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May 3- 1945-. — -10:30 = A.M.
,'. . '•
(Twenty-first day of hearings)
Dr. Melchior Palyi, consulting economist from Chicago, testified
against the Bretton Woods Agreements. He offered a prepared statement for
the record and went, on to stress certain points brought out in the statement
which tie considered the most -important drawbacks, in the Agreements, Although
Dr. JPayli approved the main objective of the.Bretton Woods Agreements, to promote international'exchange stability, 'he felt that the Agreements would not
accompliah this purpose. To achieve such-stability .in his opinion the flow of
Capital from creditor to debtor countries, must be revived,. To correct a
temporary disequilibrium in a country's balance of payments an initial credit
may be cufi'icient; to correct a fundamental disequilibrium,, a sustained capital flow toward that country will be necessary. . In D?> Palyi1s opinion, the
Bretton Woods AgrecanentS will fail-to achieve'monetary stability because the
Bank--may make or guarantee loans for reconstruction and development purposes
without sufficient consideration of the balance of payments position of the
borrower^ and more important, because the Fund will compromise the objective
of free capital movements by permitting exchange restrictions. . Mr. Palyi
pointed out the provisions' in the Fund Agreement which permit the maintenance
of exchange control during the transition period, the maintenance cf restrictions on capital movements, and the introduction of restrictions upon dealings
in a currency'declared scarce by the Fund. He felt that restrictions on capital account would lead to restrictions on current account. Because the Fund
would in his opinion discourage the flow of private capital through permitting
exchange restrictions, Dr. Palyi felt the Fund would fail to promote international monetary stability.
Representative-Brown (D. Ga.) asked Dr. Palyi whether, if the United
States accepted .the Bretton Woods Agreements, he would use his influence- to
get foreign countries also to adopt the Agreements, Dr. Palyi answered that
British public opinion was against the Agreements and that many other countries
opposed them. However, if the United States adopted the Agreements other countries would follow suit. lie felt that the Agreements were not necessary for
international financial collaboration but that bilateral arrangements between
creditor and debtor would be more satisfactory.
Representative Wolcott (R. Mich.) asked if the witness believed other
countries would accept the Agreements, Dr. Palyi said the debtor countries
could have no objection but that possible creditors, such as Argentina, Sweden
and Switzerland, might have doubts. Representative Crawford (R. Mich.) asked
Dr. Palyi to name other potential creditors. He answered there might be quite
a few, including South Africa and some Latin American nations, but that they
lacked experience in investment. To a further question by Representative
Crawford as to whether he would recommend that a creditor country not adopt
the Bretton Woods Agreements Dr. Palyi answered yes. Representative Crawford
asked if the permission given members in the Fund Agreement to impose exchange
restrictions in certain-cases would not discriminate against United States
capital invested abroad. Dr. Palyi replied that the Agreement legitimatizes
stopping repayment of borrowed capital. If a member had exhausted its right
to draw upon the Fund, it could cease repaying its obligations.

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Representative Monroney (D. Okla.) aBked if.all countries would not
have to control currency flows in the absence of on international agreement.
Dr. Palyi agreed but pointed out that exchange control is permitted under the
Fund Agreement as well. Representative Monroncy suggested that an embargo on
capital movements might be easier in 'the absence of the Fund Agreement. He
felt that United States trade would be curtailed in the absence of the currency
stability provided by the Fund Agreement. Dr. Palyi pointed out that the United
States would be the major source of supply after the war. He denied Representative Monroney'a contention that countries would trade with the'United States
only until dollars became scarce and said that as long as countries had gold
they would buy dollars. When their gold was exhausted,' they could import only
as much as they exported. Representative Monroney felt this situation would
load to barter between governments and internal regimentation in this country.
Representative Monroney declared the Fund Agreement was the only instrument
for achieving stabilization. -He accused Dr. Palyi of misinterpreting Article
XIV which permits exchange restrictions during the transition period, and maintained the Agreement did not condone such restrictions. He felt restrictions
on capital movements would be necessary after the'war to prevent flight of
capital to the United States. Dr. Paiyi maintained 'there would be no such
flow of capital. He felt that since no real stabilization "would be achieved
during the transition period, any attempt such as the'Fund should be postponed
until after the transition period had passed^

• Board of Governors
of the Federal Reserve System
Division of Research and Statistics
May 3, 1945