High Finance at the IMF
By NICHOLAS DAVENPORT As we in the United King- dom have been the biggest borrower at the International Monetary Fund in recent years, we did not expect our Mr. Reginald Maudling to make much impression at the directors' meeting in Wash- ington. A notorious debtor can hardly throw his weight
about at a meeting of banker-creditors. It appears that he took a very back seat and did not -even have a chance to bring up his old proposal—that countries in pos- session of surplus currencies should be able to turn them in to the Fund and draw credits against them. The stage was occupied by more impor- tant figures discussing more important questions —Mr. Pierre Schweitzer, the new Director- General, Mr. Robert Roosa of the US Treasury and Mr. Giscard d'Estaing of France. The con- tinuing American balance of payments deficit --running between $2,000 million and $3,000 million with 1963 at the top level—remained the question overshadowing all others. The British notion that there is a liquidity shortage—that reserves are insufficient to support world trade-- was rejected by the 'Paris Club,' and Mr. Maudling's bold idea of turning the IMF into a sort of world central bank was just left on the table. However, it was decided to initiate two studies to examine the world financial system. The first will be undertaken by the IMF ex- perts and will examine existing quotas, drawings and borrowing periods in order to see whether IMF resources .can be made more flexible and useful. The second will be conducted by the 'Paris Club' of ten countries (those which had com- mitted themselves to make $6,000 million of credits available to the IMF in case of need). This will concern itself particularly with the ways of meeting and carrying over such heavy continuing deficits as the American. The meet- ings will be held in Paris, as befits a 'Paris Club'; an interim report may be presented in the spring, but its recommendations will not be ready before next year's meeting in Tokyo.
The French delegate, M. d'Estaing, was the most powerful voice in these discussions, and he bluntly told everyone that the balancing of American payments was a 'pre-condition' of his agreement to anything. France has been holding a higher proportion of its reserves in dollars than other European countries and strongly ob- jects to financing American investment in Europe, particularly when it might involve a takeover bid for a French or French-controlled company. In fact, all the Europeans dislike Mr. Roosa's deficit financing by way of currency swaps and short-term bonds, mainly because the receivers of the dollars have no say in the policies of the deficit country and no control over the amount of dollars thrown up. They would much prefer to push the United States into borrowing from the Fund through the 'Paris Club,' for that would spread the burden fairly among the nine other members and would give the Fund a voice in Mr. Kennedy's external, finance (just as our borrowing in 1961 gave the late Per Jacobsson a 'right' to tell Mr. Selwyn Lloyd to deflate with a 7 per cent Bank rate). The Americans naturally have no wish to put themselves in this embarras- sing and subservient position; they are making a small drawing from the IMF which will not upset Mr. Kennedy's freedom of political action. Meanwhile,' they will go all out to pull their deficit down to reasonable proportions. Fortu- nately, external events are coming to their aid. Wages and prices in Europe are rising faster than in the United States and the failure of the wheat crop in Russia is causing Russian gold to flow out into Canadian reserves, which will lessen the capital outflow from the US.
How far Mr. Kennedy's proposed tax to stop American portfolio investment abroad and the making of foreign capital issues in New York will help to reduce the deficit it is impossible to say at this juncture, but if Sir George Bolton, chairman of the Bank of London and South America and a director of the Bank of England, is to be believed it could be considerable. In an article in The Times on September 30 he argues that this tax could kill international finance and damage the efficiency of the international mone- tary system. He believes that it will tend to divide the world into four restrictive monetary areas—the sterling area (which has always been partially restrictive), the dollar area (now be- coming restrictive), the European area and the exclusive Communist monetary area 'Comecon.' Sir George is, of course, talking his favourite book, which is to see London restored as the world's financial capital, mobilising European and other resources for the development of the poorer half of the world, but his counterblast does serve to remind us that if the IMF working parties fail to find a solution of the payments problem, and if the American payments deficit persists, the Western world will almoSt certainly drift into two financial camps. The dollar and the pound sterling will then be in the same boat, and the suggestion made in the recent Brookings Institute's report to Mr. Kennedy will probably be taken up—a fluctuating, flexible exchange rate between the sterling-dollar bloc and the European gold bloc. Even now, according to Sir George, the two currencies--dollar and sterling —`are indissolubly tied to each other' and 'the present exchange tensions and anxieties about the price of gold would be largely removed if the authorities concerned were publicly to accept the underlying reality, namely, that the dollar and sterling systems are one.' A fall in the dollar- sterling exchange rate against the European gold bloc which would no doubt follow would, of course. raise the dollar price of gold- - to our great relief.
If the Americans would only pool their gold stocks at Fort Knox—still over $15,000 million - with our miserable reserves of tinder fl,000 million I would hasten to endorse everything put forward by our gallant banker---St. George for England I3ol:on.
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