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July 8, 1944
E. A* Goldenweiser
Much confusion about the International Monetary Fund would be
avoided if it were clearly understood that there are three separate
aspects in the proposed plan: one, the Fundfs purpose; two, the methods
proposed for achieving this purpose, and, three, the consequences that
may flow from its achievement*
The purpose of the Fund is the restoration of world trade and
its continuing expansion. While the agreement proposing the Fund deals
for the most part with matters relating to foreign exchange and the
maintenance of its stability, that after all is not an end in itself
but merely one of the means towards achieving better trade conditions *
Similarly, while the Fund may be expected, through improving trade conditions, to contribute to the maintenance of full employment and a high
level of real income as well as to the restoration of disrupted economies
and the development of resources of undeveloped countries, these matters
are in the nature of hoped for consequences of the successful operation
of the Fund rather than its immediate purpose*
A brief discussion of the three phases of the matter is presented
in the following paragraphs* No attempt is made to describe the Fundfs
operation or to cover all the matters with which the proposal deals*
That has been done in other papers* This is only an attempt to draw a
sharp distinction between the Fund's purposes, its methods, and the
possible consequences of its operation*

No country is completely free from the influence of foreign
trade* Raw material producing countries need foreign trade in order
to find markets for their output* These countries need the proceeds
of the sale of their products abroad for the purpose of buying goods
for consumption as well as for the development of their country.
Industrial countries usually require foreign trade both for the
acquisition of raw materials "which they use in manufacturing and for
the disposal of their products. There are great differences between
countries in the extent to which they depend on foreign trade. In
some countries foreign commerce constitutes a very large proportion
of total national income. In other countries the percentage of national
income that is produced by foreign trade is small. But even in the
latter countries it is often the case that the marginal 10 or 12 per
cent involved in foreign trade may spell the difference between prosperity and depression.
For these reasons, a restored world economy cannot be imagined
without the establishment of world trade on the largest possible scale
and with the least possible obstructions. This need not be elaborated;
suffice it to recall the innumerable difficulties and frictions which
developed in the two decades after the last war as a result of increasing
obstructions to world trade. If the Monetary Fund can make a substantial
contribution to its restoration in the maximum possible volume it will

_ 3 not have been in vain that the representatives of 44 nations spent
much time and effort in promoting and fashioning the plan.
The greater part of the proposed agreement deals idth the methods
devised for the purpose of encouraging world trade* The principal method
is the restoration of exchange stability* Assurance to producers and
traders throughout the world that they can count on a reasonably stable
level of exchange rates would make it very much easier for them to engage
in their business* They would have the assurance that their profits will
not be exposed to the unpredictable risk of great fluctuations in the
value of the currencies for which they propose to sell their product or
in which they propose to pay for their imports* Exchange stability affects
directly not only those who are engaged in international trade but also
all those who produce goods a considerable part of which finds its way
into world markets* It is, therefore, not a matter that concerns merely
a relatively small proportion of some countries1 population but one that
directly concerns the great majority of all people* In fact, no prosperous world trade and no prosperous economies can persist in the face
of violent fluctuations in exchange* It is for this reason, and as a
result of painful experience, that the great necessity for developing
an International Monetary Fund was dwAald*
More specifically, the Fund proposes to limit the right of member
countries to change their exchange rates without going through a certain
procedure. The countries that join the Fund undertake not to propose

- 4 such changes unless they consider them appropriate to the correction
of a fundamental disequilibrium*
Ihile the Fund looks to exchange stability as the principal
means for the restoration of world trade, it recognizes limitations
on stability that are necessary in order to meet the internal conditions of different countries* It provides that during the period
of transition, in view of the extreme uncertainties that must prevail
after the war comes to an end, many adjustments will be necessary, and
it is proposed that the Fund in deciding on its attitude to any proposals for changes in exchange rates presented by mesibers shall give
the member country the benefit of any reasonable doubt* It is indeed
impossible to conceive of a Fund possessed of such wisdom as to provide
immediately after the war rates of exchange that will in all cases
continue to be appropriate as the process of reconstruction proceeds*
There is, therefore, an indication that the Fund will have an open mind
in this matter and will proceed with due consideration for the needs
of applying countries*
The Fund also has other provisions that add flexibility to the
system it hopes to establish. It authorizes a country to make a 10 per
cent change in its currency without obtaining the concurrence of the
Fund* However, even in that case the country is required to consult
with the Fund and to act in accordance with its purposes, so that if
the agreement is carried out in good faith such changes will not be
an arbitrary or competitive devaluation* Furthermore, the proposal
provides that a country which after having made a 10 per cent change

- 5finds itself under the necessity of making another change without delay,
may request the Fund's concurrence in such a change and a reply must be
given within 72 hours • Other changes can be obtained with the Fundfs
concurrence and there are no prescribed limitations to the time necessary
for their consideration*
It may appear that these provisions go a long ways towards diminishing the hoped for stability of exchanges * Careful consideration, however,
would indicate that the opposite is the case* Stability does not mean
rigidity, and rigidity in the past has resulted in extreme instability*
A country which finds that its domestic economy is suffering greatly from
inability to sell abroad, because of an inappropriate rate of exchange,
has no alternative but to change it* If it does not change it soon enough
but persists in maintaining it after it has become untenable, there are
serious consequences both at home and abroad* Ultimately the rate is
changed and is likely to be changed by a larger amount than would have
been necessary if the country had acted promptly* Illustrations of such
cases are too common to need mention*
Therefore, the provision for moderate changes in consultation with
an International Fund and with its concurrence, so long as they are in
accordance with the general objectives of the Fund, is a real contribution
to stability rather than an impingement upon it*
In order to protect the economies of the country from any untoward
influences resulting from excessive rigidity of the rate, there is an
explicit provision that the Fund shall not reject a requested change that
is necessary to restore equilibrium, on the ground tKat it does not approve

- 6of the domestic social or political policies of the member country,
or of its economic policies in so far as these contribute to the
maintenance of a high level of employment and real income • These
provisions are not a substantive limitation on what the Fund is expected to do, but merely a reassurance to the countries that these
vital matters were kept in mind by the framers of the proposal, and the
member countries1 inherent autonomy in domestic affairs is not threatened*
As a part of its mechanism for the restoration of world trade
the Fund provides a method of affording countries an opportunity in
effect to borrow foreign currencies from the Fund, in exchange for
their own. This enables countries that are temporarily out of means
for making payments abroad to make such payments out of the Fund!s
resources. The countries are thus protected from feeling imediately
the pressures arising out of an unfavorable trade balance in a way
that leads to disruption, measures of restrictions, blocked accounts,
limitations of trade, etc*
There are many safeguards provided in the Fund to protect its
resources from uses that are excessive in amount or in duration. The
Fund is expected to be a revolving fund which affords to the countries
a breathing spell during which they can undertake such measures as
may be necessary to restore their economy to a condition of equilibrium
without in the meantime disrupting their foreign trade. No safeguard
provided for the Fund is more important than the provision that the
countries1 request for foreign currencies must indicate that the uses
to which those currencies will be put are consistent with the purposes

- 7of the Fund* This means that countries "which conduct their affairs
in good faith in accordance with the undertaking to act in conformity
with the purposes of the Fund m i l not in any circumstances divert
the resources of the Fund to undesirable uses. In international
agreements between sovereign States no method of enforcement can be
as important as reliance on the good faith of the participants. The
Fund*s operations are limited to current transactions• With reasonable exceptions, the Fund is not supposed to be used for the transfer
of capital* Such operations must be handled through other channels •
. An important incidental provision in this connection is the
power of the Fund to warn a member country, even though that country
may not be using the Fundfs resources, that the conduct of its affairs
is not consistent with the purposes of the Fund* Such a warning
would point out to the country that its conduct not only constitutes
a failure to perform an obligation undertaken by joining the Fund
but will be prejudicial to the country if in future it should wish
to have recourse to the Fund»
To summarize, the Fund attempts to provide the greatest degree
of exchange stability that is consistent with the economic necessities
of the members. It introduces stability without rigidity and elasticity without looseness.

la drafting the proposal it has been the intention not only to
indicate the purpose and the methods of the Fund but also briefly to
mention the consequences that it may have on world prosperity* As a
means of assuring the member countries that join the Fund that it is
not conceived in the narrow spirit of protecting the financial interests of traders and thtir backers but in the spirit of far-sighted
concern about the general well-being, it is indicated that the Fund
proposes to contribute to the promotion and maintenance of high levels
of employment and to the development of the sources of productive power
in all member countries, as primary objectives of economic policy*
The Fund does not propose to be a universal panacea for all
human ills but only a mechanism for the performance of a clearly defined
specific purpose* At the same time it is one of the cogs which, in
conjunction with many other undertakings, offers hope for the reestablishment of a prosperous and, consequently, a peaceful world#