Full text of Marriner S. Eccles Papers : Bretton Woods Agreements, Box 36, Folder 11, Item 1

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E° R PUBLICATION - SUBJECT ID REVISION

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B R E T T O r : WOODS A G R E E M E N T
E. A. Goldenweiser and Alice Bourneuf
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In .July of this year there was held in Bretton Woods, -New
Hampshire, a United Nations Monetary and Financial.Conference., At
this meeting there vrere representatives of forty-four United Nations
and the nations 'associated with them and of Denmark. Agreement was
reached on the establishment of an International Monetary Fund and
of an International Bank for Reconstruction and Development. There
were also agreements on certain other matters. These agreements are
a l l in draft foxm to be su emitted to the various governments, none of
which i s bound to accept them. Nevertheless, the reaching of an
agreement on Important economic phases of the postwar world, wo iked
out in detail and ready to be put into operation when-sanctioned by
governments, i s an achievement of historic importance. I t indicates
a b i l i t y of the United Nations to cooperate in working out problems of
the future. I t augurs well for concerted action in other fields .and
for the reestablishrnent after the war of workable arrangements for
cooperation in the interest of the common welfare.
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The International Monetary Fund aims at. the restoration of
conditions under, which transactions arising out of foreign trade can
be settled smoothly with the elimination of unnecessary, risks and
haimful pressures on the economies of participating, countries,. The
Fund i s not intended to correct economic maladjustments in the different countries, but will exert an influence on members to' undertake
corrective action and afford them time to.make such action effective.
I t will, promote exchange s t a b i l i t y and offer f a c i l i t i e s for orderly
adjustment of exchanges when necessary to-the correction of basic
maladjustments,
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. . Ihe proposed International Bank for. Reconstruction and DeVelojEient i s designed for the purpose of making long-term productive
foreign loans to member countries out of i t s own funds or out of funds
borrowed from pri-vate investors, .and of guaranteeing such loans made
through the investment market. All members will share the risks in
proportion to their participation.. I t i s intended 'to assure funds
for the reconstruction of derastated countries and for the development
of resources in a l l member countries.
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The two institutions are mutually supplementary. The operations of the Fund would reduce the ezchange risks involved in i n t e r national investment, and the Bank v/ould provide help to. countries in
developing their economies in such a way as to be able to keep their
international payments in balance. Together, the two instittitions,
i f they-become r e a l i t i e s , will mark a great advance in the direction
. of a better economic world. They do not aspire to provide a l l the
elements necessary for the reestablishment of sustained international




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trade and prosperity. In particular, they cannot take the place
of the development of sound domestic policies nor of the adoption
of rational commercial policies shaped in accordance •with the position of various countries as creditors or debtors in their i n t e r national relationships.
Much has been accomplished a t Bretton Woods, but much
more' will have to be done before the countries devastated by the
war have been rehabilitated and many disruptive tendencies that
were operative before the -war have been rectified.

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HONETA.HT FIEID
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Introduction

Revival and expasion of international trade i s the central
objective of the International Monetary Fund. Ihe Agreement aims to
eliminate unnecessary exchange risks by promoting exchange stability
and establishes a procedure for the orderly adoption of such changes
in exchange rates as may be agreed to be necessary* Bie Fund also
aims to eliminate ihe destructive practices "which interfered with the
flow of world trade before the war, such as indiscriminate exchange
restrictions, multiple currency practices, and b i l a t e r a l clearing
agreements, and to assure member countries that the proceeds of sales
to any one member can be used for the purchase of goods in any other
member.

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In order to a s s i s t member countries to maintain stabXe exchange rates and avoid • harmful restrictions on trade a .pool of r e sources contributed by a l l member countries i s established,. The
Fund' s resources will be used to give member countries faced with
an international drain a breatiling spell during which they can make
necessary adjustments* The Fund i s intended to-be a revolving fund
from which members can meet temporary shortages. After a.reasonable
time a, member country must cease to be dependent on the Fund, so that
i t may be able to continue to serve others•
By providing for alterations in exchange rates when necessary and by giving member countries time in which to take corrective
action the Fund can eliminate the harmful pressures on the, economies
of individual countries •which otherwise might have adverse effects
not only on the country concerned but on other countries as well.
Each country's original contribution i s definite and i t s
commitment to the Fund i s limited to that amount. If the Fund wishes
to obtain more of a member1 s currency i t can do so only by borrowing
i t with the member's consent. Since the Fund will deal only with
central authorities and will handle only net balances which have not



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been cleared in the market, the Fund's operations •will in no tray i n t e r fere TO.th the regular exchange market.
A question arises about the similarities and the differences
between the functioning of the proposed International Monetary Fund
and the functioning of. the gold standard. The fundamental forces a t
wo-rk would-be the same under both systems. Under the gold standard,
as under the Fund, each country ultimately must find means of paying
for i t s -foreign purchases by i±ie sale of i t s goods and services. Under
both arrangements temporary deficits can be met by -gold shipments and
by credit^ and under neither of the arrangements can these methods
offer permanent solutions."
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The Fund proposes to reestablish international currencies on
a gold basis, but relieved of the disturbing rigidities "which characterized the gold standard. One important difference between the. gold
standard world and the one, visualized under the International Monetary
Fund i s that such adjustments as have to be made in exchange rates will
be orderly, systematic, noncompetitive and taken in the l i g h t of full
information and consultation with an iiirpartia-3, body. They will not
involve a breakdown of established machinery, as they did under the
gold standard. Another important difference i s that such borrowing of
short-term funds as was done under the gold standard ?ra.s entirely uncontrolled and consequently subject to uncertain conditions prevailing
in the short-term money market, while under the Fund there -will be fac i l i t i e s available for obtaining temporarily the use of foreign currencies on reasonable and equal terras for a l l countries, regardless of
pressures that may exist in money markets. The result of these differences i s that under the International Monetary Fund the violent domestic
adjustments a t times required by the gold standard will be avoided both
because the Fund will enable .a country to tide over a bad situation and
will exert i t s influence to cause proper adjustments to be made and
because a change 6f exchange rates will be permitted when i t becomes
necessary.
In the .following pages there i s presented a description of
the proposed Fund's mechanism. Full details are given in the published
text of-the Agreement. .::'•' . .
.I-..: 2 . " Exchange R a t e s

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Exchange rates and members* obligations in respect to' them
are a central
feature of the Fund agreement. After the par value of
a member1 s currency :<has been established, in -accordance with an agreed
•procedure, the Fund will prescribe a margin above and below par value
for transactions in. gold by that member and; the member i s not allowed
to buy gold a t a price above par value by more, than that margin or s e l l
i t a t a price below par value by more than that margin. Members undertake to permit'•'• exchange transactions between their currencies and other
member currencies'only a t rates within a prescribed range. This range
in the case of spot exchange transactions i s one per cent above and
below par. A member whose monetary authorities freely buy and s e l l gold



for the settlement of international transactions within the prescribed
margin of parity for such transactions i s considered to be fulfilling
the undertaking not to permit exchange transactions outside the pre*scribed aange.\ In substance, then, a member undertakes to maintain,
if'necessary by freely buying or selling gold, the established rate of
exchange between i t s currency and foreign currencies, except as methods
for orderly and necessary changes are provided by the agreement.
The Fund's purpose i s to promote exchange stability as an
important means for the restoration of world trade> but i t recognizes
that -certain changes in rates may become necessary * No change in. a
member1 s rate can be made except on i t s own proposal arid members agree
not to propose a change except to correct a fundamental disequilibrium'.
Member countries are given the right, after consultation with the Fund
but without obtaining i t s .concurrence, to a l t e r the par value of their
currencies by ten per cent frcm that i n i t i a l l y established*' For any
proposed changes beyond ten per cent the Fund has a right to concur or
object, but on changes which do not exceed a further ten per cent the
Fund must either concur or object within seventy-two hours if the member
-so requests. There i s a special proviso that a member may change the
par value of i t s currency without the concurrence of the Fund i f the
change-does not affect the international transactions of members of the
Fund. I t i s difficult to conceive of such a situation.
In order to protect member countries from deflationary pressures resulting from inability to adjust exchange rates to wo r i d , conditions, i t i s provided that the Fund must concur in a proposed change
i f i t i s satisfied that the change i s necessary to correct a fundamental
disequilibrium. Also i t must not reject such a change on account of
the domestic social or p o l i t i c a l policies of the proposing member. I t
i s for the Fund to determine whether or not a change i s necessary to
*"• correct a fundamental disequilibrium.. This places on the Fund the
responsibility for acting impartially and rationally on such' proposed
changes as may come before i t .
I t i s recognized that the postwar transition period will be
one of change and adjustment and that during this period the Fund must
give members the benefit of any reasonable doubt in deciding on their
requests. I t i s certain that during the- immediate postwar period more
than ordinary flexibility in exchange rates will be required. I t would
be impossible for the Fund to a c t immediately after the war with such
wisdom as to provide rates of exchange that would in a l l cases continue
to be appropriate as the process of reconstruction proceeds.
The question may be raised whether these provisions go a long
vray toward- diminishing the hoped for s t a b i l i t y of exchange rates. There
i s every reason to believe that the opposite i s the case. Stability
does not mean rigidity and rigidity in the past has. resulted in extreme
i n s t a b i l i t y . « A country which finds that i t s domestic economy i s suffering greatly from inability to balance i t s international transactions a t
i t s existing exchange rate and which finds i t impossible' to correct the




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situation by other adjustments without seriously haimful consequences,
has no alternative but to change i t s r a t e . Persistence in attempts
to maintain the existing rate i s likely to,.have important disturbing
effects both a t home and abroad and to result in the necessity of
larger and more frequent changes in rates when the changes are eventually made than would have been necessa,ry had the country acted promptly.
The provision for orderly changes in rates a t such times, in consultation vdth the Fund and with i t s concurrence, i s , therefore, a contribution in the long run to stability of rates rather' than an impingement
upon i t . And, finally, stability of rates i s not so much an end in
i t s e l f as a means of promoting .trade, and, through trade, a high level
of employment and income. Insistence on stable rates, irrespective: of
the effects of those rates on employment and income, may mean losing
sight of the objective.

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If a country changes i t s rate by more than ten'- per cen:tfrom
the i n i t i a l rate without the Fund's concurrence''the Fund has authority
to declare the country ineligible to use the Fund1 s resources. In such
cases, i f the Fund and the member do not ccme to an agreement on the
rate within a reasonable period, the\Fund can require -the country to
withdraw from membership i n the Fund.
' : There i s a special arrangement. v,rherob-$- the Fund may decide
to make a uniform proportionate, change in the par values-of a l l member
currencies. The decision to make such a uhifoim" change requires the
approval of a majority of the total votes plus the approval of each
country having ten per cent or more of the quotas, i . e . the United
States, United Kingdom, and the Union of Soviet Socialist Republics.
Any country, however, may refuse to accept such a change in respect
to i t s 6mr currency provided i t notifies the Furid yd thin 72 hours.
Such a uniform'change in par values would revsult in no change in the
world pattern of exchange rates. Values of currencies in gold would •
change, but values in terms o£ other currencies .would remain the same.
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Exchange Restrictions

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Member countries undertake the obligation hot to impose r e strictions on the making of payments and transfers for current
international'transactions without the approval of the Fund. r Payments for
current transactions are definpd in the Agreement as including payments
due in connection with trade, service, and normal short-term -banking
cLnd credit a c t i v i t i e s , payments of interest' oil loans and of net income
from other investments, payments in moderate amount for amortization
of loans or for depreciation of direct 'investments, and moderate r e mittances for 'fondly living expenses. In particular, current transactions do not include payments for the purpose of transferring capital.
The Fund i s empowered to detemine whether specific transactions are
current or capital transactions.. Each member has a right' to control
international capital movements -provided i t dees so in a manner which
does not r e s t r i c t payments for current transactions or unduly delay
transfers 'of 'funds- in settlement of coranitnents.




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Besides the general obligation to avoid restrictions on current transs/ctions, menfbers: are. obliged not to engage in any discriminatory currency arrangements or multiple currency; practices 'without
the approval of the Fund. If a member i s engaged in such practices
when the Fund Agreement comes "into force, i t must consult witil the Fund
as to their progressive removal.
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Exception to the general rule i s made in respect to scarce
currencies, which are discussed l a t e r . There are also provisions by
which members may avail themselves of special arrangements made for the
post-war transitional period. Members intending to avail themselves of
these arrangements must .notify the Fund. Under .'these special arrangements members may maintain and adapt to changing circumstances r e s t r i c tions on payments and transfers for current international transactions.
However, members which maintain .restrictions in accordance with this
arrangement must take a l l possible measures to f a c i l i t a t e international
payments and m.ust withdraw such restrictions as soon as they believe
that they will be able, without the restrictions, to settle their b a l ances of payments without, being forced to draw too heavily on the r e sources of the Fund. Starting three years after the Fund begins operations the Fund must issue an annual report on the restrictions s t i l l
in force under these transitional arrangements. After the fifth year,
any member s t i l l imposing such restrictions must consult with the Fund,
The Fund may indicate to a member that i t i s in a favorable position to
withdraw any or a l l of i t s restrictions and, after a suitable time, may
require a member to withdraw from the Fund i f i t continues to maintain
those restrictions.
The reason for these exemptions i s that i t would be impossible
to require a l l member countries immediately to remove a l l restrictions
on current transactions. If that wore done, some members would1 be forced
to rely heavily on the Fund with the consequence that the Fund s r e sources would be used increasingly in financing deficits in international
payments incurred tsy countries which are as yet in no position to take
advantage of the Fund* s temporary assistance to balance their* trade with
the rest of the world without such restrictions. On the other hand, a l l
member countides are committed gradually to abandon restrictions, and
after five years the Fund has the power to refuse the use of i t s resources
to, or require, the withdrawal of, a member which i s not eliminating i t s
restrictions as rapidly as the Fund believes this should be done.
In addition to the obligations to avoid restrictions on current
transactions and discriminatory currency practices j u s t described there
i s a special' convertibility provision. Subject to specified exceptions
this provision assures a member ( i . e . a Government and i t s agencies as
distinct from the general public) that i t can bring home the balances
i t hol(5.s in another member country 1) i f the balances have been recently
acquired as a result of current transactions or 2) i f their conversion
i s needed for making payments for current transactions^ The f i r s t part
of this provision assures a member that the proceeds of merchandise exports and other* current transactions can be brought home a t the paiiiy




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".' rate •"- an. assurance that, is. implicitly given- to the general public
as well elsewhere; in the Agreement. If, for instance, the French
authorities have, recently acquired sterling ba?»ances as a result of
current transactions, France can require England .to convert the balances
into francs (or 5 a t England1 s option, into gold which i s readily convertible into francs).
The second part of the provision applies to balances acquired
a t an earlier period or from other than current account, transactions.
The principle adopted i s that these balances,, too., which are part of
the monetary reserves of the countries concerned, should be convertible
for making payments for current transactions. Since each member i s
free, however, to regulate- international capital movements, i t i s free
to r e s t r i c t the use of balances of this characters and hence i t can a t *
i t s own discretion relieve i t s o l f a t any time of this second obligation.
There are other limitations .to both obligations above.. In the
example given, England will not be obliged to purchase the sterling
balances i f a t that tine England i s , for any reason, not entitled to
purchase foreign currencies from the. Fund. The obligations .in. this
special form apply only when England i s in a position to f u l f i l l them
through purchase of the required currency from the Fund. The obligations lapse, also, i f the currency needed for making the purchase, in
this case francs, has been declared scarce. If francs have been declared scarce England may be.able to obtain a certain amount of francs
from the Fund but she i s authorized to r e s t r i c t franc transactions as
she sees f i t and therefore cannot be forced to convert sterling balances
into francs. Similarly, .the obligations do not apply if England has
obtained the approval of the Fund to r e s t r i c t payments due on current 1
transactions or i f the balances have been acquired contrary to England s
exchange regulations. Finally, the o litigations do not apply to* sterling
balances accumulated during the transitional period i f England has
availed herself of the special transitional arrangements..
- Although the special convertibility obligations arc, tied up
to the Fund mechanism and lapse when a member i s for any reason no
longer entitled to purchase foreign currencies from the Fund, the general obligation net to. impose restrictions on, the making of payments
and transfers for current international transactions without permission
of the Fund' i s binding, on a l l member countries, irrespective of whether
or not they arc entitled at any particular time -to.draw on the resources
of the Fund.
4- • Subscriptions to the Fund ' ••'•
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"' ' Member countries subscribe, to..the Fund in gold and national
currencies. Each member subscribes i t s assigned quota, the gold part
of the subscription being a minimum of twenty-five per cent of i t s
quota or ten per cent of-its net official holdings of gold and United




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States dollars, vfhichever i s the smaller.^ The attache^ Table 1..shews
the" quotas of, the countries represented at. the United Nations Monetary
and Financial Conference, totaling $8,800 million, the amount of the
required United States gold contribution,. and a rough estimate
of the
required gold contributions of the other countries.
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The Fund1 s gold will be held in the central banks or other
designated depositories of member countries. At the outset, one-half
of the Fund1 s gold Trill be held in the Federal Reserve System and forty
per cent in the central banks of the United Kingdom, the Union of Soviet
Socialist Republics,, China, and France.
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The currency subscription of a member country, and any subsequent acquisitions fcy the Fund of the currency
of a member country, Trill
be held by the Fund in that member country1 s central bank or designated
depository.; Presumably in most countries the Fund will have a deposit
account a t the Central Bank. Under the teims of the Agreement a member
can substitute non-interest bearing demand obligations of the government
for any part of its. currency which the Fund does no£ consider i t necessary to hold as an operating or-working balance. .
The gold value of the Fund* s assets will be maintained i r r e spective of changes in the par or foreign exchange value of a member1 s
currency. Each member i s obligated to compensate the Fund for any f a l l
in the gold value of i t s currency held ^jy the Fund. The Fund, in tarn,
must reimburse the- member for any rise in the gold value of i t s currency
held by the Fund. The Fund may 'waive this obligation if a unifoim proportionate change i s made in the par values of a l l currencies.
5# Purposes for "Which Member Countries Can Use the Fund
Member countries can use the resources of the Fund, in general,
only to finance current transactions with other member countries. This
i s brought out in the statement on the purposes of the Fund which says
that the Fund i s to a s s i s t in the establishnent of a multilateral system
of payments in respect of current transactions. I t i s also brought out
in the section of the Agreement which states that members may not make
net use of the Fund' s resources to meet largp or sustained outflows of
capital, and that the Fund may request a member to exercise controls to
prevent such use of the resources of the Fund and declare a member i n eligible tc use the Fund if i t does not exercise appropriate controls.
1/ Holdings are measured as of the date on which the Fund notifies members that i t will soon be able to begin exchange transactions. For
this purpose net official holdings of gold and. United States dollars
means a member1 s official holdings after deducting central holdings
of i t s currency: by $thor countries and such holdings of i t s currency
by banks and other institutions in other countries which carry specified rights of conversion into gold or United States dollars. The
meaning of official holdings and central holdings i s explained in a
l a t e r section of this paper dealing with the definition of monetary
reserves.



The Fund i s not'intended to enable member countries to meet
•all deficits arising from current transactions.. The Agreement says
that the Fund i s not intended to provide f a c i l i t i e s for relief or r e construction or to deal with international indebtedness arising out of
the -war and i t i s made d e a r that members are not intended to, use the
Fund as a source of permanent financing. The Fund i s to be a revolving
fund which makes i t s resources available to members over reasonably
short periods, of tdme to provide them with an opportunity to correct
•.balance of payments maladjustments, , . , :
The Fund may limit a member1 s use of the resources of the Fund
i f i t i s of the opinion that-the member' i s using them in a manner con•:- trary to the Fund's purposes. "When the Fund so limits a member's use
of the Fund i t must issue a report to the member. If the member does
not make a satisfactoiy reply to the report, the Fund may continue to
limit the member1 s use. of the Fund or declare i t ineligible to use the
Fund.
6. "Manner of Using the Fund
Dealings between the Fund and member countries can take place
only through the Treasuries, central banks,, stabilization, funds, or simi l a r fiscal agencies of member countries. Ordinary transactions in exchange by nationals of member countries "will continue to'be effected
through the usual channels. Only when a shortage of foreign currencies
develops will the market come to the central'authorities, which in turn
will apply to the Fund.
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Although transactions of various kinds may take place between
member countries and the Fund, the essential feature of the Fund arrange*' ment is. that member countries are entitled to obtain currencies of other
member countries from the Fund in exchange for their own currencies. In
the Fund, a country* s currency i s an obligation of that country, a claim
on i t s resources. I t i s important to an understanding of the Fund1 s
operations to recognize that a country's currency, as such, i s good only
in the issuing country, and that ."when i t acquires foreign currencies
from the Fund ajnd'pays' for "them in i t s own currency,, i t , in effect, .
borrows these foreign currencies and gives the Fund, in exchange, claims
on i t s goods and services. The transaction has demonts of a loan.by
the Fund to the country which purchases- exchange. ..from i t , notwithstanding
the fact that the- currency paid into the Fund for the foreign exchange
i s money in i t s -own country. This i s the
explanation of the fact that
throughout the Fund Agreement a country1 s use of the Fund1 s resources1
a t a 'given tine i s measured by the amount of i t s currency in the Fund s
possession in excess of i t s original contribution.
I t i s also essential to an understanding o.f the Fund* s operations to. realize that the Fund must .maintain a balance in i t s holdings
of various currencies. Certain currencies will be much more in demand
by member countries than others and the Fund would be seriously handicapped i f i t s holdings of such currencies became very small and i t s




- 10 holdings of currencies which are not in demand became too large. I t
i s for this reason, particularly, that measures are provided in the
Agreement to encourage replacement in the Fund of currencies purchased
from i t i
Members may also buy foreign currencies from the Fund -with
gold. Such purchases -would not constitute a drain on the Fund, Any
member -wishing to'buy the currency of another member -with, gold i s expected, i f i t can do so with equal advantage, to acquire the foreign
currency through the sale of gold to the Fund. In this'"way the Fund's
holdings of gold, with which i t can buy any member1 s currency, will be
steadily replenished. The repurchase provisions described l a t e r also •
tend to replenish the Fund's supply of .gold or of'Currencies in demand.
7.

Quantitative Limits on Use of Fund

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A member may not increase the Fund1 s holdings of i t s own currency "ay an amount larger than one-quarter of i t s quota in any 12 month
period, except by special permission, or when the Fund1 s holdings of i t s
currency had previously fallen below 75 per cent of i t s quota. In the
aggregate, i t can riot purchase foreign 1 currencies with i t s own currency
in an amount that would bring the Fund s holdings of i t s currency to
more than 200 per cent of1 i t s quota, except by special peimission. This
moans that, i f a country s quote, i s 100 million dollars, of "tfhich 25
million dollars
i s contributed in gold and 75 million dollars in currency,
the country1 s not purchases of foreign exchange from the Fund with i t s
own currency could total 125 million dollars, 'this being the amount that
would bring the Fund1 s holdings of the purchasing member1 s currency to
200 million "dollars or 200
per cent of i t s quota. This general limit of
200 per cent of a member1 s quota i s equivalent to saying that a member1 s
. net purchases of foreign exchange from the Fund with i t s own currency may
not exceed the anount of i t s quota plus i t s gold contribution.

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These quantitative limits on a member1 3 use of the Fund have
been carefully worked out with a view to trie actual resources of the
Fund and the need of keeping the Fund in a position to meet the demands
which may be made on the Fund by other member countries. The limits
apply in general to all countries, but the 1 Fund can waive them, as well
as the other conditions governing a member s purchases of foreign currencies from the Fund. The Fund may decide to waive these limits in
the case of member countries which have a record of avoiding large or
continuous use of the Fund, or have periodic or exceptional needs for
foreign currencies, or are -willing to pledge acceptable. .collateral.
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Repurchases from' the Fund

There arc two provisions requiring a; member in certain circumstances to repurchase i t s currency from the Fund, 1The broad purposes of
the f i r s t of these'provisions are to limit a country s use of the Fund
when i t has,ample other means-of meeting i t s international payments and
to make i t share with the Fund such additions to i t s monetary reserves
as may occur from time to time, provided i t has been using the resources
of the Fund.



- 11 For these purposes a member whose reserves are in excess of
i t s quota i s required a t the end of each financial year to examine
changes in i t s reserve position in relation to i t s use of the Fund1 s
resources and to, make adjustment in accordance with the following rules.
If the member1 s,.reserves have not changed, i t must use i t s reserves to
the extent necessary to reduce "by one-half the year 1 s increase in the
Fund's holdings of i t s currency. If i t s reserves have increased, then
i t must use i t s reserves as in the previous case and, in addition, must
use half of the increase in i t s reserve^ to reduce the Fund holdings of
i t s currency whenever acquired. If the • country1 s reserves have decreased but are s t i l l in excess of i t s quota, i t must use enough of
i t s reserves to make the decrease of i t s reserves for the year equal
to the year 1 s increase in the Fund1 s holdings of i t s currency.
The second repurchase provision i s intended to l i m i t the use
of one currency, such as the dollar for example, for financing adverse
balances of payments between two other countries. This provision i s
necessary to reduce the absorption of scarce currencies into the f i nancing of balances between other countries.
There are certain limits 'on the repurchases which must take
place under these two provisions. F i r s t , no member i s required under
these repurchase provisions to reduce i t s monetary reserves to below
the amount of i t s quota. Second, no member i s required by these r e purchases to reduce the Fund1 s holdings of i t s currency below 75 per
cent of i t s quota. This means that a member i s required to make these
repurchases only i f i t has been making net use of the resources of the
Fund o r ' i f i t originally contributed less than 25 per cent of i t s quota
in gold. Third, no repurchases shall r a i s e ' t h e Fund's holdings of the
currency of any country above 75 per cent of that country1 s quota.
This protects the Fund from acquiring currencies under these repurchase
provisions of which i t already lias an ample supply and insures that the
Fund w i l l acquire only such currencies as are in demand. There are
detailed roles governing the types of reserves to be used by each member country in making the required repurchases of i t s currency.
A member's monetary reserves include a member's net official
holdings of gold and convertible currencies, convertible currencies
being, i n .general, currencies of members of the International Monetary
Fund that have not taken advantage of the special transitional arrangements and currencies of such non-members as the Fund may from time to
time sp.ecify. There i s a special exception by which occupied countries
need not include in t h e i r monetary reserves gold newly mined in the
f i r s t five years of the Agreement. The term currency includes coins,
paper money, bank balances, bank acceptances and government obligations
issued with a maturity not exceeding twelve months. A member1 s official
holdings means central holdings, i . e . holdings of Treasuries, central
banks, stabilisation funds, and similar agencies and also such holdings
of othor official i n s t i t u t i o n s or other banks as are substantially in
excess of working balances and are deemed official by-the Fund after
consultation -with the member. Net holdings are calculated by deducting
from a member1 s official holdings i t s currency l i a b i l i t i e s , to official
institutions or banks in the t e r r i t o r i e s of other members or non-members
the holdings of the currencies of which are included in the member1 s
official holdings.
' '• ' • "••



- 12 •

9.

'

•

*

Charges

.

.

•Members: purchasing foreign exchange from, the Fund-with their
own currencies are required to pay a unifoim service charge of 3/4 of
1 per cent. This charge may be altered by majority vote to not less
than- one-half or not more than 1 pefr cent. If a member1 s purchases
from the Fund raise . the Fund1 s holdings of i t s currency above i t s quota,
additional charges must be levied by the Fund on i t s holdings in excess
of the quota. These charges are levied in proportion to the Fund1 s holdings of the currency of a member because, as explained above, this
measures the extent of a country's use of the resources of the Fund,
Unless a member1 s monetary reserves are less than half i t s quota a l l
charges are payable, in gold.
The rates charged on holdings in excess of the quota are uniform, for a l l countries and vary "with the amount of the currency held
and the length of time over which i t i s held by the Fund. The attached
Table I I gives the rates charged for each step in the upward scale, both
as to amount and as to tine. I t should be noted that these are not
average charges on the entire amount or over the entire period but charges
on each indicated unit of volume and of duration. ':'
The Agreement provides, as indicated in the table, that special
consultations between the Fund and a member must take place.."with a view
•to decreasing the Fund1 s holdings of that member1 s currency when the rate
payable by that member on any amount or for any period of tine has
reached 4 per cent. If the rate rises to 5 per cent, as indicated in
the table, and if the amount held or the period of time over which the
currency i s hold continues to increase, the Fund may impose such charges
as i t deems appropriate. The scale of charges just described may be
altered by a 3/4 vote.
.
•

I t i s clear from the more substantial nature of ;these charges
and the fact that tho rates charged become progressively higher as a
member uses more of the resources ox the Fund or uses them over a longer
period of time that these charges, unlike the service and handling
charges, arc intended to act as serious deterrents to countries making
large or prolonged use of the Fund1 s resources. This i s consistent with
one of the major purposes of the Funcl which is to be in a position a t
a l l times to help any member to meet a temporary deficit in i t s balances
of payments and give i t time to correct maladjustments. The Fund' s power
• to help a l l member countries would be seriously threatened if unduly
large amounts of i t s total resources were used to meet the needs of any
one country * or if any substantial part of i t s resources were in use over
long periods of time. In such cases the Fund1 s holdings of currencies
in demand by most members would'shrink and might become inadequate for
further operations vrhile i t s holdings of currencies not in demand accumulated,
• •
••'•: •
10.

Scarce Currencies • • •

••••

If a country sells goods or services to the rest of the world
in largej*. amount than i t buys abroad, then the rest of; the world must



- 13 either be borrowing the difference or drawing upon i t s monetary reserves or the Fund to pay for i t s purchases. The maladjustment in
the sphere of trade, services, and capital may be of so persistent
a character as to force heavy drafts upon limited national reserves
or resources in the Fund. In such a case, there is danger that the
increasing difficulties of obtaining the currency may staVt a scramble
to obtain i t before i t is too l a t e . Rather than l e t things develop
to this critical point, the Fund, long before the situation lias become
acute, may inform members that a general scarcity of the currency is
developing and may issue a report analyzing the causes of the scarcity
and reconmending measures designed to bring i t to an end.
Should the Fund's holdings of the particular currency become
scarce, the Fund may require the member concerned to sell i t s currency
to the Fund for gold and a l l members undertake to buy gold offered to
them by the Fund if i t is in need of their currencies. Or- the Fund
may make an effort, with the approval of the member concerned, to borrow
i t s currency. I t will have the choice of borrowing from the member
itself or from-other members which happen to have a-supply of the desired currency. But aside from the original subscription, no country
is obliged to lend i t s currency to the Fund, since the total commitment
of each country i s limited to its original subscription to the Fund.
If the demands on the Fund are so great that the Fund* s
ability to supply the scarce currency i s seriously threatened, the Fund
must formally declare the currency to be scarce and apportion i t s supply
among member countries. In doing this the Fund must take into consideration the relative needs of member countries, the general international
economic situation, and any other pertinent factors. I t must also issue
a report concerning i t s action,
•
Once a currency has formally been declared scarce, any member
may limit the freedom of exchange transactions in that currency to the
extent necessary to reduce the demand for that currency' to' the level
of i t s supply. . Each member may determine for itself the -way. in which
i t limits transactions In the scarce currency provided i t does not violate i t s obligations in regard to exchange rates. Members agree not
to invoke the obligations of prior agreements in such a way as to prevent a member from limiting its. transactions in the scarce. currency
to the extent necessary in the circumstances just- described; but each
member also agrees to give sympathetic consideration to the representations of other members with regard to i t s administration of the re:
strictions.
•
One of the Fund1 s endeavors wi*|"l be to prevent the development of a shortage of any currency. But.a persistent demand for a
country1 s goods in excess of i t s purchases of other countries' goods
will inevitably result, with or without the Fund, in a shortage of
that country* s currency. Other countries, may meet the shortage temporarily by selling gold to the country whose currency is scarce, or by
borrowing frcm i t . But, in the end, such a scarcity can only be eliminated by the reostabiishment of balance between the country1 s exports
and i t s imports.



11.

Withdraml,. Voluntary and Compulsory

If any member fails to f u l f i l l any of i t s obligations under
; i
' the Fund Agreement, i t nay f i r s t be declared ineligible to use the r e sources, of the Fund, and i f i t persists in i t s failure, i t may be r e quired to withdraw frcm membership in the Fund. Neither of these steps
will be taken without f i r s t infoiming the member of the situation and
giving the member an opportunity to be heard. Compulsory withdrawal
of a member requires the approval of the majority of the member countries having a majority of the -voting power.
Any member has a right to withdraw from the Fund a t any time
by giving notice in "writing. In case a member -withdraws cither voluntarily or othervrisc, a member1 s accounts with the Fund are settled
either by agreement with the Fund or according to a. carefully worked
out fomula. The formula provides that a l l obligations to the withdrttwing country shall be mot in i t s currency unless i t agrees otherwise.
12. Setting Up the Fund
The Articles of Agreement include carefully worked out arrangements for the coming into operation of the Monetary Fund. Bio provisions,
botfi as to the setting of the i n i t i a l par values of nonbor currencies
and the coranonccnent of exchange transactions by the Fund in particular
currencies, insure a reasonable and gradual procedure. They should r e assure those who are apprehensive about the absorption of the Fund1 s
entire resources during the period of postwar disturbances.
"

-

•

•

•

•

»

No part of the Agreement -will enter into force or be binding
on any country u n t i l governments having sixty-five per cent of the
total assigned quotas, that i s countries having aggregate quotas of
.. , almost six billion dollars, have agreed to accept the obligations of
;. membership, and in no event before May 1, 194-5. The governments repre•••:••.' • sented a t Bretton Woods which accept membership before December 31> 1945,
.. will constitute the original members of the Fund. After that time membership will be" open to any country on such terms as may be prescribed
by the Fund. There i s a special provision that countries which have
been under enemy occupation may sign the Agreement and become original
members, but may postpone actual acceptance of the obligations of membership u n t i l six months after their t e r r i t o r i e s have been liberated from
the enemy.
• •'
:

• •

. When countrios having 65 per cent of the total quotas have
accepted the obligations of membership and the Agreement comes into
force, the United States, having the largest quota, will call a meeting
of the Directors appointed by the members. The Board of Directors will
arrange for the selection of provisional executive directors to serve
u n t i l a. regular election of Executive Directors can be held as soon
as i s practicable after January 1, 194-6.




- 15 ihe f i r s t task of the Fund will be to arrange for the fixing
of the i n i t i a l par -values and for the commencement of exchange operations in member'currencies. "When the Fund decides that i t . w i l l shortly
be in a position to begin exchange transactions i t will undertake to
establish i n i t i a l par •values. I t TO.11 ask each member country to communicate the par "value of i t s currency based on "the rates of exchange
pre"vailing sixty days before the Agreement entered into force. The
date will therefore fro sometime between March 1, 1945> and October 31,
1945. If cither* the Fund or the member i s of the opinion that this par
value i s unsatisfactory, i t must say so within ninety days. The Fund
can object to this par *yalue i f i t appears that i t can not be maintained
without leading to undue use of the resources of the Fund either by that
member or ''ay other members. The Fund and the member must agreo on an
i n i t i a l par value within a reasonable period, and if no agreement i s
reached the member wi 11, be deemed to tezvo Y&thdravjn.
Special provisions for countries which have been occupied by
the enemy allow these countries to postpone communicating the par "value
of 'their currencies u n t i l major h o s t i l i t i e s have ceased in their t e r r i tories;, or until such l a t e r time as the Fund may determine, and also
allow -these countries and the Fund more than ninety days in Y/hich to
register objections to the communicated par value. Such countries may
also use the Fund before their i n i t i a l par "values have finally been
established, in cnounts anp| under conditions prescribed fcy the Fund,
and may in the mecruvhilc a l t e r their communicated rates by agreement
nith the Fund -without prejudice to their a b i l i t y to a l t e r their rates
after i n i t i a l par -values ha-ve finally been established'.
Once the i n i t i a l par values of their currencies have been
established, countries become eligible to use the resources of the Fund
in accordance with the general pro-visions of the Agreement^ and, as has
been noted, occupied countries will bocone eligible to use the Fund on
a limited basis whenever the Fond grants such privileges. The Fund
cannot begin transactions in exchange u n t i l merr.bers. having 65 per cent
of tho totel quotas have become eligible to draw upon i t and u n t i l .me. jor
h o s t i l i t i e s in Europe have ceased. Even then the Fund need not s t a r t
exchange operations i f world conditions appear unfavorable to i t s proper
functioning. I t has full discretion to Trait until, the situation has
cleared.
-.
•
There i s a provision which gives special .power to the Fund to
' postpone exchange transactions with any particular member, even i f that
member has become eligible to use the Fund and the Fund has decided to
begin exchange transactions. This i s when the circumstances of the
member are such that, in the opinion o£- the Fund, exchange transactions
•with i f would lead to use of the resources pf the Fund in a manner contrary" to the purposes of the Agreement. Under :this provision the Fund
can protect i t s e l f and other members fcy refusing to deal with a country
in ail unstable economic, or political, condition.
• .

c



13 •

Management-of t h e Fund

•

•

•

Pro-visions for the mana.gem.ent sjid organization of the Fund
need not be described here in d e t a i l . The Board of Governors, in which
a l l the powers of the Fund vri.il be vested, will consist of one Governor
appointed by each member country. The Board may delegate i t s powers to
the Executive Directors, except for the power to decide on certain i s sues of major economic or p o l i t i c a l significance. The Executive Directors yri.ll conduct the- general operations of the Fund. There will be a t
l e a s t twelve Executive Directors, five appointed by the five members
having the largest quotas, which a t the outset will be the United States,
the United Kingdom, the Union of Soviet Socialist Republics, China, and
France, two elected by the American Republics other than the United
States, and five elected by the other members. The procedure by which
the elected Executive Directors are to bo chosen i s designed to sec that
each member will have an appropriate voice in the election of a t l e a s t
one of the Directors. TITO additional Executive Directors may be appointed to represent the two countries the currencies of which are being
used by the Fund in the largest absolute amounts, i f those countries are
not included in those already entitled to appoint Directors. As new
countries become members of the Fund the number of Executive Directors
may be increased. The Executive Directors will, appoint a Managing Director who will bo in charge of the operating staff of the Fund and will
conduct the ordinary business of the Fund. The principal office of the
Fund will be in the United States, since this country will have the
largest quota.
The voting power of member countries i s determined by giving
each member country 250 votes plus one additional vote for each $100,000
of i t s quota. The voting power of -the countries represented a t the
United Nations Monetary and Financial Conference i s indicated in the
attached Table I I I .
For voting on certain matters indicated below, the distribution of voting power shown in the table will be modified. When the
Fund i s voting on the question1 of whether or not to waive any of the
conditions governing a member s use of the resources of the Fund, or
on the question of declaring a menber ineligible to use the resources
of the Fund because i t i s using them in a manner contrary to the purposes
of the Fund, the votes of member countries will be altered as follows:
the voting power of a member country will bo increased by one vote for
each four hundred thousand dollars of net sales of i t s currency try the
Fund BXA decreased by one vote for each four JiunarX^.cfoS.ars of i t s net .
purchases of the currencies of other members, provided not purchases . •:
or net sales do not, exceed the quota of the member involved. By irzy
of example, i f the Fund's net sales of dollars equal one-h£>lf the United
States quota (that i s , i f foreign countries will have drawn on the Fund
for 01,375 million) the percentage of total voting power of the United
States will be 31»5 per cent rather than 28.0 per cent. The theory of 1
this provision i s that on these problems involving the use of the Fund s
resources the voting power of countries which have made substantial use
of them should be decreased and that of countries of whose subscriptions
other countries have made substantial use should be increased. These
changes in voting povfer, however, are relatively small.



In voting by the Board of Directors, the Governor appointed
by each member has the voting power allotted to that member. The
Executive Directors cast the number of votes either of the country
by which they are appointed, or, in the case of the elected Executive
Directors, of the countries which have elected them. An' Executive
Director must cast a l l the votes of -which he lias control as a unit.
He i s not permitted to:cast some of his votes in one v?ay and some in
another, The countries whose votes counted toward his election are
precluded from urging him to cast the number of votes which they i n dividually arc entitled to in accordance with their particular, wishes,
Most decisions of the Fund are by a majority of the votes
cast in accordance with the distribution of voting power, but certain
specified decisions require more than a simple majority of votes or
the approval of a stated proportion of member countries. ..
Decision as to what part of the Fund1 s net income should be
distributed to members will rest with the Board of Governors,. and.
cannot be delegated to the Executive Directors. There' are certain
rules, hov;ever. If income i s distributed a t a H , two per cent must be
paid to countries on the amount of their currency subscription that
lias been used fey -the Fund to meet the needs of other countries. This
preferred two per cent i s non-cumulative. Any further amounts dis- ;
tributed must be paid to a l l members in proportion to their quotas.
management of the Fund has "the right to make recommendations to any member, whether that member i s using the Fund or not.
The Fund may. coranrunicate i t s views informally or may, by a -two-thirds
veto, decide to publish a report regarding a members monetary or
economic condition or developments which are directly -tending to produce a serious disequilibrium in the international balance of payments
of members.
Tiie management has special powers to suspend
of the Fund, and also has power to decide to liquidate
the Fund i s liquidated this must'be done.in accordance
specified In the Agreement which i s designed to insure'
of a l l member countries.

a l l transactions
the Fund. If .
with a.procedure
fair treatment

Questions of interpretation of. the Agreement are to'be submitted to the Executive Directors, and may be submitted on appeal by a
member country to the Board of Governors. In special cases involving
withdrawal or liquidation a special arbitration. tribunal may be appointed.
Most of. the Articles of the Agreement may be, amended if the amendment.
i s approved f i r s t by the Board of-Governors and then by three-fifths of
the member countries having four-fifth-s of the total votes. Hc/we'vor-,
three of the' 'provisions of the Agreement can only be amended
Ydth the
1
acceptance of a l l member
countries.
They
refer
to
a
member
s
right of
1
withdrawal, a member s right to veto a change in i t s quota,
and the
prohibition against a change in the par value of a member1 s currency
being made otherwise than in response to i t s own proposal.



.

BAJ>TK K)R HECONSTRJCECON AND DEVELOPMENT

,n'
•

1.

Introduction . '

•

•

•

.

. • • •.

,

,:
While the Monetary Fund aims a t greater stability of conditions in 'world trade and is concerned with the member countries1 shortterm foreign exchange requirements, the Bank for Reconstruction and
Development i s intended to promote the international flow of long-term
capital. By direct loajis of i t s own resources and of such funds as i t
may itself borrow, and by guaranteeing loans made by.private investors,
the Bank i s expected to help in the restoration of economies destroyed
or disrupted Joy war, the reconversion of productive facilities to peacetime needs, and the development of productive facilities and resources
in less developed countii.es.
The Bank may be expected to set a pattern of interest rates
and other conditions for international loans that m i l be reasonable,
will tend to eliminate abuses such as occurred in this field in the
period after the f i r s t World War, and indirectly will exert a salutary
influence on terms"and conditions of a l l international investments.
In the long run i t i s expected to contribute to the development of a
balanced growth of world trade and the maintenance of equilibrium in
the international accounts of member countries.
Total loans and guarantees by the Bank will be limited in
amount to a maximum equal to the Bank*s capital, surplus, and reserves.
While member countries,will be jointly and severally liable on the
guarantees, each country's l i a b i l i t y will be limited to i t s subscription, which in the case of the United States will bo three billion
one hundred and seventy-five million dollars, or thirty-five per cent
of the total.
.
Since only twenty per cent of the Bank1 s capital will be
loaned directly -while eighty per cent will be held as a guarantee fund
against" losses, and since the Bank will mako or guarantee only such
loans as the borrower cannot obtain elsewhere on reasonable terms, the
Bank will promote rather than hinder in any way the flow of private
funds into international investment channels.
•
'
2.

Membership and Capital Subscriptions

members of the Bank, must also be members of the International Monetary Fund.. This provision will reduce the exchange risk
for funds invested by or through tho instrumentality of the Bank.
Withdrawal .from the Fund entails withdrawal from the Bank • a f t e r three
months, unless the Bank by three-fourths of i t s total voting power
rules otherwise. ,




- 19 -

Original members of the. Bank "will be those who accept
membership in the Bank before December 31, 194-5. After -that date
membership will be open to others on such terms and conditions as
may be prescribed by the Bank.
, '-'\
Each member i s required to subscribe to a minimum number
of shares of the capital stock of the Bank. The authorized 'capital
i s ten billion dollars of which the countries represented a t the
United Nations Monetary and-Financial Conference-are expected to
subscribe 9.1 billion dollars, three hundred million dollars more
than the quotas of these same countries in the International Monetary
Fund, The total authorized capital may be increased. If i t is i n creased each country will have an opportunity, but no obligation,
to subscribe in proportion to i t s original subscription. Minimum
subscriptions for the different members are similar to their quotas
in the Monetary Fund* The United States, however, will subscribe
425 million dollars more to the Bank than to the Fund and Canada and
China m i l subscribe 25 and 50 millions more, respectively. Latin
American countries combined Trill subscribe 154 million dollars less
and six other countries a t o t a l of 46 millions l e s s . '
Required subscriptions will be divided into two parts:
twenty per cent for the Bank1 s own loan fund and eighty
per cent as
a guarantee fund either to_meei such lc*sses as the: Ba'nk might incur
in connection'with loans made out of funds borrowed by i t or to. d i s charge i t s obligations in connection with loans i t has guaranteed.
I n i t i a l l y member countries will be required to pay two per cent of
their subscription in gold or United States dollars. Within a year,
the Bank v&ll 'call for eight per cent more. No further calls on
subscriptions will be made except as needed, and such further' calls
as are made'within any1 three month period on that part of the subscription *for the Bank s own "loan fund shall not exceed five per
cent of the price of the shares.
.
,"
The required minimim. subscription, of each country represented a t the United Nations Monetary and Financial Conference i s 1
given in the attached Table
IV, as well as the amount of each member s
subscription for the Bank1 s own loan fund and the amount', which may
be called only -bo meet losses.
"When calls are made on members for the Bank1 s own -loan
fund3 - member pays in i t s own currency. i,1Jhen calls are made for
the purpose of meeting losses a member ma;y pay, %t i t s option, in
gold, in United States dollars, or in the currency in which the obligation i s to be met. As in the case of the Fund, the Bank will"'accept non-interest bearing demand notes of member governments for ';
such funds as i t does not need currently.
.
s

c

The arrangements concerning the depositories in which1 the
Bank s gold and currency holdings shall be kept are identical with
those in the Fund Agreement. The gold value of the Bank* s funds, in
so far as the twenty per cent for the Bank1 s own loan fund i s concerned,
is protected by provisions sinilar to those in the Monetary Fund.
1




- 20 -

3.

Nature of the.Bank's,Activities

•...''

i The Bank ..may make or f a c i l i t a t e loans, in three principal
•ways. F i r s t , i t may make direct loans out of i t s O"wn funds; secondly,
i t may make loans out of funds borrowed from private investors in
member countries^ and, thirdly, i t may guarantee either in -whole or
in part loans made by private investors through the usual investment
channels.
". .... : . ' < . .
• • •• •
4.

Conditions on "Which the Bank May Guarantee or Make Loans

Total loans and guarantees by the Bank shall not exceed the
amount of the unimpaired-subscribed capital, reserves, and surplus of
the Bank,
The Bank i s to give "equitable consideration" to projects
for reconstruction of devastated areas and projects for development
a l i k e . Also, in determining the conditions and terms of loans the
Bank must pay special regard to lightening the financial burden and
expediting the reconstruction and restoration of countries devastated
by enemy action^
As in the case of the Fund, the Bank will deal vdth mcanbers
only.through their Treasuries, stabilization.funds, central banks, or
other similar fiscal agencies. Through these agencies i t may make or
guarantee loans to p o l i t i c a l subdivisions, or to particular enterprises.
"•'...
All the Bank1 s loans, participations and guarantees must be
for specific projects of reconstruction or development. Exceptions
are permitted in special circumstances. The Bank must appoint a committee to study any proposed project and can only go ahead on the
project i f the committee so recommends in a written report. The committee must in each case include an expert representing the member in
whose territory the project i s located.
• . .,
The Bank can only finance or aid in the financing of a
project i f i t i s satisfied that the borrower, without i t s help, would
not be sible to get the loan on reasonable terms. The Bank must be
sure that only reasonable interest and' other charges are levied and
that the • repayment schedule i s appropriate to the project being
financed. I t must give special attention to the general financial
position of the borrower and guarantor and to the prospects of the
borrower or guarantor being able to meet I t s obligations. "When a
loan made or guaranteed by the Bank i s not made directly to a member
government, i t must be fully guaranteed either Jby the member government or by the central bank or some comparable agency of the member
which i s acceptable to the Sank. In no case can the Bank impose the
condition that loans made or guaranteed by the Bank be spent in any
particular country,




•

•

. • • - • . .

.

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:•

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-21 5.

Direct Loans Out of the Bank1 s Own Funds

.

• ••

The Bank may make direct loans out 6£ i t s own funds, derived from the twenty per cent subscribed for this purpose. The two
per cent paid in gold can be freely used by the Bank for any purpose.
•Amounts paid in in currency, however, cannot be loaned or exchanged
for other currencies without the subscribing country1 s approval.
This means that in so far as- member governments subscribe to the Bank
in currency for the Bank1 s own loan fund, they have the right to pass
upon the projects to be financed with.iMs currency. Their permission
will also be required if the currency i s to.be exchanged for other
currency. Interest and principal payments on loans made out of these
funds must be paid to the Bank-in the .-currencies lent unless the member
whose currency i s lent agrees otherwise. The approval of the country
continues to be required in relending t or exchanging currencies received
by the Bank in payments on account of principal on these direct loans.
Members, therefore, can control the use of their currencies paid into
the Bank for i t s direct operations. However, if the 80 per cent portion
of the Bank's capital specially designated tor meeting losses and r e paying i t s own obligations i s insufficient for,that purpose, the Bank
may use for that purpose any currencies that i t possesses. Iri aay a$se,
the Bank1 s receipts from payments of interest and commissions on these
loans can be used or exchanged for other currencies in any way the Bank
sees f i t .
.
The fact that a member1 s approval i s required if the Bank
desires to convert some of that member1 s currency paid in as a part of
the Bank1 s loan, fund into' another currency gives the subscribing member
the opportunity to prevent the use of that currency outside ±%s borders,
except if i t i s required to meet losses. A •country1.s refusal to permit
conversion of i t s currency into another currency will limit the borrower1 s use of that, currency to purchases in that country.
All currency due to the Bank on direct loans made out of i t s
own funds must be equal in value, (exp-ressed dn some other currency
specified by the Bank by a three-fourths vote) to the contractual payments a t the time the loan was made. Say, for example, the loan i s
made and i s repayable in francs, interest .and other payments in francs
must equal the dollar value of the franc payments contracted for a t
the time when the loan was made, provided the dollar was specified as
the standard in the original contract. .-This.-.may be described as a
"specified currency clause11. Special exception may be made in case a
uniform proportionate change in the par value of a l l member currencies
i s made' under the International Monetary Fund; Agreement.
6.

Direct Loans Out of Funds, Borrowed by the Bank
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The Bank, with the approval of the member in whose markets
the funds are raised, can borrow funds to make direct loans. ,, If the
Bank makes the direct loan in terms of the currency of a member other
than the member in which the funds were raised the approval of that




- 22 -

member i s also•required. After approval has been given, however, the
Bank n i l l have authority to convert the currencies so raised, as well
as - proceeds of the service of the loan,- into any other currency i t
may require, or into gold.
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Uses of the proceeds of loans out of funds borrowed by the
Bank, therefore,-are free from the control of member countries where
they are raised or of others.' The Bank i t s e l f has full authority over
the use to which such' funds ai*e put.
'
I t i s specifically provided that the Bank, in making loans
out of funds raised by i t in member countries cannot a t any time have
payments due i t in any one currency on account of these'loans in excess of the amount of i t s outstanding borrowings payable, in that currency. This clause operates as a protection to a member country, for
example, the United States, against the Bank requiring payments in
dollars of amounts due to i t on loans made from funds raised in other
countries, except to the extent that dollars were borrowed by the Bank
,. in the United States,
If the Bank did require such payments to be
made in dollars the. result might be a strain on the dollar resources
of other member countries and consequent pressure on their dollar exchange rates in no way related to the need for making payments in. the
United States.
7,

Provision of Currencies on Direct Loans

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In general, the Bank will lend foreign currencies only to
finance the borrower1 s needs outside i t s borders. The Bank will ex-1pect the borrowers to raise the domestic currency needed for meeting
local expenditures without recourse to the Bank, and member countries
normally will be able to do so* There i s a special proviso, however,
that in exceptional cases in which a borrowing country cannot raise
i t s local currency requirements on reasonable teims the Bank can provide the borrower with an appropriate amount of that currency.
In. case the carrying out of-a reconstruction or development
project leads to. an indirect need for foreign exchange, the Bank may
provide such foreign exchange in an amount not to exceed, the local
expenditures of the borrower. The need.may a r i s e , for example, because
the project i s taking labor and materials which were formerly used in
producing goods for export or domestic' consumption. If- this i s the
case, foreign exchange receipts from exports will diminish or foreign
exchange requirements to pay for additional imports will increase.
In providing foreign exchange to a borrower, the Bank must
give him the particular currencies he may require. , I t will ..not give
the borrower dollars unless the borrower needs dollars to spend'in the
United States. The borrower i s not-peimitted to acquire currencies
from the Bank in order to s e l l them in the exchange markets for other
currencies. If the currency of a country held by the Bank i s to be




used to finance purchases in other countries i t must be exchanged into
other currencies by the Bank, I t i s probable that in time the great
bulk of currencies of the Bank "will be available for.free exchange by
the Bank for any currency that may be required. This m i l apply to
funds raised from private investors, or received in payment for loans
made out of funds so raised, or from the sale of gold, or received as
interest or commission charges on direct loans made out o f ' i t s own
funds, or as commissions on loans guaranteed by the Bank'l
I t i s only in regard to currencies subscribed by member governments for the Bank'1 s own loan fund that there are restriction's on
the Bank's authority to exchange them for other currencies. Currencies
so acquired the Bank cannot lend or exchange without the approval of
the subscribing countries. If a borrower wishes to borrow sterling to
purchase goods in England and 20 per cent of the British subscription
has been fully loaned out or England does not approve the use of i t s
sterling subscribed to the Bank, the Bank must use other sterling in
i t s possession, or gold, or sell for sterling currencies acquired otherwise than from subscriptions, or .obtain permission from other countries
to exchange some of their currency subscribed to the Bank for sterling.
If the Bank cannot provide sterling in any of these ways, the borrowing
country may have to change i t s plans and decide to purchase the goods
in.some other country.
From the outset, however, the Bank will have seme gold which
will be available for the purchase of any currency, and as time goes
on the Bank will acquire more and more free currency through payments
of interest and charges and through borrowings from, private investors.
Consequently, the possibility that the Bank, because of i t s inability .
to provide particular currencies, would have to force borrowers to
redirect their proposed purchases will constantly diminish.
In so far as the Bank has gold or foreign exchange which i s
available for i t s unrestricted use (or. can obtain the approval of members to so use their currencies), i t can help a country which> after
having agreed to the use of i t s own'currency to finance another member's
purchases, finds i t s e l f short of foreign exchange.
An example would be
1
a case in which England agreed to the Bank1 s lending part of i t s sterling
subscription to finance some other country s purchase of British machinery,
, and ( then found that to build this machinery i t had;to buy some of the
needed materials abroad. The Bank, in such a case, can provide foreign
exchange to England up to the amount of the ;resulting increased need
for foreign exchange.
.
8,

Charges and Schedule of Repayment on Direct Loans

The Bank determines the interest rate, the amortization payments,.,the maturity, and the commission to be charged in connection
with each direct loan. The charges and the. schedule of repayment must
be reasonable and appropriate to the project being financed,' I t i s
provided in the Agreement that the rate of commission charged by the
Bank on direct loans made out of funds raised by the Bank in member



- 24 •

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countries, as distinct from its-own funds, • shall be between one and
j • • one and one~l)alf per cent per annum .for the..first ten years of the
.• Bank's operations. , The commission does not represent the spread
between the Bank1 s boi^rov&ng. rate and i t s lending rate. The total
. . cost to the borrower, vd.ll be similar' to what he ••would have1 to pay
, - on a-loan guaranteed by the Bank. Ihe commission will be charged on
the outstanding portion of a loan. After ten years the Bank may r e duce the commission rate if i t s accumulated reserves or other earnings
are considered to, justify the reduction, and such a reduction may apply to loans already made or to future loans* The Bank may also
raise the. commission rate on future'loans.
If.a borrower or guarantor i s unable to make the payments
due to the BanH on -direct loans in the currencies in which the payments are due, because i t i s suffering from an acute exchange s t r i n gency, the Bank may relax the conditions of p a r e n t a t ihe request
of the borrower. For periods not to exceed three years, i t may accept payments, in the currency of the member concerned -with appropriate
arrangements concerning the use of that currency by the Bank, the
; . maintenance of i t s foreign exchange value, and the repurchase of the
currency by the member, The Bank also may modify the terms of amortization or extend the l i f e of the loan. This provides flexibility and
enables the Bank to make the repayment of i t s direct loans less burdensome for borrowers; when circumstances make this desirable.
.•

9.

Guarantees.

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The third way in which the Barik will promote international
investment i s by .guaranteeing loans .made by private investors through
the usual investment channels* Loans which are guaranteed by the
Bank must meet the general conditions described in Section 4. above,
which apply to a l l loans. Also, the Bank cannot guarantee a loan
without the appVoval of the member in whose markets the funds are
raised and the member in whose currency the loan i s denominated.
Furtnei&pre, when membei-s give their approval i t must carry with i t
•'-.tho agreement that ;the.funds borrowed can be exchanged by the borrow• ers for other member .currencies without restriction.
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Similar conditions must be met in the case of loans made
directly hy the Bank with funds borrowed in member countries. As
explained in connection with such loans, this meajis that-the member
in which such a loan i s raised cannot require the proceeds to be
spent in purchasing i t s own goods and services. The member can ap- '
prove or disapprove of the Bank* s g u a ran teeing the loan but, once
approval has been given, the borrower i s free to use the proceeds of
the loan to finance purchases in any member, country.
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No special procedure for making the loan available is laid
down in the case of loans guaranteed by the Bank since the loans are
made through the usual investment channels iand, not through the Bank,
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-25 The Bank must receive suitable compensation for i t s risks
in guaranteeing loans. The Agreement specifies that for the f i r s t
ten years the commission charged by the Bank on "guarantees shall be
between one and one and one-half per cent and shall be payable on
amounts outstanding, as in the case of direct loans made by the Bank
•with funds borrowed in member countries. After the f i r s t ten years
the commission may be,lowered on outstanding loans and either raised
or lowered on future loans.
In the case of a default \sy the borrower, and by the guarantor if there i s one, the Bank may terminate i t s l i a b i l i t y with
respect to interest on a guaranteed loan by buying the' bonds or other
obligations a t par plus interest accrued up to a specified date,
10.

Special Reserve

All payments
loans made by the Bank
kept in liquid form., as
ties on account of i t s

to the Bank of commissions either ori direct
or on loans guaranteed by the Bank must be
a special reserve to meet the Bank's l i a b i l i borrowings or guarantees.
•
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11, Management
The arrangements for the organization and management of the
Bank are very similar to the arrangements in the case of the International Monetary Fund. The Board of Governors i s constituted in the
same way and the Executive Directors, to whom the Board may delegate
a l l except certain specified powers, are elected or appointed in much
the same manner. There i s no proviso, however, in the Bank proposal,
as there i s in the Fund, that two directors are to be elected by the
American Republics or that those providing the largest part of the
resources used by the Bank can appoint two of the directors. Such
arrangements would not be appropriate in the case of the Bank, because
each member country has authority
to protect i t s interests by approving or disapproving of the Bank1 s use of funds subscribed by i t .
chief executive of the Bank i s called President, The
Bank also will have an Advisory Council of seven members elected by
the Board of Governors, which will include representatives of banking,
commercial, industrial, labor, and agricultural interests. The principal office of the Bank^ as in the case of the Fund, will be located'
in the United States which "will make the largest capital subscription.
Distribution of voting power in.the Bank Agreement i s by
the same formula as that in the Fund Agreement, Each member has 250
votes plus one vote for each 100,000 dollars subscribed to the Bank,
or each share of stock held irrespective of the extent to which calls
have been made for payment on subscriptions,
The voting power of countries represented a t the United
Nations Monetary and Financial Conference, on the assumption that each
member subscribes the required minimum, i s given in the attached Table V,



- 26 -

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The-arrangement for distribution of net income i s similar
to that in the Fund. The Board of Governors, can decide what part,
i f any, to distribute arid v/hen i t does distribute any part i t must
f i r s t pay up to. two per cent to each member in i t s own currency on
• the average amount of the loans outstanding which the Bank has madedire ctly out of currency subscribed ay that member for use in the
Bank1 s operations. The two per cent payment i s non-cumulative. Any
remaining net income to be distributed must be distributed in proportion to subscriptions and in the currency of the subscribing member, i f possible. If the income i s distributed to one member in
another member1 s currency, the receiving member can use i t in any
•nay i t wishes.
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The provisions concerning voluntary withdrawal, suspension
of privileges or rights and compulsory withdrawal are closely parallel
to those in the Fund. The only difference i s that a member may be
suspended by a majority vote, and a suspended member i s automatically
forced to withdraw after a year^ unless a majority vote decides otherwise.
Many of the other technical and legal arrangements concerning settlement of accounts with withdrawing members, settlement of
obligations i f the Bank suspends operations, interpretation and amendment procedure, and immunities and privileges are worked out in detail
as in the Fund Agreement, The arrangements for the entry into force
of the Bank Agreement are similar to the Fund arrangements, but are
simpler, since the Bank does not have to deal with the difficult
problems of i n i t i a l exchange rates.
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- 27
II-ITEHKAllONAL JiONETMff KIND QUOTAS AND SSITiiATSD GOLD SUBS CRIP TIOITS
CF MEMBERS REPRESENTED AT IKE
UNITED NATIONS MONETARY AND EDJANCUL CONFERENCE




(In millions of United States dollars)
Quotas

200
225
10

Australia
Belgium
Bolivia
Brazil
Canada
Chile
China
Colombia
Costa Rica.

150
300
50

550
50

5
50

Cuba

125

C ze cho Slovakia
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Ethiopia
France
Greece
Guatemala
Haiti
Honduras
Iceland
India
•
Iran
Iraq
Liberia
Luxembourg
Mexico
Netherlands
New Zealand
Nicaragua

1/

5
5

45
2.5
6
450
40

5
5
2.5
1
400
25

8
.5
10

90
275
50
2

50

Norway

Panama
Paraguay
Peru
Philippine Commonwealth
Poland
Union of South Africa
Union of Soviet Socialist Republics
United Kingdom
United States

•5

2

25
15
125
100
1,200
1,300
2,750

15
15
60

Uruguay
Venezuela
Yugoslavia
Total
Estimated Gold Subscriptions
United. States
Others

Ibtal

8,800
687.5

2/-

956

1,643




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1/ Tbe quote of Denmark shall be determined by
the Fiuid after the Danish Goioranent has declared i t s readiness -bo sign this Agreement
but before signature takes place.* - '
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2/ Figure based on gross official gold and
dollar holdings atc the end of March 19-44-.
In cases where g°3- '- reserves are not-'reported
officially the figures have been estimated
and are subject to revision. In general.,
gold confiscated in invaded countries i s
attributed to those countries since their
claims v/ill presumably be honored after the
war. To the extent that there have been net
transfers of such sold to other accounts there
i s double counting.
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- 29 MINIMUM PERCENTAGE CHARGES PAYABLE BY A COUNTRY
ON FUND'S HOLDINGS OF ITS CURRENCY IN EXCESS OF I I S QUOTA
M o u n t of country 1 s
currency h e l d by Fund

,

Per cent per anrlum payable on excess currency during

to nhifh rates
indicated apply
as percentage
of
country1 s quota

1st
Year

101 - 125

3/81-7 1

2nd 3rd 4th 5th 6 th 7th 8th 9th 10th
Year Year Year Year Year Year Year Year Year
1-1/2 2

126 - 150

1

1-1/2 2

151 - 175

1-1/2

2

176 - 200

2

2-1/2 3

201 - 225

2-1/2

3

226 - 250

3

3-1/2

Additional
amounts

2-1/2 3

2-1/2 3

2-1/2 3
3-1/2 4 g/

4-1/2 5

3-1/2

4-1/2 5

3-1/2

4-1/2 5

4-1/2 5

5

5
5

5

5

5

5

5

5

5

5

5

5

5

Correispondirig inc3-eases up to 5 per cent

1/ No payment in f i r s t three months; l/2 per cent in next nine.
2/ At this point
the Fund and the member shall consider ways and means try which
the Fund1 s holdings of the member1 s currency can be reduced.
Note.- Mo charge1 i s made on use of the Fund resources in an amount equivalent to
a member s gold subs crip taon*




5

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4-1/2 5

3-1/2

4-1/2

3-1/2

- 30 TABLE I I I
TOTENG POWER IK rIHE INTERNATIONAL MONETARY FUND
OF MEMBERS REPRESENTED AT TIIE
UNITED NATIONS MONETARY

Country
Australia
Belgium
Bolivia
Brazil
Canada
Chile
China
Colombia
Costa Rica
Cuba
Czechoslovakia
Denmark
Daainican Republic
Ecuador
Egypt
El Salvador
Ethiopia
France
Greece
Guatemala
Haiti
Honduras
Iceland
India

Iran
Iraq
Liberia
Luxembourg
Mexico
Netherlands
New Zealand
Nicaragua
Norway
Panama
ParaguayPeru
Philippine Commonwealth
Poland
Union of South Africa
Union of Soviet Socialist Republics
United Kingdom
United States
Uruguay
Venezuela
Yugoslavia

Number
of votes
2,250
2,500
350
1,750
3,250

Percentage

of total votes 1/
2.3
2.5

.3
1.8

3.3

750

.8

5,750

5.Q
.8

750
300
750

1,500

2/
300
300
700

.3
.8
1.5
2/

.3
.3
.7

275
310

.3
.3

4,750

4.8
.6
.3

650
300
300
275
260

4,250
500

.3
.3
.3
4.3
.5

330
255
350
1,150

1.2

3,000

3.0

750
270

.3

750
255

.2

.3
.2

.3
.8

.8

270
500
400

.3

1,500
1,250
12,250
13,250
27,750

1.5
1.3

.5

.4
12.4
13,4

28.0
.4
•4
.8
99,000
100.0
Total
1/ The percentage of t o t a l votes i s calculated on the assumption that only those nations represented a t the Conference m i l join the Fund. As other countries join
the Fund, each individual country* s 3hare of the t o t a l votes will decline.
2/ To be determined when the Danish Government has declared i t s readiness to sign
the A tt re omen t

Note.- Or the t o t a l number of votes,the British Bnpire controls 25.3 per cent,Contihttp://fraser.stlouisfed.org/
Federal Reserve Banknental
of St. LouisEurope,excluding the U.S.S.R. ,16.0 per cent,and Latini\merica9.7peroent.
400
400
850

-31TABLE I V .
REQUIRED SUBSCRIPTIONS 10 B E IN IERNATIONAL BANK
FOR RECONSTRUCTION AND DEVELOPMENT
OF COUNTREES REPRESENTED AT THE
UNITED NATIONS MONETARY AND FINANCIAL CONFERENCE

(In millions of United States dollars)

tion try

Amount of Tbtal Subscription
Tbtal
Which May Be Used
Subscrip- For Bank1 s Own Only to Meet Bank1 s
tion
Loan Fund 1/
Obligations

Australia
200
Belgium
225
Bolivia
7
Brazil
105
Canada
325
Chile
35
China
600
Colombia
35
Costa Rica
2
Cuba
35
Czechoslovakia
125
Denmaik
. . 2/
Dominican Republic
•
2
Ecuador
3.2
Egypt
40
El Salvador
1
Ethiopia
'
3
France
450
Greece
25
Guatemala
2
Haiti
..
2
Honduras
1
Iceland
1
India
400
Iran
24
Iraq
6•
Liberia
.
.5
Luxembourg
10
Mexico
65
Netherlands
275
New Zealand
50
Nicaragua
#8
Norway
50•
Panama
.2
Paraguay
;8
Peru
17.5
Philippine Commonwealth
15
Poland
125
Union of South Africa
100
Union of Soviet Socialist Republics 1,200
United Kingdom
1,300
United States
3,175'
Uruguay
10; 5
Venezuela
10,5
Yugoslavia
40
Tbtal
'
9,100




40
45

1.4
21
65
7
120
7

28
480

.4
7
25

281.6
28
100

2/

, 8/
.4
.64
8
- .2
.6
90
5

.4
.4
•2
•2
80
4.8
1.2
.1
2
13
55
10
.16
10
.04
.16
3.5
3
25
20
240
260
635
2.1
2.1
1,820

160
1805.6
84
260

1*6

2.56
32
.8 .
2.4
360
201*6
1.6
.8
.8
320'
19.2
4.8
.4
8
52
220
40
.64
40
.16
.64
14
12
100
80
960
1,040
2,540'
8.4
8.4
32
7,280

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Twenty per cent of total subscription. Of this
. amount 10 per cent or a -total of 182 million
dollars must be paid in gold or United States
dollars.
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The quota of Dcinmark shall be determined by the
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with the Articles of Agreement.

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- 33 TABLE .V.
TOTING POYffiR IN INTERNATIONAL B/INK IDR HECONSTHJCTION AND DEVELOPMENT
OF COUNTRIES REPRESENTED A T THE
TED NATIONS MONETARY" AMD FINANCIAL CONFERENCE

Number
Percentage
Country
of Votes
of total Votes 1/
Australia
2;2
2,250
Belgium
2,500
2;4
320
Bolivia
;3
i
Brazil
1,300
1;3
Canada
3,500
3;4
600
Chile
;6
China
6,250
6;1
600
Colombia
;.6
270
Costa Rica
.3
600
Cuba
;6
C ze choSlovakia
1,500
1.5
Denmark
2/
ll
270
Dominican Republic
;3
282
Ecuador
•3
Egypt
650
;6
260
El Salvador
;3
280
Ethiopia
.3
France
4,750
4;6
500
Greece
;5
270
Guatemala
.3
270
Haiti
•3
260
Honduras
•3
260
Iceland
.3
India
4,250
4;2
490
Iran
;5
310
Iraq
;3
255
Liberia
•2
Luxembourg
350
;3
1
900
Mexico
.9
Netherlands
3,000
2;9
750
;7
New Zealand
%
258
Nicaragua
;3
750
Norway
;7
252
Panama
•2
258
Paraguay
;3
Peru
425
;4
400
Philippine Commonwealth
;4
Poland
1,500
345
Union of South Africa
1,250
1.2
12
Union of Soviet Socialist Republics
12,250
United Kingdom
13,250
13'
32,000
United States
31;4
355
Uruguay
;3
Venezuela
355
;3
Yugoslavia
650
,6
100
Total
102,000
1/ The percentage of total votes i s calculated on assumption that only those nations
represented a t the Conference v/ill join the Bank. As other countries join the
Bank, each individual country1 s share of the t o t a l votes "will decline.
2/ Tb be deteimined when Danish Government accepts membership.
Note,Of the t o t a l number of votes, the British Empire controls 24.8 per cent,

http://fraser.stlouisfed.org/
Continental Europe,excluding the U.S.S.R., 15.2, and Latin America 7.9 percent
Federal Reserve Bank of St. Louis

c