Letter to the Speaker of the House and the President of the Senate Transmitting Proposed Legislation on the International Monetary Fund

Dear Mr. Speaker: (Dear Mr. President:)

I transmit herewith a draft bill "to amend the Bretton Woods Agreements Act to authorize consent to and authorize appropriations for an increase in the United States quota in the International Monetary Fund and to authorize appropriations for increased U.S. participation in the General Arrangements to Borrow."

The proposed bill would authorize an increase of SDR 5,310.8 million (approximately $5.8 billion at current exchange rates) in the United States quota in the International Monetary Fund (IMF), to the level of about SDR 17.9 billion; and an increase of approximately $2.7 billion in U.S. participation in the IMF's General Arrangements to Borrow (GAB), to a new total of SDR 4,250 million. These proposed increases are part of an overall expansion of IMF quotas totaling about SDR 28.9 billion and an expansion of the GAB totaling about SDR 10.6 billion.

These measures are required now because the world economy faces economic and financial problems which are without precedent in the postwar era. There is a natural tendency in time of recession, high unemployment and international economic uncertainty toward protectionism and financial contraction—reactions which were the seeds of the depression of the 1930s. The International Monetary Fund was created in the aftermath of World War II, largely at the initiative of the United States, to provide a constructive counter to those tendencies and prevent a recurrence of the slide into world depression.

The IMF remains the centerpiece of international efforts to deal with these problems in an orderly and constructive way, by supporting its members' efforts to correct their balance of payments problems through adoption of sound economic policies. However, the IMF's resources are under serious strain. Its ability to commit the medium-term financing necessary to allow member countries time to implement corrective economic policies is likely to be exhausted during the course of 1983 or early 1984. It is essential that the IMF have adequate resources to fulfill its vital responsibilities. Failure to resolve current world economic and financial difficulties in an orderly manner would result in a downward spiral of world trade and billions of dollars in simultaneous loan losses. This would pose a fundamental threat to the international economic system, and to the U.S. economy. Prospects for the economic recovery and expansion necessary to generate new jobs would be dashed, not only in the United States, but around the world.

I therefore strongly recommend prompt enactment of legislation to give effect to the proposed increase in the United States quota in the IMF and to the proposed increase in United States participation in the IMF's General Arrangements to Borrow.

The world's current economic problems are attributable to several factors, including the rapid inflation of the 1970s, the twin oil "shocks" of that decade, high interest rates, the worldwide recession, and countries' failure to adjust to a rapidly changing world economic environment. These developments led to a very rapid rise in international lending and a build-up in external debt which in some eases, particularly in a period when inflation is being brought under control, are no longer sustainable. Major borrowers abroad are finding it extraordinarily difficult to find the financing needed to sustain economic activity, purchase essential imports, and service their external debts. As a consequence, important segments of the United States economy and financial system, and a number of countries of critical importance to America's national interests, are in a vulnerable position. The health of the United States economy arid the well-being of its citizens are tied directly to the recovery and growth of other nations. Our own self-interests, therefore, demand that we demonstrate the leadership required to assure an orderly transition in a turbulent world environment.

The dependence of the United States on the world economy has grown rapidly. Today, nearly 20 percent of total U.S. goods produced are exported abroad. Some 40 percent of our agricultural production is exported. U.S. banks account for about onethird of total international bank lending, and they rely heavily on foreign sources for loanable funds. All told, more than 5 million U.S. jobs depend on exports, and those jobs in turn depend on healthy markets abroad. Foreign trade accounted for four out of every five new jobs in U.S. manufactures in the late 1970s. Our services trade surplus grew more than elevenfold between 1970 and 1980. Our surplus in high technology trade has increased from $7.6 billion to $30 billion in that period. Combining goods and services, estimates shove that one-third of U.S. corporate profits derive from international activities. Going one step further, our trade relationships with the developing countries have expanded even more rapidly than our overall trade. In the last few years, trade with LDCs has accounted for nearly 40 percent of the overall growth of American exports.

Clearly, the United States has a major direct interest in assuring a strong world economy and a smoothly functioning international monetary system. Conversely, sharp cutbacks in imports by borrowing countries, necessitated by economic collapse or inadequate financing, would have a direct and damaging impact on not only our financial system but on American workers, farmers, manufacturers and investors. On the banking side, sudden losses on foreign loans would squeeze earnings and capital positions. This in turn would impair banks' ability to finance world trade and could lead both to a reduction in their ability to lend to domestic customers and to higher interest rates.

The IMF plays a key role in helping its member countries make the economic adjustments needed to correct their economic problems and restore their creditworthiness in the world marketplace—adjustments at the national level which are the essential ingredient of a sound international economy. The IMF also provides strong support for a more open trade environment through economic programs which emphasize reliance on market-oriented economic policies.

The proposed increase in IMF resources is one part of a comprehensive strategy to resolve current world economic problems. This strategy involves adoption of sound adjustment measures by borrowing countries; IMF support in helping those countries design their adjustment programs, in formulating comprehensive financing plans to accompany their adjustment efforts, and in providing a portion of the financing required; continued provision of financing by the commercial banking system where borrowers undertake and implement a sound IMF supported economic program; official willingness to provide emergency short-term liquidity support, where that is essential in the interim while IMF adjustment and financing programs are developed and put in place; and achievement of a broadbased, non-inflationary recovery in the industrial nations, which will provide expanding markets and a basis for the adjustments borrowers must make. The IMF is at the heart of this strategy. It simply must have adequate resources to fulfill its vital responsibility.

I believe the United States is on the verge of an impressive, non-inflationary and sustained recovery. Recovery in the United States is important to global recovery; but, by the same token, failure to deal effectively with problems facing the international economy could quickly undermine our own domestic economic efforts and prospects. Approval by the Congress of the proposed increases in our IMF quota and our participation in the General Arrangements to Borrow is a critically important component of our program to assure economic recovery and growing employment in the United States.

A report of the National Advisory Council on International Monetary and Financial Policies, which provides background information on the proposed increases in the U.S. quota in the IMF and in U.S. participation in the General Arrangements to Borrow, is being transmitted to the Congress separately. I strongly urge the Congress to consider the proposed increases promptly and favorably.

It will be appreciated if you will lay the enclosed draft bill before the House of Representatives (Senate). An identical proposal has been transmitted to the President of the Senate (Speaker of the House of Representatives).

Sincerely,

RONALD REAGAN