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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 ,s than to attempt Second, a n d related to this, the Federal Reserve 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 (>i\en these c h a n g e d c o n d i t i o n s , 'enmnated syndicates and sought the s u b s t a n t i a l 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 b o r r o w e d reserves of ST»0 million last O c t o b e r to 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 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 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\ 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 substantial dollar growth could mean continued overly large official settlements deficits in 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 major industrial lar holdings in their reserves. Instead, as most of the of dollars into gold a n d . although mainly reflect- econoinv. The world needs 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 8 the u r a n e e that the traditional reserve assets, gold n d reserve currencies, can and will be supple- 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 >rld has averaged nearer to $.'> billion a year, 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 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 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 a r e a s of a g r e e m e n t : 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 decision-making 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 of a plan 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, 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 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 I interests 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 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 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 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