Full text of Diaries of Henry Morgenthau, Jr. : Volume 526 : Part 2

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The strength of the position of those who call for the
temporary transfer to an international body of certain
sovereign economic powers rests in the conviction that the
long-run interests of most countries are best served when

no country seeks to gain at the expense of another. It is
true that rich and powerful countries can for long periods
safely and easily ignore the interests of poorer or weaker
neighbors or competitors, but by doing so they will imperil

the future and reduce the potentiality of their own level of
prosperity. The lesson that must be learned is that prosperous
neighbors are the best neighbors; that a higher standard of
living in one country begets higher standards in others, and

that a high level of trade and business is most easily attained
when generously and widely shared.

It is with these thoughts in mind that the following list
of conditions for eligibility should be examined.
Any member of the United or Associated Nations is eligible
for membership in the Fund provided it agrees:

To abandon, not later than one year after joining the Fund,

all restrictions and controls over foreign exchange transactions with member countries, except with he approval of
the Fund.

It is important that participating countries be motivated by common objectives in conceiving their foreign
exchange policies and desirous of adopting basically
harmonious procedures in implementing such policies. Some

allowance will, of course, have to be made for reasonable

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differences because of dissimilarities in the economies
of various countries, and early in the Fund's existence

there would need to be toleration of lack of uniformity in
policy. In general, however, and as basic and long-run
prerequisites to participation, it would seem necessary
for each member country to subscribe to the general policies of permitting foreign exchange trading in an open,
free and legal market, and to abandon, as rapidly as con-

ditions permit, all restrictions or controls by which
various classes of foreign exchange transactions have been

prohibited or interfered with, other than from consummation
in such a free market.

This requirement calls for careful examination. There
has been too easy an acceptance of the view that an enlightened trade and monetary policy requires complete
abandonment of controls over international economic trans-

actions. There is a tendency to regard foreign exchange
controls, or any interference with the free movement of

funds and of goods as, ipso facto, bad. This view is

unfortunate. It is both unrealistic and unsound. It ignores the fact that there are situations in which many
countries frequently find themselves, and which all countries occasionally meet, that make inevitable the adoption
of controls of one character or another. There are times

when it is in the best economic interests of a country to
impose restrictions on movements of capital, and on move-

ments of goods. There are periods in a country's history

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when failure to impose exchange controls, or import or

export controls, have led to serious economic and political
disruption.

It probably would be fatal to the Fund, I believe, if
the conditions of participation in it were based upon the
assumption that no restrictions upon exchange, or Ifupon
trade were permissible.

It would be equally unfortunate, however, if it were
to be assumed that restrictions on foreign exchange transactions, on the international movement of goods, and the
use of multiple currency devices were desirable instruments
to employ under all circumstances for safeguarding or con-

trolling international economic relationships. It is easy
to exaggerate the need for such instruments and the benefits

derived from the use thereof, as it is to exaggerate their
adverse effects.

The theoretical bases for the belief still so widely
held, that interference with trade and with capital and
gold movements, etc., are harmful, are hangovers from a

Nineteenth Century economic creed, which held that inter-

national economic adjustments, if left alone, would work
themselves out toward an "equilibrium" with a minimum of

harm to world trade and prosperity.

It is doubtful whether that belief was ever sound.
Certainly few competent students of international economic

affairs would hold that it applied to present conditions or
to conditions likely to prevail during the post-war period.

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The foreces of adjustment set into motion by changing trade
balances, flows of gold or of purchasing power, changes in

price levels and all the phenomena that the expert in the

subject recognizes as instrumentalities in the so-called
mechanism of adjustment of international balances of pay-

ment, rarely, if ever, work out quickly enough or effectively
enough to be depended upon to achieve good results. In

fact, it is doubtful if they ever were depended upon, unaided, to bring about the desired "equilibrium." In modern
times, particularly, there has always been somewhere in the
picture some measure of control over, some measure of interference with the movement of funds and goods in order to

bring about certain desired ends.

The task before us is not to prohibit instruments of
control but to develop those measures of control, those

policies of administering such control, as will be the most
effective in obtaining the objectives of world-wide sus-

tained prosperity. To cast aside certain effective instrumentalities of control because they may be and have been

abused, is just as foolish as it would be to rely solely on
the self-interest motive of individuals as a means of solving our economic problems.

The requirement suggested above that there be accepted

the general policy of foreign exchange trading in open,
free and legal markets, and the abandonment as rapidly as

conditions permit of restrictions on exchange controls,

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should be taken to mean that there shall be acceptance of

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the principle that controls and restrictions will be employed only when they are clearly justified by the economic
circumstances, and only to the extent necessary to carry

out a purpose contributing to general prosperity. The chief

difficulty in the application of the principle will be
agreement as to what is in the interests of general prosperity.

The danger of conflicting policies lies not only in the
difficulty of distinguishing between real and specious advantage, i.e. between the advantages of a special group as
against the advantages of the whole--but much more in the

difficulty of reconciling short-run interests with long-run
interests. One of the purposes of this fund is to provide
for a more reasonable basis for such distinction, and to
supply the means through which it will be possible to pursue

long-run and broader interests, without too great a sacrifice
of the narrower and short-run interests.
The second requirement or condition for participation should

be the acceptance of the principle that no participating
country will alter its exchange rate on currencies of other
countries without the consent of the Fund.

This condition is very important. Its obvious purpose

is to eliminate the possibility of competitive depreciation
of currencies. It recognizes that there are occasions when
it may be economically wise for a country to increase or

decrease the value of its currency in terms of other currencies. When a country's balance of payments is in

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disequilibrium for causes that do not appear to be
temporary, and if that disequilibrium uncorrected
will deplete a country's foreign exchange reserve,

then altering the value of that currency in terms
of other currencies is one of the ways in which the
disequilibrium could be corrected. Other ways of
correcting disequilibrium in the balance of payments

are the imposition of restrictions on imports and
subsidy of exports, either directly through import
and export controls, or through use of exchange

controls or multiple currencies. Which method or
methods are best suited to accomplish the objective
depends on the cause of the disequilibrium, the

circumstances, the country, and the time. The circumstances under which it may be wise to alter an exchange

rate in order to correct maladjustments of the balance
of payments have long been a matter of controversy among

monetary theorists. But there is general agreement

that an alteration in the value of a currency in terms

of gold (or in terms of important currencies) is a very
serious business and one not to be undertaken lightly.

The change in the value of a currency in terms of gold
or of other currencies means that a change has been

imposed by that act on the other currencies. When, for
example, the dollar changes in terms of sterling,

obviously sterling changes in terms of the dollar. Because

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all countries are to a lesser or greater degree affected
by the action of any one country with respect to the
value of its currency, it is only reasonable to demand
that such action should not be undertaken without some

careful weighing of the consequences of the action on
other countries.
The purpose of requiring approval by the Fund as a

condition of alteration of currency is to assure joint
consideration of the merits of the proposed action and
thereby avoid unilateral action taken to obtain presumed
competitive short-run advantages irrespective of the
consequences of the impact of the step on other countries
or even on the same country. The mere fact that member-

ship would be forfeited if a country acted contrary to
the wishes of the majority in so important a matter would
make countries hesitate to undertake lightly a change in
their currency. The very discussion of the problem by
competent representatives of various countries will in
itself be a potent influence to avoid unnecessary changes.
It will, moreover, be an assurance that when a change is

made it will not be a signal for numerous other countries

to follow in their own real or presumed interest.
There will be difficulties surrounding the operation
of this condition, the most important of which would be
the necessity for secrecy when a country is contemplating

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a step such as altering the value of its currency in
terms of other currencies. If a country believes that
it should depreciate its currency relative to others,
it could hardly throw that matter open for public discussion. By so doing it would stimulate speculative
activities in the exchange market which might have the

effect of precipitating the very action being considered.
Some procedure would have to be devised to make possible

deliberations without publicity. It might be that an
Executive Committee could undertake to pass on such cases,

or it might be possible to arrange that during such discussions no country will accept or permit movements of

capital to and from a country considering the step.
Some objection to this requirement will doubtless be
raised on the ground that such a provision means that
other countries pass judgment on what is a domestic

monetary matter. The necessity for obtaining approval

of other countries on such a matter will be regarded in
some quarters as a serious infringement of sovereignty.
There is some measure of truth in this but hardly enough

to constitute a decisive reason for not participating in
the Fund. Alteration of a currency affects other countries
as well as the country making the change. It is, therefore,
only reasonable to demand that the other countries have some

say in the decision. Furthermore all members would be

surrendering their "rights" to an equal extent. Unless
nations are willing to sacrifice some of their power to

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take unilateral action in matters of international economic

relations, there is very little hope of any significant
international cooperation--let alone collaboration. To
avoid giving richer nations greater authority on such mat-

ters, by virtue of their larger number of votes, it may be
desirable to give each participant only one vote when
questions of altering currency rates are being voted upon.

As a last resort, a country always has the choice of withdrawing from the Fund so that it can always preserve its

sovereignty in monetary matters if it feels it is being
prevented by the Fund from taking action deemed important

to its own interest.
The principle worked only tolerably well in the Tripartite Accord during 1935, 1936 and 1937, but better
machinery for more adequate discussion and greater willing-

ness to recognize the legitimate interests of other countries,
needs to be developed to achieve best results. In evaluating
the need for collaboration on questions of foreign exchange

rates, it is well to remember that unilateral action can
easily be neutralized by similar action on the part of
other countries. When a competitive advantage is sought it

is essential if it is to be successful that other countries
do not take similar action. Otherwise the advantage hoped

for is lost. Where the chief objective sought is not a
competitive trade advantage in the international market but
modification of the domestic price structure or money market,
the favorable effects cannot be wholly negated by action of

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other countries. Since, however, the chief reason for
establishing the requirement is to avoid competitive depre-

ciation of currencies, the fact that unilateral action can
be easily neutralized constitutes an important argument for
securing approval of the Fund before taking such action.
Each country agrees (a) not to accept or permit deposits
or investments from any member country except with the

permission of that country, and (b) to make available to
the government of any member country at its request all

property in form of deposits, investments, securities,
safety deposit vault contents, of the nationals of member
countries, under such terms and conditions as will not
impose an unreasonable burden on the country of whom the
request is made.

This is a far-reaching and important requirement. Its
acceptance would go a very long way toward solving one of
the very troublesome problems in international economic

relations, and would remove one of the most potent dis-

turbing factors of monetary stability. Flights of capital,
motivated either by prospect of speculative exchange at

one time or another, exercises control over the inflow and
outflow of investments, but without the cooperation of

other countries such control is difficult, expensive, and
subject to considerable evasion.

It would seem to be an important step in the direction
of world stability if a member government could obtain the

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full cooperation of other member governments in the control

of capital flows. For example, after the war a number of
countries could request the United States not to permit

increases in the deposits or holdings of their nationals,
or to do so only with a license granted by the government

making the request. Or, some countries greatly in need of
capital might request the United States to supplement their

efforts to attract capital back to the native country by
providing information, or imposing special regulations or
even special taxes, on certain types of holdings of the

nationals of the foreign countries.
The search for speculative exchange gains or desire to
evade the impact of new taxes or burdens of social legislation have been one of the chief causes of foreign exchange

disturbances. Less hectic and less dramatic yet in the case
of some countries during some periods capable in the long

run of even greater harm is the steady drain of capital
from a country that needs the capital but is unable for
one reason or another to offer sufficient monetary return

to keep its capital at home. The assumption that capital
serves a country best by flowing to countries which offer
most attractive terms is valid only under circumstances
that are not always present.
A good case could be made for the thesis that a govern-

ment should have the power to control the influx and exflux

of capital, just as it has the authority to control the
inflow and outflow of goods and gold. In fact, virtually

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every participating government has already practiced these
controls to some extent during this war. The consequence
of cooperation in this matter among the member governments
would give each government much greater measure of control

in carrying out its monetary and tax policies. Such an
increase in the effectiveness of control means, however,

less freedom for owners of liquid capital. It would con-

stitute another restriction on the property rights of the
5 or 10 percent of persons in foreign countries who have
enough wealth or income to keep or invest some of it abroad,

but a restriction that presumably would be exercised in the

interests of the people--at least 80 far as the government
is competent to judge that interest.
The inclusion of this provision does not mean that
capital flows between foreign countries would disappear or

even greatly subside; it means only that they would not be
permitted to operate against what the government deemed to

be the interests of any country.
A fourth condition might be that each country agrees not
to enter upon any bilateral clearing arrangements except
with non-member countries, and then only with the consent

of the Fund, and to establish no geographically preferential
exchange rates.

The justification for setting up this requirement for
participation is to eliminate discriminatory practices in
foreign trade which result in friction, unfair competition,
retaliation, and sharp trade policies which serve to disrupt

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good economic and political relations. It means that for
the sake of the larger good to be obtained countries agree
to give up opportunities for making certain advantageous

arrangements. If each country is to operate in accordance

with its own immediate interest, irrespective of long-run

effects and irrespective of the impact of its actions on
other countries, a repetition of the pre-war chaotic con-

ditions in trade will result and again threaten political
and economic stability of other nations. The task which

confronts the high officials of all nations is to make possible a high level of business activity and of foreign trade
within the framework of reasonable and fair foreign trade
practices. Just as individuals subscribe to a government
of law to obtain maximum prosperity and effectiveness for
the whole group, even though adherence to that law involves

restrictions on individual behavior at numerous points, so
must nations give up lesser advantages for greater good.
The concept of sacrificing some immediate benefits for the
sake of larger good is the foundation stone of peace and

economic collaboration among nations, just as it is the
keystone of peace and prosperity within a nation.
The operations of the two agencies discussed in this

report should help considerably to remove the justification
for trade practices adopted to protect or strengthen an
exchange position.

There are times when gains could accrue from bilateral

clearing arrangements without significant adverse effects

on other countries, but in general the operation of the

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Fund should have the effect of making such clearing arrangements much less profitable as among members of the Fund.

One of the specific objectives of the Fund is to make available for each member a supply of foreign exchange adequate

to enable it to operate more freely and with a higher level
of trade than would otherwise be the case. Nevertheless,

in the interest of flexibility, and to take care of those
situations in which circumstances may warrant a bilateral
clearing arrangement, it should be possible for a country to
enter upon such an arrangement provided it can obtain the
Fund's approval. Discussion by the Fund of such proposals

do not require the secrecy or the speed involved in con-

sideration of alterations of exchange rate, and discussions
of the advantages and disadvantages of the particular proposal

should prove beneficial. An objective decision on the economic wisdom of such proposal is more likely to emerge from the
discussion by the appropriate committee of the Fund than from
the consideration by one or two countries alone where vested

or political interests are likely to dominate the decision.
A fifth requisite for membership might be subscription to
the principle that no monetary or banking or price measure

or policy would be adopted, the effect of which, in the opinion
of a majority of the member votes, would be to bring about

sooner or later a serious disequilibrium in the balance of
payments, if four-fifths of the member votes of the Fund

submitted to the country in question their disapproval of the
adoption of the measure.

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This provision would prove to be more troublesome than

any of the others and yet it would seem to be important to

the successful functioning of the Stabilization Fund.
Serious inflation or deflation in any one country would
affect not only exchange rates and trade, but price levels

in other countries as well. It is impossible for any country to take action of that character which does not have
important effects on other countries with whom it competes

or with whom it carries on trade. The decision as to whether
a particular measure or policy contemplated would bring about
a serious disequilibrium in the balance of payments would be

a difficult one on which to get agreement. To estimate even
very roughly the quantitative effects of any given measure

on a country's balance of payments is a very difficult task
at best. After sufficient agreement was reached on that

point it would be even more difficult in many cases to get
any measure of agreement as to whether the adoption of the
measure in question was economically wise or not.
There are times when domestic consequences are sought

which are more important to a country than the adverse ef-

fects that might follow in some directions from the accompanying disequilibrium in the balance of payments. There
are other instances in which disequilibrium provides a neces-

sary corrective, and frequently a country is confronted with
only poor choices and disequilibrium is the least undesirable
of them.

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To assume that it would ever prove easy to get four-fifths
of the member votes to take so drastic step as to disapprove
a measure proposed by a sovereign government deemed by it

to be in its own interest, is to ignore the known complex-

ities of the monetary problems, and the political realities
of international relationships.
Notwithstanding the difficulties involved in exercise
of a veto power by the Fund of monetary measures, there

will be instances in which the case is clear enough and the
consequences important enough to justify the exercise of

that power. It is assumed that the Fund would not concern

itself with minor measures. To help avoid the error of
attempting to evaluate measures which are not important,

the requirement provides that a majority of the members

would have to be of the opinion that the results of any
given measure are likely to be serious. It then requires
four-fifths of the member votes to authorize official dis-

approval. It may well be that despite this degree of protection against arbitrary action or needless interference
most countries would object to subjecting what they believe

to be purely domestic affairs to international supervision.
If compromise with this view is found feasible, it is hoped

that it takes the form of requiring a larger majority-say 90 percent instead of 80 percent of the member votes,

or, as a last resort, requiring that the disapproval of
the Fund call forth the promise of the offending country

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to reexamine her position in the light of the Fund's
report.

In any case, the discussion which would take place by
an international committee of the character envisaged--men

expert in their fields, international in their outlook, and
scientific in their approach--could not help but prove very
salutary. The educational process to which officials, administrative and legislative, in each country would be subjected in defending specific policies or measures before such
a committee would in itself go a long way toward improving

the quality of monetary, credit and banking policy. It
probably would be necessary for the committee, certainly

during the early years, to be very tolerant of policies
pursued by participating countries. Gradually, however,
there should develop a greater reluctance on the part of
member countries to take measures which do not meet the

approval of the majority of the members of the Fund. The
success of the Fund in this field would depend in large
measure upon the wisdom with which matters of this kind are
examined and the degree of sympathetic understanding they

are capable of displaying
The member countries agree (a) to embark within a year

after joining upon a program of gradual reduction of

existing trade barriers--import duties, import quotas,
administrative devices--and (b) further agree not to adopt
any increase in tariff schedules, or other devices having

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as their purposes higher obstacles to imports, without
giving reasonable opportunity for the Fund to study the
effects of the contemplated change on exchange rates and

to register its opinion. In rendering an opinion the
Fund will make recommendations to which member governments

agree to give serious consideration.

It might contribute notably to conditions tending to
promote exchange stability if participating countries,
particularly those with la rge reserves of foreign exchange,
were to agree to a gradual reduction of duties on imports.
It might be possible to devise an acceptable formula for

general and gradual tariff reduction to a level more in
harmony than were tariff policies of the twentieth century
with the objectives of reducing the causes for international
friction and increasing the standard of living the world over.
Those high tariff policies in the main reflect adherence to

the traditional, crude, mercantilist fallacies. So widely
held are those fallacies, so persistently clung to by persons who should know better, so potent are they in shaping
many aspects of domestic and foreign policy, and so unfor-

tunate in their effects on world peace and prosperity, that
one is tempted to list "mercantilism" or its more expressive
heir "protectionism" as "World Enemy No. 1."

Yet, though there is no doubt as to the evils of crude

protectionist policies, caution must be exercised in attempting to translate a policy of lower tariff schedules

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into an actual program. There is danger of retarding
progress by advocating a trade policy which ignores the
sound basis for the existence of some import duties.
There is too easy an assumption that as much reduction as

possible in all duties is desirable; that any movement

toward free trade is, ipso facto, a good thing for the
world.

In their reaction against the crude protectionist
fallacies that a country with high standards of living
must adhere to a policy of high tariff schedules if it is
to prevent widespread unemployment or deterioration of its

high standard of living, they are inclined to throw the
baby out with the bath and assume that all duties are bad;

that free trade, or rather tariff for revenue only, is the
ideal toward which all enlightened nations should move as

rapidly as possible.

The belief that reduction in all import duties increases

trade and yields a higher standard of living for all countries under all circumstances and in all stages of their
economic evolution assumes that countries are usually

utilizing virtually all their capital and labor; that a
country chiefly agricultural in its economy has as many
economic, political and social advantages as a country

whose economy is chiefly industrial, or a country which
has a balanced economy; that there are no gains to be

achieved by great diversification of output. These assump-

tions, essential to the belief that "Free Trade" policy

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is ideal, are not valid. They are unreal and unsound.
"Free Trade" policy grossly underestimates the extent to

which a country can virtually lift itself by its bootstraps
in one generation from a lower to a higher standard of
living, from a backward agricultural to an advanced indus-

Trialized country provided always it is willing to pay the
price. The view further overlooks the very important fact
that political relationships among countries being what

they are, vital considerations exist in the shaping of the
economic structure of a country other than that of producing goods with the least labor.

The subject of the best tariff policy for a given
country at a given period in its history is a most interesting one, but justice could not be done to it in the space
that could reasonably be allocated to it here. A great deal
has been written on the subject and the interested reader

in his search for sound policy will find that the complexity
of the problem is apt to increase with the profundity of
his reading. Yet one conclusion is certain to emerge from
his study of the subject, namely, that most import duties
are too high, that many duties remain too long, that few
are imposed for sound reasons, and virtually none of them
are re-evaluated often enough by the law-making bodies in

the light of changing needs and conditions.
The value of requiring participating governments to

agree to a general policy of lower tariffs lies solely in

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the recognition that most duties in the tariff schedules
of every country, at their present level, are inexcusable

on any economic, political or social grounds. Their existence merely reflects uncritical adhesion to protectionist
policies or the successful pressure of some powerful vested

interest, or both. It is to place on the defense obstructions to trade, whether in the form of unreasonably high
duties or in any other form that subscription to a commit-

ment of lower tariff policies might be justified.
Yet, it cannot be overlooked that the shaping of tariff
policy has been for too long the prerogative of lawmaking
bodies, and the battleground of legislative maneuvering to
expect the Congresses and Parliaments to subordinate their

authority on such matters to an international body. If
the sugar, wool, wheat growers of the United States, and

the shoe and textile, pottery, and steel manufacturers--

to name only a few of the industries insisting on high
protective duties--were to see in any suggested agency a

definite threat to what they regard as necessary protection
to their industry, they would combine and probably rally
enough support to their crusade to ruin the prospects of
acceptance by Congress of any proposal no matter how at-

tractive the scheme may be to economists, statesmen, foreign
trade associations, college professors and bankers.

It would seem to be a far wiser policy not to attempt too
much and thereby jeopardize any but an innocuous program.

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On this issue, as on no other, prudence dictates compromise.
The most one can hope to get is adherence to a principle

without surrender of any authority. Hence the requirement

calls only for public adherence to the stated principle,
and permission to the Fund to submit a report giving reasons

for its disapproval of an added barrier to trade if the
Fund deems it harmful. If any international agency or
organization wrings more than that out of the American and

other publics, a miracle in economic morality will have been
wrought by this war.

Another possible condition of participation that merits
attention is the agreement that no Government or Central

Bank shall default on its external obligations, or any
part thereof, without consent of the Fund.
This requirement has considerable possibilities for

good. If the flow of private capital from capital-rich to
capital-poor countries is to be stimulated and the flow of
specialized capital among countries is to be fostered,
something drastic must be done to reestablish confidence

of private investors in the integrity of foreign borrowers.
Defaults by governments and states have been in the past

too easy a way out of foreign exchange and budgetary diffi-

dulties. The defaulting country frequently experiences an
immediate gain but unfortunately the long-run losses have

far more than outweighed the gains. If the Fund and the
Bank could be a potent force for preventing defaults (as

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well as keeping interest rates reasonably low), a long
step forward will have been made toward the increased pro-

ductiveness of all countries.
It can hardly be expected that objective decisions on
defaults can be made by the defaulting country or by the
country gaining most by continued servicing of a debt.
To make what takes on the character of compulsory arbitration in debt adjustment an acceptable and workable instrument, the proposed judgment must be that of a large group

of nations, the majority of whom are not directly and
immediately affected by the decision. Consideration of
the pros and cons of a contemplated default by the Fund

would seem to promise that kind of objectivity, and therefore not be a requirement that would stand in the way of
acceptance by any government.

Not to subsidize--directly or indirectly--the exportation
of any commodity or service to member countries without
consent of the Fund.

One of the unfair trade practices frequently resorted
to in the past has been export subsidies. Most countries
have been guilty of subsidizing some exports either by

direct or indirect methods. It is easy for the practice
to grow as there are in every country powerful interests
who because of a monopoly position or political influence,

at the expense of the public, are able to keep up the
price of a product at home by practicing subsidized dumping

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on foreign markets. This device in essence is no different from the use of multiple currencies or special clearing
arrangements except that the gain in the latter case is
shared by more persons. They all aim to undersell a foreign
competitor not by offering the same goods at a lower price,
or better goods at the same price, but by undercutting a
foreign competitor at the expense of the taxpayer of the
exporting country.

It is just such practices that give rise to rivalries
which constitute fertile soil for international friction.
If subsidies to exports are condoned there is no logical

justification for objecting to any kind of trade device
designed to increase exports or decrease imports. The result

would be a repetition of the ruthless fight for foreign
markets that characterized international trade in the

'thirties.
It might be possible to obtain acquiescence among the
member countries not to resort to the more obvious forms of
subsidies without consent of the Fund. Since the Fund would

be a sort of court of appeal, the possibility of subsidizing the export of a commodity or service exists. Yet presumably it would be invoked only under special circumstances.
The fact that approval of the Fund were necessary would be

helpful to governments in their struggle against vested
groups seeking special advantages. Though it will be found

very difficult to get a satisfactory working definition of

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an indirect subsidy, it should be at least possible to define the term so as to apply to the more obvious devices.
The Fund would probably have to permit subsidies to

shipping and air travel. Almost every country subsidizes
these two for military reasons, for economic reasons, and

reasons of national prestige. It is irrelevant that much
of the defense for shipbuilding and shipping based on econ-

omic and patriotic grounds is specious, These subsidies are
so deeply imbedded in custom and policy that it is useless
to attempt to modify them through an agency such as we are
discussing.

Subsidies to tourists, to student voyages, etc., are

of a different character. It may well be in the interests
of all countries, and certainly is in the interests of some
countries, to attract tourists by subsidies of one form
or another. This subsidizing of exports of services seems

to arouse little objection in the importing country (i.e.
in the countries whose nationals do the touring) and can
at least be defended on social and cultural grounds.
Since United States is probably the most generous producer

of profitable touriats, there is an added justification
for attracting Americans abroad by subsidies if necessary,
namely it will help the United States to develop a much
desired "unfavorable" balance of payments through the most

desirable available channels.

All considered it were probably better to exclude "services" altogether from the prohibition of subsidies, and

255

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II-75

save the Fund much trouble. It would, moreover, make it

less unlikely that the requirement would find acceptance by
enough nations.

It may be properly questioned whether an agency of this

character is the appropriate instrument for obtaining fair

trade practices in foreign trade. It might be that some
other agency like a league of nations should be the vehicle,
or possibly dependence should be on a program of multilateral

treaties. However, it does seem that it should be less
difficult to obtain agreement on such matters when the
vehicle is an agency, membership in which has obvious economic

advantages. Moreover, a country could feel it could always

withdraw from the Fund if it deems its interests significantly
harmed by failure to obtain approval of the Fund for a contemplated action.
Restrictions on membership

No restrictions as to membership should be imposed on

grounds of the particular economic structure adopted by any
country.

There are certain to be some persons or governments,

who either out of fear, or prejudice, or dislike would wish
to exclude Russia from participation in an international
undertaking of the character described in the previous pages.
Yet to exclude Russia would be an egregious error. Russia,
despite her socialist economy could both contribute and

profit by participation. To deny her the privileges of joining in this cooperative effort to improve world economic

257
II-76

relations would be to repeat the tragic errors of the last
generation, and introduce a very discordant note in the
new era millions everywhere are hoping for. If the Russian

Government is willing to participate, her counsel in the
preliminary negotiations should be as eagerly sought as
that of any other country, and her membership in both Fund
and Bank equally as welcome.

A socialist economy like a capitalistic economy engages

in international trade and financial transactions which can

be ei ther beneficial or harmful to other countries. In C
fact, because the conduct of foreign trade and international

financial transactions are exclusively the creature of the
government in a socialist economy, there is all the more

reason to attempt to get them to join in a cooperative
attempt to introduce stability in international economic

relationships and a higher level of trade. If for no other
reason than that there are no limits to which a powerful

socialist economy could go if it sought to disrupt trade.
It would be extremely shortsighted not to welcome Russia

to participate.

11-77

258

IV. Composition of the Fund
The Fund shall consist of gold, member country currencies, and
member government securities, in such amounts as shall be indi-

cated by a formula set forth in the Agreements. The total sub-

scription to the Fund shall be the equivalent of at least
$5 billion.
The task which the Fund would be expected to perform would

involve transactions of large magnitude; it therefore should
have large resources available. Moreover, the greater its
resources the more potent could the Fund be in preventing
monetary disruption and in reducing the frequency and duration

of periods of disequilibrium. Considering the likelihood that
the number of participating governments might be at least a

score, a total subscription of the equivalent of several billion
dollars would seem to be both possible and desirable.
To avoid tying up funds that would not be needed for some

time, if ever, the participants could be required to subscribe

only 25 percent of their participation in cash. An additional
25 percent could be subscribed in obligations of the participating government. These obligations would yield revenue to

the Fund, and would also supply a source of additional funds to
be tapped if and when needed. They would also provide the Fund

with the means of conducting open-market operations in any given

country when desired. To reduce the cost to participating
countries, it might be found preferable to make the securities a
renewable three to five-year note, rather than a long-term bond,

thus reducing the interest rate and increasing their marketability.

11-78

259

The remaining 50 percent of the subscription should be paid
in such installments and in such form as shall be determined
from time to time by the Fund.

The Fund would need local currencies and gold to carry on

its operations. The provision that half the initial payment of
25 percent be in gold and half in local currencies takes care

of that, and also makes participation easier for those countries

having little gold. For a few of the countries--e.g. the United
States--gold and local currencies are synonomous for purposes

of international transactions. One of the objectives of the
Fund is to increase the number of countries about which that
could be said.

In view of the fact that the gains from participation in
the Fund would not take the form of a distribution of substantial profits, the sum each member country should subscribe can

hardly be left to the decision of each country. It is hoped that
the Fund would show an annual profit but the purpose of the
Fund is not to make profits but to help achieve much more important

objectives that are not susceptible of measurement in terms of
money profits. The Fund would be a cooperative enterprise oper-

ated for the benefit of all the participating nations, and each
participant should subscribe at least its reasonable share of
the total capital necessary, though it could subscribe more if
it wished to do so. The share of the total each country subscribes should be determined by some agreed upon formula which

would give due weight to various pertinent considerations.

260
II-79

There follows an illustrative formula that attempts to
measure the minimum amount of funds each participant should be

required to subscribe. The items listed are those which seem
most pertinent, and the weights ascribed to each attempt roughly

to reflect the importance of that item to the benefits that
might be expected to result from participation and the ability
to contribute to the Fund's capital.

100 points for every billion dollars

1. Gold holdings

#

If

2. Gold production

If

50
"

3. National income

2

11

4. Foreign trade

25

5. Population

10

6. Foreign investments

25

7. Foreign debts

10

hundred million

If

If

11

billion dollars
11

Applying the above weights to the situation in some selected

countries, the following approximate scores would result:
United States

1,200

U.S.S.R.

400
200

United Kingdom

300

China

Canada

100

Mexico

25

Netherlands

200

Brazil

25

Colombia

20

30

Norway

Converted into dollars, the contributions would be something

like the following:
TABLE

(In millions of U. S. dollars)
(Though the contributions or investments would be in the

form of gold or local currency, they are converted, for convenience,

into U. S. dollar units in the table below)

11-80

United States
England

U.S.S.R.
Canada

Netherlands

2,000

261

Argentina

50

500

Mexico

50

400

Brazil

50

Colombia

25

Cuba

25

50

100

The purpose of the table is merely to suggest a pattern of
quotas for discussion, and not to lay down any precise pattern
or formula. An attempt was made to present a pattern of quotas,
the general character of which probably could be defended on

logical grounds, but it is certain that a more appropriate
formula could be worked out if several minds focused on the
problem.

If only 50 percent of the participation were called for,
and only half of that in cash, the amounts indicated in the
above tables would not be onerous. The United States would be

called upon to subscribe $500 million in cash and Cuba only

$12-1/2 million. That would be the minimum. They could, of
course, subscribe more if they wished. Experience would show
whether the total was much more than was needed, or much less.

If more were needed the securities could be converted into

cash and the remaining half called in. On the other hand, if

after long experience it is found that even the initial payments were greatly in excess of needs, it would be an easy

matter to return the excess. Since the Fund should be ample
to take care of periods of special stress, many years would
have to pass, however, before enough experience is acquired to

262
II-81

determine the most appropriate size of the Fund. It would

certainly be better in the beginning to err on the side of having too much rather than not enough. The effective strength of

the Fund and its ability to instill confidence in the currency
stability of its participants will be enhanced with the ease
with which the Fund can be expected to meet all legitimate

claims on its resources. A sum of several billions of dollars
does not, therefore, seem inappropriate to the task.
Inasmuch as some of the assistance the Fund can give to

member countries is directly proportional to the sum of parti-

cipation of that country, there will be a strong incentive for
some countries to make their participation larger than the scheduled amount.

The Bank for Reconstruction and Development of the United

and Associated Nations could be called upon to participate to

the extent of possibly $100 million.

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II-82
V. Management

Where control of the Fund shall be vested is a matter of
paramount importance in the formulation of a workable plan.
The magnitude of the Fund, the broad scope of its likely powers,

the requirements for continued eligibility of participants, together make the question of situs of control important.
The management of the Fund should be vested in a Board of

Directors consisting of the representatives appointed by the
member governments, each government to appoint one representative.

It would be easy to reach agreement that the most convenient

and simplest device would be to vest control of the Fund in a

board of directors, to consist of representatives appointed by
member governments, each government appointing one representa-

tive. It probably would be desirable to have each government

appoint an alternate as well. In view of the technical nature
of many of the problems, the governments might wish to select
as alternates men who would be more qualified than are likely

to be the representatives to take up the kind of problems that
would most frequently come before the Fund. The representatives
would probably be selected from more responsible posts than the

alternates, and would likely be concerned with the arger and

less technical issues involved in decisions.
The Board shall elect a chairman and a small operating committee.

With a body so unwieldy as it would likely be with representatives from each government, added to the fact that many of
such representatives could devote only brief periods away from

their home governments, it is virtually essential that the dayto day-operations of the Fund be handled by a small operating

11-83

committee of representatives. Such a committee would be able

264

to devote full time to the task of managing the Fund, and
would, of course, have to be adequately compensated. The

election of this operating committee by the member participants would insure the selection of a competent group and the

brief period of their tenure of office before reelection would
assure also a responsiveness to the wishes of the board.
Delegation of authority by the whole board to the committee on
many matters could be safely made, leaving larger policy decisions

to be referred to the entire board. It is to be expected that
the operating committee would have the assistance of a competent

technical staff.
If a Fund were to be established with anything like the
powers and resources outlined in this report, it would need the

services of a large staff of the best experts available.
Nothing would injure the changes of effective and successful

operation and of making a major contribution to the solution
of some of our most troublesome international economic problems

than mediocrity in directors and technical staff. A board the
size of the one recommended here can, of course, assimilate
without serious damage some stuffed shirts, some narrow-minded

nationalists, and a few bankers with counting house ideals.

But the board will have to include more than a sprinkling of
economic statesmen, forward looking, of broad vision, compre-

hensive experience world outlook and tenacity of social purpose.

The technical staff will have to be headed up by experienced
analysts with a thorough knowledge of monetary theory and

11-84

265

international economics, with intellectual
integrity and aggresquota
siveness, and also include a generous sprinkling of eager, able,
young men who have been at or near the top in their scholastic
achievements and technical writings. The United and Associated
Nations can produce plenty of such men.

In all voting by the board, each representative should have one

hundred votes, plus one vote for every million dollars of gold
(computed at $35 an ounce) turned over to the Fund, plus one

vote for the equivalent of every $2 million of local currency
originally turned over to the Fund.
There would be little difficulty in reaching agreement
that some such set-up as the board working through a committee

as outlined above would provide a satisfactory working arrange-

ment, but the real problem is how to distribute the voting
power. If each member of the board were to be given an equal

vote, then a small country that invested one million dollars
would have as much power in making decisions as a country that

has subscribed a hundred or a thousand times that amount. With

the possibility that the number of small countries participating
will be much greater than the large countries, a one-vote-onemember arrangement is palpably unwise. On the other hand, to

accord voting power strictly proportionate to the value of the
subscription would give the one or two powers control over the

Fund. To do that would destroy the truly international character of the Fund, and seriously jeopardize its success. Indeed,

it is very doubtful if many countries would be willing to

II-85

266

participate in an international organization with wide powers

if one or two countries were to be able to control its policies.
It is clear that the voting power must be so arranged as
to steer between these two evils. This might be accomplished
by working out some compromise between the two bases 01 voting

power referred to above. By giving each member 100 votes plus

one vote for every million dollars of gold invested in the Fund,

plus one vote for every $2 million of local currency, a satisfactory distribution of control might be approximated. Thus,

if the United States subscribes $1 billion--half in gold--it
would have 100 plus 500 plus 250 votes, or a total of 850 votes,

whereas a country contributing $10 million, half in gold, would
have 100 plus 5 plus 1 votes, or a total of 106. With such an
arrangement ten small countries could outvote the United States.

If any country felt the arrangement agreed upon did not give it

an adequate share of control, it could increase its contribution.
A country should have the privilege of replacing, wholly or

in part, its securities, or currency with gold. The number of
votes its representatives can cast would alter accordingly.

This provision would supply some flexibility in the
assets a country turns over to the Fund, and also provides a
means whereby a country could increase its voting power. How

important the provision might prove to be is uncertain, but
in the beginning at least it would appear desirable to introduce

flexibility wherever possible.

267
II-86

All decisions, except where specifically provided otherwise,
should be decided by a simple majority of the votes cast.
To give adequate protection to each country, most of the
important decisions could be made to require more than a simple

majority of the votes.
The President of the Bank should be a member of the Board, and
would have 100 votes.

Because of the interdependence of the two institutions-the Fund and the Bank--close liaison and opportunities to harmonize policies would be helpful. Both agencies would have

broad objectives, both would be international in their outlook,
and both would be motivated by the desire to promote worldwide

peace, prosperity, and stability. Each would be undertaking
responsibilities that call for analyses and judgments of economic situations and trends. The operations of each would affect
the other, and the decisions of each should be partly based on
the knowledge, plan and judgment of the other. There, therefore,

is much to be gained by close liaison between them. That is
why the head of each should be a director of the other.
To avoid cumulating voting power, however, the Bank should

not be able to cast votes in excess of the minimum, irrespective

of the extent of its monetary participation.

268

PART III

Part III

III-1

269

Bank for Reconstruction
of the United Nations
and Associates
I. Purpose

The objectives of the Bank are: To provide capital for the
economic reconstruction of the United Nations; facilitate a
rapid and smooth transition from a war-time economy to a
peace-time economy in the United Nations; supply short-term
capital for the financing of trade among the United Nations-where such capital is not available at reasonable rates from
private sources; and help strengthen the monetary and credit

structures of the United and Associated Nations by redistributing the world gold supply.
To eliminate the danger of world-wide crises that are

financial in origin, and reduce the likelihood, intensity
and duration of world-wide economic depressions; raise the

productivity and hence the standard of living of the peoples
of the United Nations.
To promote a greater degree of economic cooperation and

collaboration among the United Nations; make easier the solu-

tion of many of the economic and political problems that will
confront the "peace conference".
To enhance the opportunity throughout the world for a

healthy development of democratic institutions; help assure

a distribution at fair prices of important scarce raw materials; and promote stability in prices of important commodities.
Finally, the Bank would provide for the financing and
distribution of foodstuffs, clothing and other essential
commodities that will be needed in large quantities for the
relief of populations devastated by war conditions.

270

III-2

270

A perusal of the outlined objectives will reveal that
they constitute quite an ambitious list. They include some
mighty important purposes. Yet, given the resources and
powers suggested below, and managed in a spirit appropriate

to the importance of the task, there is every reason to
expect that substantial progress can be made toward each of

the goals listed.

The objectives of the Bank, it will be noted, are similar
in some respects to those of the Fund, but a careful examina-

tion will reveal that in their most important aspects they are
different. The Fund is designed chiefly to prevent the disruption of foreign exchange and to strengthen monetary and

credit systems and help in the restoration of foreign trade,
whereas the Bank is designed chiefly to supply the huge volume

of capital to the United Nations and Associated Nations that
will be needed for reconstruction, for relief, and for economic
recovery.

The end of the war will find us confronted with an unprecedented demand for capital. The actual physical destruc-

tion caused by the war in Europe, Asia and Africa will be

stupendous. Factories and public works will have to be rebuilt;
hundreds of thousands of homes and farms will have to be re-

habilitated; public utilities, transportation systems, which
have been destroyed or deteriorated, will have to be reconstructed and improved. Millions of f armers will need to be

supplied with seed, fertilizer, livestock and new equipment.
Monetary and banking reserves will be depleted. Finally, most
of the industry in Europe now geared to supply war demands will

III-3

271

need to be transformed to produce peace-time goods. All this

will require billions of dollars. If a substantial portion
of the capital needed for this tremendous task of reconstruction can be supplied, we can help prevent social disintegration and political disturbances in the defeated countries, and
also have an excellent chance of preventing the development
of a post-war depression.

To supply this capital at rates of interest low enough
and period of repayment long enough to give the borrowing

country reasonable hope of being able to repay the loan, is
the prime task and justification for a Bank of the character
envisaged in this report.
It must be recognized that private capital will not perform

this function. It has suffered too many losses. It has been
too severely discouraged by depreciating currencies, exchange

controls and defaulting governments, to justify the hope that
investors will lend large sums to a foreign country, except
possibly at rates of interest which would make such loans
extremely dangerous because of the burden they would put upon

the borrowing country. Only a non-profit institution with
enormous resources can afford to undertake the task of supply-

ing adequate amounts of capital on the gigantic scale that

will be necessary after the war. Only an international governmental organization can make such loans under the kind of conditions which would help promote and sustain prosperity rather

than sow the seeds for future trouble.
Once the combined operations of the Fund and the Bank serve

to restore confidence in the continued stability of exchanges,
and freedom from restrictions on withdrawal of profits, private

272

III-4
capital will probably flow in large volume to areas badly in
need of capital. At the beginning these foreign investments
will take more likely the form of branch plants, complete
ownership of mines, factories and plantations. With the
restoration of confidence they will take on more and more the

form of loans to governments, to municipalities and finally
to foreign corporations. It is to free the tremendous accumula-

tions--past and future--of private capital to seek profitable
employment in countries that sadly lack capital that much of
the activity of the Bank should be directed. To do so the

Bank must pioneer with loans private capital is as yet justly
too wary to undertake, while at the same time both Fund and

Bank seek to develop those conditions in which trade and productive capital movements can be expected to prosper.

II. Powers

111-5

273

To help carry out these objectives, the Bank shall have
the power to:

Make short-term and long-term loans to any participating government and to any political subdivision or business enterpri se

therein, providing the servicing of the loan is fully guaranteed
by the national government.

To assure the most effective use of the Bank's resources

it would probably be desirable to permit the extension of longterm financial aid to any government only after certain conditions are made. These c conditions might be as follows:

(a) First, it would have to be reasonably certain that funds
cannot be borrowed by the government in question from

private investors except at high rates of interest.
The Bank should carefully avoid competing with private

investors when private investors are willing to invest

or lend at reasonably low rates of interest. It will
doubtless be possible for a number of the governments to

borrow from foreign investors at low rates of interest,
but for many of the countries such borrowing will be
impossible until confidence is reestablished in the stability
of the currency and in the social and economic stability
of the borrowing countries.
(b) A second condition might well be that the loans can be
made only after a careful study and written report has
been made by a competent committee on the merits of the

project and the loan. This condition would prevent
hastily conceived action and also provide a record for

the basis of any action taken by the Bank. It is a

III-6

274

procedure which would be followed in most cases by the

Bank anyhow, but because of the non-profit nature of

the organization and the fact that it is a cooperative
undertaking, such studies and reports are especially
important.

(c) A third condition might be that financial aid should be
forthcoming only when the committee's report definitely

indicates that the loan would serve directly or indirectly
to permanently raise the standard of living of the borrowing country. This provision would seem to be desirable
in order to avoid loans that would finance armaments or
loans that would permit careless budgetary practices, or
loans to meet a deficit created by unwise fiscal policy.
Unless a loan is productive in a broad and significant
sense, it would seem better that the borrowing country
should not be able to make the loan. For it to do so

would in such case only increase its difficulties later
on, and also defeat the purposes for which the Bank would
have been established.

An exception to the above could, of course, be emergency

relief loans. Immediately after the war there unqi estionably
would be need for provision of food and clothing and services

which are definitely of relief character. Such financial
aid would be vitally necessary in many countries to prevent

social deterioration and political disruption as well as
on purely humanitarian grounds. Where such financial assistance

is given in the form of a loan and hence financed by the Bank
it would seem just that the rate of interest charged should
be only nominal.

111-7

(d) Another condition of the loan that would seem to be necessary is that the funds borrowed are not to be used for

275

purposes of repayment of an old loan. Unless some such

requirement is imposed the funds of the bank will be
sought too frequently for purposes of bailing out defaulted
bondholders. Nor would a refunding loan seem to fall in
the category of productive loans. What the Bank is

interested in is in expanding production, not in assuring
past investors of the security of their investments.
Nonetheless, there will be cases in which a refunding
loan at a low rate of interest might be of considerable
help in relieving pressure on the country's budget. Consideration might be given to the possibility of permitting
loans for that purpose under such circumstances providing

four-fifths vote of the board of directors is obtained.
However, once this possibility exists it would open the
door for sluicing away a large part of the Bank's assets
in loans which would contribute only remotely if at all
to the objectives of the Bank.
Finally, loans should be made only at low rates of
interest with the schedule of repayments varying with the

project. The conditions of the loan ought never to be
such as to impose a burden on the borrowing government

either on its budget or on its balance of payments situa-

tion, which creates economic difficulties for that country.
The lower the rate of interest the less difficulty will
the c country have in repaying the loan and the less risk

will there be in making such loans. Low interest rates
will have the effect of encouraging countries to borrow
for productive purposes and make it possible at the same

III-8

276

time for them over a course of years to build up their
credit and thus encourage private investment. The greatest
contribution that this Bank could make toward world

recovery is that it could go a long way toward strengthening monetary systems of certain countries and increase the

productivity of those countries, and thereby stimulate the
flow of capital from private sources to those countries.
An American corporation, for example, will much more

readily undertake to finance the construction and opera-

tion of a plant in a foreign country if it feels that there
are no undue burdens on the balance of payments imposed on

the country and if, further, it sees concrete evidence of
increasing productivity of that country arising from funds
borrowed at low rates of interest and for long terms.
The gain that the United Nations would hope to obtain

from the extension of long-term credits obviously does not

rest in the interest payments that will be received. The
gain is of a much more important character. It is the
increased productivity, the heightened standard of living
and improved well-being of the United Nations that would
be reflected in increased trade and higher level of
business activity everywhere. These desired goals can

be attained more easily if the interest rates charged on
loans are kept lower and if further the terms of payment
are made such as do not bear too heavily on the borrowing

country. It would be a grave error if the loans to the
member nationals were to be evaluated according to commer-

cial private banking principles. There are a number of
reasons why the more ability to pay the highest interest

277

III-9
rate does not reflect the best international use for
capital under conditions which will prevail during the
post-war decade. That does not, of course, mean that
loans can be made irrespective of a careful evaluation

of their productivity. On the contrary, it is hoped that
loans will be based on more careful studies of their =
utility than has ever been true with most private investments made to foreign countries. But it does mean that
the studies of the merits of an investment is taking proper
cognizance of the economic, social and political ramifications involved in the particular circumstances of any
given loan.
Whenever possible the Bank should guarantee loans made by private

investors, instead of making the loans directly, provided:
(a) The rate of interest is not in excess of (say) 4 percent;
(b) Not more than 80 percent of the principal and 50 percent
of the interest is guaranteed;
(c) The loan is not for the purpose of repayment of an old
loan.

In order to stimulate the flow of private capital and also
to make the Bank's capital go as far as possible, it would be
desirable wherever possible for the Bank to utilize the method
of guaranteeing loans made by private investors instead of

making the loans directly. This does not mean that the Bank

would take the greater portion of the risk but in return for
that it could make certain that the loan would be made under

conditions and terms which received its approval. It would
seem that such terms should include a low rate of interest
probably not to exceed 3 or 4 percent. As stated above, the

lower the rate of interest the less likely will there be a
default. The difference, for example, between a 3 percent rate

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278

of interest on a 25-year loan and a 5 percent rate of interest
on a 15-year loan is large. A country borrowing, say, $50 million for a 15-year period at 6 percent interest with straight
line amortization would have to raise $ million a year for
its budget and burden its balance of payments with that amount

compared with $ million a year on its budget and balance of
payments if the loan were at 3 percent and for a 25-year period.
Another reason for a low rate of interest is not to encourage

private capital from being reckless in the kind of loans it
wi shes to undertake. With the rate of interest high and with
the government sharing a large part of the risk, there may be
a tendency for loans to be made for purposes and under circum-

stances which in the long run would have unsatisfactory consequences.

For much the same reasons it would seem desirable for the

Bank not to guarantee all the loan or service charges but to
limit its guarantee to a maximum say 80 percent of the principal

and 50 percent of the interest. There should, of course, be

flexibility in this arrangement with broad authority left to
the Bank to adjust the terms according to what it regarded to
obtain the best results.
The provision that the loan should not be for the purpose
of repayment of an old loan is based on considerations similar
to those discussed a few pages back.

No extension of credit should be extended by the Bank to any

country, the National government of which is in whole or partial
default of a foreign loan, unless:
(a) The defaulted loan was made between Allies in a common
war, or

III-11

279

(b) The defaulted government has agreed to renew service of
the defaulted debt on a basis worked out by a special
committee appointed by the Bank for that purpose, or
(c) Ninety percent of the member votes approve the loan.

If governments in default were made eligible for loans,
again the danger would exist that the funds of the Bank might
be used for the benefit of old bondholders and creditors rather

than for the purpose of increasing the standard of living or
productivity or trade of the borrowing nation. On the other
hand, there are many countries in default and a number of them

may be the very ones in need of financial aid. It would seem,
therefore, that they should not be excluded from the possibility
of borrowing provided certain conditions are present. For
example, the loan in default may have been made by the Allies
in a common war. This would apply, for example, to the British,
French debts to the United States. It would seem that such
loans because of their character and large magnitude should be

excluded from the limitation.
A second condition, and one that has great possibilities

for good and some possibilities for evil, is that a loan might
be permitted to a government in default provided that government

has agreed to renew the service of the defaulted debt on a basis
worked out by a special committee appointed by the Bank for that

purpose. A splendid job could be done in facilitating debt adjustments. The committee could approach the problem with a

great deal more objectivity than could be true of a bondholders'
committee representing the creditors and working with a committee

representing the debtors. It could in its recommendations take

III-12

280

a broader point of view and one that might well leave both the

debtor and creditor nation better off than would be the case if
a debt adjustment were to be obtained either as a result of
political pressure of one kind or another, or because of an
inducement offered to the defaulting government in the shape

of a new loan to be made in effect only if the bondholders give
their approval to the terms of adjustment.
With a committee of the Bank making the recommendations the

loan could be forthcoming if the defaulting government accepted
the committee's recommendation of terms of adjustments irre-

spective of whether the bondholders did or did not. As it is
now the bondholders are in a position frequently to prevent the
government from extending any credits on the grounds that they

are not satisfied with the terms of adjustment offered by the
defaulting government.

In some cases it might be extremely difficult to work out
an adjustment with the defaulting government and it might be

desirable in such cases to still permit a loan to be made, provided almost all of the member votes approve the loan. It might,
therefore, be feasible to permit loans to the defaulting governments provided 90 percent of the member votes approve the loan.

Loans made for the purpose of providing metallic reserves or
otherwise strengthening monetary systems of the borrowing country
should bear lower rates of interest and longer terms of repayment
than loans made for other purposes.

There will doubtless be opportunities to make loans for the
purpose of providing metallic reserves or otherwise strengthening the monetary systems of the borrowing country. These loans
could have a very salutary effect both because they would help

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promote monetary stability and would encourage the flow of

private capital. Loans of that character should, it seems, bear

a specially low rate of interest for three reasons. In the
first place, such loans do not yield profits to the borrowing
country of a character which are east ly measurable. The charge

on the budget of the servicing of the loan is a burden that
can be justified only on general grounds. The encouragement
to make loans for such purposes would be greater were the

interest rate very low. Secondly, it would help defeat the
purpose of the loan if high interest rates were charged, inasmuch as the burden caused by the loan would in that case tend

to vitiate rather than to strengthen the benefits the loan
might otherwise have. Finally, it might be said that in many
cases the risk involved in lending metallic reserves for a
monetary system under proper circumstances are less than other

types of loans. For these reasons it would seem that an
interest rate even as low as 1 percent on loans of metallic
reserves for strengthening the country's monetary system might
be in order.
Note Issuing Power.

To increase its resources, the Bank is given the authority
to issue its own non-interest bearing currency notes. The notes
might be made redeemable on demand in gold. The security for

these notes should be the obligations of the participating
governments or those of an intergovernmental corporation ade-

quately secured, equal to 100 percent of the note issues, provided there is maintained in the Bank a gold reserve of 50 per-

cent of the note issue. The provision that the obligations of
any participating government shall not constitute backing for
more than 10 percent of the note issue, is included to give added
strength to the note issue.

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282

Through its power of note issue, the Bank can substantially
increase its cash resources. There could hardly be much question as to the soundness of the notes in view of the security
required behind each note. The notes would be secured by

100 percent obligation of the borrowing country, plus 50
percent gold reserves, plus all other assets of the Bank,
including obligations of all participating Governments. The
notes should be as good as gold and should serve as a supplementary means of international payments.
The reason for suggesting that the Bank should be given

the authority for the creation of a new currency unit lies
chiefly in the fact that such authority would have, as indicated above, the effect of substantially increasing the
loanable funds at the Bank's disposal.
A New International Currency

We frequently hear expressed a desire or hope for a

new international currency, but the specific nature of the
new currency is never described, nor are the gains that are
presumed to result from such a currency ever stated in
meaningful language. They are either taken for granted or
referred to only in the vaguest of generalities. So much

misunderstanding of the nature and utility of a new international currency seems to prevail that it is probably
worth attempting to indicate the limits of usefulness possessed by such a currency. The disinterested reader can
omit the next few pages.
There are some persons who seem to think that all
foreign exchange problems would be solved if only all coun-

tries adopted the same international unit for use in

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283

international transactions. A little thought will demonstrate
how absurd that belief is, The fact that Canada adopted a
"dollar" unit containing 100 cents and having the same de jure
gold content as the United States dollar, did not prevent
the adoption of foreign exchange controls in Canada nor did
it keep the United States dollar-Canadian dollar exchange
rate from moving, any more than did Australia, South Africa
and New Zealand, by adopting the same unit as England,

prevent the value of the currencies of those countries from

changing in relation to the British b sterling. There are
innumerable instances of different currency units keeping
the same value, in terms of each other, for many years; and

other instances of similar currency units beginning with
identical values and only to have those values change greatly.
Thus, the pound sterling hovered around $4.86 for twenty
years (1893-1914), and the Swiss franc was about 20 cents for

forty years; whereas, the exchange rates between the British
L and Australian 6 and New Zealand To and the Egyptian b

have moved greatly notwithstanding the fact that to begin

with they all were the same unit, not only in designation
pound sterling--but in the sense that their value was 1 to 1.
The value of any currency in terms of any other country
is a consequence of a complex of monetary and economic forces,

changes in these forces influence the value of one currency

in terms of others. The adoption of a new international
currency would not modify those forces one whit. If all
of the Western Hemisphere were to adopt the "dollar" as

their own unit of currency, it would not be long before it

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284

would be necessary to distinguish from the "U. S. dollar",
the "Mexican dollar", the "Colombian dollar", etc., because
the exchange rates between those currencies had moved away

from the 1 to 1 ratio. In fact, even now there are a number
of "dollars" in use in the foreign exchange systems of the
American Republics. The adoption of the same unit of currency no more eliminates foreign exchange problems than

would the general adoption of Esperanto solve international
political problems or no more than does the use of a common

language, e.g. Spanish, eliminate international political
problems between all Spanish-speaking nations.

Occasionally, one hears expressed the view that if only
there could be created some unit of currency that could be

universally used in trade--"a trade dollar" or "export dollar",
or any unit with a new name--considerable advantages in trade

and other international transactions would result. Unfor-

tunately, this view is fallacious. The obstacles to trade
do not lie in the fact that different countries use different
units of currency. Insofar as currency has anything to do
with obstructing trade, it is the scarcity of foreign exchange
and the variations in exchange rates which are responsible.

Neither of these two obstacles to trade will be dissipated
by the adoption of a new international unit of currency.
There are, it is true, possibilities of developing machinery
which will make foreign exchange more plentiful to countries
that lack adequate foreign exchange, and there is also
machinery which may be developed to reduce the fluctuation

in exchange rates. The proposal here made for the Fund and
the Bank is designed to help achieve those very objectives

among others. Neither proposal involves, or needs, or is
dependent upon the adoption of an international unit of currency.

111-17

We already have an international medium of exchange,

285

namely, gold. An ounce of gold .999 fine is the same in

United States as it is in China or South Africa or Iceland.
Any exporter or importer or banker or investor can liquidate
a monetary debt with gold just as easily as would be possi-

ble with a new international unit. Such difficulties as
exist in the use of gold as a medium of international exchange lie in difficulties imposed by war conditions. In
peace time nothing could be simpler than to send or receive

gold, or send or receive dollar or other exchange convertible into gold.
Some who clamor for a new international currency to

replace gold would concede this, but claim gold is too expen-

sive to be used. This is quite another matter. It may be
possible to develop a satisfactory international medium of
exchange that costs less to produce than more gold, but

certainly not significantly less than gold already in monetary stock. It is important to remember in thinking about
this subject that the monetary gold stock of the country
has already been paid for. It is very inexpensive to use the
gold already in monetary stocks. Even the cost of shipping
from one country to another can be avoided through development of earmarking. The only expense of using gold already

mined is the small value that gold would have for industrial
uses if it had no monetary value.

The situation is quite different with respect to further
additions to the gold stock and more complex. Obviously
there is a real cost as well as a monetary cost involved in

mining and refining gold. Insofar as the gold would not be
produced had it only commodity value, and insofar as the

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286

labor and material used in gold mining would be used for
some other purpose, it is true that additions to our mone-

tary gold stock is expensive. The solution to that, however,
is simple--namely, just limit the addition of newly-mined
gold to the world's monetary stock. This is not the place

to discuss the method; suffice to say it is entirely feasible should it ever be deemed desirable. There are some
advantages and disadvantages to the proposal, but it is
entirely possible that the time may come when the advantages may outweigh the disadvantages. In any case, the

utility of additions to the world's monetary stock is a
separate question from that of use of existing stocks.
There is no advantage in substituting a new medium of

international exchange for existing gold--even if it could
be done--and I am confident it could not be done. But it
may be worthwhile giving the Bank note-issuing powers--

based on some gold reserve--solely in order to make the
world's monetary gold stock do more work, and at the same

time help correct the maladjustments in its distribution.
To be sure, the United States already does just that
when for one reason or another, by one method or another it
increases its supply of currency and demand deposits. The

only difference between what the United States (and virtually
every other country) already does, and what it is proposed
the Bank shall do is that in the United States note issues
are regulated by the law of the country, whereas the proposed note issues of the Bank will be regulated by the bylaws of the Bank as drawn up by the member Governments.

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III-19

The belief previously referred to as being held in
some quarters that a common unit of currency will solve
the world's foreign exchange problems, and help promote

foreign trade in goods and services, and the international

flow of capital does not concern itself with either the
scarcity of gold, or its maldistribution. It seems to
take the form of something much less intelligible. It
assumes that sooner or later a new international unit will
be adopted by many countries as a substitute for their own
currency.

The belief that countries will replace their own currency in favor of a currency to be used by all, or by a
group of nations, is based on a fundamental misunderstand-

ing of the factors which determine the value of any currency.
So long as most countries insist on shaping their own mone-

tary policies so long will it be impossible to replace local
currencies with a new international currency. The adoption
of a common currency by several countries is possible only
if they each surrender separate sovereignty in monetary and

credit policies in favor of sovereignty exercised by one
over all of them, or by an international organization. For
example, it was impossible for the states in the American
colonies to have a common currency with a common value until
the United States was formed and the Federal Government given

sole authority over currency. Even then scores of different
bank notes existed, many of them with changing val ues, because the State rather than the Federal Government exercised

sovereignty in matters of bank note issue. It was only
until the Federal Government became supreme in the matter of

all note issues that the United States was able to keep all
its bank notes at par.

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III-20
But, it may be asked, would not the use of a new inter-

national unit as a supplement to local currency facilitate
international trade and finance? The answer is an unqualified "No".

A "trade dollar" or "Demos" or "Victor" or "what-haveyou" unit of currency supplementing the United States

dollar, whether of the same or different value, would no
more help foreign trade than would the adoption of a new
flag. The only difference in trade between Massachusetts
and Texas and trade between Massachusetts and Mexico--aside

from tariffs--1s that in the first case both buyer and
seller deal in dollars only, whereas in trade between
Mexico and United States two currencies are involved--the

Mexican peso and United States dollar. The supply of either

currency to either country would be no different than it
could be without it, therefore, the matter of supply and
demand for currency can be ignored in this discussion. An

importer, exporter, bank, or a tourist has simply to make
conversions from one currency into another in his transac-

tions. Were it possible to eliminate by use of an international currency unit the arithmetical labors involved
in the conversions, it would indeed be a convenient device,
though by no means a very important one. Unfortunately,
however, the use of a new international currency unit does
not obviate the necessity of calculating conversion values

any more than does the use of gold in settling international
transactions.

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III-21

Let us, for example, consider the case of a tourist.
As it is now, when an American travels to Mexico he converts his dollars into Mexican pesos, when he enters
Colombia he converts his dollars into Colombian pesos, and

when he goes to Brazil he converts his dollars into milreis,

etc. Yet, if there existed a new international unit of
currency he would be no better off; his purchases and sales
would be consummated with no less inconvenience. On the
contrary, he would have to make more calculations and more

monetary adjustments in his price judgments. For example,
upon leaving the United States he would have to convert

his dollars into the new international unit and then when
he came to Mexico he'd have to convert the international
unit into pesos just as he would have had to do had he

carried with him dollars instead of an international currency, since most prices in any country are expressed in

terms of the local currency unit. Only this time, if he
wanted to judge the value of an article tagged, say 50 pesos,
he would have to make two mental conversions instead of

one because most of his life he has been dealing in dollars
and cents, not in a new international currency. Then when
he enters Colombia he would have to again calculate conversions and again make the necessary mental adjustments

in evaluating his purchases. It would be possible, of
course, to have price tags or price schedules in shops
and hotels frequented by tourists expressed in the inter-

national unit, but such a practice would be a nuisance to
the seller and would be only a slight convenience to the
buyer.

Nor does a buyer of imported goods purchase those

goods in one country rather than in another because of ease

111-22

of an arithmetical calculation. Where there is any difficulty and the seller meets with any sales resistance on

this score, he can easily overcome it by quoting his price

in the buyer's currency even if a bill is to be paid in
seller's currency.
Is there then no advantage to be obtained from the

adoption of a new international unit of currency aside
from the advantage of increasing the bank's lending resources
described earlier?
Yes, there is one advantage, though of minor importance.

It is in the realm of economic research. A universally
recognized international monetary unit of account would

be helpful in the presentation of those statistical series
which are pertinent to international comparisons and of
use in discussions involving international comparisons of
quantitative data measured in money terms. For many purposes and in many media it would be convenient to set up
tables that involved summation of money values in more

than one currency. It would also prove useful in statistical data involving comparisons of various money values

over long periods of time. It would make easier certain
significant comparisons in cases where values set in terms
of a local currency which had undergone substantial changes

in purchasing power relative to other countries.
Altogether, the introduction of a new currency unit
would not be of sufficient importance to warrant its

introduction at this time, were the Bank not to be estab-

lished with note issuing power. But if it is to be established and given the authori to issue notes, what unit
shall it be?

290

111-23

It would probably be preferable to adopt an entire
new unit. The adoption of a new international unit of
currency of account would probably meet with little opposition, whereas an attempt to use any one of the existing

currencies, such as dollars, sterling, or franc for that
purpose, would be opposed on the grounds that it would
seem to give the country possessing that currency some

slight advantage either in international publicity or in
trade. There are deemed to be some national prestige
values and possibly slight economic gains in trade and

financial transactions that accrue to a country having a
currency that is widely used as an international unit of
account. For that reason a new unit belonging to no
country would be more welcome to most countries than the

unit of any selected country.
Obviously, a new unit of currency would have to be

defined. It would have to be fixed in terms of something,
whether by international agreement or by general acquies-

cense, or unilateral action. To set the value of the new
currency unit in terms of some existing currency has the
disadvantage of subjecting the new unit to the variations

of the currency to which it is tied and also raises the
question of "favoritism". A unit of account does not have
to be set in terms of gold. It could, of course, be set
in terms of some commodity other than gold--tin, platinum

or any material. It could even be set in terms of an
average basket of goods or an aggregate of goods. But

examination of the various possibilities will reveal that
the only practical solution is to set the new currency unit
in terms of a given physical volume of gold.

291

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III-24
For convenience of arithmetical calculation it would
probably be well to define the new unit as being equivalent
to 14.62 grains nine-tenths fine. This would make the new

unit worth 50 U. S. or 10 yuan or 2 S. at current rates of
exchange and at present price for gold in the United States.
Conditions to be imposed on borrowers.

It is hoped that the Bank in making loans would impose

no condition on a loan as to the particular country in which
the proceeds must be spent. To do so would not be in accord
with the objectives of the Bank and the principles which under-

lie its creation. A borrowing government should be able to
spend the borrowed funds in any of the participating countries.
The participating countries are all members of the Bank, and
even where a country spends the proceeds of a loan in a single
country the flow from that expenditure ramifies to other coun-

tries. Therefore, any restrictions on the source of expenditure should be made only where very special circumstances

seem to justify such action.
One of the conditions that might be given consideration
is the provision that no loans shall be made where the funds
are to be used for military purposes or the acquisition of
armaments. It would probably be easier to obtain agreement

on the principle than on carrying it out. Difficulties of
execution arise because, though a country may not be using

the specific funds which it is borrowing for the acquisition
of armaments, it may still be true that the borrowed funds
may release other funds which could be used for that purpose.

It would therefore be very difficult to know how far to proceed with this limitation. If a potential borrower were
expending any portion of its budget on the purchase of armaments

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III-25
made wholly or partly abroad, it would be, in effect, using
funds that if not so spent could be used for the purpose for
which the loan is presumably requested. The logical result
of a strict imposition of such a condition would be that no
government spending funds on armaments would be eligible for

a loan. Clearly, this would be carrying the matter too far,
inasmich as it would mean that virtually no government would

be able to borrow. On the other hand, if the world conditions
are such as to justify the expectation of continued peace,
the Bank should have the privilege of refusing the loan if it
is convinced the borrowing country is spending too much on

armaments. Probably, it would be best to phrase the condition in such way as to provide the Bank with authority to

withhold loans if it sees fit on the basis of a country's
unreasonably large expenditure on armaments.

When a loan or credit is extended to a member country the

Bank shall divide the loan into two parts. One part shall
consist of local currency and the other of the international
units.

The division shall be based upon an estimate of the

portion of the loan that is to be spent at home and that portion which is to be spent abroad. The reason for this is,

first, the Bank will have included in its assets local currencies. This provision would provide a channel through which
the Bank could utilize those currencies easily. Secondly,
there is no reason why a country borrowing from the Bank for

a specific venture not for the purpose of strengthening the
monetary system should accumulate foreign exchange as the

immediate result of such a loan. A substantial part of most
loans would probably take the form of local expenditures and

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III-26

therefore local currency would fill the need. If the Bank
does not have an adequate amount of such currency it could

purchase it from the Fund thereby replacing local currency

in the Fund with international units or its equivalent in
gold. Care would have to be exercised in estimating the

amount of local currencies to utilized to make certain
that due allowance was made for the indirect effects on imports of increased domestic expenditure--particularly where
the loan is large relative to the economy of the borrowing
country.

An alternative method might be to have all the Bank's
transactions made in international units, leaving the Fund
to perform the function of exchanging those units for various
local currencies when necessary. This would have the advantage of simplifying somewhat the activities of the Bank, and
of delegating all the questions of exchange transfers to the
Fund. It would, however, have the disadvantage of making it

a little more difficult in some cases to utilize local currency assets of the Bank and the Fund.

The service of the loan could be either in the identical currencies borrowed or in the new international units

or gold. If it is to be made in local currencies it might
be that the Bank would have to bear the risk of exchange.

It could avoid that risk if it wished by making the underwriting of the exchange risk by the borrowing government a

condition of the loan. Whether such practice would be desirable depends upon the particular case considered.
The Bank would have to be given the authority to buy, sell,

hold and deal in gold, and in the obligations and securities
of any participating government, to act as a clearing house
for funds, balances, checks, drafts, and acceptances for the

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account of participating governments or their fiscal agencies
and accept, demand time custody of the deposits and accounts

from the participating governments and their fiscal agencies

and central banks. It should also have the authority to discount and rediscount bills and acceptances and other obligations and instruments of credit of participating governments
and fiscal agencies and central banks, and finally to act as
agent or correspondent for any participating government and

for fiscal agencies, central banks and political sub-divisions.
In short, the Bank is to perform virtually the same
services of the participating governments that a central bank

performs for the banks within a country. To what extent the
various categories of services would be used only experience

would demonstrate. For many years, the activities of the
Fund in servicing the member governments, or their fiscal

agents, may be quite unimportant. On the other hand, it is
possible that in time the Bank will become more and more
useful to the member governments.

It is expected that the Bank would interfere as little
as possible with the activities of private banks and would
perform only those services which the private banks are unable

for one reason or another to perform efficiently or which are
not performed at all. An exception to the above would be
the operations of the governments and central banks. These
should be performed by the Bank irrespective of the method.
The Bank might be given authority to organize and finance
an international essential raw material development corporation

for the purpose of increasing the world supply of essential
raw materials and assuring member countries of an adequate

supply at reasonable prices.

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296

There are a number of possibilities which exist for the
development and proper distribution among nations of raw

material sources. It may be that under the aegis of this
Bank it would be possible to establish international corporations, government controlled, which would on the one hand

promote the exploitation of natural resources in distant
areas, and on the other hand, assure to the member governments

a fair share of those resources at reasonable prices. It is
too early to know what will happen to many of the colonies
of European nations now in enemy hands that possess needed

raw materials. There would doubtless be considerable opposi-

tion to the resumption of control of important sources of
raw materials by any one nation. It may be that the problem
of determination as to the sovereignty of particular areas
invaded by the enemy would be simplified if some instrumen-

tality were developed to provide for the exploitation and
the distribution of the product among cooperative, intergovernmental lines. Under any such arrangement it would still
be possible for private capital and managerial services to
operate such resources with the international organization

by virtue of some financial participation determining such
major policies as price and national quotas of sale.
Were the Bank able to solve the problem of preventing

monopoly of control of necessary raw materials, it will have
made a large contribution toward removing one of the elements

of friction among nations. Such an organization need not be

created by the Bank, it could be a quite independent international undertaking. Yet being an international govern-

mental institution operating for the benefit of all the

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members, and having large financial resources would seem to

be an appropriate agency for the promotion and partial finan-

cing of international controls over raw material sources.
on the other hand, it might be felt that the Bank is 111
equipped to handle a task of that complexity and magnitude.
That objection, however, would apply more to the management

of a corporation than to supply a part of the necessary

capital to the various ventures.
The advantage of having the Bank possess the authority

to finance an international corporation of this character is
the relative ease with which the financing could be accom-

plished if plans for such an organization were acceptable to
the governments concerned. Unless there is an international
agency such as the Bank to provide a substantial portion of

the capital necessary to get an international corporation
started, each of the countries would have to make separate
appropriations possibly of rather substantial sums. There
probably exists in many countries adequate authority to

participate in an international enterprise of the kind described above but funds would not be available unless Congress

or Parliament made special appropriations. If, therefore, a
bank were to be able to provide part of the funds, the
remainder to be obtained by public fluctuations from private
investors, it might not be necessary to have the matter go
before various legislative bodies.
Another possible advantage of having the Bank help finance

the corporation instead of making it necessary for a specially
created body to obtain all its capital from governments or
public would be that there would then exist an independent
inter-governmental organization equipped with personnel and
sources of information which should be able to wield a desirable influence and provide a useful check on the operations

of the corporation.

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298

The provision giving the Bank authority to organize and
finance what might be termed an International Commodity

Stabilization Corporation represents a departure similar to
that discussed above in the Raw Material Corporation.
There is urgent need for the establishment of an agency
owned by a number of interested governments which shall

engage in activity having for their objective the stabilizing of the prices of important commodities. To develop a
satisfactory working arrangement capable of evening up the
gluts and scarcities of important commodities and raw mater-

ials--such as tin, rubber, cotton, coffee, wheat, corn-will prove to be a very difficult task. There are innumerable problems of great complexity involved in such an
attempt. There are some who think it can be worked out.

One of the obstacles is the provision of adequate financing
arrangements. The purpose of including among the powers of

the Bank the authority to organize and finance such an

institution is to provide the vehicle for implementing a
plan if one is developed that gives promise of being able to
satisfy the need.
In view of the large sums of money that are likely to
be involved and the large risks inherent in any such attempt,
it seems desirable to (a) require that the Bank can organize
and finance such an agency only if at least five governments
participate directly in the management and operation of the

corporation and subscribe to part of the capital of the
corporation, and (b) that the corporation will undertake to
stabilize the price of any specific commodity only with the
consent of the Bank, and (c) the policy governing the operations

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III-31

of the corporation gives, in the opinion of the Board,
proper weight to the interests of world consumers as well
as producers.

It is presumed that if satisfactory plans could be
worked out for the establishment of an international com-

modity stabilization corporation it would include as one
of its most important functions the authority to purchase
a selected commodity when the price rose above a selected

level and sell when it rose below a pre-determined level.
The amount of capital which a corporation attempting to

carry out such a plan could absorb would be very great in-

deed. To help finance itself it could give its notes to
the sellers of the commodity for part of the purchase price.
The Bank could be given authority to discount these notes,

provided the government of the country in which the seller
of the commodity resided in question would endorse the note.

In this way the activities of the corporation could be
partly financed by the Bank without the Bank taking great
risks. It also would make possible the sale of surpluses
by governments who could not afford under other circumstances
to finance the warehousing or purchasing of those surpluses.

Inasmuch as the Bank is an inter-governmental institu-

tion representing the interests of the peoples of member
countries it would seem that it should make certain that
the corporation lending large sums is operating under policies which protect the consumer as well as the producer.
There might be a strong temptation in the corporation's
operations to overlook the interest of the consumers and

place the selling price of particular commodities at too
high a Devel

111-32

To increase the potential resources of the Bank, authority
should be given to it to rediscount with any government or
fiscal agents or central bank bills, acceptances and other

instruments of credit taken from the Bank's portfolio.
Also the Bank should be able to issue or sell acceptances and obligations of the Bank in order to obtain
assets for the purpose of the Bank.
Both of these latter provisions should provide potential resources adequate to satisfy any reasonable demands

that the Bank might be called upon to supply. The operations
of the Bank as the operation of any credit agency would have
to be managed with an eye to building up the strength, the
prestige and status of the Bank. The extent to which it
can increase its capacity to undertake long-term financing
and at the same time be able to take care of unusual situ-

ations, will be directly related to the care with which it
exercises in the increase of its portfolio. On the other
hand, it cannot be as cautious in its decisions as would be
a commercial bank. It would be easy to operate on a very

conservative basis. It is far easier, and of course far
less risky, for a banker to say "no" to a demand than "yes."
But in the case of the Bank it should never be forgotten
that its primary purpose is to make loans that commercial
banks would not, could not, or should not make except at

very high interest rates. Hence, a banking policy characterized by caution and conservatism could easily defeat the
purpose for which the Bank is to be created. If an error
is to be made, it probably were preferable that the management err on the side of under-caution rather than overcaution. Yet the Bank must be built carefully and soundly

300

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III-33

if it is to endure and play an important role in the distant as well as in the immediate future. It is certain to
prove to be a difficult task to steer between excess

caution and excess liberality. Realization of this difficulty only emphasizes the necessity for selecting the
most able men to manage the Bank; men with varied experience

who are more than bankers in their outlook and less than

college professors in their decisions.

III. Capital Structure

III-34

In order for the Bank to have resources adequate

for the purposes for which it is presumably to be created,

it should have very large sums available for loans. It
is suggested that the capital stock be authorized up to
$10 billion, consisting of 10,000 shares having a par

value of $1 million each. The provision that only 50
percent of the issue price need be paid at the time of the
subscription, and the further provision that one-half of
the down payment can be in the currency of the partici-

pating country (the other half being in gold), should make

it not too difficult for all of the United Nations to
participate even though the shares have a par value of $1
million each.
The provision that each eligible government can subscribe to as many shares of stock as it wishes but must

at least subscribe to a number of shares equal to 2 percent
of its annual national income, is designed to permit small

countries to participate as well as large and yet to prevent large countries from investing a small sum merely to

obtain such benefits as participation yields without under-

taking any of the responsibilities or risks that participation carries with it. Under that arrangement, for example,
the United States would have to acquire at least $2 billion
worth of shares, half of which would be paid for at the
time of the subscription, whereas a country like Cuba, for

302

III-35

303

example, would have to subscribe to only $20 million.

There is, however, the further provision that the
maximum votes any country may cast is 25 percent of the

total, irrespective of the number of shares it might own.
The purpose of this provision is to prevent control of
the Bank by any one government.

As with the Fund, there is the very important problem

of control over the Bank. In the Bank as in the Fund,

there is the necessity to give the country with larger
participation a larger number of votes and yet to assure

the small countries an influence in voting in excess of
their necessarily small contribution. This might be achieved
by giving each member of the Bank the authority to cast 50

votes plus one for each share of stock held. Thus the
United States--assuming it were to subscribe $2 billion
worth of shares--would have 50 votes plus 2,000, while Cuba

would have 50 votes plus 20. It was thought that the country acquiring more shares should have a larger number of

votes relative to the other countries than was true in the
case of the Stabilization Fund, because the monetary risks
involved in the Bank are much greater than those in the Fund.

It is not expected that the Fund would experience great

losses over a course of years, whereas there is no telling
what losses the Bank would have to sustain. The difference

in risk follows from the difference in character of the
transactions undertaken by the Fund and by the Bank.

304
IV. Eligibility for Membership

III-36

By including the requirement that the participant be
a member of the United Nations Stabilization Fund in effect
includes all the requirements of membership in the Fund.

It may well be that after discussion some of the eligibility
requirements of the Fund may be dropped and yet may be de-

sired for membership in the Bank. There does not seem to
be any special reason why the requirements should be different in one case than the other, but such reasons may be
revealed during discussions.
One reason for requiring that a member of the Bank be
also a member of the Fund would seem to be that some coun-

tries would stand to gain most from membership in the Bank,
and others from membership in the Fund. If a country were
able to select the agencies membership in which it had most

to gain, the more powerful and richer countries might prefer
the Fund, while the less powerful countries, or those most
in need of long-term capital assistance, might prefer member-

ship in the Bank. The result might be that the Bank would

start out with resources that are inadequate for its objectives, whereas the Fund would have more resources than

necessary and, at the same time, would have its effectiveness

diminished because of a smaller number of participants. The

more participants there are in the Fund, the more effective
it would be, whereas, the larger the subscriptions to the
Bank, the more effective could be the Bank.

III-37

305

Inasmuch as the objectives of both the Fund and the

Bank are such as to benefit all of the United and

Associated Nations, either directly or indirectly, it would
seem reasonable to expect them to be members of both, even

though the direct benefits they might achieve might be

allocatable to either one or the other agency.
In addition to having to be a member of the Fund there

is the requirement indicated that the participants subscribe publicly to a "Magna Charta of the United Nations".

This requirement is inserted with trepidation as it is not
at all certain that the inclusion of such a requirement is
appropriate. The Magna Charta constitutes a bill of rights
of the peoples of the United Nations. A copy of this
Magna Charta is appended. Public adherence to the policies
expressed in the document would, I believe, be opposed by

none since the document sets forth the ideal of freedom
for which most of the peoples are fighting the aggressor

nations and hope they will be able to attain and believe
they are defending.

Examination of the document will reveal, however, that

there are a number of countries which in their practices
do not now give, and have not given, evidence that they

subscribe to the principles contained therein. No country
would probably wish to admit that they were not, however,

willing to abide by those principles as soon as it was feasible

III-38

306
and insofar as it was possible. Since the document

merely calls for a public adherence to the principles, it
would probably not prevent any of the United or Associated
Nations from participating. The mere public announcement

that they subscribe to those principles would be a great

step forward in the struggle to obtain those rights for
all the peoples. The inclusion of that provision would
make clear to the peoples everywhere that these new instrumentalities which are being developed go far beyond usual
commercial considerations and considerations of economic

self-interest. They would be evidence of the beginning

of a truly new order in the realm where it has hitherto
been most lacking--international finance.
A final condition is that the members be at peace wi th
other member countries. Any member that is held by twothirds of the members of the Bank to have undertaken an

act of aggression against any other member of the Bank shall

forfeit its membership in the Bank.

The purpose of this requirement is two-fold. First, it
would provide an additional motive for hesitating to under-

take an act of aggression. As a deterrent, this last would
probably be much less significant in the case of large coun-

tries than it would be in the case of small ones. There
have been instances in the past decade in which the small
countries have undertaken what are generally recognized as

III-39

307

acts of aggression, where they might have hesitated to do
so if the consequences of such act were to have been

economic loss, loss of credit standing and loss of prestige,
such as would follow from being dropped from two agencies,
such as the Fund and the Bank, were they to have played the

role that is expected of them, if they are established.
The second reason would be to impose at once a form of

economic sanction on an aggressor country, and by that act,

to obtain for the non-aggressor nations whatever political
and psychological advantages accrue from the public designation of an aggressor.

If other international agencies, political in character, are developed which would have the responsibility of
determining the aggressor and apply economic sanctions,

the authority of the Bank to do so would probably be much

less important. Until such time, however, it might be helpful to include it in the requirement for membership in the
Bank.

As an inducement to the countries to subscribe to the
terms and conditions required of members, and as a penalty

for not doing so, there is a provision that any government
that withdraws or is expelled from the Bank loses its member-

ship in the Fund and vice versa. In other words, the two
agencies, the Fund and the Bank, have closely linked together

in their adherence to the kind of policies set forth in
their objectives and powers.

III-40

V. Management

As wi th the Fund it would seem that the most efficient
me thod of management is to have the administration of the

Bank vested in the Board of Directors with an executive
committee appointed by the Board of Directors and the

President of the Bank elected by the directors. Provisions
for the selection of the officials of a Bank should be such
as to assure a responsiveness of the Board of Directors to
their respective governments and of the Executive Board to
the Board members.

Also, regulations should be such as to permit the
Executive Board to conduct as much as possible of the day-

to-day operations, without the necessity of referring to
the larger Board for decisions. Because of the importance
that continued experience would have for the best function-

ing of the Board, it would be desirable to provide for
long tenures of office for many of the Board members, and

eligibility for reelection for the higher officials.
To stress the international character of the Board of

Directors, and to avoid any possible affront to the dignity
of member governments, it may be desirable to work out an

arrangement for rotating the chairmanship of the Board of
Directors.

To facilitate the operations of the Board, authority
is given to permit the executive committee to exercise any

308

309
III-41

specified powers provided those powers are set forth by

four-fifths majority vote, and provided further that such
powers shall be exercised only until the next formal meeting of the Board and only in a manner consistent with the
general policies and practices of the Board.
Because of the very broad area of operations which

the Bank would in time wish to undertake, it is thought
that the Bank should be able to take advantage of special
advisory committees appointed by the Board, the members of
which may not be readily employed by the Bank.

It is further required that two-thirds of the majority
vote of the Bank shall be required for making long-term

loans. It is thought desirable to have more of a majority
acquired for this purpose because it would seem that if
almost half of the members of the Board disapprove of a

loan that in itself would constitute adequate justification
for not undertaking it.

310
III-42

VI. Distribution of Profits
The Bank should have substantial earnings almost

from the beginning of its operations. To build up a
surplus in the Bank, provisions should be made for the

distribution of not more than 75 percent of the profits,
and possibly less, until the surplus shall be equal to a
substantial portion of the paid-in capital, possibly 20
percent.

To further strengthen the Bank's assets, it might
be possible to work out an arrangement whereby each coun-

try were to receive its profits in the form of its own
currency. This would provide an opportunity for the Bank

to reduce greatly its holdings of local currency. So
long as the Fund is in existence, there is no need for
the Bank to operate in anything but gold and international
units.

III-43
311

VII. Reports and Information

As with the Fund, the Bank's ability to conduct its
affairs wisely will depend in large part on the competence
of the economic analyses and information available to it.

Because of its anticipated close liaison with the Fund, it
would have available the comprehensive current information

that the Fund would use in the performance of its duties.
But the Bank would need additional special studies and

special reports appropriate for its particular functions.
It should have the necessary authority to obtain such studies
and to require such reports from the member governments.

It should also have the authority to send the experts into
the field to make surveys, studies and investigations neces-

sary for the proper evaluation of any project in which it

already has a financial interest, or in which it is requested
to help finance.

Bank for Governments. The Bank is definitely not an insti-

tution to be operated for the purpose of acquiring profit.
It will, of course, have to undertake risks which no commer-

cial bank would or could afford, and its activities furthermore are related to problems of monetary, financial and

commercial policy of foreign governments. Hence, it is fitting that the Bank should deal only with governments or

their fiscal agents.

312
III-44

The Bank should have authority to engage in financial

economic studies and public reports thereof. This should
become an important function of the Bank both because it

would give an opportunity for the people in various countries to evaluate the work of the Bank and also because

it could well serve as a channel for information and edu-

cation on matters pertinent to the Bank's operations. As
time went on, and if and when the importance of the Bank
grew, these studies would become an important medium for
analysis and discussion of economic developments the world
over.

Treasury Department

Division of Monetary Research
Date

May 8

To:

Miss Chauncey

From:

Mr. White

19 42

The Secretary wanted to

see this.

313

314

TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION

DATE May 8, 1942
TO

Secretary Morgenthau

FROM

H. D. White

Subject: Financial Implications of the Proposed Pooling of
Canada's War Production through Washington.

Messrs. Clark, Carswell, Wrong and Plumptre of the
Canadian Government met yesterday afternoon in my office
with Generals Aurand and Maloney and representatives from
State, Lend-Lease, Board of Economic Warfare and this

Division, to discuss the possible effects, on Canada's
dollar position and use of Canadian production facilities,

of the proposed pooling of Canada's war production through
the Joint Munitions Assignment Board in Washington. The

discussion brought out the following interesting facts:
1. War production of Continental United States is

being assigned by the Joint Munitions Assignment Committee

in Washington, without regard to financing according to
strategic needs. The Joint Assignment Committee in London,
on which there is an American representative, has complete

responsibility for assigning munitions within the British

Empire.

2. The present arrangement of assigning Canadian
production through London has given rise to a number of

difficulties largely because many Canadian factories have
orders for the identical item from each of the Governments
of Canada, the United Kingdom and the United States. The

proposal that Canadian production be pooled through
Washington has come from the British and Canadians and not
from the United States side. However, General Aurand

strongly favors the proposal.
3. The Canadians feared that the proposed pooling

arrangement would mean the United States Government would

order less in Canada and Canada would therefore receive the

fewer U. S. dollars. General Aurand assured them that
U. S. Army would not order less, but more, even if the
pool does dispose of the finished munitions.
4. The problem of financing arises only in those

cases where goods produced in Canada on British orders

315
2-

would be diverted to non-British Empire countries, because
there appears to be no doubt that goods ordered in Canada
by England, and assigned to the Empire will be financed by
arrangements between Canada and British Treasury. General
Aurand believes that the best possible utilization could be
made of the resources and finished munitions of both countries by the pooling proposal. He has confidence that the
financial problem, which should not be allowed to interfere,
can be settled by the Treasuries.
Dr. Clark is pleased and is now satisfied that the
new arrangement will not adversely affect Canada's dollar
position.
I presume that Canada will enter the pooling arrangement.

It looks to us as though the new arrangement will increase Canada's U. S. dollar receipts. There is a possibility that Canada will be producing progressively more on
United States account than on British account. This may
mean that the United States will be paying Canada more

dollars, while Canada will be contributing less to England,

or, to state it differently, that England will be getting

more from us under lend-lease and less from Canada under

the recently-announced Canadian gift to Britain.
The Treasury should watch the situation carefully and

we propose to ask General Aurand to keep us informed as to
orders and deliveries on U. S. Government contracts in
Canada. We may also have to obtain data on orders and
deliveries on British and Canadian Government contracts

placed in Canada if we are to be able to explain what is
happening in the three-way financing arrangements.

316

MAY 8 1942

Dear Mr. Chen:

I am glad to receive your letter of

March 22, 1942 and appreciate your kind

words regarding the part which the United
States Treasury has played in extending
aid to China.
As you know, I an happy to have had

the opportunity to be of some assistance

to the Chinese people whose valor and

courage have always had my deep esteem.

May I congratulate you again on the prompt
repayment of the Woodoil Loan in spite of

the very difficult conditions under which

you worked.

I hope this letter finds you in the

best of health.

Sincerely yours,
(Signed) H. Morgenthada July

Secretary of the Treasury.
Mr. K. P. Chen,

Chairman, Stabilization
Board of China,
Chungking, China.

987
HDW
1sF/eff
5/6/42

FILE COPY

Iden.m.c.
cc-Dr.White

317
UNIVERSAL TRADING CORPORATION
EXPORT AND IMPORT

630 FIFTH AVENUE

TELEGRAPHIC ADDRESS
UNITRACORP

NEW YORK

CODES USED
BENTLEY'S

TELEPHONE

ACHE'S

CIRCLE 5.7646

May 1, 1942

The Honorable Henry Morgenthau, Jr.

Secretary of the Treasury
Department of Treasury
Washington, D. C.

Dear Mr. Secretary:

I take pleasure in enclosing herewith letter addressed to you by
Mr. K. P. Chen which came in care of a personal

friend of Mr. Chen who has just arrived from
China.

With my kindest personal
regards,

Sincerely yours,

sorm

S. De Ren

Vice-President

SDR:d

enc.

il.or

318

K. P. CHEN

PRIVATE OFFICE
Chungking

The Hon. Mr. Henry Morgenthau
Secretary
Department of Treasury
Washington, D. C.

March 22, 1942

Dear Mr. Morgenthaus

I have just had the pleasure of informing you through
the cable that the Universal Trading Corporation has been authorized

to hand over to the Export-Import Bank the last instalment in
repayment of the Woodoil Loan of February 8, 1939. As sufficient
funds have accumulated on hand, the Universal is thus happily enabled

to discharge its obligation ahead of the stipulated time.
I would like to take this opportunity to thank you once
more for the great pleasure which our association has given me. I
am gratified that fortune has enabled me to make good my old promise
to you.

For the past three years I have been watching with ever
keener interest and admiration the consistent demonstration of your

statesmanship in the prosecution of America's policy of financial
assistance to China which you initiated. Needless for me to say how
deeply appreciative our people are of the abiding friendship of your
nation. Events of the world have lately developed to make China and
America comrades in arms, and I have not the least doubt that the two
countries, bound by a common determination and objective, will ultimate-

ly see the triumph of liberty over organized barbarism.
With compliments and regards,
THEBETT

SALT D YAM
to golatvic
dosessoR custom

Then
K. P. Chen

319

0

0

P

Y

DEPARTMENT OF STATE
WASHINGTON

May 8, 1942

In reply refer to
FD 846K.5151/4

The Secretary of State presents his compliments to
the Honorable the Secretary of the Treasury and encloses
copies of telegram no 24, dated May 8, 1942, from the American

Consulate, Suva, Fiji Islands, concerning "plan of procedure
outlined for the disposal of United States paper currency and

official drafts".

Enclosure:
From Consulate, Suva,

no. 24, May 8, 1942.

Copy:1c:5/9/42

320

BR

Suva

This telegram must be
paraphrased Before being
communicated to anyone
other than a Governmental
agency. (BR)

Dated May 8, 1942

Rec'd 8:45 a.m.

Secretary of State,
Washington.

24, May 8, 1 a.m.

Your 20, April 27. 1 p.m.
Please inform treasury "plan of procedure outlined for
the disposal of United States paper currency and official
drafts welcomed by Bank of New South Wales and Bank of New
Zealand.

If Treasury approves the proposed procedure will be
adopted also for Bank of New Zealand except that bank (*)

United States paper currency (but not drafts) it may cash
to Bank of New South Wales for cancellation and delivery to

this office.
The new local exchange rates when fixed and the date of

their adoption will be telegraphed."
ABBOT

RR

(*) Apparent omission.

Copy:1c:5/9/42

CORRECTED COPY

321

BR

Suva

This telegram must be
paraphrased before being

Dated May 8, 1942

communicated to anyone

other than a Governmental

Rec'd 8:45 a.m.

agency. (BR)
2

Secretary of State,
Washington.

24, May 8, 1 a.m.

Your 20, April 27, 1 p.m.
Please inform treasury "plan of procedure out-

lined for the disposal of United States paper currency
and official drafts welcomed by Bank of New South
Vales and Bank of New Zealand.

If Treasury approves the proposed procedure

will be adopted also for Bank of New Zealand except

that bank will pass on United States paper currency (but
not drafts) it may cash to Bank of New South Vales

for cancellation and delivery to this office.
The new local exchange rates when fixed and

the date of their adoption will be telegraphed."
ABBOT

RR

Copy: 5-12-42

322
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE

Chamoes

May 8, 1942

Secretary

TO

FOR

Mr. Dietrich

FROM

Official sales of British-owned dollar securities under the various vest-

ing orders since February 19. 1940:

$ Proceeds of
Bonds Sold

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

25

-

24

-

23

Shares Sold

-

22

Sold

Nominal Value
of Bonds Sold

-

21

$ Proceeds of

-

Apr. 20

No. of Shares

-

-

Sales from

Feb.22,1940 to

Apr. 18, 1942 9,847,610-1/6
Sales from
Feb.22,1940 to

Apr. 25, 1942 9,847,610-1/6

281,858,763

45,648,016

37,474,216

281,858,763

45,648,016

37,474,216

D

323

TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION

DATE May 8, 1942

Chaunoey
TO

Secretary Morgenthau

FROM

Mr. Dietrich

Official sales of British-owned dollar securities under the various vest-

ing orders since February 19, 1940:

-

-

-

-

-

-

22

-

21

Total

Bonds Sold
-

Apr. 20

$ Proceeds of

-

$ Proceeds of
Shares Sold

-

23
-

-

-

-

-

Apr. 18, 1942
Sales from
Feb.22,1940 to

Apr. 25, 1942

-

-

Sales from
Feb.22,1940 to

-

25

-

24

281,858,763

37,474,216

319,332,979

281,858,763

37,474,216

319,332,979

$ proceeds of non-vested securities sold
Apr. 13, 1942 - April 18, 1942
$ proceeds of non-vested securities sold
Sept. 1, 1939 - April 11, 1942
$ proceeds of non-vested securities sold
Sept. 1, 1939 - April 18, 1942

319,332,979

300,000

246,500,000
246,800,000

246,800,000

GRAND TOTAL

566,132,979
61

$

Jan. 7. 1942 - Cash Dividend on 156 Shares

Jan. 9. 1942 - Partial Liquidating Dividend
9 Units sold from Aug. 18, 1941 - April 25, 1942 for
11 Shares Stock Dividend sold Aug. 18. 1941 - April 25, 1942 for
56,007 Rights sold from July 24, 1941 - April 25. 1942 for

125
42

123

102,938

D

324
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE

TO

Secretary Morgenthau

FROM

Mr. Dietrich

May 8, 1942

consumony

For Miss

Official sales of British-owned dollar securities under the various vest-

ing orders since February 19. 1940:
Sold

$ Proceeds of
Shares Sold

Nominal Value
of Bonds Sold
-

Apr. 27

$Proceeds of
Bonds Sold
-

No. of Shares

-

-

-

-

-

-

-

28

-

29
-

-

-

30
-

-

-

1

-

-

May

-

2

-

.-

Sales from
Feb.22,1940 to

Apr. 25. 1942 9.847.610-1/6 281,858,763 45,648,016

Sales from
Feb.22,1940 to
May 2, 1942

9,847,610-1/6

281,858,763

45,648,016

-

-

37,474,216

37,474,216

of

325
TREASURY DEPARTMENT
INTER-OFFICE COMMUNICATION
DATE

TO

Secretary Morgenthau

FROM

Mr. Dietrich

May 8, 1942

Official sales of British-owned dollar securities under the various vest-

ing orders since February 19. 1940:
$ Proceeds of
Shares Sold

$ Proceeds of
Bonds Sold

Total
-

-

Apr. 27

-

-

-

-

28

-

-

-

29
-

-

-

30

-

-

1

-

-

May

2

-

-

-

Sales from
Feb.22,1940 to

Apr. 25. 1942

281,858,763

37,474,216

319,332,979

Sales from
Feb.22,1940 to
May 2, 1942

281,858,763

37,474,216

319,332,979

$ proceeds of non-vested securities sold

400,000

$ proceeds of non-vested securities sold
Sept. 1, 1939 - April 18, 1942
$ proceeds of non-vested securities sold
Sept. 1, 1939 - April 25. 1942

246,800,000

April 20, 1942 - April 25. 1942

319,332,979

247,200,000

247,200,000

GRAND TOTAL

566,532,979
61
$

125

Jan. 7. 1942 - Cash Dividend on 156 Shares

Jan. 9. 1942 - Partial Liquidating Dividend
9 Units sold from Aug. 18, 1941 - May 2, 1942 for

11 Shares Stock Dividend sold Aug. 18. 1941 - May 2, 1942 for
56,007 Rights sold from July 24, 1941 - May 2, 1942 for

42

123

102,938

&

326

BRITISH AIR COMMISSION
1785 MASSACHUSETTS AVENUE
WASHINGTON. D. c.
TELEPHONE HOBART 9000
PLEASE QUOTE
REFERENCE NO

With the compliments of British Air Commission
who enclose Statement No. 32 - Aircraft Despatched
- for week ended May 5, 1942.

The Honourable Henry Morgenthau, Jr.

Secretary of the Treasury
Washington, D. C.

May 8, 1942.

327

MOST SECRET

STATEMENT NO. 32
AIRCRAFT DESPATCHED FROM THE UNITED STATES

DURING WEEK ENDED MAY 5th, 1942

TYPE

FLIGHT DEL'

DESTINATION

ASSEMBLY POINT

U.K.

U.K.

BY SEA BY AIR FOR USE IN CAN.

BELL

Airacobra

3

BOEING

Boston III

U.K.

U.K.

5

1.

CESSNA

AT 17 Crane IA

Canada

Canada
4

URTISS

Kittyhawk TA

Middle East

Port Sudan

New Zealand

Wellington

U.K.

Canada en route

28
7

CONSOLIDATED

Liberator II

LOCKHEED

U.K.

Canada en route
Canada en route

Ventura

Canada

Canada

U.K.

U.K.

U.K.

U.K.

1

Canada

U.K.

5

Canada

A 29A AC 151
Ventura

1

A 29 Hudson III A AC 5

2

GRUMMAN

Martlet II

12

NORTH AMERICAN

Mustang

TOTALS

itish Air Commission
May 8th, 1942.

59

103

8

7

328

BRITISH AIR COMMISSION
1785 MASSACHUSETTS AVENUE
WASHINGTON. D. c.
TELEPHONE HOBART 9000
PLEASE QUOTE

REFERENCE NO

With the compliments of British Air Commission
who enclose weekly Statement No. 50, covering

Aircraft Flight Delivery as at May 6, 1942.

The Hon. Henry Morgenthau, Jr.

Secretary of the Treasury

Washington, D. C.

May 8, 1942.

329
MAY 6. 1942
CONFIDENTIAL REPORT

REF. 10. M
LOCATIONS OF FLIGHT DELIVERY ATROBATT - REPORT 10.50
1. LIBERATOR II off Contract

(a) lever taken by MAY.
55 delivered to U.K.
5 delivered to N.S. (1 crashed in Africa)
at Montreal
65

(a) Taken and Retioned or Kent by MAIL
3 delivered to U.K.
1 at Mute West 1
2 in Ferry Service (delivered to Montreal)
1 at Gander

11 at Nontreal

2 at Detroit
1 on route Detroit
3 to be returned
6 retaines by L.L.F.
46 kept by A.A.F.
94

2. HUDBON y (LONG BANGE) off Contract 1579

173 delivered to U.K.
39 delivered to Dobert
3 at Montreal (for Debert)

1 at Detroit (for Debert)
2 under repair
7 crashed (2 in U.S., 5 after export)

225

3. HUDSON III (LONG - off Contract A-68

211 delivered to U.K.
4 at Mentreal
19 for U.S.A.A.F. Familiarisation Program
1 under repair

10 crashed (1 in U.S., 9 after export)

245

be VENTURAS off Contract A-344

A TOTO WAS
8 delivered to U.K.
1 at Glosse
9 at Gender
12 en route Gender

59 at Montreal (including 1 for West Palm Beach)
92 at Detroit (including 15 for West Palm Beach)
10 on route Detroit
3 at West Pala Beach

1 at Wright Field

2 at Long Beach
1 exashed (in Ganada)
197

(a) SHORT RAIN

8 at Montreal

4 at Detroit
1 on route Detroit
2 at West Pala Beach
1 at Long Beach

16

(10 shipped to U.K. by Sea
Total reported away from plant)

S. SECRET - BRITISH MOST SECRET

CONFIDENTIAL

-

329
6. 1942

OF WAT ATROBATE - - REPORT
La LIMERATOR II off Backmark Birth

OF -

55 delivered to U.K.
5 delivered to M.S. (1 crashed is Africa)
at Mentroal

(10) Takes and Defineed by

3 delivered to U.S.
1 at Mute West 1
2 in Ferry Service (delivered to Montroal)

1 at Gender
11 at Nontreal

2 at Detroit

1 - route Detroit

3 to be returned
6 solution by A.A.F.
44 kept by A.A.F.

n

, (10mg RANGE) off Sexteal 1-17
173 delivered to U.S.
39 delivered to Dobert
, at Montreal (for Dobert)

1 at Detroit (for Dobert)

2 under repair
exasted (2 in U.S., 5 after apert)
,

225

*** (see - off

211 to U.S.
4 at Natural

19 for U.S.A.A.F. Familiarisation Program
1 unier repair

10 created (1 in U.S., 9 after export)
24

he TERRIS off
M
8 delivered to U.K.
1 at Goose
9 at Gender
12 on route Gender

59 at Mentrol (including 1 for West Palm Beach)
92 at Detroit (including 15 for West Palm Beach)

10 - route Detroit

3 at West Pala Beach

1 at Wright Field
2 at Long Beach

(in Gannda)
197

(a)in - -

4 at Detroit

1 - route Detroit
2 at West Fala Beach
at Long Death

shipped to U.E. by Sea

Total reported - from plant)

S. SECRET - BRITISH MOST SECRET

Sheet 2

CONFIDENTIAL REPORT

MIX 6 1948

10.15

LOCATIONS OCKANIC FLIGHT DELIVERY ATROBATT - REPORT NO.
Sa GATALTERS

OFTAL
TYdelivered
Contracts
Les. J-STA - SALES
to U.S.
9 delivered to Singapore
27 delivered to Australia
8 at Darteorth
3 is Bernada

created (in Bernada)
153

(a) - Salta off - Bag. 19772
. delivered to U.S.
at Mentroal

6. LODESTARS off W Contract MS-53 as Reg. 1049

ORGAN

6 departed Mami or V.Fala Beachs
14 Hand
3 taken by A.A.F.
10

(a) 0-6018
7 departed Miami or W.Pala Beach

3 at Rist

4 at West Pala Beach
on route West Fala Beach
19

7. HIIDBOT Wes
OF

116 delivered to Dobart
4 at Mentroal
2 at Ottam
12 at Montreal for Dobert

3 at Detroit for Dobert
5 under repair

2 at Long Beach (transition training)
33 for China
20 divorted to U.S. Hevy
153 taken by A.A.F.
created (5 in U.S; 1 in Canada)
336

(61 shipped

419 Total reported away from plant)
(a) are LA Contract 10-152
117 delivered to U.K.
22 at Gunder
5 on route Gender

10 at Montreal

19 at Detroit
1 on route Detroit
1 at Burbank
4 at Long Beach

created (3 in U.S, 2 in Canada, 1 on route U.K.)

185

(67 shipped

20 to be shipped
1 created (on acceptance flight)

273

U. S. SECRET - BRITISH MOST SECRET

330

331
me 2948

Sheet S

ORGANIC ELIGHT DELIVERY - REPRESENTATIVE

off

neg

1050

departed

at West Fala Beach

delivered but

Reg. 10559

1 as Gondow (notified)
3 at Montreal (modified)

1 at Detroit (notified)

2 at Wright Field (notified)
7 at Chayanne (notification enter)
12 retained by A.A.F.

10. B-24 20a (American RBC Bea. 10553

, delivered U.S. (mm/dd/yd)

1 at Gunder
1 at Gandile

(notified)

, at Natural (modified)

1 at Method (notified)

, at Detroit (montified) (for Lafrentia)
1 6 at - route Lafuardia modification Field (motification center center)

1 enashed (modified) (lost en sute U.K.)
24

11. 3.25 Pa ( Release) Bank 30111
6 at

9 at Detroit (notified)

as no Paul (modification enter)

12. (Amer Palesse) BOO
48 at Kansas day center)
16 at st. Pail (notification enter)
29 status by A.L.F.

on route Names City
102

11. M.M Ala
69 at Cashs (modification center)

3 - route modification center

crashed (en route modification center)

.

.

U. S. SECRET - BRITISH MOST SECRET

332
Sheet &

VIDENTIAL REPORT

MAY 6. 1942

LOCATION OF OCHANIC ELTONY DELIVERY ATHROAM - REPORT no.

PARAGRAM
UNITED KINGDOM

1

58 173

ITDOLE EAST

8 112

233

117

7

12

1

693

7

5

5

27

AUSTRALIA
SINGAPORE

27

9
9

Quie West 1

1

1

In Ferry Service

2

2

loose

1
1

Bender

route Gander
artmouth

12

1

35

2

17

5

ontreal

as

9

1

8
8

16

Dobert

67

4

3

26

4

133

6

4

3

116

39

Ittem

155

2
2

Bernada

3
3

Departed Mami or V.Pala B.

13

land

10

6

4

et Pala Beach
route V.Pala Beach

11

2

4

5

1

Detreit

route Detroit

1

22

95

1

2

11

1

133

9

1
3

13

1

urbank

1

fright Field
be returned by A.A.F. 3
dification centers

1

2
3
3

1

64
9

67
3

152
13
9

long Beach

.

a route and.

8

6

7

6
3

2

1

8

Inter repair

5

for Ohina

33

33

diverted to U.S. Bary
..A.F. Fan. Pro.

20

20

3 153

200
12

6

Brashed

TOTAL

19

19
44

7

139

225

10

245

1

213

12

2

165

25

542

47

29
1

34

71

1824

1

Taken by M.P.F.
Retaken by A.A.F.

8

33

24

23

102

Solumn 1. Liberator II off Contract 2-677
2. Endoon V off Contract A-1749

3. Rudson III off Contract we

4. Ventures off Contract 1-344
5. Gatalinas off Contracts A-2587, P-210. A-37, AUS-98, GAN-78, and BBG Req. 10772
6. Lodestars off L/L Contract AG-53 (200 Req. 1049)
7. Hudson III-A off L/L Contracts AGS and AG-153 (180 Reqs. 62, 2467, 2718, 3371)
8. 0-53's off B80 Reg. 1050
9. B-17 R's (Army Release) BBC Reg. 10552
10. B-24 B's (Army Release) BBC Req. 10551
11. B-25 B's (Anny Beloned) BBG Req. 10558
12. B-25 O's (Army Belease) BSO Req. 10559
13. B-26 A's (Army Release) BSG Req. 10556

AIRFRAME DIVISION
PLANNING & PRODUCTION DEPARTMENT

BITTE ATR COMMISSION

J. S. SECRET - BRITISH MOST SECRET,

333
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE

May 8, 1942

Secretary Morgenthau

TO

FROM

Mr. White

Subject: British memoranda on their dollar position and on
their proposed terms of reciprocal aid.
There are attached several memoranda from the British Government

and one from the Australian Government. The first reviews the prospects of Britain's dollar position for the 12 months beginning April 1,
and the others state the terms under which the British and Australian
Governments wish to extend reciprocal aid.
I.

The proposals made in the memoranda may be summarized as follows:

1. There should be no further transfer of capital assets or
gold between the United States and the Sterling Area;

2. The United States should take over British airplane contracts;
3. For its part, the British Government would agree that it
should not accumulate dollars beyond an adequate working
balance. Gold holdings are considered to be outside the
working balance, and it is implied that they would continue to increase;
4. The British Government would further agree to provide
reciprocal aid from itself and its colonies (not dominions)
for all U.K. military and naval exports, for some troop
supplies in the Sterling Area, and for some of the costs
of the construction and maintenance of bases. An outline
of the terms of this reciprocal aid proposal is given on
page 3.

5. The Australian Government states that it is generally in
agreement with the U.K. memoranda on reciprocal aid, but
that the magnitude of the problem is greater in Australia,
and it would like to discuss the matter further.
II. The British case for these proposals 18 as follows:
1. The British have maintained since last February that current

gold production must be held as a reserve against their
accumulating sterling debt, and that it cannot therefore
either be sold to the United States or counted amongst their
available dollar assets. The memoranda state that their

sterling debt is accumulating at a rate of $2 billion annually,

and that the United Kingdom will not receive more than
$500 million annually from the current gold production of the
Empire.

334
Division of Monetary

-22.

Research

Excluding gold production, the British memoranda state that

they will have a dollar deficit on current account of $250$300 million in the 12 months beginning April 1, 1942. To
this deficit must be added approximately $450 million of
payments due on B.P.M. contracts, making the total deficit
$700-$750 million. (These estimates agree approximately
with our estimates. See page 4 for our estimates.) To

offset this deficit the British anticipate approximately
$390 million of special receipts. A list of the special

receipts and our comments upon them is given on page 5.
Because the special receipts are inadequate to meet the

expected deficit the British Government requests that

their airplane contracts, amounting in all to about $450
million, be taken over.

III. Comments on the British proposals:
1. Expected British receipts for the coming 12 months are
inadequate to meet their current expenditures end payments
on remaining B.P.M. contracts only if we accept the British
contention that receipts from current gold production
should not be counted amongst their dollar receipts and
dollar assets. Hence, their case for the take-over of
airplane contracts depends upon acceptance of their case
for earmarking current gold production against sterling
debts. If gold production is included in their dollar
receipts and assets, British gold and dollar holdings,
which were $615 million on April 1, would total $755-805

million on April 1, 1943, without the take-over of airplane
contracts. If, in addition to this, their $450 million of
airplane contracts were taken over, their gold and dollar

balances would amount to $1,205-$1,255 million by next

April, or twice as much as the United States Treasury has
considered to be adequate.

2. The British proposals for reciprocal aid appear to be

satisfactory, but they should not be made to depend upon
our acceptance of the other proposals.

335

3Terms suggested by the British for Reciprocal Aid
from the United Kingdom and its Colonies.

A. Types of transaction
(1) Exports to U.S.

(a) commercial and raw
material exports

U.S. pay dollars

(b) U.K. military and naval

Reciprocal aid to either
U.S. or its authorized

exports

(o) Items from Britain's
dollar contracts

(2) Expenses for U.S. Troops in
Sterling Area
(a) pay and allowances
(b)

troop supplies

contractors. (profit

limitation imposed.)
U.S. pay dollars.

U.S. purchase local

currency with dollars.

Either reciprocal aid or

U.S. purchase or importation, depending upon convenience. U.K. would
refund any payments made

for materials previously

(c) oil

imported under Lend-Lease,

Special case. Reciprocal
aid unless it cost U.K.

dollars.

(d) construction and
maintenance of

bases

Government making the base

to bear the cost with no
apportionment of expense

on the basis of use, and
with no lend-lease or

reciprocal aid obligation.
U.K. would like this to
be "retrospective"
(retro-active?) However,
all dollar costs would be
met by U.S. or provided
on Lend-Lease, and U.K.

would provide supplies and
services for projects in
U.K. or colonies.

336
-4

Estimated U. S. dollar expenditures and receipts of
the Sterling Area on current account

April, 1942 to April, 1943
Dollar Expenditures

(In millions)
A. Payments to U. S. by U. K.
1. On British Purchasing Mission commitments
$450
2. For other merchandise imports outside Lend-Lease
120

3. For services

105

4. All other

80 $755

B. Payments to U. S. by other sterling area
1. For merchandise imports
2. For services
C.

$170
70

240

Payments by sterling area outside U. S. requiring
gold or dollars

1. For oil

2. All other payments including 40 million of
payments to Iran

$ 60
85

Total estimated United States dollar expenditures

145

$1,140

Dollar Receipts

A. Receipts from U. S. by U. K.
1. For merchandise exports
2. For services

3. All other

B. Receipts from U. S. by rest of sterling area
1. For merchandise exports
2. For services
Total estimated United States dollar receipts

Estimated dollar deficit of sterling area

on current account April, 1942 - April, 1943

$100
70

80 $250

$160
40

200

$450

$690

This deficit of $690 million compares with the
deficit stated in the British memoranda of
$700 - 750 million.

reasury Department, Division of Monetary Research

May 8, 1943

337

-5The British anticipate the following special

receipts during the year beginning April 1942

Balance of R.F.C. loan 1

$40

Wool sales

Sale of capital facilities 2

90

Payment already received for

airplanes diverted to U.S.

70

Additional payment for airplanes
diverted to U.S. or Russia
Take-over of ordnance contracts

Dollar receipts from U.S. troops
in Sterling Area
4

Total, at least

?

90

3

100

$390

The balance due on the R.F.C. loan is $35 million, but
the R.F.C. may not be willing to extend more than $25
million.

1

2

3

This figure envisages the sale of all British armament

plant facilities.

Our figures indicate the British will not be able to

obtain more than $70 million from this source unless
the War Department is willing to refund some portion

of the advance payments made on ordnance contracts.
4

This figure is much lower than our estimate of the
sterling area receipts from American troops. Our
figure for military pay alone in calendar year 1942
is $202 million, and it would unquestionably be larger
for the 12 months beginning April 1942. The figure
for civilian pay, some of which will be paid in dollars
is $412 million for calendar year 1942.

Treasury Department, Division of Monetary Research

May 8, 1942

338

aid t Br.
May 40 1942

Mr. White

Mr. Hake

Subject: Sir Frederick's Menoriandum on Britain's Dollar Position

1. A dollar deficit on current account (1.0. excluding gold pro-

duction, capital sales, and payments on B.P.M. contracts) of #250 - 300

million is predicted for the 12 months beginning April 1, 1942. Including B.P.M. payments, the deficit will be $700 - 8750 million.
2. These estimates agree reasonably well with our own estimates

for similarly defined categories.

3. The British anticipate the following special receipts:
(a) balance of R.F.C. loan V

(b) wool sales
(a)

sale of capital facilities 2/

(d) payment already received for airplanes
diverted to U.S.
(e) additional payment for airplanes
diverted to U.S. or Russia

(f) take-over of ordnance contracts 3/
(g) dollar reseipts from U.S. treepe in
Sterling Area w
Total, at least

840
90
TO

,

90

100

$ 390

4. If current gold production of $500 million, as estimated by the
British, is added to these special receipts, the total of $890 million
would be larger than the expected deficit of $700 - 8750 million, and
British gold and dollar holdings would increase from the 8615 million
(the British have included "scattered gold" and "gold held against
immediate liabilities" in this figure) held on April 1, 1942 to 8799 $805 million on April 1, 1943. This total would be reached without any
further sale of American securities. 5/

5. However, the British repeats the contention advanced

since February that current gold production must be held as a reserve
against their accumulating starling debt, and requests acceptance of the
following programs

(a) U.K. be required to make no further sales of gold
or capital assets,

(b) U.S. take-over British aircraft contracts in the
United States.

339

Division of Monetary
Research

-

The value of undelivered aircraft materials is 8450 million, and
if these were taken over the British gold and dollar balance including new gold production would be $1,205 - $1,255 next April, or twice

as large as the amount the U.S. Treasury has considered to be adequate.

6. A problem exists, therefore, only if we approve the British

contention that current gold production should be earmarked as a

specific reserve against their accumulating sterling debt. The British
menerandum states that their starling debt is accumulating at a rate
of 82 billion annually. This contention raises a number of problems:
(a) The British have advanced this contention repeatedly
since last February. I de not believe that we have

ever accepted or denied it. If is is not denied it

may be assumed to have been tacitly accepted.
(b)

Sir Frederick justifies the contention on the ground
that the starling debt *will have to be repaid some

day." It is clearly implied that sterling obligations even those held by the Empire - are a prior claim
to British income.

1 The balance due on the R.F.C. loan is 835 million, but the R.F.C.
may not be willing to extend more than 825 million.

2/ This figure envisages the sale of all British armanent plant facilities.
1 Our figures indicate the British will not be able to obtain more then
870 million from this source unless the War Department is willing to

refund some portion of the advance payments made on ordnance contracts.

w This figure is such lower than our estimate of the starling area
receipts from American troops. Our figures for military pay alone
in calendar year 1942 is $202 million, and it would unquestionably
be larger for the 12 months beginning April 1942. The figure for
civilism pay, some of which will be paid in dollars is 8412 million
for calender year 1942.

s Marketable securities available for sale amount to about 865 million.

JEH/grs - 5/4/42

MEMORANDUM

British holdings of gold and ,dollars (excluding the

1.

Belgian loan) rose from about $190 millions on March 31, 1941 to
$615 millions a year later. The increase in the year ended March 31,

1942, thus amounted to 3425 millions. During the year the position
of the United Kingdom worsened by about 33 billions, of which nearly
$2 billions represented the growth of overseas balances in London,
which will have to be repaid some day.

An approximate analysis of the increase in the balance

during the year is shown by the following figures:
S Millions

Gold, net acquisition *

505

Special receipts:
from RFC loan

from direct investments
(Viscose and B.A.T.)
from market securities
from South African securities

(special sale for gold)

from sale of wool stock

Net credit on current 8 account

390

80

90

130
40

730
90

1,325

less Net payments on British Government

contracts in the U.S. **

900
425

#

Excluding special purchase of gold from South Africa shown

under capital receipts. The acquisitions of newly-mined

gold from South and other Africa WRS $455 millions, Austral-

asian gold (mainly sold direct to U.S. before Pearl Harbor)
WAS about $60 millions, other acquisitions of gold (from

dishoarding, Russia, etc.) was $60 millions. Of the total
of $575 millions, $70 millions was sold direct to countries
other than U.S., giving A net acquisition of $505 millions.
Sales to U.S. (including direct Australian sales) amounted

to approximately 100 millions, included in the figure of

$505 millions.

**Deducting sales of capital facilities (e.g. Tennessee Powder)
and refunds on contracts taken out by the United States.

-2-

It. MAV be noted that if there had been no old contracts

2.

to nav for, rdd no special receipts, the year would have shown a small

pain of $90 millions, spert from newly-mined Fold. Had this state of
nfairs continued for the rest of the war, the newly-mined Fold would
have accumulated AP e small but useful reserve arainst the liabilities
represented bu the growth of overseas sterling balances. But the ster-

ling aren, since the entry of the United States into the war, no longer
brings us in n f'avourable balance of dollars.
The LOBS of Mnlayan exports alone amounts to $300 millions

n year. There is A lerge but AS yet unknown fall to be faced in Indian
and Burmesa exports. Mennwhile, United Kingdom exports, not only to

the United States but to all destinations, are steadily falling owing to
lack of shinning, labour and raw materials. Instead of 8 small net gain,
there will he R lerse current deficit in the coming year which might
amount to RS much ne $250 - 3:00 millions.

British Government contracts still outstanding in the
United States on the 1st April last required payments of about $430

millions before they run out early next year. Taking account of rising

costs (not fully Allowed for in this figure) and of administrative expenses, we have at least 8450 millions to pay during the year.

The sterline ren may, thus, need to find dollars to an
amount of $700 to $750 millions during the coming year, with a continuing

though smaller deficit thereafter.
3.

The liabilities of the United Kingdom to sterling area

and other countries outside the United States are already very large and
the present British gold holding is but a small reserve arainst them. We
had beer at war more than two years before December 7th last and had

been fighting the United Nations' cause practically alone for over 18
months. For & considerable time more than half of the national income

of the United Kingdom has been spent on the war. But, as a result of
the burden carried so lon alone, British investments in the United
States have been largely sold or nledged while British indebtedness
to India, South Africa, South America and other countries has grown to
large proportions.

The present British rold holding must, therefore, be
maintained a rainst liabilities outside the United States.

This is, however, not the end of the story. Additional

4.

liabilities to countries other than the United States are being incurred

on an increasing scale. It is estimated that additional liabilities
during the coming year will amount to 6500 millions, or $2,000 millions,
even when we allow for the Caradians' genérous gift. The net acquisition

of pold will almost certainly fall short of the amount received in the
past year, especially if mining entifneent is not forthcoming from the
United States in sufficient quantities to maintain output and since
some sources (e.g. New Guines) have been cut off and others threatened

by the THE Tie can count on less than 8500 millions a year, i.e., less

than one-cuarter of the additional liabilities TO expect to incur. The
British Government is, therefore, most concerned that the current gold

output should he retained AS n partial reserve against currently incurred

liabilities.
5.

In the circumstances described the British Government

asks that arrangements should be ade which will -ake it unnecessary

for ANY further Fold or other capital assets (other than canital facilties mentioned above) to be sold to the United States. In this event
how is the dollar deficit of $700 to $750 millions to be found in the
coming year ?

Special receipts will comprise only the balance of the
RFC loan and A little to come from special wool sales, sav 910 millions

altogether. No further special purchase of South African Fold, other

than of the output of newly-mined "old is possible. Sele of capital
facilities might come to $90 millions (of which $60 millions for the
eleven cases covered by the President's directive, and 830 millions for
new cases). For airplanes handed over after Pearl Herbour we have

received $70 millions; the balance to come is not yet known. This
reduces the figure to 8500 millions - 8550 Fillions.
The most angropriate method for enabline 115 to meet

6.

this expected deficit is R bulk take-out of OUT remaining dollar
contracts. Planes and munitions supplied from our pre-lend-lease
contracts are now regarded as being at the disposal of combined boards

and are allocated by these boards in accordence with strategic needs.
The move towards A nool of overseas resources is further emphasised
by the reciprocal lend-lease pronosals. The United States Government
has already agreed to take over our outstanding ordnance contracts and
we should hone to obtain resistance by this means of some $90 millions.

It will he seen that if the estimate in this memorandum is correct, this

is far from enough. The value of the deliveries still to be made under our

air contracts is about 2/50 millions, 250 millions of this represents
payments still to be made under the contracts end the remaining $200

millions represents payments rade in advance. Both because of the pooling of supplies and because of our need of additional reserve we ask
that the air contracts n. well a° the ordnance contracts should now be
taken over.
7.

As indicated above there may he further receints in

respect of airplanes, etc., taken over after Pearl Harbour or for Russia
and China. Moreover, the presence of United States trooms in the storling

area will produce some dollars. But the letter will hardly oveeed 2200
A man a year. and this source of dollars would only reach $100 millions

on the basis of 500,000 men in the sterling Area on the throughout

344

-5-

the year. The effect of reverse lend-lease itself, which the
United Kingdom hope to make as generous as possible, is somewhat adverse

to our dollar position.
The principle we seek to establish is that there should
be no further transfer of capital assets or gold, and that we should
not attempt to build un anything beyond a working balance in dollars.

Willard Hotel,
Washington, D.C.,
May 2, 1942.

o

3455

April 30, 1942
The Secretary
Mr. White

Subject: Outline of Attached British Memoranda on Reciprocal Aid
I. Introductory Memorandum:

A. U.K. desires to extend reciprocal aid, but is limited by its

finances, overseas obligations, the loss of Empire exports, and
the "increasingly inappropriate" financial arrangements with U.S.,
particularly the continuation of payments on dollar contracts for
materials destined for a common pool.
B. H.M.G. suggests as a principle

(1) "No further transfer of capital assets or gold between
U.S. and Sterling Area." Apparently this provision would
preclude further sale of British securities.

(2) The Sterling Area "should not accumulate dollars beyond
an adequate working balance." It is implied that gold holdinga are outside the working balance and that they would
continue to increase.

(3) U.K. could then provide reciprocal aid from itself and

its colonies (not Dominions) according to the following plans
II. Memorandum on Reciprocal Aid from U.K. and its Colonies:
A. Types of transaction

(1) Exports to U.S.

(a) commercial and raw

U.S. pay dollars.

(b) U.K. military and naval

Reciprocal aid to either
U.S. or its authorised
contractors. (profit
limitation imposed.)
U.S. pay dollars.

material exports
exports

(c) Items from Britain's
dollar contracts
(2) Expenses for U.S. Troops in
Sterling Area
(a) pay and allowances

(b) troop supplies

U.S. purchase local

currency with dollars.
Either reciprocal aid or

U.S. purchase or importation, depending upon
convenience. U.K. would

refund any payments made for

materials previously

imported under Lend-Lease.

(o) oil
n Or. to Miss Chauncey with or. of attachment; cc
of memo to D.W. Bell and photostat of attachment

Special case. Reciprocal aid

unless it cost U.K. dollars.

O

2

(d) construction and
maintenance of

bases

346

Division of Monetary
Research

Government making the base

to beer the cost with no
apportionment of expense

on the basis of use, and

with no lend-lease OF

reciprocal aid obligation.
U.K. would like this to
be *retrospective* (retroactive?). However all
dollar costs would be net
by U.S. or provided on

Lend-Lease, and U.K. would
provide supplies and

services for projects in

U.E. or colonies.

B. Procedure

(1) Requisitions
for reciprocal aid to be filed in
London.
(2) U.K. cannot keep full records and suggests that no
records be kept of such services as repairs.

(3) Shipping arrangements need further discussion.
III. Australian Memorandum.
A. Australia is generally in agreement with U.K. memoranda,
but suggests that the magnitude of the problem is greater
in Australia, and requests that the matter be discussed

further.

HEHIgs - 5/1/42

MEMORANDUM
N

His Majesty's Government are anxious to grant

reciprocal Lend-Lease aid to the United States of America on the

most generous scale possible, and are well aware of the political
importance attaching to the matter, but the extent of the assistance which they CAN give is necessarily affected by their financial
position. The United Kingdom in already defraying war expenditure

equal to sixty percent of the national income and the rates of
taxation in force are the herviest of any of the United Nations.
Progress towards a financial settlement is now
urgent and H.M.G. submit that the present financial arrangements

are increasingly inappropriate. Munitions supplied from our prelend-lease contracts are now regarded AS being at the disposal of
Combined Boards and are allocated by these Boards in accordance

with strategic needs. The move towards a pool of overseas
risources is further emphasized by the reciprocal lend-lease
proposals, the principle behind which we accept and warmly
approve.

It seems quite inappropriate in present circumstances that we should be r equired to ship to the United States

currently mined gold, which can surely be of little value AS an
addition to United States resources, to pay for munitions which

will be AS much at the disposal of the United States as at ours.
We can only obtain such gold by increasing our overseas indebtedness and even if we had no payments to make in the United States

or Canada and were acquiring no gold, we should still have to
increase our oversens indebtedness by upwards of 6400 millions

to meet our growing expenses elsewhere. This point is frequently

overlooked. It is not merely that we export less and import much

more from the United States and Canada. The same thing happens

with every other country from which we draw supplies.

The A'nnun l increase in the liabilities now being
incurred by the United Kingdom to countries other than the U.S.A.

and anada, is not less than four times the total amount of the
present output of gold by the sterling area, and H.M.G. are anxious

that the pold output should be retained as a partial reserve against

these liabilities. At the same time the possibility of holding or
accumulating B reserve has been heavily reduced by the loss of tin

and rubber exports, b the loss of exports, which it is impossible
yst to estimate, from India, and the absence or shortage of shipping,
labour and raw materials resources in the United Kingdom itself.
H.M.G. suggest as A general principle that from now

on there should be no transfer of capital assets or of gold between
the United States and the sterling area, and that at the same time
tate sterling aren should not accumulate dollars over and above an

adequate working balance. If this is to be done a new settlement

involving the remaining pre-lend-lease contracts is urgently required.
If arrangements can be made to carry this general

principle into effect, H.M.G. would hope not only to extend reciprocal

lend-lease aid on the desired scale, but also to avoid difficulties
And possible criticism arising out of the bringing of borderline or
doubtful cases within the ambit of the lend-lease system.

(Sgd.) F. Phillips
Washington, D.C.,

April 18, 1942.

FP:KF

L

MEMORANDUM

MILITARY STORES

We propose to supply munitions, military and naval

stores (not including local supplies for United States forces
abroad for which see below) and associated services on LendLesse te ms to the United States Government. These supplies
if requested from and furnished through G recognized Government

organisation would be made on lend-lease terms whether they are

issues from stores or whether they involve the placing of special
contracts by the supplying Government. They would similarly be
mode available to contractors working for the United States
Government on specific re uest of the United States Government to

that effect, and on the assurance that the contractor is acting on
behalf of the United States Government and that steps will be
taken to prevent his making an uncovenanted profit.
The above offer would not apply to commercial sup lies

or to raw materials except that minor supplies of raw materials
might be more properly dealt with as military stores and furnished
on Lend-Lease terms at the discretion of the supplying Government.

Munitions, etc., off United Kingdom dollar contracts
would not be transferred under reverse lend-lease, but should be

paid for in dollars. We should not, however, claim dollars for
materials which had already entered our depots except when they

can be distinguished from lend-lease or sterling materials.
2.

UNITED STATES FORCES IN STE LING AREA

United States would purchase the local currency required
for pay and allowances and for local cash disbursements.

As regards supplies other than munitions nd strictly mill-

tary stores for American forces in the sterling ar a, it is not possible

owing to the variety of considerations which may arise, to lay
down precise rules in advance. It would have to be settled on
considerations of convenience from the point of view of supply,
shipping and administration whether particul r supplies should
be made available on reverse lend-lease by local purchase or by
importation by the United States Government.
As regards American forces in the United Kingdom,
the arrangements would be settled in London between the Service

Departments and the nited States Missions who are in daily
contact on these matte i, and broadly speaking, the supplies
such as fo d, ruel, etc., are being treated on the same lines

as B itions.
Arrangements would h ve to be made to avoid possible

criticism if United States Purchasing Officers paid for particular
goods previously received by the United Kingdom under Lend-Lease.

This would be done by refunding in any particular cases claimed

by the United States authorities. If desired 8 short list of
important articles could be agreed on which & general refund would

be made of a proportion of the cost corresponding to the proportion
of Lend-Lease supplies to the total supplies in the United Kingdom.
011 is a special case. Broadly speaking, H.M.G. would

provide both lend-lease and sterling oil on reverse lend-lease,
but would expect to be recouped any dollar expenditure in the
case of dl supplies (e.g., from Bahrein) which had involved the
United Kingdom Government in such expenditure.
3.

TASKS AND OTHER CAPITAL WORKS

The original conception of tasks and other capital works
as works carried out on our behalf by the United States should,
since the entry of the United States into the war, be revised to &

conception of them I.B joint works carriedout for the autual

benenfit of the two countries. It is suggested that:(1)
The initial cost should lie where it falls;
1.0., the government responsible for construction,
maintenance, and/or operation should bear the cost,
including the provision of local currency, except for
such supplies and services as it may be convenient for

other governments to contribute. Dollar costs would,
in all Cases, be provided on "end-Le e. We should
be willing to make available supplies and services for
tasks being carried out by the United States Government

in United Kingdom and the Colonial Empire. In the Middle

East, which ever government has assumed re nsibility as
above should normally itself obtain supplies and services
by local purchase wherever expenditure in local currency
is involved.
(11)

The contribution by each government to the

capital and running costs should finally dispose of the

ru-st on of the respective liability of the two countries
and no attempt should be made on either side to record

lend-lease or reverse lend-lease liabilities or to up ortion
the 11 bility according to user benefit. This disappearance
of book records and a protionmen's night, it is suggested,
be arde retrospective.
H.M.G. would like the above principle of no account and

n liability in connecti n with works of mutual benefit extended
as widely AS possible.
4.

PROCECU

United State S demands for reverse lend-lease should be

presented not to the Missions in Wa hington, but to the appropriate
department in London by the ppropriate Unit ed States Mission.

In the case of assignable stores the appropriate department would
KO P the London Munitions Assignment Board informed, and its decisions
would be communicated to the Combined Munitions Assignment Committee

in Washington. It is important that the American requests should
fol OT. the above channel and not be presented direct to the sup liers,
5. DOMINIONS AND COLONIES

We w:11 take the responsibility as regards the colonies
and the same principles will be applied as in the United Kingdom.
As regards the Dominions and India they have be n, and

will be, kept informed of our views. So for bs possible uniform

criteria for reverse lend-less wil be a plied, but there will
no dou t de difference of detail between the various Dominions.
6. RECORDS

We cannot keep complete priced records, and there can be

no joint accounts or records. We not ask the Uni d States not
to expect full records from us. Ro standardised re ulsiton form

is suggested for reverse lend-lease. In particisr no records are
being kept of services (e.g. repairs of army trucks) rendered by

British to Uni' ed States forces. In view of the fact that records
of such service must in any case be extremely incomplete we suggest

that it is important that the principle should be fol owed that no
record should be kppt on ither side in the case of miscellaneous
services.
7. SHIPPING

Under the head of shipping, questions or reve se lend-lease
depend rather intimately on the arrangements made as regard direct

lend-lease, and in view of the complicati na and technicalities involved, the satter needs direct discussion between the Ear Shipping
Administration and the British Shipping Mission.

(Sgd.) F. Phillips
wil ard Hotel
Washington, D.C.

Apr 1 24, 1942

Y

RECIPROCAL LEND LEASE.

Australia is supplying war stores to United States forces in Australia,
and has provided supplies for United States forces in the Philippines
to the value of about $500,000. It has also approved the construction
of special defence works in Australia to a value of about 65,000,000
in excess of the requirements of its own forces, and is considering a
much larger programse of the same Eind, estimated at present to cost
about 650,000,000 and required by the United States forces.
Australia desires to come to on arrangement with the United States on
these matters, and to enter into joint discussion on aspects of autual
interest with representatives of the United States and of the United
Kingdom, with a view to 3 common understanding on the princi les to be
followed based on the terms of the Mutual Aid Agreement of Feb. 23rd
between the United States and the United Kingdom, and on views which
have be n expressed by the Department of State.

3.

A memo of current date setting out the pro osuls of the United Kingdom
in connection with similar arrangements, has been noted. The Australiq
view is generally in accord with the suggestions unde therein, but :
is desired to state certain 5390141 Australian considerations which
have been communicated by the Print Minist F.

The magnitude of Australian suppline to the United tates forces is
likely to he proportionately greater than those of the United Kingdom
or of any other country, with respect to -

(a) the rence of supplies, nd
8 the popul tion and resources of the country, e.s.
(1) The runge of stores to be supplied will include prepared foods
and ersonal entigment for the forces, which In other thestres

will normally be provided fr the United States. It may also

include A larger pro ortion of aras and unmunition and other
military stores and maintenance than could be provided locally

to U.S. forces in other countries.

(11) The supply of all such stores to United States forces in the
South-Test Pacific areas other than Australia the become
large also, particularly when R strong offensive is launched
with Australia LS L base.

(111) The Works proposed are much In excess of the needs of Australia,
other than RS E se for United Nations operations. The add1-

5.

tion of these "Tasks" to on alre dy crowded program will strain
the resources of the country and reduce roduction for comercial
ex art, with consequential reducti ns In OV rsea funds.
Australia is C debtor country with large annual liabilities for intere on

etc. It also has very heavy liabilities in terling, in Canadian dollars, for special F&P ex_ enditures both with respect

(a) to the maintenance of its forces In verious theatres of W&F, r
(b) to the purchase of T&T equipment and exponents in the United
States, Canada and the United Kingdom.

Des ito certain countery iling c edits, Lic can e discussed,

nd severe restrictions on civil torts fro all sources,

Australia is at present faced with a heav. defici on oversea

account.
6.

the desire of the Australia Cover ent to contribute what but its is
needed It is in and from Australia to the fullest itself. possible It extent, 1: realised
circumstances are difficult recisted and seculiar both by to the United States nd the

that these facts and are it e is hoped that & solution satisf ctory to all

United concerned Kingdom, will emerge from the pro osed discussions.

354

- a sigh
Mr. Bloom

Mr. District

Please and the attached e to the Section)
"You Casaler free the Secretary of the -

O
FB:1e:5/8/42

355
S.V.
American

Register

the Secretary of the Treasury

Please eable at sase whatever information you - obtain quickly

is - to the following questions:
(1) In connection with present British individual income
tesse. have - provisions been made to relieve taxpayers with

relatively large contractual obligations such as life insurance,
long-term leases and mortgages and other debt repayments? Prom

ably increased incons taxation has made $ difficult for persons to most weak contructual obligations.

(a) What has been the effect of the increased rates ea the
living standards of the upper inconclusive classest It has I seggosted that living standards have been retained and supported from

liguidation of assets dospite the virtual 1 on the amount of
earrent inconc remising after tax.
(a) In there ovidence that evacion or avoidance has been

attempted or that - important Looyholes have developed to releas
the effectiveness of the tax rates?
(4) Is there ovidence that high rates have reduced appro-

etably the incentive in the upper I groups to centines is
gainful compatient

MB 5/7/48

356

TELEGRAN SENT

PL.IN

HRL

May 8, 1942
LEMBASSY

LONDON (ENGLAND).

2010, Eighth.

For Cassaday from the Secretary of the Treasury.
QUOTE. Please cable at ONCE whatEver information

you can obtain quickly in answer to the following questions:

(1) In connection with present British individual
income taxes, have any provisions been mode to relieve

taxpayers with relatively large contractual obligations
such as life insurance, long-term leases and mortgages and
other debt repayments? Presumably increased income taxation
has made it difficult for SOME persons to MEET such contract.

unl obligations.
(2) What has been the Effect of the increased rates
on the living standards of the upper income classes? It
has been suggested that living standards have been retained

and supported from liquidation of assets despite the virtual
limit on the amount of current income remaining after tax.
(3) Is there EVIDENCE that Evasion or avoidance has
been attempted or that any important loopholes have
developed

357

-2- #2010, May 8, 1942 to London, England.

developed to reduce the Effectiveness of the tax rates?
(4) Is there EVIDENCE that high rates have reduced

appreciably the incentive in the upper income groups to
continue in gainful occupation?
HULL

(FL)

FD:FL:BMcB

358

COPY

EMBASSY OF THE

UNION OF SOVIET SOCIALIST REPUBLICS
WASHINGTON, D. C.

May 8, 1942

My dear Mr. Secretary:

I wish to acknowledge the receipt of your letter
of May 7 informing me of the allocation of the net value
of the gold deposit of $11,222,110.13.

I am cabling this information to the Soviet State
Bank.

Yours sincerely,

(Signed) Maxim Litvinoff
Ambassador

The Honorable

The Secretary of the Treasury
Washington, D. C.

#

COPY:1ap-5/9/42

359

MAY 8 1942

my dear Mr. Secretary:

Reference is node to your letter of March 27. 1948 (SA).

enclosing copies of a draft test of the general provisions.
Final Rigutoe, related notes and Schedule 11 of the proposed
trade agreement between the United States and

Reference is also sade to the letter addressed w the Chief
of the Division of Commercial Policy and Agreements of the Deposit-

meat of State to the Director of Nometary Research of this Depart-

sent on April so, 1942, relative to the scope of Article X of the
proposed agreement.

is examination of the submitted provisions of the proposed

trade agreement, when considered is the light of the letter of
the Chief of the Division of Generalial Policy and Agreements

referred to above, discloses as administrative difficulty for
the treasury Department which would warrant objection by me to
the conclusion of the agreement.

Very truly yours,
(Signed) H. Morgenthau, Jed

Secretary of the treasury.
the Recorable,

The Secretary of State.
8-6-62

fine
Thompeon
co-m.m.
By manager Sturgies 4:40

360
COPY NO.

13

BRITISH MOST SECRET

(U.S. SECRET)

OPTEL No. 152

Information received up to 7 A.M., 8th May, 1942.
1. MADAGASCAR

French Forces on the ORONJIA Peninsula (south of DIEGO SUAREZ BAY

and east of ANTSIRANK) have surrendered. The Fleet has entered DIEGO SUAREZ

Harbour. During sixth, two enemy bombers were certainly and one probably

destroyed by our fighters.
2. NAVAL

One of H.M. motor launches has been sunk by enemy action off MALTA.

One small Russian ship sunk off NORTH CAPE on first.
3. AIR OPERATIONS

WESTERN FRONT. 6th/7th. About 80 tons of high explosives and incendiaries dropped on STUTTGART area, extensive fires reported.
7th. Twelve Bostons attacked coke ovens at ZEEBRUGGE, which was

soon to be enveloped in smoke, and power station at OSTEND. 21 Squadrons of

Spitfires provided escort and carried out one sweep, but no conclusive combats
took place. A Junkers 88 was destroyed south of PORTLAND.
7th/8th. Aircraft were despatched - Sea mining 81 (east coast DENMARK
and HELIGOLAND), ST. NAZAIRE 5, Lonflets Vichy 1. Two aircraft are missing.

convoy of 12 ships was attacked off TEXEL. Proliminary reports indicate that
about ten hits were obtained. Two Hudsons are overdue. A small number of
enemy aircraft operated over this country, causing slight damage in KENT and
SUSSEX. Two were destroyad by Boaufighters.
EGYPT. 3rd/4th. 20 enemy aircraft bombed ALEXANDRIA causing slight

damage. Beaufighters destroyed one and damaged two, whilst anti-aircraft
probably destroyed another.

BURMA. 5th. Blonhoims made a successful low-levol attack on loaded
barges at MONWA several being hit.

5th/6th. Wellingtons, boubed AKYAB. Three Fortresses started large
fires at MINGALADON herodrome.
4. INTELLIGENCE

French Navy. There WILS no change in the disposition of French Naval
Units at DAKAR on 6th May.

A