Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

34. Memorandum by the U.S. Member of the Board of Executive Directors of the International Monetary Fund (Southard)⁰

April 18, 1958.

SUBJECT

• IMF Resources in Relation to Prospective 1958 Needs

1. This memorandum makes the following points:

(a) Even if the U.S. recession is fairly sharp, its world impact will not be severe in 1958. A sharp recession prolonged into 1959 will cause trouble for other countries.

(b) The industrial countries have foreign exchange reserves which will enable them to get through 1958 without difficulty, with the possible exceptions of the United Kingdom and France. However, the underdeveloped countries are in a more exposed position and as a group their reserves do not provide any margin of safety.

(c) IMF resources in the aggregate are large. However, the amounts available to underdeveloped countries are relatively small and the amounts available to countries which are in actual or potential difficulty are particularly small. This raises the question of the feasibility and timing of an increase in the Fund’s resources.

2. The prospects for 1958

The Fund Staff have prepared estimates of the likely impact of the U.S. recession on the U.S. balance of payments and hence on other countries, based on two hypotheses, one, that U.S. industrial production in 1958 would be 8 per cent, and two, that it would be 15 per cent below the average of the last 12 months of the boom.

(a) The Staff estimate that on the assumption of a mild recession there would not only be no deterioration in the payments balance of the rest of the world with the U.S., but the “dollar gap” of about $2 billion which appeared in 1956–57 would disappear almost entirely. If the recession was deeper, the dollar gap would be little if at all worse in 1958 than in the base year.

(b) However, the Staff point out that a deficit vis-à-vis the United States in 1958 of about $2 billion would be more serious than it was in 1956–57, especially since IMF resources are considerably lower than they were in September 1956.

(c) By regions, the Fund Staff estimate that only Latin America would show a serious worsening of its dollar position in a mild recession in 1958 but both Latin American and the overseas sterling area would have a worsening of balance with the United States amounting to about $900 million and a worsening of global balance of about $1.3 billion, in a deep recession.

(d) The final conclusion of the Fund Staff is that a U.S. recession involving a 15 per cent decrease in production would cause embarrassment to many primary producing countries and might threaten sterling. If U.S. industrial activity continued for long at that level a payments crisis might supervene toward the end of 1958 or in early 1959.

3. On the whole it seems unlikely that there will be a liquidity crisis in 1958. In talks with the U.K. and other foreign officials U.S. officials will be justified in arguing that the situations to be dealt with will primarily involve the underdeveloped countries whose reserves tend to be low.

(a) The foreign exchange reserves of industrial countries are in reasonably good shape. All of them are benefiting by shifts in the terms of trade in their favor and this has thus far compensated for weaknesses in some export markets. The notable exception is France, which has not strengthened its reserve position to any appreciable extent.

(b) The evidences of strain are to be found among the underdeveloped countries. Of 40 representative countries in this group, 23 suffered losses of reserves in 1957. Moreover, relatively few underdeveloped countries have foreign exchange reserves large enough to provide any substantial cushion against declines in export earnings. Taking reserves as a per cent of annual imports as a measure, only 13 underdeveloped countries out of a group of 40 had reserves in excess of 50 per cent. These were Australia, Cuba, Egypt, Ethiopia, Iran, Iraq, Ireland, Pakistan, Taiwan (China), Thailand, Uruguay, Venezuela and Viet-Nam. Moreover, it will be seen that two of these countries, Taiwan and Viet-Nam, receive very large aid from the United States. Two others, Uruguay and Egypt, have substantial gold reserves which they would find extremely difficult politically to use to any appreciable extent. Ten other countries on the list have reserves ranging between 30 and 50 per cent of annual imports. These are Burma, Ceylon, Dominican Republic, Ecuador, El Salvador, Guatemala, India, Lebanon, Mexico and Syria. It is interesting to note that Mexico is on this list. Although Mexican reserves at the end of 1957 amounted to $431 million, they amounted to only 37 per cent of Mexico’s imports in that year, and thus were equal to only four months’ imports. The remaining 17 countries on the list at the end of 1957 had reserves amounting to less than 30 per cent of annual imports. In fact 11 of them had reserves amounting to less than 20 per cent. These were Bolivia, Brazil (net reserves), Chile, Costa Rica, Iceland, Israel, Nicaragua, New Zealand, Peru, Philippines, and Union of South Africa.

4. Resources available in the IMF are large in absolute terms but they are small relative to the potential needs of countries whose reserve positions are weakest.

(a) There is attached hereto a table¹ which shows the following situation. The Fund at the end of March 1958 had $2,585 million in gold, U.S. and Canadian dollars, and deutsche marks. The industrial and developed countries had unused portions of their quotas comprising the gold tranche, first credit tranche and second credit tranche amounting to $1,195 million, and the United Kingdom had a stand-by comprising the third credit tranche amounting to $325 million. The total of these availabilities is $1,520 million, which amounts to 3.6 per cent of the annual imports of those countries. As to the underdeveloped countries, those with quotas in excess of $75 million had unused portions of their quotas in the same tranches amounting to $495 million. The underdeveloped countries had unused quotas in those tranches amounting to $298 million, stand-by arrangements within the third credit tranche of $33 million and other third credit tranche facilities amounting to $139 million. The total of these amounts potentially available to underdeveloped countries is $965 million, or 4.6 per cent of their annual imports. The grand total of these amounts available to the industrial and underdeveloped countries which are members of the Fund is $2,485 million, which is $100 million less than the Fund total of gold and convertible or near-convertible currencies as shown at the bottom of the table.

(b) A second table has been attached which shows resources available to member countries which are in difficulty. The list is necessarily selective but it serves to show that, looked at from this point of view, Fund resources are relatively small. The 25 underdeveloped countries in the table have remaining only $103.1 million in the gold tranche and first credit tranche—that is, the portion of their quotas which may be drawn readily. They have $296.8 million in the second credit tranche which, under present Fund policies, they may expect to draw provided they are taking corrective measures which seem likely to be effective in dealing with imbalance. For some of these countries, such as Indonesia, this test may be very difficult to meet under present conditions. In any event, even assuming that the test can be met, the two amounts combined would provide assistance of about $400 million, which is less than 4 per cent of the annual imports of these countries. To this may be added another $66 million comprising the third credit tranche in the case of countries with very small quotas and which they may be allowed to draw on substantially the same terms of the second credit tranche. Countries with larger quotas have no such expectations since, as the first table shows, the funds would not be available to meet such demands.

5. This analysis raises the question of an increase in the Fund’s resources.

(a) A number of countries, notably the United Kingdom, are beginning to press for an increase in the resources of the Fund. The U.S. Government will have to decide what reply to give to this pressure. If the U.S. recession is still a matter of concern at the Annual Meeting in New Delhi, it is likely to be very difficult for U.S. representatives to remain silent on this matter.

(b) It has to be recognized that IMF resources would be inadequate to deal with any substantial balance of payments deterioration among the underdeveloped countries, if it should develop in 1958–59. For that matter, as the attached table shows, the Fund resources available to industrial countries amount to less than 4 per cent of their annual imports.

(c) A good practical case could be made out for an increase in Fund resources, from the U.S. point of view. An increase in Fund quotas is the only available way in which a U.S. contribution for balance of payments assistance would be substantially matched by contributions from other countries. For example, if the United States were to agree to an increase in its quota of $1 billion (present quota $2.7 billion), the prospects would be for total quota increase of about $3.5 billion. Of the $2.5 billion increase in quotas of other countries 25 per cent would be in gold, or $625 million. The U.S. increase would also be 25 per cent in gold. Hence the Fund would receive $875 million in gold and $750 million in U.S. notes, or slightly more than $1.6 billion in gold and U.S. dollars. In addition, the Fund would receive increased amounts of deutsche marks and Canadian dollars which would bring the total new availabilities up to around $2 billion, or double the U.S. contribution. Moreover, it should be kept in mind that repayments to the Fund in U.S. dollars automatically return to the U.S. Treasury until needed again by the Fund.

(d) The question is whether the Congress would be willing to agree to an increase in the U.S. quota in the Fund. This seems most doubtful under present circumstances. Very strong arguments by the Secretary of the Treasury and other high U.S. officials would be necessary to win Congressional support, including presentation of evidence that the world foreign exchange situation was in danger unless added support could be provided. At the present time this line of argument could readily lead to pessimistic speculation in foreign exchange markets.

(e) The conclusion to be drawn from the above line of reasoning is that an increase in the U.S. quota in the Fund is not feasible at this time. However, in forthcoming talks with the United Kingdom the U.S. officials might say that they were aware that Fund resources were inadequate, that it is not feasible for the United States to submit a request to Congress for an increase in U.S. quota at this time, but that the United States will watch developments and keep the prospects for a quota increase under review.

FAS

0. Source: National Archives and Records Administration, RG 56, Records of the Office of the Secretary of the Treasury, Robert B. Anderson, Subject Files, International Matters, 1957–1958. Official Use Only. Southard sent the memorandum to Secretary Anderson with a covering note of the same date stating that he thought it would be of use in connection with plans for talks with the British.
1. The tables are not printed.