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Although the reports of the American Bankers1 Association and
the New York State Bankers1 Association differ as far as presentation,
accuracy, and degree of detail are concerned, they take substantially the
same positions on all matters of importance• Both reports oppose establishment of the Fund and favor acceptance of the Bank plan with such amendments as are necessary to enable the Bank to take ovsr some of the functions of the Fund* The arguments against the Fund aru many but they revolve
around two main points: (l) that members have what amounts to a right to
borrow from the Fund and the Fund's resources are therefore bound to be
abused; and (2) that the Fund plan recognizes too much flexibility of 3xchange rates and permits too much exchange control•
1* The Right to Borrow and Abuse of the Fundfs Resources
The reports say that members have an implicit right to borrow
from the Fund and that this is obviously contrary to accepted banking principles ^ They are convinced that members will abuse their borrowing privileges and the Fundfs resources will be wasted•
Proponents of the Fund have explained that members can borrow
in general only to meet payments due for goods and services and that the
Fund can at any time declare a member ineligible to use the Fund if it is
using the resources of the Fund in a manner contrary to the purposes of
the Fund# The association reports aay that these limitations are too general to mean anything• Although the phrase ffin accordance with the purposes of the Fund" is general, the purposes themselves are more specific#
The two purposes which are especially relevant are*
"To give confidence to members by making the Fund1? resources
available to them under adequate safeguards, thus providing them
with opportunity to correot maladjustments in their balance of payments without resorting to measures destructive of national or
international prosperity,
"In accordance with the above, to shorten the duration and
lessen the degree of disequilibrium in the international balances
of payments of members f M
These purposes make it quite clear that the Fund's resources are to be used
to help countries meet temporary trade deficits and to give them an opportunity to correct more deep-seated maladjustments^
The bankers emphasize, however, that it will be difficult to decide in a given case whether credits are being used in accordance with
these purposes• The corrective measures needed and the extent to which
they might be destructive of national prosperity are matters upon which
there may be serious differences of opinion. This is true of coursef The
management of the Fund will have to weigh conflicting considerations. The
success of the Fund will depend in large part on ths management but this
is the case with every institution*

- 2 The reports emphasize particularly the fact that a member can
borrow from the Fund to meet an adverse trade balance unless and until
the Fund objects• This indicates, in their opinion, that resources of
the Fund are bound to be wasted before the Fund can object* A country
may borrow even though its budget is not balanced, for example, or its
financial policies are such as to result in a chronic trade deficit*
Furthermore, they believe the Fund will not step in when it should because members have been led to expect credits and will exert political
pressure on the management of the Fund.
The associations do not seem to realize that the fact that
members can come to the Fund and expect help under certain conditions,
and until the Fund objects, is at the very core of the whole Fund Agreement* Foreign countries would not be willing to accept firm commitments
on exchange rates and exchange controls unless they had this feeling of
confidence* Furthermore, there are bound to be many cases in which an
adverse trade balance is essentially a temporary phenomenon and use of the
Fund will prevent disturbing and destructive measures. If a drop in
France's exports leads immediately to defensive deflationary measures and
restriction of imports her exchange difficulties will spread to other
countries and a vicious circle of restrictions on trade and deflation
will be set in motion* If Prance, with the help of the Fund, can maintain
her imports a whole series of deflationary and depressing reactions may
be prevented. It is imperative that a country should bo able to get
credit without delay in such circumstances because any delay may lead to
a series of expectations of further difficulties and aggravate the situation* The bankers1 proposal tjmt the Bank should sit back and analyse
the situation and stipulate a whole saries of conditions before making a
loan to France would destroy the very important sustaining effects of
the Fund system*
Furthermore, there is no way of telling when a deficit first
develops what has led to the deficit and just what measures are required•
The bankers1 idfca of making individual stabilization loan? on condition
that the borrowing government balances its budget, establishes a new government, raises interest rates, etc*, is really based on experience in
the 3 ° t s when the bankers, after a period of instability, deflation, unemployment, and exchange depreciation, made a loan to a country when that
country was already in a position in which it had to do something drastic
to get back on its feet* The Fund aims, once members have achieved sufficient stability to be eligible to borrow from the Fund, to prevent any
country from getting into such a position* Under the Fund plan there
will have to bQ specialists watching the situation in France and every
other country and especially their borrowings fropi the Fund* If France
should borrow continuously from the Fund these specialists will set to
work to analyse the situation* They mp,y war© the French authorities that
certain corrective measures are necessary* Once France has started to
borrow from the Fund she will not want to be declared ineligible to borrow further and will be receptive to the views of the Fund* The efforts
to correct tho situation will be the subject of the best possible advice
and altered as the situation develops* The Fund method aims to keep a
country in a standing positicn, not merely to help it to its feet after $
fallf The Fund aims to influence every country to keep its house in order, not to force countries tojjut tfceir house in crder after months or years of neglect •

-3It is true that you can not start with the ide$, of keeping a
house in order if it is already badly in need of a thorough overhauling•
That is why the Fund plan makes it clear that members do not become eligible to borrow in any automatic fashion• The Fund must decide that a
member has achieved sufficient stability to make good use of the Pundfs
resources before the member is allowed to borrow from the Fund at all* ,
In the immediate post-war period the bankers1 procedure has its place*
But once members have achieved a reasonably sound position the Fund procedure offers much greater chances of sustained stability.
It is quite true that the Fund procedure will work only if the
Fund does exercise its power to declare members which are not playing the
game ineligible to borrow, The lengthen!the importance attached to, the
discussion of this power both at Atlantic City and Bretton woods arc testimony to the fact that the countries represented do not consider that
they have an implicit right to borrow or that the management of the Fund
is not intended to control usa of its resources* The management must be
able and courageous, of course, and not subject to all sorts of political
pressures* But surely the same thing is true of the Bank proposal in
spite of its thoroughly conventional provisions concerning loans for longterm development and reconstruction p r o j e c t s /
The bankers1 associations are concerned not only with the use
of funds borrowed by members but also with the conditions governing re~
payment* They dislike the idea of no specific time limit on loans and
think the deterrent (interest) charges are too low* They point out that
the repurchase provisions will ensure repayment in some cases but not in
others* I am sure that, if they had any confidence, as the proponents of
the Fund have, in the Fundfs ability to preserve some degree of stability
in international monetary relationships they would not be unduly worried
about repayment•
There are several other objections to the Fund proposal on
the part of the bankers1 associations which grow out of their contention
that members have an "implicit right11 to borrow and that the Fund will
not be able to prevent abuse of its resources*
(a) They say there is no general need for assistance on the
tremendous scale of the Fund plan and cite large gold and foreign exchange reserves held by many countries* This argument is not very convincing in view of the following facts: several countries will use a
large part of their reserves to meet immediate post-war needs; in many
countries the reserves are tied up in meeting legal reserve requirements;
all of the major oountries have independent reserves in excess of their
quotas and have to use up their reserves at the same rate as they draw on
the Fund; even countries with large reserves may restrict foreign trade
\J One point the bankers fail to elucidate is what kind of provisions they
..-fcould favor as far as stabilization loans are concerned* The existing
provisions are obviously not applicable* There is every reason to believe that the type of conditions the bankers would like to specify
would not be acceptable to any of the major foreign governments*

or adopt deflationary measures rather than lose substantial quantities of
gold; and as* of March 19i|lj.# 22 of the member countries with quotas amounting to 2<5 billion out of foreign quotas totalling 6.1 billion, had gold
and dollar reserves equal to 50 per cent or less of their 1929 exports and
trade will certainly reach higher levels after the war, Furthermore, the
Fund does not make huge sums available: maximum loans will be nearer $i+
billion than $8 billion• And the annual maximum drawing privilege of all
but 2 countries other than the United States is less than 20 per cent of
the value of their exports in 1936and of 26 countries is less than 10 percent*
(b) The reports object to setting up the Fund in the transition
period primarily because of distrust of the Fundfs lending methods* They
seem unimpressed by two safeguards which are certainly of the utmost importance* First, the Fund may postpone all exchange transactions until conditions are reasonably stable, Second, the Fund can postpone transactions
with any one member until it is in a position to make good use of the Fund*
Fear is expressed in the repprts that the resources of tho Fund
will be used for relief and reconstruction, It is true that any credits
granted in the transition period to a country in need of relief or reconstruction credits will indirectly help that country to meet its relief or
reconstruction needs, Th$ Fund can surely prevent substantial use of its
funds for such purposes however* It must be remembered also that there is
little chance of the Fund being engaged in exchange transactions before
late in 19l|6t By that time immediate relief needs in Europe will have been
met, and the Bank will be able to help finance recobstruction# Furthermore, annual borrowing privileges are small enough to prevent any serious
drain in a period of one or two yearst
The reports also refer to credits b$ing wasted in the transition period in supporting exchange rates which can not be maintained.
Here the general uncertainty and Jack of clarity as to their whole position on exchange rates and exchange controls becomes apparentt Tne problem is discussed below.
(c) Because the bapkers are convinced that loans will be misused and not repaid in a reasonable time, they think the Fund is pretty
sure to run out of dollars, TOien this happens they believe the United
States will be under heavy pressure to lend more to the Fund, If theFund
is reasonably well managed and still runs out of dollars it will be because, despite the Fundfs influence, the United States balance of payments
with other member countries has been favorable to the amount of at least |6
billion^ Exhaustion of the Fund's dollars will make it quite clear to this
country that our failure to balanoe our international transactions has made
it impossible for us tp maintain our exports unless we buy more abroad or
lend more abroad. The fact that this situation will be made clear is probably a very good thing* It may induce us to lower tariffs pr expand our
income. Furthermore, I dp not "Hi ink it would be impossible for the United
States to refuse to lend more to the Fund at that time. There is already
considerable understanding of the possibilities of maintaining exports by
loans and yet the opponents of government foreign lending programs are
able to win tremendous support.

- 52» Exchange Rates and Exchange Controls
The whole object of the Fund plan is to achieve reasonable stability of exchange rates and the elimination of exchange controls• The
Pundfs resources are to be used to help countries to live up to their com*
mitments as far as exchange rates and exchange controls are concerned* In
this most crucial and difficult area the bankersf reports are unconvincing
and unclear.
Both reports take the general position that the Fund provides
for more flexibility of exchange rates than it should* There is reason to
believe that the bankers are confusing rigidity with stability and are not
fully aware of the fact that permitting necessary changes will contribute
in the end to stability•
The New York Bankers1 report raises a number of objections to
the precise language of the proposal* They object to the fact that "funda*mental disequilibrium11 is not defined and to the fact the Fund is not to
reject a change in rates ffbeeause of the domestic social or political policies11 of the member requesting the changef These specific objections to
language are unreasonable. With no definition of fundamental disequilibrium the management of the Fund is quite free to develop its own criteria*
Any specific definition might force the Fund to approve changes they would
not otherwise approve. The clause about "domestic social and political
policies1* does not reduce in any way the absolute power of the management
to deoide whether or not a change, in rates is necessary to correct a fundamental disequilibrium* If a large government spending program for social
security is leading to a rise in incomes and prices which is making it difficult for "Britain to ipaintain the established rate the Fund can ppint out
to Britain that a change in rates will not correct tho situation because a
new rate would soon be out of line if Britain continued her government
spending program* The Fund may decide to grant a change to offset whatever rise in prices has already taken place or it may not. It may point
out that contraction of government spending can correct the situation, If
it dow approve a change $n rates to meet the existing lerefj of prices and inoome it
can certainly refuse to lend to Britain to support the new rate if Britain
continues her spending program. It can thus exart great influence on Britain to give up a policy which would be bound to lead to the necessity of
further rate changes.
The reports believe that differences of interpretation between
the British and Americans on the subject of exchange flexibility show that
the Fund provisions on exchange rate changes will be unworkable9 They do
not seem to realize that public statements both here and abroad are bound
to exaggerate somewhat the phrase? which will be most popular. They neglect to point out Britain1s real and longstanding interest in the reasonable stability of sterling. The British want to have some confidence that
a change will be approved when they have reached a situation like that of
1931 and a change in rate seems absolutely necessary. But this does npt
mean that the British will \>e seeking to change their rate frequently or
that in the actual situations which arise th^re will be great difference
of opinion between the British and American representatives on the Fund.

- 6All the comments in the reports on exchange rate flexibility
become difficult to understand when it is realized that the reports recommend, instead of a firm principle of changes (beyond 10 per cent) only
with approval of an international body, that agreements for consultation
on exchange rates be added to the Bank plan* How could mere consultation
persuade a country to not change its rate if outright Fund objection
would hot? Perhaps the bankers would want the American representatives
to be able to oppose any change and not even be governed by the principle
of grafting a change when necessary to correct a fundamental disequilibrium*
This would lead to all;the exchange rate fluctuations and difficulties of
the 30 f s rather than to Stability of ratss*
As far as the transition period is concerned, both reports imply that changes in rates will be necessary and therefore object to the
Pundfs resources being used to help maintain rates. Surely, however, the
bankers would not want to see a repetition of the fluctuating rates from
1919 to 1925• Such fluctuations lead to world^wide disturbances• Under
the iPund proposal it is provided that somewhat greater flexibility shall
be allowed in the transition period. Neither the Fund nor the member
countries will have any incentive to waste the Fundfs resources in trying
to support untenable positions, and the mere existence of the whole Fund
Agreement will contribute in an important w$y to confidence in the currencies of member countries and thus prevent disturbances which would otherwise occur.
Both reports take the same kind of attitude on exchange controls
that they take on exchange rates. They say the Fund provides for maintenance of and approval of too much in the way of exchange controls* They object to particular detailed provisions as being too weak or sanctioning
objectionable types of controls• But their own proposal is merely that
there be provision under the Bank Agreement under which a 11 members agree
to the gradual removal of controls and consultation on exchange controls«
It is very difficult to see how mere consultation could accomplish as much
as the provisions in the Fund plan which give the Fund power to require
removal of controls and the power to refuse to approve of any introduction
of new controls. They are afraid the Fund may never succeed in eliminating
controls. But their own proposal would be much more apt to lead to a
greater and greater reliance on and tightening of controls* Under the
Fund plan a member which tries tp relax controls has some confidence that
it can draw on the Fund to meet a temporary deficit. Furthermore, under
the Fund plan a country which does not relax controls as quickly as possible can be refused credits, or even suspended from membership*
The New York Bankers1 report says the Fund can only require removal of controls w in exceptional circumstances11 and thinks this language
puts a heavy burden of proof on the Fund. But it must be remembered •
that this clause simply recognizes that it would be evidence of bad faith
on the part of members if they did not relax controls as quicly as possible and that the Fund does not expect members to act in bad faith.
The New York Bankers1 report also quotes Keynes as saytng that
nothing in the plan would prevent a barter trading agreement requiring
some matching of imports and exports with particular countries* There is

- 7no difference of opinion on this issue between the Americans and British
who understand the whole problem* The Fund does not have anything to say
about quantitative trade restrictions, quotas, tariffs, etc, The regulation of such practices must be taken care of under an international com*
mercial policy agreement• Elimination of monetary controls would accomplish little if trade controls wer6 not also eliminated, and vice versa•
The New York Bankers1 report is also very much concerned because
the Fund permits complete freedom to control capital movements • They say
that control of capital movements is impossible without some supervision of
all exchange transactions. This is quite true but they seem to imply that
supervision of all transactions means restrictions on all transactions*
This is not true* Members are bound not to restrict payments on current
transactions and can control capital movements provided the controls are
not exercised "in a manner which will restrict payments for current trans*
It is surprising that the New York Bankers1 report does not recognize that most members will not control capital transactions except in
periods of difficulty and that control of capital transactions in such circumstances is absolutely essential for the maintenance of international
monetary stability* Speculative capital movements were one of the most
disturbing factors in the inter-*ar period and might take place on an even
larger scale after the war if completely unchecked*
It is again difficult to understand just what the bankers contemplate in the transition period* They donft like the idea of loans be*
ing readily available, they don f t like exchange rate changes, and they
don't like exchange controls* But one QT another of these methods will
have to be resorted to and a reasonable combination of the three is provided for under the Fund Agreement* The bankers are not following the
position of John Williams on exchange controls* He definitely believes
that exchange controls should be relied on in the transition period* The
bankers want as little as possible of all three and seem to have unbounded
faith in the extent to which internal stability and putting onefs house in
order can eliminate balance of payments and exchange difficulties* It is
quite mweasonable to think that internal measures can cure all balance of
payments problems, and especially that they can do so without leading to
very serious internal maladjustments*

Alice Bourneuf
February 28,