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THE last days of 1958 provided the most spectacular move that has occurred in the monetary sphere since the end of the war; no less than 12 European countries simultaneously introduced "non-resident" or external convertibility of their currencies. The essence of this move is that non-resident holders of these currencies can now use them freely to purchase any other currencies, including dollars. At one time it was thought that such a degree of convertibility would be feasible only if rates were allowed to fluctuate within fairly broad margins. That idea has now been abandoned; rates in the exchange markets will fluctuate only within narrow margins--maintained if necessary by the intervention of central banks or exchange funds. As a result of this development, the basis has been laid for currency stability over a very wide area.
One of the countries, namely Western Germany, has gone further, and has extended to its own citizens the same freedom to purchase foreign currencies as is granted to non-resident holders, although it has not dismantled its system of exchange control. In practice, other countries, too, may go beyond the limits of external convertibility, and in certain circumstances extend the right of convertibility to their nationals. Although external convertibility of sterling does not apply to residents of the sterling area, in practice the monetary authorities in that area have been allowed great freedom to change their sterling holdings in London into other currencies.
When these 12 European countries introduced external convertibility, the European Payments Union lapsed and was replaced by the European Monetary Agreement. The former has done a great deal of good work over the ten years it has been in operation, but it was technically so constituted that it could not continue to operate under a system of external convertibility. The European Monetary Agreement was drawn up in 1955 when the introduction of external convertibility was first envisaged; it was to become operative in place of the E.P.U. the moment that external convertibility was established. However, adverse circumstances then and in the following three years delayed the taking of this major step. A suitable opportunity presented itself toward the end of 1958 when the French authorities were anxious to adjust their currency system before the Common Market came into effect on January 1, 1959, and while the de Gaulle government was still in possession of full powers in the financial field. For the British, the approach of the seasonally strong period in the balance of payments, which covers the first five months of the year, also made the end of 1958 an appropriate moment to take a step that they had been contemplating for some time. It was very important that the opportunity should be grasped, for any further postponement would have meant still further delay in moving toward full convertibility.
With the introduction of external convertibility, multiple exchange rates in Europe have virtually disappeared together with the need for official permission for a number of transactions; not the least important aspect of this step has therefore been the elimination of a great deal of red tape in relation to foreign payments. External convertibility does not in itself imply greater freedom of trade, but the very fact that so many countries in Europe could agree on these currency steps at a time when discussions on the future of their trade relations were distinctly acrimonious may be expected to have a very useful psychological impact. In these matters there is a close interaction: the genuine value of a currency cannot really be known before trade moves freely, and, conversely, the strengthening of currencies, of which convertibility is a sign, invalidates many arguments which are often advanced in favor of trade restrictions. Now that countries can, if they wish, convert their earnings in all the main currencies into dollars, they no longer have any reason to be specially concerned about their balance in relation to the dollar area as such. In other words, the famous "balance of payments reasons," so often brought forward in the GATT negotiations, have lost a very great deal of their validity.
Moreover, the greater freedom in payments has already in fact been accompanied in some countries by the further relaxation of restrictions on imports, and in other countries moves in this direction have been announced for the near future.
At the Commonwealth Trade and Economic Conference in Montreal last September, the British Government announced the removal of virtually all remaining restrictions on dollar imports of raw materials, basic foodstuffs and industrial goods, and declared its intention of making a start this year in freeing dollar imports of consumer goods and remaining foodstuffs. In France, the devaluation of the franc, the move to external convertibility and various internal measures, including budgetary economies, permitted a relaxation of the severe import controls previously in force; from the beginning of this year imports have been liberalized up to 90 percent for France's European partners, and by more than 50 percent for the dollar area.
When we try to answer the question what developments made these currency moves possible, and whether the moves are likely to be successful in the future, we must look back upon the monetary position in the years immediately after World War II.
A great war cannot be conducted without inflation, but the techniques of control adopted during the Second World War were remarkably effective in keeping down costs and prices. The result was that at the end of the war, in 1945, most countries were left with excessive liquidity--with more money in the form of notes, deposits and other liquid assets than was warranted by the supply of goods and services available at the prices then applying; a situation commonly referred to as too much money chasing too few goods. Faced with such a situation the authorities had open to them two alternative lines of action. One was to cut down the money supply by a sudden harsh measure; this was the course taken in Western Germany where, in the summer of 1948, 90 percent of the value of notes and bank deposits was cancelled overnight--a painful but in its way very effective remedy. The other course, adopted in most countries, was to achieve balance more gradually by combining increased output of goods and services and higher prices with the enforcement of firm credit measures which would prevent the money supply from increasing at the same pace as the gross national product. In most countries it was not easy to give up cheap money policies, and to restrict credit through higher interest rates and other measures; but public opinion has become increasingly tired of inflation, and this change in the attitude of the public has made it possible for the authorities almost everywhere to take steps which a few years ago would have seemed out of the question.
In Great Britain, for instance, the bank rate was raised in 1957 to 7 percent--the highest rate ever applied in peacetime. Similarly, the government's firm attitude at the time of the bus strike in the summer of 1958 did much to persuade public opinion that continuous cost increases on a large scale would, and should, no longer be tolerated. Over the whole period 1946 to 1958, the gross national product of the United Kingdom rose by 131 percent, while the money supply increased by only 19 percent and, over the last five years, has in fact been kept almost constant. For Western Europe as a whole, total output rose in volume between 1947 and 1957 by 70 percent; prices rose by 67 percent, and in recent years the increase in the money supply has on the whole been kept within narrow limits. These results could not have been achieved without cautious fiscal and credit policies, and due attention to the movements of wage costs.
It is not surprising that those countries which after the war were the first to discard cheap money and to adopt, instead, flexible credit policies included several which, like Italy and Germany, had suffered most from inflation in the past. When the official discount rate in Germany was raised to 6 percent in 1950, and 8 to 11 percent had to be paid for bank credits, there were many who feared that such high interest rates would greatly curtail the volume of investment--and thus reduce the rate of expansion. But it was soon found that the cautious monetary policies had just the contrary effect; they helped to improve monetary confidence and, indeed, to increase the flow of savings which formed the basis for a high volume of investment. In that way it was proved that economic expansion could not only be combined with, but was in fact stimulated by, monetary stability. Example being more effective than precept, other countries began to take heed, and within a few years a flexible monetary policy had regained its proper place as an indispensable part of the general economic and fiscal policies of most countries.
That these European countries have been able to make this recent step forward in the monetary field is due in the first place to their own efforts; but they have also been greatly helped by some important external factors. In addition to Marshall aid, which was so helpful in the period of postwar reconstruction, these countries have recently benefited from the decline in the prices of primary products, from the favorable repercussions of certain policies in the United States, and from the activities of the International Monetary Fund.
A consideration of these factors gives an opportunity to review their impact in a wider context, and to take into account their influence on general monetary issues. The decline in the prices of primary products has had the effect of improving the balance of payments position of industrialized countries, since they have been able to import more cheaply, while the prices of the finished products they export have been maintained, and even in some instances risen. It has also made it easier to keep down the general price level and the cost of living in these countries; in many cases it has also eased the task of the authorities in applying restrictive credit policies, since the lower level of raw material prices reduced the need for working capital to finance inventories and, hence, reduced the demand for credit from the banking system.
For the primary producers themselves, the effect of these price movements has, of course, been quite the opposite. Even when the volume of their exports could be increased or maintained, the amount they received in foreign exchange was generally reduced. These reductions were the more difficult to bear as these countries often had heavy fixed obligations in the form of debt service, etc. The primary producing countries have naturally sought international help to arrest the decline in the prices of their products; and there is a general feeling that the industrialized countries ought to do what they can to help bring about somewhat better conditions. With the improvement in the world business trend, it may be expected that the demand for primary products will increase again, and this should give some support to prices and in any case make it easier to dispose of accumulated stocks.
However, this is not a problem that arises only in connection with general cyclical fluctuations in world business conditions. The statistics show that the decline in raw material prices had already begun during the boom of 1956-57. This seems to indicate that we are also faced with some deep-seated structural changes. Wool and cotton--and especially cotton--have had to meet increasing competition from synthetic fibers; natural rubber has in the same way had to compete with synthetic rubber; the prices of several light metals, particularly copper, have felt the effect of competition from the growing output of aluminum; and the coffee producers of Latin America must cope with the increasing production of coffee in Africa, as well as the shift to instant coffee, which uses fewer coffee beans. These are all changes which have, in different degrees, affected individual primary producers, and, whatever may be the helpful influence of general measures of monetary policy, the structural difficulties require something more. Many primary producers are in fact faced with a long-term problem for which the only proper solution is probably a diversification of their own production, and for this they will need new capital and also better technical knowledge.
It is unfortunate that this decline in the prices of raw materials should have occurred just at the time when several primary producing countries have obtained their political independence. Their reduced earning capacity weakens their balances of payments and their increased economic difficulties accentuate their need for investment, not only for the diversification of their production but for the general expansion of their economies.
It is now increasingly recognized that the search for solutions to the problems of the less-developed countries requires action in many fields. For these countries, too, however, it is certain that sustained growth will best be ensured by monetary stability. Experience has shown that inflation does not for long produce any fresh internal resources to sustain investment. Moreover, it impairs the creditworthiness of the countries concerned and thus discourages the flow of foreign capital which they so badly need.
United States policies--the second outside factor which has influenced recent monetary developments in Europe--may usefully be considered against the background of Europe's fears with regard to the impact of fluctuations in the U.S. economy on the rest of the world. It has often been said that the American economy is prone to vacillate between extreme booms and depressions, or is, in other words, so volatile that it would be dangerous for other countries to link themselves too closely to the United States--an argument that has often been advanced in favor of fluctuating exchange rates vis-à-vis the dollar. There is no doubt that this particular fear has greatly diminished in recent years. The fact that the postwar recessions have on the whole been rather mild, and in any case short-lived, has been taken to indicate that the U.S. economy has developed a considerable capacity to resist contracting influences. Moreover, the flexible monetary policies followed in the United States since 1951 have inspired confidence in the willingness of the United States to take the measures appropriate to each phase of the business cycle. The fact that the recent moves to convertibility in Europe have been made on the basis of stable exchange rates in relation to the dollar reflects this increased confidence in the stability of the American economy.
Another fear, of which much less has been heard in recent months, concerned the dangers of a persistent dollar shortage. This fear was based on a variety of arguments, not always impressive for their consistency. The most widely held opinion was that a recession in the United States would inevitably be accompanied by a scarcity of dollars for other countries. Now in this last recession of 1957-58, the contrary happened. In 1958, the outflow of gold from the United States amounted to about $2.2 billion and, at the same time, foreign holders increased their dollar balances by about $900 million. Those who have refused to believe in the inevitability of a structural or long-term dollar shortage (or whatever it has been called) have generally argued that the relatively high level of wages and living costs in the United States would, in the long run, make it easier for other countries to compete with American products. They also believed that the United States, for its own good reasons, was likely to pursue a policy of credit expansion at as high a rate as in other industrialized countries. As a matter of fact, in 1958 credit expansion in the United States was at a higher rate than that in Europe generally, and this has been of very great importance for developments here and elsewhere.
A careful examination of the situation in mid-1957 showed cause for some apprehension about the trend of affairs in the United States, and even elsewhere. The decline in raw material prices, the reappearance of surplus capacity in several lines of business, and the fact that for nearly two years there had been virtually no change in the total amount of demand deposits and currency outside of banks, resembled rather too much the situation which had prevailed in 1927-28, immediately preceding the Great Depression.
It could well be argued in 1957 that there was need for increased liquidity--not so much in the form of reserves held by central banks or governments (what is generally called "international liquidity") as in the form of credits provided by the private banking system, which determine the amount of cash resources within the economy. By the middle of 1957, the excess liquidity inherited from the war had been worked off in quite a number of countries and a fresh impetus was thought to be required through an expansion of bank credit which could gradually be transformed into effective purchasing power. It was only natural that those countries which were in a strong position, such as the United States, should have to take the lead in any expansionist policy.
The occasion for such a lead was provided when recession set in in the United States during the second half of 1957. The Federal Reserve System then began to increase the cash of the private banking system, which was followed by an expansion of the credit volume at the rate of about $1 billion a month--$12 billion in all over the year. Together with an increase in the Government's defense orders, this credit expansion was one of the potent factors in bringing about a recovery of business activity in the second half of 1958; it also made it possible for the banks to grant foreign credits more readily, and for the economy as a whole to continue its foreign investments at a high level. Thanks to the large gold holdings of the United States, which still owns one-half of the monetary gold stock of the free world, the authorities could continue a policy of credit expansion, even after the gold had begun to flow out. This was a direct deviation from the traditional and sometimes too rigid rules of the old gold standard, which required the adoption of a restrictive credit policy whenever gold reserves declined. It is unlikely that without this credit expansion the other factors would have been sufficiently powerful to stage the recovery. Thanks to the resilience of the American economy, and the various measures taken, consumers' income was maintained, and with it the level of imports. Exports declined from the peak reached in 1957, when they had been exceptionally high as a result of the Suez crisis and the pronounced boom, which had forced Europe to buy more gasoline, coal and steel from the United States.
It was this change in the trade balance of the United States, together with the high level of U.S. investment abroad, both on public and private account, that led to the outflow of gold and the accumulation of larger dollar holdings by other countries. This redistribution of monetary reserves has been particularly helpful to the European countries, which were able on the basis of their increased reserves to make their moves toward external convertibility and greater freedom of trade. During 1958, the total monetary reserves of these countries increased by $3.6 billion, from $17.1 billion to $20.7 billion. This addition to reserves was not entirely due to the favorable balance with the United States, since gold was also acquired from current gold production, and from Russian sales; gold and dollars were also acquired as the result of favorable balances with other countries.
The outflow of gold from the United States has, of course, been reflected in a relative weakening of the dollar in the exchange markets. This has led to a remarkably quick shift in public opinion from one extreme to another; instead of anxieties about a dollar shortage, fears began to be expressed that the emergence of inflationary pressures in the United States might seriously affect the exchange value of the dollar. As often happens in such cases, certain of the arguments advanced have clearly been erroneous. There is, for example, no real basis for reports about "a flight from the dollar," since foreign countries today hold larger dollar balances than they did a year ago.
Better informed opinion has attached more weight to the deficit in the United States budget, to the pressures for higher wages, and to the inflationary sentiment in the country. The Administration did well to resist the widespread demands for a reduction in taxes in the spring of 1958. If these demands had been granted, the reduction of taxes could hardly have become effective early enough to contribute to shortening the recession--which in any case proved to be relatively brief; the reduction would rather have increased the deficit later when recovery had already begun, thereby adding dangerously to the inflationary pressures.
To obtain a balanced view of the situation, account must be taken not only of the existing inflationary pressures, but also of certain anti-inflationary factors that are operating in the American economy. In the first place, there is still a great deal of unused capacity, and there has been a considerable improvement in productivity. Secondly, there is a certain amount of unemployment, notably higher than the average for recent years, which--however undesirable in itself--is likely to exert a moderating influence on labor relations and wage movements. Third, the still relatively low prices of raw materials will help to hold down wholesale prices and the cost of living. Fourth, there is the increased foreign competition which is making itself felt in the American export trade, and also to some extent in the domestic market through the impact of imports; this, too, will tend to hold down prices. Finally, there is the more restrictive Federal Reserve policy which is designed to ensure that borrowing to cover the budget deficit in the current fiscal year will be made in the market, and not by an extension of bank credit.
With business recovering from a recession, it is of course in accordance with the best modern theories of compensatory fiscal policies that the budget for the coming year should be at least in balance. A balanced budget is also called for from the point of view of debt management. The reception of the Treasury's conversion offer early in February is of considerable interest in this connection; holders of the maturing issues asked for cash payments of no less than $2.1 billion. Most of those who chose cash rather than conversion were probably corporations taking the opportunity to strengthen their cash positions in anticipation of higher expenditures and outlays on plant and equipment. The private sector of the economy is therefore beginning to use the liquid resources acquired during the recession, and temporarily invested in government bonds, in ways which will add to active purchasing power. In such a situation, it would in fact be desirable to have a surplus in the budget to offset this increased spending of liquid resources by the private economy. Far from impeding business expansion, a cautious budget policy would, at the present juncture, provide the proper basis for growth of the national product at a rate which can be sustained.
In the present recovery phase of the business cycle, it can safely be expected that all current savings will be readily invested, and there is then no need for increased public spending to ensure the maximum rate of sustained growth. A higher level of public expenditure would, indeed, be likely to provoke higher costs and prices which could easily lead to a distortion of the markets, and with it the danger of stagnation and increased unemployment. Such a situation would be particularly dangerous for an economy which already has a high cost level, and is meeting increased foreign competition.
Taking all the circumstances into account, including the inflationary psychology which still persists in some quarters of the American public, there seems to be a need for a clear demonstration that inflation will be resisted; for this reason, too, a balanced budget would serve a very useful purpose. Fortunately, the recent stability in the cost of living index has begun to impress the public, and there is a fair chance that, with appropriate fiscal and credit policies, the fears of continuing inflation will soon be abated.
In the field of foreign trade, American firms will more and more have to take account of the fact that other countries are now able to deliver fairly promptly and can often quote lower prices. It seems probable that U.S. export possibilities will be increasingly restricted to articles for which this country has long held a position of superiority, and to some new articles which have been developed here in recent years; but even in those lines, American firms will have to keep a closer watch on their costs and pay more attention to foreign tastes and requirements. When there is growing foreign competition on the home market, there is a temptation to grant increased protection to American industries. But that can easily become a double-edged weapon: protection will keep out imports, but at the same time, by making it easier to sell on the domestic market, it will tend to relieve U.S. producers from the necessity of having to adjust themselves to the requirements of the export trade.
It must not be forgotten that the United States is also a large exporter of raw materials, and that export prospects in this line are likely to improve as world trade expands again. This expansion has probably already begun under the influence of the recent recovery in the United States, and it seems likely to be given a further impetus by developments in Europe. It is of great importance that the recent convertibility measures in Europe were taken from a position of strength and not from weakness. This strength is revealed by the fact that convertibility has been introduced in an environment of falling discount rates. In the first six weeks of 1959, after the move to convertibility, the official discount rates of Belgium, France, Germany and the Netherlands were reduced. In the United Kingdom, restrictions on bank credit had already been relaxed in the summer of 1958, and the bank rate was progressively reduced from 7 percent at the beginning of the year to 4 percent in November 1958.
This easing of credits in Europe may well have an influence on the balance of payments between Europe and the United States. Until very recently the combination of restrictive credit policies in Europe and expansionist credit policies in the United States encouraged a flow of funds to Europe, both on current and capital accounts. Now that the European countries are in a stronger position and are adopting expansionist credit policies, including a reduction in interest rates, and now that the authorities in the United States seem likely to hold to tighter credit policies in conjunction with a balanced budget, the prospects are that the outflow of gold from the United States may be moderated, if not reversed.
Much more could be said of the impact of the U.S. economy on monetary developments in other countries, but it is time to consider the third factor which has been of importance for the recent introduction of external convertibility in Europe, namely, the influence of the International Monetary Fund.
While foreign aid was being received under the Marshall Plan and other arrangements, there was little or no need for European countries to turn to the Fund with requests for assistance. But such a need suddenly arose in connection with the Suez crisis, which primarily affected sterling. Nobody can tell what the consequences might have been in this emergency, not only for sterling but for other currencies, had not the International Monetary Fund in December 1956 been able to grant financial assistance to the United Kingdom in the total amount of $1.3 billion. At the height of the boom in the following year, when loanable funds became scarce, Belgium, Denmark and the Netherlands were also able to make use of the Fund's resources. Early in 1958, France obtained financial assistance from the Fund, supplementing credits obtained from other sources, and this enabled it to put into effect a comprehensive stabilization program. All in all, it is no exaggeration to say that without this timely assistance from the Fund the recent moves to external convertibility could probably not have been made. One might even go a step further: the proposal for a substantial enlargement of the Fund's resources through increases in quotas, initiated at the Fund's annual meeting in New Delhi last October and since approved by the Governors of the Fund, cast its shadow before it. There can be little doubt that the expected enlargement was one of the considerations which led the European countries to proceed to external convertibility.
The purpose of the International Monetary Fund is precisely to help its member countries to establish proper monetary conditions, and in that way to assist in laying the basis for expansion in world trade and production. The Fund is concerned with the par values of currencies, it conducts consultations with member countries regarding exchange restrictions and other matters, provides technical assistance to its members, and through the financial assistance which it is able to grant to countries in need, it can help to ensure the restoration and maintenance of balanced conditions. Gradually, over the years, the Fund has established certain principles which govern the access of member countries to the use of its resources. Each country has a quota which determines its contribution to the Fund's resources, its voting power, and the extent to which it may obtain financial assistance from the Fund. In the case of a request to draw against the first 25 percent of its quota, an amount normally equivalent to its own gold subscription, a member country has the overwhelming benefit of the doubt; for drawings within the next 25 percent of the quota, the member is required to show that it is making reasonable efforts to solve its own problems. Requests for drawings beyond these limits, however, require substantial justification: namely, that the drawing must be in support of a sound program likely to ensure enduring stability at realistic rates of exchange.
Access to the Fund's resources is therefore not automatic, but each case is considered on its merits. The Fund is not just another additional source of credit, but is recognized more and more as a source of credit that is available in substantial amounts only to member governments that have satisfied the Fund of their intention and capacity to restore balance. In this way the Fund contributes to the observance of monetary discipline, which is as important for the proper functioning of the international monetary system as for the restoration of monetary order in the particular country. One of the results of the breakdown of the gold standard during the Great Depression in the 1930s was that the rules of that standard no longer commanded the same allegiance as before. But rules of some sort there must be; and the Fund has helped to establish a set of rules which may be said to represent a synthesis between the old gold-standard rules and the need for more conscious management of monetary affairs in the increasingly complex world of today.
It has been the experience of recent years that countries are willing to discuss their affairs much more frankly with Fund officials than with representatives of individual governments; this is of particular importance when it comes to the elaboration of effective stabilization programs. When such programs have been elaborated and put into effect, the countries concerned have often arranged to have the assistance received from the Fund supplemented by credits from other sources, including the Export-Import Bank, the U.S. Treasury, the European Payments Union and, in some cases, commercial banks in the United States.
In this way the Fund and the other financial institutions are complementary. To appreciate the rôle of credit in the international system which is being developed, it is useful to stress one particular feature relating to the replacement of the European Payments Union by the European Monetary Agreement. Under that Agreement, ad hoc credits may be granted to individual countries, but the automatic credits which were obtained by member governments under the rules of the European Payments Union have now disappeared. As a consequence, the financing which is necessary for the movement of goods is being transferred more and more to the regular channels of the market, to the private banks in particular for short and medium-term credits, and to them and other institutions for long-term issues. It follows that countries which need to borrow are increasingly having to pay attention to their creditworthiness, and to that end to observe the required self-discipline in their financial management.
Thus neither the new European Monetary Agreement nor the International Monetary Fund competes with private credit sources. On the contrary, they help to establish conditions under which private banking can operate more securely; in fact, these official institutions supplement the market forces in situations where the market cannot itself do the work that is needed. The private banking system would find it difficult, not to say impossible, to cope with the strains of an acute emergency such as that of the Suez crisis. At such a time substantial sums have to be provided promptly and at considerable risk, under conditions which are hardly suitable for institutions responsible for funds belonging to depositors and shareholders. In emergencies of this sort the Fund's assistance may well be indispensable in preventing a crack in the exchange structure. Experience has shown, as was learned very forcibly in 1931, that once a crack starts it may quickly spread to other markets, and make it very difficult to limit its effects. It may lead to a series of forced devaluations of both minor and major currencies--devaluations not dictated by the realities of foreign trade and competitive prices.
Moreover, private banks cannot negotiate stabilization programs. When a country is clearly in an unbalanced condition, private banks may properly be deterred by the risks involved from granting further credit facilities. It is only if a comprehensive program is adopted and put into effect that the risks will be reduced. But once the programs are agreed upon, and Fund assistance has been extended, the banks can give valuable support; and when the programs succeed, the banks obtain new opportunities for business.
Since the beginning of its operations, the Fund has made available about $4.1 billion to 36 countries, of which approximately two-thirds was provided during the past two years. At the end of 1958, the Fund held $2.3 billion in gold and U.S. dollars, but of this amount the uncommitted funds available were only $1.4 billion, as compared with $3.5 billion at the end of 1956. The proposed enlargement of the Fund's resources, which is now before the parliaments of the member countries, would increase the Fund's holdings in gold and U.S. dollars to about $3.7 billion; and the Fund will also be able to utilize more readily other currencies, especially after the recent introduction of external convertibility. In this way, the Fund's position will be greatly strengthened. Experience of recent years has shown how in an emergency, or even in a period of exchange tension, movements of funds from one market to another are likely to be on a large scale. It is for this reason, particularly, that members have to be assured that there are sufficient secondary reserves available in case of need. The hope is, of course, that no serious emergency will arise, and that the additional resources which the Fund is now to receive will not, therefore, need to be drawn upon. Their main purpose is to be potentially available as a second line of reserves; and this will, in itself, make countries more ready to take those constructive steps which will lead to a really stable monetary system. All this is not to say that the Fund does not expect to make financial assistance available to countries in the future. There are many occasions other than emergencies when the Fund's assistance can be of great help, not least in connection with stabilization programs; but if the European monetary situation continues to improve, the Fund's activities will probably be increasingly directed to member countries in other parts of the world, particularly to the underdeveloped countries.
These are in fact the countries which have made the most frequent use of the Fund's resources in recent years. While their major need is for capital for development purposes, these countries, like any other, may be exposed to the risk of temporary difficulties in their balance of payments. The justification for the Fund making its resources available must always lie in its conviction that, in each case, the need for assistance is in fact temporary, and that the resources which it provides will be returned to the Fund within a three to five-year period. For the underdeveloped countries, Fund assistance may have a particularly interesting advantage, since arrangements made with the Fund often open the way for the inflow of long-term capital from both official and private sources.
It is often said that the present generation lives in an age of anxiety and, looking at the political situation throughout the world, one finds much justification for such a statement. To a great extent, however, economic life pursues its course independently of political disturbances. The recent introduction of external convertibility in Europe is a case in point, especially as it has been followed by calm and steady exchange markets. In the 1930s there was much flight of capital from Europe seeking safety from political risks. In this age of nuclear weapons, the risks have spread so widely that fear of war has had little influence on capital movements, which are increasingly responsive to economic considerations.
The authorities are of course still faced with many difficult tasks: they must seek to alleviate the difficulties of primary producers; they have to resist inflationary pressures; and they must establish the proper basis for continued economic growth and an expanding world trade. But these difficulties should not be allowed to obscure the fact that there have been very real economic and financial achievements in recent years. Not only have several exchange crises been successfully overcome but the whole international exchange structure has been considerably strengthened. Recessions have been short-lived. Assistance has been provided to underdeveloped regions and effective stabilization measures are being taken in an impressive number of countries. The chances are that in many fields progress will continue, provided policies proper to the ever-changing economic conditions are pursued. As always, character, courage and conviction are needed, but there is no reason to think that they will be lacking.