International monetary reform
The present paper, which is the written version of a lecture given on April 25, 1966, considers the shortcomings of the international monetary system under three headings: faulty methods for generating international liquidity, instability of the system resulting from shifts between various reserve assets, and an inadequate mechanism of international payments adjustment.
As to thefirst problem, present methods for generating international liquidity show two major shortcomings. First, since they are dependent to a large extent on the accumulation by other countries of U.S. dollars, these methods are reaching their natural limits as the willingness of monetary authorities to accumulate further dollar balances diminishes and the willingness of the U.S. to incur further balance of payments deficits has been reduced. Secondly, having been dependent on the balance of payments position of the reserve centers, primarily the United States, the generation of international liquidity has been governed, not so much by world needs for liquidity, but rather by the internal economic and financial policies pursued by the reserve center countries. A major aim of international monetary reform must therefore be to establish a conscious control over the generation of international liquidity. This can best be achieved by the creation of a new reserve asset.
Such a major reform raises a number of important policy issues.
i. What criteria should govern decisions as to the quantity of the new asset? The balance between inflationary and deflationary forces in the world should be an important guideline. But a general recourse to payments restrictions of an undesirable kind might also be a symptom of a shortage of liquidity, while special measures to reduce the inflow of funds from abroad might be an indication of too abundant liquidity. And the picture may be influenced by the deflationary effects of persistent payments deficits or the inflationary effects of persistent payments surpluses, calling for differential changes in cost levels or even exchange rate adjustments rather than for changes in the supply of international liquidity.
Given the nature of these guidelines an important role will have to be played by human judgment.
ii. Hence the importance of the procedure for decision making. It would seem that one has to build here on the structure as it has evolved since the restoration of convertibility in 1958, i.e. on the collaboration between the Group of Ten and the IMF. This collaboration has taken concrete form in the General Arrangements to Borrow of 1962. Calls under these Arrangements require an affirmative decision both by the Group of Ten and by the Executive Board of the IMF. In the present case such a procedure might prove capable once more of reconciling the interest of all countries in international monetary stability with the special responsibility of a limited group of industrialized countries which would in fact have to finance the creation of a new reserve asset and to support it with their economic strength.
iii. Who would get the money first? Given the difficulties of deciding on the amount of new reserve assets to be created, it would seem wise not to add to those problems by making the creation of reserves serve the purpose of an international redistribution of wealth. Hence, the deliberate creation of reserve assets should not be connected with the financing of development aid nor with balance of payments deficits. It should rather be distributed on the basis of quotas in the IMF or some similar formula.
Concerning thesecond major heading referred to at the beginning, the instability of the system resulting from shifts between different reserve assets, it has been proposed to convert balances held in reserve currencies into new reserve assets. But it is not clear how, after such an operation, a renewal of the creation of liquidity through payments deficits on the part of the reserve centers could be prevented. We would then again be faced with the problem of control, and of the flow of resources to the countries generating liquidity in this way. At the moment a certain equilibrium has evolved. On the one hand the pressure on the gold reserves of the reserve centers limits the possibilities of further additional generation of liquidity in a similar way as the activity of commercial banks is restrained on the national level. On the other hand the system of support operations, which has grown up between the major central banks, has shown itself capable of acting as a lender of last resort in a crisis of confidence. However, a further element of stability could be added by some understanding among the major countries as to the composition of their reserves.
With regard to thethird problem, the defects in the mechanism of international payments adjustment, the question arises whether we can achieve our internal and external goals without some reinforcement of the instruments of economic policy at our disposal. Increasing international coordination of policies between national policy makers has made an important contribution to the adjustment process and should be further strengthened. Some specific suggestions are made. However, a tendency for political aims to act as a restraint on the effective use of the instruments of economic policy hinders the full achievement of important economic objectives.
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