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Board of Governors of the Federal Reserve System
December 1945

CONFIDENTIAL
'

Bretton Woods Legislation in Latin American Countries
Robert Triffin, Henry Wallich and Alice Bourneuf
Many Latin American countries are, at the moment, preparing
enabling legislation for adherence to the Bretton Woods convention and
acquisition of membership in the International Monetary *und and in the
International Bank for Reconstruction and Development, It is vitally
important that this legislation should be so drafted as to integrate and
coordinate relations between the member and these agencies with the
member's general economic and financial policies. Only through such
integmtion will member countries reap the fSill benefits of membership
and ensure the- smooth and successful functioning of the new institutions.
This paper will discuss the main points which national enabling acts
might conveniently cover in order to attain those objectives,
(1) Ratification * According to the^ agreementsf a country must
>
accept membership on or before December 31, 1945, if it i$ to become a
charter member. It should be noted that, upon subscribing to the agreements in Washington, a country must be in a position to show that it has
taken all necessary steps to implement its membership obligations^
(2) Appointments • It would be convenient to appoint the same
person as Governor of J^und and Bank. S^nce the position is an important
one and et the same tire one requiring & high degree of technical
qualification, the choice might fall upon the President or Manager of the
Central Bank. Their appointment would not interfere with their regular
duties# since the Boerd of Governors would meet only at infrequent
intervals, These meetings would give the appointees a valuable opportunity for an exchange of views with the top financial men of other
countries.
The law itself, however, should better be kept flexible on this
point and merely provide that the appointment be me.de at the recommenda<tion of the Monetary Board or Advisory Council dealt with in the following paragraph,
(3) Policy Decisions - While the Governor should have authority
to act on all routine matters, important policy decisions must be reserved
to a higher authority. Since All operations with the Fund or Bank are
likely to be conducted through the country*s central bank and since they
involve primarily exchange operations of fundamental significance in the
monetary field, it would be logical to confer the policy-making powers
on the Board of Directors of the central bank. This solution is especially
indicated in countries in which monetary and central banking legislation
of the type developed by Dr, Triffin has made such Board <-• under the
name of Monetary Board -7 into a cohefent and powerful instrument of
national monetary policies. In some countries, where tradition or
legislation gives a less prominent role to central bank action^ a special




-2-

CONFIDENTIAL

Advisory Council might be created, in which the centre 1 bank should share
influence with other economic end financial agencies of the government.
In either case, the Monetary Board or Advisory Council should
formulate the country*s policy with respect to the Fund and Bank, be in
charge of relations with the two agencies, and guide the actions of the
Governor. In situations where the Bretton Woods Agreements provide for
action by a member, the council should iave sole authority to take such
action in so far as the national constitution does not reserve the decision to the legislature, A list of the; cases in which the agreements
specify action by a member is appended,,!
(4) Financing and Operations ~ The financing of the contributions and the handling of the operations with both Fund and Bank can be
carried out either by the central bank or by the government directly,
through the treasury or another agency. For a variety of reasons it
would probably be preferable, for most Countries, to act through their
central banks,
(A) With regard to financing of and operations with the
Fund the central bank seems to be the more desirable medium because?
(i) the central bank is the institution responsible
for the custody and management of monetary Reserves and for
the stabilization of the external value of the currency;
operations with the Fund are basically similer to those,
both as to their nature and purpose;
(ii) the central bonk is el$o the institution responsible
for regulating general monetary and credit conditions, and
especially the volume of means of payment; operations with
the Fund will have, initially, the seme effect on monetary
circulation as en inflow or outflow of monetary reserves; if
such operations wer<^ to escape the control of the central
bank, there would result a very undesirable division of
monetary responsibility, especially as the conversion of
the Fundfs currency holdings into demand notes might be
used as e means of internal inflationary financing.
Operation through the central bank does not mean that
activation of the contribution, i,e,, its use to pay the memberfs ex*
porters, would necessarily lead to *n increase in the money supply.
When this moment comes, the central bank could offset the monetary
expansion resulting from the payment to local exporters by mefcns of
open market operations, including sale of participation certificates
in the contribution it has made to the Fund, The decision whether to
monetize p*rt or all of en active balance paid to the member through
the Fund, should be left to bo decided according to " h needs of the
te
moment.




CONFIDENTIAL
(B) Financing of and operations with the Internaticn al Bank
likewise could most conveniently be handled through the central bank,
although, in this case, exclusively for Government account* This would
include the guarantee to be given in case the International Bank facilitates a loan to a non-governmental borrower in the member country.
The main reason for central* bank handling of such operations
lies again in their direct relation to tke balance of payments and to
monetary reserves and to their impact upon the domestic money and credit
market* On the other hand, while borrowings from the Fund are essentially
of a short-term nature and very similar.^to en inflow of general monetary
reserves, borrowings from the Bank ore likely to be long-term and to be
directed toward specific ends of a non-monetary character* Similar
considerations would apply in the case of lending operations* For these
reasons, the central bonk should not boar the ultimate responsibility
for operations so distinct from its natural sphere of action and of
which it is not the ultimate beneficiary*
In conclusion, it would be desirable (l) to let the central
bank make the contribution to the International Bank, but for account
of the government, (2) cuthoriee the Monetary Eoard or Advisory Council
to make special arrangements with the government for speedy amortization
by the letter of any portion of the contribution effected by the central
bank for its account and actually used in the International Bank f s lending
operations, end (3) to make good to the central bonk, through delivery
of amortizable government bonds, any loss thet it might incur as the
result of guarantees or payments on contribution*
(5) Belfries Sheet and Reserve Position - The form in which
the Fund contribution end subsequent operations with the Fund are integrated with the centre! bank's belp.nce sheet r.nd with the eclcuktion
of its legal reserves will be a matter of some importance, because of
the resulting effect upon central bank reserve ratios and because the
handling of this question will, in a sense, express the monetary
authorities1 basic philosophy of their relations with the Fund*
Two alternative methods may be mentioned here;
(A) Alternative No. 1: On the br.lrnce sheet of the central
bank, show es an asset, unchrr^ging in amount, the full contribution to
the Fund (both in gold and in currency), and as e liability the total
current holdings of the country's currency (whether in the form of
deposit or of demand notes) by the Fund*
In the calculation of not international reserves, add to
gold and foreign exchange assets an unchanging amount, m^de of:
(1) 100$ of the gold contribution to the Fund;
(2) 50% of the currency contribution.
Qm %h& other hand, deduct as P liability 50?$ of the total current holdings
of the country's currency by the Fund.




CONFIDENTIAL
This procedure will achieve, in f\ very simple manner, the
two following objectives:
(1) Adherence to the ^'und will leave net reserves unchanged, since the loss of gold experienced cs e consequence
of the contribution to the Fund will be made up by the addition of this gold contribution to reserves, and since the
currency contribution leads to identical increases in both
assets and liabilities,
(2) Later borrowings from the Fund will decrease net
reserves by an amount equal to 50% of the borrowings, and
any extension of credit through the Fund will increase net
reserves by an amount equal to 505? of the cred'it extended.
The logic of this recommendation is based on the following
reasoning. While adherence to the Fund lowers slightly the countryfs
gold reserves, the advantages of membership ~ end especially the
prospective borrowing right of the member — more than makes up for the
lowering of reserves. On the other h?nd, it would be improper to
consider that net reserves are incrersetf, since sny borrowings will be,
in a sense, offset by the obligation incurred abroad and since the
borrowing right of a member is fer from unconditional. Thus, it is
recommended that net reserves be so calculnted es to be left unchanged
by adherence to the Fund,
Secondly, the fluctuations of net reserves should be such as
to * o w a strengthening of the country's international position when it
accumulates credits against the Fund, and to show a weakening of that
position when the country builds up its indebtedness towards the Fund.
On the other hand, the purpose of the Fund would be defeated if borrowings
were to be completely assimilated to a loss of reserves. Under the
procedure recommended, borrowings from the Fund would lower net reserves
by an amount equal to 505? of the borrowing. Similarly, credits extended
to the Fund would increase net reserves by an amount equal to 5C$ of
such credits. This result is obtained very simply by deducting 5Q?o of
the Fund's current holdings of the country's currency from gross reserves,
the original 50?? deduction resulting from mere adherence to the Fund
being offset by a permanent and corresponding addition tp international
reserve assets (see examples in Appendix II),
The procedure recommended will tend to moderate fluctuations
in net reserves and thus restrain somewhat the expansionary psychology
which would result if a creditor position in the Fund were treated as
fully equivalent to gold and exchange reserves and, on the other hand,
will mitigate the deflationary psychology which would result if a passive
balance of payments were met out of gold and exchange resources rather
then by drawing upon the Fund, This stabilizing influence of the
method appears desirable both from the point of view of the Fund arid
from the point of view of national monetary policy.




•5-

CONFIDENTIAL

The 5Q?Q effect on net reserves, allowed above to transactions
with the Fund, is, of coir se,. arbitrary, This percentage might be
raised or lowered uniformly depending on whether a country wishes to
assimilate more fully operations with the Fund to changes in reserves or
to neutralize them to a larger extent than is here recommended,
(B) Alternative NO, 2% The case for alternative Na* 1 is
especially strong in countries which calculate their reserve ratio in
the manner recommended by Drf Triffin^j/ In other countries, borrowed
funds are usually fully assimilated to owned reserves, with no deduction
except for sight or short-term obligations to foreign correspondents•
If it be desired to handle operations with the Fund in the same manner,
end to give to reserve calculation a more definite expansionary bias, a
second alternative might be followed; A creditor position in the Fund
might be assimilated fully to gold or sight deposits abroad, while a
debtor position would be treated as a medium^ or long-term obligation
and wpuld not require any deduction from reserves* Thus, any extension
of credit to the Fund would increase net reserves by the full amount of
the credit granted, while borrowings from the Fund would leave reserves
unchanged, except for the exception now to be mentioned. In accordance
with Article V, section 7, and Schedule B of the Fund Agreement, each
country is obliged, when certain conditions are reolized, to repurchase
from the Fund at the end of eech financial yeur a certain portion of
the Fundfs holdings of its currency* Such repurchase obligations,
calculated as of the end of each month, should clearly be deducted in
full (or at least to the extent of 75$) from legal reserves at the end
of each month, in preparation for the lump payment to be made to the
Fund at the end of the current year (see examples in Appendix II),
The asymmetrical treatment of credits and debits toward the
Fund imparts to alternative No, 2 a stronger expansionary impct on
net reserves than would be allowed under alternative No, 1, On the
other hand, it t£kes into account the difference between indebtedness
subject to the repurchase obligation and indebtedness of more indefinite
maturity. While cleerly illogicel for central banks which already
deduct from their legal reserves all or pert of their indebtedness
abroad, it may be adopted by countries in wh^ch such deductions ere not
customary and in which the central benk deems it desirable to emphasize
further expansionary significance of operations with the Fund and to
avoid, as far as possible, anjr contractionary impact on net reserves,
In any case, it is important to note that the choice between
the two methods is of rather secondary importance, The differences
1/ A certain percentage of the central bank's indebtedness abroad, vary"~ ing with the maturity of the obligation, is deducted from gross gold
and foreign exchange holdings in order to arrive at net reserves.
The reserve ratio is then calculated by dividing net reserves by
average annual payments abroad -r or total sales of exchejage —*
rather than by sight obligations of the central brnk, .See frey
Organica del Banco del Paraguay y Ley de Bancos, Asuncion, Paraguay,
1944, pp. 38-40 and 44-45.
"""




CONFIDENTIAL
between the two procedures are confined to the calculation of net
reserves and thus to any psychological influences that they may have
on the attitude of the public and on central bank policy* An active
balance of payments — whether it takes the form of gold or foreign
exchange inflow, or of credits against the Fund ~ tends to expand
the domestic volume of money and commercial bank reserves, A passive
balance of payments — whether financed by loss of reserves or by
borrowings from the Fund -* has the opposite effect. Far more im~
portent than fluctuations in an arbitrarily defined legal reserve
ratio will be the central bank's attitude toward this internal
impact of balance of payments fluctuations and its decision to accept
it passively, reinforce it or neutralize it through domestic monetary
and credit policies. Such decision should vary with the nature of the
fluctuations and the central bankfs estimate as to their probable
duration and as to their fundamental or non-rfundamental character.
The contribution to be made to the International.Bank, if it
is made by the central bank, can in no case enter into the central
bankfs reserves, since membership in the Bank does not give any individual country any clear-cut presumption that it will be able to
borrow a specified amount of foreign exchange resources from the Bank,
Since the gold contribution to the Bank is no more than 2% of the quota,
however, the weakening of the central bank's reserve position is insignificant. The central bemk should be appointed as the sole depository
of the Fund and the Bank for the respective country,
(6) Corrective Measures and Safeguards - To insure smooth
collaboration with the Fund, and to avoid indebtedness to the Fund for
excessive periods, the Board of Directors of the central Jank or the
Advisory Council, as the case may be, might be required tt consult
with the Fund whenever legal reserves fell below a certain critical
level, or, if alternative No. 2 has been adopted, when the country
hed remained substantially in debt to the Fund for more than two years
at a time. Following these discussions, the Board or the Council
should be required to suggest to the government such measures as would,
in the Fund's and its own opinion, be suitable to restore equilibrium
in the balance of payments and, after a period of time which Fund and
Council regard as reasonable, bring the countryfs situation in the Fund
back to normal.
The Board or Council should wntch over the fulfillment by
the country of its obligations toward Bank and Fund, To this purpose
the Council should take all measures within its powersfind,where these
powers are insufficient, should call the attention of the government
to the needs of the situation, in which case the government should be
obligated to take appropriate action.
Information * Since Fund and Bank may, from time to time,
•
require from a member certain special information essential to their
effective operation, it seems appropriate that the respective national




-7-

CONFIDENTIAL

agencies and individuals in possession of this information be required
to supply it, provided that individual affairs are not disclosed thereby*
Statusf Immunities and Privileges ~ The immunities and
privileges listed in Article IX, Sections 2 to 9 inclusive, and in the
first sentence of Article VIIJ, Section 2b of the Fund Agreement, and
the immunities and privileges listed in Article VI, Section 5i, and
Article VII, Sections Z to 9 inclusive, of the Bank Agreement, should
be given full legal force end effect throughout the countryf It is
of particular importance that the International Bank be given adequate
protection, since without this, securities arising out of the Bank's
loans to the 'country concerned will not enjoy the full confidence of
private investors*
(9) Use of Stabilization Loans • It might be specifically
*
mentioned that the local currency equivalent of exchange bought from
the Fund and of stabilization loans granted by the Bank shall under no
circumstances be employed for internal budgetary or similar expenditures without the expressed ruthorization of these agencies* This
inunction is plainly inherent in the Bretton Woods Agreements them-*
sieves but does not seem to be universally p.pprecif ted; When the
central bank sells to local importers exchange acquired from the Fund,
the local currency it receives in return is automatically withdrawn
from circulation. But if the treasury handles the operations and
pays the Fund with demsnd notes, it will then have on its hands the
local currency received from exchange soles to importers* This
currency should in no qese be employed for budgetary expenditures, but
held for redemption of the demand notes.




COHFIPENTIAL
APPENDIX I
Action by Member Countries
The Bretton Wopcls Agreements specify action by member countries
in the following casest
A,

Instances in which a member country may take the initiative;
(1) Propose a modification in the par value of its currency.
(Fund IV, 5).

(2) Propose the imposition of exchange control and obtain the
approval of the Fund. (Fund VIII, 2),
(3) Propose an adjustment in its quota in the Fund, (Fund III, 2)
or its subscription to the Bank, (Bank II, 3).
(4) Propose amendments to the Fund and Bank Agreements and submit
differences of interpretation to the Board of Governors of the respective
agencies, (Fund XVII, XVIIJ; Bank VIII, IX),
(5) Decide upon the withdrawal of the country from the Fund,
(Fund XV, l)or Bank, (Bank VI, l).
(6) Request of the Bank a modification of the conditions governing
the payment of loans granted by the Bank to the country. (Bank* IV, 4, c)>
(7) Make reply to reports
country is using the resources
poses, as well as to any other
the Fund may make; and to name
ceding the publication of such

which the Fund may issue stating that the ,
of the Fund contrary to the latterfs purcommunication or statement of views which
a representative for the discussions prereports. (Fund V, 5; XII, 8),

(8) Name a representative to participate in the preparation of a
report to explain the causes of an imminent general shortage of its
currency and to make recommendations to remedy this shortage, (Fund VII, l),
B*

Cases requiring the approval, agreement or consent of the member for
certain decisions by the Fund or the Bank:

(1) Modifications in the quota of the country in the Fund.
(Fund III, 2).
(2) Loans to the Fund in local currency by the country or by
third parties. (Fund VII, ,2),
(3) The supply of additional information to the Fund.
5, c).




(Fund VIII,

-9-

CONFIDENTIAL

(4) With regard to direct losns granted by the Bank out of its own
resources:
(a) approve the use for loan purposes of the 18% quota
subscribed in local currency or its conversion into
other currencies for purchases outside the country^
(Bank IV, 2, a ) ,
(b) permit the payment of interest and amortization on
loans granted under (a) to be made in other currencies, (Bank IV, 4, b, i)i
(c) permit the use or conversion of amortization receipts
by the Bank, (Bank IV, 2, b ) ,
(5) With regard to other direct loans granted by the Bank out of
borrowed funds:
(a) permit the Bank to borrow funds in the country,
(b) permit the Bank to make loans denominated in its local
currency* (Bank IVf 1, b ) .
(6) With regard to guarantees given by the Bank for loans granted
by private investors! to approve such guarantees when the funds ere
roised in the country or when the loeji is me.de in the country^ local
currency. (Bank IV, 1, b ) f
(7) Approve purchase or sale by the Bank in the national territory
of any securities which the Bank has issued, guaranteed or purchased and
the raising of loans by the Bank in local currency• .(Bank IV, 8) f
(8) To approve the liquidation of pending accounts in the case of
withdrawal from the Fund or the Bank, (Fund XV, 3; Bank VI, 4 ) f
C.

Instances in which certain matters must be submitted to the vote of
member countries:
(1) Amendment of the Agreements,

(Fund XVII, a; Benk VIII, a),

(2) Uniform modification of parities*
D,

(Fund IV, ?)•

Various other instances of action implicitly required by the member
are those eonnected with the obligations to which reference is made
in Section (6) of this paper.




-10-

CONFIDENTIAL

APPENDIX II
Applications of alternative methods of calculating reserves (see section 5)<
It is assumed that before the subscription is made the central
bank has reserves of 325, The "normal position11 shows the bankfs statement after making the subscription to the Fund required by an assumed
quota of 100, Under "creditor position11 it is assumed that an active
balance of payments of 50 has been paid to the country exclusively
through^the Fund. Under "debtor position" it is assumed that a passive
balance of 50 has been paid by the country exclusively by drawing upcSn
the Fund. This gives rise to a repurchase obligation of 25 by the end
of the year, the liquidation of which is shown under "After Repurchase",




-11-

CONFIDENTIAL

Alternative 1»
I, Before adherence to the Fund
Gold and foreign exchange
II.

325.0

"Normal* position after adherence to the Fund
Assets? Gold and foreign exchange
100$ of gold contribution to Fund
50$ of currency contribution (75)

300.0
25.51
37.5J

6

*

362.5
Liabilities: 50$ of Due to Fund (75)

37.5

Net Reserves? 362^5 - 37.5 •
*
III.

325.0

Creditor position of 50
Assets: as before, i.e., current gold and foreign
exchange, plus a fixed item of 62.5
Liabilities: 50$ of Due to Fund (75 , 50

5

25)

362,5
12.5

Net Reserves: 362.5 * 12f5 * 350.0, i.e., an increase equal to
50$ of the amount lent (SO • 25)

~F
IV,

Debtor position of 50
Before repurchase
Assets: as before

362f5

Liabilities: 50$ of Due to Fund (75 + 50 * 125)

62.5

Net Reserves: 362.5 - 62.5 * 300.0, i.e., a decrease equal fco
50$ of the amount borrowed (50 * 25)

T
After repurchase of 25
Assets: igold and foreign exchange
mmm
Contribution to Fund
Liabilities: 50$ of Due to Fund (75 + 25 • 100)
Net Reserves: 337.5 n 50 f 0 *

275fO
62.5
337.5
50.0
287.5

Note: On its balance sheet proper, the central bank will enter the full
amount of its contribution (always 100 in the example) as asset
and the full amount of its current indebtedness to the Fund as
liability,




Alternative 2 #

3

Before Adherence "Forml11 Position Creditor Position Debtor Position After Repurchase
of 50
of 50

EH

Assets
Total legal reserves
Gold and exchange
325
. Equivalent of gold contribution
0
Creditor position in Fund
0

300
25
0

300
25
50

7«)r

n ot

r» rjr~

ado

ocb

375

Exchange assets earmrked against
repurchase obligations
Currency contribution remaining
in Fund
^

275
25
0
300

275
25
0
300

0

0

0

25

0

0

75

25

75

75

Other assets

100
100

100
100

100

100

100

Total
Liabilities

425

500

500

500

475

Currency and demnd deposits

400

400

450

350

350

0

75

25

125

100

J25

J25

JJ5

J25

J2£

425

500

500

500

475

Special deposit in favor of Fund
or uemand notes (This itern not
subject to reserve requirements)

Other liabilities
Total