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PERSPECTIVE ON INTEREST RATES AND
INTERNATIONAL MONETARY REFORM
By J. Dewey Daane
M e m b e r , Board of Governors of the Federal Reserve System
Supplement

to B u s i n e s s

Review

(EDITORS
NOTE: Mr. J. Dcwcy Panne, member of tlic Hoard of (Governors of the Federal
Reserve
System addressed the Municipal Bond Clnh of Philadelphia
on II ednesdaY< May •'»'. l')f>7. In response
fa numerous requests, his remarks are hcinp reproduced in this special
supplement.)
I a m verv pleased lo have llie opportuititv

In

address this distinguished group, including: m a i n

called an "even keel" policy. And in my opinion.
" c \ e n keel

might well be redefined lo include no

of my good friends and mentors, like Karl Hupp

public speeches In Federal Reserve Hoard Gov-

and George Kneass. with whom

e r n o r s ! The market deserves at least that much

I have

been

associated for many years.

surcease from the flow of words!
vour

I do. however, want to begin In making a few

President " J a c k " Dempsey. twisted mv arm to

ohservalions-as to the economies of interest rales.

Although

George

Kneass.

along

with

make some eoimnenls <>n interest rates as well as

\rl Okun. one of the m e m b e r s of the President's

"ii international monetary r e f o r m . I am sure none

Council of Economic

< f us realized that I would he speaking at a lime
>

thai what we are. or should be. concerned with is

Advisers, sometimes savs

when the hooks were still open on a Treasury

not "old

economics or "new"

economies but

financing and also, of particular importance to

" g o o d " economics. \ n d todav I thought I might

this group, bidding in process for the Common-

lake lhi< opportunity to outline what I consider

wealth of Pennsvlvania

lo be "good ' economics regarding interest rates.

Turnpike bonds.

Thus

I do wish to emphasize at the outset that I am

First of all. interest rales do not have a sepa-

aot. and I hope undetstandahlv so. not g o i n g to

rate. autonomous. identHv apart f r o m the avail-

forecast—or even attempt to

abilitv

the f u t u r e of inter-

est rates, or the future of Federal Reserve policy.

of

funds and

the d e m a n d s

upon

that

availability The idea thai interest rates can be

'Nor will I be releasing these remarks pnblidv at

varied bv voice or fiat, in contradiction to under-

this point, not because I will be saying a m thing

Kin': market

cither

either-

mental fact that interesl rates are not independent

but

,,f. but lied iutcgrallv to. the supply and demand

startling

domestic

or

or

super

international

secret,

about

developments,

forces, ignores this very

funda-

simplv because, as all of you know, when a

for funds. To complain thai there must be a

Ireasnrv

Federal

licttei wav of allocating funds than via interest

Uese rve notmallv follows what is euphemislicallv

rales simplv means thai one wishes to substitute

financing

is in process

the

3

rationing

some of the d i s p a r a t e rate movements that h a v e

process f o r m a r k e t forces. T h i s is surely some-

occurred in recent weeks. As \ o u all know, the

thing I would not want to see and I am s u r e you

System began easing policy last fall a n d has con-

would not cither. T h e implications of this point

tinued

in the recent a n d c u r r e n t setting are, I hope,

recently reaffirmed b\ the discount rate reduction

c l e a r ; it is not only p r e f e r a b l e hut clearly m o r e

of a feu weeks ago. I here has been no c h a n g e in

realistic to rely on competitive m a r k e t forces to

o u r policy objectives of c o m b a t t i n g

a d j u s t interest r a t e s — w i t h i n the f r a m e w o r k of

tendencies in the economy, or promoting renewed

reserve a v a i l a b i l i t y — r a t h e r

a r b i t r a r y j u d g m e n t s and a controlled

on an " e a s e " c o u r s e ever

since—most

weakening

to

e x p a n s i o n , to the extent a m o n e t a r y policy of

a d j u s t rates t h r o u g h concerted c h a n g e s in ceil-

ease can do so. Despite c o n t i n u a n c e of this policy

ings by r e g u l a t o r y authorities.

of ease, however, and

than to attempt

Second, a n d related to this, the Federal Reserve
,s

reserve availability

not the p r i m a r y d e t e r m i n a n t of interest rales,

some

interest

its reflection in

and rapid credit

rates

have

once

greater

expansion,

again

firmed

cither in t e r m s of rale levels or c h a n g e s in rates.

markedly and widely d i f f e r i n g p a t t e r n s of rate

It is true that

behavior have emerged in specific sectors of the

interest

rates

F e d e r a l Reserve
( a m o n g other

policy affects

things)

but—and

this is an i m p o r t a n t qualification that frequently

market.
T o recall, quickly, recent

rate

developments

is o v e r l o o k e d — t h e r a n g e within which the Sys-

with which you a r e all familiar, y ields on some

tem can influence interest rates as part of a policy

new and recently offered c o r p o r a t e a n d m u n i c i p a l

of p r o m o t i n g

is

bonds have a d v a n c e d as m u c h as 3 0 basis points

economic

in the past few weeks, reflecting a rash of syndi-

sustainable

economic

growth

very much d e t e r m i n e d by the basic

e n v i r o n m e n t , by expectations r e g a r d i n g the out-

cate t e r m i n a t i o n s , the generally

look

actual

accorded many recent new issues even at currently

supplies a n d d e m a n d s for f u n d s tlva! relied both

higher yields, the still congested state of under-

for that e n v i r o n m e n t , a n d

by the

•he e n v i r o n m e n t a n d its prospects.

The System

writers' inventories, and

slow

reception

the heavy v o l u m e of

can only a d d or s u b t r a c t a m a r g i n a l , albeit impor-

offerings still to come on the f o r w a r d c a l e n d a r .

tant. f r a c t i o n to the basic e q u a t i o n .

T o illustrate, rcoffering yields on new

T o be sure, since the System

is

inevitably

AA-rated

electric utility b o n d s with five-year call protection

always a part of the d e m a n d and supply, we must

have a d v a n c e d to a new l % 7 high of 5.60 per

always be conscious of. and h a v e some concept

cent. T h i s is 22 basis points above the end of

of. where the initial impact of o u r a c t i o n s supply-

March level, a n d some " .> basis points a b o v e the
>"

ing or s u b t r a c t i n g reserves n u n

For

low reached at the end of J a n u a r y . I b i s rise f r o m

impinge.

example, there may be. times when, in the light of

the |0(>7 low has erased m o r e than half of the

c o n t i n u i n g balance of p a y m e n t s s t r a i n s alongside

earlier overall decline f r o m the

i n a d e q u a t e domestic economic g r o w t h , it is advis-

6.0.1 per cent

able to tailor Svstem reserve s u p p l y i n g o p e r a t i o n s

leusions last August.

in such a wav as to minimize d o w n w a r d

pres-

A practical

illustration

been m a k i n g — t h a t
determined

bv

interest

market

of the point

I have

rates a r e basic-all)

forces and

cannot

be

determined bv fiat or legislation—is suggested In
4

1966 high of

at the peak of

market

The s h a r p n e s s of this recent a d v a n c e in b o n d
^ j el (Is has

sures on short term rates.

reached

reflected

the interaction

of

several

m a j o r influences:
At
both

the b e g i n n i n g

of

corporate

municipal

substantial

and

April

underwriters
securities

unsold balances of recently

of
held

offered

new issues which they h a d taken on at d e c l i n i n g

try to l i q u i d a t e p o s i t i o n s : and s o m e b o r r o w e r s

interest rates in the e x p e c t a t i o n of b e i n g able to

in both c o r p o r a t e a n d m u n i c i p a l m a r k e t s

resell t«, i n v e s t o r s at still lower r a t e s - f o l l o w i n g

a p p a r e n t l y accelerated t h e i r b o r r o w i n g plans in

,he

a n t i c i p a t e d cut in the d i s c o u n t ratq, a n d a f t e r

some expected m o d e r a t i o n in new issue v o l u m e
f r o m the hectic. M a r c h pace.

an -effort to satisfy t h e i r n e e d s b e f o r e an anticipated f u r t h e r c h a n g e in m a r k e r c o n d i t i o n s .
S p e a k i n g m o r e generally, we n o w seem to be

I'ollowing the d i s c o u n t r a t e cut in early April.
However, these e a r l i e r

have

expectations

of

further

interest rate declines b e g a n to be called in ques-

living t h r o u g h a period of a w h o l e s e q u e n c e of
r e a c t i o n s to the s t r a i n s of. last s u m m e r ,

strains

f r o m which you as m a r k e t p a r t i c i p a n t s a n d we as

tion. M a r k e t o p i n i o n s on the b u s i n e s s outlook for

monetary a u t h o r i t i e s have. I hope, l e a r n e d a n u m -

•He

suddenly

ber of lessons. And one reflection is e v i d e n t in

s t r e n g t h e n e d bv the unexpectedly f a v o r a b l e busi-

the e m p h a s i s placed on r e s t o r i n g liquidity as the

Mc

second

half

of

the

year

were

ss news, a n d by the r e p o r t s of likely f u r t h e r

escalation of the w a r in V i e t n a m . At the s a m e
Me, large f u r t h e r a d d i t i o n s to the new
c a l e n d a r — i n b o t h the c o r p o r a t e a n d

issue

municipal

m a r k e t s — m a d e it look as if t h e r e would be n o

first, a n d q u i t e

n a t u r a l , reaction

to the e a s i e r

availability of money a g a i n s t the b a c k g r o u n d of
last

year's developments.

evident

in

the

For example,

changed

behavior

this is

of

bank

d e m a n d , in t u r n in part reflecting u n w i l l i n g n e s s

significant respite f r o m b u s i n e s s a n d state a n d

to seek l a r g e r inflows of CI) m o n e y . T h u s , de-

local g o v e r n m e n t d e m a n d s on capital m a r k e t s

spite

at least t h r o u g h the s e c o n d q u a r t e r .

posture

syndicates

and

shift

in

Federal

Reserve

as noted in the s h i f t f r o m a v e r a g e net

underwriters

sought

b o r r o w e d reserves of ST»0 million last O c t o b e r

to

(>i\en these c h a n g e d c o n d i t i o n s ,
'enmnated

the s u b s t a n t i a l

to a recent a v e r a g e of well a b o v e $ 2 0 0 million

liquidate

'Heir h o l d i n g s of o l d e r issues in o r d e r to be in a

free reserves

Position to p a r t i c i p a t e in new o f f e r i n g s at h i g h e r

Treasury

' a t e s - But s h i f t i n g eX|)ectations on the b u s i n e s s

contrasted

and interest rate outlook, the heavy v o l u m e of

m a r k e t s which at times have been c h a r a c t e r i z e d

( Urr

as " n o t h i n g " m a r k e t s .

to
(

e n t security offerings, and further additions

active b i d d i n g

for s h o r t e r

term

bills a n d s h o r t e r t e r m m u n i c i p a l s h a s
with

conditions

in

the

long-term

the f o r w a r d c a l e n d a r of f u t u r e olTcrings all

T h u s , while the d i s p a r a t e rate m o v e m e n t s re-

"lUinucd to m a i n t a i n u p w a r d p r e s s u r e s on rates,

m a i n an interest p h e n o m e n o n , thev a r e an u n d e r -

" ' u s . despite t h e i r e f f o r t s to t r i m

inventories,

u n d e r w r i t e r s h a v e c o n t i n u e d to end u p with sizen ) R

' '

Holdings—particularly

market

where

inventories

in
are

the
in

municipal

near

record

volume.

s t a n d a b l e b y - p r o d u c t of the c o n c e r n that develo p e d . a n d of the shift in e x p e c t a t i o n s , which h a s
meant

a differing pattern

of

rate changes

as

between s h o r t a n d long t e r m securities. As I said
at the o u t l e t . 1 am not try ing to o f f e r a full blown

'He p a r t i c u l a r catalyst that lias t r i g g e r e d this

theoretical

or

practical

explanation

so

as

to

•nix of influences is. of c o u r s e , the g r o w i n g expec-

pretend

tations that b u s i n e s s is s t r e n g t h e n i n g , a n d

the

interest rates, but simply to h i g h l i g h t that c u r r e n t

1'esultant view that the cyclical d o w n - s w i n g

in

d e v e l o p m e n t s serve once a g a i n to u n d e r s c o r e the

to identify

and

predict

the c o u r s e of

long-term rates m a v have e n d e d . In these c i r c u m -

t r u i s m 'Hat the m a r k e t is bigger t h a n a n y of us

stances i n v e s t o r s h a v e b e c o m e reluctant

a n d that m a r k e t e x p e c t a t i o n s a n d related a c t i o n s

buyers,

waiting to see if the heavy f o r w a r d supply

will

force rates h i g h e r : u n d e r w r i t e r s have pressed to

are. m o r e o f t e n t h a n not. all i m p o r t a n t .
What

has occurred

represents,

in p a r t ,

the
5

element of reaction to expectations, expectations

environment

that, in my j u d g m e n t , a r e u n f o u n d e d at least in

c o u n t e d for these most recent rate developments.

ajul

expectations,

that

have

the sense that the one t h i n g of which 1 am sure is

Such u n d e r l y i n g

that events never repeat themselves iu precisely

a n d if at times the m a r k e t t e m p o r a r i l y overdoes

the same way. But just as significant as the expec-

its a< ljustment to such p r e s s u r e s : in the long run

tational catalyst, however, a n d not unrelated to

they must be adapted to if m a r k e t s a r e to r e m a i n

it, has been the actual supply of securities offered

free a n d competitive.

f o r c e s a r e real, not

ac-

illusory,

in the various m a r k e t s . In the m a r k e t for new

Not so simple at the moment is the p i c t u r e with

publicly offered c o r p o r a t e b o n d s it now looks as

respect to the relationship of the v a r i o u s credit

if the April c a l e n d a r will a g g r e g a t e in excess of

markets.

A m a j o r complicating

91.3 billion, which c o m p a r e s with the $1.7 billion

anal)sis

of

March record. T h e May c a l e n d a r alreadx exceeds

m a r k e d c h a n g e in the role played by b a n k s . In

S i billion a n d s o m e think it may ultimately rise

a sense, it a p p e a r s as if b a n k s , in a d r a m a t i c

• < S I . 5 billion. Similarly, with the J u n e c a l e n d a r
>

a b o u t face f r o m their 1961-65 practice, recently

< f scheduled o f f e r i n g s a l r e a d y at SHOO million, it
>

have been b o r r o w i n g long a n d lending s h o r t . On

loo m a y ultimately exceed SI billion. In s h o r t ,

the l e n d i n g side, despite r a p i d overall credit ex-

pross public o f f e r i n g s of c o r p o r a t e b o n d s for the

pansion. there has been, a f t e r a d j u s t m e n t for nor-

first half of 1967 m a y total nearly $7 billion,

mally large tax p a \ ments. a r e d u c e d rate of growth

recent

credit

f a c t o r in

developments

the

is

the

c o m p a r e d with gross o f f e r i n g s of So billion in the

in business loans in 1967. Hanks obviously have

entire year 1966. As to new Stale a n d local gov-

been e n g a g e d iti r e s t o r i n g p o r t f o l i o liquidity, as

e r n m e n t b o n d s , o f f e r i n g s in April a r e estimated

reflected in the large increase in security h o l d i n g s

to have exceeded Si billion for the fourth con-

—about $9 b i l l i o n — i n the last five m o n t h s . As to

secutive m o n t h . A n d . as you know all too well.

sources of f u n d s , total time a n d savings deposits

gVoss m u n i c i p a l

at b a n k s rose sharplv f r o m last fall a n d were the

offerings through

the end

of

April a r e estimated at $1.7 billion. IS per cent

m a j o r s o u r c e of f u n d s used to rebuild liquidity.

larger than in the like p e r i o d a year ago.

T h e increase was particularly r a p i d until mid-

T h i s recital of details as to public o f f e r i n g s is
»<>t intended to s o u n d alarmist over either recent
or prospective resultant rate developments. One
partial offset to the enlarged llow of public offerings has been a d r o p in p r i v a t e placements. In the
first half of the year these may r u n a r o u n d
,v

to

i of a billion d o l l a r s below the first half of

1966. And the u n p r e c e d e n t e d c o n c e n t r a t i o n

of

February.

with

over

one-half

of

the

increase

c o m i n g f r o m large d e n o m i n a t i o n negotiable CD s.
Since F e b r u a r y , however, both CD and total t i m e
and savings inflows have m o d e r a t e d : all of the
criowth in C D ' s in this latter period a p p e a r s to
have o c c u r r e d at b a n k s outside l V w Y o r k City.
This slower growth in C D ' s at the larger b a n k s
reflects, it seems to me, two m a i n factors. First,

public offerings in the first h a l f — n o t unrelated

the c o n t i n u e d

either to the r e p a y m e n t of b a n k debt (reporte< ll\

than

increase

a c c o u n t i n g for over 10 per cent of first q u a r t e r

pavings deposits have served to m a i n t a i n a r a p i d

negotiable

CD's

in time deposits
a n d the

other

turnaround

in

asset

inflow of f u n d s without the use of large C D ' s .

corporate

Second, with loan d e m a n d s r e q u i r i n g a smaller

issues of this typo sometime later in the year. Hut

s h a r e of deposit growth, with security p o r t f o l i o s

offerings)

<)r to the build-up

positions—suggest

of liquid

a t a p e r i n g off in

m\ point h e r e is a simple one. namely that it is

rising, and with declining market yields on the

the u n d e r l y i n g

short term assets banks were a c q u i r i n g , the need

6

market

forces, including

both

and desire to seek large C D ' s aggressively has

ments basis f o r the y e a r 1966. Before y e a r end

tended to w a n e at most h a n k s . T h u s , in the last

1966 we began to see those f u n d s flow out a g a i n

two m o n t h s or so. h a n k s lowered their m a r k e t a b l e

— p e r h a p s to tin; extent of nearly $1 billion by

CI) rates s h a r p l y , to levels that reduced appreci-

early F e b r u a r y . Following two m o n t h s of little

ably the level of CI) yields relative to c o m p e t i n g

or no movement, in April t h e r e " w a s a m o d e r a t e

financial

a s s e t s — i n c l u d i n g the CD yield in the

outflow again. All of this would i n d i c a t e that the

secondary market. W i t h rates at levels i n d i c a t i n g

published statistic for the U.S. b a l a n c e of pav-

that h a n k s clearly

ments

were no longer a n x i o u s

attract large CD's, o u t s t a n d i n g s
SR0

°

m

'"'°n

rose by

to

only

f r o m m i d - F e b r u a r y to the end of

March. Over the first three weeks of A p r i l — w i t h
U )

offering rates 10 to 3 0 basis points below

secondary m a r k e t yields on

deficit

on

an

official settlements

basis

could hardly be expected to look very f a v o r a b l e
in the first q u a r t e r or first half of 1067. As to o u r
other principal p a y m e n t s balance

measure—the

overall liquidity basis—it is more difficult to sort

CD's—outstandings

out and anticipate possible results. One can. how-

'•eclincd by almost $ 6 0 0 m i l l i o n — a l m o s t three-

ever. suggest thai it is a m a t t e r of striking a bal-

fourths of which o c c u r r e d over the tax week. Last

ance between offsetting developments on c u r r e n t

week, o f f e r i n g rales were generally
a

unchanged

and capital account. T r a d e developments thus f a r

' i d o u t s t a n d i n g s at b a n k s in New Y o r k declined

this year point to an e n c o u r a g i n g l y l a r g e r t r a d e

an
li

additional $27 million. And despite the reduc-

surplus. On the other h a n d , some d e t e r i o r a t i o n is

° n in o u t s t a n d i n g CD's. New Y o r k banks, on

expected in military e x p e n d i t u r e s and in the net

balance, c o n t i n u e d to repay Euro-dollars in April.

capital outflow.

' h i s reference to E u r o - d o l l a r s leads me to com-

The b a l a n c e of p a y m e n t s p r o b l e m — h o w e v e r it

ment that, just as in the case of the d o m e s t i c

may turn out to a p p e a r statistically in the first

s

phere,

international

rate

relationships

also

q u a r t e r — r e m a i n s a serious one. And here I would

I" miarily r e l i e d c h a n g e s in basic e n v i r o n m e n t a l

like to clear up anv r e m a i n i n g c o n f u s i o n as to

economic c o n d i t i o n s and expectations a l o n g with

the

•nonetary policy moves, a n d these

problem to o u r c u r r e n t efforts to b r i n g the search

relationships

relationship

of

our

balance

Correspondingly shift with these internal dcvel.

for an international money

op'nents in individual countries. All of this is b\

and dollars to

Ua

>' of s a y i n g

that

the spread

of

downward

central b a n k rale a d j u s t m e n t s since J a n u a r y

was

a

of

payments

to supplement

gold

successful conclusion.

T h e plain fact is that there.is no real connection
between o u r c u r r e n t balance of p a y m e n t s financ-

a to-be-expected response to the c h a n g i n g avail-

ing problem a n d the problem of c r e a t i n g a new

'

international reserve asset to provide a supple-

) and d e m a n d s for f u n d s already in process

b e f o r e last year end. as many E u r o p e a n econoIn,
,,(

e s also began to experience a slowdown

'onomic

activity.

The

resultant

in

ment t«> gold and reserve currencies. There- is
simply

no international

liquidity

escape

route

international

f r o m the h a r d road <'f r e s t o r i n g e q u i l i b r i u m in

Hows of f u n d s , reflecting the variety of changes in

our balance of payments. And I would s u b m i t

availability a n d rates here and a b r o a d is. 1 be-

that lb'' c o n t i n u i n g and increasingly c o m p r e h e n -

•'eve, well k n o w n . L o o k i n g back, most

sive efforts m a d e to reduce the U.S. balance of

marked

was last year's inflow into the United States of

payments deficit in themselves serve as a denial

around $ 2 ' o l,,lHon

f ( ) r c i g n branches of

t»f the asserted escapism. F u r t h e r m o r e , the modest

b a n k s — l e a d i n g in turn to a small s u r p l u s in

amount of reserve assets that would accrue to

° U r b a l a n c e of p a y m e n t s on an official settle-

the United States u n d e r any plan, as well as the

. ^

from

7

delay in actual creation of new assets in any

f u t u r e difficulties. T a k i n g new gold first, there

realistic timetable, u n d e r s c o r e s the irrelevance to

has been

c u r r e n t deficits.

very

little

addition

to

international

reserves f r o m this s o u r c e in recent y e a r s — p e r -

In plain fact, it j s simply inconceivable that

h a p s 200 to :«)» million d o l l a r s a year. And. last

the United Stales could go on r u n n i n g significant

year there was actually a net d r a i n f r o m m o n e t a r y

deficits on the basis of o u r s h a r e in any new-

reserves into n o n m o n e t a r y

reserve asset c r e a t i o n . M o r e o v e r , so far as the

creased

i m m e d i a t e situation is c o n c e r n e d . I can see no

jewelry, etc.. a n d . undoubtedly, c o n t i n u e d specu-

prospect that the m a n y r e m a i n i n g p r e l i m i n a r i e s
( a n

completed, a n d actual

initiated, b e f o r e 1969 or

reserve creation

1970. So neither

the

' ' • " o p e a n s who a r e skeptical of o u r motives, n o r
'he A m e r i c a n s

who

have

indulged

in

industrial

uses—reflecting

uses associated

with

in-

space,

lative d e m a n d . So gold alone does not seem to
p r o v i d e the answer to the need for g r o w t h in
international
about

reserves as we look a h e a d .

dollars—or

about

some other

What

currency

wishful

p e r f o r m i n g this f u n c t i o n ? Again, there are clear

•'linking, should be misled c o n c e r n i n g the real

indications that growth in f o r e i g n official dollar

nature of o u r g e n u i n e interest in reserve creation
as

a f u n d a m e n t a l i m p r o v e m e n t necessar\ for the

international m o n c t a r \
f(

system, not as a crutch

>r the U n i t e d States.
lhen

idiy

stantial

dollar

growth

could

mean

continued

overly large official settlements deficits in

a t e we s e a r c h i n g

for ways

and

means of deliberately c r e a t i n g , for the first time.
an

balances alone, or in c o m b i n a t i o n with new gold,
cannot meet these prospective needs. F o r sub-

i n t e r n a t i o n a l m o n e v ? T h e answer is relati\el\

the

U.S. balance < f p a y m e n t s to p r o v i d e such
>

an

outflow, ^ e t . such deficits—unless a c c o m p a n i e d
l>\

net

increases

in

U.S.

reserve

assets—are

simple—it is because there w ill not be e n o u g h of

clearly u n d e s i r a b l e , for tliev can only serve to

'lie existing kinds of reserve assets to go a r o u n d .

weaken the value of the dollar a n d lead m o r e and

I he present sources of increases in international

more to an unwillingness of foreign monetary

reserves are. it is generallv

a u t h o r i t i e s to accept, or at least to hold, such

conceded, likely

t**

prove i n a d e q u a t e over the years a h e a d a n d global

dollars in their reserves. In the past two vears.

reserve s h o r t a g e s could have deflationary effects

monetary

and lead to restrictive external policies that co uld

countries have, in fact, not a d d e d to official dol-

"nly serve to reduce growth of world t r a d e and
(,

f

a

the

major

industrial

lar holdings in their reserves. Instead, as most of

the

u r a n e e that the traditional reserve assets, gold

of dollars into gold a n d . although mainly reflect-

econoinv.

The

world

needs

n d reserve currencies, can and will be supple-

nientcd b\ a new reserve asset as needed to meet
' o illustrate, d u r i n g the past decade, roughly,
•he increase in world reserves has averaged,close
to S2 bill ion a vear. If one excludes the United
States which has experienced a substantial

ing the policy and actions of one c o u n t r y , this
results

in a c o r r e s p o n d i n g

international reserves.

future requirements.

de-

cline in reserves, reserve growth of the rest of the
Hr

of

\ ou know, there has been a substantial conversion

the world

ass

authorities

reduction

I he why

in

total

of o u r search,

therefore, is the strong evidence that the supply
of

reserves

from

traditional

gold and dollars—will
r*
g r o w i n g needs.

sources—mainly

not be e n o u g h to meet
c

As to any other national c u r r e n c y filling the
breach, apart f r o m the special role of sterling,

analysis of t r e n d s in the principal c o m p o n e n t s

all m a j o r c o u n t r i e s have m a d e clear their unwill-

tluu reserve growth point to the likelihood of
8

>rld has averaged nearer to $.'> billion a year,

ingness and inability to accept the b u r d e n s of a

reserve currenev c o u n t r y . T h u s it is onlv p r u d e n t
to look e l s e w h e r e — a n d

a r e a s of a g r e e m e n t :

look

First of all. there is now a u n a n i m o u s con-

plan-

sensus on working a h e a d t o w a r d the establish-

it is this p r u d e n t

that has heen. and is. called "contingencv

ment of a plan for deliberately, c r e a t i n g reserve

n i n g " for reserve asset c r e a t i o n .
Finally. it m a y he asked, where is the search
taking place a n d what a r e the prospects for suc-

assets to provide for a d e q u a t e s e c u l a r growth in
reserves.

cess? T h e where question is the easiest to answer,

Second, it is generally agreed that the c r e a t i o n

but not the least i m p o r t a n t , for it sets the stage

of such reserves should he designed to meet the

for at least one of the key

global

namely,

how

the

issues

t o n u s of I,o||, i|„. e s t a b l i s h m e n t
create assets and

remaining,

needs

of

all

Fund

the

balance

to

c o u n t r \ . And there is a g r e e m e n t , too, that reserve

mined. S p e a k i n g generally, the search for ways

creation should
assistance.

needs of any

not

in

ils activation, will he deter-

of p a y m e n t s

members,

process,
of a plan

decision-making

not be linked to

individual
development

and means of deliberately c r e a t i n g reserve assets

Third, there also seems to be general support

'<> supplement gold and reserve c u r r e n c i e s in the

for the principle of u n i v e r s a l i t y — t h a t is. that any

international m o n e t a r y system has been going on

asset created will be distributed to, a n d available

for several

years,

forinus—which

in

two

for use by. all c o u n t r i e s not just a privileged few.

in

this

T h e consensus on this score seems to lean toward

Deputies of the C r o u p of

distribution to all m e m b e r c o u n t r i e s of the Inter-

most

have now

efTort-^the so-called

meaningfulh
been j o i n e d

fen (the deputies to the finance ministers and

national Monetary F u n d a c c o r d i n g to a generally

'"'Mitral bank g o v e r n o r s of the ten leading indus-

objective formula such as I M F q u o t a s . N o clear

trial c o u n t r i e s I and the I n t e r n a t i o n a l

view has yet emerged as to the relation of uni-

I'.Und itself

for. as M a n a g i n g

Monetan

Director

I'nul Schweitzer has o f t e n said,

Pierre

'"international

efforts and

last

fall these two g r o u p s

a series of joint

joined

meetings of

the

Deputies of the Ten and Kxeeutive Directors of
the I M F has been held, the first in W a s h i n g t o n
"I the end of N o v e m b e r . l % f > : the second, in
l-ondou n e a r the end of J a n u a r y . I % 7 : the t h i r d ,
"gain iu W a s h i n g t o n last w e e k : and a f o u r t h a n d
final meeting scheduled for P a r i s in m i d - J u n e .
Against the b a c k g r o u n d of all the efforts to date
!,

and

decision

making

but

here.

too.

g r a t i f y i n g p r o g r e s s has been m a d e in discussing
and e x p l o r i n g the possibilities.

liquidity is the business of the Fund.'"
beginning

versality

nd of these most recent joint meetings, what can

he said- as to the progress m a d e and hope's for

Fourth, as to the more specific and technical
questions of the n a t u r e and

form of the new

. asset it is now also generallv recognized that the
I wo principal t \ p e s of reserve assets that have
been discussed

«>ne a new reserve unit and the

other a new d r a w i n g right claim on the

Fund-

r a n be m a d e nearlx identical in technical properties. Hut there are i m p o r t a n t questions remaining as to the precise c o n s t r u c t i o n of an unconditional reserve asset that will clearly a n d cfTccliveh

serve as a true supplement to gold

and

dollars. T h o s e f a v o r i n g a reserve unit a p p r o a c h

•lie f u t u r e ?
T h e answer here is not such a simple one be-

point out thai it can m o r e readilv do just that.

ause it involves the c u r r e n t negotiations and a

Bui apart f r o m , although not unrelated to. the

n u m b e r of still unresolved issues. Hilt 1 believe

question of ihe choice of a p p r o a c h e s a n u m b e r of

that i( j;* f a i r t,, state that great p r o g r e s s

important issues remain to be resolved:

(,

been made. Consider the b r o a d , and

has

important.

First, the question of decision m a k i n g

with
9

respect both to the initial decision to b r i m ; the

the

plan into being and subsequent decisions as to

interests that a r e identical in some respects and

interests

of

a wide

variety

of

countries,

reserve asset c r e a t i o n u n d e r it. It is u n d e r s t a n d -

diverse in others. Some c o u n t r i e s have been in

able that this i m p o r t a n t question h a s not been

b a l a n c e of p a y m e n t s s u r p l u s for a n u m b e r

settled while other aspects of reserve c r e a t i o n a r e

vears a n d others in deficit, a n d this inevitably

still in process of d e l i b e r a t i o n .

colors attitudes. S o m e o f - t h e c o u n t r i e s a r e large

Second, the wa\ in which the asset might be

of

a n d others small. Some h a v e e c o n o m i e s which are

t r a n s f e r r e d and accepted. N o decisions have yet

others international t r a n s a c t i o n s a r c a relatively

assets will be ensured, how they will be used,

small

and, as Pierre Paul Schweitzer has put it. "all
I

very d e p e n d e n t on external m a r k e t s , w h e r e a s f o r

been taken as to how the acceptability of the new

Despite all the differences and diversities, how-

' ' l e rules of the game, u s i n g a new kind of c h i p s . "

ever. I think one can be optimistic about

But I think it is fair to say that the r a n g e of view

prospects

is being n a r r o w e d .

Director Schweitzer indicated in his Press Con-

A third a n d related basic question as to whether

part

of

their

total

economic

for success. Certainly,

as

activity.
the

Managing

ference following last week's meeting one can

any provision should be m a d e for the reconsti-

hope that the b r o a d outlines of a plan will be

tution or repayment of such assets when

placed b e f o r e the I M F G o v e r n o r s at their Annual

used,

f°r example, in cases of p r o l o n g e d or large-scale

Meeting in Kin de J a n e i r o this S e p t e m b e r . With-

use of the new asset by individual m e m b e r s .

out a r g u i n g whether a full-blown plan will b e

I'ourth.

the question

International

Monetary

of

utilizing

Fund

a

affiliate

separate
and/or

segregation of resources.

. L o o k i n g a h e a d , it is always difficult to foresee

agreed

upon

In

fall, a g r e e m e n t

on

the

basic

elements of a m u c h needed plan is within

our

g r a s p , given the political will to c o n t i n u e

the

international

lms

monetarx

cooperation

the outcome in an a r e a as complex as this, one

been the h a l l m a r k of the postwar

that involves a u n i q u e effort a n d that involves

m o n e t a n system.

which

international