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October 7t 1944
Consents on John ffilliams
E. A. Goldenweiser

(Article on International Monetary Plans After Bretton Woods
in Foreign Affairs for October

John Williams has been writing against the monetary fund
proposals ever since their inception. The line of his criticism has
shifted as the plans evolved from the early drafts through various
stages to the final act approved at Bretton Woods. At first he
thought that exchange rates would be too rigid under the Fund, later
he believed that they would be too flexible. One criticism, however,
has persisted throughout his writings, namely, that the Fund is not
adapted to the transition period after the war, that it would be
wrecked in the first years, end that we should then be worse off than
if no Fund had been established.
In his latest article Williams reiterates this belief. He
realizes, however, that the matter has gone too far to be dropped now
without serious loss to the United States, end proposes as a compromise that the plan for the Bank be adopted as soon as possible and
that decision on the Fund be withheld. His doubts about the Fund
persist but he has developed a growing appreciation of the possibilities of accomplishing through the Bank much of what is desired from
the Fund.
Whether such a compromise would avoid the loss of prestige
and leadership which Williams envisages as the result of dropping
both plans, is a matter of opinion. It might be contended that the
loss to this nation would be great and well nigh irreparable. Also
there is grave doubt whether the countries, which were willing to
accept both plans, would feel that the Bank alone would be an adequate
substitute. Williams' statesmanlike purpose, to develop a helpful
solution out of the plans, "whatever one's earlier preferences may
have been," would hardly be accomplished by his proposal.
In his latest article Williams spells out in some detail
the defects which he finds in the Fund proposal. Upon analysis the
defects which trouble him do not appear to be valid criticisms of the
plan. It is proposed here to take up seriatim the principal points
he makes against the Fund. Williams1 text flows smoothly and the
points are not sharply delineated, but nevertheless they can be
identified and listed in the order in which they are made.
Williams says; "the development of the discussion over the
past year or more has pointed increasingly toward the conclusion
that the Fund is intended primarily as a long-run agency of monetary

- 2 -

In this quotation the words which seem to be misleading have
been underlined. There has been no increasing emphasis on the longrun functions of the Fund, which are no more primary then its immediate
objectives. Also the Fund is hardly on agency of monetary regulation.
It is an agency of cooperation in a mutue.1 attempt to encourage exchange stability and for that purpose to provide assurance of temporary
access to foreign means of payment to countries whose international
accounts are temporarily out of balance* The sentence quoted from
Williams gives an entirely erroneous impression.
The statement that the Fund is not expected to be used in
connection with relief and reconstruction is a recognition of the truth
that a great many other means besides the Fund will have to be developed to accomplish postwar reconstruction. There will be plenty for
the Fund to do in the immediate postwar period in trying to help balance
trade accounts, over and above grants for relief and loans for reconstruction. Devastated countries will need a numberless amount and
variety of goods, other than relief supplies, during the time when they
will strive to regain a normal life. Exclusion of relief and reconstruction payments from the field of the Fund's activities is a recognition of the fact that the Fund would be overloaded if it attempted
to handle such payments, and not a relegation of the Fund's activities
to a time when reconstruction will have been completed and relief no
longer necessary. Other new provisions in the Agreement in regard to
the transition period represent the difference between preliminary
drafts of principles and a detailed elaboration of a plan that is intended to be workable both immediately after the war and over the
years. In this as in other criticisms of the Fund Williams makes the
mistake of assuming that elaborations of provisions represent changes
in viewpoints.
Williams objects to the Fund because it provides for general
needs for exchange resources, whereas it is clear to him that need for
these resources will be specific rather than general. The fact of the
matter is that the Fund provides to each member country a certain
quota, or line of credit, on which it can count in making its plans,
always provided that the need for the funds arises out of transactions
consistent with the purposes of the Fund, that is, out of unavoidable
temporary shortages of foreign exchange for current payments. There
is nothing "general" about this, the transactions are specific, but
all member countries are given assurance of equal treatment, which
would certainly seem to be in accordance with the purposes of international cooperation.
Williams says that the Fund "would supply these balances
indiscriminately to all the United Nations and would make them available on a time schedule and as a matter of automatic right." This
sentence is incorrect. In order to draw on the Fund a member must
indicate that it needs the foreign exchange for certain specified

-3 purposes. It has no automatic rights. All it is assured of i3 that,
if a country's needs are of a kind that the Fund is intended to meet,
the country will have drawing rights up tc a certain maximum amount.
In banking language, what the member countries have is a line of
credit โ€” not a drawing account. It is true that there were pressures
from some countries to make the Fund's resources available almost
automatically, but these pressures were resisted and there are numerous safeguards against indiscriminate use or abuse of the Fund's resources. What emerges is very far from on automatic right to draw on
the Fund. The provisions in which these limitations are incorporated
are given in Attachment I.
Technically perhaps Williams' key objection to the Fund is
that the mechanics of the Fund plan will tend to cause a shortage of
dollars in the Fund. The fact is that a demand on the Fund for dollars and dollar scarcity could develop only to the extent that other
countries actually needed dollars to pay for purchases in America,
in excess of sales to this country, plus the extent to which countries having all around favorable balances of payments wanted to hoard
dollars. Williams' statement that "even though this country had on
even balance of payments position, the Fund's holding of dollars would be rapidly exhausted" is, therefore, erroneous. Whether dollars
are acquired for the purpose of paying for American goods or for the
purpose of hoarding - they are a drain on the supply of dollars, so
that this country's payment position would not be oven.
It is true that some countries have been in the habit of
settling accounts among themselves in terms of dollars or sterling.
But why? Primarily because all these countries had unfavorable balances with the United States and with England, or with other countries
that were willing to accept dollars or sterling because they had unfavorable balances of payments with the United States or with England.
They wanted dollars or sterling because they all owed dollars or
sterling, or owed other countries which wanted them. In so far as
the practice merely meant the passing of claims on the United States
or on England by one country which at the moment did not need them
to another countiy which did, this was o triangular settlement of
accounts. It would not be feasible, unless the key country had a
favorable balance with the countries in question. In so far as dollar
or sterling bills were a kind of international currency which circulated from country to country without representing any actual transactions with the United States or England, this circulation could continue to take place, with the Fund as well as without it. Under the
Fund agreement, furthermore, dollars accumulated by one country in
dealing with another country (not the United States) would have to
be turned over to the Fund at the end of a year if the country accumulating the dollars haa made drafts on the resources of the Fund.
So that an accumulation of dollar accounts that does not arise out
of transactions with the United States would be discouraged under the
terms of the Agreement.

~4 As a practical matter, there is little likelihood of hoarding of dollars on any considerable scale in the postwar world when
goods will be desperately in demand, but if there will be dollar hoarding it will not bo caused or enhanced by the Fund, but would be one
of the unhappy consequences of disruption of other currencies. The
Fund would bo set up for the very purpose of diminishing the causes
that would otherwise lead to dollar hoarding and dollar hunting on
an unprecedented soale. There is nothing in the Fund agreement to
stimulate such hoarding.
The fact that the amount of dollars and pounds that the
Fund is prepared to supply is limited is in Williams* opinion another
fatal defect. It would seem that at this point he feels that the
Fund is not liberal enough, though at other points he criticizes it
for being too liberal, in fact, automatic. The fact that the amount
of dollars that the United States is pledged to turn over to the Fund
is limited to o specific figure is not only a feature essential for
the adoption of the proposnl by American public opinion, but is also
an indication of the determination of the proponents of the Fund to
work toward balanced accounts for all member countries rather than
for an unlimited and continuous excess of purchases by many countries
from the United States.
Williams says that the aggregate potential claims for dollars in the Fund will be $6.05 billions, while the American contribution to the Fund will be only $2-3/4 billions. This he says is a
great gap. This ignores the $1 billion dollars in gold, which is
convertible into dollars, that countries other than the United States
will pay into the Fund and as a result of which they get claims on
dollars in excess of their quotas. In all, the Fund will have approximately $3-3/4 billions of dollars or dollar equivalents against
a potential maximum demand of $7 billions, not a bad ratio as the
world goes. For it is not probable that all the countries will want
to use all their drawing power on the Fund to obtain dollars and
dollars alone.
More fundamentally, the point once more ascribes to the
Fund a condition of dollar scarcity which is likely to arise in the
postwar world but will not be caused by anything the Fund would do.
It is a probable condition that the world will have to face owing to
our general economic strength and the war-caused weakness of most of
the rest of the world. The Bank and the Fund and other undertakings
are attempts in part to mitigate this condition and to give the world
a chance to counteract it in time. It is difficult to see how the
Fund, by contributing 2-3/4 billions of dollars to the world supply,
can increase the likelihood of dollar scarcity. To blame the Fund
for its existence is a complete misrepresentation of the situation.
Williams, of course, knows better. But his statement lends itself
to use by those who do not.

- 57*
Williams discerns in the history of the Fund proposals
"a growing anxiety about a possible scarcity of key currencies and
this means especially the dollar." This anxiety unquestionably existed; it was not growing, it was c fundamental basic probability
recognized from the beginning* That the means proposed for coping
with this scarcity have now been made public in more detail than
earlier is the result of the fact that they have now been sufficiently perfected by hard work and consultation to make it possible to
include them in the proposal.
The Agreement includes a whole array of devices, which had
been under consideration right along. Progressive interest charges,
provisions for suspension of borrowing privileges, requirements for
clear indication of purposes for which drafts on the Fund are made,
repurchase of currencies, and many other methods are spelled out and
presented either for the first time or in much more complete detail
in the Agreement than in earlier drafts,
Provisions dealing with this point are cited in Attachment

Williams says that the provisions about gold "would probably
result mainly in attracting gold, via the Fund, to the United States."
Once more he blames the Fund for a condition that exists without it
and that the Fund would tend to mitigate rather then accentuate. Foreign countries will emerge from the war stripped of goods โ€” but with
more gold in the aggregate than they ever had before. This is due to
the fact that we have exported largely on lend-lease, and that other
goods were not available here for export. Without the Fund (and the
Bank, and UNRRA) the gold would flow to this country in a mighty stream.
It is looped that by the various proposals end undertakings, including
the Fund, the flow of gold will be delayed, and possibly diminished.
The only conceivable circumstances under which the Fund could increase
this flow would be if countries, relying on the Fund, failed to make
efforts to balance their accounts. This could happen only if the Fund
management completely failed of its purpose. Williams does not put
it in these terms; ho seems to think that gold will be attracted in
some mysterious way via the Fund to the United States. But how? That
is not indicated.
Williams says that "the great weakness of the Fund, from a
mechanical standpoint, is that while other countries in paying for our
exports would use up the Fund7s supply of dollars, our own payments
for imports would not replace these dollars." In other words, the
Fund- would have to meet the gross, not the net, demand for dollars.
But why? What would be done with the dollars that we pay for goods
we buy? Will countries that receive the dollars hoard them and go
without the goods they will need so badly? Is this realistic? This
is a reappearance of the point already discussed under U above. It
does not stand up under analysis.

- 6
Finally, Williams states that "the successive drafts of the
plan have watered clown and finally left out altogether any reference
to corrective economic measures essential to its operation." This is
not true. The crucial provision aimed at the adoption of corrective
measures is the one which says the Fund can refuse to lend to any
country which is not using the Fund in accordance with its purposes.
This provision was in the earlier drafts as well as in the Bretton
Woods agreement. .Among the Fund's stated purposes is "to give confidence to members by making the Fund's resources available to them
under adequate safeguards, thus providing them with an opportunity to
correct miladjustments in their bolances of payments without resorting
to measures destructive of national or international prosperity."
There is also recognition that the Fund and the Bank alone cannot expect to meet the situation, that rational commercial and domestic economic policies will be necessary for reestablishing a functioning
world economy.
To be sure, the extent that the Fund c : use its influence
to correct unsound domestic policies of members, in so far as they
may result in an unbalanced trade position, is left vague in the
Agreement. This was inevitable. It is obvious that this is the most
delicate subject in negotiations with sovereign countries which have
to reckon with public opinion at home. This is the most important
instance in which the Fund will have to feel its way and to grow in
influence as confidence in its judgment and its fairness becomes more
firmly established. A rigid statement on this point at the outset
would prevent acceptance of the agreement and would become, in case
agreement were reached, a deed letter โ€” since countries are free to
withdraw from the Fund at any time. It is in this field that constructive statesmanship should develop over the years. There is little
profit in wishing for complete control of the world, for a new and
untried institution and one that is established by voluntary agreement. But cooperative action of a constructive kind to develop in
time holds great promise for improvement in world trade conditions in
the future.
Williams wonts the proposed Bank to do the job designed for
the Fund. He thinks that the Bank could be more selective, could impose conditions, and could serve in a practical way the purposes proposed for the Fund. Perhaps it could. But this plan would abandon
the heart and core of the Fund proposal, namely, the reestablishment
of greater confidence in making future plans because of the assurance
that a great mutual institution is there to help out in case of need,
and that all countries stand on a par before it, within the limits
of an accepted amount. If countries must go hat in hand to a bank to
help them out over temporary trade difficulties entirely at its discretion and on its own conditions, chances are that the countries will
prefer to try to work out their own salvations by methods which proved
to be so disastrous in the period between the two World Wars. It is
doubtful whether the Williams compromise would meet the world' s needs
for constructive international cooperation.

Attcchment I

Page 4. (first psragraph)
The precise provisions which are referred to in this paragraph ere the following:
1) Art. XX, Sec. 4 (i)ยป The Fund may postpone exchange
transactions v;ith any member if its circumstances are such that, in
the opinion of the Fund, they would lead to use of the resources of
the Fund in e meaner contrary to the purposes of this Agroemont or
prejudicial to the Fund or the members.
2) Art. V, Sec. 3 (a) (i). A member shall be entitled to
buy the currency of another member from the Fund in exchange for its
own currency subject to the following conditions: (i) The member
desiring to purchase the currency represents that it is presently
needed for making in that currency payments which are consistent with
the purposes of this Agreement.
3) Art. V, Sec. 5. Whenever the Fund is of the opinion
that any member is using the resources of the Fund in a manner contrary to the purposes of the Fund, it shall present to the member a
report setting forth the views of the Fund and prescribing a suitable
time for reply. After presenting such a report to a member, the
Fund may limit the use of its resources by the member. If no reply
to the report is received from the member within the prescribed
tine, or if the reply received is unsatisfactory, the Fund may continue to limit the member's use of the Fund's resources or mey, after
giving reasonable notice to the member, declare it ineligible to use
the resources of the Fund.

Attachment II

Pages 6-7

1) Art. V, Sec. 5 and Art. V, Sec. 3 (a) (i). See
Attachment I.
2) Art. V, Sec. 8 xvhich provides for progressively
increasing charges es the .mount borrowed and the
tine over v&lch it is borrowed increase. The provision is too complicated end lengthy to repeat
in full.
3) The repurchase provisions, Art. V, Sec. 7, which
require z member to use its own reserves in excess
of its qupte at the same rate it uses the Fund end
also require a member to use half of any increase
in its reserves above its quota to repay borrowings
from the Fund. These provisions also are too complex and lengthy to repeat in full.