Cynicism in Rio MONEY
'Rolling down to Rio' have gone all my friends of the financial world to attend the annual meetings of the International Monetary Fund and the World Bank. If this is their idea of a spree they will find themselves much mistaken. I read that there are only 2,000 hotel beds in Rio to cope with double or treble the number of financial excursionists. Clearly, it is a plot on the part of the French delegation to demon- strate to the Americans that if the world trading demand for bedding (gold reserves) is so greatly in excess of the supply, the price of beds (gold) must go up. This view is still held strongly by M Rueff and his friend, President de Gaulle. The French officials, I suspect, have only dropped the idea of doubling or trebling the price of gold for the time being while the pro- posal for SDR (Special Drawing Rights)—agreed to in London two months ago by the Group of Ten—goes forward for formal approval at this IMF meeting. But there is a snag. The French and Germans are insisting that the SDR resolu- tion must be passed in conjunction with a resolution making proposals for the reform of the IMF as a sort of package deal. The outcome is still in doubt as I write.
The SDR resolution has been described as an 'act of momentous monetary history' by IMF officialdom, as 'a vacuum disguised as money' by M Rueff, and as 'a licence to print farthings' by Mr Jock Bruce-Gardyne in this journal on 1 September. It all depends on how starry-eyed or how cynical you are. It is true that in addi- tion to the existing drawing rights-25 per cent of quotas automatically (being the gold tranche) and conditionally 100 per cent in additional credits—there are to be further special drawing rights (convertible into usable currencies) which members can use unconditionally at any time they like up to an over-all ceiling (not yet speci- fied) of between $1,000 and $2,000 million a year for an initial five years. The fund's total resources are at present over $20,000 million (or about $15,000 million if you deduct the unlendable currencies it owns) and an addition of, say, $7,500 million over the five years is not to be despised, particularly as the scheme could gradually be enlarged once it had been put into operation. But the snag is that it cannot be put into operation without the approval of 85 per cent of IMF votes (which means that the six European Common Market countries voting en bloc could veto it) and until the American balance of payments has been restored to sur- plus. This may be never—certainly never while the Vietnam war lasts.
The SDR agreement has been welcomed as a victory for the Anglo-Saxons, especially for Mr James Callaghan who has lately been the patient chairman of the Group of Ten, but it has also been claimed as a victory by the obstructionist French. Unless you can believe in an early end to the Vietnam war and the American deficit, unless you can believe that leopards do change their spots and that the French will drop their intransigence vis-a-vis the United States you may be forced to the con- clusion that it is all pie in the sky. My belief is that the French are only playing for time. I am sure that they have no intention of allow- ing the creation of 'paper gold' of the Special Drawing Rights. They are convinced that the increasing Euro-dollar market created by the ever-rising deficit on the American balance of payments (now running at about $2,000 million a year), is throwing the international monetary system off gold and leading to a dangerous and potentially inflationary situation. But they do not want to force the Americans into a violent riposte by demanding the conversion of all surplus dollars into gold. They are afraid that any aggressive action might induce the Federal Reserve to counter-attack by putting up a notice at Fort Knox that they are no longer prepared to buy gold at $35 an ounce. Such an ultimatum could produce chaos and lead tem- porarily to a fall in the price of gold through dishoarding. The French are therefore prepared to play along with the American-supported SDR resolution and wait patiently for the time to come when the us stock of gold falls below $10,000 million—it is now over $13,000 million —and frightens Congress into the more con- ventional notice at Fort Knox of `no more sales of gold at $35 an ounce.' That would be the signal for a world rise in the price of gold, which is really the French official aim. Seeing that the new supply of gold is insufficient to support the growing volume of world trade they honestly believe that a rise in the price of gold is neces- sary and bound to come.
It is a relief to turn from the sheer cynicism of the IMF annual meeting to the idealism which always lies behind the reports of the World Bank and its affiliates IDA and IFC (International Development Association and International Finance Corporation). Turning over the pages of the World Bank report and seeing photo- graphs of a Thai farmer walking beside a new irrigation ditch provided by a Bank loan and an African worker adjusting the bogie on a tank wagon in Kenyan workshops financed by the Bank one would think that western man had at last become beneficient as well as rational. But alas! cynicism creeps in even when the rich help the poor with aid. Although the Bank and its affiliates disbursed over $1,000 million for the first time in the year, bringing the total loans and credits up to $12,000 mil- lion, the four largest donor countries, account- ing for 80 per cent of the IDA credits, have failed to increase their aggregrate aid between 1961 and 1966 in spite of the growth of their own economies. The IDA which makes the 'soft' loans has now run out of funds and is anxiously waiting to hear what the donors will provide. It is already hinted that there will be no more aid except that tied to the donor's exports. The 'hard' loans of the Bank are now costing the -,.recipients in interest and sinking funds no less than $4,000 million a year. In fact, the service of the loans is growing at an annual average rate of 10 per cent which is faster than the rate of increase of the developing countries' exports. The result is that the more the developing coun- tries borrow, the more they will get into the 'red' on their balance of payments. It is obvious that if the western world really wants the non- communist half of the world to grow and to feel 'loyal' it will have to give up its old- fashioned banker rules for the servicing of debts at the prevailing high rates of interest. The Bank, unfortunately, has had to pay more for the money which it has raised itself on the world's capital markets ranging from 5.35 per cent in the us to 6.41 per cent in Canada. It charges its borrowers about 2 per cent above that. Dear money in time will kill the develop- ment programmes of the underdeveloped western world.
Of course, what is important at Rio is not what is resolved at the meetings but what goes on behind the scenes. Mr Callaghan is again discussing with his friends how to stop interest rates rising any further, how to cheapen government money and how to bring sterling into a common European currency. It could all have been done more cheaply and comfort- ably in London and Paris.