Professor Triffin on International Liquidity and the Role of the Fund

Professor Triffin on International Liquidity and the Role of the Fund Oscar L. Altman* N HIS RECENT BOOK, Gold and the Dollar Crisis (New Haven, I 1960), Professor Robert Triffin of Yale University draws a bold picture of the dangerous state of, and prospects for, international liquidity, and suggests expanding the role and changing the character of the International Monetary Fund to cope with these problems 1. The main part of this book (pp. 17-145) consists of reprints, with only minor changes, of two long articles published in 1959 in the Quar- terly Review of the Banca Nazionale del Lavoro: "The Return to Con- vertibility: or Convertibility and the Morning After" and "Tomorrow's Convertibility: Aims and Means of International Policy" (March and June issues, respectively). These articles drew upon his previous writings, notably Europe and the Money Muddle (New Haven, 1957) and his Wicksell Lecture for 1958, The Future of the European Payments System (Stockholm 1958, especially pp. 34-43). The book also contains a reprint of Triffin's statement to the Joint Economic Committee of the Congres^ of the United States in October 1959 and most of the questions and answers from the Committee's Hearings (pp. 1-17 and 167-91, respectively). The few remaining pages of the book are devoted to comments from other sources, including the Report of the Radcliffe Committee. The general thesis of these several studies was also treated in a paper, "The Gold Shortage, the Dollar Glut, and the Future of Convertibility," delivered at the August 1959 meeting of the International Economic Association, and an article, "Improving World Liquidity," in The Banker (January 1960). The most recent statements of Triffin's position are given in his paper, "Le Crepuscle de L'Etalon de Change-Or," presented to the Belgian Royal Economic Society in June 1960 and in his testimony before the Joint Economic Committee in December I960.1 * Mr. Altman, Advisor in the Research and Statistics Department, is a graduate of Cornell University and the University of Chicago. He taught economics at Ohio State University and was on the staff of the National Resources Planning Board and of the French Supply Council. He was Director of Administration of the Fund until 1954. He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals. 1 Comptes Rendus des Travaux de la Soci6t6 Royale D'Economic Politique de Belgique, No. 272; and Current Economic Situation and Short Run Outlook, Hearings Before the Joint Economic Committee of the Congress of the United States (86th Congress, Second Session, December 7 and 8, I960). The latter will hereafter be referred to as Hearings, 1960. 151 ©International Monetary Fund. Not for Redistribution 152 INTERNATIONAL MONETARY FUND STAFF PAPERS The printed record of both occasions includes his statement and the questions and discussion that followed. 2. Section I of this paper2 is an exposition of Triffin's diagnosis of present and prospective difficulties in the international financial area and of his prescriptions for dealing with these difficulties. Section II is an analysis of five questions that are basic to Triffin's proposals: first, the problems involved in obtaining a stable structure of international reserves; second, the need for changing the character of the International Monetary Fund (IMF) to provide additional international liquidity; third, the characteristics of the reserve structure contemplated by the Triffin Plan, including the role played by gold and by exchange guaran- tees; fourth, the operational and policy problems that an expanded IMF would have faced in recent years in assessing and managing the state of international liquidity; and fifth, some political and international implications of an expanded IMF. It should be noted at the outset that Triffin has focused attention upon some major problems of international liquidity and international financial organization. His diagnosis of present and prospective difficulties, and his recommendations for meeting these difficulties, are acute and thought provoking. They reflect his extensive knowledge of financial history and his working contributions to the solution of postwar problems. His diagnosis and his prescription are, nevertheless, highly con- troversial. His proposals involve a number of far-reaching changes in financial structure and operation, and in working controls over them. They deserve intensive and systematic examination. The present article tries to do this, but it does not attempt, except in passing, to discuss other suggestions of a less comprehensive character. Neither does it deal systematically with the increasingly important role of the International Monetary Fund, and of adjustments in its operating policy—past, present, and potential—designed to make it even more useful. These self-imposed limitations have given this article a more unrelieved critical cast than was originally intended. To modify this, however, would make an overlong article even longer. I. Professor Triffin's Views DIAGNOSIS 3. Triffin's diagnosis is that The most fundamental deficiency of the present system and the main danger to its future stability, lies in the fact that it leaves the satisfactory development 2 An earlier and somewhat differently arranged version of this article was published in Hearings, I960, pp. 175-207. ©International Monetary Fund. Not for Redistribution PROFESSOR TRIFFIN ON INTERNATIONAL LIQUIDITY 153 of world monetary liquidity primarily dependent upon an admittedly insuffi- cient supply of new gold and an admittedly dangerous and haphazard expansion in the short-term indebtedness of the key currency countries.3 4. The world's normal requirements for increases to monetary reserves appropriate to the growth of trade and the maintenance of convertibility, principally by the major trading countries, will certainly be greater than prospective additions to reserves resulting from gold production. In the ten years 1958-67, the shortfall will be at least $6 billion and it may be as much as $17 billion, depending upon whether trade grows during the period at the rate of 3 per cent or 6 per cent a year, and also upon the following assumptions:4 (a) the United States, Germany, Switzerland, and Venezuela will not increase their reserves; (b) in the next decade the United Kingdom and France will increase their reserves to 40 per cent of imports as of the end of 1957, or to $4.6 billion and $2.5 billion, respectively, and the reserve requirements of these two countries for the ensuing decade will involve an expansion of these base figures in line with the growth of their trade;5 and (c) sales of gold by the U.S.S.R. will average $200 million a year, that is, approximately the average of annual sales in 1956-58. Triffin calculates the reserve deficiency for the next decade, over and above $7 billion of gold additions to reserves, on the basis of four assumed rates of growth of trade, ranging from 3 per cent to 6 per cent a year, but he would probably be inclined to accept a higher rather than a lower figure.6 5. The gap between required "normal" additions to reserves and prospective additions to reserves in the form of gold cannot be filled by the growth of dollar or sterling balances. The gap cannot—and what is more, it should not—be filled by larger international holdings of these or any other national currencies. It is contrary to the interests of the United States and the United Kingdom to permit much additional 3 Gold and the Dollar Crisis, p. 100. 4 Ibid., pp. 49-50. 6 Reserves of the United Kingdom and France at the end of 1957 were $3.1 billion; reserves equal to 40 per cent of their imports in 1957 would be $7.0 billion, leaving an initial shortfall of $3.9 billion. Reserves of the United Kingdom alone at the end of 1957 were $2.4 billion. Reserves corresponding to 40 per cent of imports would be $4.6 billion; and if growth at the rate of 3 per cent a year is assumed, they would in 1967 be $6.1 billion. Under the same assumptions, French reserves in 1967 would be $3.3 billion. 6 The illustration of the world's reserve deficiency for a decade in the Wicksell Lecture was that "world trade and production are estimated to have increased in volume, over the last ten years, at a pace of about 6 per cent a year. A parallel rate of increase of the world's monetary reserves ($62 billion at the end of last year [1957]) would require their expansion by $3.7 billion annually." As for a low rate of growth, he stated that "the 3 per cent rate assumed by the Fund [in International Reserves and Liquidity] becomes plausible only when 'normal' peacetime experience is diluted with the abnor- mally low, and in fact predominantly negative, growth rates of wartime years and of the 1930's world depression" (Gold and the Dollar Crisis, p. 48). ©International Monetary Fund. Not for Redistribution 154 INTERNATIONAL MONETARY FUND STAFF PAPERS growth of dollar and sterling foreign balances, since growth of these balances weakens the net reserve positions of these countries. Moreover, it is not in the interests of the world to create international reserves in the form of exchange balances by unrequited capital exports to wealthy creditor countries; nor is it reasonable to tie the growth of international reserves to the needs of the domestic policies of the creditor countries whose currencies are so used. 6. The balance of payments deficit of the United States in the postwar period has increased markedly the official dollar holdings of all other countries, excluding those in the communist bloc The reserves of many countries are at comfortable levels, while some are large.

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