The First Ten Years of the International Monetary Fund

The Fund has an important role in facilitating the continued expansion of world trade. Its goal must be to provide an environment of freedom in transfers and payments for all current transactions which will encourage international trade and investment. To attain this goal, the Fund must help its members to reduce and to remove all exchange restrictions and discriminations that hamper the growth of trade. The ultimate test of a world payments system making its maximum contribution to international trade and investment is the convertibility of the currencies of the great trading countries. With continued growth in world trade, there should be little difficulty for a country maintaining sound financial policies in moving decisively toward the adoption of the fair exchange standards of the Fund.

Reserves and International Payments

The removal of exchange restrictions and discriminations and the establishment of a world payments system based on convertible currencies will be facilitated if the availability of monetary reserves grows with, although not necessarily at the same rate as, the expansion of world trade. The members of the Fund will need additional reserves to enable them to undertake a much larger amount of international payments without resorting to direct controls to offset temporary fluctuations in receipts. In this connection it is helpful to see how the greater need for reserves in the postwar period was actually met.

The world was relatively well supplied with monetary reserves in the prewar period. By 1955, however, the value of world trade, which in 1938 had been $21 billion, had increased to $84 billion. Additional reserves have been acquired in a variety of ways. From 1938 to 1955, the gold production of countries outside the Soviet area exceeded $16 billion; of this total, more than $10 billion was added to their monetary reserves, which at the end of 1955 amounted to about $35 billion. These countries also added to their monetary reserves about $10.6 billion in dollar balances and about $6.5 billion in sterling balances, apart from smaller sums in other currencies. In addition, a common reserve is available for Fund members in the form of resources amounting on April 30, 1956 to $1.8 billion in gold, $1.8 billion in U.S. dollars, $1.1 billion in sterling, and over $4 billion in other currencies.

The extent to which the reserve positions of Fund members have strengthened or deteriorated has varied widely, and the significance of increases in gold reserves has to be interpreted in relation to movements in the liabilities of the countries that accumulate gold. These figures, however, show the important contribution made by the growth in dollar and sterling balances toward meeting the need for increased reserves. Gold, dollars, and sterling will continue to provide the primary monetary reserves of most countries, and further increases in such reserve assets are to be expected. The growth of dollar and sterling balances, however, is unlikely to continue on the same scale as during the last two decades. That

does not mean that the world will be unable to acquire the monetary reserves it needs. It does indicate that it will probably have to place greater reliance on the use of the common reserve provided by the gold and currency resources of the Fund.

The availability of monetary reserves is an important factor affecting the behavior of the world economy, and it will become of greater importance as international trade and investment expand. The need for use of the Fund's resources is likely to be greater in the future than it has been in the past. For this reason, it would be desirable to have better integration of the use of the Fund's resources and the use of members' reserves. If this is done, there is no reason why aggregate reserves should not be adequate for an expanded world economy in which all of the great trading countries have convertible currencies. There will still be a few countries with reserves far too small for their needs. For them, the principal remedy must be the strengthening of their payments positions and the continued accumulation of reserves. For some countries whose relative quotas are clearly too small, their reserve positions can be improved by increasing their quotas in the Fund.

Problems of the Future

As the world economy expands further, new problems will emerge and new opportunities will present themselves for international monetary cooperation. The special difficulties that have necessitated the transitional arrangements of the postwar years will largely disappear. Other special difficulties will no doubt arise from time to time, and countries which allow inflationary pressures to arise from overambitious plans for investment or from excessive expectations for consumption will continue to have payments problems. And apart from the risks of political tension, there may also sometimes be wider payments problems originating in broad changes in the world economy. The Fund can help its members to meet their payments problems by encouraging them to adopt suitable financial policies, by providing them with additional reserves to meet ternporary payments difficulties, and by maintaining fair exchange standards which will make it possible to deal with their difficulties in a constructive way.

In the last analysis, the objectives of the Fund can be achieved only through the diligent pursuit of policies that create conditions within each country conducive to the expansion and balanced growth of international trade. A prosperous world economy, in turn, will contribute to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all countries. The most important task of the Fund is the constant encouragement of its members to pursue sound policies designed to deal with problems by eliminating the causes and not merely by hiding the symptoms. In this sense, the future of the world economy may very well depend in considerable part upon successful collaboration between the Fund and its members.