I know that you share my own pleasure that this year’s meetings of the Boards of Governors of the International Monetary Fund and International Bank for Reconstruction and Development are taking place in London.
In these days, when so large a part of mankind is still struggling against the consequences of the unprecedented destruction and dislocation of the Second World War, the importance of such international institutions is evident. Our problems are not confined to any one country. They are thrown into sharp relief by the world wide shortage of primary products, both agricultural and mineral. They can only be resolved by wise and thoughtful international co-operation. I should be grateful if you would convey to the delegates my own good wishes for the success of their deliberations.
Chairman of the Boards of Governors of the International Monetary Fund and the International Bank for Reconstruction and Development
Gentlemen, I am very happy to welcome to London the Governors, the Directors and the staff of the International Monetary Fund and of the International Bank for Reconstruction and Development. I trust that your stay in our capital city, which still shows many marks of the damage it suffered during the war, will be interesting and pleasant, and that you will also find time to visit some other parts of our country.
This is the second Annual Meeting of these two important Institutions. I have many vivid memories of the first Annual Meeting held twelve months ago at Washington, and of the most friendly welcome which we all received in the United States. Since that meeting six new members have joined our number—Australia, Italy, the Lebanon, Syria, Turkey and Venezuela. We are very glad to see their representatives here today, and we are sure that they will bring each his own characteristic contribution of strength and wisdom to our gathering. Even so, our ranks are still far from complete, and I hope that, before long, a number of other countries will also decide to take up membership of these two Institutions.
Since the first Annual Meeting, and particularly in the last few months, there has been a very marked and rapid worsening in the economic position and prospects of almost all the countries represented here. This deterioration has been most frankly and clearly set forth in the two admirable Annual Reports, of the Fund and the Bank respectively, which we shall be considering during the next few days.
In the words of the Fund Report, “Now, more than a year after the establishment of the Fund, the world is confronted with seriously unbalanced trade, with an urgent problem of financing international payments, and with severe shortages of goods for reconstruction and even for maintaining minimum consumption standards in many countries. … The consumption of food and other goods is being severely restricted and in general held considerably below the pre-war level. In most of Europe and the Far East deficiencies in consumption and housing have already endangered the health of the people and impaired the efficiency of labour. …
“The present position is that certain countries of key importance in the world economy are rapidly running out of exchange resources. The magnitude of the reconstruction task is far greater than was foreseen in 1945 and 1946 when most of the credits were made available. Moreover, the sharp rise in prices has reduced the value of the credits in acquiring imports. Reconstruction is far from complete and there is grave danger that the reconstruction effort of a number of countries will soon receive a serious setback because of the lack of means to continue essential imports. This will not only delay the completion of reconstruction and endanger the progress already made, but will also postpone indefinitely the achievement of a strong and healthy world economy. …
“The monetary reserves of the rest of the world are obviously inadequate to meet a sustained balance of payments deficit with the United States of the present magnitude.”
These are quotations, gentlemen, from the admirable Report of the International Monetary Fund. I would like also to quote to you from the no less admirable Report of the Bank. In this Report it is stated: “We now know that the problem is deeper and more difficult than was envisaged at Bretton Woods. The deadening effects of the utter and prolonged disruptions of trade have been more serious than was anticipated in 1944, delays in satisfying the most elemental needs for food and fuel have been greater, and the dislocations of the industrial mechanism, of governmental organizations and patterns, and of human resources have been of more profound significance. Unforeseen political conflicts have accentuated economic difficulties. As a result, the requirements of recovery today are not limited to the rebuilding of individual productive facilities. They include rehabilitation and reconstruction of entire national economies.
“There has also been, as a result of unsettled political conditions, an uneconomic diversion of labour to the continued maintenance of large armed forces and to the military production necessary to supply them.
“Confidence in international investment was severely shaken by the depression of the 1930’s. It is the Bank’s hope that, by its activities in the fields of reconstruction and development, it can help to restore that confidence.”
Gentlemen, these are admirable, cogent and irresistibly logical observations. The situation which is thus disclosed in these two Annual Reports means that these two Institutions now face a grave new challenge. Events have overrun all our calculations, and these present meetings are being held under the shadow of the international economic emergency which now prevails.
Both the Fund and the Bank have, during the past twelve months, begun operations. Their first transactions are recorded in the Reports. The Fund has already sold exchange, both dollars and sterling, to France, to the Netherlands and to Mexico. The Bank has already made loans to France, the Netherlands, Denmark and Luxembourg and has successfully made its first public issue of its own Bonds. The Fund has now fixed par values for the currencies of nearly all its members, and has issued a timely warning against sales of gold at premium prices, an evil practice which might easily undermine exchange stability and transfer gold from central holdings into private hoards. These beginnings are good, and they give grounds for future confidence and for our congratulations to M. Gutt and Mr. McCloy. But I feel sure that you will wish to consider here all possible ways by which both the Fund and the Bank may make, within the next few months, an even larger contribution towards solving the urgent problems which confront us all, and towards helping to stave off the economic disasters which threaten so many of our members.
As regards Europe, the first necessity is a great increase in production and in international trade. This, within a framework of co-operation between the Governments, is the key to recovery. Each nation can, and must, go a great way along the road to recovery through its own efforts. But, unaided, most cannot go all the way. Such aid can come, in part, from the Fund and the Bank. In this critical interval necessary for recovery, there are grave dangers, in many countries, of economic collapse and of social dissolution. Even those fortunate nations in the New World on whose country no bombs fell and through which no enemy armies marched, even those fortunate nations are indissolubly bound, by ties of common interest, to the battered lands of Europe and of Asia. As Mr. McCloy has said in a most striking phrase, echoing back the great words of Abraham Lincoln, “the world cannot endure half skyscraper and half rubble.” We are all, indeed, whether we will it or not, members one of another.
While we are meeting here in London, the representatives of many nations are meeting in Paris to prepare a plan in response to the bold and generous initiative of Mr. Marshall. This urgent effort to avert an economic catastrophe which, if it were once allowed to begin, might soon engulf us all, calls for many contributory approaches. One such approach is through the discussions in Paris. Another is through our discussions here in London.
Let us, therefore, take counsel together, each with a full sense of the gravity of this historic hour. The tides of fate are fast running out. We must be prompt and resolute to seize what may be our final opportunity.
Chairman of the Executive Board of the International Monetary Fund
Gentlemen, the report which I have the honour to present, in the name of the Executive Board, to the Board of Governors of the International Monetary Fund would not give a correct impression if it were not placed in its proper relation to the international situation as a whole.
The signatories of the Bretton Woods Agreement had in mind—and this was, I think, their merit—the creation of an organization, the action of which should be conditioned essentially by economic and financial factors. Nevertheless it would be illusory to think that finance and economics can be divorced from political conditions, national and international. The reverse is, on the other hand, also true. The extent to which one of these elements influences the other may depend on the vision and energy of governments, but such influence is in any case a fact.
In a world whose future would be secure, where social peace as well as international peace would reign, all the resources of each country could be fully employed in providing for current needs and, through national and international investment, for raising living standards. Under such conditions, national trade would be an important factor in developing a strong and stable world economy. It is to the extent that these ideal conditions do not exist, that the task of realizing economic and monetary stability becomes more difficult.
If we look merely at the material results obtained so far, we would feel encouraged. Only two years after the cessation of hostilities, the reconstruction of the countries devastated by the war has reached a stage which could not normally have been expected when one reflects on the destruction of wealth which had taken place uninterruptedly and on a scale nearly beyond imagination throughout the five preceding years. In the other countries, the reconversion from war to peace has taken place without serious disruption if one considers the extent and difficulties of the task.
However, it would be vain to look only at these results. The future is weighted down by great uncertainties. Adding its effects to the already existing scarcity of agricultural products, a particularly rigorous winter, followed by a prolonged drought, has wrought considerable ravage in Europe. The task of reconstruction, if it is to be completed, still requires an effort the scope and magnitude of which have been described in masterly fashion at Harvard University in June last and again stressed two days ago by the United States Secretary of State, Mr. Marshall. In another field, it would be absurd to close one’s eyes to the fact that the German economic problem—to say nothing of the political problem—is still waiting for a solution and that this delay weighs heavily on the general economic situation.
Thus it is that the meeting of the International Monetary Fund takes place between the Sixteen Nations’ Conference in August, in Paris, and the Four Power Conference, in London, in November. It opens its deliberations four weeks after the suspension by the British Government of the convertibility of sterling, restored one month previously. It assembles countries in many of which the monetary situation, to say the least, is not exempt from difficulties.
You will find in the Second Annual Report of the Executive Directors a full statement of the problems and policies with which the Fund must deal. The problems of the Fund are, in effect, the problems of its members. The success that the Fund can achieve in attaining its objectives will depend, to a very large extent, on the ability of its members to solve their international economic and financial difficulties. For many countries, this will depend, in turn, on the way in which they deal with their internal situation.
Internal financial and monetary reform has been in the forefront of the international discussions which have taken place recently. Emphasis has rightly been placed on this, for there is no more important task today than to assure producers, workers and traders that the currency in which they are paid and in which they keep their savings will retain its value. Without stability in the purchasing power of money, production is inhibited and distribution is diverted from normal channels to the detriment of the national economy.
The necessity for currency stabilization has often been stressed. The difficulties arise when the steps necessary to assure it have to be taken. To stabilize the currency means essentially that spending for all purposes must be limited to the supply of goods that can be purchased at stable prices. This requires that the income distributed to the public must be so limited that after payment of taxes and voluntary savings, the expenditure for consumption will not exceed the value of goods available for consumption. This requires that the expenditure for investment must be limited so that it will not exceed the value of goods available for investment. In particular, the outlay on construction and equipment must not be augmented by the creation of bank credit.
In some countries, the inflation—and that means the excessive expenditure for consumption and investment—originates in large government deficits. The starting point for internal financial and currency reform, therefore, is the balancing of the national budget. This must be a real balancing of the budget with actual receipts from the current income of the public covering actual payments to the public. It must be a comprehensive balancing of the entire budget, including the ordinary and the extraordinary budget and the operations of state enterprises. Public expenditure for all purposes must be reduced until it can be covered by taxes and other current receipts. In particular, neither the central bank nor the private banks should be providing funds for public expenditure.
I do not underestimate the difficulty of limiting expenditure for consumption, investment and for government purposes. Yet this is the time when the balancing of supply and demand at stable prices can most effectively be secured. During the next few years it may still be possible to maintain investment for reconstruction somewhat above the level of domestic savings. The import surplus from foreign grants and credits will provide governments with receipts which should make them completely independent of financing by the central bank and the private banks. It is for this reason that I say that the practical task of securing internal financial reform will be relatively easier now than later.
When internal financial and monetary reform has been achieved, a major step will have been taken toward restoring the international economic position of the countries whose economies were devastated and disrupted by war. But other steps will also be necessary. If these countries are to pay their way in world trade, they must place their international payments in order. That will require them to increase their exports and, in some cases, to limit their imports. A continued increase in production can provide these countries with goods for export and diminish their dependence on a surplus of imports.
But increased production will not in every case by itself solve the balance of payments problem, for if prices and exchange rates in a country are out of line, they will be an obstacle to exports and they will be an encouragement to excessive imports. The final step in financial and monetary reform must be to bring the prices and the exchange rates of countries into a competitive position in world markets.
That all these steps must be the primary concern of each country itself was made absolutely clear in the current Paris discussions. Proposals are being formulated, the ultimate aim of which is to convert Europe from a deficiency economy to a self-maintaining economy. Before the war more than half of the world’s trade was done by the countries of Europe. The restoration of their production and trade to a level commensurate with their needs will be a long step forward in establishing a strong and stable world economy. That is why it is necessary for European countries to take all necessary measures to strengthen their own economies and to help each other. That is why aid from abroad to complete reconstruction is of urgent importance at this time.
I have indicated in the beginning of this statement how much, in the monetary field as in others, the disruption of the war still makes itself felt. But that is no reason for abandoning or modifying the objectives of the Fund. Rather, concerted effort must be made to establish the conditions under which these objectives can be attained. A premature attempt to force the acceptance of exchange and trade practices suited for a balanced world economy can do much harm and even endanger the attainment of these objectives.
The establishment of a strong world economy is the indispensable condition for attaining these objectives. To the full extent of its powers, the Fund will do everything possible to bring this about. It is prepared to cooperate with all countries and all international organizations willing to work toward this end. We realize the limits of its capacity. But though it cannot do the entire job, there is no reason why we should do less than our full share of it.