Federal Reserve Board chairman Arthur F. Burns warned yesterday that the international financial system is seriously overextended and "especially vulnerable" to collapse if there were another serious recession.
He said the "troubled circumstances that now exist" cannot be improved unless there is "broad agreement" among nations "that parochial concerns will be subordinated to the vital objective of working our way back to more stable conditions in international finance."
Burns said the major debtor countries must cut back their international borrowing by holding down internal spending and reducing inflation.
He said the amount of money available through international lending institutions like the IMF must be increased and he urged a major policing role for the monetary fund to insure that nations get their financial houses in order.
But the "painful" program Burns urged in an address to the Columbia University Graduate School of business will come to naught if the major oil-producing countries raise their prices again.
While not all of the debt problems in the international financial order can be traced to the five-fold increase in petroleum prices over the past four years, it is a major cause of balance of payments problems among nations, the central banker said.
Heads of state of the major industrial countries will meet in London next month to discuss the problems of the international economy. One of the major difficulties is the inability of many countries, especially poor ones, to pay for their oil bills. Inflation and slow recovery from the worst recession since World War II also plague the world.
The Fed chairman also warned private banks, which have been heavy lenders to hard-pressed countries, that they must carefully scrutinize their international loans and must also be careful not to undercut the IMF's attempt to impose economic discipline on many countries by offering credit on easier terms.
Countries not only borrowed heavily to pay their oul bills but aslo borrowed a finance "extensive social-welfare and development programs" which they undertook early in the 1970s.
But even after oil prices soared and inflation was rampant, most countries changed their monetary and fiscal policies very little, chiefly because of the "political difficulty of gaining broad acceptance of the painful things that must be done to restrain inflation and achieve energy conservation."
Because international lending institutions did not have the resources to supply the credit demands of these nations and because they would have imposed conditions on these countries before making loans, hard-pressed countries found it preferable, for the most part, to turn to private banks.
Private banks, such as Chase Manhattan or Citibank did not have the inclination or the loverage to clamp down on countries as a condition for making loans.
Burns called on these banks to carefully examine the credit worthiness of countries before making loans. Already, he noted, "commercial banks generally, and particularly those which have already made extensive loans abroad, are now evaluating country risks more closely and more methodically."
He said borrowing nations should be more "forthcoming" in supplying information to lenders with bear on their creditoworthiness. Burns suggested that some international institution such as the Basle-based Bank for International Settlements (a central bank for European central banks) might draw up a list of information that "all countries borrowing in the international market would be expected to make available to present or prospective lenders."
He also told bankers and bank examiners that they should be wary of concentrating loans in individual countries.
He warned what should oil countries raise prices again "the whole exercise of trying to reduce the massive payments imbalances traceable to the oil shock would be rendered futile."