The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
p,
7
Proof of July 21,1943.
BANCOR AND UNITAS
by R. C. Lcffingwell
Anglo-American collaboration after the war is as
vital to the survival of our nations as their military
collaboration during the war. The United States
cannot stand alone in war or peace. So we approach
the Experts' Plans for a world bank and a world
currency with the most patient thoughtful interest;
and with full recognition of their high objective, to
create and maintain after the war a decent world
for decent men to live in. We Americans dare not
be isolationists again. We cannot maintain ourselves and our American standard of living unless
we have a peaceful and prosperous world to trade
in.
(1) World bank government. However, an international bank and an international currency are
impracticable and undesirable. An international
government must come first; and the day for that is
far distant.
True, Keynes says (IX 40) "we have here (in the
world bank) a genuine organ of truly international
government." But I suggest that when we do have
an international government it should be a democratic government of elected representatives of the
peoples and not a government of super-central
bankers, inflating or deflating us, as a whole or in
sections, for our good, as Keynes suggests (IX
39(5)).
In peace time perhaps 10% of our production is
exported and 90 % is for home consumption. We
do nine-tenths of our business with ourselves. Yet
the value of the dollar we pay to our wage earners,
the American cost of living, the American standard
of living, will under the Experts' Plans be determined by a world bank board. A stable foreign exchange value of the dollar, not a stable domestic
1
price level, and wage level, are to be their objectives. Our price level, our cost of living, are to be
inflated or deflated, in order to keep the dollar at
rates of exchange with other currencies determined
as provided in the plans. No nation can permit^a
central bank of central banks to dictate its taxes
and tariffs (and other nations' tariffs), its expenditures, its interest rates, its wage level, its cost of
living, the foreign exchange value and the gold value
of its currency. These are functions of government, not of a world central bank. The American
Constitution, Article 1, Section 8, provides that the
Congress shall have power "5. To coin money, regulate the value thereof, and of foreign coin, and fix
the standard of weights and measures."
9
I
So I am against a world bank as an instrument of
world government.
—
(2) Causes and consequences. Both plans are
obscure about the fundamental questions involved
in currency stability and instability. Are we to
guarantee the currencies of countries addicted to
the abuse of the monetary printing press? What
about the tariffs of the United States or the Ottawa
Empire Preference tariff policy? Are we to maintain the Hawley-Smoot tariffs, except for piecemeal
reciprocal trade agreements? What about the First
World War debts? Shall we repeal the Johnson
Act? What about Lease-Lend? Are we going to
demand return of the goods and services with which
the United Nations have fought our war? These
questions are passed over or left to imagination and
admonition and to the world bank board in which
the voices of the borrower nations and of the remote and uninterested nations will predominate at
least numerically.
Stable foreign exchanges are desirable. But they
should reflect balanced budgets and balanced international payments. Gifts, grants and loans for relief and reconstruction from creditor countries to
impoverished countries will be necessary after the
\
war. They should be financed by taxes and long
loans, not by currency issues. So will lower tariffs
and the removal of embargoes and quotas and exchange controls, and the forgiveness of old and new
war debts be necessary. When these things have
been done, and peace and law and order restored,
foreign exchange stability should follow, as a matter
of course, the removal of the causes of instability.
No good can come of printing paper money of the
creditor countries to buy printed paper money of
debtor countries. We must first remove the causes
that make them bad.
So I am against pegging the exchanges.
(3) Inflationary plans. And I am against exchange pegging because it is inflationary. The Rt.
Hon. Walter Elliot, M.P. put it well in the London
Times of April 20th:
". . .after all, what does even the Keynes plan,
the most important of the currency plans issued
so far, amount to? It amounts to this, that if
the plan goes through an international bank
will be established in which every one will have
a credit.
That is the sort of bank we have all dreamed
about for many years. Borrowing will be done,
• as the White Paper ingenuously puts it, with
A 1 an 'anonymous' or 'impersonal' quality. One
' of the sentences is perhaps worth quoting in
full :—
'Where financial contributions are required
for some purpose of general advantage it is a
great facility not to have to ask for specific
contributions from any named country, but to
Q
depend rather on the anonymous and impersonal aid of the system as a whole.'
In fact, the stuff would be sent around in
plain vans.
Lord Keynes is quite intelligent enough to
know that such a system, taken by itself, would
have a short life, though a gay one."
The tragic needs of the occupied, devastated, and
impoverished countries must be met and working
capital provided. The need is great, but need does
not furnish a basis for sound money. And a sound
world bank cannot be managed by the borrowers nor
caKlPgoiuid wurTcTcurrency be~T5asecl on giving them
automatic overdraft facilities, or the privilege of
selling their currencies to a world bank. The suggestion of allowing such overdraft facilities up to a
limited amount without charge and of charging only
\°/c or at the most 27c on borrowings in excess of
that limited amount is inflationary. The suggestion
that creditor countries in effect shall automatically
be obliged to buy the currency of debtor countries
without condition, and issue in effect their own currency against it, is unsafe. All that these overdraft
facilities could achieve would be temporary relief
for the needy by debasing the sounder currencies to
the level of the unsound. We should be attempting
the cure of war inflation and post-war inflation by
more inflation.
(4) American safeguards. The American plan
accepts all the fundamental principles of a world
bank and a world currency but sets up certain seeming safeguards of which some may be mentioned
here;
A. In effect, though not in words, it gives the
United States veto power in many cases by requiring a four-fifths vote. I do not know however
wThether we can wisely invite others to sit in the
game, and then refuse to play, when we have most of
the chips.
B. While Keynes provides that the world bank
shall be an almost unlimited liability company in
which the creditor nations, notably the United States,
pay the bills, the American plan limits our liability
to our quota or share of a total fund of at least
$5 billion. The American plan requires all participants, not merely creditor nations, to provide some
capital contribution. These are to be made to an
extent varying from 5% to 12V<>% of each nation's
quota in gold, and the balance in the contributing nation's own obligations. However, it does not appear
that debtor countries are in a position to make any
contribution to the capital of the world bank. Indeed,
the mere fact of their making a contribution in gold
would tend to weaken their currencies and force
upon the world bank the purchase of more of them.
Similarly if they were to print bonds or currency
to deliver as a capital contribution to the world
bank this would seem to weaken the currencies of
the debtor countries. The truth is that only the
creditor countries are in a position to make any real
contribution to the capital of the world bank, and
of these the chief is the United States. As the
London Economist, May 1st, page 556, with refreshing frankness says:
(
~{
ty
0
0
". . . it is as well to be entirely candid—more so
than either official document could be—about
the specific nature of the conditions which any
scheme will have to meet in the post-war world.
To talk of 'surplus countries' and 'deficit countries', of currencies of which there is a shortage
and those of which there is a superfluity, is all
very well; but it is better to name names. The
one country which, above all, was a surplus
country before the war and is certain to be
still more strongly so after the war, is the
United States. The central currency difficulty
of the post-war years will be to find means by
which the rest of the world can meet its obligations to the United States and buy the American
goods it needs. The 'rest of the world' is not,
of course, a homogeneous expression and among
the countries other than the United States there
will be some that have more difficulty than
others, and some that have less, in balancing
their books. One country which, to judge by
the present indications, will have rather more
than the average difficulty in paying its international way is the United Kingdom."
C. The American plan however ties the unitas
to $10 of the present gold value. The American plan
thus demands the best of both worlds. It would inflate our currency to buy foreign currency, create
a dollar exchange standard for the whole world,
putting our gold behind the world's currencies, and
yet keep the dollar at its present gold value. If we
couldn't achieve this miracle and were bankrupted
in the effort, as in 1933, we should have to get the
world bank board's permission to reduce the gold
value of the dollar, instead of the consent of the
President and Congress of the United States as in
1933.
The value of bancor too is fixed in terms of gold
"but not unalterably." Keynes proposes "to supplant
gold as a governing factor, but not to dispense with
it." He recognizes its great psychological value and
its value for international purposes.
(5) Not enough gold. Keynes says that our gold
is the basis of our "impregnable liquidity" (VI, 26).
Let us examine that. How much of "our gold" is
ours? How impregnable is our liquidity?
Our stabilization fund had a net loss of $856
millions of gold in less than two years—the fiscal
year 1942 and 1943 to the middle of April. For the
last five years earmarking of gold for foreign account
has been proceeding in varying amounts, and the
total under earmark at the end of March was $2,872
millions, the all-time high. We have to provide for
the pay of our overseas forces and services in cash.
We have to pay cash for our purchases in South
America and elsewhere so far as not covered by
reverse Lend-Lease. Thus the foreign claims against
our gold which were great before the war are mounting. The aggregate of foreign-owned long-term
investments and of bank deposits and earmarked
gold, was over $13 billion in June 1941. Part of it
was more or less permanent foreign investment here,
part "hot money" frozen by the war.
Quite aside from foreign claims, what we call our
gold is not all free for another reason. Though the
gold that came here was sterilized between 1933 and
1939, latterly it has been most fertile. We are
inflating currency and bank deposits rapidly against
this gold base. Our banks have been without excess reserves of their own for a long time and the
Federal Reserve System has necessarily been manufacturing the reserves for them without which the
commercial banks cannot subscribe for the war bonds
the people do not take.
Until the war is over, and the reconstruction
period too, we must continue lend-lease and make
exports of food and raw materials as gifts or grants
in aid without getting paid for them. Meanwhile
gold exports, gold earmarks, and dollar claims
against our gold in favor of foreign nations and
central banks will continug_tfljnse; and so will dollar claims against our gold in favor of Americans,
represented by dollar currency and bank deposits
being created to enable the United States to finance
the war. In addition we must put our gold behind
most of the currencies of the world, not, I hope,
under the Keynes plan or the American plan, but by
making dollar credits available to every peaceful
and law-abiding country that will put its_housejn_
order and comply with reasonable conditions, imposed by us, the creditors, for monetary and economic sanitation. It may not, therefore, be possible
to maintain the present gold value of the dollar and
the dollar-exchange value of sterling and other currencies tied to it and so to gold. War-time gold production is curtailed and war-time production of paper
money is very great. The effort to support the
world's currencies on the existing gold base in terms
of a dollar of the present gold value might bring
about a drastic deflation.
(6) Forgotten lessons. We had a major deflation
to protect the gold standard in 1921-2 following the
First World War inflation.
The deflation of 1931-3 was the result of the American adherence to the old gold standard, from the
time England went off gold in the autumn of 1931
until our banks were closed in March 1933. We
deflated our economy to protect the gold standard.
Our gold had been counted twice: once in our reserves and once in the reserves of foreign central
banks, which were more or less on the gold-exchange
standard. Although we seemed to have ample gold
we had inflated credit about ten to one on that gold
base, some of which belonged to foreign governments
and central banks, and when the French and the
British and others withdrew their gold, which
seemed to be ours but wasn't, that withdrawal required something like a proportionate contraction of
credit.
We must after the war stop the inflation, but I
do not think the world economy and social structure
can stand another major deflation in our time.
(7) Capital movements. Both plans contemplate
freezing capital movements as well as extraordinary
war balances to a greater or less extent. That means
necessarily that all foreign exchange transactions
must continue to be controlled and licensed by government and proof given that any remittance whatever is not capital nor an extraordinary war balance.
One naturally thinks of stable exchanges as desirable
not as an end in themselves but as a means to freer
movement of goods and services, of capital and its
usuf ruct.\ It is disappointing to find that these experts
I intend merely to peg the exchanges by policing them
I and preventing remittances not approved by the
I policemen.
In addition to the war debts we are now incurring
to foreign nations, very great amounts of flight
money came to the United States before the war, and
to England and other countries too, and have been
quite properly frozen during the war. But these
balances should be, at the earliest possible date after
the war, made free and liquid, so that the owners
8
of them as soon as peace is restored may use them
for their own purposes.
A bank, or a national economy, can only expect to
receive deposits of funds if it is prepared to pay out
deposits of funds. The paying teller's window must
be open or the receiving teller will have nothing to
do. Anything in the nature of a continuing freezing
of foreign balances after the war is going to be a
first-rate misfortune not only for the creditor countries which own these balances but also for the
two great powers, England and the United States,
which hold and owe them. Perhaps it would be a
greater misfortune for England than for the United
States, for one of the greatest items of England's
international balance of payments has been her receipts from banking services, due to the fact that
London has been the world's banker. London has
been the world's banker by virtue of her willingness
to pay out as well as to receive money. The first
great task after the war is going to be to open up
London and New York as free money markets from
which money may be withdrawn and in which it
may be deposited.
No money center is entitled in peace time to use
foreigners' deposits, whether represented by money
in bank or gold or securities, unless the owners of
those deposits are willing to leave them on deposit.
Failure after peace is restored, and after a reasonable transition period, to get the machinery working
again, to pay out money or gold or securities on
demand, is neither good business nor creditable.
(8) Rumor. An international board of all nations
such as both plans contemplate may become the
center of international rumor and of international
bad news as well as good news, if any. Whenever
any doubts exist about the ability of any country
to maintain a good exchange quotation, or about
any political or economic policy of any country, or
any admonitions are suggested to be addressed to
any nation that is thought to be misbehaving itself,
the board which these plans contemplate will become
a debating society for the discussion of every sordid
and unhappy detail. Such problems as these, of the
gravest import, should be dealt with by Secretaries
of the Treasury, Finance Ministers, and central bank
governors, in the secrecy and confidence of their
head offices. They are unfit for discussion in the
perpetual conferences of international financial delegates such as both plans contemplate.
(9) Voluntary or competitive depreciation. Germany after the last war used the printing press
freely, depreciated her currency to the vanishing
point and wiped out all indebtedness. At the same
time by this process she wiped out the middle class,
which is the backbone of any country, and no doubt
so made more certain and inevitable the rise of a
Hitler sooner or later. That was in no way comparable to the following cases.
In 1926-7 France sold the franc and pegged it
down. Thus France acquired gold. This laid a
heavy burden on the pound, and in spite of the Federal Reserve Banks' support of the pound in 1927
(which had such inflationary results in the United
States), finally, in 1931, the pound was forced off
gold. Great Britain then sold the pound for gold,
and France and others withdrew gold from the
United States—with disastrous deflationary effects
upon the United States. This forced the United
States off gold in early 1933. Later in 1933 the
United States, in turn, sold the dollar for gold, and
sold it down for some six months, and then, in January 1934, pegged it down to a 40 7^ depreciation—
with disastrous consequences to the rest of the
world. That was seven years of competitive depreciation, engaged in by the three great Governments
of the Allies, France, Britain and the United States,
in turn.
That sort of thing ought not to happen again. The
three great powers, the United States, Great Britain
and Russia, should agree among themselves, if they
10
will, not to engage in competitive depreciation, and
to invite the adherence of others to this agreement.
That would seem an easier thing for them to do than
to join in either of these global exchange-pegging
plans.
D
0
(10) New world currency is not desirable. We
do not need more machinery. We need to make
better use of the machinery we have. The dollar
and the pound have weathered many storms and
stood solid. Though they had to bend, they never
broke before the storms. The pound and the dollar
were both off gold, in fact though not in law, during
the First World War. The pound went off gold
again in 1931 and the dollar in 1933. Yet nobody
lost faith in either or in their buying power. The
reputation for soundness is hard won. Both the
pound and the dollar have won it, in the course of
long and bitter experience, the pound since the Napoleonic wars, the dollar since some time after the
Civil War. Behind the pound and the dollar stand
the resources of the two greatest and wealthiest
trading nations of the world, Great Britain and the
United States. (Make no mistake. Britain though
short of gold is rich in men and resources, in real
wealth, and will be so after the war too.) Behind
them stand the banking experience of the two great
English-speaking nations, who understand the
principles of banking and finance; though they don't
always practise them. It would be wrong to throw
away the good will and experience of the managers
of the Bank of England and the Federal Reserve
System and substitute an untried and unknown currency of account, managed by an untried and unknown international bank, many of whose directors
must necessarily lack experience and the tradition
of sound money.
-<-*
There is a fundamental vice in all plans for a
world government, whether political or financial or
economic. These plans put control of human affairs
in charge of a majority of little nations, thus separating responsibility from power.
11
(11) Dollar sterling alliance. But it would be a
very sound idea for the United States to lend to
Great Britain whatever funds may be needed to
support the pound sterling in the initial period of
reconstruction at or about $4 to the pound or what//
ever other rate may be determined upon by the two \ ^
Governments as proper and defensible. (Britain
has been more successful than the United States in
controlling inflation and it has been suggested that
the purchasing-power parity is nearer $6 to the
pound). Great Britain is a strong and powerful
nation, and though, with sublime recklessness of
everything but to preserve her freedom, she has
thrown all her resources into the war,* and did so
gallantly before America came to her financial
assistance by lend-lease, I believe profoundly in the
military, financial and economic durability of the
British Empire.
It would be wise and right and prudent for the
United States to put our gold behind the pound.
Together we should create a dollar-sterling-gold exchange standard, and invite adherence to it by
countries desiring to join us and complying with
conditions necessary to exchange stability. Then,
though most of the money might have to come from
the United States at first, I should like to see Great
Britain and the United States lock arms as partners,
and, with the participation of such creditor nations
as might be induced to join, extend such aid as
they in their prudent judgment might think best to
the suffering countries which have been overrun by
our bitter enemies the Germans and the Japanese,
imposing such conditions of financial aid as prudence suggests.
(12) And Russia. I should like to see Russia join
in if and to the extent she will. Russia has become
* "According to the latest White Paper, about £2,200 millions of external resources, grold, bank balances and investments were mobilized in the three year period 1940-42, and
another £600 millions of foreign resources is to be conscripted
during- thp present fiscal year." (National City Bank circular,
July 1943, p. 83.)
12
the great power of eastern Europe and Asia, and
her participation in any aid given in the east of
Europe and in Asia would be of immense, if not
controlling, financial, economic and political importance.
(13) Conclusion. World welfare, and our own
(which is inextricably interwoven with the world's),
will be best served by preserving the monetary
standards of Great Britain and the United States,
the dollar and the pound, and by our making frank
gifts and grants in aid, of foodstuffs and raw materials and working capital, to the less fortunate
nations, during the period of reconstruction after
the war. The occupied countries should have an
opportunity to re-create and re-organize their currencies, and they should be provided with gold
credits by the creditor countries after careful
examination of their plans for monetary and economic reconstruction and on approval of those
plans. Relatively small gold loans will furnish
ample bases for sound currency for each of the impoverished countries provided they put their houses
in order and adopt sound budgets and sound monetary and economic policies—and provided creditor
countries lower their tariffs. But loans of this
character to the occupied countries or to other impoverished countries do not furnish a sound basis
for issue of currency by the creditor powers,
whether directly or by the bancor or unitas device.
The problem will be to provide sound government, and peace and law and order, and capital
loans and grants and gifts of food and raw materials, and currency stabilization; to forgive war
debts; and to reduce tariffs, particularly of the
creditor nations, of which the United States is the
outstanding example; so that all countries may balance their international payments, and trade may
be free and employment available for all who will
work.
This document is protected by copyright and has been removed.
Author(s): British Information Services
Title: International Clearing Union: Text of a Paper Containing Proposals by British
Experts for an International Clearing Union
Date: April 8, 1943
Page Numbers:
FEDERAL RESERVE BANK
OF NEWYORK
July 24, 1943
Mr, Leon Fraser,
The First National Bank of the
City of New York,
2 Wall Street,
New York, New York.
Dear ^r. Fraser:
For your information there are enclosed copies of a
letter dated July 15, 1943, by Mr. Ruml to the Board of
Governors of the Federal Reserve System regarding the Keynes
and White Plans for post-war international currency stabilization and the statement of Mr. Williams on this subject which
is referred to in the letter.
This is the final form of the
letter, a draft of which was read to and discussed at the
meeting of the board of directors held July 15, 1943.
' .|
Very truly yours,
William F. Treiber,
Secretary.
^
c
0
p
Y
July 15, 1943
Board of Governors
of the Federal Reserve System
Washington, 25, D. C.
Sirs:
As stated in Mr. Sproul*s letter of July 1st, we discussed at
the meeting of our Board of Directors on that date your letter of June 25th
regarding international currency stabilization, and arrangement was made
for a further discussion of the question at our meeting on July 15th.
In
the interval between the two meetings the substance of Mr# Williams1 statement at the meeting of the Federal Open Market Committee on June 28th was
distributed to the directors and senior officers of the Bank, A copy of
this statement is enclosed.
Since the publication in April of the plans for currency stabilization by the American and British Treasuries, this Bank has taken a great
interest in this problem, tinder the direction of the Foreign Relations
Committee of our Board of Directors, plans were developed for systematic
research
and for collaboration between our Research Department and the
Boardfs Staff in the study of the problem. Mr. Knoke's letter of July
12th presents a list of some of the memoranda prepared here which have
been furnished to the Board• Other studies are now under way and will
be forwarded to the Board of Governors as completed.
While our directors and officers have been greatly interested in
the plans for currency stabilization and have discussed many of the questions involved at our Board meetings during the past several months, no
attempt has been made to arrive at a consensus or to formulate any statement as the official position of the Bank. It has seemed to us, in view
of the magnitude and complexity of the problem and the importance of exploring carefully all approaches to it, that premature crystallization of
views would be undesirable.
At our present stage of discussion, our directors and officers
feel that there are a number of major questions that deserve much more
thoroughgoing exploration than they appear thus far to have received before
any final decisions are reached with regard to the Keynes and White plans or
any alternative approach to the problem of currency stabilization.
Some of these questions are:
J
1. Whether it is better to attempt to create from the
beginning some nev/ world monetary organization on the lines
of the Keynes or the White plan under the control of an international governing body, or whether it is better to undertake
first to stabilize the leading currencies.
Page 2
Board of Governors
of the Federal Reserve System
July 15, 1943
2. As a corollary to this question, should we not have a
thorough exploration of England's post-war problems and our relation to them rather than permit these problems to be merged
into the "world problem11 tinder an international currency plan?
Yihatever plan is adopted, it seems clear that the solution of
England's special problems will be one of the basic requirements
for world economic and monetary stability after the war, and it
seems a fair question to raise whether the best way to help the
British, as we all desire to do, is to go at the problem directly
rather than through the medium of a general international currency plan*
3. Whether the many and difficult problems of transition
from war to peace and the problems of 1 onger run monetary stability
should bs handled by a single monetary plan or should be treated
separately• Here again, England's situation provides the best illustration of the nature of the question involved• In the
transition period, England will need to have for a number of years
large international credits. Should this special necessity of the
transition period, which will apply also to many other countries,
be saddled upon a plan for long run monetary stability? As
Mr. Williams states in his memorandum; "The transition problem
will be that of providing credits in one form or another for the
debtor countries, whereas for the purpose of longer run stability,
the fundamental assumption underlying any mechanism that is set up
should be that the country's position will oscillate around a zero
debit-credit position* To start the scheme off therefore with a
difficult transition period
will mean that the longer run
working of the plan will be already jeopardized by the lopsided
condition of the fund or the union which is bound to occur if the
transition problem is effectively handled.11 Without indicating
any final conclusion as to our own views, we do think this is a
question of the most fundamental importance and one that should
have the most thorough exploration before any final views are
reached with respect to the plans for currency stabilization*
,
'
4« One of the most difficult questions, in our judgment, is
that relating to the nature, degree, and duration of exchange
control, One of the major purposes of both plans appears to be
the relaxation and final abandonment of exchange control* But it
is recognized, at least in the Keynes plan, that control of shortterm capital movements may require some kind of over-all supervision of exchange operations. Even apart from short-term capital
movements, moreover, it will be a difficult question of the
transition period to decide at what stage and under what circumstances exchange controls can safely be relaxed, and any currency
plan which encouraged a premature abandonment of exchange control
might do more harm than good* We therefore feel that this whole
subject of exchange control and its relation to the plans deserves
more careful study before final decisions are reached.
Page 3
Board of Governors
of the Federal Reserve System
July 15, 1943
5# Among students of the problems of post-war economic
stability, there exist some differences of opinion as to the
fundamental method of approach• All agree in general terms that
the problem is politico-economic as well as monetary, but many
insist that the economic adjustments that vail have to be made
after the war, involving questions of trade organization, tariffs,
foreign investment, price and cost adjustments, are much the more
fundamental aspects of the subject, and that if vdse decisions are
made in these fields, the question of monetary stabilization will
not present major difficulties. Others, v/hile perhaps not dissenting, insist that a start must be made in the field of currency
stabilization, and that if this is done, it will provide an essential
part of the framework within which international economic and
financial policies can be developed.
We recognize that this is a difficult question, but we think
there is a danger today of over-emphasis, both among the technical
experts and in public discussion, upon the mechanics of currency
stabilization, and that from this point of view it might be desirable to withhold judgment, and even deliberately to delay final
action, on currency plans until more work has been done and more
public discussion has been developed upon these other aspects of the
problem* One of the greatest dangers of over-preoccupation with
international currency organization is that the public, in this and
other countries, will assume that the adoption of a currency plan
provides assurance that the other and far mor^difficul^parts
of
the problem of post-war international -adJCs:5nen:rTi^e^been solved.
6. We are particularly impressed with the thought that the
Reserve System will have a special responsibility of its own for the
maintenance of monetary stability at home. '.Thatever plan is adopted,
it ought to provide for adequate safeguards against an uncontrolled
or uncontrollable expansion of reserves and deposits in this country.
How this aspect of the problem is to be handled is one of the most
difficult questions. It seems clear that the provision of foreign
exchange resources to other countries on the scale suggested by
Keynes would be an extremely hazardous undertaking from the standpoint of this country. On the other hand, there appears to be much
evidence in the White plan that consideration has been given to this
problem. This seems apparent both from the much more modest size of
.: X1-' the fund and from the fact that under the White plan there cannot be
a general convergence of the demand of other countries upon the
dollar. The extent of the expansion of our bank reserves will be
limited by our contribution to the fund and"the amount of gold held
outside this country, It seems apparent also that the White plan is
intended to protect the United States from undue risks by its provision of a four-fifths majority vote on most of the major questions
that could arise in the operation of the plan.
i
is
v,1
/
•
Page U
Board of Governors
of the Federal Reserve System
July 15, 1943
7. These differences between the two plans reveal, v/e are
inclined to think, a most difficult dilemma, and one which raises
doubts about the workability of this kind of world-wide approach
to the problem. On the one hand, the plan must be big enough and
bold enough to offer.some promise of achieving its objectives, but,
on the other hand, the bigger and broader it is, the larger and
less definite become the risks and responsibilities of the United
States, which
stands in a unique relation to all such schemes as
the worldfs leading and only important creditor and a principal
source of ravr materials and manufactures. One of the lines of
criticism offered against the White plan in public discussion has
been that in its effort to protect this country it has proposed
machinery that is likely to prevent constructive action, and that
the main result might be a general freezing of an unsound and
unstable situation* If there is any. merit in this sort of
criticism, it again raises some of the questions we raised earlier
in this letter, particularly, (l) whether it would not be better
to deal vjith the transition problems first and the long run questions of currency stabilization laterj and (2) whether it would
not be better to deal first with the British problem and our relation to it before attempting to set up a general scheme for currency stabilization under an international governing body.
The substance of this letter has been read to and discussed at a
full meeting of our Board today and fairly represents their present views.
Vfe expect to continue our discussions and will be very glad to keep the Board
of Governors informed of any further development of views among us.
Yours very truly,
(Signed) Beardsley Rural
Chairman
CURRENCY STABILIZATION:
THE KEYNES AND WHITE PLANS (D
By John H« Williams
Publication in April by the American and British Treasuries
of plans for monetary stabilization after the war has launched a
debate that will continue until a decision has been reached. This is
a fine example of the democratic process* Both* Treasuries have emphasized the tentative character of the proposals and have invited comment
from any quarter. The plans have been announced as the work of technical
experts. Dr. Harry D, White, Director of the Division of Monetary
Research of the Treasury, is the author of the American plan and Lord
Keynes, now serving as an adviser of the British Treasury, the author
of the British plan. The discussions thus far both between the two
Governments and with the other allied and associated governments have
been entirely through the medium of technical experts. The Governments
themselves remain uncommitted. Although the American plan has been presented by Secretary Morgenthau to the appropriate committees of Congress
and there has already been some preliminary discussion of both plans in
the British Parliament, it seems probable that the legislative phase of
the debate will not get seriously under way for some time. At the appropriate stage, presumably, public hearings %ill be conducted by our
Congressional committees.
(l)
With soiie minor revisions, this is the statement that was presented at a meeting of
the Reservefcankpresidents with the Boarl of Governors on June SS, 1943.
The present planning and discussion of monetary stabilization
contrasts most favorably with the complete lack of planning of this character
in the last war, and provides some hope that we may escape the international
monetary chaos which occurred after the unpegging of sterling in 1919 had
revealed the breakdown of the gold standard which the war had produced. This
period of currency disorder was marked especially by the drastic inflation
of the German and other Central and Eastern European currencies and by the
milder inflations in France, Belgium, and Italy. Beginning in 1924, there
was a general effort in the world to restore the gold standard. It would
not be true to say that this effort was unaccompanied by attempts at
international collaboration, but on the most fundamental question, that of
the rates at which the exchanges should be stabilized, each country acted
entirely independently, the English adopting the pre-1914 pound and the
French stabilizing at a depreciated rate* It was generally agreed among
economists that the pound had been over-valued and the franc under-valued,
with the result that England was subject to the constant hazard of losing
gold, while France was absorbing gold and exercising a deflationary
pressure on the outside world. The United States also was a large importer
of gold, though most of it came in the earlier twenties before other
currencies had been stabilized and largely by reason of that fact*
These large and abnormal movements of gold, which exercised a
profoundly disturbing effect upon international trade and financial
relations, gave rise to violent controversy, particularly between the
British and ourselves. The British reproached us for our unwillingness
or inability to raise our price level, which, as Keynes put itj was
burying the world's gold in the vaults of Washington and threatening to
create a new breakdown of the gold standard• American economists, on the
other hand, emphasized England's failure to lower her costs of production,
which, as they pointed out, was the clear implication of her decision,
independently taken, to over-value the pound. YJhen we realize that we were
then already in the early phases of the boom which culminated in the crash
of 1929, the English reproach seems pointless but typical of the kind of
conflict of viewpoints which arises when nations make decisions stabilizing
exchange rates independently, rather than by mutual agreement•
With the onset of the great depression, of which they were in
part the cause, these maladjustments of exchange rates resulted in a
second breakdown of the gold standard. England was forced off gold in the
fall of 1931, and in the spring of 1933 the United States, after suffering
a large drain of gold and under conditions of a general banking collapse,
also suspended the gold standard and embarked on its experiment of raising
the price of gold* It was in this period that an increasing number of
economists, and particularly Lord Kuynes, began to say that a stable
exchange system was no longer feasible or desirable in the world, and to
advocate freely flexible exchango rates. As they put it, we were faced
with a choice between stable exchanges and stable internal prices, incomes and employment* External monetary stability would have to give
way to the requirements of internal stability. I never agreed with this
advocacy of fluctuating exchange rates which seemed to me to be based on
shallow reasoning, and I wrote several papers about it at the time. One
of the most interesting developments of the last ten years is that this
controversy
seems to have almost entirely faded out and been followed by
a general recognition of the necessity of exchange stability.
II
Both the Keynes and the White plans give abundant evidence that
the lessons of the inter-war period have been carefully ponderedf
The
fundamental purpose of both is to provide exchange stability, but to
provide also a method of orderly change in rates through international
cooperation when changes are really necessary, Both recognize also the
need for controlling short-term capital movements, those erratic flights
of capital from one country to another which we were studying a few years
ago, rather fruitlessly, under the name of "hot money.11
Both emphasize the
danger that unless we can achieve currency stabilization on some such
lines as these, the world may be forced permanently into a system of exchange
control with all the evils of bilateralism and other restrictive trade
policies which accompany that system* With these general purposes of the
two plans and with their general lines of compromise of earlier ideas in
order to achieve a less rigid and more effectively controlled system of
stable exchange rates, I am heartily in accord, and in these respects I
welcome the plans as a great step forward•
But there is a real danger, I believe, that because of our
approval of the general purpose of the plans vie may assume that they
provide the only effective methods of going at the problem. If one of
the reasons for early publication of the plans is that of public education,
we must be careful that the scope of the debate does not narrow down too
soon. In this regard, the technique that has been adopted of inviting the
technical representatives of the Allied and Associated Governments to discuss
the plans in Washington and London before the process of public education
is well developed, and particularly before the question has been thoroughly
aired in Congress, may have an unfortunate effect• To take the visiting
experts point by point through the plans is likely to center their interest
unduly upon these particular plans, or some combination of them, even though
they are invited to submit their own ideasj and if the*experts of our own
and other governments do most of their thinking within the framework of
these plans, it becomes difficult to see how there can be really adequate
discussion among the interested policy-making agencies of government of
other possible approaches to the problem•
In much of the press comment and in the analyses thus far
published by economists there seems to me to be a similar danger of
prematurely narrowing the discussion* Simultaneous publication of the
two plans has resulted, not unnaturally, in much comparison of them with
each other and with the gold standard. The differences of detail between them are over-emphasized and the much more fundamental similarity
is often overlooked• One plan or the other is preferred, moreover, mainly
on the ground of the degree of similarity or difference from the gold
standard which the particular writer thinks he finds, and thus the public
might be led to the conclusion that we have a choice between one or the
other of these plans, or some combination of them, and the gold standard
as we formerly had it*
In all this there is much danger that we may fail to made a
really thoroughgoing exploration of the problem and fail to take adequate
account of other ways of going at it* Not only are the two plans
fundamentally similar, but both are essentially gold standard plans* If
we can fully grasp these facts, we shall have a better basis not only for
understanding the plans themselves but for considering other possible
approaches to the problem*
In zny Foreign Affairs article, I tried to show
the similarity of these plans with the gold standard mechanism by means
of a point-by-point comparison between the gold standard method of international trade adjustment and the mechanism provided in these plans. The
essential point of the comparison is that transfers of currencies in
White*s stabilization fund or transfers of debit and credit on the books
of Keynes* clearing union perform precisely the same function as international gold movements, To put the same point another way, and one which
is of special concern to the Reserve System, bank reserves and bank deposits
would be affected by these transfers within the fund or the union in
precisely the same way as they have previously been by international gold
movements *
III
If then these plans are variants of the gold standard system,
we must ask ourselves what are the fundamental grounds on v M c h these
particular variants of the gold standard are proposed as a solution of
the post-war monetary problem*
In my mind it seems very clear that there
are two main grounds for these proposals: first, to handle the international
problems of transition from war to peace, and second, to provide a mechanism
for international monetary stability in a more normal world, after this
transition has been effected.
Both of these of course are problems of the most fundamental
importance, but I doubt the wisdom of trying to solve them within the
framework of a single monetary plan, and the fact that both the Keynes
nnd the White plans attempt to do this constitutes ray first major objection against them.
To consider first the problem of transition from war to peace:
there ydll of course be many difficulties in many countries? some countries
will have large blocked war balances; some countries will be deficient
in gold and foreign exchange while other countries will have too much;
all the nations at war, and to a considerable extent even the neutrals,
will be faced with the difficult problems of conversion from a war
economy to a peace economy. In the British 7/hite Paper outlining his
plan, Lord Keynes lays great stress upon these problems of transition
and argues that it will be necessary to start the nations off on a great
wave of monetary expansion which will induce them to trade and produce
freely. In his plan, provision is made for the creation of about $30
billion of foreign exchange resources, of which about &25 billion would be
credited to countries outside the United States. If to this we add the
$11 billion of gold now existing outside this country and about $1 billion
of new gold production each year for the next five years, which might
represent the remainder of the war and the period of transition, we get
a total of about $40 billion as the measure of the monetary expansion which
8
Lord Keynes has in mind. The Reserve System is bound to have a very
•special interest in the creation of such a fund, for if, as seems highly
probable, its expenditure during the transition period should take the
form of a convergence of world demand upon the dollar, this would mean
that our problem of excess reserves would be re-created on a much larger
scale than during the thirties. And we have to bear in mind that this
expansion of reserves would come on top of the doubling and more likely
the trebling of our money supply which is resulting from our financing of
the war, This danger of forcing an undue monetary expansion upon the
United States would be much more moderate under the White plan than under
the Keynes plan as now devised. The YJhite plan calls for a stabilization
fund of $5 billion, of which $2 billion would be put up by this country,
Under the IShite plan, moreover, there could not be a general convergence
of monetary demand upon the United States, since this would be limited to
the amount of currency that this country would put up plus the amount of
gold held outside this country.
From the point of view of its expansionary effects upon the
United States, I would much prefer, if I had to choose between these two
plans, to have the 7/hite plan so far as the problem of the transition
period is concerned, but I have a fundamental objection to the dual purpose character of either plan.
To use.either plan, first as a method of
handling the problems of transition from war to peace and then as a
mechanism for ensuring longer run monetary stability seems to me a fundamentally fallacious method of approach to the problem, for in- the transition period the problem will be mainly one of lending and borrowing.
9
Whichever plan is used, the transition problem will be that of providing
credits in one form or another for the debtor countries, whereas for the
purpose of longer run stability, the fundamental assumption underlying
any mechanism that is set up should be that the country's position will
oscillate around a zero debit-credit position* To start the scheme off
therefore vdth a difficult transition period in which some countries are
bound to run up large debits and others large credits vail mean that the
longer run working of the plan will be already jeopardized by the lopsided condition of the fund or the union which is bound to occur if the
transition problem is effectively handled. I am not sure how clearly I
have made this point, but the essence of it is that the character of the
problems in the two periods are fundamentally different, and are in fact
in conflict vdth each other to such a degree that no single monetary plan
for both purposes would be likely to succeed well in each; the more it
fixed attention on one problem, the more it would jeopardize its success
vdth the other.
Perhaps the point will be clearer if we illustrate it by considering the special problem of England.
England will have one of the
most difficult problems of transition from war to peace.
In the war
she has been forced to use up most of her foreign capital assets.
At
the same time, much of her export production has been diverted to her
war activity, while the war has required the maintenance of a large volume
of imports, for which in many cases she vdll be unable to pay until after
the war.
And even then, until she has developed her export trade, the
payment of her blocked war balances vdll require large international
credits.
It has been estimated that England will need from $1 to $2
10
billion of international credit a year for the first five years after the
war.
How this credit should be supplied is one of the major questions of
the transition period.
One wonders whether this is one of the cases which Lord Keynes
had in mind when he talked about starting off the nations on a wave of
international monetary resources large enough to overcome any fears they
might have of producing and trading courageously and freely. What
Englandfs situation will call for will be an international credit which
. would have to be furnished presumably mainly by this countryf
Perhaps
the best way to furnish it, if it is politically feasible, would be to
iregard the transition to peace as a projection of the war period and
continue the lease-lend arrangement.
But surely this is the kind of
/
problem that requires some direct and specific treatment, and no long- ^
run plan for international monetary stabilization should be burdened
with it.
I have heard it said that the British, and possibly some other
countries, would prefer to borrow from an international stabilization
fund or clearing union on the ground that the arrangement is more impersonal, that it is a method, in effect, of denationalizing a loan,
but surely this kind of camouflage ought not to be permitted to
jeopardize a plan for international monetary stability for the longer
run future which is based, as I have said, upon the assumption of the
maintenance on the average by every country participating in it of a
no debit-credit position.
(
11
IV.
VJhether the Keynes and VJhite plans provide the best basis for
longer run monetary stability, after the transition to peace has been
achieved, is also a difficult question.
I have long believed in another
kind of approach to the problem. As I said earlier, these are gold
standard types of plans, but they are modelled after v*hat might be called
the textbook type of gold standard, rather than after that which actually
existed in the nineteenth century. As developed by the classical
economists the theory of the gold standard was that of the compensatory
action of a large number of countries of equal economic weight interacting upon each otherj through international gold flow at stable rates
of exchange and its effects on internal prices and incomes of the trading
countries, the nations were supposed to hold themselves more or less in
balance.
But actually trade and finance were organized around a central
country, which in the nineteenth century was England, and the stabilizing
control for the entire group of countries was exercised predominantly by
the central country.
This is what was meant by the familiar statement
that England was on gold and the rest of the world on sterling.
The
clearings function which Keynes emphasizes so much in his plan was performed by the London discount market, which in turn was controlled by
the Bank of England and its discount rate.
Though the organization of trade and finance has changed considerably since the nineteenth century, the question of finding the modern
counterpart to this arrangement seems to me to be the essence of the
problem of how to achieve international monetary stability.
One advan-
tage which this approach would have would be to fix attention upon the
12
truly international currencies whose stability is essential for all the
others,
Even in the post-war world* and taking account of all the
changes since the nineteenth century, there are not likely to be more
than a few such international currencies; the currencies of most
countries will be local, or at best neighborhood, currencies.
Vfhen,
for instance, Argentina makes a payment to South Africa, it is done, not
directly, but through New York or London,
For these and many other
countries the most fundamental international monetary question is bound
to be the stability of the dollar-sterling rate*
Stabilizing the leading currencies first and fitting in the
lesser currencies afterward would, I think, have many advantages*
By
proceeding in this way, it would be less necessary to wait until normal
peacetime conditions have been restored through all or most of the world,
We could begin, for example, with the dollar-sterling rate, even though
recognizing that its relation to many of the European currencies could
not be determined until after a period of reconstruction.
This piece-
meal character of the approach I am suggesting seems to me one of its
best features•
Since, moreover, the United States will be the only
important creditor, we have a special interest in going at the problem
in a way that enables us to get the clearest conception of the nature
and the magnitude of the responsibilities and risks which we are tindertaking.
The problem of international monetary stabilization is highly
complex. It involves many questions of international economic adjustment, particularly questions of commercial policy and foreign investment.
One of the chief dangers of focusing attention on such worldwide plans
13
for monetary stability as those proposed by Keynes and Yfhite is that the
other fundamental aspects of the problem may get pushed into the background •
From this point of view it might not be a bad idea to slow down
consideration of these plans until we can get a clearer idea of what is
being proposed on these other segments of the problem. But I have great
difficulty in seeing how we can have any but the vaguest ideas about plans
for international commercial policy and foreign investment, except as we
begin to think concretely in terms of the major countries, their relations
to each other and to the rest of the world*
One aspect in particular of these relations between the major
countries is what they mean to do toward coordinating their internal
policies.
In my article in Foreign Affairs, I commented at some length
upon how almost completely Lord Keynes in his Iflhite Paper has neglected
this aspect of the problem of international monetary stability.
Yet the
whole history of the period between the two v/ars proves nothing more
clearly than the fact that the stability of currencies throughout the
world depends primarily upon the ability of the major countries to maintain a high degree of stability of production and employment within their
own borders,
I have tried the experiment in recent months of asking
visitors from* foreign countries what they regard as most essential for
the well-being of their own countries and the stability of their currencies after the war, and invariably the answer is good markets in the
United States and other leading countries.
In my view, therefore, the
problem of achieving international monetary stability is primarily one of
coordinating the economic, monetary, and fiscal policies of the leading
countries, both internally and externally. If that could be done,
u
particularly as between this country and the British Empire, the problems
of currency stability for the rest of the world would probably not present
major difficulties•
7.
In closing, I would like to say a word about the analogies between the problems of monetary stabilization and those that will arise in
the international political sphere after the war.
The Keynes and White
schemes could be called a League of Nations type of approach to a postwar problem, the kind of approach which says, "Let us all be represented
on democratic principles, and let us all cooperate,11 The more I think
about this approach, the more I fear it may be verbiage—high sounding
words and sentiments that do not get us anywhere.
Coming down on the train* I ran across a digest of Walter
Lippmann*s new book on American foreign policy and was struck with the
similarity of his approach to that I have suggested here*
He says the
Spanish-American War thrust us into the international scene and led us to
make commitments without developing commensurate powers*
For the almost
half century since then, we have talked about keeping free from entangling alliances, about disarmament, about making the world safe for
democracy.
These, according to Mr. Lippmann, were mirages which pre-
vented our seeing how the world is put together and where our interests
lie.
His main thesis is that if in time of war, recurrently, we find
ourselves allied with the British and the Russians, for example, then the
basis for peace in the future is frankly an alliance with those countries.
15
I would not push this analogy too far, but what it has in common with
what I am trying to say is the necessity for breaking down a world problem into its parts•
There is one other thought I should like to express in conclusion.
I have heard it suggested in recent weeks that it is now too
late to consider any other approach to the international monetary problem than the Keynes and White proposals.
This is put on the ground
that many foreign experts have now visited 7/ashington and London and that
the task of finding the core of agreement, always difficult in international negotiation, is now far along*
The English experts in particu-
lar, I understand, have shown their willingness to make adjustments of
their plan in favor of ours.
This is, I grant, a most difficult question,
but democracy begins at home and it is not likely that our Congress will
consider itself committed by the discussions among experts which have been
announced as purely tentative in character and as not committing even the
Treasuries, and certainly not the other policy-making agencies of government.
The greatest danger in the present procedure probably is that,
if at a later stage Congress or the public should reject these particular
plans, we might be faced with a purely negative result. That would indeed be unfortunate, and constitutes a main reason why at this stage we
should be exploring the various approaches to the problem of monetary
cooperation, rather than narrowing the discussion down to the Keynes and
White plans.
POSTWAR INTERNATIONAL MONETARY STABILIZATION
On April 6, 1943 the United States Treasury
Department made public a provisional outline
of a plan for postwar international monetary
stabilization drafted by American technical experts. The next day the British Government
issued in London tentative proposals drafted by
British experts with the same general objective.
The texts of these two plans (currently referred
to as the White plan and the Keynes plan)—
are presented below together with brief introductory statements issued with the plans
by the Treasury Department and the British
Government respectively. Both plans were
drawn up as a basis for discussion and exchange of views; neither Government is committed to the proposals put forward by its experts. These plans have been submitted to the
Governments of the other United and Associated
Nations, and are now being discussed with
technical experts from these countries. A number of modifications are under consideration.
A. PLAN SUBMITTED BY UNITED STATES EXPERTS
INTRODUCTORY STATEMENT
It is still too soon to know the precise form
and magnitude of postwar monetary problems.
But it is certain that we shall be confronted with
the task of dealing with three inseparable monetary problems: to prevent the disruption of
foreign exchanges, to avoid the collapse of some
monetary systems, and to facilitate the restoration and balanced growth of international trade.
Clearly, such a formidable task can be successfully handled only through international action.
The creation of instrumentalities adequate to
deal with the inevitable postwar monetary
problems should not be postponed until the end
of hostilities. It would be ill-advised if not
dangerous to leave ourselves unprepared at the
end of the war for the difficult task of international monetary cooperation. We should
begin now to devise an international monetary
agency, for the task is certain to take many
months at least. Specific and practical proposals must be formulated by the experts and
must be carefully considered by the policyshaping officials of the various countries. In
each country acceptance of a definitive plan can
follow only upon legislative or executive action.
And even when a plan is finally adopted, much
time will be consumed in gathering personnel
and in establishing an organization before an
international institution for monetary cooperation can begin effective work.
There is another important reason for initiating now concrete discussions of specific proposals. A plan for international monetary cooperation can be a factor in winning the war.
JUNE
1943
It has been suggested, and with much cogency,
that the task of assuring the defeat of the Axis
powers would be made easier if the victims of
aggression, actual and potential, could have
greater assurance that a victory of the United
Nations will not mean in the economic sphere a
repetition of the exchange instability and monetary collapse that followed the last war. That
assurance should be given now. The people in
all of the United Nations must be encouraged to
feel themselves on solid ground. They must be
given to understand that a victory of the United
Nations will not usher in another two decades
of widespread economic disruption. The people
must know that we at last recognize the fundamental truth that prosperity, like peace, is
indivisible.
One of the appropriate agencies to deal with
international economic and monetary problems
. would be an international stabilization fund
with resources and powers adequate to the task
of helping to achieve monetary stability and to
facilitate the restoration and balanced growth
of international trade. A proposal drafted by
American technical experts is appended. The
draft presents only the essential elements of an
international stabilization fund. The provisions
of the proposal are in every sense tentative,
intended as a basis for discussion and exchange
of views. Obviously, there are many details
that have b-en omitted and that can be better
formulated after there is agreement on the
general principles.
It is recognized that an international stabilization fund is only one of the instrumentalities
501
POSTWAR INTERNATIONAL MONETARY STABILIZATION
which may be needed in the field of international
economic cooperation. Other agencies are also
needed to provide capital for postwar reconstruction and development, to provide funds for
rehabilitation and relief, and to promote stability in the prices of primary international commodities. There is a strong temptation to
embrace within a single international agency the
responsibility for dealing with these and other
international economic problems. We believe,
however, that international economic institutions can operate more effectively if they are not
burdened with important but extraneous duties
for which they have not been devised and for
which they are unsuited. For example, the
highly specialized nature of international monetary stabilization and the provision of longterm capital would seem to call for separate
institutions, each designed to deal with its distinct problems.
It should be emphasized that the appended
draft deals only with an international stabilization fund. It is anticipated that there will
/ also be submitted for consideration a preliminary
} ; draft of a proposal for an international agency
/ ! whose function will be to provide capital for
reconstruction and development. It is hoped
that the appended draft will call forth from the
experts of the United Nations, critical comment
and constructive suggestions. It is our belief
that a workable and acceptable plan can emerge
only from the joint efforts of the United Nations.
PRELIMINARY DRAFT OUTLINE OF PROPOSAL FOR A
UNITED AND ASSOCIATED NATIONS
STABILIZATION FUND
II. Composition of the Fund
1. The Fund shall consist of gold, currencies
of member countries, and securities of member
governments.
z. Each of the member countries shall subscribe a specified amount which will be called
its quota. The aggregate of quotas of the member countries shall be the equivalent of at least
5 billion dollars.
The cniota for each member country shall be
determined by an agreed upon formula. The
formula should give due weight to the important
factors relevant to the determination of quotas,
e.g., a country's holdings of gold and foreign
exchange, the magnitude of the fluctuations in
its balance 6f international payments, and its
national income.
3. Each member country shall provide the
Fund with 50 per cent of its quota on or before
the date set by the Board of Directors of the
Fund on which the Fund's operations are to
begin.
4. The initial payment of each member country (consisting of 50 per cent of its quota) shall
be 11.5 per cent of its quota in gold, 12..5 £er
cent in local currency, and 2.5 per cent in its
own (i.e., government) securities. However,
any country having less than 300 million dollars
in gold need provide initially only 7.5 per cent
of its quota in gold, and any country having
less than 100 million dollars in gold need provide initially only 5 per cent of its quota in gold,
the contributions of local currency being increased correspondingly. A country may, at
its option, substitute gold for its local currency
or securities in meeting its quota requirement.
5. The member countries of the Fund may be
called upon to make further provision toward
meeting their quotas pro rata at such times, in
such amounts, and in such form as the Board of
Directors of the Fund may determine, provided
that the proportion of gold called for shall not
exceed the proportions indicated in II-4 above,
and provided that a four-fifths vote of the Board
shall be required for subsequent calls to meet
quotas.
6. Any changes in the quotas of member
countries shall be made only with the approval
of a four-fifths vote of the Board.
I. Purposes of the Fund
i. To stabilize the foreign exchange rates of
the currencies of the United Nations and nations
associated with them.
z. To shorten the periods and lessen the degree
of disequilibrium in the international balance of
payments of member countries.
3. To help create conditions under which the
smooth flow of foreign trade and of productive
capital among the member countries will be
fostered.
4. To facilitate the effective utilization of the
abnormal foreign balances accumulating in some
countries as a consequence of the war situation.
5. To reduce the use of foreign exchange con- III. Powers and Operations
trols that interfere with world trade and the
The Fund shall have the following powers:
international flow of productive capital.
1. To buy, sell, and hold gold, currencies,
6. To help eliminate bilateral exchange clear- bills of exchange, and government securities of
ing arrangements, multiple currency devices, and member countries; to accept deposits and to
discriminatory foreign exchange practices.
earmark gold; to issue its own obligations, and
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
to discount or offer them for sale in member
countries; and to act as a clearing house for the
settling of international movements of balances,
bills of exchange, and gold.
All member countries agree that all of the
local currency holdings shall be free from any
restrictions as to their use. This provision does
not apply to abnormal war balances acquired in
accordance with the provisions of III-9, below.
z. To fix the rates at which it will buy and
sell one member's currency for another, and the
rates in local currencies at which it will buy
and sell gold. The guiding principle in the
fixing of such rates shall be stability in exchange
relationships. Changes in these rates shall be
considered only when essential to correction of a
fundamental disequilibrium and be permitted
only with the approval of four-fifths of member
votes.
3. To sell to the Treasury of any member
country (or stabilization fund or central bank
acting as its agent) at a rate of exchange determined by the Fund, currency of any member
country which the Fund holds, provided that:
a. The foreign exchange demanded from the
Fund is required to meet an adverse balance
of payments on current account with the
country whose currency is being demanded.
b. The Fund's holdings of the currency of any
member country shall not exceed during
the first year of the operation of the Fund,
the quota of that country; it shall not
exceed during the first two years 150 per
cent of such quota; and thereafter it shall
not exceed 2.00 per cent of such quota;
except that upon approval by four-fifths
of the member votes, the Fund may purchase any local currency in excess of these
limits, provided that at least one of the
following two conditions is met:
i. The country whose currency is being
acquired by the Fund agrees to adopt
and carry out measures recommended
by the Fund designed to correct the
disequilibrium in the country's balance
of payments, or
ii. It is believed that the balance of payments of the country whose currency is
being acquired by the Fund will be such
as to warrant the expectation that the
excess currency holdings of the Fund
can be disposed of within a reasonable
time.
c. When the Fund's net holdings of any local
currency exceed the quota for that country,
the country shall deposit with the Fund a
special reserve in accordance with regulaJUNE 1943
tions prescribed by the Board of Directors.
This provision does not apply to currencies
acquired under III-9 below.
d. When a member country is exhausting its
quota more rapidly than is warranted in
the judgment of the Board of Directors,
the Board may place such conditions upon
additional sales of foreign exchange to
that country as it deems to be in the general
interest of the Fund.
e. A charge at the rate of 1 per cent per
annum, payable in gold, shall be levied
against any member country on the amount
of its currency held by the Fund in excess
of the quota of that country. Abnormal
war balances acquired by the Fund (in
accordance with III-9 below) shall not be
included in the computed balance of local
currency used as a basis for this charge.
/. When the Fund's holdings of the local
currency of a member country exceed the
quota of that country, upon request by the
member country, the Fund shall resell to
the member country the Fund's excess
holdings of the currency of that country
for gold or acceptable foreign exchange.
4. The right of a member country to purchase
foreign exchange from the Fund with its local
currency for the purpose of meeting an adverse
balance of payments on current account is recognized only to the extent of its quota, subject to
the limitation in III-3 above and III-7 below.
5. With the approval of four-fifths of the
member votes, the Fund in exceptional circumstances may sell foreign exchange to a member
country to facilitate transfer of capital, or repayment or adjustment of foreign debts, when
in the judgment of the Board such a transfer is
desirable from the point of view of the general
international economic situation.
6. When the Fund's holdings of any particular
currency drop below 15 per cent of the quota of
that country, and after the Fund has used for
additional purchases of that currency,
(a) Gold in an amount equal to the country's
contribution of gold to the Fund, and
(£) The country's obligations originally contributed,
the Fund has the authority and the duty to
render to the country a report embodying an
analysis of the causes of the depletion of its
holdings of that currency, a forecast of the
prospective balance of payments in the absence
of special measures, and finally, recommendations designed to increase the Fund's holdings
of that currency. The Board member of the
country in question should be a member of the
5°3
POSTWAR INTERNATIONAL MONETARY STABILIZATION
9. To buy from the governments of member
Fund committee appointed to draft' the report.
This report should be sent to all member coun- countries, abnormal war balances held in other
countries, provided all the following conditions
tries and, if deemed desirable, made public.
Member countries agree that they will give are met:
a. The abnormal war balances are in member
immediate and careful attention to recommendacountries and are reported as such (for the
tions made by the Fund.
purpose of this provision) by the member
7. Whenever it becomes evident to the Board
government on date of its becoming a
of Directors that the anticipated demand for any
member.
particular currency may soon exhaust the Fund's
b. The country selling the abnormal war
holdings of that currency, the Board of Direcbalances to the Fund agrees to transfer
tors of the Fund shall inform the member counthese balances to the Fund and to repurtries of the probable supply of this currency and
chase from the Fund 40 per cent of them
of a proposed method for its equitable distribu(at the same price) with gold or such free
tion, together with suggestions for helping to
currencies as the Fund may wish to accept,
equate the anticipated demand and supply for
at the rate of 2. per cent of the transferred
the currency.
balances each year for 10 years beginning
The Fund shall make every effort to increase
not later than 3 years after the date of
the supply of the scarce currency by acquiring
transfer.
that currency from the foreign balances or memc. The country in which the abnormal war
ber countries. The Fund may make special
balances are held agrees to the transfer to
arrangements with any member country for the
the Fund of the balances described in (&)
purpose of providing an emergency supply under
above, and to repurchase from the Fund
appropriate conditions which are acceptable to
40 per cent of them (at the same price)
both the Fund and the member country.
with gold or such currencies as the Fund
The privilege of any country to acquire an
may wish to accept, at the rate of 2. per
amount of other currencies equal to or in excess
cent of the transferred balances each year
of its quota shall be limited by the necessity of
for 2.0 years beginning not later than 3
assuring an appropriate distribution among the
years after the date of transfer.
various members of any currency the supply of
which is being exhausted. The Fund shall
d. A charge of 1 per cent, payable in gold,
apportion its sales of such scarce currency. In
shall be levied against the country selling
such apportionment, it shall be guided by the
its abnormal war balances and against the
principle of satisfying the most urgent needs
country in which the balances are held.
from the point of view of the general interIn addition a charge of 1 per cent, payable
national economic situation. It shall also conin gold, shall be levied annually against
sider the special needs, and resources of the
them on the amount of such balances reparticular countries making the request for the
maining to be repurchased by each country.
scarce currency.
e. If the country selling abnormal war bal8. In order to promote the most effective use
ances to the Fund asks for foreign exchange
of the available and accumulating supply of
rather than local currency, the request will
foreign exchange resources of member countries,
not be granted unless the country needs the
each member country agrees that it will offer
foreign exchange for the purpose of meeting
to sell to the Fund, for its local currency or for
an adverse balance of payments not arising
foreign currencies which it needs, all foreign
from the acquisition of gold, the accumulaexchange and gold it acquires in excess of the
tion of foreign balances, or other capital
amount it possessed immediately after joining
transactions.
the Fund. For the purpose of this provision,
/. Either country may, at its option, increase
including computations, only free foreign exthe amount it repurchases annually. But,
change and gold are considered. The Fund may
in the case of the country selling abnormal
accept or reject the offer.
war balances to the Fund, not more than
To help achieve this objective each member
2. per cent per annum of the original sum
country agrees to discourage the unnecessary
taken over by the Fund shall become free,
accumulation of foreign balances by its nationand only after 3 years shall have elapsed
als. The Fund shall inform any member counsince the sale of the balances to the Fund.
try when, in its opinion, any further growth of
g. The Fund has the privilege of disposing of
privately-held foreign balances appears unany of its holdings of abnormal war balwarranted.
ances as free funds after the Z3~year period
504
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
is passed, or sooner under the following
conditions:
i. its holdings of the free funds of the
country in which the balances are held
fall below 15 per cent of its quota; or
ii. the approval is obtained of the country
in which the balances are held.
h. The country in which the abnormal war
balances are held agrees not to impose any
restrictions on the use of the instalments
of the 40 per cent portion gradually repurchased by the country which sold the
balances to the Fund.
i. The Fund agrees not to sell the abnormal
war balances acquired under the above
authority, except with the permission or
at the request of the country in which the
balances are being held. The Fund may
invest these balances in ordinary or special
government securities of that country.
The Fund shall be free to sell such securities in any country provided that the approval of the issuing government is first
obtained.
j . The Fund shall determine from time to
time what shall be the maximum proportion of the abnormal war balances it will
purchase under this provision.
Abnormal war balances acquired under
this provision shall not be included in
computing the amount of foreign exchange
available to member countries under their
quotas.
10. To buy and sell currencies of nonmember
countries, but shall not be authorized to hold
such currencies beyond sixty days after date of
purchase, except with the approval of four-fifths
of the member votes.
11. To borrow the currency of any member
country, provided four-fifths of the member
votes approve the terms of such borrowing.
11. To sell member-country obligations
owned by the Fund provided that the Board
representative of the country in which the
securities are to be sold approves.
To use its holdings to obtain rediscounts or
advances from the central bank of any country
whose currency the Fund requires.
13. To invest any of its currency holdings in
government securities and prime commercial
paper of the country of that currency provided
four-fifths of the member votes approve, and
provided further that the Board representative
of the country in which the investment is to be
made approves.
14. To lend to any member country its local
currency from the Fund for one year or less up
JUNE 1943
to 75 per cent of the currency of that country
held by the Fund, provided such loan is approved
by four-fifths of the member votes.
15. To levy upon member countries a pro
rata share of the expenses of operating the Fund,
payable in local currency, not to exceed x\ per
cent per annum of the quota of each country.
The levy may be mad'e only to the extent that
the earnings of the Fund are inadequate to meet
its current expenses, and only with the approval
of four-fifths of the member votes.
The Fund shall make a service charge of
34 per cent or more on all exchange and gold
transactions.
16. The Fund shall deal only with or through
a. The treasuries, stabilization funds, or fiscal
agents of member governments;
b. The central banks, only with the consent
of the member of the Board representing
the country in question; and
c* Any international banks owned"predominantly by member governments.
The Fund may, nevertheless, with the approval
of the member of the Board representing the
government of the country concerned, sell its
own securities, or securities it holds, directly to
the public or to institutions of member countries.
IV. Monetary Unit of the Fund
1. The monetary unit of the Fund shall be the
Unitas (UN) consisting of 137 \ grains of fine
gold (equivalent to $10 U.S.). The accounts of
the Fund shall be kept and published in terms of
Unitas.
z. The value of the currency of each member
country shall be fixed by the Fund in terms of
gold or Unitas and may not be altered by any
member country without the approval of fourfifths of the member votes.
3. Deposits in terms of Unitas may be accepted by the Fund from member countries upon
the delivery of gold to the Fund and shall be
transferable and redeemable in gold or in the
currency of any member country at the rate
established by the Fund. The Fund shall maintain a 100 per cent reserve in gold against all
Unitas deposits.
4. No change in the value of the currencies of
member countries shall be permitted to alter
the value in gold or Unitas of the assets of the
Fund. Thus if the Fund approves a reduction
in the value of the currency of a member country
(in terms of gold or Unitas) or if, in the opinion
of the Board, the currency of a member country
had depreciated to a significant extent, that
country must deliver to the Fund when
505
POSTWAR INTERNATIONAL MONETARY STABILIZATION
requested an amount of its local currency equal
to the decreased value of that currency held by
the Fund. Likewise, if the currency of a particular country should appreciate, the Fund must
return to that country an amount (in the currency of that country) equal to the resulting
increase in the gold or Unitas value of the Fund's
holdings. The same provisions shall also apply
to the government securities of member countries held by the Fund. However, this provision shall not apply to currencies acquired
under III-9 (abnormal war balances).
V. Management
1. The administration of the Fund shall be
vested in a Board of Directors. Each government shall appoint a director and an alternate,
in a manner determined by it, who shall serve
for a period of three years subject to the pleasure
of their government. Directors and alternates
may be reappointed.
In all voting by the Board, the director or
alternate of each member country shall be entitled to cast an agreed upon number of votes.
The distribution of voting power shall be closely
related to the quotas of member countries, although not in precise proportion to the quotas.
An appropriate distribution of voting power
would seem to be the following: Each country
shall have 100 votes plus 1 vote for the equivalent of each 100,000 Unitas (1 million dollars)
of its quota.
Notwithstanding the approved formula for
distributing voting power, no country shall be
entitled to cast more than one-fourth of the
aggregate votes regardless of its quota. All
decisions, except where specifically provided
otherwise, shall be made by a majority of the
member votes.
z. The Board of Directors shall select a Managing Director of the Fund and one or more
assistants. The Managing Director shall become an ex officio member of the Board and shall
be chief of the operating staff of the Fund.
The Managing Director and the assistants shall
hold office for two years, shall be eligible for
reelection, and may be removed for cause at any
time by the Board.
The Managing Director of the Fund shall
select the operating staff in accordance with
regulations established by the Board of Directors. Members of the staff may be made available, upon request of member countries, for
consultation in connection with international
economic problems and policies.
3. The Board of Directors shall appoint from
among its members an Executive Committee to
506
consist of not less than eleven members. The
Chairman of the Board shall be Chairman of the
Executive Committee, and the Managing Director of the Fund shall be an ex officio member
of the ExecutiveXommittee.
The Executive" Committee shall£be^continuously available at the head office of the Fund
and shall exercise the authority delegated to it
by the Board. In the absence of any member
of the Executive Committee, his alternate shall
act in his place. Members of the Executive
Committee shall receive appropriate remuneration.
4. The Board of Directors may appoint such
other committees as it finds necessary for the
work of the Fund. It may also appoint advisory committees chosen wholly or partially
from persons not employed by the Fund.
5. The Board of Directors may at any meeting,
by a four-fifths vote, authorize any officers or
committees of the Fund to exercise any specified
powers of the Board. The Board may not
delegate, except to the Executive Committee,
any authority which can be exercised only by a
four-fifths vote.
Delegated powers shall be exercised only until
the next meeting of the Board, and in a manner
consistent with the general policies and practices
of the Board.
6. The Board of Directors may establish
procedural regulations governing the operations
of the Fund. The officers and committees of the
Fund shall be bound by such regulations.
7. The Board of Directors shall hold an annual meeting and such other meetings as it
may be desirable to convene. On request of
member countries casting one-fourth of the
votes, the chairman shall call a meeting of the
Board for the purpose of considering any matters
placed before it.
8. A country failing to meet its obligations
to the Fund may be suspended provided a majority of the member votes so decides. While
under suspension, the country shall be denied
the privileges of membership but shall be subject
to the same obligations as any other member of
the Fund. At the end of two years the country
shall be automatically dropped from membership unless it has been restored to good standing
by a majority of the member votes.
Any country may withdraw from the Fund
by giving notice, and its withdrawal will take
effect two years from the date of such notice.
During the interval between notice of withdrawal and the taking effect of the notice, such
country shall be subject to the same obligations
as any other member of the Fund.
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
A country which is dropped or which withdraws from membership shall have returned to
it an amount in its own currency equal to its
contributed quota, plus other obligations of the
Fund to the country, and minus any sum owed
by that country to the Fund. Any losses of the
Fund may be deducted pro rata from the contributed quota to be returned to the country that
has been dropped or has withdrawn from membership. The Fund shall have five years in
which to liquidate its obligation to -such a
country. When any country is dropped or
withdraws from the Fund, the rights of the
Fund shall be fully safeguarded.
9. Net profits earned by the Fund shall be
distributed in the following manner:
a. 50 per cent to reserves until the reserves
are equal to 10 per cent of the aggregate
quotas of the Fund.
b. 50 per cent to be divided each year among
the members in proportion to their quotas.
Dividends distributed to each country shall
be paid in its own currency or in Unitas
at the discretion of the Fund.
VL Policies of Member Countries
Each member country of the Fund undertakes
the following:
1. To maintain by appropriate action ex'change rates established by the Fund on the
currencies of other countries, and not to alter
exchange rates except with the consent of the
Fund and only to the extent and in the direction
approved by the Fund. Exchange rates of member countries may be permitted to fluctuate
within a specified range fixed by the Fund.
i. To abandon, as soon as the member country
decides that conditions permit, all restrictions
and controls over foreign exchange transactions
(other than those involving capital transfers)
with other member countries, and not to impose
any additional restrictions without the approval
of the Fund.
The Fund may make representations to member countries that conditions are favorable for
the abandonment of restrictions and controls
over foreign exchange transactions, and each
member country shall give consideration to such
representations.
3. To cooperate effectively with other member
countries when such countries, with the approval of the Fund, adopt or continue controls
for the purpose of regulating international
movements of capital. Cooperation shall include, upon recommendation by the Fund,
measures that can appropriately be taken:
a. Not to accept or permit acquisition of
deposits, securities, or investments by nationals of any member country imposing
restrictions on the export of capital except
with the permission of the Government
of that country and the Fund;
b. To make available to the Fund or to the
Government of any member country full
information on all property in the form
of deposits, securities and investments of
the nationals of that member country; and
c. Such other measures as the Fund shall
recommend.
4. Not to enter upon any new bilateral foreign
exchange clearing arrangements, nor engage in
multiple currency practices, except with the
approval of the Fund.
5. To give consideration to the views of the
Fund on any existing or proposed monetary or
economic policy, the effect of which would be
to bring about sooner or later a serious disequilibrium in the balance of payments of other
countries.
6. To furnish the Fund with all information
it needs for its operations and to furnish such
reports as it may require in the form and at the
times requested by the Fund.
7. To adopt appropriate legislation or decrees
to carry out its undertakings to the Fund and
to facilitate the activities of the Fund.
B. PLAN SUBMITTED BY BRITISH EXPERTS
INTRODUCTORY STATEMENT
In Parliament on February 2., the Chancellor
of the Exchequer mentioned the need, after the
war, of "an international monetary mechanism
which will serve the requirements of international trade and avoid any need for unilateral
action in competitive exchange depreciation . . .
a system in which blocked balances and unilateral clearances would be unnecessary . . . an
orderly and agreed method of determining the
JUNE 1943
value of national currency units . . . we want to
free the international monetary system from
those arbitrary, unpredictable and undesirable
influences which have operated in the past as x
result of large scale speculative movements, of
short-term capital.'*
On the directions of H. M. Government, this
problem has been under close examination by
the Treasury in consultation with other Departments. The present paper has been prepared,
5°7
POSTWAR INTERNATIONAL MONETARY STABILIZATION
and the Government has decided that it should
be published, as a preliminary contribution to
the solution of one of the problems of international economic co-operation after the war.
H. M. Government is not committed to the
principles or details of the scheme. Any proposals for a satisfactory international monetary
mechanism after the war can only be framed
after full consideration of all aspects of a very
difficult problem. It is hoped that these proposals will afford a basis for discussion, criticism
and constructive amendment, together with
similar plans having similar objectives which
may be prepared by experts of other Governments.
On these terms it has been presented for
technical examination by experts of the U. S.
Government. On these terms also it has been
discussed in an informal and exploratory manner
with officials of the Governments of the Dominions and of India. These discussions were
on the expert plane, and did not commit the
Governments concerned in any way. It has
also been discussed with representatives of the
European Allies, and has been communicated to
representatives of the other United Nations.
PROPOSALS FOR AN INTERNATIONAL
CLEARING UNION
PREFACE
Immediately after the war, all countries which
have been engaged will be concerned with the
pressure of relief and urgent reconstruction.
The transition out of this into the normal world
of the future cannot be wisely effected unless we
know into what we are moving. It is therefore
not too soon to consider what is to come after.
In the field of national activity occupied by
production, trade and finance, both the nature
of the problem and the experience of the period
between wars suggest four main lines of approach.
i. The mechanism of currency and exchange.
z. The framework of a commercial policy
regulating conditions for exchange of goods,
tariffs, preferences, subsidies, import regulations
and the like.
3. Orderly conduct of production, distribution
and price or primary products so as to protect
both producers and consumers from the loss and
risk for which extravagant fluctuations of
market conditions have been responsible in
recent times.
4. Investment aid, both medium and long
term, for countries whose economic development needs assistance from outside.
508
If the principles of these measures and the
form of institutions to give effect to them can
be settled in advance, in order that they may
be in operation when need arises, it is possible
that taken together they may help the world
to control the ebb and flow of the tides of economic activity which have, in the past, destroyed security of livelihood and endangered
international peace.
All these matters will need to be handled in
due course. The proposal that follows relates
only to the mechanism of currency and exchange
in international trading. It appears on the
whole convenient to give it priority, because
some general conclusions have to be reached
under this head before much progress can be
made with other topics.
In preparing these proposals care has been
taken to regard certain conditions, which the
groundwork of an international economic system to be set up after the war should satisfy
if it is to prove durable.
(1) There should be the least possible interference with internal national policies, and the
plan should not wander from the international
terrain. Since such policies may have important
repercussions on international relations they
cannot be left out of account. Nevertheless, in
the realm of internal policy, the authority of
the governing board or the proposed institution
should be limited to recommendations, or, at
most, to imposing conditions for more extended
enjoyment of the facilities which the institution
offers.
(z) The technique of the plan must be capable
of application irrespective of the type and
principle of government and the economic policy
existing in the prospective member States.
(3) Management of the institution must be
genuinely international, without preponderant
power of veto or enforcement lying with any
country or group. And the rights and privileges
of smaller countries must be safeguarded.
(4) Some qualification of the right to act at
pleasure is required by any agreement or treaty
between Nations. But in order that such arrangements may be fully voluntary so long as
they last and terminable when they have become
irksome, provision must be made for voiding the
obligation at due notice. If many member
States were to take advantage of this, the plan
would have broken down, but if they are free
to escape from its provisions if necessary, they
may be more willing to go on accepting them.
(5) The plan must operate not only to the
general advantage but also to the individual
advantage of each of the participants, and must
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
not require a special economic or financial sacrifice from certain countries. No participant
must be asked to do or offer anything which is
not to his own true long-term interest.
It must be emphasized that it is not for the
Clearing Union to assume the burden of long
term lending which is the proper task of some
other institution. It is also necessary for it to
have the means of restraining improvident borrowers. But the Clearing Union must also seek
to discourage creditor countries from having
unused large liquid balances which ought to be
devoted to some positive purpose. For excessive credit balances necessarily create excessive
debit balances for some other party. In recognising that the creditor as well as the debtor
may be responsible for a want of balance, the
proposed institution would be breaking new
ground.
is exercised on any country whose balance
of payments.with the rest of the world is
departing from equilibrium in either
direction, so as to prevent movements
which must create for its neighbours an
equal but opposite want of balance.
( 0 We need an agreed plan for starting off
every country after the war with a stock
of reserves appropriate to its importance
in world commerce, so that without due
anxiety it can set its house in order during
the transitional period to full peace-time
conditions.
(f) We need a central institution, of a purely
technical and non-political character, to
aid and support other international institutions concerned with the planning and
regulation of the world's economic life.
QQ More generally, we need a means of reassurance to a troubled world, by which
I. The Objects of the Plan
any country whose own affairs are conAbout the primary objects of an improved
ducted with due prudence is relieved of
system of International Currency there is, toanxiety, for causes which are not of its
day, a wide measure of agreement:—
own making, concerning its ability to
(a) We need an instrument of international
meet its international liabilities; and
currency having general acceptability
which will, therefore, make unnecessary
between nations, so that blocked balances
those methods of restriction and disand bilateral clearings are unnecessary;
crimination which countries have adopted
that is to say, an instrument of currency
hitherto, not on their merits, but as
used by each nation in its transactions
measures of self-protection from disrupwith other nations, operating through
tive outside forces.
whatever national organ, such as a
z. There is also a growing measure of agreeTreasury or a Central Bank, is most ap- ment about the general character of any solution
propriate, private individuals, businesses of the problem likely to be successful. The
and banks other than Central Banks, each particular proposals set forth below lay no
continuing to use their own national claim to originality. They are an attempt to
currency as heretofore.
reduce to practical shape certain general ideas
(b*) We need an orderly and agreed method belonging to the contemporary climate of ecoof determining the relative exchange nomic opinion, which have been given publicity
values of national currency units, so that in recent months by writers of several different
unilateral action and competitive ex- nationalities. It is difficult to see how any
change depreciations are prevented.
plan can be successful which does not use these
(/) We need a quantum of international cur- general ideas, which are born of the spirit of
rency, which is neither determined in an the age. The actual details put forward below
unpredictable and irrelevant manner as, are offered, with no dogmatic intention, as the
for example, by the technical progress of basis of discussion for criticism and improvethe gold industry, nor subject to large ment. For we cannot make progress without
variations depending on the gold reserve embodying the general underlying idea in a
policies of individual countries; but is frame of actual working, which will bring out
governed by the actual current require- the practical and political difficulties to be faced
ments of world commerce, and is also and met if the breath of life is to inform it.
capable of deliberate expansion and con3. In one respect this particular plan will be
traction to offset deflationary and infla- found to be more ambitious and yet, at the same
tionary tendencies in effective world time, perhaps more workable than some of the
demand.
variant versions of the same basic idea, in that
(d) We need a system possessed of an internal it is fully international, being based on one
stabilising mechanism, by which pressure general agreement and not on a multiplicity of
JUNE 1943
509
POSTWAR INTERNATIONAL MONETARY STABILIZATION
bilateral arrangements. Doubtless proposals II. The Provisions of the Plan
might be made by which bilateral arrangements
6. The provisions proposed (the particular procould be fitted together so as to obtain some of portions and other details suggested being
the advantages of a multilateral scheme. But tentative as a basis of discussion) are the
there will be many difficulties attendant on such following:—
adjustments. It may be doubted whether a
(1) All the United Nations will be invited to
comprehensive scheme will ever in fact be become original members of the International
worked out, unless it can come into existence Clearing Union. Other States may be invited
through a single act of creation made possible to join subsequently. If ex-enemy States are
by the unity of purpose and energy of hope for invited to join, special conditions may be
better things to come, springing from the vic- applied to them.
tory of the United Nations, when they have
(z) The Governing Board of the Clearing
attained it, over immediate evil. That these Union shall be appointed by the Governments of
proposals are ambitious is claimed, therefore to the several member States, as provided in (12.)
be not a drawback but an advantage.
below; the daily business with the Union and
4. The proposal is to establish a Currency the technical arrangements being carried out
Union, here designated an International Clearing through their Central Banks or other appropriUnion, based on international bank-money, ate authorities.
called (let us say) bancor, fixed (but not un(3) The member States will agree between
alterably) in terms of gold and accepted as the themselves the initial values of their own curequivalent of gold by the British Common- rencies in terms of bancor. A member State
wealth and the United States and all the other may not subsequently alter the value of its
members of the Union for the purpose of settling currency in terms of bancor without the perinternational balances. The Central Banks of mission of the Governing Board except under
all member States (and also of non-members) the conditions stated below; but during the first
would keep accounts with the International five years after the inception of the system the
Clearing Union through which they would be Governing Board shall give special consideraentitled to settle their exchange balances with tion to appeals for an adjustment in the exchange
one another at their par value as defined in terms value of a national currency unit on the ground
of bancor. Countries having a favourable of unforeseen circumstances.
balance of payments with, the rest of the world
(4) The value of bancor in terms of gold shall
as a whole would find themselves in possession be fixed by the Governing Board. Member
of a credit account with the Clearing Union, States shall not purchase or acquire gold,
and those having an unfavourable balance would directly or indirectly, at a price in terms of their
have a debit account. Measures would be national currencies in excess of the parity which
necessary (see below) to prevent the piling up corresponds to the value of their currency in
of credit and debit balances without limit, and terms of bancor and to the value of bancor in
the system would have failed in the long run if terms of gold. Their sales and purchases of
it did not possess sufficient capacity for self- gold shall not be otherwise restricted.
equilibrium to secure this.
(5) Each member State shall have assigned
5. The idea underlying such a Union is simple, to it a quota, which shall determine the measure
namely, to generalise the essential principle of of its responsibility in the management of the
banking as it is exhibited within any closed Union and of its right to enjoy the credit facilisystem. This principle is the necessary equality ties provided by the Union. The initial quotas
of credits and debits. If no credits can be re- might be fixed by reference to the sum of each
moved outside the clearing system, but only country's exports and imports on the average of
transferred within it, the Union can never be in (say) the three pre-war years, and might be
any difficulty as regards the honouring of (say) 75 per cent of this amount, a special assesscheques drawn upon it. It can make what ment being substituted in cases (ofwhich there
advances it wishes to any of its members with might be several) where this formula would be,
the assurance that the proceeds can only be for any reason, inappropriate. Subsequently,
transferred to the clearing account of another after the elapse of the transitional period, the
member. Its sole task is to see to it that its quotas should be revised annually in accordance
members keep the rules and that the advances with the running average of each country's
made to each of them are prudent and a visable actual volume of trade in the three preceding
years, rising to a five-year average when figures
for the Union as a whole.
510
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
for five post-war years are available. The determination of a country's quota primarily by
reference to the value of its foreign trade seems
to offer the criterion most relevant to a plan
which is chiefly concerned with the regulation
of the foreign exchanges and of a country's
international trade balance. It is, however, a
matter for discussion whether the formula for
fixing quotas should also take account of other
factors.
(6) Member States shall agree to accept payment of currency balances, due to them from
other members, by a transfer of bancor to their
credit in the books of the Clearing Union.
They shall be entitled, subject to the conditions
set forth below, to make transfers of bancor to
other members which have the effect of overdrawing their own accounts with the Union,
provided that the maximum debit balances thus
created do not exceed their quota. The Clearing Union may, at its discretion, charge a small
commission or transfer fee in respect of transactions in its books for the purpose of meeting
its current expenses or any other outgoings approved by the Governing Board.
(7) A member State shall pay to the Reserve
Fund of the Clearing Union a charge of 1 per
cent per annum on the amount of its average
balance in bancor, whether it is a credit or a
debit balance, in excess of a quarter of its quota;
and a further charge of 1 per cent on its average
balance, whether credit or debit, in excess of a
half of its quota. Thus, only a country which
keeps as nearly as possible in a state of international balance on the average of the year will
escape this contribution. These charges are
not absolutely essential to the scheme. But if
they are found acceptable, they would be
valuable and important inducements towards
keeping a level balance, and a significant indication that the system looks on excessive credit
balances with as critical an eye as on excessive
debit balances, each being, indeed, the inevitable
concomitant of the other. Any member State
in debit may, after consultation with the
Governing Board, borrow bancor from the
balances of any member State in credit on such
terms as may be mutually agreed, by which
means each would avoid these contributions.
The Governing Board may, at its discretion,
remit the charges on credit balances, and increase correspondingly those on debit balances,
if in its opinion unduly expansionist conditions
are impending in the world economy.
(8)-~(V) A member State may not increase
its debit balance by more than a quarter of its
quota within a year without the permission of
JUNE 1943
the Governing Board. If its debit balance has
exceeded a quarter of its quota on the average
of at least two years, it shall be entitled to
reduce the value of its currency in terms of
bancor provided that the reduction shall not
exceed 5 per cent without the consent of the
Governing Board; but it shall not be entitled to
repeat this procedure unless the Board is satisfied
that this procedure is appropriate.
(F) The Governing Board may require from
a member State having a debit balance reaching
a half of its quota the deposit of suitable collateral against its debit balance. Such collateral shall, at the discretion of the Governing
Board, take the form of gold, foreign or domestic currency or Government bonds, within the
capacity of the member State. As a condition
of allowing a member State to increase its debit
balance to a figure in excess of a half of its
quota, the Governing Board may require all or
any of the following measures:—
(i) a stated reduction in the value of the
member's currency, if it deems that to
be the suitable remedy;
(ii) the control of outward capital trans. actions if not already in force; and
(iii) the outright surrender of a suitable proportion of any separate gold .or other
liquid reserve in reduction of its debit
balance.
Furthermore, the Governing Board may recommend to the Government of the member State
any internal measures affecting its domestic
economy which may appear to be appropriate
to restore the equilibrium of its international
balance.
(V) If a member State's debit balance has exceeded three-quarters of its quota on the average
of at least a year and is excessive in the opinion
of the Governing Board in relation to the total
debit balances outstanding on the books of the
Clearing Union, or is increasing at an excessive
rate, it may, in addition, be asked by the
Governing Board to take measures to improve
its position, and, in the event of its failing to
reduce its debit balance accordingly within two
years, the Governing Board may declare that
it is in default and no longer entitled to draw
against its account except with the permission
of the Governing Board.
(d) Each member State, on joining the system, shall agree to pay to the Clearing Union
any payments due from it to a country in default
towards the discharge of the latter's debit
balance and to accept this arrangement in the
event of falling into default itself. A member
State which resigns from the Clearing Union
511
POSTWAR INTERNATIONAL MONETARY STABILIZATION
without making approved arrangements for the
discharge of any debit balance shall also be
treated as in default.
(9) A member State whose credit balance
has exceeded half of its quota on the average of
at least a year shall discuss wkh the Governing
Board (but shall retain the ultimate decision
in its own hands) what measures would be
appropriate to restore the equilibrium of its
international balances, including—
(a) Measures for the expansion of domestic
credit and domestic demand.
(b) The appreciation of its local currency in
terms of bancor, or, alternatively, the
encouragement of an increase in money
rates of earnings.
(V) The reduction of tariffs and other discouragements against imports.
(d) International development loans.
(10) A member State shall be entitled to obtain a credit balance in terms of bancor by paying
in gold to the Clearing Union for the credit of
its clearing account. But no one is entitled to
demand gold from the Union against a balance
of bancor, since such balance is available only
for transfer to another clearing account.' The
Governing Board of the Union shall, however,
have the discretion to distribute any gold in
the possession of the Union between the members possessing credit balances in excess of a
specified proportion of their quotas, proportionately to such balances, in reduction of their
amount in excess of that proportion.
(11) The monetary reserves of a member
State, viz., the Central Bank or other bank or
Treasury deposits in excess of a working balance, shall not be held in another country
except with the approval of the monetary
authorities of that country.
(iz) The Governing Board shall be appointed
by the Governments of the member States,
those with the larger quotas being entitled to
appoint a member individually, and those with
smaller quotas appointing in convenient political or geographical groups, so that the members
would not exceed (say) I2- o r *5 *n number.
Each representative on the Governing Board
shall have a vote in proportion to the quotas
of the State (or States) appointing him, except
that on a proposal to increase a particular quota,
a representative's voting power shall be measured by the quotas of the member States appointing him, increased by their credit balance
or decreased by their debit balance, averaged
in each case over the past two years. Each
member State, which is not individually represented on the Governing Board, shall be en-
titled to appoint a permanent delegate to the
Union to maintain contact with the Board and
to act as liaison for daily business and for the
exchange of information with the Executive of
the Union. Such delegates shall be entitled to
be present at the Governing Board when any
matter is under consideration which specially
concerns the State he represents, and to take
part in the discussion.
(13) The Governing Board shall be entitled
to reduce the quotas of members, all in the same
specified proportion, if it seems necessary to
correct in this manner an excess of world purchasing power. In that event, the provisions of
6 (8) shall be held to apply to the quotas as so
reduced, provided that no member shall be
required to reduce his actual overdraft at the
date of the change, or be entitled by reason of
this reduction to alter the value of his currency
under 6 (8) (a), except after the expiry of two
years. If the Governing Board subsequently
desires to correct a potential deficiency of world
purchasing power, it shall be entitled to restore
the general level of quotas towards the original
level.
(14) The Governing Board shall be entitled
to ask and receive from each member State any
relevant statistical or other information, including a full disclosure of gold, external credit
and debit balances and other external assets
and liabilities, both public and private. So far
as circumstances permit, it will be desirable that
the member States shall consult with the
Governing Board on important matters of policy
likely to affect substantially their bancor balances or their financial relations with other
members.
(15) The executive offices of the Union shall
be situated in London and New York, with the
Governing Board meeting alternately in London
and Washington.
(16) Members shall be entitled to withdraw
from the Union on a year's notice, subject to
their making satisfactory arrangements to discharge any debit balance. They would not, of
course, be able to employ any credit balance
except by making transfers from it, either
before or after their withdrawal, to the Clearing
Accounts of other Central Banks. Similarly,
it should be within the power of the Governing
Board to require the withdrawal of a member,
subject to the same notice, if the latter is in
breach of agreements relating to the Clearing
Union.
(17) The Central Banks of non-member States
would be allowed to keep credit clearing accounts with the Union; and, indeed, it would be
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
advisable for them to do so for the conduct of
their trade with member States. But they
would have no right to overdrafts and no say
in the management.
(18) The Governing Board shall make an
annual Report and shall convene an annual
Assembly at which every member State shall be
entitled to be represented individually and to
move proposals. The principles and governing
rules of the Union shall be the subject of reconsideration after five years' experience, if a
majority of the Assembly desire it.
III. What Liabilities Ought the Plan to Place
on Creditor Countries?
7. It is not contemplated that either the debit
or the credit balance of an individual country
ought to exceed a certain maximum—let us say,
its quota. In the case of debit balances this
maximum has been made a rigid one, and, indeed, counter-measures are called for long before
the maximum is reached. In the case of credit
balances no rigid maximum has been proposed.
For the appropriate provision might be to
require the eventual cancellation or compulsory
investment of persistent bancor credit balances
accumulating in excess of a member's quota;
and, however desirable this may be in principle,
it might be felt to impose on creditor countries
a heavier burden than they can be asked to
accept before having had experience of the
benefit to them of the working of the plan as a
whole. If, on the other hand, the limitation
were to take the form of the creditor country
not being required to accept bancor in excess of
a prescribed figure, this might impair the general acceptability of bancor, whilst at the same
time conferring no real benefit on the creditor
country itself. For, if it chose to avail itself
of the limitation, it must either restrict its
exports or be driven back on some form of bilateral payments agreements outside the Clearing Union, thus substituting a less acceptable
asset for bancor balances which are based on the
collective credit of all the member States and
are available for payments to any of them, or
attempt the probably temporary expedient of
refusing to trade except on a gold basis.
8. The absence of a rigid maximum to credit
balances does not impose on any member State,
as might be supposed at first sight, an unlimited
liability outside its own control. The liability
of an individual member is determined, not by
the quotas of the other members, but by its
own policy in controlling its favourable balance
of payments. The existence of the Clearing
Union does not deprive a member State of any
JUNE 1943
of the facilities which it now~possesses for receiving payment for its exports. In the absence
of the Clearing Union a creditor country can
employ the proceeds of its exports to buy goods
or to buy investments, or to make temporary
advances and to hold temporary overseas balances, or to buy gold in the market. All these:
facilities will remain at its disposal. The difference is that in the absence of the ClearingUnion, more or less automatic factors come into*
play to restrict the volume of its exports after
the above means of receiving payment for them
have been exhausted. Certain countries become
unable to buy and, in addition to this, there is
an automatic tendency towards a general slump
in international trade, and, as a result, a reduction in the exports of the creditor country.
Thus, the effect of the Clearing Union is to give:
the creditor country a choice between voluntarily curtailing its exports to the same extent
that they would have been involuntarily curtailed in the absence of the Clearing Union, or,
alternatively, of allowing its exports to continue
and accumulating the excess receipts in the form
of bancor balances for the time being. Unless
the removal of a factor causing the involuntary
reduction of exports is reckoned a disadvantage,
a creditor country incurs no burden but is, on
the contrary, relieved, by being offered the
additional option of receiving payment for its
exports through the accumulation of a bancor
balance.
9. If, therefore, a member State asks what
governs tjie maximum liability which it incurs
by entering the system, the answer is that this
lies entirely within its own control. No more
is asked of it than that it should hold in bancor
such surplus of its favourable balance of payments as it does not itself choose to employ in
any other way, and only for so long as it does
not so choose.
IV. Some Advantages of the Plan
10. The plan aims at the substitution of an
expansionist, in place of a contractionist, pressure on world trade.
11. It effects this by allowing to each member
State overdraft facilities of a defined amount.
Thus each country is allowed a certain margin
of resources and a certain interval of time within
which to effect a balance in its economic relations with the rest of the world. These facilities are made possible by the constitution of the
system itself and do not involve particular indebtedness between one member State and
another. A country is in credit or debit with
the Clearing Union as a whole. This means
513
POSTWAR INTERNATIONAL MONETARY STABILIZATION
that the overdraft facilities, whilst a relief to
some, are not a real burden to others. For the
accumulation of a credit balance with the
Clearing Union would resemble the importation
of gold in signifying that the country holding it
is abstaining voluntarily from the immediate
use of purchasing power. But it would not
involve, as would the importation of gold, the
withdrawal of this purchasing power from
circulation or the exercise of a deflationary and
contractionist pressure on the whole world,
including in the end the creditor country itself.
Under the proposed plan, therefore, no country
suffers injury (but on the contrary) by the fact
that the command over resources, which it does
not itself choose to employ for the time being,
is not withdrawn from use. The accumulation
of bancor credit does not curtail in the least its
capacity or inducement either to produce or
to consume.
12.. In short, the analogy with a national
banking system is complete. No depositor in
a local bank suffers because the balances, which
he leaves idle, are employed to finance the
business of someone else. Just as the development of national banking systems served to offset
a deflationary pressure which would have prevented otherwise the development of modern
industry, so by extending the same principle
into the international field we may hope to offset
the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world.
The substitution of a credit mechanism in place
of hoarding would have repeated in the international field the same miracle, already performed in the domestic field, of turning a stone
into bread.
13. There might be other ways of effecting
the same objects temporarily or in part. For
example, the United States might redistribute
her gold. Or there might be a number of bilateral arrangements having the effect of providing international overdrafts, as, for example,
an agreement by the Federal Reserve Board to
accumulate, if necessary, a large sterling balance
at the Bank of England, accompanied by a great
number of similar bilateral arrangements,
amounting to some hundreds altogether, between these and all the other banks in the
world. The objection to particular arrangements of this kind, in addition to their greater
complexity, is that they are likely to be influenced by extraneous, political reasons; that
they put individual countries in a position of
particular obligation towards others; and that
the distribution of the assistance between dif-
ferent countries may not correspond to need and
to the real requirements, which are extremely
difficult to foresee.
14. It should be much easier, and surely more
satisfactory for all of us, to enter into a general
and collective responsibility, applying to all
countries alike, that a country finding itself in a
creditor position against the restjf the world as a
whole should enter into an arrangement not to
allow this credit balance to exercise a contractionist pressure against world economy and, by
repercussion, against the economy of the creditor
country itself. This would give everyone the
great assistance of multilateral clearing, whereby (for example) Great Britain could offset favourable balances arising out of her exports to
Europe against unfavourable balances due to
the United States or South America or elsewhere. How, indeed, can anv country hope
to start up trade with Europe during the relief
and reconstruction period on any other terms?
15. The facilities offered will be of particular importance in the transitional period
after the war, as soon as the initial shortages of
supply have been overcome. Many countries
will find a difficulty in paying for their imports,
and will need time and resources before they
can establish a readjustment. The efforts of
each of these debtor countries to preserve its
own equilibrium, by forcing its exports and by
cutting off all imports which are not strictly
necessary, will aggravate the problems of all
the others. On the other hand, if each feels
free from undue pressure, the volume of international exchange will be increased and everyone will find it easier to re-establish equilibrium
without injury to the standard of life anywhere.
The creditor countries will benefit, hardly less
than the debtors, by being given an interval of
time in which to adjust their economies, during
which they can safely move at their own pace
without the result of exercising deflationary
pressure on the rest of the world, and by repercussion, on themselves.
16. It must, however, be emphasized that
the provision by which the members of the
Clearing Union start with substantial overdraft
facilities in hand will be mainly useful, just as
the possession of any kind of reserve is useful,
to allow time and method for necessary adjustments and a comfortable safeguard behind which
the unforeseen and the unexpected can be faced
with equanimity. Obviously, it does not by
itself provide any long-term solution against a
continuing disequilibrium, for in due course the
more improvident and the more impecunious,
left to themselves, would have run through
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
their resources. But, if the purpose of the overdraft facilities is mainly to give time for adjustments, we have to make sure, so far as possible,
that they will be made. We must have, therefore, some rules and some machinery to secure
that equilibrium is restored. A tentative attempt to provide for this has been made above.
Perhaps it might be strengthened and improved.
17. The provisions suggested differ in one
important respect from the pre-war system because they aim at putting some part of the
responsibility for adjustment on the creditor
country as well as on the debtor. This is an
attempt to recover one of the advantages
which were enjoyed in the nineteenth century,
when a flow of gold due to a favourable balance
in favour of London and Paris, which were then
the main creditor centres, immediately produced
an expansionist pressure and increased foreign
lending in those markets, but which has been
lost since New York succeeded to the position of
main creditor, as a result of gold movements
failing in their effect, of the breakdown of international borrowing and of the frequent flight
of loose funds from one depository to another.
The object is that the creditor should not be
allowed to remain entirely passive. For if he is,
an intolerably heavy task may be laid on the
debtor country, which is already for that very
reason in the weaker position.
18. If, indeed, a country lacks the productive
capacity to maintain its standard of life, then
a reduction in this standard is not avoidable.
If its wage and price levels in terms of money
are out of line with those elsewhere, a change in
the rate of its foreign exchange is inevitable.
But if, possessing the productive capacity, it
lacks markets because of restrictive policies
throughout the world, then the remedy lies in
expanding its opportunities for export by removal of the restrictive pressure. We are too
ready to-day to assume the inevitability of unbalanced trade positions, thus making the
opposite error to those who assumed the
tendency of exports and imports to equality.
It used to be supposed, without sufficient reason,
that effective demand is always properly adjusted throughout the world; we now tend to
assume, equally without sufficient reason, that
it never can be. On the contrary, there is great
force in the contention that, i£ active employment and ample purchasing power can be sustained in the main centres of the world trade,
the problem of surpluses and unwanted exports
will largely disappear, even though, under the
most prosperous conditions, there may remain
JUNE 1943
some disturbances of trade and unforeseen
situations requiring special remedies.
V. The Daily Management of the Exchanges
under the Plan
19. The Clearing Union restores unfettered
multilateral clearing between its members.
Compare this with the difficulties and complications of a large number of bilateral agreements. Compare, above all, the provisions by
which a country, taking improper advantage of
a payments agreement (for the system is, in fact,
a generalized payments agreement), as Germany
did before the war, is dealt with not by a single
country (which may not be strong enough to
act effectively in isolation or cannot afford to
incur the diplomatic odium of isolated action),
but by the system as a whole. If the argument
is used that the Clearing Union may have difficulty in disciplining a misbehaving country
and in avoiding consequential loss, with what
much greater force can we urge this objection
against a multiplicity of separate bilateral
payments agreements.
xo. Thus we should not only obtain the advantages, without the disadvantages, of an
international gold currency, but we might enjoy
these advantages more widely than was ever
possible in practice with the old system under
which at any given time only a minority of
countries were actually working with free exchanges. In conditions of multilateral clearing,
exchange dealings would be carried on as freely
as in the best days of the gold standard, without
its being necessary to ask anyone to accept
special or onerous conditions.
2.1. The principles governing transactions are:
first, that the Clearing Union is set up, not for
the transaction of daily business between individual traders or banks, but for the clearing
and settlement of the ultimate outstanding
balances between Central Banks (and certain
other super-national Institutions), such as
would have been settled under the old gold
standard by the shipment or the earmarking of
gold, and should not trespass unnecessarily
beyond this field; and, second, that its purpose
is to increase freedom in international commerce
and not to multiply interferences or compulsions.
2.2.. Many Central Banks have found great
advantage in centralising with themselves or
with an Exchange Control the supply and demand of all foreign exchange, thus dispensing
with an outside exchange market, though continuing to accommodate individuals through the
existing banks and not directly. The further
extension of such arrangements would be
5*5
POSTWAR INTERNATIONAL MONETARY STABILIZATION
consonant with the general purposes of the Clear- union would merge its currency identity in that
ing Union, inasmuch as they would promote of a mother country, with a quota appropriately
order and discipline in international exchange adjusted to the merged currency area as a whole,
transactions in detail as well as in general. The and not enjoy a separate individual membership
same is true of the control of capital movements, of the Clearing Union, as, for example, the
further described below, which many States are States of a Federal Union, the French colonies
likely to wish to impose on their own nationals. or the British Crown Colonies.
But the structure of the proposed Clearing
2.5. At the same time countries, which do not
Union does not require such measures of centrali- belong to a special geographical or political
sation or of control on the part of a member group, would be expected to keep their reserve
State. It is, for example, consistent alike with balances with the Clearing Union and not with
the type of Exchange Control now established one another. It has, therefore, been laid down
in the United Kingdom or with the system now that balances may not be held in another
operating in the United States. The Union country except with the approval of the monedoes not prevent private holdings of foreign tary authorities of that country; and, in order
currency or private dealings in exchange or that sterling and dollars might not appear to
international capital movements, if these have compete with bancor for the purpose of reserve
been approved or allowed by the member balances, the United Kingdom and the United
States concerned. Central Banks can deal States might agree together that they would not
direct with one another as heretofore. No accept the reserve balances' of other countries in
transaction in bancor will take place except excess of normal working balances except in
when a member State or its Central Bank is the case of banks definitely belonging to a
exercising the right to pay in it. In no case is Sterling Area or Dollar Area group.
there any direct control on capital movements
by the Union, even in the case of 6 (8) (V) (ii) VI. The Position of Gold under the Plan
above, but only by the member States themselves
z6. Gold still possesses great psychological
through their own institutions. Thus the value which is not being diminished by current
fabric of international banking organisation, events; and the desire to possess a gold reserve
built up by long experience to satisfy practical against unforeseen contingencies is likely to
needs, would be left as undisturbed as possible. remain. Gold also has the merit of providing
2.3. It is not necessary to interfere with the in point of form (whatever the underlying
discretion of countries which desire to maintain realities may be) an uncontroversial standard
a special intimacy within a particular group of of value for international purposes, for which it
countries associated by geographical or political would not yet be easy to find a serviceable subties, such as the existing sterling area, or stitute. Moreover, by supplying an automatic
groups, like the Latin Union of former days, means for settling some part of the favourable
which may come into existence covering, for balances of the creditor countries, the current
example, the countries of North America or gold production of the world and the remnant
those of South America, or the groups now of gold reserves held outside the United States
under active discussion, including Poland and may still have a useful part to play. Nor is it
Czechoslovakia or certain of the Balkan States. reasonable to ask the United States to deThere is no reason why such countries should monetise the stock of gold which is the basis
not be allowed a double position, both as of its impregnable liquidity. What, in the
members of the Clearing Union in their own long run, the world may decide to do with gold
right with their proper quota, and also as is another matter. The purpose of the Clearing
making use of another financial centre along Union is to supplant gold as a governing factor,
traditional lines, as, for example, Australia but not to dispense with it.
and India with London, or certain American
27. The international bank-money which we
countries with New York. In this case, their have designated bancor is defined in terms of a
accounts with the Clearing Union would be in weight of gold. Since the national currencies
exactly the same position as the independent of the member States are given a defined exgold reserves which they now maintain, and change value in terms of bancor, it follows that
they would have no occasion to modify in any they would each have a defined gold content
way their present practices in the conduct of which would be their official buying price for
daily business.
gold, above which they must not pay. The
Z4. There might be other cases, however, in fact that a member State is entitled to obtain a
which a dependency or a member of a federal credit in terms of bancor by paying actual gold
516
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
to the credit of its clearing account, secures a
steady and ascertained purchaser for the output
of the gold-producing countries, and for countries holding a large reserve of gold. Thus the
position of producers and holders of gold is
not affected adversely, and is, indeed, improved.
z8. Central Banks would be entitled to retain
their separate gold reserves and ship gold to
one another, provided they did not pay a price
above parity; they could coin gold and put it
into circulation, and, generally speaking, do
what they liked with it.
2.9. One limitation only would be, for obvious reasons, essential. No member State
would be entitled to demand gold from the
Clearing Union against its balance of bancor;
for bancor is available only for transfer to
another clearing account. Thus between gold
and bancor itself there would be a one-way
convertibility, such as ruled frequently before
the war with national currencies which were
on what was called a "gold exchange standard/*
This need not mean that the Clearing Union
would only receive gold and never pay it out.
It has been provided above that, if the Clearing
Union finds itself in possession of a stock of gold,
the Governing Board shall have discretion to
distribute the surplus between those possessing
credit balances in bancor, proportionately to
such balances, in reduction of their amount.
30. The question has tbeen raised whether
these arrangements are compatible with the
retention by individual member States of a full
gold standard with two-way convertibility, so
that, for example, any foreign central bank acquiring dollars could use them to obtain gold
for export. It is not evident that a good purpose would be served by this. But it need not
be prohibited, and if any member State should
prefer to maintain full convertibility for internal
purposes it could protect .itself from any abuse
of the system or inconvenient consequences by
providing that gold could only be exported
under licence.
31. The value of bancor in terms of gold is
fixed but not unalterably. The power to vary
its value might have to be exercised if the stocks
of gold tendered to the Union were to be excessive. No object would be served by attempting
further to peer into the future or to prophesy
the ultimate outcome.
VII. The Control of Capital Movements
32.. There is no country which can, in future,
safely allow the flight of funds for political
reasons or to evade domestic taxation or in
anticipation of the owner turning refugee.
JUNE 1943
Equally, there is no country that can safely
receive fugitive funds, which constitute an
unwanted import of capital, yet cannot safely
be used for fixed investment.
33. For these reasons it is widely held that
control of capital movements, both inward and
outward, should be a permanent feature of the
post-war system. It is an objection to this
that control, if it is to be effective, probably requires the machinery of exchange control for all
transactions, even though a general permission
is given to all remittances in respect of current
trade. Thus those countries which have for
the time being no reason to fear, and may
indeed welcome, outward capital movements,
may be reluctant to impose this machinery,
even though a general permission for capital,
as well as current transactions reduces it to being
no more than a machinery of record. On the
other hand, such control will be more difficult
to work by unilateral action on the part of those
countries which cannot afford to dispense with
it, especially in the absence of a postal censorship, if movements of capital cannot be controlled at both ends. It would, therefore, be of
great advantage if the United States, as well as
other members of the Clearing Union, would
adopt machinery similar to that which the
British Exchange Control has now gone a long
way towards perfecting. Nevertheless, the
universal establishment of a control of capital
movements cannot be regarded as essential to
the operation of the Clearing Union; and the
method and degree of such control should
therefore be left to the decision of each member
State. Some less drastic way might be found
by which countries, not themselves controlling
outward capital movements can deter inward
movements not approved by the countries from
which they originate.
34. The position of abnormal balances in
overseas ownership held in various countries
at the end of the war presents a problem of considerable importance and special difficulty.
A country in which a large volume of such
balances is held could not, unless it is in a
creditor position, afford the risk of having to
redeem them in bancor on a substantial scale,
if this would have the effect of depleting its
bancor resources at the outset. At the same
time, it is very desirable that the countries
owning these balances should be able to regard
them as liquid, at any rate over and above the
amounts which they can afford to lock up under
an agreed programme of funding or long-term
expenditure. Perhaps there should be some
special over-riding provision for dealing with
5*7
POSTWAR INTERNATIONAL MONETARY STABILIZATION
the transitional period only by which, through
the aid of the Clearing Union, such balances
would remain liquid and convertible into
bancor by the creditor country whilst there
would be no corresponding strain on the bancor
resources of the debtor country, or, at any rate,
the resulting strain would be spread over a
period.
35. The advocacy of a control of capital
movements must not be taken to mean that the
era of international investment should be
brought to an end. On the contrary, the
system contemplated should greatly facilitate
the restoration of international loans and credits
for legitimate purposes in ways to be discussed
below. The object, and it is a vital object,
is to have a means—
(a) of distinguishing long-term loans by
creditor countries, which help to maintain
equilibrium and develop the world's
resources, from movements of funds out
of debtor countries which lack the means
to finance them; and
(F) of controlling short-term speculative
movements or flights of currency whether
out of debtor countries or from one
creditor country to another.
36. It should be emphasised that the purpose
of the overdrafts of bancor permitted by the
Clearing Union is, not to facilitate long-term,
or even medium-term, credits to be made by
debtor countries which cannot afford them, but
to allow time and a breathing space for adjustments and for averaging one period with
another to all member States alike, whether in
the long run they are well-placed to develop a
forward international loan policy or whether
their prospects of profitable new development
in excess of their own resources justifies them
in long-term borrowing. The machinery and
organisation of international medium-term and
long-term lending is another aspect of post-war
economic policy, not less important than the
purposes which the Clearing Union seeks to
serve, but requiring another, complementary
institution.
VIII. Relation of the Clearing Union to Commercial Policy
37. The special protective expedients which
were developed between the two wars were
sometimes due to political, social or industrial
reasons. But frequently they were nothing
more than forced and undesired dodges to protect an unbalanced position of a country's
overseas payments. The new system, by helping to provide a register of the size and where518
abouts of the aggregate debtor and creditor
positions respectively, and an indication whether
it is reasonable for a particular country to adopt
special expedients as a temporary measure to
assist in regaining equilibrium in its balance of
payments, would make it possible to establish
a general rule not to adopt them, subject to
the indicated exceptions.
38. The existence of the Clearing Union would
make it possible for member States contracting
commercial agreements to use their respective
debit and credit positions with the Clearing
Union as a test, though this test by itself would
not be complete. Thus, the contracting parties, whilst agreeing to clauses in a commercial
agreement forbidding, in general, the use of
certain measures or expedients in their mutual
trade relations, might make this agreement
subject to special relaxations if the state of
their respective clearing accounts satisfied an
agreed criterion. For example, an agreement
might provide that, in the event of one of the
contracting States having a debit balance with
the Clearing Union exceeding a specified proportion of its quota on the average of a period,
it should be free to resort to import regulation,
to barter trade agreements, or to higher import
duties of a type which was restricted under
the agreement in normal circumstances. Protected by the possibility of such temporary indulgences, the members of the Clearing Union
should feel much more confidence in moving
towards the withdrawal of other and more
dislocating forms of protection and discrimination and in accepting the prohibition of the
worst of them from the outset. In any case,
it should be laid down that members of the
Union would not allow or suffer among themselves any restrictions on the disposal of receipts
arising out of current trade or "invisible"
income.
IX. The Use of the Clearing Union for Other
International Purposes
39. The Clearing Union might become the instrument and the support of international
policies in addition to those which it is its
primary purpose to promote. This deserves
the greatest possible emphasis. The Union
might become the pivot of the future economic
government of the world. Without it, other
more desirable developments will find themselves
impeded and unsupported. With it, they will
fall into their place as parts of an ordered
scheme. No one of the following suggestions
is a necessary part of the plan. But they are
illustrations of the additional purposes of high
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
importance and value which the Union, once
established, might be able to serve:—
( i ) The Union might set up a clearing account
in favour of international bodies charged with
post-war relief, rehabilitation and reconstruction. But it could go much further than this.
For it might supplement contributions received from other sources by granting preliminary overdraft facilities in favour of these
bodies, the overdraft being discharged over a
period of years out of the Reserve Fund of the
Union, or, if necessary, out of a levy on surplus
credit balances. So far as this method is
adopted it would be possible to avoid asking
any country to assume a burdensome commitment for relief and reconstruction, since the
resources would be provided in the first instance
by those countries having credit clearing accounts for which they have no immediate use
and are voluntarily leaving idle, and in the
long run by those countries which have a
chronic international surplus for which they
have no beneficial employment.
QL) The Union might set up an account in
favour of any supernational policing body
which may be charged with the duty of preserving the peace and maintaining international
order. If any country were to infringe its
properly authorised orders, the policing body
might be entitled to request the Governors of
the Clearing Union to hold the clearing account
of the delinquent country to its order and
permit no further transactions on the account
except by its authority. This would provide
an excellent machinery for enforcing a financial
blockade.
(3) The Union might set up an account in
favour of international bodies charged with the
management of a Commodity Control, and
might finance stocks of commodities held by
such bodies, allowing them overdraft facilities
on their accounts up to an agreed maximum.
By this means the financial problem of buffer
stocks and "ever-normal granaries" could be
effectively attacked.
(4) The Union might be linked up with a
Board for International Investment. It might
act on behalf of such a Board and collect for
them the annual service of their loans by automatically debiting the clearing account of the
country concerned. The statistics of the clearing accounts of the member States would give
a reliable indication as to which countries were
in a position to finance the Investment Board,
with the advantage of shifting the whole
system of clearing credits and debits nearer to
equilibrium.
JUNE 1943
(5) There are various methods by which the
Clearing Union could use its influence and its
powers to maintain stability of prices and to
control the Trade Cycle. If an International
Economic Board is established, this Board and
the Clearing Union might be expected to work
in close collaboration to their mutual advantage.
If an International Investment or Development
Corporation is also set up together with a
scheme of Commodity Controls for the control
of stocks of the staple primary products, we
might come to possess in these three Institutions
a powerful means of combating the evils of
the Trade Cycle, by exercising contractionist
or expansionist influence on the system as a
whole or on particular sections. This is a
large and important question which cannot be
discussed adequately in this paper; and need
not be examined at length in this place because
it does not raise any important issues affecting
the fundamental constitution of the proposed
Union. It is mentioned here to complete the
picture of the wider purposes which the foundation of the Clearing Union might be made to
serve.
40. The facility of applying the Clearing
Union plan to these several purposes arises out
of a fundamental characteristic which is worth
pointing out, since it distinguishes the plan
from those proposals which try to develop
the same ,basic principle along bilateral lines
and is one of the grounds on which the Plan
can claim superior merit. This might be described as its "anonymous** or "impersonal"
quality. No particular member States have to
engage their own resources as such to the
support of other particular States or of any
of the international projects or policies adopted..
They have only to agree in general that, if they
find themselves with surplus resources which
for the time being they do not themselves wish
to employ, these resources may go into the
general pool and be put to work on approved
purposes. This costs the surplus country nothing because it is not asked to part permanently,
or even for any specified period, with such
resources, which it remains free to expend and
employ for its own purposes whenever it
chooses; in which case the burden of finance is
passed on to the next recipient, again for only
so long as the recipient has no use for the
money. As pointed out above, this merely
amounts to extending to the international
sphere the methods of any domestic banking
system, which are in the same sense "impersonal" inasmuch as there is no call on the
particular depositor either to support as such
POSTWAR INTERNATIONAL MONETARY STABILIZATION
outside the resources made available by the
Clearing Union and additional to them, it
might be better for such specific aid to take the
place of the proposed overdrafts during the
''relief" period of (say) two years. In this
case credit clearing balances would be limited
to the amount of gold delivered to the Union,
and the overdraft facilities created by the
Union in favour of the Relief Council, the
International Investment Board or the Commodity Controls. Nevertheless, the immediate
establishment of the Clearing Union would not
be incompatible with provisional arrangements,
which could take alternative forms according
to the character of the other "relief" arrangements, qualifying and limiting the overdraft
quotas. Overdraft quotas might be allowed
on a reduced scale during the transitional
period. Or it might be proper to provide that
countries in receipt of relief or Lend-Lease
assistance should not have access at the same
time to overdraft facilities, and that the latter
should only become available when the former
had come to an end. If, on the other hand,
relief from outside sources looks like being
inadequate from the outset, the overdraft
X. The Transitional Arrangements
quotas may be even more necessary at the outset
41. It would be of great advantage to agree than later on.
the general principles of the Clearing Union
43. We must not be over-cautious. A rapid
before the end of the war, with a view to economic restoration may lighten the tasks
bringing it into operation at an early date of the diplomatists and the politicians in the
after the termination of hostilities. Major resettlement of the world and the restoration
plans will be more easily brought to birth in the of social order. For Great Britain and other
first energy of victory and whilst the active countries outside the *'relief" areas the possispirit of united action still persists, than in bility of exports sufficient to sustain their
days of exhaustion and reaction from so much standard of life is bound up with good and
effort which may well follow a little later. expanding markets. We cannot afford to wait
Such a proposal presents, however, something too long for this, and we must not allow exof a dilemma. On the one hand, many coun- cessive caution to condemn us to perdition.
tries will be in particular need of reserves of Unless the Union is a going concern, the problem
overseas resources in the period immediately of proper "timing** will be nearly insoluble.
after the war. On the other hand, goods will It is sufficient at this stage to point out that
be in short supply and the prevention of infla- the problem of timing must not be overlooked,
tionary international conditions of much more but that the Union is capable of being used so
importance for the time being than the opposite. as to aid rather than impede its solution.
The expansionist tendency of the plan, which is
a leading recommendation of it as soon as XI. Conclusion
peace-time output is restored and the productive
44. It has been suggested that so ambitious
capacity of the world is in running order, might a proposal is open to criticism on the ground
be a danger in the early days of a sellers' market that it requires from the members of the Union
and ah excess of demand over supply.
a greater surrender of their sovereign rights
4x. A reconciliation of these divergent pur- than they will readily concede. But no greater
poses is not easily found until we know more surrender is required than in a commercial
than is known at present about the means to be treaty. The obligations will be entered into
adopted to finance post-war relief and recon- voluntarily and can be terminated on certain
struction. If the intention is to provide conditions by giving notice.
resources on liberal and comprehensive lines
45. A greater readiness to accept superthe purposes for which his banker makes
advances or to forgo permanently the use of
his deposit. There is no countervailing objection except that which applies equally to
the technique of domestic banking, namely
that it is capable of the abuse of creating excessive purchasing power and hence an inflation
of prices. In our efforts to avoid the opposite
evil, we must not lose sight of this risk, to
which there is an allusion in 39 (5) above. But
it is no more reason for refusing the advantages
of international banking than the similar risk
in the domestic field is a reason to return to the
practices of the seventeenth century goldsmiths
(which are what we are still following in the
international field) and to forgo the vast expansion of production which banking principles
have made possible. Where financial contributions are required for some purpose of general
advantage it is a great facility not to have to
ask for specific contributions from any named
country, but to depend rather on the anonymous
and impersonal aid of the system as a whole.
We have here a genuine organ of truly international government.
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
national arrangements must be required in the
post-war world. If the arrangements proposed
can be described as a measure of financial disarmament, there is nothing here which we need
be reluctant to accept ourselves or to ask of
others. It is an advantage, and not a disadvantage, of the scheme that it invites the
member States to abandon that licence to pro-
JUNE 1943
mote indiscipline, disorder and bad-neighbourliness which, to the general disadvantage, they
have been free to exercise hitherto,
46. The plan makes a beginning at the future
economic ordering of the world between nations
and "the winning of the peace." It might
help to create the conditions and the atmosphere
in which much else would be made easier.
This document is protected by copyright and has been removed.
Author(s): Foreign Research Division, A. I. B.
Title: Comments on the Latest Revision of the White Plan
Date: July 28, 1943
Page Numbers:
On July 12, ip4j, the Canadian Minister of Fi- Like the British and the American plans, the
nance, the Hon. J. L. llsley, tabled in the Canadian proposals of the Canadian experts are provisional
and tentative in character; they incorporate
House of Commons a document containing general
important features of both the American and the
observations of Canadian experts on flans for postwar British plans and add to them certain new
monetary organisation and tentative draft proposals elements.
z. The main objectives of the American and
of these experts for an International Exchange Union,
As explained in the general observations, the proposals the British proposals appear to be identical,
of the Canadian experts, like the British and Ameri- namely, the establishment of an international
monetary mechanism which will aid in the
can plans,l are provisional and tentative in character. restoration and development of healthy interMr. Ilsley, in presenting the Canadian plan to the national trade after the war, which will achieve
House of Commons, stated that * 'the document does not a high degree of exchange stability, and which
necessarily represent the vieivs of this Government by will not conflict with the desire of countries to
which, indeed, it has not as yet been considered, and carry out such policies as they may think appropriate to achieve, so far as possible, economic
involves no commitment whatsoever as to the attitude stability at a high level of employment and
which may later be taken by the Government when incomes. To aid in the achievement of these
formal intematonal discussions are held to deal with objectives, the British and American experts
the problem in question.'' The text of this document have proposed the establishment of a new interis given below, with certain minor modifications in the national monetary institution. Their proposals
are large in conception, but no larger than the
headings.
GENERAL OBSERVATIONS OF CANADIAN EXPERTS
ON PLANS FOR POSTWAR MONETARY
ORGANIZATION
I. Officials of the Canadian Government have
had an opportunity of examining the United
States Treasury Department Preliminary Draft
Outline of a Proposal for a United and Associated
Nations Stabilization Fund, and have received
explanations of this proposal from American
officials. A similar procedure was followed in
connection with the paper containing proposals
by British experts for an International Clearing
Union. The discussions with both British and
American officials have been entirely exploratory
and the Canadian Government has not been
committed to any course of action as a result of
these conversations'. The American and British
experts, for their part, have laid stress on the
fact that their proposals are tentative in character, and have made it clear to representatives of
the Canadian Government (as well as to those of
other Governments) that they would welcome
critical comment and constructive suggestions.
Canadian experts who have been studying the
British and the American proposals are, therefore, led to make certain observations of a general character and to submit an alternative plan.
1
For texts of these plans, see the BULLETIN for June 1943, pp. 501-
521.
7
i8
problem itself. There is every reason to improve
the structure and operation of the monetary
mechanism on the basis of experience. But
there is no reason why proposals should be based
exclusively on the limited, and on the whole,
bad experience of the past two decades. Unless
dependable exchange and credit relations between countries can be achieved before the
stresses and strains of the postwar period begin,
there is little likelihood that irreparable damage
can be avoided.
3. If plans for international monetary organization are to be successful, other problems—by
no means less difficult or less important—will
also have to be faced and solved by joint international action. It would, indeed, be dangerous
to attach too much importance to monetary
organization of and by itself, if this resulted in
neglect of other problems which may be even
more important and difficult, or in a misguided
faith that with a new form of monetary organization the other problems would solve themselves. In the international field alone (to say
nothing of the innumerable domestic problems
involved in the profound changes in the structure of production and employment which have
taken place in all belligerent and many nonbelligerent countries due to the exigencies of the
war) it will be necessary to attack frontally such
problems as commercial policy, international
investment, the instability of primary product
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
, prices—to name but a few. No international
monetary organization, however perfect in form,
could long survive economic distortions resulting from bilateralist trade practices, continued
refusal of creditor countries to accept imports in
payment of the service on their foreign investment or to invest their current account surplus
abroad, or enormous fluctuations in food and
raw material prices such as characterized the
years between the two wars. But the fact that
there are many problems to be faced cannot be
used as an excuse for facing none. A start must
be made somewhere, and for the reasons given
in paragraph 5, the problem of international
monetary organization is a logical and fruitful
starting-place.
4. The establishment of an international
monetary organization is no substitute for the
measures of international relief and rehabilitation which will be required as the war draws to
its conclusion and afterwards; and in the view of
the Canadian experts any monetary organization
which is set up should, not be called upon to
finance transactions of this nature. Some continuing and stable arrangements regarding international long-term investment are also clearly
essential if equilibrium is to be achieved and
maintained. Nor should it be thought that the
proposed international monetary institution is
merely an instrument of the transition period
from war to peace. True, it has special importance in this period but it should be designed as
a permanent institution and not as a stop-gap to
function during a relatively short period or time.
5. An important, perhaps the most important,
feature of the British and the American proposals
is the provision in both plans for the extension
of credit between countries. The two plans
differ as regards the precise techniques to be used
in extending credit and as regards the amounts
which may be involved; but both plans provide
that foreign credits are to be available under
certain conditions to countries having need of
them, and that they shall be made available
through an international monetary organization
rather than through bilateral arrangements
between pairs of countries. The provision for
credit extension is nothing more nor less than a
straightforward and realistic recognition of the
fact that at the end of the war a large number of
countries, whose import requirements will be
considerable, will not have immediately available a sufficient reserve of foreign assets to
enable them to expose themselves to the risk of
participation in a world economic system. An
interval will be needed to give time for adjustment and reorganization. If the penury in
AUGUST 1943
foreign means of payment of certain important
countries is to be allowed to fix the pattern of
postwar trading and domestic policies, then all
can look forward to penury—no country, rich or
poor, will escape the impoverishment resulting
from the throttling of international trade which
will result.
6. It is useful to consider what would happen
if no action were taken to set up international
machinery of the general character suggested by
the experts of the United States and the United
Kingdom. Theoretically, one alternative would
be immediate cash settlement for all international transactions. But how can cash be
produced for purchases abroad? Only by selling
goods or services abroad, or by disposing of
acceptable foreign assets such as securities and
gold. The facts regarding the distribution of
the world's monetary gold reserves and the
changes which have taken place in the course of
the war in various countries' holdings of foreign
securities are too well known to require elaboration. Broadly speaking, and allowing for
certain exceptions and time-lags, a cash basis for
the settlement of international transactions
would mean that any country's capacity to
export would be limited to the amount of its own
currency it made available to foreign countries
through its imports and other current payments
abroad—in other words, trade would in effect be
reduced to barter. In point of fact, however,
there is no possibility that countries would for
long allow themselves to be confined in such a
strait jacket. Faced with the problem of an
unsalable surplus of export goods and with consequent domestic unemployment, they would
refuse to accept the penalty of disorganization
of export trade if that penalty could be avoided,
even temporarily, by the extension of credit.
Countries would embark on bilateral credit
arrangements, no doubt linked with deals relating to the purchase and sale of goods; and as
soon as certain countries began to adopt this
course others would find that they had to follow
suit to protect their trade interests. It is difficult to imagine a more fruitful source of international dissension than a competitive trade and
credit extension programme of this character.
The Canadian experts believe it to be true,
therefore, that the Stabilization Fund or Clearing
Union plans do not involve a decision as to
whether foreign credits shall be extended or
withheld. In some form or other, credit willin
fact be extended; and the decision which has to
be taken relates primarily to the method employed. For the reasons given above, interna-
7*9
POSTWAR INTERNATIONAL MONETARY STABILIZATION
tional arrangements are greatly to be preferred
to bilateral deals.
7. This leads to the question, how much
credit should be made available through the
international monetary mechanism? A vital
feature of any plan of this sort is the provision it
makes for the borrowing power of each participant and for the contribution to the resources of
the organization by the participating countries
through the provision of capital, the accumulation of balances or through loans. Some
concern has been expressed in regard to the size
of the commitment which may be assumed by
prospective creditors. It is probable that Canada will be a creditor country on current account,
and the Canadian experts have therefore given
careful thought to this aspect- of the arrangements.
8. There is one preliminary observation which
should be made in this connection. It would
be a distortion of the realities of the situation for
any country, or its citizens, to regard the willingness to provide resources to an international
organization of the general character proposed
by the British and the American experts as an
act of generosity which is performed for the sake
of foreign countries. Resources are provided to
the organization first, because all have a stake
in recreating a functioning international eco-,
nomic system and secondly, because for each
individual country the realistic alternatives in
the form of trade disorganization are costlier
than the provision of resources. Moreover,
and most important of all, the resources provided are not given away; they are fully secured
by the organization's holdings of gold and
national currencies. It can only lead to confusion of thought to regard participation in such
plans as these as in any way similar in character
to participation in international relief schemes,
important and necessary though the latter may
be.
9. It seems apparent that, in one way or another, substantial unregulated movements of
capital between countries will be prevented. In
these circumstances, countries will, by and large,
lose or gain foreign exchange to the extent, but
only to the extent, of the unbalance in their
current account transactions with the rest of the
world. If a country is building up a substantial
credit position, it will know that this situation
is produced because it is selling more goods and
services abroad than it is buying abroad. If it
is dissatisfied with this position, if it wishes to
reduce its credit balance, it has through participation in the proposed organization lost no
single one of the courses of action ever open to it.
72.O
True, it is by no means easy for a country, acting
alone, to solve problems of unbalance. But as
a last resort a country can find a solution by
unilateral action. It can do the only things it
ever could do in these circumstances; it can buy
more abroad—goods, services or investments;
or it can sell less abroad. It is therefore quite
wrong to assume that countries participating in
the proposed institution would, because of this
participation, be left without control over their
international commitments. It may be, and no
doubt is, useful to erect danger signals at various
stations along the road followed by both debtors
and creditors. Such signals are useful reminders.
But there is nothing to prevent either creditor or
debtor from taking remedial action at any time;
10. If the foregoing is a correct analysis of the
situation—and it would appear to be a simple
statement of fact—creditors need not be unduly
concerned about the possible size of their investment in the Fund, knowing that the ultimate
actual size of their stake can be determined by
their own course of action from day to day and
from year to year. Nevertheless, even the
appearance of an unlimited commitment is probably undesirable and in the tentative proposals
of Canadian experts, a limit is placed on the
obligation of each participant to provide resources to the institution. But there is less real
danger to the interests of creditor countries in
the establishment of a Fund or a Union whose
potential resources are unnecessarily large (and
may in consequence never be entirely used) than
there is in the establishment of an institution
whose resources are obviously too small. The
interests of all will best be served by providing a
fair degree of latitude, a satisfactory breathingspace—to debtors and creditors alike. If its
objectives are to be achieved, the resources must
be large enough to permit time for basic readjustments to be accomplished; they must be such
that the organization will command general confidence in its own stability. For if this is not
the case, what will happen? It will be believed
that certain currencies are likely to become
*'scarce" currencies—a belief which will be
reinforced by the reduction in the institution's
holdings of that particular currency. Countries
which are likely to require a "scarce" currency
will hasten to make their purchases which are
payable in that currency. As the holdings of
the "scarce" currency are used up, as discussions
and arguments commence regarding an enlargement of the quota or some other form of extension of credit, grave misgivings in regard to the
international situation will arise. The position
will be very much akin to that of a bank whose
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
cash reserves are feared to be insufficient. There
will be a run on that currency in the institution;
and if the currency concerned is an important
one, the international effects will be very serious
indeed. No form of international monetary
organization can continuously compensate for
chronic maladjustments in the current account
balance of payments of the countries which may
be concerned, but it would be most unwise to set
up machinery which stood a fair chance of facing
a crisis at a comparatively early date.
I I . To avoid misunderstanding it should be
emphasized that it would be extremely dangerous to use short-term credits as a device to cover
up basically unsound positions. This would be
no less disastrous in the international than in
the domestic field, and any monetary system
which made such an attempt on a large scale
would inevitably break down. A chronic
unbalance in current account balances of international payments which is not matched by
voluntary long-term capital movements—lending abroad by creditor countries, and borrowing
abroad by debtor countries—is symptomatic of a
deep-seated maladjustment which has to be
dealt with if equilibrium is to be restored. No
debtor country can live beyond its resources
indefinitely; and no creditor country can persistently refuse to lend its surplus abroad or make
other adjustments to its creditor position without ripping the international fabric. But time
is required for adjustments to be made and for
remedial measures to have their effects, and the
contention of this paper is that the time allowed
must be adequate. More time may be purchased
at a smaller real cost than less time.
12.. There is one final observation of a general
character which should be made. The new
international monetary institution which it is
proposed to establish will be neither omniscient
nor omnipotent. Its aim will be to promote
conditions in which member countries arc free to
carry out sound economic policies for the welfare of their own people and in which they will
not be induced or forced, for lack of organized
cooperation, to pursue policies which impoverish themselves and contribute to the impoverishment of the world. The organization should be
international and not supernational. Nations
should enter into the proposed agreement for
common purposes and advantages, realizing
that without such agreement the common purposes cannot be achieved. In their national
policies, countries should be limited only by
their own will in entering and remaining in the
organization. If the proposed institution functions well, it will have at its disposal more
AUGUST 1943
information regarding the currents of international financial transactions and the causes of
disequilibrium than has ever been available
before. It will be in a position to offer informed
and disinterested advice to its members. It may
be hoped that the quality of the advice offered
will be such that it will carry great weight.
But no member state should be asked to bind
itself in all circumstances to follow the advice
given by the organization. Moreover, if a
country feels at any time that its national interests are being jeopardized by the actions of the
organization, and is willing to sacrifice the
advantages of continued membership, it should
be free to withdraw, after making provision to
liquidate its obligations to the organization or,
if the country is a creditor, it should have returned to it its original contribution to the
resources of the organization. The proposals
here advanced are put forward in the belief that
a soundly conceived international agreement
can give greater scope for national policies
than can exist outside it.
13. To sum up these general observations, it
is suggested that:
(a) An international agreement for the establishment of an international monetary
organization which involves the extension of credit is essential if international
cooperation in the postwar world is to be
achieved.
(b) Such machinery will deal with only one of
the numerous problems which must be
faced, but it is a logical and convenient
starting place for joint international
action.
(c) The credit made available through the
international monetary organization
should be adequate to deal with that portion of current account surpluses and
deficits which is not met by relief and
other concerted international action in
the years immediately after the war; it
should be sufficient to provide a firm basis
on which multilateral world trade can be
re-established after the war; and it should
provide time to countries which find their
international accounts unbalanced to take
the necessary corrective measures to adjust their position.
(d) The extension of credit is not a cure-all;
it merely provides time for adjustments;
and unless unbalanced positions (except
those accompanying long-term capital
movements) are brought into equilibrium,
any arrangements made will break down.
(e) No country participating in the arrange-
POSTWAR INTERNATIONAL MONETARY STABILIZATION
ments loses control over the size of its
international commitments, since it can
determine their size by its own action, if
it wishes to do so.
f
(f) No country participating in the arrangements loses control over its domestic
economic policies.
TENTATIVE DRAFT PROPOSALS or
CANADIAN
EXPERTS POR AN INTERNATIONAL
EXCHANGE UNION*
I. Purposes of the Union
i. To provide for stability of exchange rates
and to provide an orderly method for their determination.
i. To provide a convenient clearing mechanism to settle balances in international payments.
3. To provide to all countries access to foreign
exchange resources in order to reduce the danger
that economic and commercial policies in the
period immediately after the war will be largely
determined by a shortage of foreign exchange
and to enable countries thereafter to be guided
in their economic and commercial policies by
long-run considerations when faced with a
temporary reduction of foreign markets.
4. To aid in the achievement of international
equilibrium by measures designed to prevent
excessive short-term borrowing through the
Union or the excessive accumulation of uninvested foreign surpluses.
5. To contribute to the re-establishment and
development of a multilateral trading system
and to the elimination of discriminatory trading
and currency practices.
II. Resources of the Union
Member countries shall agree to make the
following resources available to the Union:
1. A capital subscription to the amount of the
quota assigned to each member country, the
aggregate of such quotas to be 8,000 million
dollars.
(a) Determination of quotas
The quota for each member country shall
be determined by a formula which will
give due regard to factors such as international trade, national income, and holdings of gold and foreign exchange convertible into gold. A special assessment may
* It mi^ht be preferable to refer to the proposed organization as the
International Exchange Fund. However, to avoid any possible misunderstanding which might arise through the use of the term Fund to
describe both the association of members and the resources of the institution, the term Union has been used throughout this document to
describe the organization itself.
be levied in any case where this formula
would be inappropriate.
(b) Payment of capital subscriptions
The capital subscription of each member
country shall be paid up in'full on or before the date set by the Governing Board
of the Union on which the Union's operations are to begin. Each member country
shall pay in at least 15 per cent of its quota
in gold and the balance in national currency; a country may substitute gold for
national currency in meeting its quota
requirements. The Union may make
such arrangements as it deems appropriate
to provide a period of time within which
countries having less than 300 million
dollars in gold or foreign exchange convertible into gold in official exchange
reserves may pay up their gold contribution in full, the equivalent in national
currency to be paid in the interval. Notwithstanding the provisions of subsequent
paragraphs, the Union shall sell foreign
exchange to such member countries for
the purpose of acquiring gold to pay their
capital subscriptions.
(c) Change in quotas
The Board may from time to time change
the quotas of particular member countries,
provided, however, that in voting on
proposals to increase quotas the voting
strength of each member shall be increased
or decreased to take account of the
Union's net sales or purchases of the currency of each member country in accordance with the weighted voting formula
set out in IX, 3, below. No increase
shall, however, be made in the quota of
any country without the consent of the
representative of the country concerned,
i. Loans to the Union, as required, in amounts
not exceeding 50 per cent of the quota of each
member country.
(a) Conditions of borrowing
The terms and conditions of loans made
by member countries to the Union under
the provisions of paragraph II, z, shall be
set out in the rules and regulations of the
Union. The Union's authority to borrow
domestic currency from member countries
in amounts up to 50 per cent of their
quotas shall be a revolving authority.
The union shall not exercise its right to
borrow until it has used its available gold
resources to acquire additional supplies of
the currency in question. Subject to the
provisions of the preceding sentence, the
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
Union must exercise its right to borrow IV. Exchange Rates
when its holdings of the currency of any
1. The Union shall fix, on the basis of exmember country have been reduced to 10
per cent of the quota of that member change rates initially agreed between it and each
country. When the Union exercises its member country, the rates at which it will buy
right under the provisions of paragraph and sell one member's currency for another's,
II, z, to borrow additional supplies of the and the rates in local currencies at which it will
currency of any member country it shall buy and sell gold. The spread between the
have'the duty to attempt to improve its Union's buying and selling rates for member curposition in the currency concerned by rencies and for gold shall not exceed 1 per cent.
acquiring the currency or gold from the Except as provided in paragraph IV, z, below,
holdings of other member countries for member countries shall agree not to change the
payment in their national currencies or in initially agreed exchange rates without the
approval of the Union and any country which
other foreign exchange they need,
alters the value of its currency without the con(b) Conditions of repayment
The Union shall have the right to repay sent of the Union shall be declared in default of
loans contracted under the provisions of its obligations and become subject to the penalparagraph II, z, at any time. The member ties provided in XI, 1, below.
z. Notwithstanding the provisions of paracountry making the loan shall have the
right to demand repayment in gold to the graph IV, 1, above, any member country which
extent of the Union's gold holdings at is a net purchaser of foreign exchange from the
any time and shall also have the right to Union (arising from other than capital account
demand repayment in its national cur- transactions) to the extent of at least 50 per cent
rency provided that such repayment does of its quota and has so been on the average of the
not reduce the Union's holdings of that preceding 11 months shall be entitled to deprecicurrency below 50 per cent of the quota of ate its exchange to the maximum extent of 5
the member country. Member countries per cent; provided, however, that the provisions
shall agree to give 30 days' notice of of this paragraph shall not apply to any country
demand for repayment of loans made to which holds independent official reserves of gold
the Union under the provisions of the and foreign currencies freely convertible into
gold in amounts exceeding 50 per cent of its
present article.
quota. No country shall be entitled to repeat
the exchange depreciation provided for in this
III. Monetary Unit of the Union
paragraph without the specific approval of the
i. The monetary unit of the Union shall be an Union.
In the course of conversation in Washington
international unit of such name as may be
agreed (hereafter referred to as the Unit) and it the Canadian experts expressed the view that it
shall consist of 137 4 grains of fine gold. The might be desirable to provide for a somewhat
accounts of the Union shall be kept and pub- greater permissive range of depreciation in exchange rates with somewhat different safeguards
lished in terms of the Unit.
than those incorporated in paragraph IV, z.
z. The value of the Unit in terms of gold shall The following is a draft of a paragraph which
not be changed without the approval of four- might be substituted for paragraph IV, z, of
fifths of member votes.
the text:
3. Member countries shall agree with the
"Notwithstanding the provisions of paraUnion the initial values of their currencies in graph IV, 1, above, any member country which
terms of gold or the Unit and, except as provided has had an adverse balance of payments on curin paragraph IV,z, below, shall undertake not to rent account during a two year period of such
alter these values without the approval of the magnitude that it has utilized, to cover this
Union.
deficit, 50 per cent of its independent gold and
4. Deposits in terms of the Unit may be ac- foreign exchange reserves and is, in addition, a
cepted by the Union from member countries upon net purchaser of foreign exchange from the
the delivery of gold to the Union. Such Unit Union to the extent of 50 per cent of its quota
deposits shall be transferable to other member shall be entitled to depreciate its exchange rate
countries. They shall be redeemable in gold and to the maximum extent of 10 per cent. The
the Union shall maintain at all times a 100 per provisions of this paragraph shall only be apcent reserve in gold against all Unit deposits. plicable once in respect of each member country
AUGUST 1343
72-3
POSTWAR INTERNATIONAL MONETARY STABILIZATION
unless the specific approval of the Union has been
obtained. Any member country intending to
depreciate its exchange rate under the provisions
of this paragraph shall inform the management
of the Union in advance and shall afford it an
opportunity to make such observations as it
deems appropriate before taking such action."
3. No change in the value of currencies of
member countries shall be permitted to alter the
value of the assets of the Union in terms of gold
or the Unit. Thus if the Union approves a
reduction in the value of the currency of a
member country, or if a country depreciates its
exchange under the provisions of the preceding
paragraph, or if a significant depreciation in the
value of the currency of a member, as determined
by quotations on the exchange markets of other
member countries, has in fact occurred, that
country must on request deliver to the Union an
amount of its local currency equal to the decrease in the value of that currency held by the
Union. Likewise, if the currency of a particular
country should appreciate, the Union must return to that country an amount in the currency
of that country or in gold equal to the resulting
increase in the value of the Union's holdings.
V. Operations of the Union—Provisions of
Special Applicability to Deficit Countries
1. The Union shall have the power to sell to
the Treasury of any member country (or. exchange fund or central bank acting as its agent
for the purpose) at the rate of exchange established by the Union, currency of any country
which the Union holds, subject to the following
provisions:
(a) Without special permission, no country
shall be a net purchaser of foreign exchange from the Union except for the
purpose of meeting an adverse balance of
payments on current account and the
Union may at any time limit the amounts
of foreign exchange to be sold to any
member country which is permitting significant exports of capital while having an
adverse balance of payments on current
account.
(i) A county shall be regarded as a net purchaser of foreign exchange if as a result of
the Union's purchases and sales of currencies the Union's holdings of its currency rise
above the amount originally provided to
the Union by way of capital subscription,
(ii) The Union may require any member
country to furnish at periodic intervals
statistics of its balance of international
payments on current account and on capi-
7H
tal account and statistics of gold and
foreign exchange holdings, public and
private. Each such member country shall
agree to furnish officers of the Union with
detailed explanations of the basis on
which such statistics are computed. If
at any time the Governing Board has
reason to believe that an outflow of
capital from any member country is
resulting directly or indirectly in net
purchases of foreign exchange by that
country from the Union, it shall have the
right to. require a control of outward
capital movements as a condition of .
making additional sales of foreign exchange to such country. Without limiting the generality of the foregoing, the
Union shall normally require any member
country which has been a net purchaser
of foreign exchange to the extent of 2.5
per cent of its quota to impose restrictions
on outward capital movements if none
exist.
(iii) In considering applications from countries
which have been net purchasers of foreign
exchange from the Union for the special
permission referred to in paragraph V, 1,
(a), to purchase foreign exchange for
purposes other than the meeting of an
adverse balance of payments on current
account, the Governing Board shall give
careful attention to applications for
foreign exchange to facilitate the adjustment of foreign debts where this is deemed
to be desirable from the point of view of
the general economic situation and shall
also give special attention to applications
for foreign exchange by member countries
not in default on their foreign obligations
for the purpose of maintaining contractual principal payments on foreign
debt.
(b) In order to promote the most effective
utilization of existing stocks of gold and
foreign exchange, no member country
shall have the right to be a net purchaser
of foreign exchange from the Union so
long as that country's holdings of gold
and foreign currencies freely convertible
into gold (including private as well as
official holdings) exceed its quota.
In interpreting this provision the Governing Board shall give special consideration to the position of certain Asiatic
countries where gold has long been used
as private treasure.
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
(c) In general, the Union shall have the power
to sell foreign exchange for domestic
currency to member countries up to xoo
per cent of the quota of each such member
country. Net sales of foreign exchange
shall not exceed 50 per cent of the quota
of each member country during the first
year and the cumulative net sales shall
not exceed 100 per cent, 150 per cent, or
2.00 per cent during the first two, three,
and four years of the operation of the
Union.
On special vote of the Governing
Board, in which voting strength shall be
weighted to allow for the Union's net
purchases and sales of each member
country's currency in accordance with the
provisions described in paragraph IX, 3,
below, the Union may purchase any
currency in excess of these limits provided
that (a) the country whose currency is
being acquired by the Union agrees to
adopt and carry out measures recommended by the Union to correct the disequilibrium in its balance of payments, or
(b) it is the view of the Governing Board
that the country's prospective balance of
payments is such as to warrant the
expectation that the excess currency
holdings of the Union can be disposed of
in a reasonable time.
(d) In order to promote the most effective
utilization of existing stocks of gold and
foreign exchange the Union may, as a
condition of making further sales of
foreign exchange to any member country
which would bring its net purchases to
an amount in excess of 50 per cent of its
quota, require such country to sell to the
Union, for domestic currency, appropriate amounts of any reserves it (or its
residents) may hold of gold or foreign
exchange acceptable to the Union.
(e) Notwithstanding the provisions of paragraph (c) above, whenever a member
country is exhausting its quota more
rapidly than is warranted in the judgment
of the Governing Board, the Board may
make such recommendations to that
country as it thinks appropriate with a
view to correcting the disequilibrium,
and may place such conditions upon
additional sales of foreign exchange to
that country as it deems to be in the
general interest of the Union.
2_. A charge of 1 per cent per annum payable
in gold shall be levied against member countries
AUGUST 1943
on the amount of their currency held by the
Union in excess of the quotas of such countries.
VI. Operations of the Union—Provisions of
Special Applicability to Surplus Countries
1. In order to promote the most effective
utilization of the available and accumulating
supply of gold and foreign exchange resources of
member countries, each member country shall,
on request of the Union, sell to the Union, for its
local currency or for foreign currencies which it
needs, all gold and foreign exchange it acquires
in excess of the amounts held immediately after
joining the Union.
For the purpose of this provision, only free
foreign exchange and gold are considered.
Each member country shall agree to furnish the
Union with periodic reports of gold and foreign
exchange holdings, public and private.
2.. ^hen the Union's operations have resulted
in excess sales of the currency of any member
country to the extent of 75 per cent of the quota
of that country the Union may, in order to increase its resources of the currency in question,
attempt to arrange, in cooperation with such
agencies as may be established to promote international investment, with the member country
a programme of foreign capital investment (or
repatriation) and may sell foreign exchange to
facilitate such capital movements.
3. When the Union's holdings of the currency
of a member country are being exhausted more
rapidly than is warranted in the judgment of the
Governing Board, the Board may make a report
on the situation. Without restricting the
generality of the foregoing, whenever the
Union's operations have resulted in excess sales
of the currency of any member country to the
extent of 85 per cent of the quota of that country,
the Union has the authority and the duty to
render to the country a report embodying an
analysis of the causes of the depletion of its holdings of the currency and recommendations appropriate to restore the equilibrium of the
international balances of the country concerned.
Such recommendations may relate to monetary
and fiscal policies, exchange rate, commercial
policy, and international investment.
The Board member of the country in question
shall be a member of the Union Committee appointed to draft the report. The report shall
be sent to all member countries and, if deemed
desirable, made public.
4. The Union shall have the right at any time
to enter into arrangements with any member
country to borrow additional supplies of its
715
POSTWAR INTERNATIONAL MONETARY STABILIZATION
currency on such terms and conditions as may
be mutually satisfactory.
5. The Union shall have the right: at any time
to enter into special arrangements with any
member country for the purpose of providing an
emergency supply of the currency of any other
member country on such terms and conditions
as may be mutually satisfactory.
6. Whenever it becomes apparent to the
Governing Board that the anticipated demand
for any currency may soon exhaust the Union's
holdings, the Governing Board shall inform the
member countries of the probable supply of this
currency and of a proposed method for its equitable distribution together with suggestions for
helping to equate the anticipated demand and
supply.
£a) The provisions of paragraph VI,6, shall
come into force only after the Union has
exercised in full its right under paragraph
II,i, to borrow additional supplies* of the
currency of the member country and after
the Union has taken such further steps to
increase its supply of this currency as it
has deemed appropriate and found possible.
(b) The provisions of paragraph V,i, (c),
shall, if necessary, be restricted by the
duty of the Union to assure an appropriate distribution among various members
of any currency the Union's supply of
which is being exhausted.
(c) In rationing its sales of any scarce currency the Union shall be guided by the
principle of satisfying the most urgent
needs from the point of view of the
general international economic situation.
It shall also consider the special needs and
resources of the various countries making
the request for the scarce currency.
(d) Member countries shall agree that restrictions imposed by other member
countries on the importations of goods
from a country whose currency is being
rationed by the Union shall, for the duration of such rationing, not be regarded as
constituting an infraction of the most
favoured nation obligations of commercial treaties except in the case of
countries holding official reserves of gold
and the currencies of member countries in
amounts exceeding 50 per cent of their
quotas.*
* This proposal will clearly have to be reviewed in the light of such
general arrangements as may be made regarding international commercial policy and coordinated with those arrangements.
716
7. Whenever the Governing Board has, under
the provisions of the preceding paragraph, taken
steps to ration the Union's supply of the currency
of any member country, it may require the remaining member countries to prevent the sale
by their residents of each other's currencies,
including bills of exchange, in the country
whose currency is being rationed and to prevent
the purchase by their residents of the rationed
currency through the exchange markets of nonmember countries. In addition, whenever the
Board has taken steps to ration the Union's
supply of the currency of any member country, it
shall have the duty to re-examine the prevailing
exchange rates and to recommend such changes
as it may regard as appropriate to the changed
circumstances.
VII. Powers of the Union-General
1. The Union shall have the powers to take
such actions as are required to carry out the
operations enumerated in the preceding paragraphs. For greater clarity, the Union shall
have the power to buy, sell and hold gold, currencies, and government securities of member
countries; to accept deposits and to earmark
gold; to issue its own obligations and to discount or offer them for sale in member countries;
and to act as a clearing house for the settling of
international movements of funds and gold.
Member countries agree that all of the Union's
local currency holdings shall be free' from any
restrictions as to their use for payments within
the country concerned.
x. When the Union's holdings of the local
currency of a member country exceed the quota of
that country the Union shall have the power to
resell to the member country, upon its request
the Union's excess holdings of its currency for
gold or acceptable foreign exchange.
3. The Union shall have the power to invest
any of its currency holdings in government
securities of the country of that currency, provided that the Board representative of the
country concerned approves.
4. The Union shall have the power to buy and
sell currencies of nonmember countries, but shall
not normally hold the currencies of nonmember
countries beyond 60 days after the date of purchase.
5. The Union shall have the power to levy
upon member countries a pro rata share of the
expenses of operating the Union, such levy to be
made, however, only to the extent that the
earnings of the Union are inadequate to meet its
current expenses.
FEDERAL RESERVE BULLETIN
POSTWAR INTERNATIONAL MONETARY STABILIZATION
6. The Union shall make a service charge of
one-quarter per cent on all gold transactions.
7. In conducting its own operations the
Union shall have the power to deal only with or
through (a) the Treasuries, exchange funds, or
fiscal agents of governments, (b) central banks
with the consent of the member of the Board
representing the country in question, and (c)
any international banks owned predominantly
by member countries. The Union may, nevertheless, with the approval of the member of the
Board representing the country concerned, sell
its own securities directly to the public or to
institutions of member countries.
8. The Union shall have the power and the
duty to cooperate with such other institutions of
an international character as may exist or be established to deal with matters of international
concern, including but not restricted to international investment and commercial policy.
to the resources of the Fund (by way of original
capital subscription or by way of loans made
under the provisions of paragraph 11,2.) which
has been utilized, net, on the average of the
preceding year by the Union for sale to other
member countries; and member countries shall
lose one vote for each 100,000 Units of their net
utilization of the resources of the Union on the
average of the preceding year.
X. Management
1. The administration of the Union shall be
vested in a Governing Board. Each government shall appoint a representative and an
alternate who shall serve on the Board for a
period of three years subject to the pleasure of
their government. Representatives and alternates may be reappointed.
x. The Governing Board shall select a Governor of the Union and one or more assistants.
The Governor shall become an ex officio member
VIII. Abnormal Wartime Balances
of the Board and shall be chief of the operating
During the first two years of operation the staff of the Board. The Governor and his asUnion shall have the right to purchase abnormal sistants shall hold office for five years and shall
wartime balances held by member countries in be eligible for re-election and may be removed for
other member countries for the national currency cause at any time by the Board.
of the country selling such balances or for foreign
3. The Governor of the Union shall select the
exchange needed to meet current account def- operating staff in accordance with regulations
icits in such country's balance of international established by the Governing Board. Members
payments, in amounts not exceeding in the aggregate 5 per cent of the quotas of all member of the staff may be made available upon request
countries. At the end of two years of operation of member countries or of other institutions of an
the Governing Board shall propose a plan for the international character for consultation in
gradual further liquidation, in whole or in part, connection with economic problems and policies.
4. The Governing Board shall appoint from
through the Union, of abnormal wartime balances lying to the credit of member countries in among its members an Executive Committee to
other member countries and other financial consist of not fewer than eleven members. The
indebtedness of a similar character. If the Chairman of the Board shall be the Chairman of
Governing Board feels unable to recommend the Executive Committee and the Governor of
that the Union's resources be used for this the Union shall be ex officio a member of the
purpose it shall have the duty to propose some Executive Committee. Meetings of the Exother method by which the problem can be ecutive Committee shall be held at least once
every two months and more frequently if the
considered.
Executive Committee shall so decide.
5. The Governing Board shall hold an annual
IX. Voting Power
meeting and such other meetings as it may be
1. Each member country shall have 100 votes desirable to convene. On request of member
plus one vote for the equivalent of each 100,000 countries
casting one-fourth of the votes the
Units of its quota.
2.. All decisions, except where specifically Chairman shall call a meeting of the Board for
provided otherwise, shall be made by majority the purpose of considering any matters placed
before it.
of the member votes.
6. Net profits earned by the Union shall be
3. Notwithstanding the provisions of paragraph 1 above, in any vote on a proposal to distributed in the following manner:
(a) 50 per cent to reserves until the reserves
increase the quota of any member country,
are equal to 10 per cent of the aggregate
member countries shall acquire one additional
quotas of the Union,
vote for each 100,000 Units of their contribution ,
AUGUST 1943
72-7
POSTWAR INTERNATIONAL MONETARY STABILIZATION
(b) 50 per cent to be divided each year among
the members in proportion to their quotas.
XI. Withdrawal and Expulsion from the Union
1. A country failing to meet its obligations to
the Union may be suspended provided a majority
of the member votes so decides. While under
suspension the country shall be denied the
privileges of membership but shall be subject
to the same obligations as any other member of
the Union. At the end of one year the country
shall be automatically dropped from membership unless it has been restored to good standing
by a majority of the member votes.
2.. Any country which has been a net purchaser of foreign exchange from the Union may
withdraw from the Union by giving notice and
its withdrawal shall take effect one year from
the date of such notice. During the interval
between notice of withdrawal and the taking
effect of the notice such country shall be subject
to the same obligations as any other member of
the Union.
3. Any country which has not been a net
purchaser of foreign exchange from the Union
may withdraw from the Union by giving notice
and its withdrawal shall take effect 30 days from
the date of such notice. During the interval
between notice of withdrawal and the taking
effect of notice such country shall be subject to
the same obligations as any other member of the
Union; except, however, that no country which
has given notice of withdrawal shall be required
to make loans to the Union under the provisions
of paragraph II,x, above.
4. A country which is dropped or which withdraws from membership shall have returned to it
an amount in its own currency equal to its contributed quota plus other obligations of the
Union to the country and minus any sums owed
by that country to the Union. The Union shall
have 5 years in which to liquidate its obligation
to such country.
XII. Policies of Member Countries
In addition to the obligations assumed under
the preceding paragraphs, each member country
shall undertake the following:
1. To maintain by appropriate action the
exchange rates initially agreed with the Union
on the currencies of other countries and not to
alter exchange rates except under the provisions
of paragraph IV,i, above, or with the consent of
the Union and only to the extent and in the
direction approved by the Union. Exchange
rates of member countries may be permitted to l
72.8
fluctuate within a range not exceeding the
spread fixed by the Union itself for its own purchases and sales of foreign exchange.
z. To abandon, as soon as the member country
decides that conditions permit, all restrictions on
foreign exchange transactions other than those
required effectively to control capital movements
with other member countries; and not to impose
any additional restrictions, except for the
purpose of controlling capital movements,
without the approval of the Union.
The Union may make representations to member countries that conditions are favourable for
the abandonment or relaxation of foreign exchange restrictions other than those required
effectively to control capital movements and
each member country shall agree to give consideration to such representations.
3. To cooperate effectively with other member
countries when such countries, with the approval of the Union, adopt or continue controls
for the purpose of regulating international
movements of capital.
Cooperation shall include, upon recommendation by the Union, measures that can appropriately be taken
(a) not to accept or permit acquisitions of
deposits, securities, or investments by
residents of any member country imposing
restrictions on the export of capital except with the permission of the government of that country and the Union;
(b) to make available to the Union or to the
government of any member country full
information on all property in the form of
deposits, securities, and investments of the
residents of that country; and
(c) such other measures as the Union may
recommend.
4. Not to enter into any new bilateral foreign
exchange clearing arrangements nor engage in
multiple currency practices except with the
approval of the Union.
5. To give careful consideration to the views
of the Union on existing or proposed monetary
or economic policy the effect of which would be
to cause a serious disequilibrium in the balance
of payments of the country adopting such policy
or of other countries.
6. To furnish the Union with all information
it needs for its operations and to furnish such
reports as it may require in the forms and at the
times requested by the Union.
7. To adopt appropriate legislation or decrees
to carry out its undertakings to the Union and to
facilitate the activities of the Union.
FEDERAL RESERVE BULLETIN
BRITISH WHITE PAPER ON WAR FINANCE
There is given below the text of a British Govern- A. THE SOURCES OF WAR FINANCE
[In millions of pounds]
ment White Paper (Cmd. 6458) presented to Parlia1941
1940
1942
ment on April 12 last by the Financial Secretary to the
3,339 4,616 15,103
(1) Central government expenditure
British Treasury under the title "An Analysis of theLess
- 7 5 6 -797
-632
Sources of War Finance and an Estimate of the Na-(2) Overseas disinvestment
(3) Expenditure requiring domestic finance... 2,583 3.819 4,471
tional Income and Expenditure in 1958, 1940>, 1941,
Less
-1,259 -1,828 -2,343
and 1942/' This document is the third of a series (4) Central government revenue
1,324
1,991 2,128
initiated in 1941; the texts of the earlier White Less
(5) Extra-budgetary funds and local authorPapers (Cmd. 634-/ and Cmd. 6261) were published
inity surpluses
-220
-186
-231
the BULLETIN for July 1941, pages 633-638, and
1,138
1,897
1,771
Less
June 1942, pages 539-$49- These documents, which
(6) Compensation received in respect
of war
3
-36
-248
risks and war damage claims
-215
are presented in connection with the annual budget
1,102
1,523 1,682
Less
speech in Parliament by the Chancellor of the Ex(7) Savings and undistributed profits, includ-1,080 -1,323 -1,509
chequer, are prepared in the British Central Statistical ing reserves against taxation
(8) Residue (Table I, item 8) from sources inOffice with the collaboration of the Treasury.
22
200
173
dicated below
PREFACE
In the preamble to the statistical material
presented in Cmd. 6347 (April i94x), it was
stated:
"The results of more comprehensive enquiries covering overseas disinvestment and
expenditure on consumption are, unfortunately, not available in time to be included
below, and thefiguresfor these items are given
subject to this reserve. Any subsequent
modification in either of these totals will
require a corresponding change in the total of
domestic disinvestment/'
These enquiries are now substantially further
advanced, and, in addition, the main categories
of national income have been re-examined in the
light of later information. The effect of this
additional information is set out in section G.
In Table I, item 8 (domestic investment) is
the balancing figure obtained by difference, and
not (except in 1338) by direct estimation. In
Table II, item z8 (net personal savings) is the
balancing figure. Tables III and IV are mainly
based on actual figures taken from the Public
Accounts etc., apart from items repeated from
Tables I and II.
The calculation of the proportion of resources
absorbed by government expenditure given in
section B of Cmd. 6347 has been discontinued.
AUGUST 1943
1
Excluding expenditure equivalent to the Canadian contribution
of 225,000,000 pounds. This sum is also excluded from lines (2) and
2
Excluding the Exchange Equalisation Account, changes in which
are already included in overseas disinvestment.
3
See the explanation of this item in footnote (1) below.
The residue has been provided from the following sources:—
(a) Sales to public authorities of fixed capital
assets (such as sites, buildings, and stocks
of goods) previously owned privately;
(£) Sinking funds and depreciation funds of
firms and institutions;
0 ) Depletion of stocks and working capital
(apart from sales under (a) above and
temporary investment under (d) below)
carried by private finance, measured by
the reduction in their value as reckoned
in the calculation of profits;
Less
0 0 New investment financed out of privatelyowned funds, including investment of a
temporary nature due to the financing, out
of private funds, of work in respect of
government contracts ultimately recoverable from the Exchequer;
( 0 Replacements and renewals charged on
depreciation funds;
(/) Replacements of war losses actually carried out (including new ships in private
ownership and stocks of commodities lost
and replaced within the year).1
1
This deduction must be made because credit has been taken in the
table above for the whole of compensation received in respect of war
risks and war damage claims, whether or not it has been applied to
replacement.
72-9
BRITISH WHITE PAPER ON WAR FINANCE
It will be seen that in comparison with the
figures for 1940 and 1941 given in Cmd. 6347,
revisions in the estimates have resulted in a veryconsiderable reduction in the residue and an
increase in savings and undistributed profits
including reserves against taxation. The revisions are further examined in section G.
Attention is drawn to the statement under (V)
above that the net change in stocks and working
capital is measured by the change in their value
as reckoned in the calculation of profits. While
the practice in this respect is not uniform, the
measure given here will approximate more
closely to the change in the value of stocks than
to the value of the quantitative change. In
other words, the calculation of profits takes account of changes in the value rather than in the
quantity of stocks.
Since the amount of the residue has been obtained by difference, any errors in other items in
Table I have been absorbed into it. Undue
weight should not be attached to the fall in the
residue in 1942.. It is not possible to say more
than that the residue in 1941 was of the same
order of magnitude as in 1941 and in all probability was smaller rather than larger.
B. THE COMPOSITION OF PERSONAL
EXPENDITURE ON CONSUMPTION
[In millions of pounds]
1938
1940
1941
1942
1,198 1,235 1,260 1,320
Food
912
452
750
Drink and tobacco
_
617
520
521
524
500
Rent, rates, and water charge/.
242
233
210
194
Fuel and lipht
241
241
261
251
Other household goods
462
450
496
441
Clothing
Travel, including privately-owned
vehicles and their running ex215
202
185
296
penses
465
469
461
468
(8) Other services
(9) Other goods, including the income issued in kind to H . M. Forces and
423
383
303
225
Auxiliary Services
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(10) Personal expenditure on consumption
4,035 4,282 4,509 4,800
a t market prices
These figures relate to expenditure on consumption met out of personal income2 and exclude, as far as possible, money spent on consumers' goods and services by businesses and
public authorities. The more comprehensive
enquiry referred to in the preamble to Cmd.
6347 has brought about a small reduction in the
aggregate figures. This is discussed further in
section G.
The composition of the nine sub-groups is as
follows:—
2
Including the expenditure on consumption of charities and other
non-profit-making bodies, as well as of individuals. No distinction
is made between purchases by civilians and purchases by members of
the Forces out of their pay and cash allowances.
730
Food—comprises purchases of food, including
such beverages as tea, coffee, and cocoa, by
households together with the value of food used
in canteens, restaurants, and hotels after allowance for purchases not made out of personal
income.
Drink and tobacco—comprises expenditure on
beer, wine, spirits, other alcoholic beverages,
and tobacco.
Kent, rates, and water charges—-includes an al-
lowance in respect of buildings occupied by
non-profit-making bodies, hotels, boarding
houses, etc., in addition to private dwelling
houses.
Fuel and light—includes coal, coke, gas, electricity, and paraffin.
Other household goods—includes furniture, furnishings, hardware, soap, cleaning materials, etc.
Clothing—includes dress materials and boots
and shoes together with an allowance for repair
work, besides all forms of men's, women's, and
children's wear.
Travel—includes travel paid for out of personal
income, and therefore the travel of members of
the Forces when at their own expense, in all
public conveyances together with the purchase
of privately-owned vehicles and running expenses incidental to their use.
Other services—includes such services as post,
telegraph and telephone, medical, undertaking,
domestic, hotel and restaurant, entertainment in
so far as they are purchased out of personal
income.
Other goods—includes all goods not appearing
above, together with the income issued in kind
to H.M. Forces and Auxiliary Services.
C. PERSONAL EXPENDITURE ON CONSUMPTION IN TERMS OF CONSTANT PRICES
Personal expenditure on consumption at
market prices and after adjustment for subsidies
and indirect taxes is estimated to have changed
as follows between 1938 and 1941:—
[In millions of pounds]
1938
1940
1941
1942
(1) Personal expenditure on consumption
at market prices
4(O35 4,282 4,509 4,800
Plus
(2) Subsidies
.15
70
142
150
4,050 4,352 4,651 4,950
Less
(3) Indirect taxes specifically on consumption
-431 -578 -770 -931
(4) Personal consumption thus adjusted.. 3,619 3,774 3,881 4,019
A new study has been made of the average
change in the retail market price of goods and
services covering approximately 90 per cent of
FEDERAL RESERVE BULLETIN
BRITISH WHITE PAPER ON WAR FINANCE
former series covers the expenditure of all classes
of the community and includes luxuries as well
as necessaries.
In interpreting these figures it is desirable to
recognise that from slightly different points of
view it would be possible to adopt a system of
weighting which would justify an index of
quantity changes either higher or lower than the
one given here. To illustrate the position with
the example of food, an index of the nutritional
value of rood consumed would show a smaller
decline than the food component of the present
index of quantities, but such an index would
make no allowance for the fact that dietary
standards are maintained in war-time with
some inevitable sacrifice of consumers* ordinary
preferences. On the other hand, an index of
quantity change which fell more than the one
given here would be obtained if it were assumed
that consumers were rigid in their peace-time
preferences, for it is unlikely that consumers
would buy the collection of goods and services
which they do at present at the relative prices
• now ruling, in the absence of rationing and other
forms of control.
The series given here of personal expenditure
on consumption in terms of constant prices indicates the position of the community as a
whole, but not necessarily that of any particular
[Per cent]
class or individual. Any measure of price
Proportionate change in—
changes obtained by dividing either series of
1938 1940 1941 1942
money values by the series in terms of constant
(1) Personal expenditure on consumption
prices, should not be used for other purposes
at market prices, including indirect
taxes and excluding subsidies
1.06
1.19
such as the reduction of the net national income
(2) Personal expenditure on consumption.
excludinR specific indirect taxes and
or the expenditure of public authorities on goods
increased by subsidies
1.00 1.04 1.07 1.11
and services to terms of constant prices. Price
(3) Personal expenditure on consumption
in terms of constant prices
1.00 0.88 0.82 0.82
movements in other sections of the economy
(4) Retail prices, excluding specific indirect taxes and increased by subhave been very different from those applicable to
sidies
1.18 1.30 1.36
consumers1 expenditures, but it is not at present
possible to provide any numerical measure of
Thefigures*in line (3) confirm the estimate them.
previously given in Cmd. 6347, where it was
D. PRIVATE SAVINGS
stated that "the measure of the reduction in the
PERSONAL SAVINGS
volume of consumption in 1941, compared with
[In millions of pounds)
1938, cannot be estimated more precisely than
1938 1940 1941 1942
that it probably lies within the limits of 15 and
2.0 per, cent according to the system of weighting (1) Gross personal savings, including allowance for accrued taxation
which is adopted," inasmuch as the more
241
807 1,004 1,271
accurate figure now available turns out to be 18 Less
(2) Death duties, etc
- 9 4 -100
-90 -85
per cent.
(3) Net personal savings after allowance
910 1,171
for death duties etc
151
722
It is important that the price series given in
line (4) should not be confused with the Min- Less
(4) Increase in allowance to meet accrued
taxation*.........
... -17 - 9 4 -206 -280
istry of Labour's Cost of Living index, since the
the total of civil expenditure on consumption,
that is, of the total of expenditure shown in
line ( i ) above, less the income issued in kind to
H. M. Forces and Auxiliary Services. To illustrate the method adopted, the figure for 1942.
was calculated by taking the average of the
change between 1938 and 1941 in the cost at
market prices of buying the collections of goods
and services bought in 1938 and 1941 respectively.3 Since the diversion to war purposes of
resources used in peace-time for the satisfaction
of consumers' needs has necessitated a considerable change in the structure of consumers' purchases, it might have been expected that the two
components of the final average would differ
somewhat widely. This, however, is not in
fact the case, the proportionate increase between
1938 and 1941 in the cost of purchasing each
collection being almost the same. The two
percentage changes are sufficiently close to one
another for their average to afford a reasonable
measure of market price changes applicable to
personal expenditure on consumption.
By adjusting the figures of personal expenditure on consumption for changes in the level of
prices, an indication is obtained of the movement
in the quantum of consumers' purchases. The
resulting series are as follows:—
3
The figures were obtained not by a direct comparison between
1938 and, say, 1942, but by Unking together direct comparisons of adjacent intermediate periods. A direct comparison of 1942 with 1938
would, however, yield a figure which differed only in the third place of
decimals.
AUGUST 1943
(S) N e t personal savings after allowance
for accrued taxation
134
628
704
891
1
This item shows the excess of the liability for direct taxes accruing
on current incomes at current rates of taxation over current direct tax
payments.
73 *
BRITISH WHITE PAPER ON WAR FINANCE
The allowance to meet accrued income tax in
each year is the excess of tax liabilities accrued
during the year, on the assumption that there
will be no change in the rate of tax, over total
payments during the year in respect both of tax
currently due and of arrears. Thus in order to
obtain the total amount required at the end of
1942. to meet the taxation accrued and unpaid,
though not necessarily due, at that date, the
figures in row (4) must be added together;
that is to say, the aggregate at that date was
580 ( = 94+2.o6+z8o) phis the amount accrued
and unpaid at the end of 1939, plus or minus
any adjustment due to changes in the rate of
tax between the dates of earning and of assessment. The same applies to the increases in
allowances to meet accrued taxation on impersonal income shown in line (7) below.
It was stated in Cmd. 6347 that an attempt to
check the figures of personal savings by direct
methods suggested that the figures of net personal savings were not over-estimated and that
it would have been easier on such evidence to
justify a higher than a lower total. This has
been borne out by the revised estimates, which
give a considerably higher figure than before for
personal savings in 1940 and 1941. On the other
hand, it was then thought likely that a more exact estimate of expenditure on consumption
would increase rather than decrease that figure,
but, as explained above this expectation has not
been fulfilled.
(6) Gross impersonal savings, including
allowance for accrued taxation.... 182
Less
(7) Increase in allowance to meet accrued
-12
taxation
(1) N e t impersonal savings, after allowance for accrued taxation
170
1940
1941
1942
358
413
338
-183
-233
-148
175
180
190
N E T PRIVATE SAVINGS (PERSONAL AND IMPERSONAL)
[In millions of pounds]
1938
1940
1941
1942
(9) N e t personal savings after allowance
• for accrued taxation
{10) N e t impersonal savings after allowance for accrued taxation
134
628
704
891
170
175
180
190
{11) Aggregate net private savings after
allowance for accrued t a x a t i o n . . . .
304
803
884 1,081
The series in line (11), /.*. the sum of lines (5)
and (8) above has been obtained indirectly by
deducting direct estimates of personal consumption and taxes met out of private incomes from
732-
[In millions of pounds]
1940
1941
June June
30
30
IMPERSONAL SAVINGS
[In millions of pounds]
1938
direct estimates of private incomes. Net impersonal savings have then been estimated separately and the remainder allocated to personal
savings. There is, however, no very precise line
between "personal" and "impersonal." Impersonal savings in the present context is intended to include not only the net undistributed
profits of companies but also the savings held in
the business accounts of traders, farmers, and
other individuals. For savings used to extend
farm equipment or to repay business mortgages
and other debts cannot reasonably be regarded as
personal. Great precision cannot be achieved in
the estimation of the last-mentioned kinds of
impersonal savings, since in these cases there is
not the line between distributed and undistributed profits that exists in the case of companies.
Any revision of the item of impersonal savings
would require an equal and opposite change in
the estimate of personal savings.
While it is still impracticable to construct a
direct estimate of personal savings by setting
down the net change in all assets held by persons,
some information can be provided on the distribution of bank deposits. The following
table, provided by the courtesy of the Clearing
Banks, shows the movement of net personal and
other accounts:—
Dec.
31
1942
June Dec.
30
31
(1) Total deposits- held by Clear2,469 2,946 3,329 3,263 3,629
ing Banks
Less
(2) Advances to customers and
- 9 2 6 - 8 5 9 -807 - 8 0 0 - 7 7 3
other accounts
(3) Total deposits (net)
;4) Personal deposits (net)
(5) Other deposits (net)
1,507 2,087 2,522 2,463 2,856
617
692
661
704
820
890 1,426 1,830 1,759 2,036
Net personal deposits in line (4) exclude the
accounts of businesses, financial institutions,
public authorities, and also, for example, those
of individual traders, shopkeepers, farmers,
and professional men where the accounts are
known to be used for the purpose of business.
Nonresident deposits and sundry accounts are
also excluded. No attempt has been made to
adjust for the amount of bank accommodation
obtained by the discounting of bills.
The figures in line (5) have been obtained by
subtracting those in line (4) from those in line
(3). Thus line (5) includes nonresident deposits
and sundry accounts as well as the business
deposits of which it is mainly made up.
FEDERAL RESERVE BULLETIN
BRITISH WHITE PAPER ON WAR FINANCE
F. DISTRIBUTION OF PRIVATE INCOME BY
RANGES OF GROSS INCOME SHOWING
THE EFFECT OF CHANGES IN INCOME
TAX AND SURTAX, 1938-41
Financial Year 194CM1
E. PROPORTION OF PRIVATE INCOME
(PERSONAL AND IMPERSONAL)
DEVOTED TO TAXATION
[In millions of pounds]
1938
1940
1941
1942
Aggregate
net income
(1) Private income (item 37 of Table II).. 4,920 6,156 7,063 7,836
(2) Direct taxes, social insurance contributions of employees, War Damage Act contributions and premiums,
etc., met out of private income
(3) Indirect taxes and rates specifically on
consumption less subsidies
(4) Other indirect taxes, etc., met out of
private income
(5) Excess of tax liabilities over payments
Range of gross income
552
794 1,231
416
508
170
200
240
220
29
277
439
428
(6) Total tax liabilities in respect of private income, i.e. (2) -f (3) + (4) +
(5)
(7) Line (6) as a percentage of line ( 1 ) . . .
1,167
24
628
1,527
29
36
38
This table shows the proportion of the private
income devoted to direct and indirect taxation,
rates, compulsory contributions to social insurance and war risks insurance schemes, and
contributions and premiums (almost the whole
of which are compulsory) under the War Damage Act, abated by the amount of subsidies.
The figures relate not only to taxes falling on
personal incomes, but also to those which fall on
other private income, e.g. National Defence
Contribution and Excess Profits Tax.
The figures in line (4) are estimates of that
part of the sum of items 12. and 13 of Table I
which is met out of private income, i.e. which
does not appear in the expenditure by public
authorities on goods and services at market
prices. Consideration of Table IV will show
that the remaining part of these taxes and compulsory payments represents transfers within the
public authority sector and is, therefore, selffinancing. It does not have to be met out of
private income.
It is not possible to estimate accurately the
division of these taxes and compulsory payments between those to be met out of private
income and those which represent transfers
within the public authority sector. The figures
given in line (4) represent approximate orders of
magnitude, but it is unlikely that any inaccuracy
they contain perceptibly affects the percentages
in line (7).
AUGUST 1943
1940-41
781
1,779 2,538 2,956
Proportion
of gross
Aggre- with income income reNum- gate
tained with
tax and
ber of gross surtax at— taxes at—
inincomes come 1938- 1940- 1938- 1940-
(In
thousands)
39
rates
41
39
rates rates
(In million sof
P ounds)
Private income at the disposal of individuals—
Under 250
3,328
250-500
3,295 1,069
500-1,000
516
770
345
1,000-2,000
250
2,000-10,000
360
97
170
S
10,000 and over
41
rates-
(Per cent'*
3,322 3,302 99.8
984 96.9
1,036
411 88.6
457
245 82.0
283
256
197 71.1
48 49.4
84
99.2
92.0
79.7
71.0
54.7
28.2
Other private income
*624
210
33.7
Total private income
6,412
5,397
84.2
Financial Year 1941-42
Aggregate
net income
Range of gross income
Proportion
of gross
Aggre- with income tincome reNum- gate
tained with
tax and
ber of gross surtax at— taxes at—
inincomes come 1938- 1941- 1938- 19411941-42
39
42
42
39
rates rates rates rates
(In
thousands)
Private income a t the disposal of individuals—
Under 250
. . .
250-500
4,450
500-1,000
1,050
1,000-2,000
285
2,000-10,000 , .
...
97
10,000 and over
8
(In]million
Pounds)
(Per cent)
3,398 3,392 3,307 99.8
1,490 1,445 1,276 97.0
495 89.5
613
6S5
245 82.0
328
400
170 71.1
256
360
35 49.4
84
170
97.3
85.6
72.3
61.3
47.2
20.6
Other private income
*761
200
26.3
Total private income
7,264
5,728
78.9
1
Including all liabilities for National Defence Contribution and
Jxcess Profits Tax which are deducted together with income tax in
arriving at net income.
These tables, which relate to income received
in 1340-41 and 1941-42., show the amount of
private income at the disposal of individuals in
different ranges of gross income. The category
of other private income includes the investment
income of charities, the increase in assurance
funds, and the undistributed profits of companies
together with all liabilites for National Defence
Contribution and Excess Profits Tax. It is not
the same as impersonal income shown in Table
II which does not include the first two of the
above categories but makes allowance for the
business savings of private traders, etc., as well
as the undistributed profits of companies.
733
BRITISH WHITE PAPER ON WAR FINANCE
As in the case of income tax assessment, the
incomes of a husband and wife are reckoned as
one income. Further, in the table relating to
1940-41, for example, the aggregate net income
at 1940-41 rates is the amount which would have
resulted if all taxpayers had during that year
paid the full tax liability at 1940-41 rates on
the income actually received by them in that
year. The figures in the corresponding column
headed 1938-39 do not relate to the income of
that year, but to the income that would have
remained after tax in 1940-41, if the taxation
of 1938-39 had been in force in that year.
The whole of transfer payments other than
National Debt interest has been included in the
incomes below 2.50 pounds.
G. A COMPARISON WITH Cmd. 6347
As stated in the preamble, it is now possible
to give substantially more accurate estimates of
certain items as a result of additional information that has become available since last year.
So far as the main items are concerned, the position may be summarised as follows:—
(1) The estimates of profits and salaries are
now known to be higher than was supposed a year ago, while the estimate of
wages, etc., is slightly reduced. In the
case of salaries, the new figures are approximately 10 per cent higher than those
previously given for 1940 and 1941. In
the case of profits and interest, comparable
percentages are 5 and iz. However, as
may be seen from Table II, item 15, paid
out profits are not greatly affected and are
even somewhat reduced. The net
national income as a whole is increased by
%y2 and 4 per cent respectively in the two
years.
(2.) The more reliable estimates of personal
expenditure on consumption now available indicate that this item was slightly
over-estimated in Cmd. 6347. The figures now available for 1940 and 1941 are
3 and 1 per cent below the corresponding
estimates given last year.
(3) Consequent upon the increase in the estimates of profits and salaries, there is an
increase in the estimates of direct tax
liabilities and therefore in the figures
given for the excess of tax liabilities over
payments.
(4) Further information on overseas disinvestment leaves the figures given in Cmd.
6347 substantially unchanged. It has not
so far been possible to provide a further
check on this figure by the direct estimation of the balance of overseas payments
on current account.
734
(5) As a consequence of the rise in income and
fall in consumption there is a substantial
decline in the residual estimate of private
net disinvestment at home. At the same
time, there is a corresponding rise in savings, including allowance for accrued
taxation, a considerable part of which is
absorbed by the increase in the estimates
of such allowance.
The extent of the revision under (5) illustrates
the precarious nature of residual figures in circumstances in which they cannot be checked
by direct estimates.
The new figures are believed to be much more
accurate on the strict definition of the meaning
of the residual figure. The reason why this is so
falls under two headings:—
(a) The previous estimate of the residual
figures was partly justified by reference to the
large amount of the accumulating sinking funds,
etc., against depreciation which represented a
net reduction in the national wealth in so far as
they could not be employed currently. The new
figures do not necessarily disturb the conclusion
that disinvestment of this kind was taking place.
It would now appear, however, that, in using this
factor to explain the residual figure previously
published, not enough allowance was made for
various expenditures incurred for war purposes,
partly for building, partly for the working capital
of government contractors, which is carried temporarily by private businessfinanceand therefore
krecons, under the definition, as positive private
home investment, and offsets the depreciation
which is not currently made good. There is
evidence of an increase in the value of stocks and
work in progress carried under private finance.
(b) It was explained in Cmd. 6347 that a
change had been made from the procedure
adopted in Cmd. 6161 by which sums used for
writing down stocks which have fallen in value
were deducted from business earnings. It was
also stated that such an adjustment was only
required in times of falling prices. This last
conclusion has been the subject of legitimate
criticism. It is right either to keep the statistics
entirely in money terms without adjustment for
price changes, or to adjust for falling and for
rising prices alike. Since no uniform practice is
adopted in bringing the effects of the rising
prices of stocks into profits and since no adequate statistics are available of the amounts so
brought to account, it has seemed better to revert to the procedure of Cmd. 62.61 and make no
adjustment for either contingency. It follows
that the resulting figure for disinvestment relates to the money value of stocks as reckoned
in the calculation of profits. Thus, in so far
as rising prices offset, in terms of value, a decline
FEDERAL RESERVE BULLETIN
BRITISH WHITE PAPER ON WAR FINANCE
in quantity, there is no apparent disinvestment
in terms of money, in spite of the real disinvestment which has occurred. The effect of the
rising prices at which stocks are taken into profits should be apparent both in an increased level
of profits before tax and in a decreased residual
figure for disinvestment, etc.
It is believed that the revised figures show
more accurately the effect of both these
influences.
TABLE I
ESTIMATES OF NET NATIONAL INCOME AND EXPENDITURE IN 1938, 1940, 1941, AND 1942
[In millions of pounds]
1938
1940
1941
1942
381
1. Rent of land and buildings
2. Profits and interest
1,241
3. Salaries, and the pay and allowances
(in cash and kind) of officers in
H.M. Forces and Auxiliary
Services
1,081
4. Wages, and the pay and allowances
(in cash and kind) of other ranks
in H.M. Forces and Auxiliary
Services
1,787
389
1,624
385
1,926
384
2,183
1,288
1,338
1,408
2,425
2.970
5. Net national income
4,490
5,726
6,619
3,409
7,384
6. Personal expenditure on consumption at market prices
7. Expenditure at home and abroad,
by public authorities, on goods
and services at market prices
8. Private net investment at home and
war losses made good
9. Private and government net investment abroad
10. Subsidies
1938
1940
1941
1942
4,035
4,282
4,509
4,800
845
3,059
4,194
4,608
287
(-22) (-200) (-173)
-55
15
-756
70
-797
142
-632
150
11. Indirect taxes and rates specifically
on consumption
12. Other indirect taxes, rates, etc
13. War risks insurance premiums
-431
-206
-578
-205
-124
-770
-220
-239
-931
-239
-199
14. Net national expenditure
4,490
5,726
6,619
7,384
NOTES
directly by individuals (including nonprofit-making bodies)
or through businesses or public authorities, will be paid
1. This item represents the income from the ownership
of lands, houses, etc., after allowance has been made for main- out of them. The item is "net" in the sense that the sums
shown in items 1 and 2 exclude that part of gross receipts
tenance and repair. It includes incomes from these sources
which is set aside in the calculation of net rent and profit
below the effective income tax exemption limit and also
for the maintenance and repair or replacement of all existing
when received by nonprofit-making bodies, e.g. charities,
capital equipment (such as houses, machinery, or stocks)
colleges, etc.
which is being currently worn out or used up.
2. Aggregate profits here are net, i.e. after current business
6. This item shows the money value of all consumption
losses have been deducted. Also, as before, this item exgoods
and services either bought by individuals and noncludes interest on the national debt and income due to
profit-making bodies or received by them as income in kind.
foreigners, but includes miscellaneous government income
(such as trading profits and certain receipts from abroad). Thefiguresshown here are therefore at prices which include
indirect taxes, rates, etc., and war risks insurance premiums*
The item includes income from profit and interest received
which appear in the market price of these goods and services..
by persons below the income tax exemption limit or by nonThey
exclude costs which, being met by government subprofit-making bodies and also incomes below the income tax
sidies, do not enter into market prices.
exemption limit belonging to persons working on their own
7. This item excludes expenditure by public authorities
account. As explained in section G, the allowance for the
year 1938 in respect of sums used to write down stocks has which does not arise from a direct demand for goods and
services. Thus it excludes (i) transfer payments, (ii) claims
not been continued.
3. This item includes: (a) the untaxed allowances whether paid in respect of war losses, (iii) loan repayments, payments
to sinking funds, etc., (iv) subsidies. Further, Post Office
in money or in kind (food, clothing, etc.) received by officers
expenditure and the expenditure of local authorities on
in H. M. Forces and Auxiliary Services, (£) the whole of the
housing and trading services are excluded. Thus, Qt) Post
earnings of shop assistants, ( 0 small salaries below the
Office new capital and expenditure is included in net investincome tax exemption limit.
ment at home (item 8), (b) personal expenditure on postal
4. An allowance for income received in kind (food, clothing, etc.) by, e.g. other ranks in H. M. Forces and Auxiliary services appears in personal expenditure on consumption
(item 6), and (c) business expenditure on these services is
Services and domestic servants, has been added to their cash
included as a cost of production in the price of the other
income and allowances. The estimate of personal expendigoods and services enumerated in items 6, 7, and 8.
ture on consumption at market prices (item 6) includes a
Lend-Lcase assistance and expenditure equivalent to the
similar allowance.
Canadian contribution are excluded from this item. Thus,
5. This item is the sum of items 1 to 4 and is an estimate
in so far as goods have been received under Lcnd-Lease or
of the incomes received by factors of production in, or only
have been paid for out of the Canadian contribution, this
temporarily absent from, the United Kingdom in the course
series is not a consistent measure of the value of the total
of producing the current output of goods and services of all
amount of goods and services currently at the disposal of
kinds. These incomes are "before tax," since all taxes, dipublic authorities, since it includes overseas resources obrect and indirect, falling on these incomes, whether paid
tained by borrowing or disinvestment, but not those ob-
AUGUST 1943
735
BRITISH WHITE PAPER ON WAR FINANCE
taincd under Lend-Lease provisions or as a result of the Canadian contribution.
8. This item is composed of GO gross expenditure on fixed
capital and its upkeep, i.e. new investment, and replacement
and repairs (whether normal or resulting from war damage)
actually made good, provided that it is financed privately
or forms part of the capital expenditure of the Post Office
or the housing and trading services of local authorities,
minus (F) sinking funds and depreciation allowances which
have been set aside in the calculation of rent and profits in
items 1 and 2, minus (c) receipts from the sale to public authorities of existing privately-owned capital assets, such as land,
buildings, or stocks, plus QT) the increase in stocks, excluding
(i) below, held under private finance (as valued for the calculation of profits in item 2), plus (/) stocks replaced to make
good war losses, plus (/) expenses connected with the investment of savings, such as certain legal costs and stamp duties
incurred in the transfer of property, which do not enter into
the market value of other goods and services. The figure
for 1938 is affected, as compared with the estimate given in
Cmd. 6347, by the change in the basis of the valuation of
stocks referred to in the note to item 2 above.
It has been impossible to make a direct estimate of the
constituents of this item for the war years. The figures in
brackets have been obtained by subtracting the sum of items
6, 7, 9, 10, 11, 12, and 13 from item 5 and are therefore dependent on the accuracy of these estimates.
9. This item is an estimate of the net increase (or, when
negative, decrease) in the overseas assets of the United Kingdom and is equal to the United Kingdom balance of payments
on current account. Any liability incurred as a result of
Lend-Lease assistance is not taken into account in this item
736
just as the value of the goods and services received in this
way is not included in item 7 above.
10. This item is restricted to the following classes of
payments made by the central government to meet the costs
of goods and services bought by the public: (i) agricultural
subsidies such as the beet sugar subsidy, milk subsidy, wheat
deficiency payments, and grants in respect of fertilizers,
grassland ploughing, and field drainage, (ii) losses incurred
on the commercial accounts of the Ministry of Food and the
Ministry of War Transport, and (iii) a subsidy on coal paid
by the Ministry of Fuel and Power. This item is included
here since it represents payments in respect of costs not
appearing in the market value of goods and services.
11. This and the two items following require to be deducted from the sum of items 6 to 9 (which equals the net
national income at market prices) since they appear in market
prices but do not appear in any of items 1 to 4. The item
includes (i) certain customs and excise duties and (ii) local
rates on dwelling houses, etc.
12. This item includes (i) compulsory contributions of
employers to social insurance, (ii) motor vehicle duties on
vehicles owned by businesses, (iii) stamp duties other than
those on the transfer of property, and (iv) customs and excise duties and local rates not included in item 11 above.
13. This item shows the premiums paid under the commodities and marine war risks insurance schemes, but not
contributions and premiums under the War Damage Act,
which are treated like direct taxes.
14. This item is the sum of items 6 to 13 and is an estimate
of expenditure on the factors of production in, or only temporarily absent from, the United Kingdom. It is, therefore,
by definition equal to item 5.
FEDERAL RESERVE BULLETIN
BRITISH WHITE PAPER ON WAR FINANCE
TABLE II
ESTIMATE OF PRIVATE INCOME AND OUTLAY IN 1938, 1940, 1941, AND 1942
[In millions of pounds]
Personal Income
1938
15. Rent of land and buildings, profits
and interest (including National
Debt interest and interest accrued
on National Savings Certificates)
received by persons
1,515
16. Salaries, and the pay and allowances
(in cash and kind), of officers in
H.M. Forces and Auxiliary
Services
.
1,081
17. Wages, and the pay and allowances
(in cash and kind), of other ranks
in H.M. Forces and Auxiliary
1,787
Services
131
18. Pension payments
19. Payments in respect of unemployment and the relief of poverty... 112
20. Health payments
35
21. Other transfer payments
1940
1941
1,648
1,650
1,288
1,338
2,425
151
2,970
178
64
35
15
30
33
29
4,661
5,626
6,228
259
530
835
1938
1942
1940
1941
1942
23. Personal expenditure on consumption adjusted for subsidies and
specific indirect taxes, rates, etc.. 3,619 3,774 3,881 4,019
24, Excess of indirect taxes and rates
specifically on consumption over
1,811
781
subsidies
628
416
508
25. Direct tax payments other than
death duties, etc.. and War
Damage Act contributions and
1,408
premiums met out of personal
income
825
715
385
537
26. Death duties and stamps on the
100
94
85
90
transfer of property
3,409
200 27. Excess of direct tax liabilities on
280
206
94
17
personal income over payments...
18 28. N e t personal savings after setting
aside the excess of direct tax
39
liabilities over payments
(134) (628) (704) (891)
11
p
22. Personal income before tax
6,896
29. Personal outlay
4,661
5,626
6,228
6,896
15
68
231
348
62
104
191
254
12
183
233
148
Impersonal Income
30. Impersonal income before tax.
31. Impersonal income before tax.
259
530
940
835
940
32. National Defence Contribution and
Excess Profits Tax payments
33. Other direct tax payments including
War Damage Act contributions
and premiums met out of impersonal income
34. Excess of direct tax liabilities on
impersonal income over payments
35. Net impersonal savings after setting
aside the excess of direct tax
liabilities over payments
170
175
180
190
36. Impersonal outlay
259
530
835
940
6,156 7,063
7,836
Private Income
37. Private income before tax (sum of
items 22 and 31)
4,920
6,156
7,063 7,836 ||
NOTES
15. This item is composed of items 1 and 2 of Table I plus
National Debt interest received by the private sector of the
economy and accrued interest on National Savings Certificates less impersonal private income less miscellaneous income from public property, etc. (sec item 81 of Table IV).
16 and 17. The same as items 3 and 4 respectively of
Table I.
18. This item is composed of noncontributory and contributory old age pensions, other contributory pensions,
supplementary pensions, and cash payments in respect of war
pensions and service grants.
19. This item is composed of unemployment insurance
benefits, unemployment allowances, and outdoor relief paid
by local authorities.
20. Cash and medical benefits under the National Health
Insurance Scheme.
21. Certain transfer payments, e.g. billeting allowances,
arising out of the war.
The sum of items 18 to 21 plus the National Debt interest
and interest accrued on National Savings Certificates, included in item 15 above, is equal to the total of transfer payments shown in item 101 of Table IV.
AUGUST
1943
38. Private outlay (sum of items 29 and
36)
4,920
22. This item is the sum of items 15 to 21 and shows the
total of disposable money income received by persons (including nonprofit-making bodies).
23. This item is equal to item 6 of Table I less item 24 of
Table IL
24. Numerically equal to item 11 of Table I less item 10 of
Table I.
25. This item includes payments of (i) income tax (other
than that paid by businesses in respect of business savings)>
(ii) surtax, (iii) employees' contributions to social insurance, (iv) War Damage Act contributions and premiums,,
met out of personal income, (v) motor vehicle duties on vehicles owned by persons.
26. Together with item 25 makes up the total of direct
tax, etc., payments met out of personal income.
27. This item shows the excess of the liability for the
direct taxes included in items 25 and 26 accruing on current
income at current rates of taxation over current direct tax.
payments. It relates particularly to income tax and surtax,,
since in these cases liabilities in respect of current incomes
(payable in the future) differ considerably from current payments at times when money incomes or rates of taxation arc
changing.
737
BRITISH WHITE PAPER ON WAR FINANCE
28. This item represents the excess of personal money income over outgoings for consumption and liability for taxes,
compulsory contributions, etc., including death duties. It
has been obtained throughout by subtracting the sum of
items 23 to 27 from item 22; it therefore depends on the
accuracy of these items.
29. This item is the sum of items 23 to 28, which show the
various ways in which personal money income is disposed
of. Current income may be either (a) spent on consumption, (£) paid away in taxes and the like, (r) set temporarily
aside against increased liabilities to tax, or (V) added to past
savings. Since this list is exhaustive the item is by definition
equal to item 22.
30. This item is equal to that part of the net national income before tax (item 5 of Table I above) which is neither
paid out to persons (in which case it enters, together with
transfer payments, into item 22) nor accrues to public authorities as miscellaneous income from public property, trading,
etc.
31. Sec preceding note.
32. Equal to the total payments of National Defence Contribution and Excess Profits Tax.
33. This item is composed of other direct taxes such as
income tax and War Damage Act contributions and premiums met out of impersonal private income. Together
with items 25, 26, and 32, it is equal to item 73 of Table IV.
34. This item shows the excess of the liability for the
direct taxes included in items 32 and 33 accruing on current
income at current rates of taxation over the current payments of these taxes. As explained in the note to item 27,
accruals of this kind will be payable in the future in so far
as current payments arc made in respect of assessments based
on the income earned in an earlier period.
35. An estimate of impersonal private savings and intended to include not only the net undistributed profits of
companies but also the savings held in the business accounts
of traders, farmers, and other individuals.,
36. The sum of items 32 to 35 and by definition equal to
item 31.
37. The sum of items 22 and 31.
38. The sum of items 29 and 36.
TABLE III
CENTRAL GOVERNMENT EXPENDITURE AND THE SOURCES FROM WHICH IT WAS FINANCED
IN 1938, 1940,1941, AND 1942
[In millions of pounds]
39. Central government revenue
40. Net personal savings including
allowance for accrued taxes
41. Undistributed profits after payment
of taxes and War Damage Act
contributions and premiums but
including allowance for accrued
taxes
42. Surplus on extra-budgetary funds...
43. Local authority surplus
44. Compensation received in respect
of claims under the marine and
commodities war risks insurance
schemes and the War Damage
Act
Less
45. Private net investment (or plus disinvestment) at home and war
losses made good
46. Private and government net investment (or plus disinvestment)
abroad
1938
1940
1941
1942
891
1,259
1,828
2,343
1,171
151
182
22
7
-287
55
722
358
148
38
910
413
154
66
33$
151
80
36
248
215
22
200
173
756
797
632
1938
1940
1941
1942
49. Central government revenue
891
1,259
1,828
2,343
50.
51.
52.
S3.
-1
-2
24
9
5
64
8
9
74
12
10
258
515
73
-47
Unemployment Fund
National Health Funds
Local Loans Fund
Other extra-budgetary receipts including war risks insurance and
certain War Damage Act receipts,
Exchange Equalisation Account,
and redutcion in Exchequer
balance
. .
54. Reconstruction Finance Corporation
loan
55. Canadian Government interest-free
loan
56. Receipts from capital transactions
included in miscellaneous revenue,
and appropriations in aid arising
from capital transactions
Less
57 Sinking funds
58. Other expenditure (net)
59. Finance through government agencies
87
5
10
10
10
-11
4
-12
-8
-17
13
-13
253
543
247
206
119
214
234
168
180
552
50
213
174
1,021
150
231
134
1,026
170
130
338
279
473
17
151
155
453
60. Post Office and Trustee Savings
1
Banks
61. National Savings Certificates including increase in accrued interest...
3
62. Defence Bonds
63. Other public issues (net)
62
64. Increase in fiduciary issue
10
65. Increase in Treasury bills held outside government departments and
Bank Ways and Means
-199
66. Treasury deposit receipts
67. Tax reserve certificates
47. Central government deficit.
130
48. Central government expenditure
1,021
2,080
2,760
68. Public borrowing a t home
-123
1,537
2,541
2,554
4,616
5,103
69. Central government expenditure
1,021
3,339
4,616
5,103
NOTES
i
2,788
39. This item, the sum of items 70, 74, and 78 of Table IV,
is composed of total ordinary revenue {including throughout
the period the receipts from wireless licences but excluding
receipts tinder the War Damage Act, which appear in extra-
738
4
157
budgetary funds, and the Canadian contribution) plus receipts from classes which may be appropriated in aid of Votes
corresponding to gifts, taxes, and income from property,
less receipts from the Post Office Fund, which is treated as
an extra-budgetary fund, less Post Office Vote of Credit exFEDERAL
RESERVE
BULLETIN
BRITISH W H I T E PAPER O N W A R
pcnditure (since the Post Office is treated as part of the
private sector of the economy; see note to item 7 of Table I),
less receipts from capital transactions included in miscellaneous revenue, which are properly regarded as a part of the
finance of the deficit, less transfers between public authorities
included in miscellaneous revenue, less departmental receipts
in excess of those appropriated in aid of Votes since these
appear in miscellaneous revenue and also, so far as they are
relevant, in receipts from classes which may be appropriated
in aid of Votes corresponding to gifts, taxes, and income
from property.
40. The sum of items 27 and 28 of Table II.
41. The sum of items 34 and 35 of Table II.
42. Item 83 of Table IV with its sign changed. The current account of extra-budgetary funds as a whole has show
an excess of income over expenditure.
43. Item 84 of Table IV with its sign changed. See note
to item 42 above.
44. Item 97 of Table IV. The whole of the compensation
received by claimants appears here as available to finance the
deficit, since allowance is made for outgoings on war losses
made good in item 45 below.
45 and 46. Items 8 and 9 respectively of Table I.
47. The sum of items 40 to 46, which show the economic
sources from which the central government deficit is financed,
and is the same as item 82 of Table IV.
48. The sum of items 39 and 47 of this table and the same
as item 86 of Table IV.
50, 51, and 52. Net increase in these funds available for
loan to the Exchequer.
FINANCE
53. The net increase in government securities held by other
extra-budgetary funds including the Exchange Equalisation
Account, certain receipts in respect of war risks insurance
and the War Damage Act, and the reduction in Exchequer
balance.
56. These items are included here since they appear in
central government expenditure but not in revenue.
58. This item includes net issues under various Acts, e.g.
North Atlantic Shipping Act, 1934, Tithe Act, 1936, AngloTurkish (Armaments Credit) Agreement Act, 1938, Overseas
Trade Guarantees Act, 1939.
59. The sum of items 50 to 58, and represents the total of
sums used to finance the central government deficit which is
received from government funds and similar sources as opposed to loans from the public.
60. The increase in investments from the net deposits in
the Post Office Savings Bank and Trustee Savings Bank.
61 and 62. The net receipts after deduction of repayments.
63. Receipts from public issues, e.g. National War Bonds
and Savings Bonds, and Other Debt (net) less securities redeemed, and excluding purchases of government securities
(war or pre-war issues) by public departments.
65. The increase in bills held by the market or by Empire
Funds and in Bank Ways and Means Advances.
66. Receipts less repayments.
68. The sum of items 60 to 67, showing the amount of
public borrowing at home. The sum of item 59, and this
item shows the financial sources from which the central
government deficit is financed, and is equal to item 47.
69. The sum of items 49, 59, and 68, and equal to item 48.
TABLE IV
THE INCOME, DEFICIT, AND EXPENDITURE OF PUBLIC AUTHORITIES IN I938 f 1940, 1941, AND 1942
[in millions of pounds]
Direct taxes, War Damage Act
contributions, etc.
70. Central government
71. Extra-budgetary funds
72 Local authorities
73.
Total
1938
1940
1941
1942
497
55
734
60
1,089
142
1,390
137
552
794
1,231
1,527
Indirect taxes, rates, war risks insurance
premiums, etc.
372
74. Central government
:
54
75. Extra-budgetary funds
211
76. Local authorities
77.
Total
1938
1940
1941
Subsidies
90. Central government
91. Extra-budgetary funds
92. Local authorities
15
70
142
150
9?>,
15
70
142
150
36
248
215
36
248 |
215
Total
.
Payments in respect of claims under the
marine and commodities war risks
insurance schemes and the War Damage
Act
94. Central government
883
95. Extra-budgetary funds
272
96 Local authorities
214
502
182
223
705
304
220
637
907
1,229
22
23
34
70
65
103
1,369
97
Total
Miscellaneous income from public
Property, trading, etc.
78. Central government
79. Extra-budgetary funds
80. Local authorities
26'
Transfer payments
98. Central government
99. Extra-budgetary funds
2o" " " 3 1 " " " 3 3 " 100. Local authorities
81
48
49
Total
deficit
82. Central government
83. Extra-budgetary funds
84. Local authorities
85
Total
130 2,080
—22 - 1 4 8
—7
-38
101
Income plus deficit
1,894
101.
Total
2,788
-154
—66
2,760
-151
-80
Expenditure on goods and services
102. Central government
103. Extra-budgetary funds
104. Local authorities
2,568
2,529
105.
Total
1,021
87
230
3,339
94
211
4.616
292
185
5,103
258
167
106. Central government
107. Extra-budgetary funds
108. Local authorities
89
1,338
3,644
5,093
5,528
109
AUGUST
1943
318
137
23
343
117
19
394
101
14
441
103
11
478
479
509
555
464
14
367
2,680
13
366
3,831
12
351
4.254
13
341
845
3,059
4,194
4.608
797
151
390
3,093
166
385
4,307
361
365
4,845
331
352
3,644 j 5,093
5,528
Total expenditure, excluding transfers,to
other authorities but including payments
out of transfers from other authorities
86. Central government
87. Extra-budgetary funds
88. Local authorities
Total
K42
Total
1,338
7*9
BRITISH WHITE PAPER ON WAR FINANCE
NOTES
This table is a combined statement of the income, deficit
and expenditure of public authorities in the United Kingdom.
Transfers between one public authority and another, such as
Exchequer grants to local authorities, arc excluded from the
income of the receiving authority and from the expenditure of
the authority making the transfer. Thus, expenditure by
local authorities from Exchequer grants is attributed to local
authorities and not to the central government as in Cmd.
6347. Reimbursements to local authorities in respect of
expenditure incurred on behalf of the central government
have, as far as possible, been shown as expenditure of the
central government.
Expenditure on goods and services is here net in the sense
that it is after deduction of goods and services sold by public
authorities to the general public, which arc included either in
personal expenditure on consumption or in private investment
at home.
70. Includes income tax, after allowance for the small
amount paid by public authorities in respect of their income
from property, surtax, other Inland Revenue duties, National
Defence Contribution, and Excess Profits Tax. In contrast
with the treatment adopted in Cmd. 6347 -all War Damage
Act contributions and premiums arc excluded from this item
and included in the following item. Certain appropriattonsin-aid or receipts appearing in miscellaneous revenue which
correspond to gifts (e.g. sundry contributions towards the cost
of the war) or direct taxes are also included. The receipts
from wireless licences are here treated as direct taxes as also
are motor vehicle duties on vehicles owned by persons.
71. Composed of employees' contributions to social insurance and War Damage Act contributions and premiums.
74. Composed of customs and excise duties, motor vehicle
duties not included in item 70 above, stamp duties other than
those on the transfer of property and appropriations-in-aid
corresponding to indirect taxes.
75. Composed of employers' contributions to social insurance and premium payments under the commodities and
marine war risks insurance schemes.
76. Composed of local rates with the exception of water
rates, which are treated as current receipts from trading
services.
78. Post Office net receipt, receipt from Crown Lands and
from Sundry Loans, certain items appearing in miscellaneous
revenue, such as contributions towards the cost of the war
received from colonial governments and peoples, and certain
appropriations-in-aid, such as receipts under the Railway
Agreement. Interest on National Debt owned by public departments, etc., is excluded.
740
80. An estimate of the profits from trading services and
corporation estates treated in such a way that (i) central
government grants to local authority trading services, but
not transfers from rate fund accounts in aid of deficiencies, and
(ii) contributions from local authority trading services to the
rate fund account are included.
82. The excess of central government expenditure over
revenue. The sources from which this deficit isfinancedareset out in Table III.
83. This item shows the decumulation of the commodities
and marine war risks insurance schemes' monies, and of
monies held by funds such as the Unemployment and National.
Health Insurance Funds, and in various accounts managed by
the National Debt Commissioners, etc.
84. In ascertaining, this item, capital expenditure on
housing and trading services, which appears in private net
investment (item 8 of Table I), is excluded. Subject to this,
the item is a net figure representing the excess of capital expenditure over savings represented by debt repayments, undistributed profits of trading undertakings, etc.
86. The sum of items 70,74,78, and 82; items 87 and 88 arc
obtained similarly.
90. This item has been fully described in the note to item
10 of Table I.
95. The value of claims paid under the commodities and
marine war risks insurance schemes and the War Damage Act.
98. This item includes (i) National Debt interest paid to
persons and businesses, (ii) interest accrued on National
Savings Certificates, (iii) contributory and non-contributory
old age pensions, (iv) cash payments in respect of war pensions and service grants, (v) supplementary pensions, (vi)
unemployment allowances, (vii) billeting allowances.
99. Unemployment and National Health Insurance benefits
and contributory pensions.
100. Public assistance (out-relief) in money and kind.
103. This item is composed of fees paid to agents under
the war risks insurance schemes and War Damage Act and of
contributions towards administration costs made by the
Unemployment and National Health Insurance Funds, etc.
104. This item differs from the corresponding item in
Cmd. 6347 by the inclusion of expenditure out of net transfers
from other public authorities. •
105. The same as item 7.
106. This item excludes net transfers made by the central
government to extra-budgetary funds and local authorities
which, in so far as they are spent, appear in items 107 and
108. It therefore differs from item 48 (which also appears
as items 69 and 86 and item (1) of section A above) which
includes such transfers.
FEDERAL RESERVE BULLETIN
W a s OH J?IS0J3SI0KflgCUBDING^GST-WAS IHTKtt*A«*IOKAL COBB1KCY STABILISATION
Sew York
September 3 , 1943»
Preceding the regular meeting of the Board of Directors of the FEDERAL
SB3SRVS BANK OF MEW 701V held at i t s office at 8 o'clock p. m. t h i s day, as informal
nesting wae held at 10 o'clock a m. for the purpose of discussing the subject of post'
war International currency s t a b i l i z a t i o n .
At t h i s Informal meeting there were
Present:
He* Buml, Chairman,,
Messrs. Brown, Gluts, Gonway, I r a s e r ,
Myers and Williamson,
Mr, Sproul^, President,
Mr Bounds, f i r s t Vice President,
Messrs. Sidney, Knoke, Logan„ Rice..
Bouse and f i l l l s j * * , Vice Presidents,
Mr, Boelse, Assistant* Vice President,,
Mr, D i l l l s t i n , General Auditor,
Mr. Treiber, Assistant Counsel aid
Secretary ,
Wto Brorae, Assistant (Counsel
and Assistant Secretary*
Mr R B Wlltse, Managing Director of the Buffalo
Branch of the Federal Reserve Bank of He* York, fee Moorep
Chiefi Foreign Research Division,, Research Department, and
Mro H^ C Wallieh, Foreign Besearch Di Tie ion Besearch
Department attended the Meeting by invitation
DTo Barry D White, Director of Monetary Besearch of
the Treasury Department, Mr,, l , M. Bernstein. Assistant
Director of Monetary Research of the Treasury Departaunt,
and Mr S» A Goldenveiser, Director of the Division of
Beoe&roh and S t a t i s t i c s of the Board of Governors of the
Federal Beserve System.,, a l s o attended the s^etlng by
invitation ,
Mr Baal stated that too oessvttteo of directors on foreign relations has
been studying the problems r e l a t i n g to post-war intern- tional •Mtefeury Btebiliifttiort
for several months end that these problems have been discussed with the board of
directors and offloors of the bank on several occasions; and he expressed the
appreciation of the directors and o f f l e e r s of the opportunity t o discuss these
problems with Dr0 White and Mr* Bernstein
Be stated that i t was not expeoted that
any conclusions would be reached a t the meeting but that the eegstitter of direc
-2on foreign relations would continue its study and would probably report the results
of its study to the board of directors.
At the suggestion of the eonreittee of directors on foreign relations
MTo Ruml opened the discussion, by reading the following paragraph from a memoran
d m prepared by Kr Sproul which, be stated, had not been adopted by the board of
directors but which it was thought expressed the point of Yiew of the committee:
*lo The purposes which underlie proposals for an international currency stabilization mechanism will find
general acceptance. International collaboration to pronote increased productivity and a higher standard of
living for all peoples is a legitimate world aspiration
The reduction of international barriers to the exchange
of goods and services, whether those barriers are political;,
commercial, or monetary, is a legitimate world goal, The
question then is not one of internationalism T B 3 isolationism, nor of multi-lateral ism vs. bi-lateralisER, but
of how best to achieve oar objective**
Mra Buml then referred to the tentative outline of discussion setting
forth the questions which the directors and offleers had been considering. copies
of which had been distributed among those present at the meeting,: and it was agreed
that the points in the outline should be taken up in order,
Hr, Buml then read questions X(s), (b) and (c) of topic X as follows:
Xo
fa) Can we «r other countries, Including the relatively undeveloped countries, intelligently commit ourselves to a
currency stabilization plan, until plane as carefully
•ad deliberately explored have been worked out for dealing
with other problems such as the abnormal situ* Ion at the
end of the war, international long term lendlr . and
development, and international stabilization of important
tmm material pricest
(b) H I ! the Immediate organization of an international
currency stabilization fund facilitate ether and more
impi laat measures of international economic collaboration,
or i 1 it facilitate avoidance or postponement of
solution of more difficult problems, meanwhile loading
the currency stabilization mechanism with burdens which
it cas&ot bear?
(c) Unless the international currency stabilization fund is
de facto a world political organization» can It exercise
the controlc necessary to its operation, and is this the
way to establish a world political organization, assuming
the world Is ready for such an organization?
-3Vtr, Dillietin enterad the aettiag at this point.
Mr. Sproul stated that JOB felt that these topics raise soae fundamental
questions, although aot necessarily the moat fundament^.*
He laid that question l(a) should eonoern not only ourselves but aleo.
to perhaps a greater extent, the nailer, more undeveloped countries for whose
interests n , M a leading nation,
should have sen* ftomoern» Be stated that
tha question is whether, without more bei»& done about such problems as those
enumerated in the question, any country could eeonit itself to the discipline and
requirements of an international stabilization plan* no Batter how set up?
Bfir. Sproul said that it appears to him that these questions should be explored
as thoroughly and discussed as smeh publicly as the currency stabilization plans
hare been; tbat otherwise there is a danger that the imerican people, for instance,
will feel that they do not know the entire package > that they do not know the
whole program for which they will be expected to supply funds, when attention is
focused on the segsent of currency stabilization*
Question l(b), Mr. Sproul said, presents a question of JudgBent, opinion
and guesso
Unless the whole thins ia on the table-, he said9 the ehanees of
solution and acceptance are less. In his opinion, the adoption of a currency
stabilization Meohanlea prior to any attack os the other problems might be accepted by public opinion la many countries as a solution to the more difficult problems
with the result that action which should be taken to solve those problems might
not be taken; He stated that he was influenced b\ too experience In the 19S0*s
when central banks were expected to do everytbinc by the control of credit; end
he expressed the view that failure to meet these other problems.might place too
great a burden upon the currency stabilization mechanism,
Mr. Sproul said that question l(c) opens up a whole field that has
been argued with much heat and little light.
It raises the question of the effec-
tiro powers of the Fund and the extent to which the sorereignty of the participating
-4~
nations is invaded.
It will be necessary for corrective measures to be taken by
creditor countries and by debtor countries. Re stated that many people feel that,
unless the ?und hrs the powers to compel adjustments, tbere can be no assurance
that proper corrective measures will be taken. Without such powers it is difficult
to see how the fond een preTent eurreney disequilibrium in the long rumo
If the
Fund has such powers, the organizetion would appear to be de faeto e world political
organization as well as a monetary organization,, and it should be clearly understood
that it impinges upon the sovereignty of the participating countries0
If this is
so, he aaid, the question arises whether it would not be better to establish a world
political organization as sueh» and to fit the monetary organisation Into thet sitting
BTo
BUBI
suggested that Br
White night wish tw ecuient on the qesticns
as outlined by Mr. 6proul; and Or, White replied that he would be glad to do so,
Dr. White stated that the Treasury representatires had sought the
opportunity of discussing these problems with the directors and officers of the
bank because they want the suppert and understanding of the directors and officers
If, after understanding* they feel that they ean fire their support* and also
because they thought it desirable t» explore what each other has in mind and to
discuss the whole subjeet
thereby restoring any area of iBlsoaderstanding and, if
possible, narrowing the points of difference, if any.
Dr. Goldenweleer entered the meeting at this point.
Dr. White stated, with reference \<i question l(a), that all who had
worked on the problem readily admit that the Treasury's proposal is designed to
make a contribution only to a segment of the •'
that the development of solutions to the otfe«
one problems inrolved
Be said
lems er the creation of agencies
to deal with them is highly desirable; and to the extent9 for instance
that
provision irould be made fer long-term erediti and reccaetruction and rehabilitation
a substantial contribution would be made to the prosperity of the world. If there
Is nigh prosperity, the stabilization agency will hare little work to do. If
there
fa
assure will be put on the Fu.
Her. fcite stated that pinna for an organisation to uandle Xh
m»
or foreign inrcsmwents are being considered although i t has not yet been determined
whet
en such plena are presented to
for & national or an international organization
ild hare ample ©pportux
He sale
discus* sue!
currency stabilization plan i s acte
*'ore either i t or
as..
He aald lie f e l t tnat i t la a basic error to assume tbat the success of
the Fund or of a Ion/,-term i&Tentaent agency would be completely dependent upon
ha*
;?on haying c
1(«),
s other problems referred to in question
TLe creation of i n a t m e s t a to 30I7
1 sake each task
eeeier, he »aid, and i t would be unfortunate i f taere ebould eserge from the vorld
dlseuaaions only a •tabilization fund; but i t would be eren more unfortunate if a
fund were not created.
In any event, the Find would have a contribution to mare
i f the other problems were not 0 >ndled>
Dr. Ihite said that the kind of ccomwrcitl policy whloh prewalla afv.er
the war would hawe Important effects en the problems of the ]*umd because tbe 4 vent
to which countries would have to resort to the Fund weuld he influev
a b i l l t - to s e l l their goeds,
Although proposals for seeking a more intelligent
commercial policy are going forward, he expressed the fear that they might end
with a mere statement ef principles.
-marker*
Ka does sot expect e greet deal from this
If tnere i s an iBteiligemt commercial progran, i t will taake lbs task
•« Fund easier.
In the aesaacs of cm intelligent cemmerclal pregra^i the Ttind
will be wore necessary.
The fund cacnot *break down," fee said.
increased pressure on the Fun.
«xerwise tougher jud^tentr
I l l that could nac- en ^ould he
make i t neceasar - for those in I
insider ewiftgs of tisequlllbrlum over longer
erieds; or. the creditor nations might refuse to supply more foreign exchange when.
-6their original commitments hare been exhausted.
These factore, he pointed out,
would also ersate pressure for a more sensible eommereial policy.
X>r« White stated that the trade agreement program is going forward.
That
program, he said, has two parts, one of which is applicable here and the other is
sot, that which might affect the Fund is the design to raise the level of trade;
and this is desirable. Referring to tariff concessions, he expressed the view
that the concessions usually granted would not affeet the balance of payments
because in most eases one of the following conditions exists
(1) the concessions
are meaningless, (2) the concessions involve goods which we do not produce at all,
and thus result merely in shifts of imports from one country to another, or,
(3) where the concessions Involve an increase in our imports, there is usually a
quid pro cu« for such increase in the font of other changes designed to increase
ear exports. The other aspects of the trade agreement program, he said, is the
elimination of discriminatory trade practices, the principal result of which has
been to increase the ability of this country to compete. It has not in the past
resulted in any diminution of the excess payments to this country. He said that the
pressure to increase our imports in relation to exports does not necessarily result
from trade discussions, and that pressure to reduce tarriffs would not come from Inter*
national discussion; nor does a reasonable tariff policy aim at or achieve a correction
of disequilibriWo
If there were no tariffs the swings in the balance of payments
would be much greater than they are now. Too much should not be expected from commercial
policy,,
&To Whits stated that although the stabilization of intern tional commodity
prices would help in the stabilization of currency and should tsome in for a great
deal of public discussion in the future, he feels that the task of getting stability
of prime materials is difficult to achieve and the results in this field will not be
overwhelmingly effective. This, he said, would only meka the task of the Itn* greater.
©r White said it is important to make progress in all of these fields*
The fewer results are obtained in any one field the more Important It is to obtain
goc-d results in others. The problems in the various fields are handled by so meny
different ageneies and people that a start must be mad* with respect to one thing at
a tine* Currency stabilization is the most important field because it is in a
relatively simple area wnere national interests play a smaller roleo
If the
technicians agree and tneir agreement is accepted b? the people, it should be easier
to reach agreements in the other areas; and ain
one at a time (because no men are capable of gre
olems must be approached
all of them simultaneously)
the field of monetary stabilization is an excellent place to start. If we fail to
attain agreement in other areas it is all the more important to have agreement in
this area*
Mr. Fraser Inquired vhat Dr. White meant when he said that the fund could
not break down. Dr. White replied that it could never cease to function,* or go
bankrupt. It would always be able to assist some countries. The worst that could
happen, he said, would be pressure upon one or two currencies. In that case the
fund would have to deeide whether it wished to provide such currencies, and the
countries whose currencies were involved vould have to decide whether to make the
currencies available. For example, in the ease, of exhaustion of United States
dollars in the Fund'the Reserve Banks, the Board of Governors
or the Treasury, would
have to deoide whether to supply additional dollars to the Fund,
If dollars ware
not made available the Fund would become inactive in this currency but would be
active in other currencies, this would be bad, he stated; and these conditions
would prevail until United States authorities were willing to make more dollars
available or the Fund should impose conditions on the debtor countries, or suggest
action by the United States * M c h would result in a torreetion of the disequilibrium?
In this oonnectio&9 Dr. fhlte pointed out that if, l* the opinion of the directors
of the Fund, the reason for the disequilibrium is some aspact of the United States
internal policy it would be the duty of the Fund to poiat that out and to rocoamemd
corrective measures?
•Dr. White subsequently stated that the Fund ml,ht break down and cease to function
if one or more of the major countries withdrew.
*
Kfo Fraeer Inquired vhy some each conditions are not laid dotm in
advance. Dr. White replied that they are, that certain phrases and olauses give
the Fund authority from the start. Then, said Mr, Freser, does this not ahoir an
impingement upon the sovereignty of the participating cpuntrieSc
Referring to question l(e), Or? White stated that the powers of the Fund
come from two sources. In the firet instance, the countries agree to abide by
certain principles, which agreement has the sane effect as far as sovereign powers
are concerned that trade agreements and other treaties hare always had.
In addition,
a country (except one in default) is always free to withdraw front the Fund on one
year's notice. If the United States or another major country were to withdraw the
Fund would break down. Jlthough a small country might legally withdraw It v?ould be
in a far different position if the large countries stayed in. JL small country, he
said, would not always be able to withdraw with impunity because of the possible
adverse effect upon its international credit status
Adherence to the Fund,
Dr. White said, does not constitute a "surrender of sovereignty* as those words
are generally understood»
The Fund is a multilateral arrangement with power to put
more pressure on the partictpatina countries.
The other source of the Fund's power cones when a country seeks to buy
exchange in excess of the amount of gold contributed by it
Dr. White pointed cut that
exchange*
in the absence of a Fund
In this connection
this gold could bo used to buy
When the country has drawn upon the Fond to the extent of Its gold con*
tribation . the Fund's holdings of that currency will equal the country's cuota, As
soon a* this is the case the Fund may set conditions for further sales of exchange.
It is not necessary that these conditions be written or formal3
Knowing the condition
of the country the Fond could say that it belleTed the country should not buy that
aceh currency, or that the Fund will not let it hare that much currency unless it
changes its policies
The fund sii ht say that the country should do various internal
acts designed to eorreet the disequilibrium in that country*s balance of payments*
-9*
The Fund oust protect its assest and encourage the participating countries to pursue
tnose policies which in the long run aeem most likely to maintain equilibrium in the
balance of payments. If a country (which has exceeded its quota) wants to get aid
from the Fund, it is in the saae position as a business man coming to a commercial
bank for credito
The country may hare to modify its policy as the price of getting
assistance., The country, however, still has the choice of not coming to the Fund
and operating as if the Fund did not exist
The dlrecotrs of the Fund, Dr. White said( would be in an excellent position
to suggest appropriate policies because of the opportunity to draw upon the best
minds in the member countries and the access of the Fund to more detailed information than
would otherwise be available. The Fund will make mistakes, he said, for human beings
are D O smarter in the Fond than out side * The Fund, however, would hesitate to make
recommendations unless it felt clearly that it was right. Dr c White stated that much
better results would be obtained from the standpoint of encouraging a country to
vnrmxt a proper policy when that policy is determined by a group of men, representing
a lumber of countries, who are experts removed from political pressure and without
close political interests in that country. The Fund need not be a de facto world
political organization.
With reference to creditor countries, Dr. White pointed out that if the
Fund directors, having studied the matter, prepare a report to the effect that the
disequilibrium is the result of practices or policies of a creditor eou&try which
should be corrected , hat would bo a powerful factor it bringing about the correction
Many people in tbe particular country would agree with the recommendations of the
Fund and this would bring about pressure towards the desired action, However, ho
stated, the correction could only some about as a result of unilateral action upon
the pert of the creditor country.
Is such a ease or 1 B the case of conditions laid down to debtor countries,
a polities! problem of the first magnitude t* presented to the country involved*
-10• 9 said.
not be at poll*
Any question of
is a political one for
nvolvsd.
Dr. <«hit» stated that one of the things the
;e to in adTunoe
i s that they will not indulge in competitive depreciation of their exchange.
They
J* not to maxe any change in exchange rates without the approval of the fund.
In the past the easy way out for a country with a constant adverse balance of payments was to depreciate i t s currency, which action is frequently followed by similar
offsetting action elsewhere, with disrupting results.
This agreement to abide by the
decision of the Fund regarding exchange rates, he stated, constitutes raore nearly
• surrender of sovereignty.
In so far as the United states is concerned, this is
not very important because we are not interested in depreciating the dollar. We
are, however, very ouch interested in seeing that other countries do not depreciate
their currencies.
We should, therefore, be behind thle principle.
He stated that
certain other countries are concerned over this provision because they feel that
they could never alter their rates.
As to this he pointed out that they can do so
with the approval of a three-fourths vote of the Fund, which presumably would be
forthcoming in a case where such action is deemed appropriate.
Ho also pointed
that such action could not be taken if the British and United States representatives f e l t that i t was cot appropriate because they woold control substantially more
than one-fourth of the votes.
The requirement of a thret-fourths vote, to which
considerable opposition has been expressed, shi
o a long way to bring home to
^overaaents the naad of refraining frost taking the easy
road.
In conclusion, Dr. White expressed the view that tr.is provision i s a lc
step toiard preventing a scramble of currency depreciation after the war,
oldenweiser expressed the) view that this prevention of currency
depreciation is the heart of the whole problem.
itx
I stated that when the Fund lias created e
it is 31f>
to say
i has not exorcised a .
)blea for
al power.
-lire is a difference between an agreement between two countries
on certain principles and an agreement which also sets up an international body with
power t o interpret those principles and to require compliance therewith.
Mr. Sproul also stated .bat he wondered whether the Greeks, for example,
understand, or If they do understand whether they accept, the idea that they will
be restricted in their use of the fund.
He said he f e l t that sons at least night
feel that bavin made their currency available i t i s up to others to buy Greek goods.
Dr. Unite stated that i t i s clearly expressed in the plan, and i t has been
pointed out t o the oreek delegate and other delegates, that when in the judgment of
the fund a country has exceeded i t s quota and i s exhaustine; i t s permissible quota
.Tiore rapidly than i t should the Fund may place conditions on the sale of exchange to
sucr; country.
Mr. fraser inquired whether i t would not be roar* l i k e l y that the plan
would x> forward i f i t is frankly stated that adherence does involve a modification
to some extent of what people commonly think of as sovereignty, as distinguished
from the technical le$al sense of that tezm.
In many cases the conditions which
might be imposed by the fund would relate to major politioal and social Internal
policies of the countries involved.
If the people of any such oountry disagree with
the fund they may say the fund i s interfering with tbsir internal affairs.
They may
also say that the trouble i s not with them but with sonw other country the policies
of which are affecting their trade and the balance of payments.
Having emphasized the point that the asreeaent not to depreciate i t most
desirable, Mr. Fraser inquired fv
i s to what would happen if a currency were to
depreciate i n the open market without any legal
In fact, ha a,
so far as the fund i s concerned.
i s would appear t o be the most likely thing that would happen in
practice.
refei*sD.cA to
?raser' a f i r s t
j*
Crr*
* A T*©**\ i n d fc HAH
country involved zcuat
country asserts t
I meas.
i satisfaction of the fund.
» trouble i s the fault of sens c
directors disagree t
r^try could
;t exchange from the Fund,
If the
end the Fund
i f tLe fund
directors agree and the second country does not take steps recommended by the pur
it i s not possible for the Fund to protect the first country from the consequences
of the other country*a action.
In such a case the Fund *ould probably make the
needed exchange available to a certain extent and would try -o exert pressure on
B other country.
Dr. "Cite agreed that i t is desirable that each country under-
stand this before coming into the plan; and he stated that there has boen prepared,
and will bo xado available to each country, a l i s t of questions and answer* covering
Many of those points.
Referring to Ifr* fraeer'a second inquiry regarding currency depreciation
in the open market, Dr. white stated that certain provisions of the plan require a
country to use those resources which in the Jud jaent of the fund it should use to
protect i t s rate of exchange and that as long as they are used the rate would be
maintained.
If in the opinion of the fund they cannot be used, the fund has a
responsibility to suggest a way out and to continue to give assistance as lon^ as
the country pursues the suggested policies.
If the country refuses to accept the
suggestions it mt-ht be declared in default, but Dr» White assumed that a wise board
would do that only after very careful consideration.
If the conclusion were perfectly
clear, the country 7*ould probably be declared in default and certain consequences
It did not like would follow
On the other hand, if the conclusion were not
perfectly clear, the Fund would agrae to altering the exchange rate.
Mr. Ruml inquired whether there would be any significant rellnquishmant
by a member country of i t s capacity to regulate i t s Internal economic affairs, either
upon adherence to the plan or at such tints as situations r
arise.
orrectioa mi
lie referred to t tie fact that countries may not unilaterally alter exc
rates and inquired whet he:* they I
classes of imports.
.nilatsraliy discriminate between certain
-13Dr. ihite said that this raised a troublesome point.
The only advance
agreement ia that the countries will not undertake that type of discriminatory
trade practice which reduces the amount of its total trade.
Questions relying to
restrictions for reasons other than exchange control remain to be det rained in the
f i e l d of commercial policy.
By way of example, said Dr. White, suppose Argentina
restricts automobile imports (primarily an American product) and does not restrict
electrical machinery (primarily purchased from Germany),
If the purpose is to
conserve foreign exchange Argentina has the right to determine what it can afford
and what it cannot.
negotiations.
That type of discrimination is a matter for commercial
The Fund approaches the problem from the view of total imports and
total exchange*
In answer to Mr. ftuml's question, Dr. Ihite stated that the plan did not
attempt to prevent a nation from imposing export controls.
Dr. White stated, in answer t o a question by Mr* Ruml, that a member country
may, and should, seek foreign exchange outside of the Fund.
to interfere with the regular transactions.
The Fund i s not intended
Countries resorting to the Fund should
f i r s t exhaust the usual sources of exchange«
In response to Mr* Ruml's inquiry as to whethax a country mi^iit subsidize
i t 8 exports to obtain foreign exchange. Dr. fhite stated that under the plan there i s
nothing to stop i t .
Ha said it had been covered in a prior draft, but subsequently
i t was agreed that it did not belong there.
He stated that this is a knotty problem
what coanercial policy will have to deal with and expressed the opinion that it would
mat be successful.
Mr Bernstein pointed out that subsidies by the use of multiple
currency rates are prohibited under the plan except that tourist expenditures .aight
be encouraged in this manner»
Jlr* Brown referred to the provision prohibiting discriminatory trade
practices reducing the level of trade and inquired whether the Fund would have any
power to correct such a discrimination?
Dr. unite replied that i t would not exc
in so far aa discriminatory exchange practices were involved.
He stated t
is
-14point had been l e f t out of the draft of the plan because i t proved too difficult a
problem,, but with the expectation that i t would be given further consideration in
subsequent negotiations.
In answer to Mr. Brown's inquiry as to whether information in the
possession of the Fund will bo made public, Dr. White stated that he believed the
factual icforniation should be made public although with perhaps some lapse of time
in certain cases at the discretion of the directors, but that evaluations and reports
by the Fund's staff probably should not be made public.
participa.
vernment would have the information available to it through i t s
representative on the board of the Fund;
in 9$c
vie*
Ha pointed out that each
and he stated that amount of the balances
3 account probably should be made public.
Dr. White expressed th*
the advantages of publicity outweigh the disadvantagesc
iir. Fraser stated his belief that there ie a ^reat dial of feeling that
the plan is not quite frank in indicating where, if at a l l , it impinges upon the
social, as distinguished from the legal, sovereignty of a country, i . e . political
action within the country.
He pointed out that when an international body says to
the world that a particular country should do thus and so trie people addressed are
likely to feel that fchia a asatter that f a l l s ri
decide,
lie expressed the view that i
,.ieir soverei^
ri.jbts to
it be better to say frankly that a country
coming in might be called upon to do certain things and that the plan would not work
if they did not play the game.
Dr. WJuite illustrated his reply 'to this point by giving examples of the
;e situations in which the Fund would be called upon to act.
(1) in the case of
a creditor country, the Fund's only power is to recommend and although i t s opinion
tt carry considerable weight the Congress,, in the case of the United States, would
deeide whether OT not to aet upon the recoianendation.
debtor
(2)
In the case of a powerful
such as Great Britain, coming to the Fund for exchange in excess of
lisbible quota, toe plan provides that when the amount of any currency in the
Fund i s reduced
ar cent of the original contribution that country has a veto
power over any sale of additional currency.
Under ouch circumstances the American
member could refuse to permit the sale of additional dollars to Great Britain.
reason would be known to the British member and discussed by the board.
The
If the
board agrees with the English position no problem is presented a© far as Knglish
sovereignty i s concerned.
If the board disagrees it might say to England that it
would not make a sale at the prevailing rate but would at a reduced rate.
At this
point, the English number might inquire under what conditions dollars would be available, and the board, presumably in consultation witn the American member, would make
suggestions or ask England to do so.
Dr. iffhite expressed the view that this involves
no relinquishment of English sovereignty, that England eeuld pursue any policy she
wants to although she could, of coarse, &e\ no further dollars until she had met the
conditions laid down.
(5) In the case of a small debtor country which i s not willing
to accept the board's conditions, the country would not be in quite the same position
as England because the threat of English withdrawal from the Fund would carry greater
consequences to the Fund. Accordingly, there would be greater pressure on the smaller
country to pursue the policy suggested by the Board, otherwise the situation would be
the same.
If the debtor country was not willing to adopt the measures suggested it
would have to get alon,j without additional dollars; which is what it would have to do
in the circumstances in the absence of the Fund*
lir» Rural suggested that it might be desirable to have a technical
memorandum prepared discussing the various points involved in this question of
sovereignty;
and Dr. White stated that he would be happy if a member of the bank's
staff would prepare S'Jch a memorandum, and that the Treasury Department would be glad
to do likewise.
At this point t£r» Ruml raud to the meeting question 2of topic I in the
agenda as follows:
2,
3hould the problemsof transition from war to peace and the
problems of long run currency stability be encompassed in a
single currency plan, or should they be dealt with separately?
And if they should be dealt with separately, can they be dealt
with concurrently in the immediate post-war years? Or should
the transition problem be dealt witn f i r s t as a projection of
the wartime problem, a problem of credits of long term or no
term, with currency stability maintained by exchange controls;
to be gradually modified as underlying balance of payment
positions make such modification possible?
-16Mr. Rontl au&sested that fir. Williams elaborate on this question*,
Mr. Williams stated that major emphasis aeems to have been placed upon
the difficult problems that will be presented in the immediate post-war period.
He expressed the view that the fact that trie British su^ested a large fund and
we a small fund indicates a recognition of this aspect of the problem.
The plan,
he said, i s of a dual purpose character* Intended to carry us over the bad postwar years and also to provide a mechanism for long-run currency stabilization.
He
questioned whether it is wise to attempt to do the two things in the same plan and
posed the question whether anything within reason could be done to protect the lor
run aspects of the plan from the things that a
post-war period.
o wron<£ with it in the iia&edi,
In other words, he said, there; are inherent fundamental conflicts
between the requirements of the post-war period and long-run currency stabilization.
In the ironsdiate period something in the nature of 1 end-lease or long-term loans for
various purposes or some combination of the two seems to be required.
If those needs
are met by the Fond, the Fund i s likely to emerge from the initial years in a very
unbalanced situation; and, on the other hand, if the Fund is protected against those
3 not make i t s maximum contribution to the solution of the post-war
problems.
If after a few years the Fund i s lopsided, some countries having exhausted
ir quotas and in-
o adopt r e s t r i c t i v e treasures not because of anything that
their lon^-run situation requires, the creditor countries would have to consider
~?ould put up something more or take the debits out of the Fund and fund
them in some w&7> All of this night seriously jeopardize the Fund or render it unable
to achieve i t s major purpose
It would be deplorable, he said, if another measure
for international cooperation should come to grief in this fashion.
Iliarns pointed out that if one takes tiae position that the Fund should
not start to function on it a main'purpose until after the immediate period of tr&nson i s over this
;;
& to many people tl
Fund should not be set up at this
and if the Fund were to be set up now but not ~iven anythiB^ to do in the period
-17-
.
of transition i t would become a debating society and rai ;ht be discredited as impotent
before the time for action arrives.
should do.
There i s a dilemma he said, as to what the Fund
If i t takes care of the transitional period, i t may be overburdened and
break dctrn before the time for i t s normal functioning has arrived; but i f it does not
take care of the transitional period, it may become merely a debating society.
This
dilenraa, he believes, has not been taken into account in any of the plans.
Dr. SThite stated that this is the most difficult problem for the Fund and
that it has been cdven a great deal of consideration.
He said that the Fund sight
be looked upon as designed to take care of the tide and the waves but not the storms
at sea.
He said that it was not the function of the Fund to do what Keynes provided
for the clearing union in his plan, namely, to handle long-texm investments.
This
was prevented, he said, by restricting the size of the Fund,
The problem of long-term investments or credits, he stated, is separate
and i t i s hoped that it will be given separate consideration.
He said that the
Fund would be badly operated and i t s purpose distorted if it were used as a mechanism
for long-term investment.
The work of the Ifund would be greatly facilitated by
proper handling of this problem and it would be fine if a separate agency were provided for that purpose.
Otherwise, he said, lon^-tarm credits would have to be
obtained in the same manner as before tha war.
Lth reference to relief and rehabilitation expenditure* , Dr. White said
that he f e l t sure that soa» relief would be provided although he (id not know in
what manner and f e l t that it would probably be insufficient.
On the other hand, he
said, the Fund would be able t o protect i t s e l f against excessive use for this purpose
through the substantial brakes provided in the plan.
In the first place, the need
for relief would exist during the f i r s t tws or three years and no country can get
more than a certain percentage of i t s quota during any one year*
In addition, each
borrowing country would have to pay for the assistance partly in gold, with which
exchange "or relief purposes could be purchased in the absence of any fund.
Any
country seeking to obtain exchar^e in excess of i«s quota could only do so at the
-16discrstion of the directors of the Fund.
Dr. ahit© expressed the view that the faot that the Fund, reasonably used,
could make some contribution during the post-war period was a justification for i t s
existence to be^in with;
that aaencies to handle the problems of long-run invest-
ments and relief and rehabilitation were desirable;
but that if they were not created
there would be all the more need for the Fund in order to avoid the destructive
effect on world economy of competition for exchange.
The fact, he said, that the
Fund was designed to make corrections during the stable periods does not indicate
that it is not needed during the troublesome periods.
Mr* Williams inquired whether it was necessary to put the question in this
fashion, namely:
If we do not have these other agencies then we must have this one.
7ould it not be more desirable, he said, and in the interests of the Fund, to say to
the public, as a part of the program of education, that machinery must be devised to
meet the special problems of the transition period because the Fund is not assigned
to meet those problems and should not be used to do so.
In the interests of long-run
monetary stability the plan should be buttressed by some o*her plan or plans to take
care of those special problems and to protect the Fund for the longer period.
Dr. tfhite said, in effect, that he did not disagree.
He said that a pro-
posal for a United Nations relief administration has been under considerction for a
year and a half and that while i t had been expected to go forward rapidly it had been
unduly delayed.
He also said that he felt confident that relief in some form would
be made available although he was not sure that Congress would extend lend-lease.
It
should be stressed, he said, that any stabilization arrangement is not a substitute
for relief;
but that does not mean that it could not be used for that purpose to a
limited extent.
f l t h reference to long-term investments, he said that the plan originally
contained 2 second part providing for the creation of an instrumentality for that purpose,
but that it was f e l t that the presentation of the two parts of the plan to the public
at the same time would be complicated and confusing, and that attention would be likely
to be focused on the latter instrumentality to the detriment of the currency stabilization plan.
-19If and vh&n. there is a formal convention or conference, ha said, it i s to be expected
that currency stabilization ane ion:;-term investments will be considered together
and will be presented to Congress together.
Mr. Williams raised the question of intermediate credits involving neither
r e l i e f nor lon^-term investments but funds needed for a short period pending the
recapture of markets.
£>r. White agreed that this question i s important and trouble-
Dr. obit a stated, by way of conclusion on question 2, his belief that there
i s too :reat a tendency to assume that the immediate post-urar period will result in
terrific demands for American goods and credit.
He pointed out that many countries
tod&y htva greater assets in the form of £old and foreign exchange than ever before,
that export controls and limitations on shipping space will limit the amount of goods
that can be sold during any period, that short-term credits by banks and merchants
w i l l be available, and that the prospects for a high degree of production and employment in this country are very good.
This will enable us, he said, to make extensive
purchases abroad and perhaps result in an outflow of investment capital and tourist
trade.
The outflow of investment capital will probably be on a large scale.
jgxpendi-
tures abroad by American tourists after the war may amount to between $800 million
and $1 b i l l i o n ,
accordingly, taken together, the immediate post-war period may not
result in the tremendous pressures on the Fund that have been visualized..
Under these circumstances, he admitted, the existence of the Fund would
not be as necessary; but he pointed out that in such circumstances this country
would take no risk in adhering to the Fund and that the Fund would be available in
periods of future disequilibrium,
in the absence of the Fund, he said, this country
would probably be thrust into a multitude of bilateral stabilization arrangements.
-30At th%& point Mr* Rranl reed to the meeting question 3 of topic I in tfee
agenda, as follows:
3. Is it necessary to undertake to stabilize all currencies
immediately after the war? Are sot the relationships
between Great Britain and the United States, between the
dollar aad sterling, the heart and core of the immediate
problem? Are not internal stability in these two countries
and stability of the dollar»*terling rate the most important
questions of international stabilization for nearly all
countries? Would a beginning with these two currencies
facilitate adherence of other countries to the currency
stabilization, program when they are both ready and able to
observe the roles of the game? Would it be better to
approach the Eritish-^k&eriean problems (including blocked
balances) directly, instead of trying to impersonalize
loans, or aake borrowing anonymous, by means of as inter*
national organization?
Mr* Suffll stated that there is one point in this question he would like
to stress, He said that one of the difficulties %a the inability of the United
States to hays a policy or to administer one in the fiscal and monetary area*
Concretely, he said, there are three committees of the Senate, four of the House,
three or four divisions of the executive branch and the Federal Reserve System all
interested, with no satisfactory channel of communication between them* He raised
the point of whether this *hculd not be considered as a part of the procedural
problem involved in adherence to any stabilization, arrangement that requires a
monetary policy on the part of the United States and ebility to administer it*
DTj White said that obviously the development of an intelligent policy
and harmonizing it between the executive and the legislative branches is desirable,
and that the problems of the Fund will be more dj
i their absence* How*
over, he does not believe, he said, that we can use the plan as a lever for the
creation of an effective policy at home*
In this connection, he said, he was sorry
to see the disposal of the Rational Resources Planning Board because that agency
might have presented this problem to the public for discussion* !2here is no agency
now performing that function, though several agencies think the responsibility is
theirs and may have a grograsu
In this connection, i.e ttated, ta&t the Office of
3 COUlAlttee Under tiie S«C of
national comnarcial policy under
: know
aountarpttrt in ti»e
"erring to the kc
&ns&e th&t Sngl&ad and
'ited Statas tua
med in t lie so j&tters eni that ti
dtary and tirade ar?angciaeixt8*
*pe tna jAttarn f
Th« policl<
axiftl ral&tioiia or break any •
-trt
list by th«BS#lY«£ they can m
in not from ?*el*"* or tbm United States but froia a
"M^P'Q
covntry dnga&
practice preasure
sr au"
ntris3 ? on part 8 of tlie Britiafe I
itad States.
nutziei
arital
If you intend to set up a code
ioh you «'
oountriea to sabaerlbe i t la the ameC
-te expcreflsed
.»»
t an axvangeaent merely betweer. Xn^land and the
later po8t»«ar probleiaa and would not a&ke i t «aalex f
a appropriate polioi
aa error to aesnazLeij be »a
tka aaaiatanoi tiiafe %h*y would want*
it stabilizat-
•Id aclTe toe problems with vhich «e *
^ould sake i t possible to satisfy the nes*
Ad.tnou^Li we are i s a positicu to ex&en» xiie ai^
S^1Y»S 3
he said
we would waat tLoae otiier countries
4
also want the countries aided to assu-.'.o ©. -v responsibilities*
it and
It •
-22The assumption that all the Unit ad States and Sngland might have to do la
to get together and tall the other countries how to behave la somethingp he said*
that the other countries resist and would b# a step in the wrong direction*, The
other cc uitries want0 and should have, eorae voicor
The other countries, eaid Dr. Whitet ehould feel a joint reapoxsibility
for the orderly conduct of monetary affairs throughout the world in which they ahare.
He eaid that there might well he more reluctance about including a Large umber of
natione if that increaeed the riak involved, tmt that the proposals in the plan
would in fact reduce the risks* There la a general trend to greater International .
cooperation cm mutual problem* asd this should be encouraged*
MTo Sproul eaid that the idea underlying question 3 was that, since the
principal problems involved relate to the United State a and Great Britain the beat
starting place would appear to be a direct approach to those problem* and that we
can go on from there»
He stated that the point la one of procedure and that it la
felt by m a y that the solution of the problems of other countries would be assisted
by the prior solution of the problems of Great Britain, sad that without a solution
of the latter problems there could be no satisfactory solution of the former.
KTj Sproul also pointed out that one of the other thoughts behind this
question was that if it should appear to the public that the plan is an atteatpt to
make borrowing by Great Britain from the United States anonymous then there may be
a considerable amount of resentment towards the pleju
l£r> White eaid that he did not know what waa meant by "anonaM»ua* borrow**
pointing out that when England comes to the Fund for dollars the Fund would
receive additional sterling in return* Mr* 3proul pointed out that, although such
dealings are between ftaglnnd asd the Fund, if they are of substantial volume* they
nill be considered aa borrowing in effect from th* United States which furni*
raateat proporti<
j& Fund*a *mpitel.
Mr Bunl said i l a t lie f e l t I
result el
t was largely a
. ke long«tera iovestBei;
3 and not knoiinr; AOW each would
,e sta
at.
opera*
He expressed tUe
at the-
Irrvastaent proble&a should be worked out directly between the countries involved*
The discussion »&
. let at
ie underst
t i t would be resumed i
directors soheduled 1
'-he re.T.'lar n eet
sld at
m.
Followiag tLe aljournmen
at 2:?
the board
>• reKOlar meet log of the board c
i«, the dieaaeaion was resivaed with the easoe persons preAest ns
were preaent during the mo ruing*
Kaforrir.
tc. question to) of "epic: I on tha «. :e^da, t£r, l i l l i -
?: naaed
the Tiaw that the isiuft ia not between a two currency system and an interne
stabilization plan bat that there are steps in between* The issue, he aaid9 i s
procedural, the suggestion bein
a plan to er
I aaay countriee one mi^Lt proceed by steps* The f i r s t step v
out an. understanding between the United States and Great Britain covering soany
things, not Barely the sterling-dollar rate of exchange but also what ahonld be
in the trans
orxod and, perhaps, an ezplorati
eration of what
e done in cooperate
insare ".irh employiaent and pro»
:*• next 5*
nations with perhaps considerati
waiting
3 side
..e way to nee*
d be considered* This would he
aternal policies an
to consider how to b
whether certain criteria should be laid down
That point, he said, )
.is.
One
tra^r
aldfcrable
v l o w sxbu
• and point
Mr* House strterecl
x
e key
s« He said h© Tell
a bftd
-ttifyin^i under a cloa^,
The astabllahmd
e ?oad i».
i8tio irjftovatiou l3«t would b© a can'
atlve
Tiie Fvird, h© sai
lie Fond sad
atand-
?laa alr&
a diff
.^recan be ad
t aXre<
and tLe fact *.het
hands of a few joatl
trote;
and that wh.ere a BO*
onffju
i n effect, no decisions
«t tiv-
the a*
Ilie existcace of the otlje* members xare.'
additioiiaX ju^pents and A-oint-s of vt9mm
si^&t sor
Ao
rakea and
Mr* Bernatein stated
csrltlelan of the Plan been
critleioQ taJcac t
tint n
atate
oXar
-sopi© vho ar<
their opposition*
With refaa?enoe to the vmr
lllaaa* ar^unxen
here i s the ...zectioai question of w]
One qua»ti-
la how
«9 ca_
Al
.tried will reel ah
many oovjstries. Including Euciand, ^ T -
• statr
a vtte
able if two great pe*«
mhole world*
The tm
"-tee recognize tfc
countrio? map"
ea.©h
. mtt*f
t o o . I s a aajor coui
imd Ac^rxcan mterjest^^ ss^d i t sees no re*ir
-i.
TW&JLX J u ^
een
at.
' ?
i
• •*•*,
v*
English feel that through a body of inter national opinion there is a b
that one country will not lay down the law for the whole we.
Phillips, he said, made the statement '
:e
Frederick
would never undertake to
ize
sterling on the basis of advances from a central bank because there is n«.v*r enough
under such an arrangement and there is uncertainty aboi
the last minute.
each advance uatll
Mr. Bernstein made the point that the conditions which would be laid
D if £n -I -j.n.3 and the United States agreed t o consult would be the conditions t
the dominant power laid down so that there would not be international cooperation.
From the practical side, he concluded, very few countries would like the key country
appro*:
Xr Bernstein said that another side of the question is form and substanc
If, he said, what Mr. Jillians is saying i s that in substance there are such things
as important currencies the behavior of which is of primary importance, and that
those countries must take the lead, th*t could be well and perhaps better done
through an international stabilization fund than in bilateral arrangements.
He said
that he could not see what disadvantage there is in having a fund to which other
countries adhere.
In a fund, he said, i t is possible to obtain the substance of
leadership by the leading countries together with a greater stability of the important
currencies-
In addition, the key countries would in effect control the general
policies of the fund.
flth reference to the suggestion that, having started with t*-a leacountries, other countries could be taken in when they met certain requirements,
|fr« Bernstein said that the fund provides safeguards of this character.
each of the United Nations may J
would be set by that m
« Fund the exchange rate for each nation
a consultation with tLe Fund and must be satisfactory
to the fund, and; hence, to the az
countries.
i t ia not the intention of the fuac to etart sup
i s out of line
Altho
If satisfactory rates cannot be set
and aiaintaining a rate ti
In this connection Mr. Bernstein read tc those present the second
paragraph of section IT 2a of the *hite Plan (Revision of July 10, 1943) which provides that no operations in a particular currency shall be undertaken by the fund
until a rate has been established which has the
in question*
member country
el of the Fund and of t
3ba©r 7ik"j i o n s :
(1)
It
era:
» a ae;
.ude froa
United State?
leal e
: u.vo a f
.ed
board of direct.
Iran cortain countries, suau «a the Netherlands*
u i t mot
(3)
Sinaller countries
•.••:r>iucv«it to receive
3tione AS ry
or group of
© case i f recoaaendaiiona emerged from an laterl
-1 body in wiU
smaller countries had representative;*,
(4)
It is politically dc
powers pa.
ate in i
Dr. Goldenveiser said
conviction.
ovoro 1]
ia is a point on v>u., be U s a very definite
He said he felt that •
United Kin
uiajor
jeaent
*tea and t
icipate, presupposes tnat they would a^roe on rates
and « skeleton of ct
said, i s '
cposala.
»ae tw<
f ezchantse
Tli« polfit or tb# atabilization fund prcpoaal,
riea are
s ID « poaiviou to be
developments in a larv.e nuaber of aaaller countries and it seems much more reulle 1
to start out with all of these countries having agreed to cooperata en a ;lt& in
nhi
psy^
ttve
a say.
He also oxpressed the view t;is>t there is *. .
al advantage
arable
ntrles feel that tueir interests are -joins
to be conaidered felon, with the interests of the ua»vor ^ o u u i e s .
pr. sfhite stated that the British had first »i>;_:d8tod tbi
ed
States and Great Britain a&ree upon a plan befcra present in*, it to the smaller
countries;
and <* said that aacy representatives of the soaller
a point of expresain^ the
s e d a t i o n in beii
. ies had raa.de
aded in the prel
. discussions.
Mr. Conway inquired wnether it is not es&antial for Great j r i i a i a an4 the
United Statea to come to some agreement on certain fundumental ^uestlon« affecti
the sterling and dollar areas, tie pointed
and French areas, combineu,
the world's business.
ftited
ontaln a population
Thus, he said, a plan has l i t t l e
it ia aaade dear that agreement has been obtained %m
States and the aterll
lion people and do 80$ of
I of acceptance unless
«se areas.
1Z this is
espbaslzed he feels the situation would be much dearer tc business man.
DT, ./hits replied that there i s not a complete identity of interest
between various parts of the sterling area and the dollar area and he expressed '
view
.e Fund would make it easier to effect a
He also stated that talks
at the present time;
nts covering these areas*
reat Britain on these problem* are t>
i iard
and he said that one reason no arrangements faave yet been
made to hold a formal convention on the Plan is that they are awaiting agreement
on the major points with the* aajor countries, and that they do not inte
ceed until there is such agreement.
o-
The establishment of an international
stabilization fund would not prevent and vould in fact f a c i l i t a t e , he said, the
bilateral discussions between the United States and
i r i t a i n , and many important
decisions would continue to be made outside of the ?un4, the representatives of t
respective countries then presenting those views to the Fund.
Mr. praaer expressed the view that the key country approach does not
involve merely the setting of a rate of exchange by Great Britain and the United
States which would then be imposed upon the world, but that the point, as he sees
i t , is that if with or without the help of this country. Great Britain can get on
i t s feet, that would be the greatest thing that could happen to the world and would
automatically solve many of the problems that would come up before the Fund.
Par-
haps, he said, some of the other countries would not have the same problem t and we
may talk too much about currency stabilization.
Any world bank will break down
unless the United States and Great Britain work together and are in reasonably good
internal condition.
He said that be was glad to near Dr. White say that these
problems are being discussed with the British, but he observed that we do not hear
much about this in approaching the Plan.
Mr. Fraser expressed the view thet ; in
presenting the Plan to the public, emphasis should be placed upon the point that
the United States and Great Britain must work to-ether and that each must be in
reasonably good internal condition.
29
rressed agreement with what Mr
Fraear had aa:
tat he did not understand why tho formation of th* Fund would exclude or do lay
th? wholly desirable objective of promotl
parity la Sngland «-
Stataa. la ao far aa tba Fund affects It at allt ba said, It
tioo to that and
Mr 3 Ruml empresaed the Tiaw that if tba Fund la to work tba principal
currencies aniet ba ao buttreaeed tbat they will atand up without tba need of o
reney stabilization activity
Vro Willlema amid, witb reference to hi a approach,, tbat tba thing that
disturbed bin moat la that wa Might have the form without tba aubatanea
pointed
out that it is eaay to aat up a aehene or plan on paper tbat appear* to prov
answer for every difficulty, flhen you gat away from the paper9 ha said
and try to
iaaglne how it will work you realize that the problems have merely been shifted from
one group to another and ha does not know whather there la sufficient realization of
tbat faat or sufficient meeting of the minda to sake it work tfhen I suggest a aaall
tnetead of a large group, ha aaid, I am trying to gat a higher degree of cooperation in smaller areas which would have declalve results for al
Looking over the laat twenty year*9 Mr,, Williama aaid ha la impressed by
the fact that the leading countries never performed their function in the scheme of
things
They were letting the other countries down
with reference to the ateaturea
which sight ba brought to bear on the small eountriea under the Plan
countries do everything required of them
area if those
we sight merely have a repetition of history.
The basic difficulty ifeieh tboae countries fa«#d la the past wee the Inability of
the leading countries to maintain good markets and stable conditions
Mr, Wlllleaa
aaid tbat tba laaaon ha drawa la not that we need more elaborate machinery, but that
the moat eaaentiaJL part of the economic problem la political and that what we have
moat need of economically ie atablllty in world centers,
Mr 0 filllama ruestioned ^bother thera are ways of safeguarding the Plan
to prevent ths Burger of tho responsibilities of the leading countries into the
responsibilities of the Fund from resulting in buck passingo
B
ability of the League of Mations to function better than it did, he questioned
whether there are any real teeth in the Plan. In this concur
a reforred to
his article la the July, 1913, issue of Foreign Affairs Magazine In which he outlined the; '•teeth* in the Eeynes Plan, and said that the imposition upon the smaller
countries of the conditions whlea Bight be imposed under the Plan would be of no
•vail if conditions in the leading countriea were not right?
Kr. Willlams reported that representatives of sever*1 of the more
sophisticated smaller oontries have indicated to him that they would like to feel
that there is going to be some central core to the plan to which they can adhereo
Mr. Roelse left the meeting at this point.
Mr
Sproul expressed the view that it is not a question of the cautious
approach as against a bolder approach, but that the boldest approach would be to tackle
directly the difficult Britieh-imerlcan problems rather than to serge them into s
number of others. If we gat away, he said, from the idea of just setting exchange
rates and consent rate upon the idea of a high degree of domestic prosperity in
those ttro countries then the argument for bringing in a lot of other countries e.t
the outsat loses much of its point. Furthermore, he said, if you set up an organization In which those two countries have a veto power and a dominant position and those
countries continue to take action outside the Fund with important consequenees to the
Fund, you may not have changed the situation but merely erested a facade
Mr. Ruml read to the meeting question 4 of topic I. as follows:
4. Is it necessary, in trying to anticipate problems whieh may
develop la the immediate post-war period, to put aside all
existing machinery la favor of a new international organization
for currency stabilisation?
(a) Lead-Lease*
(b) Stabilization Loan Agreement
-t-Import Bank Mechanism :>
Mr, Rial suggested that Mr Fraaer open the discussion on this queetion
Mr. Eraser said that although ha had been an internationalist professionally
for thirty years ha fait that tha fundamental problem* are not international but
dose at ic; that aouad domestic eituations beget sound international altuatlona; and
that tha original emphasis should be on tha domestic situations in major countries
•hetear other countries Ilka it or not. He expressed tha view that this has not
team adequately emphasized in connection with the Plan
Sometimes, ha amid, we
overemphasize international aspects and that ia the vogue at tha present time. Ha
added that ha felt we should consider vary carefully whether it la necessary to
create new international naehlnery at thla time
Mr. Fraaer alao atated that he haa great difficulty reaching a view with
respect to tha Flan because it ia ao incomplete.
One should sea the whole package
before one oan conclude Aether it will work. there la a great danger that people
will think that tha Plan will accomplish many thinga, ha aald; and he questioned
whether It would not do more aerviee to tha Plan to aay that it will work only if
certain specified stapa are taken, and that it will not work unless certain specified
atapa are taken
I have come to the vie*, he said, that thit currency mechanism is the
laaat important of tha various thinga that have to be done and that it should oe
handled subeequently rather than first
The great danger in setting it up first
ia that many aay think nothing further ia necessary
In this connection, he
auggeated that it might be possible to merge tha international plan idea with tha
key country approach with happy results; and ha suggested that sueh existing
machinery might be uaed to affect thla and. Mr. Fraaer pointed out that the list
sat forth la question nuabor 4 ia not intended to be complete and might include
among other things, the stabilization fund and Regulation V loans somewhat revamped.
suggeeted that ths Bank f.or International Settlements
be revamped
idapted o u t scale l e e s gran
ian, but tfe*t i t would a**:
nany small countries want to aad should be in tlie organisation
.• begi
Mr* fr&aex Also expressed the view tliat i t i s e mistake t
we t e l
that warn
ktain we Lave in mind helping tfreet Britain aitm
laoause tae British problam i s th» greatest, and i t would jeem nast
appropriate
to Approach that proxies f irct and to say that the Plan oan .Ire the results that
people would expect of i t only if this
?a& be worked out between Great Britain
end the United States f i r s t or oonoosdtantly*
kx# Eraser conoluded by sayisg that si co so aaay other problems need
the monetary stabilise
ta mi^ot be pressiture as step nMser one;
•.* suggested that the ether problens mi^rht be approaohed ttooogh the xsdiuni of
existing mohinery, which includes the possibility of bringing the other countries
, and that a monetary stabilisation plan, should come in as a subsequent step*
i fhite rafsix'ed to the tendencies to apeak of the Flan as elaborate and
expressed the Tiew that i t was simple, though i t s teohni^oe a&gkt be considered
elaeora
0xw Mfhite said that tha repeated i
Britain puzzled him..
to taking things up t \
it
referred to the continuing discussions
.ain 9 ha said, because i t i s necessary to reach an understanding .
certain poi&ts as a prere^iiiaite to any international arrangsasnt• fie said that
similar discussions would hare to take place with certain other co\uitri»\ alt
if agreements were not arrived at the Plan could go through anyway* However^ he
these discussions relate to laonetary policy as between ourselves aa.
ah
Treasury;
,^iaad
and he did not understand what waa meant by ocmiag tc
and sattling ea
r*s problems*
We and the British are going after
. he atated y and lco >r.i for a lilghev level of proap*
do wit;} the
teznatlonal monetary stab'.
m
a.t has
Dr<> White
rw i s pro*
anetery problems are seconds
the monet
at should not
monetary problem* do e x i s t a con*
thing.
tbersoir
on to •
Most e x i s t i n g a£»neieB, he sale
does
1 probe
some-
on, al
expressed
aane doubt concerning future functions of the Bank for International Settlements.
Dr* White characterized as unreal- the assumption that \
will a<
back i f the Plan i s adopted, although he agreed that the public may expect too mi
from the Plan,
Dr. Whits esDreased hia agreement with the v i e * that the soundness of
small countries depends upon the policy pursued by the major countries.
for discuesioit, he s e i d , i s v
stence of an I n s t i t u t i o n such as the I
contributes towards a more or l e s s reasonable pc
the Pund would contr
pressure.
The question
He expressed his belief
.rd a more reasonable policy beceu»e of two formr«
In the f i r s t place, when, for instance, dollars in the Fund are nee
exhausted It i s indicative of a disequilibrium;
and at that point the eorernmental
a u t h o r i t i e s in t h i s country are confronted with the n e c e s s i t y for making a dec IF
either to supply additional dollar
' home the fee*
cannot supply dollars i n d e f i n i t e l y and
something I s wrong with us.
ng la wrong.
I t mey be that
I f so, I t would seem that there i s •
se
to bring before the Congress or other appropriate body on the basia
be ur^ed that our •
-e
eh I t may
aodifi-
p o a s l b l l l t y of an international body presenting a report 1
i n t s the
finger at t h i s country and says that the disequilibrium i s our fa
Fhis, he said,
should be an aid in the adoption of appropriate policy
Dr, I
ided by agreeing that the establishment of *cund p o l i c i e s
and a high degree of
r countrlea was desirable and stating
the Fund i s designed to bri'
directi0B o
He a l s o sxpree
view
aar come pressure in that
Utat Its potentialities
-sVty good
Mx •. Rial suggested that the remaining tin* b« devctad to what»Tsr ru»."
the director a sight have,,
Hr. Wlllismeoa inquired whether it would be possible for the fund to change
the value of the dollar in terwia of gold, thereby affecting wages and price* in this
country„
Dr.ftfcltereplied that, with the approval of this country, the value of
the unitas in terms of gold night be changed * the reason for that, he said*, was to
meet the possibility that new discoveries or processes increasing the production
or output of gold might make it desirable to disoourage gold mining. He pointed
out, however, that the value of the dollar would remain unchanged in terns of other
currencies; sad he emphasized that this change in the gold price could only be
effected with the approval of the United States representative on the board«
Dr. itoite indicated that the operations of the Fund could affect price
levels in the United States indirectly, If the Fund were to make additional purchar
power available to other countries, and such purchasing power were used to buy Jmerican
goods, the prices of such goods might be bid up 0
He pointed out, however, that under
the Plan only limited amounts of any currency may be made available by the Fund and
omly during limited periods.
Mr* Brown pointed out that the potential advantage cf the Fund lie* in the
opportunity it affords to assist the expansion of internetional trade and that this
mould be offset if the accumulated credits were to to used in payment of old international detrte, and he inquired how it is intended to treat thess debts
Dr. Shite said that the Plan do©« not pezmit • country to buy exchange from
the Furd with which to pay debts now in default. Be pointed out. howerer that there
may be occasions when debt defaults stand in ths way to private espital caning into
a particular countryf and he stated that the Plan provides that on a three-fc
*ueh country may be permitted access to the Fund for the purpose of paying off ...vinh
debts
•ffjth refersv&ee to lend-lac
thlte stated tli*t i f England i s expected
to be handled outside the Fur
Mr. Williams Inquired whether the Treasury has reviewed with the British
the question of the desirability of handling these balance* outside of the fund;
and Dr. Ihlte replied thet thie had been done only to the extent that at one of the
meetings a Treasury representative said that that problem could not be settled by
the fuad and that Knglend would have to attempt to make other arrangements.
deferring to an iaquiry by Dr. ^hite earlier in the meeting as to what
more could be done with England. Hi. Williams suggested that we ask of the British
chsthftr the VAind would not hsve bAttsr oroiDfiCts of itifiMii i f AAPfcAln nrc^liMi
easing 19 in the Immediate post-war period were handled in some other way
Dr. Unite
replied thet discussions along those lines are going on now, but he indicated that
expressed the •lew, howevers that the Fund would be able to help on these probler
Mr, Xnoke stated that he has frequently heard the comment from bankers
that they are disturbed OTer the possibility of the gradual deteriorstion of the
assets of the ^undr.
The brake* of the Fund beecsie effeetive very graduallyc be saidv
end a eountry ean purchase foreign exchange up
becomln*? tM*« effee^ive
sc thst at the end of fTV— t^>T>#s
i t i t s £ocd assets are ac
Able i
ve been supplanted
* with
" i w * ^"«*
*
s are
to do
.
'« das
.
ltd that h« w<
3 t;:««'rleers of t&e b r
• di 6cu*aioi. <£•
jfted at
r,.
This document is protected by copyright and has been removed.
Author(s): Foreign Research Division, H. C. W.
Title: Sovereignty under the White Plan
Date: September 21, 1943
Page Numbers:
This document is protected by copyright and has been removed.
Author(s): Foreign Research Division, H. C. W.
Title:
Date: September 21, 1943
Page Numbers: 27
QPNFIOEH
J. H. w,
September 24, 1943
INTERNATIONAL CURRENCY STABILIZATION
I*
There has been general agreement that currency stabilization
should be but one part of a brtaad program of post-war international
economic reconstruction which must include as well such questions as
trade policy, long-, and short-term foreign lending, stabilization of
raw material markets, and international price and cost adjustments,
but there has been icuch disagreement as to the order in which the work
on these various aspects of the general problem should be brought to
maturity and presented for discussion by Congress and the public.
Currency stabilization probably provides the most feasible and the
most focal point of departure for work and discussion upon the whole
range of topics, but, on the other hand, it presents a danger that the
other aspects of the problem on which the success of any currency plan
fundamentally depends vri.ll remain under-emphasized and under-developed,
and even the danger that other countries and our own public might be
misled into accepting a plan for currency stabilization as a cure-all.
Ati some stage in the discussion of currency stabilization,
therefore, and certainly well before final decisions are reached, it
seems to me a matter of the most fundamental importance to insist upon
the fullest possible revelation of the other parts of the general plan.
I recognize that this may be a counsel of perfection which asks for
more than is reasonably feasible, and the concrete problem may well
turn out to be to strike the best compromise between a comprehensive
and thoroughgoing exploration .of the entire field of post-war international economic reconstruction and the premature adoption of monetary plans. But it seems a fair and a fundamental criticism of the
procedure thus far followed that the discussion of currency stabilization has been pushed out too far ahead*
II* Coming to the currency plans themselvesj the most fundamental question about them in ay mind is their failure to differentiate between problems of the transition period from war to peace
and the longer run requirements of currency stabilization* Both the
English and the American plans (and also the Canadian) appear to be
dual purpose plans intended to deal with both sets of problems• This
is revealed in the Keyncs plan, both by the very large amount of
foreign exchange resources he wishes to create and by his insistent
and repeated emphasis upon the difficulties in which nony nations
will find themselves at the end of the war and the desirability of
starting them off on a vrave of expansion* It seens equally clear that
the much nore nodest size of the Yftiite fund and its greater insistence
on limiting this country's liability reflect concern about the possible
effects upon us of using the fund to meet the requirenents of the
transition period as well as those of currency stabilization under the
nore normal long-run conditions* This concern is apparent as well in
the provisions of the Yihite plan regarding war balances*
These two purposes of the stabilization plans seem to ne in
fundanental conflict with each other, for on effective handling of
the problems of the transition period will require lending and borrowing (or lend-lease) end thus the development of debtor-creditor
relationships v/hich may have to stand for a long period, whereas any
effective plan for long-run currency stabilization nust assume a
tendency on the part of all participating countries toward an average
zero debit-credit position analogous to the assumption of tvfo-way gold
flow in a properly v/orking gold standard* The danger therefore is,
if the currency plan is permitted to retain its dual-purpose character,
that after a few years it will acquire such a lop-sided condition (if
indeed it does not brealc dov/n altogether) that all pretense at the
maintenance of any even balance position would have to be given up*
I can see no escape from this dilemma so long as both purposes are adhered to, for trying to avoid a lop-sided condition in
the fund in its early years would mean not doing the job of facilitating the transition to more normal conditions effectively and trying to
correct the lop-sided condition in later years would mean imposing
restraints and penalties upon both debtors and creditors arising not
out of their long-run normal relationships but out of the handling of
purely emergency problems which have really no bearing upon the longer
run requirements•
%
first general recommendation therefore with regard to
currency stabilization is that a separate plan should be devised'for
dealing with the problems of the transition period and that no final
action on any plan for long-run currency stabilisation should be
taken until after, or at the most concurrently with, the development
or adoption of such a plan for the 'short-run period*
III. Development of a separate program for the transition period
implies no hostility to a plan for longer run currency stabilization.
On the contrary, it is intended to promote the success of such a plan
by providing the conditions under which the plan could operate. It
is sometimes suggested that v/c must have a plan for currency stabilization to go into effect immediately after the war in order to avoid
the period of currency chaos which followed the last -war* But, in view
of the development of exchange controls, the problem this time is not
so much to avoid erratic fluctuations of currencies as to find the
equilibrium rates at which the exchange controls can in general be
removed, and one of the main purposes of the separate plan for the
transition period would• of course be to assist this process.
Some of the problems which should be explored in developing
the short-run program are the following*
a. Plans for relief and reconstruction and for the continuance of 1end-lease.
b«
The need for a purely credit granting institution, as
distinguished from an agoncy for currency stabilization.
In this connection we should explore tho possible use
of the B.I.S. or sone similar institution, stabilisation
loan agreements such as have been used in the past,
the Export-Import Bank mechanism, and in general all
machinery whether old or new which might be helpful for
this purpose.
c# The desirability of a separate arrangement to toko care
of abnormal or blocked balances.
d. The relation of long range developmental loans to the
heeds of the transition period.
IV • In considering plans for long-run currency stabilization,
a distinction should be made between the procedure to be followed in
putting the plan into effect and the final form of the mechanism to be
adopted. Such a distinction between procedure and final form might go
far to reconcile some of the most important differences among those who
favor different approaches to the problem* Yihatever pien is finally
adopted, its success would depend very largely upon the prior understandings reached among the principal participants. Of most fundamental importance would be such an understunding between our country
and the British«
It should embrace internal aS well as external
policies for maintaining economic stability, and would of course include
a complete understanding with regard to hov; the problems of transition
were to be handled in the separate plan to be devised. This first step
in the procedure having been worked out, there should be a thorough
exploration of the conditions .^nd methods for tying in other countries.
Once it is agreed that there is to be a short-run as well as a long-run
plan, there ought not to be any difficulty in reaching an agreement,
quite as much in the interest of the other countries as ourselves, upon
the desirability of establishing criteria for determining when a country
is ready to pass from the one stage to the other,
V*
Adoption of the program I have outlined would go far to
lessen my objections to the Yftiite plan* But what attitude to adopt
toward it would remain, even so, a most difficult question. Should
the plan, with these safeguards, be set up at the outset, or should
it, though planned and agreed upon now, go into effect only after a
transition period?
Or would it be wiser to ;vait and see how necessciry
and desirable such a mechanisn nuy prove to be after nore normal
conditions had been restored and norc stable currency relations
established onong the leading countries?
Those who favor the plan, but agree that the nore immediate
problems should be handled in other ways, argue that the only chance
to get the nations to adopt it is under war-time conditions, before
our ardor for international cooperation has had time to cool.
On the
other hand, there is the danger that if so pretentious a mechanism is
set up prematurely it will again be tarred with the familiar reproach
of being another world organization that doesn't do anything.
Five
years of innocuous desuetude would probably kill it*
I see no way of resolving this dilemma except by reexamining
the grounds on which the plan is favored. Undoubtedly, as indicated
earlier, the British have been much influenced by anxiety about their
immediate post-war problems and their preference for "anonymous" borrowing. But if a separate plan were provided for that purpose, and White's
resurrection of his bank plan following our meeting suggests we may be
moving in that direction, this ground for preference of a world plan
would be removed• From the American experts we have heard much about
their plan's being in "the spirit of the times." But this is part of a
much larger question. If there is to be a political organization of the
United Nations, this will set the pattern for currency stabilization and
many other post-war plans. But if this is the main ground for preferring
a world currency plan we ought to settle the larger question first* So
far we have had very little idea of what this political structure is to
be, and the kind of cooperation which is being practiced in the war
suggests much more a close association among leading countries than a
United Nations world government; though this may not mean that such an
association might not lead to some kind of broader structure, of which
the leading countries would provide the core.
The analogy for currency
stabilization seems very close and suggests a similar process of development •
In previous memoranda I have argued that the key countries
approach has many advantages. It permits of more intensive, and at the
same time more flexible and informal, cooperation in the area of the
problem which is most decisive, not only for the leading countries but
for all the countries. It enables these countries to explore the problems
without prematurely subjecting themselves to hard and fast rules and
commitments. In particular, it permits them to explore possibilities of
common action in the field of internal economic policy, which to my mind
is a vastly more ambitious, more difficult, and more decisive area of cooperation in the interests of world stability than that envisaged in the
currency plans• Unless the problem of international stabilization is approached in this way, I think it will probably end in another failure,
.Whether all this can still be done within the framework of the White plan
or the Keynes plan I strongly doubt. It is in its nature a different
kind of approach, even though it might later develop into some kind of
world currency organization*
How different it is can perhaps best be illustrated by the way
in which discussion has developed since the Keynes and T/hite plans were
published. Simultaneous publication of the two plans directed public
attention toward their differences but the experts sought to emphasize
their fundamental similarity, and for a time it seemed that there would
8
be no great difficulty in reconciling differences and agreeing on a
common plan, which in essence would be the White plan with concessions
to the advocates of the Keynes plan. The revised "Shite plan, when it
appeared in August, made substantial concessions which I will not stop
to review. But the British press expressed general disappointment, The
Manchester Guardian going so far as to say that any British Government
that adopted these proposals would not last beyond the first post-war
election• At about the same time, the London Economist came out with
the statement that it had heretofore withheld judgment but now had come
to the conclusion that neither plan, nor any plan of this general type,
would be workable in the conditions of the post-war world*
In addition,
we know that the British experts have come back to 7/ashington with very
different ideas about what they are prepared to accept from those with
which they left in June*
This unfavorable turn, though perhaps touched off by the
White plan revisions
side of the case
even though these were favorable to the British
obviously reaches much deeper and indicates the need
for a much more thorough understanding between the two principal
countries* Whether in the meantime it was wise to invite the representatives of the Allied and Associated Governments to Washington indicates
the kind of question I have had about the global approach to the problem
and provides an early illustration of the essential difference between
the two approaches. It seems clear that the English on second thought
have become assailed with doubts. One kind of question raised is how in
a general assembly you can decide upon a change of exchange rates without
provoking speculation and disorder*. Another is that in a world organization there must be definite rules spelled out in an agreement} but if a
country accepts such rules, it must consider carefully what may be the
consequences. It seems clear to me that the inevitable result will be
that each of the principal parties at interest will so protect itself
that the rules vdll be of little use for any major purpose of currency
stabilization. The English, for example, will gladly agree to a large
stabilization fund since to them as a deficit country this can only mean
more leeway for ordering their own affairs at home and abroad in their
own fashion. But we as the principal creditor country will oppose a
large fund because of the economic effects upon us and the international
obligations which the debtors vdll wish to impose upon the surplus
country. In proportion as we insist upon limiting the fund, England
will insist upon retaining her freedom of action with regard to the
exchange rate.
Until such fundamental difficulties are ironed out and agreement reached which really looks toward currency stabilization and provides
the means and policies, externally and internally, to make it effective
as between the principal countries, it will remain difficult to see
what benefits the currency plan vdll confer upon the rest of the world
or on the leading countries themselves. l$r principal point in advocating
a key currencies approach has been that there would be a better chance of
reaching such an understanding if we began Tdth a more intensive and
thoroughgoing, but at the same time more informal and experimental, attack
upon the Anglo-American problems, Ity doubt has been whether this could be
done effectively at the outset in terms of a formal and elaborate world
currency plan with rules and regulations, pains and penalties, and a
world governing body.
October 7, 1943.
INTERNATIONAL CURRENCY STABILIZATION
<] v ^ ^ ^ -
^
1* The purposes which underlie proposals for an international currency stabilization
mechanism will find general acceptance• International collaboration to promote
increased productivity and a* higher standard of living for all peoples is a
natural world aspiration. The reduction of international barriers to the exchange of goods and services, whether those barriers are political, commercial,
or monetary, is a desirable world goal* The question at issue, therefore, is
not one of internationalism vs* isolationism, nor of multi-lateralism vs*
bi-lateralism, but of how best to achieve our objective!
2* Proposals for an international currency stabilization fund or clearing union,
which have been put forward in differing fonus by monetary experts of Great
Britain, Canada and the United States, all attempt to provide substitutes for the
disciplines of an international gold standard, and a means of temporary moderation or avoidance of the disciplines which any workable international standard
requires. The substitutes are the punitive or corrective measures which may be
applied or suggested, by managers of the fund or union, to countries whose debit
or credit balances become excessive* The means of moderation or avoidance of
rigid adherence to an international monetary system are the credits which the
fund or union will provide for countries needing temporary aid in meeting their
external liabilities on current account• Acceptance of the disciplines of an
international monetary system is urged upon all countries in preference to competitive exchange depreciation; exchange controls, bi-lateral trade agreements,
and other measures of currency protection which tend to limit the volume of world
production and trade. The inducement offered to countries which might not otherwise be willing to contribute their support to such a world program is the
credit privilege which they obtain as members of the fund or union. The primary
or distinctive feature of the operations of the fund or union would be the grant
of temporary credits by an international agency on a prearranged basis* This is
so whether credits be thought of in the usual sense or as a consequence of the
"clearing principle," which places on the creditor country the burden of making
• it possible for the debtor country to pay its debts* The technical clearing
\ function, as has been well said, can be handled by the existing private machinery
\ with a dispatch and smoothness not likely to be matched by any new world institui tion.
3»
In the preparation, and more clearly in the discussion, of these proposals, as is
further developed below, it seems to us that insufficient attention has been paid
to:
(a) the primary importance of achieving internal stability at a high level
of production in the principal trading nations of the world;
(b) the key position of the United States and the United Kingdom in the
field of international financial and commercial arrangements*
Until these questions have been further explored and discussed, and until there
is a reasonable prospect of the adequate solution of the problems which they
pose, international currency stabilization plans will not have a proper foundation for successful operation and, therefore, such plans seem to us to be premature*
4. More specifically, it is believed that.an international currency stabilization
fund (or clearing union), such as has been proposed, is not the best approach to
the world*s currency problems at this time for the following reasons:
(a) Y/e do not think that the long run requirements of currency stabilization and the shorter run problems of transition from war to peace
can effectively be encompassed in'the same plan, and we believe
that presently suggested plans will lead to a confusion of these
two problems* It is our view that certain problems of transition
must be dealt with first, or at least separately, if an international
currency stabilization fund is to have a world climate in which it
can work successfully. The giving and receiving, or lending and
borrowing, growing out of relief, reconstruction and readjustment,
must be kept outside any currency stabilization fund, if it is long
going to be able to perform its true function of smoothing out
temporary disequilibria. This does not mean that ?/e must resign
ourselves to currency chaos in the transition period. During this
period exchange controls will have to be maintained, but they can be
progressively relaxed as the conditions necessary to exchange
stability are more nearly achieved,
(b) We doubt whether the immediate and independent organization of an
international currency stabilization fund vail facilitate other and
more important measures of international collaboration. It is more
likely to facilitate avoidance and postponement of solution of more
difficult problems, and to abate public concern for the solution of
these problems, meanwhile loading the currency stabilization mechanism with burdens it cannot bear* Holding this view, we must reject
the claim that if these other things are not done, it will, be all the
more necessary to have an international stabilization fund - that the
fund will be better than nothing. The alternative is not "nothing" there are other ways of meeting the problem. If the proper environment for the successful working of the fund does not exist or is not
created, the fund will be a failure; a failure which will set back,
not advance, the cause of international collaboration.
(c) .We do not see how this country, or other countries, including the
relatively undeveloped countries, can intelligently commit themselves
to a currency stabilization plan, or any other international economic
arrangements of this general character, until they know the rest of
the international financial program. Until plans have been worked
out, publicized and discussed, for dealing with other problems such as
the transition period of relief and reconstruction at the end of the
war, international long term lending and development, and the stabilization of prices of the principal raw materials of international
trade, it is not possible to pass judgment upon a currency stabilization program. Certainly it would seem that the American people are
entitled to know, in advance and in toto, approximately what and how
much they are going to be asked to give or underwrite through these
impersonal international agencies, the majority of whose members will
be debtors and in which the United States is sure to be the largest
creditor.
(d) In general, it is our experience that in international affairs more
progress is made by breaking down each problem into its parts and
building on the best materials available, than by trying to impose
global solutions, in all cases, at the outset. Having regard for how
the world is presently put together, we believe that international
currency stability is more dependent upon internal stability than the
other way round, and particularly upon the maintenance of a condition
of high production, income, and employment in the leading countries;
and second, that stability of the dollar-sterling rate is the crucial
question for most other currencies. This suggests that problems of
internal stability in the United States and the United Kingdom and
erling rate should be dealt with before attempting a
tabilization Fund. We believe it is/correct to say
ihair-exchstfge disequilibrium is most likely to begin with the small,
economically weak, countries. This is to mistake symptoms for the
disease. Exchange disequilibrium is most likely to begin when the
large, economically strong, countries fail in their broader international obligations.
(e) None of the proposed plans, nor any of the many comments upon them,
suggests a practicable procedure for fixing a large number of exchange rates during the immediate post-war period. To select a past
date, and to fix the rates as of that date with a large range of
permitted deviation, is to beg the question. Nor can rates be set
in a town meeting, after the fund is established, without provoking
speculation and disorder. If, as appears certain, we must proceed by
the method of trial and error, we should concentrate on a few principal
currencies and let the lesser currencies adjust to them.
(f) None of the proposed plans gives serious' attention to possible procedures for combatting inflationary tendencies which appear to be inherent in them all. It is not at all clear that the United States,
for example, will find this desirable in all circumstances and at all
times.
(g) Political considerations are interwoven vdth economic considerations in
any international arrangements, but this is particularly so in the case
of a world organization. An international stabilization fund would be
an instrumentality of world government although there is no world government. If the controls which it must exercise (in the absence of a
situation so stable as to make the mechanism of a fund a refinement,
not a necessity) are to be effective, the international stabilization
fund will also be a world political organization. It is believed that
this is not the way to establish a world political organization. If
there is to be a world political organization, it should set the pattern
for world currency stabilization; the larger question should be settled
first. Based on the war experience, close association among the leading countries (or some device such as that proposed for the United
Nations Relief and Rehabilitation Administration) seems a more likely
outcome than a United Nations World Government.
(h) We question the practicability of debtor country control of an institution of the international stabilization fund type, which is a credit
granting agency. We also question the desirability of setting up egi
institution which attempts to give the appearance of democratic control
when, in fact, it must be dominated by a few key countries, under existing world conditions, if it is to v/ork properly. And finally, we
believe that to hold out the promise, or what will be taken as the
promise, to a large number of countries that they will, by right of
membership, and the too ready assumption of certain policy obligations,
'establish a credit line for a substantial amount of United States
dollars, or rather United States goods and services, in the immediate
post-war years, may be a dangerous step. Vfe should draw all possible
lessons from the unhappy experience of the League of Nations in trying
to grant large authorities and large powers, in the international
sphere, to small, economically weak, nations. Either it is a fiction
and leads to disappointment and bitterness, or it is a reality and
leads to confusion and frustration*
(i) We do not raise the question of sovereignty in a narrow legal sense,
but we do believe that there should be a more thorough exploration
and explanation than has yet been undertaken or given, of the domestic
controls (such as measures to achieve a high level of employment and
production) which may have to be foresworn or moderated by countries
adhering to currency stabilization plans if there is to be a .fairly
rigid international currency standard or internationally controlled,
flexibility, (This question appears to be particularly disturbing to
the British at present.)
5« Vfe suggest that the problems of currency stabilization in the period of transition from war to peace be approached as follows: (it is assumed that in this
period other and more important questions of international political and
economic collaboration will also be under development.)
(a) Extend lend-lease and/or other credit granting machinery to assist
rehabilitation and reconstruction. The immediate post-war years will
be a prolongation of the war, in the economic sense, and credits of
long term or no term will be needed. This will chiefly be the burden
of the United States, but other countries such as Canada, Switzerland,
Sweden and Argentina should bear a share of the burden. It must be
remembered, of course, that the resources of the United States are not
inexhaustible, and that too great generosity in international financial
affairs may bring a violent political reaction.
(b) During this period, exchange control should continue widespread and
provide currency stability* It would be anticipated that such control
would be relaxed gradually as more stable international conditions became established, and pressure to this end might be exerted in connection v/ith whatever credits are extended.
(c) Establish a working relationship with Great Britain for collaboration
and consultation in:
(1) Achieving and maintaining stability of the dollar-sterling rate
(by the trial and error method until an equilibrium rate is
found) which includes meeting the problem of blocked balances in
sterling. This would provide the counterpart of the world money
center about which trade has revolved in the past. It proceeds
on the assumption that the international currency most nations
want and need is either dollars or sterling (at their option) in
final settlement of multi-angular trade«
(2) Achieving and maintaining internal stability at a high level of
production in these two principal commercial nations• Yfhile this
is primarily a matter of domestic concern, whatever steps are
taken should be taken with a knowledge of and with regard for their
international repercussions *
MISC. 3B.I-OOM-IO-«2
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
PATP
To
Mrw SproTil
,^_.^__^__
FnnM
A> ! • Bloomfield
November 3f 1943.
s n a j p f l T Xin^*eyna'^ioT)a-^ yiTiftYiftiflX pnp^^i^Ti of..
Great Britaiiyand World Gold Reserves*
In answer to your inquiry of a few days ago, I am submitting
(1) some notes on the amount of international credits which Great Britain
may require to tide it over the transition period; (2) a table giving the
amount of frozen sterling balances at present held in London by different
countries; and (3) a table giving the gold reserves of central banks and
governments in August 1929 and in August 1943.
The problem of estimating the amount of international credits
which Great Britain will require to meet its balance of payments deficit
during the so-called transition period is one of great difficulty, in view
of the extremely wide range of variables involved for which only limited information is available* These brief notes will, therefore, be concerned
primarily with an enumeration of these variables, rather than with the attempted calculation of any specific amount of foreign credits which Britain
may require. It is obvious, moreover, that the very word "requirements11 is
an elastic one, depending upon the standard of living and the level of activity
that Britain proposes to maintain* By the word "requirements" we will assume,
rather conservatively, an amount of international credits per year which,
given the state of the other items in the British balance of payments, will
make it possible to finance at least' the same volume cf goods which Britain
imported on the average in the years 1936 to 1938*2/
The logical starting point for any attempted estimate of the international credits which Britain may require lies in an examination of the likely
1/
I do net in this memorandum draw a distinction between Britain's ~~
postwar needs for dollar credits and for credits in other currencies*
I deal simply with Great Britain's probable exchange requirements as a
whole, such as would, for example, be extended to it through an international organization*
MISC. 3B.i.5OM.io~t2
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE
To
SUBJECT-
FROM
-2-
pattern of the British balance of payments in the early postwar years. In
the three prewar years, 1936 to 1938, Britain had an average annual merchandise import surplus of £388 million, which was "paid for" primarily ty net
receipts of £203 million from overseas investments, £105 million from shipping
services, and £40 million from financial and other services. The remaining
annual average deficit of £40 million (i.e., the deficit on current account
transactions as a whole) was met by foreign repatriations of British overseas investments, by short-term capital inflows, and ty net gold outflows.
At the conclusion of the war, the British balance of payments position on current account will have substantially deteriorated. As a result
of wartime sales and losses of foreign investments, totaling at least £1,000
million and probably considerably more, and the sharply increased volume of
foreign balances in London (which have already risen by over £800 million
since the outbreak of the war), Britain's net receipts from overseas investments may have declined by as much as £100 million per year at the conclusion
of the war. It is also believed that British net receipts from shipping
services for several years after the war will have declined by about £40 million as compared with 1936-38. (This estimate is based on certain reasonable
assumptions as to the absolute and relative size of Britainfs merchant fleet
in the early postwar years, the level of shipping rates, the demand for shipping
services, etc.) Finally, net receipts from financial and other services may
be expected to have declined by about £10 million per year.
In short, net annual receipts from overseas investments, shipping,
and financial services are likely to be as much as £150 million less at the
MISC. 3B.1.BOKMO.4Z
F E D E R A L RESERVE BANK
OF N E W YORK
OFFICE CORRESPONDENCE
DATE
To
SUBJECT
FROM
-3-
-
conclusion of the war than in the immediate prewar years, though the figure
may, of course, vary somewhat, depending on the level of national income in
the rest of the world and on other factors* If we assume that the value of
exports and imports remains the same as in 1936-38, or that the difference
between the two remains the same, and remembering that in 1936-38 Britain already had an average annual deficit on current account of £40 million, there
will thus be an annual gap of some £200 million, or roughly $800 million,
in the British balance ot payments at the conclusion of the war*
However, there is no necessary reason to assume that the value of
exports and imports will remain the same as in 1936-38 (or that the difference
between them will remain the same) • These two items are, in fact, the big
question marks in the picture, and the size of each (which will intimately
affect the amount of credits needed by Britain) will be determined lay a wide
range of variables which may be briefly outlined.
a. Imports: There is good reason to believe that the volume and
value of goods which Britain would like to import, or, in the absence of
special restrictions, would reasonably be expected to import, will tend to
be higher in the early postwar years than in the years 1936 to 1938* One
obvious reason lies in the increased requirements for capital goods and supplies for rebuilding and reconstruction purposes, while the high level of cash
and liquid assets in the hands of consumers will tend to involve heavier purchases of imported consumers1 goods than prevailed before the war. Moreover,
if British plans for full employment are carried through, there will inevitably
be a higher demand for imports • In addition, import prices will undoubtedly
MISC. 3B.i.50M.io-*a
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE
To
SUBJECT
FROM
-4^-
tend to be higher than in 1936-38, in view of the relative wshortage" of
goods which will prevail on world markets after the war. The value of
British imports after the war will thus tend to be substantially larger,
due both to a higher volume and to higher prices.^/ This will tend to expand Britainfs balance of payments deficit. If, however, Britain maintains,
or even intensifies, its present import licensing, exchange control, and
rationing systems, this increased demand can be prevented from becoming effective. Even if the British authorities do not permit a higher volume of
imports than prevailed in 1936-38 (which, as noted earlier, we assume to be
the bare Required11 minimum), the very rise in import prices itself would increase the value of imports, thereby widening the "gap". If we assume, however, that the 1936-38 volume of imports is too low (as it undoubtedly is,
in view of reconstruction needs, the higher level of population, etc.), then,
of course, the volume of international credits needed by Britain would tend
to be proportionately larger.
b. Exports: To what degree may an expansion in British exports
after the war tend to offset the expansion of imports, and thereby keep down
the volume of international credits which Great Britain may require? The
answer to this question will depend, as in the case of the postwar pattern
of imports, upon many variables. Certain factors will tend, on the one hand,
to keep down the level of British exports in the early postwar years as compared
with the 1936-38 levels. In this connection one might refer to the wartime
industrialization of overseas markets and the disruption of British trade
2/
The increased postwar demand for imports, however, may be somewhat
reduced ty increased domestic production of goods previously imported,
a development which has been stimulated by the war.
MISC. 3B.LBOM.io.42
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE
To
SUBJECT
FROM
-5-
ponnections due to the governments wartime policy of keeping exports at
a minimum. Moreover, domestic requirements for the reconversion of war
industry back to civilian uses, the reconstitution of damaged property, and
the meeting of pent-up consumers1 demands, may tend to leave fewer resources
available for export than before the war. Nor should it be overlooked that
some time will be required to reconvert industries to export uses. On the
other hand, there are various factors which may tend to offset the above,
and cause a higher level of British exports. One such factor is that the
British Government, aware of its postwar shortage of foreign exchange, has
stated on many occasions that after the war high priorities will be given
to exports, and that every effort will be made to follow an aggressive export
policy in order to recapture lost markets. The degree of success of this
export drive, however, will depend on such variables as the level of national
income abroad, the level of British export prices both in relative absolute
terms and in relation to prices in competing sources of supply (here the
question of the pound-dollar rate is partly involved), upon British ability
to adapt its production of exportable goods to the types and qualities required by foreigners, etc. (We omit consideration of possible British resort
to export subsidies, bilateral bargaining, etc.)
Although it may be that British exports will be maintained at a
higher level in the early postwar years than in 1936-38, this is unlikelyj
certainly exports will fail at first to expand at a rate fast enough to offset the rise in merchandise imports and the loss of income from overseas investments, shipping, and financial services. The conclusion seems warranted,
MISC. 3B.LSOM.IO.42
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE
TO
SU B JECT
FROM
.
therefore, that for probably at least three years after the war (even making
the conservative assumption that the volume of imports will be kept down to
a level not higher than that of 1936-38) Britain will require international
credits amounting to a minimum of £200 million, or $800 million, a year,
and probably substantially more, in order to meet the deficit on its balance on current account J2/
We have thus far assumed no changes in Britain1 s capital accounts
as compared with 1936-38. This assumption seems to be a reasohable one, in
view of the fact that the British intend to maintain their exchange control
regulations for several years after the war. Mention must, however, be
/made of the massive volume of frozen sterling balances in London, now totaling
/
over £1,000 million* If the owners of these balances were permitted freely
to withdraw them at the conclusion of the war, then, of course, Britain's
requirements for international credits would be enormously enhanced. Although it is obvious that Britain will not permit such an unfreezing of
foreign balances, the possibility must not be overlooked that some arrangements may have to be worked out with the countries concerned, wherely a
gradual liquidation will be permitted over a period of years. Inasmuch as
we have no knowledge as to what the British plans in this regard are, we
cannot say tjy how much British requirements for international credits would
thereby be increased in the early postwar years • (We likewise omit consideration of the possibility of some land-Lease repayments.)
One final variable remains to be discussed, namely, the degree to
which Britain will be able and willing to meet its postwar gap ty drawing
2/
Not all of this sum, of course, will be required to meet Britain!s
deficit vis-a-vis the United States; a sizable fraction will represent
its deficit vis-a-vis Empire and other countries.
Misc. 3B.I.8OM.IO.42
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE
TO
SUBJECT
FROM
-7-
dovm its accumulated stocks of gold and foreign exchange. The British
authorities at present hold roughly $625 million of balances in the United
States, while the Foreign Research Division has estimated that British gold
holdings at present total about $1,150 million (both these figures are confidential)* Assuming that at the end of the war Britain's total gold and
dollar holdings aggregate about $2 billion, the British authorities could
theoretically meet any anticipated balance of payments gap for at least two
years. It is highly unlikely, however, that they would be willing to dip
appreciably into these resources.
The problem of how long the British will require international
credits likewise cannot be answered unambiguously. This will basically depend upon the time it will take to expand British exports and repair the loss
in invisible income to a degree adequate to finance British requirements for
imports and other purchases abroad* This, in turn, will depend on a wide
variety of factors, as suggested above#
AIB:DHF
TABLE I
STERLING BALANCES IN LONDON
(millions of pounds sterling)
Country
India
Canada
Eire
Malaya
Egypt
Australia
Argentina
New Zealand
South Africa
Amount
501
170*
226**
100***
76
69
42
28****
12
Date
Aug.
Aug.
June
Dec.
May
Sept.
Sept.
July
Sept.
194-3
1943
1943
1941
1943
1943
1943
1943
1943
1,124
*0f this sum, £157 million, or $700 million, represents the
interest-free loan extended by the Canadian Government in 1942. ine
balance, or £13 million, represents sterling held by the Bank of
Canada and the net sterling assets of the chartered banks.
7/liich £106 million represents the net sterling assets of
the commercial banks, and £20 million the sterling holdings of the
Central Bank of Ireland*
#***0f which £21 million represents sterling held by the Reserve
Bank of New Zealand and £7 million sterling held by the Trading banks.
N.B. In addition to the above amounts, sterling balances for
which no figures are available are held by Brazil, Chile, British
West and Ji&st Africa, Iceland,-Sweden, Switzerland, and Middle eastern
countries, such as Iraq and Palestine. The sums involved, however, are
small in comparison with the figures given in the above table*
S II
GOLD RttSJfllVES OF UKNTR&L B&MKS AND GOVERNMENTS*
(In millions of dollars)
August 1929
August 1943
At $520.67 At S35
per fine oz.
u. s.
(33,994
$6,764
Other
6,285
10,641
Total
fl0,280
$17,405
§22,243
12,260**
$34,503
^•Including holdings of U»S*S*R«
•frKReported and estimated unreported holdings; reported holdings,
according to the Federal Reserve Bulletin of October 1943> totaled
§8,200 millions*
\
This document is protected by copyright and has been removed.
Author(s): Dag Hammarskjold; Klas Book; Erik Lindahl; Arthur Montgomery; Ivar Rooth;
Mats Lemne
Title: Bases for Sweden's Monetary Policy after the War: A Report Issued by Experts in
the Bank of Sweden
Date: November 22, 1943
Page Numbers:
This document is protected by copyright and has been removed.
Author(s):
Article Title: Monetary Plan Liked: First Reactions in London to the New Scheme Are
Favorable
Journal Title: New York Times
Volume Number:
Date: April 23, 1944
Page Numbers:
Issue Number:
This document is protected by copyright and has been removed.
Author(s):
Article Title: Proposals of Monetary Experts in World Stabilization
Journal Title: New York Times
Volume Number:
Date: April 22, 1944
Page Numbers:
Issue Number:
This document is protected by copyright and has been removed.
Author(s):
Article Title: A World Monetary Plan
Journal Title: [New York Times]
Volume Number:
Date: [April 22, 1944]
Page Numbers:
Issue Number:
Statement
of
B. H. Beckhart
on
H. J. Res. 226
made before the
Committee on Foreign Affairs
of the
House of Representatives
Thursday, April 27 >
Mr. Chairman: In offering testimony on H. J* Res, 226 introduced by the
Honorable Charles S« Dewey, I should make clear that whatever opinions I express
represent my personal point of view and not that of any institution or organization
with which I am associated.
Congressman Dewey's proposals can best be viewed against the background
of the entire role of the United States in international financial and economic
relationships in the poet-war period* In other words they constitute one of a
series of Important actions which this Government might undertate in the extension
of financial assistance to foreign nations.
Accordingly, I should like to set forth a few general principles which
might be given consideration in the development of our International financial and
trade policies:
l f In extending aid to foreign nations we should distinguish very
carefully between gifts and loans, between the financial aid
which we extend to relieve human suffering and distress and
for which we do not expect repayment, and the financial aid
which we extend for economically productive purposes and for
which we expect repayment. Nations occupied by the Axis powers
-2will stand in desperate need of food and clothing. These
needs we should meet to the utmost of our ability and without thought of repayment.
2. Post-war loans, as opposed to relief grants, should be ex*
tended for definite projects of economic merit, or in the
words of Congressman Dewey's resolution, for "sound economic
objectives "• The terms of each credit extension should be
"tailored" to fit particular borrowing needsf Careful consideration should be given to the credit-worthiness of the
borrowing country.
5. Preference should be given to loans, the proceeds of which
will be so utilized as to Increase the export ability of the
borrowing nation.
If borrowing needs associated with purely domestic re*
quirements are financed through external loans, a heavy
burden will be placed upon a nation's balance of payments
without at the same time enhancing its ability to export
goods and thus to repay its external debt.
k* In the extension of financial aid, the funds loaned should be
similar in character to the funds required.
The mistake committed in the decade of the 'Twenties of
using short-term funds to finance long-term needs should
not be repeated* Short-term funds should be used solely
to finance short-term requirements and long-term credit
needs should be met from investment funds*
5. The United States should stand ready to grant financial aid only
if it is confident that borrowing nations at the earliest
practicable moment will remove existing controls over import and
export trade and foreign exchange transactions, and that they
will not use such controls as instruments of national policy*
6. Credits should not be extended unless the United States is willing to absorb the amount of imports necessary to enable foreign
debtors to meet Interest and amortization charges on their indebtedness*
In many nations, and more particularly in those which
must resort to external borrowings, there will be an
intense demand for dollars, a problem which can be eased
if, in accordance with a recent recommendation of the
United States Chamber of Commerce, this country pursues
"a constructive, liberal and realistic tariff policy
designed to prevent world-wide erection cf11 excessive
tariff walls such as followed the last war *
-3Such then are a few of the general principles to which attention
might be given when post-war lending policies are being formulated. Not all
foreign nations will need to seek loans • Many possess dollar assets and gold
in sufficient amount to stabilize their currencies and to purchase in this
country the commodities, machinery and capital goods which they will require.
Others will need to borrow for purposes of currency stabilization, economic rehabilitation and reconstruction. In certain instances, the loans that will be
required can be secured from private sources; in other instances, they will have
to be secured from the United States Government or from a government agency.
Post-war financial problems cannot be separated from those of the war
itself. In fact, they represent an outgrowth of the war situation. Just as we
are extending financial aid during the course of the war, so must we be prepared
to continue this aid in the post-war period* Our responsibilities in this connection are implied in Congressman Dewey's resolution. In view, however, of our own
internal monetary and fiscal situation, our ability to extend credits is not an
unlimited one. Similarly, the ability of borrowing nations to repay is not unlimited. In consequence, credits should be extended largely for purposes which
will increase the export ability of the borrowing country.
International capital movements on private account will take place and
will increase in the post-war period if the political, financial and economic
environment is a favorable one. The creation of a favorable environment presupposes that the United States will reduce trade barriers, that countries overrun
by the Axis powers will achieve political stability, that the problem of post-war
inflation will be handled successfully, and that controls over foreign trade and
over the foreign exchanges will be removed at the earliest possible moment by
those nations in which the system of private capitalism prevails*
Moreover the creation of an environment favorable to private Inter**
national finance requires that a constructive solution "be found to questions
concerning reparations and inter-allied debts. The United Nations should
neither attempt to collect huge reparations nor insist upon the repayment of
inter-governmental obligations resulting from the war effort. Though the enemy
powers should be required to return looted goods and relinquish seized territory,
reparation payments, except in limited amount, should not be demanded* The United
States must take care to avoid being maneuvered into a position, where, as a
result of loans extended to the defeated nations, It is in effect covering the
reparation payments of those nations* A prompt settlement should be made of the
obligations due to this country under the Lend-Lease Agreements* The terms and
conditions of the settlement should, In the words of Article VII of the Master
Agreement between the United States and the United Kingdom, "be such as not to
burden commerce between the two countries, but to promote mutually advantageous
economic relations between them and the betterment of world-wide economic
relations". A further necessary action in the clearing up of political obligations
would be the repeal of the Johnson Act of 193*J-*
As the first step towards an international economic and political
environment favorable to private enterprise, this country should stand ready,
within the framework of the principles set forth above, to lend financial
assistance abroad.
Whether loans are extended for a short or a long period,
whether they are extended privately, or by the Government, or by one of its
agencies will depend upon the credit standing of the borrowing nation.
In general, post-war credits will be extended for the following four
major purposes:
1. Trade finance*
2. Currency stabilization*
-55. Economic rehabilitation.
^. Economic development.
In each instance the funds required will differ as to length of life and as to
the private or public character of the institution meeting the need.
Trade credits of a short-term self-liquidating character can and should
be supplied by commercial banks. American commercial banks have close business
relationships with American importers and exporters and, through their correspondents and branches, are in close touch with foreign business* American commercial banks can render a very important service in the financing of international
trade, and every effort should be directed towards the building up of a discount
market in New York to perform services of the sort rendered so ably and effectively by the London discount market prior to the first World War»
In order to prevent an over-extension of such credits in the aggregate
to any one nation, the Federal Heserve Banks might maintain statistical records
of all foreign credits extended by commercial "banks, classified by countries*
Aggregate data could be reported periodically to the lending banks so that
they would be in a position to Judge whethor any nation were incurring too large
an indebtedness on short-term account.
The second type of demand for funds arises in connection with currency
stabilization. Although credits for this purpose can render an important service,
it must be emphasized that currency stabilization is essentially an Internal
problem. It Involves the balancing of governmental budgets, the severance of
the commercial banking system from deficit financing, the refunding of the float*
ing debt, the unpegging of.interest rates, the re-establishment of free competitive markets, the restoration of a true balance In the cost-price structure, and
the re-establishment of profit and loss as a guide to production and as a measure
of efficiency.
-6The Uhited States itself will have an important responsibility in
providing a dollar which will serve as a firm basis for the currency systems of
other countries. To accomplish this, the dollar must be freed of all foreign exchange controls, gold coin redemption must be reintroduced, a balanced federal
budget must be achieved, and commercial bank credit must not be used, as was the
case in the decade of the twenties, to meet the demand for long-term investment
funds.
The United States can make a further contribution to world economic
stabilization to the extent that it Is able to prevent deep business depression^
and exaggerated booms and the attendant erratic exports of capital.
Although the problem of currency stabilization is fundamentally an
Internal one and one which must be solved by the adoption of appropriate Internal
measures, stabilization credits in certain Instances can prove helpful. Such
credits are of two types: short-term credits required for seasonal or temporary
emergency needs, and long-term credits required for the purpose of providing gold
and foreign exchange reserves.
The first type of stabilization credit can best be granted by an international central bank, i.e., by an institution similar to the Batnk for International
Settlements, or by the Bank for International Settlements itself operating under
a revised charter. Such an institution could serve a most important function not
only by granting short-term stabilization credits but also by serving as a meeting
place for central bankers and as an agency for research on world economic problems.
The Bank for International Settlements, which was American in conception, has
rendered important services in connection with these functions and its experience
will be of great value in solving impending stabilization problems,
M%y I suggest that the Board of Governors of the Federal Be serve System
give Immediate attention to the problem of enlisting the cooperation of the
-7officials of various other central banks in the establishment of an Institution
similar to the Bank for International Settlemente, or in the revision of the
charter of the present institution to make it an effective instrument in currency stabilization.
The second type of stabilization credit is that extended for a long
period of time to provide the borrowing nation with gold or exchange reserves.
Such a credit is exemplified in the Dawe 8 loan of 800 million gold marks or about
190 million dollars, granted to Germany in 1921) to provide gold reserves for the
new central bank, to contribute towards the establishment of a sound currency, and
to prevent a complete suspension of payments to creditor nations during the period,
of economic rehabilitation. The bonds, offered in the markets of eight foreign
countries, were 25-year obligations.
Although the Dawes loan was relatively small In amount, the proceeds were
sufficiently large, along with the internal measures Instituted by Germany, to
provide a stable currency. This experience would seem to indicate that long-term
stabilization credits following this war will not have to be large to achieve their
purpose.
Experience with stabilization credits after this war will probably
be similar to that after the last war. Not all nations will need to borrow to
secure currency reserves. Many will possess a sufficient supply of gold and
dollar exchange. Nations which stand in need of long-term stabilization credits
will doubtless wish to obtain them in this country. Gold will probably not be
available elsewhere, and the dollar may be the only Important currency free of
foreign exchange controls. If private funds are not available for such loans, the
United States Government should doubtless assume the responsibility of providing
the requisite funds.-' Biy doing so, this country can stimulate international tra<
of a multilateral character and promote world recovery.
1/ Within the framework of principles set forth at the outset of this statement.
-8In order to facilitate the granting of long-term stabilization credits
by our Government in the difficult period of transition from a war to a peace
economy, I propose that a Foreign Credit Administration be established, operating
under the direction of a Board of Governors chosen in the manner set forth by
Congressman Dewey in H, J. Res. 226* The powers and duties assigned to this
Board, however, would be somewhat broader than those delegated in Congressman
Deweyfs proposal. Among other duties, this body would have the responsibility
of receiving and passing upon applications for long-term stabilization loans to
be granted by our Government, and, if favorable action were taken, of recommending to Congress that the necessary appropriation bills be Introduced.
The' first step in any program of world currency stabilization is the
stabilization of the British pound in terms of the American dollar. Once this is
accomplished, an important initial step will have been taken towards the stabilization of all currencies and the reconstruction of world trade. If the Foreign
Credit Idminietration were established in the near future, it could give
immediate consideration to the problems involved in the stabilization of the
British pound and to the role which this country should play in effecting such
stabilization.
The third type of credit demand has to do with the loans that will
be required for purposes of economic rehabilitation, I.e., to assist nations in
building up inventories of raw materials and in repairing docks, factories, public
utilities, railroads, etc. Such credits are closely related to relief activities
inasmuch as they enable nations to resume their normal economic life and to "become self-supporting.
It is to this problem that Congressman Dewey has in par-
ticular addressed his proposal.
Not all nations will need to borrow abroad for such purposes. A number
will possess gold or foreign assets. Some nations will be assisted by Immigrant
remittances and by the donations of philanthropic organizations* In certain
instances, as the enemy withdraws from the occupied countries, the work of rehabilitation will be undertaken by the American and British armies In order to
maintain the services of supply*
To the extent, however, that foreign nations must rely on the
assistance of the United States Government to finance working capital needs,and the
reconstruction of plant and equipment, I would suggest that the granting of such
credits constitute another of the functions of the Foreign Credit Administration,
and that such credits, in accordance with Congressman Bewey's suggestion, be
extended on a Joint-account basis* Inasmuch as the loans will tend to become
long-term in character, the amount of the revolving fund will probably have to
be somewhat larger than that proposed in H* J. Res. 226* Moreover, foreign
nations cooperating in the joint-account arrangements should be permitted to
participate with this country in supervising the use of the credits.
The fourth and final type of credit need will arise from the desire
of nations to further their economic development, i.e., to expand capital
equipment* The greater part of such expansion must be. financed from Internal
sources, for much of It is of such a character that It will not Increase the
export balance and, in consequence, will not facilitate the repayment of funds
borrowed abroad.
In certain Instances, nations, by using their own gold holdings and
foreign exchange assets, will be able to procure in the United States or elsewhere the capital equipment they desire* Ija other cases, capital expansion
can be brought about by direct investments on the part of American individuals
and corporations* This is the most desirable type of capital import, since it
does not subject the balance of payments of a nation to fixed charges*
-10To the extent that the assistance of the American Government is required
and justified in financing capital development In other nations, I would suggest
that the Export-Import Bank be used for this purpose, operating under the supervision of the Foreign Credit Administration• The experience which it lias obtained
in the granting of such credits will prove valuable In meeting somewhat similar
needs in the post-war period•
By way of recapitulation, the funds required by various foreign countries
in the post-war period (aside from relief grants) will be those needed to finance
International trade, currency stabilization, economic rehabilitation, and economic
development* A certain portion of the external credits required can be supplied
privately, another portion may need to be supplied by governments or government
agencies. In order to simplify and expedite the extension of the credits which
may have to be granted by the American Government, I have suggested that a Foreign
Credit Administration be established* This would be charged with the threefold
responsibility of recommending to Congress appropriation measures in order to
provide long-term stabilization credits, of participating with other nations in
financing economic rehabilitation, and of directing the work of the Export-Import
Bank.
This suggestion was based upon and grew out of the proposals made byCongressman Dewey* The Foreign Credit Administration differs from the Central
Eeconstruction Fund, proposed In H. J. Res* 226, in that it would possess somewhat
broader powers and responsibilities, and its functions would be departmentalized in
accordance with the type of credit granted» Its Board of Directors would be
selected in accordance with the procedure set forth by Congressman Dewey.
In the post-war period, the United States will have a unique opportunity
and a real responsibility in offering leadership in the fomulation of constructive
International financial and commercial policies• We must be prepared to accept
this challenge and to develop policies and follow the course of action most
-11conducive to the economic recovery of all nations and to the maintenance of world
peace. In directing attention to the urgency of these questions, Congressman Dewey
has rendered a signal service•
This document is protected by copyright and has been removed.
Author(s):
Article Title: Gold! - Well, Hardly Ever
Journal Title: New York Times
Volume Number:
Date: May 12, 1944
Page Numbers:
Issue Number:
@FedFRASER