Hold That Line

In Washington's Sheraton-Park Hotel, 68 member nations of the International Monetary Fund met last week to grapple with what Xenophon Zolotas, governor of the Bank of Greece, wryly termed "numismatic plethora." The inflated phrase aptly described the basic cause of inflation--a common crisis of too much money and too few goods. Not even the Greeks had a word for the cure. Yet all knew that the fund's work in stabilizing currencies by strategic loans was one of the free world's most powerful weapons.

"Uppermost in our minds" were three "haunting questions" posed by Swedish Economist Per Jacobsson, the fund's managing director. The problems: 1) Is it possible to halt inflation in a world so anxious for expansion? 2) Can the ravenous capital appetites of underdeveloped countries be appeased without further inflation (see below)? 3) How can world currencies, undermined by inflation, be stabilized?

Top Investment. As its answer to question 3, the fund ended fiscal 1957 with a currency-supporting record that topped the entire previous total of business in its ten-year career. To halt a run on sterling in the Suez crisis, the fund gave the United Kingdom a dollar loan of $561.5 million and stand-by credit of $739 million, its biggest single deal to date. The fund gave temporary first aid to the slumping reserves of countries "with rather ambitious development programs" (Argentina, Denmark, France, India, Japan, The Netherlands). It eased seasonal trade deficits in countries with only one major export crop (Cuba, Honduras, Nicaragua, El Salvador). It backed programs in Latin America (Chile, Colombia, Bolivia, Paraguay, Peru) to simplify systems of multiple exchange rates that threaten trade stability by favoring some foreign customers at the expense of others.

Having poured out a total $1.47 billion in loans and $874 million in stand-by credits, the fund's liquid resources had been cut by 50% to $1.55 billion in a single year. It was time, suggested Director Jacobsson, to consider hiking the quotas of member nations; those of the charter nations have not been changed since Bretton Woods in 1944.

More Goods. As for the overall onslaught of inflation, Jacobsson voiced an optimism that took some of his listeners by surprise: "In some countries, at least, recent increases in the cost of living may be partly regarded as a belated adjustment to earlier inflation in that the cost-of-living indexes have shown a much smaller increase than the wholesale prices. Commodity prices have been falling for some time now on the world markets, and quotations on stock exchanges have shown considerable weakness. There are indeed some signs that inflation may no longer be dominating the whole economic pattern."

For this reason Jacobsson warned: "When the tide turns, there must be sufficient flexibility for money rates to be eased." Moreover, underdeveloped countries that rely on inflation in more advanced countries, particularly the U.S., to increase the price of their raw materials, are now doing so at their own peril. "If the countries do not stop their inflationary movements, they will probably not be able to rely on the U.S. to save them. The U.S. has arrested inflation."

Defense of the Pound. For Great Britain, desperately battling to keep steady the value of the pound, he also had some encouragement. "On the basis of present indications, sterling is certainly not overvalued."

But that was a fact that Britain had yet to prove to the speculators and merchants of the world. The speculators had sold the pound short in the hope of devaluation, or had sold it to buy German marks in the hope that they would be revalued upwards, possibly both steps to be taken at the fund meeting. Merchants had engaged in a game of what Jacobsson called "leads and lags." The leaders (British importers) had sold sterling to buy dollars and other foreign currencies to pay their bills well in advance of due dates, thus save money come devaluation. On the other hand, the laggers (foreign traders) had delayed buying sterling to pay their bills, hoping to settle with a cheaper pound. The unexpected drain on sterling might run as high as $1 billion unless the British convince the world that they have the determination and resources to defend the pound.

Stronger Remedy. Rising at the fund meeting, British Chancellor of the Exchequer Peter Thorneycroft showed the determination. "I have not come to discuss the exchange-rate parity of the pound," said he. "It stays at $2.80. I stated this before I left London. I repeat it now.'' One cogent reason was a stronger British trade surplus than expected, equivalent to $600 million in the year ended June 30, against previous official predictions of $350 million. Even at the risk of unemployment from the tightening of money by the Bank of England fortnight ago, said Thorneycroft, Britain will defend the proud pound. To add to her resources, she will draw down a $500 million credit from the U.S. Export-Import Bank, can also call on her $738.5 million stand-by credit from the Monetary Fund.

For West Germany, Hans Karl von Mangoldt-Reiboldt, alternate fund governor and chairman of the European Payments Union, spoke up almost as strongly: "There is no intention whatsoever to contemplate a change in the dollar value of the Deutsche Mark.''

At week's end the pound had rallied strongly, hurdled the $2.79 level for the first time since July 11. Yet the world currency battle was far from over. If the pound had staved off the DM for the moment, Britain and other countries were concerned about the resurgence which began the fourth quarter of last year of a dollar gap for the first time since 1952. Though down from $600 million in the first quarter of 1957, the second-quarter U.S. surplus of $400 million (exclusive of a special $300 million payment to Venezuela) was still a heavy drain on foreign reserves. But Britain's Thorneycroft suggested a stronger remedy aimed to control U.S. inflation as well as help him at home. Said he: ''By importing more freely, you would both lower prices and at the same time sustain the reserves of the free world outside your shores."

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