It would in­

deed be difficult to conclude otherwise in the light of the enormous

gains that have been made in recent years. In the purely monetary sphere,

external convertibility has been established, and with the better dis­

tribution of reserves, there is an increasing measure of freedom for

capital movements. There has been a parallel development in the ever

growing liberalization of trade and, under conditions of relatively

stable prices, international trade has been increasing at an annual rate

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of about 4 per cent In recent years, reflecting by and large a corres­

ponding rate of growth In world production. These are no mean


But In spite of these achievements there have been periods of

tension and unease. I do not think that the movements of short-term

funds from one country to another have really Impaired the financing

of trade or the flow of goods, but It Is largely the fears that these

movements have aroused that have led to the questioning of the soundness

of our present system. In some quarters doubts have been expressed

whether the system under which countries hold part of their Interna­

tional reserves In currencies (which Is knovm as "the gold exchange

standard") will work satisfactorily In the longer run, and whether It

might not break down as It did In the lnterwar period. I do not think

we need draw that conclusion, for it is Important to remember that the

currency failures which occurred In the early 1930*s were caused not

by inflation, but by deflation--by a fall In prices which made itself

felt first in the United States and then in Europe. I am sure there

will be no such deflation now, for there has been such a change in the

objectives of the authorities that sufficient measures would surely be

taken to prevent such a calamity, If it seemed to be threatening.

Secondly, in the 19306s the exchange reserves of many of the European

countries had been acquired by large-scale short-term borrowing, and

melted away when the short-term loans were not renewed: today most

countries ire the true owners of their exchange holdings. A third

difference is that the Fund today stands behind the nations8 reserves,

supplementing them within the framework of its principles and practices

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and working at all times to promote International monetary consultation

and collaboration; there was no similar International agency in the

Intervar period.

Today two currencies, the United States dollar and sterling, are

the main reserve currencies. There is no doubt In my mind that the

authorities In the United States and the United Kingdom are determined

to pursue policies which will ensure confidence in the stability of

their currencies. Of the outstanding short-term U.S. liabilities,

about two thirds are In the hands of foreign central banks and govern­

ments, and the remainder are largely held by commercial banks and business

firms. For sterling the proportion is very much the seme. Of these

currencies there are thus substantial amounts in private hands, and

in a convertible world, liquid resources owned by business firms and

banks can now with little or no difficulty be shifted from one country

to another. There is thus no lack of International liquidity in private

hands, and for this very reason it Is Important that there should he

adequate resources In official hands to meet the possible impact of

international movements of private funds.

As Indicated In the Report of the Executive Directors before you,

the Fund has been studying in the course of this year a broad range of

problems, seme of general Import and seme of a more detailed technical,

legal or Institutional character connected with this situation. It is

possible to summarize the main issues that have been considered in the

form of three questions. To begin with, what are the payments difficul­

ties for which Fund resources may be made available under its Articles of

Agreement? Secondly, how can the Fund best use its resources to meet these

difficulties? And, finally, what resources are required to meet the dif­

ficulties and are the Fund's available resources adequate to do so?

- 5 -

On the first question, the Executive Directors have discussed the

extent to which the Fund's resources may he used for helping to meet those

deficits in the balance of payments of members that go beyond the current

account and are attributable, in whole or in part, to capital transfers.

From a purely practical point of view, there is of course a great diffi­

culty in separating current and capital payments under a system of con­

vertible currencies. After a thorough examination of the various

aspects of the problem, the Executive Directors have clarified the inter­

pretation that they had adopted on September 12, 1946, and in that way

eliminated any doubt which had not already been dissipated by the practices

of the Fund that the Fund resources can be used for capital transfers, in

accordance with Article VI and the other provisions of the Articles of

Agreement. If a country facing such an outflow of capital were to turn

to the Fund for assistance, the test would be the same as in the case of

countries with current account deficits, i.e., that appropriate measures

were being taken, so that the disequilibrating capital outflow would be

arrested and the repayment of any assistance provided by the Fund thereby

made possible within a maximum period of three to five years.

The answer to the second question— how the Fund can best use its

resources--must take into account the strengthening of the current posi­

tion and reserves of several member countries and the increased number

which have accepted the obligations of Article VIII. This has made

possible the use of a much wider range of currencies held by the Fund, thus

increasing the volume of its usable resources. The Fund has therefore

sought to diversity the use of its currency holdings in such a manner as to

ensure that transactions with the Fund, and their repayment, will be con­

ducted in those currencies which will be most helpful to the world* payments

- 6 -

situation. In pursuing this objective, the Fund has teen guided increasingly

by the principle that drawings should be in the currencies of those coun­

tries that have a strong payments and reserve position, while it is to be

hoped that repayments will be made in those currencies that can be

strengthened by their use in this way. There are a number of technical and

legal problems to be faced in evolving a satisfactory program for the use

of a wider range of currencies in Fund transactions and repayments. Some

have already been resolved, others will need further attention. A measure

of the success already achieved is shown by the fact that during the last

year drawings have been made in eleven different currencies.

As a result of sales of their currencies by the Fund, a number of

countries in the Fund have now acquired increased drawing rights because

the Fund's holdings of their currencies have been reduced considerably below

75 per cent of quota. The Fund must therefore always take account of the

fact that, should there be a reversal in the payments position, the existence

of these increased drawing rights could give rise to appreciable demands on

the resources of the Fund.

I come now to the third question— the adequacy of the Fund's resources.

It v;ill be apparent from what I have said about the Fund's evolving policies

on the currencies that should be d r a w that the answer to this question

cannot be settled simply by adding up the Fund's holdings of gold and cur­

rencies, or even gold and convertible currencies, at any particular time.

V/hat is important is to ensure that the Fund has enough of those currencies

which it would be appropriate to use at any particular time, given the

economic conditions of that time and the purposes for which it is appro­

priate to use the Fund resources.

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I have already referred to the fact that the intense activity over

the last year has reduced the Fund's holdings of certain currencies to a

very low level, despite the recent sale of $500 million of the Fund's gold.

But this is more than a transitory problem confined to the present circum­

stances, and is more than just the narrow question of the Fund's own

liquidity. It is vital to consolidate and defend the convertible system

built up over the last few years, and to avoid the risk of any relapse into

restrictions and currency disorder. In order that the Fund may play its

part in this effort and meet the expectations of its members, it must be in

a position to provide resources that are adequate beyond doubt to meet

any needs that may arise. And in a world in which market fears and expec­

tations play a large role, resources— national and international combined--

must not only be adequate to meet demands that may be made on them, but also

large enough to convince the public that they are adequate to defend cur­

rencies from ill-advised speculation. A substantial reduction in the Fund's

holdings of major international currencies could itself become a disturbing

factor, long before the point of exhaustion is reached, unless there existed

arrangements for replenishing these holdings.

All these questions have to be evaluated in the light of the swift

changes in the balance of international payments that have occurred in

recent years. In the circumstances I cannot conclude that the composition

and size of the Fund!8 resources are adequate to support a healthy inter­

national financial structure without further strengthening. The need for

additional resources might be remedied by an increase in particular quotas, ; .·

but in present circumstances I belipve it can be handled more acceptably by

firm borrowing arrangements, ί These would be concluded, in particular, with

the main industrial countries, because of the major role they play in the

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swings in international trade and payments. This does not mean that

other countries would have no interest in the conclusion of such arrange­

ments, for the maintenance of a stable and convertible exchange system,

is as important to them as it is to the industrial countries.

Some of the problems arising from use to be made of the Fund's bor­

rowing powers under Article VII of the Fund Agreement have already been

discussed in general terms by the Executive Directors, but many aspects

still remain to be considered. An essential step in the conclusion of any

borrowing plan is for the author!tie s in the individual countries to obtain

the power to lend to the Fund if they do not already possess it. However,

it would not in my opinion be sufficient to leave the actual borrowing

transaction to an ad hoc agreement, between the Fund and the lending

country, under these powers. There is great merit in an assurance that

additional resources are available for its transactions. The ready

availability of resources is itself a contribution to stability and

strength. It has time and again been the experience of the Fund that as­

surance to a member that it has access to the resources of the Fund under

the provisions of a stand-by arrangement is in itself a stabilizing factor

of great importance, and that often it has not been necessary for the member

to use all, or, indeed, any of the drawing rights thus assured. There is no

reason to believe that the same sort of benefit would not be obtained from

credit facilities granted to the Fund.

At the same time, adequate provisions would have to be made for con­

sultation and general.safeguards for the lending members. Thus it should

be part of the arrangement that the Fund would not borrow from a member

country unless the country's payments and reserve position permitted this.

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Moreover, the arrangement would be such that any member that had lent its

currency to the Fund would readily be able to obtain repayment if its own

payments position changed. There would of course be no question of any

weakening of the principles that the Fund has worked out for the appro­

priate use of its resources. These have stood the test of time in a great

variety of circumstances, and we know they are endorsed by the members of

the Fund.

I believe that it should not be difficult to arrive at an agreement

that will give due weight to all the aspects of borrowing, and thus to

establish a workable system which would be beneficial and acceptable to

all members of the Fund. There Eire however clearly a number of decisions i i, ' ■ '

of policy to/be taken.

As is said in the Annual Report of the Executive Directors, this

approach to the increase in the Fund's resources by means of borrowing "looks

beyond the immediate needs and endeavors to equip the Fund to handle flexibly

the many and varied situations that may arise under a system of freely

convertible currencies."