The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Restricted
June 19f 1946
LENDING OPERATIONS OF THE FUND
A, Bourneuf
The International Monetary Fund has supervision over the exchange
rate and exchange control policies of members and also provides financial
assistance to members. The importance of its supervision of exchange rate
and exchange control policies is generally recognized; opinions differ,
however, on the importance of its lending operations* Mr* Nurkse sayst
w
The main function of the International Monetary Fund will be to create
an addition, and quite a substantial addition, to aggregate international
liquidity. w i/ Mr. Viner, discussing the original Keynes and White plans,
said, "By creating an additional and flexible supply of internationally
liquid means of payments both plans would provide needed safeguards against
either world or local deflations originating in national balance of payment
difficulties. This is the greatest service which the plans would render
• *»*"£/ This pap;#r examines the contribution which the Fund v s lending
operations may iteik& to international monetary stability and the avoidance
of deflationary and restrictive measures.
Reasonable stability and freedom in international monetary relations is possible only if appropriate measures ore taken to achieve balance over a period of time in the international transactions of iaitvidual
countries. The adoption of suitable exphange rate and exchange .control,
policies is of fundamental importance*
But it is perhaps of equal impor-
tance, if unnecessary changes in exchange rates, excessive restrictions
on current transactions, and domestic deflationary measures ore to be
1/ felgna^ Nurkse, Cpnd:}. tft.ppspff Inteyn^ionol Monetary
^ T ^ r
Irincetoii International Finance Section, "Essays in International
jtaqa&oe," S p H » $ 1945, p f 13,
p / iTticob Viner Two* JErlans f o r ^EBtftT**^^^<&flft^ lutenetorv Stabilization
New Ycftfk Jiconomic NationS Com4ttee M dietary Policy,1943^
Reprinted from the Yale Review of Autumn 1943, p. 13.
- 2 avoided, that countries have some available means of meeting balance of payments deficits. Prom this point of view the Fund's lending operations may
be considered as important as its supervision of exchange rate and exchange
control policies. Although the Fund has the power to object to exchange
rate changes and exchange controls on current transactions, it can not do
so in practice unless there is some other means of meeting the deficit or
correcting the situation.
The Fund's Lending Operations
The normal financial transactions of the Fund are essentially
international lending operations. Unless special permission is granted
the total net borrowing privileges of each member are equal to its quota,i/
or subscription to the Fund, and no more than one quarter of this amount
may be obtained in any twelve-month period. The obligation of each member
to lend is also equal to its quota. Countries borrowing from the Fund put
1/ The provisions of the Fund Agreement run in terms of purchases of currencies from the Fund. Each member may purchase 'foreign currencies
with its own currency until the Fund's holdings of its currency equal
200 per cent of its quota. This means that a member can purchase up
to the amount of its quota plus the amount originally subscribed in
gold. To the extent that a member obtains foreign currencies up to
the amount of its gold subscription it is not obtaining net assistance
from the Fund and is not in fact a net borrower from the Fund. If it
should withdraw, e.g., it would take back all the Fund's holdings of
its currency and would have no further obligation to the Fund.
Although the accumulation of foreign currency balances is
essentially an international lending operation, the purchase of foreign currencies with gold is not. However, the Fund's operations in
gold may involve lending operations. The gold subscribed by a member
may be considered as a loan to the Fund. Also when the Fund uses
gold subscribed by members to purchase currencies needed by others
a larger proportion of all members' claims on the Fund are now claims
on foreign currencies rather than on gold. At this stage the Fund
itself becomes the lender* Ordinary gold sales through the Fund may
also involve lending operations. When a country sells gold through
the Fund to purchase a foreign currency there is no lending whatever
if the Fund uses the gold to obtain the currency requested.' If the
Fund is able to keep the gold, however, and provide the currency from
its own holdingsj the country whose currency is provided is lending
through the Fund.
- 3 up equivalent amounts of their own currencies, which they are expected to
repurchase from the Fund within a reasonable period of time with gold or
with currencies which are in short supply in the Fund* Countries lending
through the Fund are countries whose currencies on balance are being made
available to other members through the Fund. Such countries obtain equivalent additional privileges to obtain foreign currencies from the Fund.
Transactions of the Fund are limited to those involved in supplying foreign currencies to members in exchange for their own currencies at
their request. It has no power to operate on its own initiative, except
that it can sell gold or borrow in order to supply the currencies requested.
Although the Fund is passive in this sense, its lending operations are not
automatic. The Fund can and must exercise discretion in its lending operations. The Fund's resources are not intended to finance large or sustained
outflows of capital, relief or reconstruction neods, or war debt settlements.
It is probably fortunate that the Fund will not begin lending operations
until the end of 1946 since the difficulty of avoiding the financing of
relief and reconstruction needs would have been much greater if operations
had begun in 1945 or early in 1946. Furthermore, the American and Canadian
postwar lending programs, which have taken a heavy burden off the Fund and
the Bank,might never have been adopted.
Most important of all, the Fund can and must refuse to lend to a
country which is not using the resources made available "in accordance with
the purposes of the Fund.11 One of the stated purposes is, "To give confidence to members by making the Fund's resources available to them under
adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures
- 4 destructive of national or international prosperity.n i / To continue to
draw on the Fund to meot a deficit which promises to be chronic, while
taking no measures to correct the deficit, would be a waste of the Fund's
resources and of the member1s borrowing privileges.
The Fundfs supply of a particular currency, furthermore, may fall
short of the amount which members exercising* their normal borrowing privileges may request. The Fund must try to maintain a balance in its holdings
of various- currencies if it is to continue to be able to meet the requests
of members. For this reason it must bear in mind the prospects that the
borrowing country will be able in due course to repurchase amounts of its
own currency paid into the Fund. Even from this very limited point of view,
then, the Fund must satisfy itself that a borrowing country is adopting
corrective measures so that it will be in a position to repay the Fund. If
the Fund's resources were much larger and its ability to supply any particular currency were sufficient to meet all possible demands a compromise
similar to that in the original Keynes plan might have been adopted. Only
after a country had exhausted half of its borrowing privileges could certain
corrective measures, including a change in exchange rates or control of
capital movements, be required as a condition of further borrowing. Other
internal measures could be recommended at this stage but could not be required unless a member had been borrowing up tQ 3/4 of its quota for at
least a year. As a practical matter, there may be a range within which
1/ Some writers have argued that the phrase n in accordance with the purposes of the Fund11 is much too vague in view of the fact that there
are possible inconsistencies as between the various stated purposes.
It would seem that the purpose quoted above' which is the only one referring specifically to use of the Fund's resources is the directly
relevant one, and, reasonably interpreted, excludes such extreme
possibilities as that the Fund should bo used to whatever extent is
necessary to maintain exchange rates unchanged, or should be used to
give the borrower time to correct the disequilibrium provided that it
does so in the quickest possible way.
- 5 even the Fund, in its more vulnerable position, will exercise little discretion, but this range should be small•
Conditional Borrowing Privileges and International Liquidity
Will a country1s ability to borrow from the Fund help to avoid
measures "destructive of national and international prosperity11 and lead
to the adoption of more constructive corrective measures? Of course the
Fund may refuse to approve certain measures and suggest drawing on the Fund
temporarily instead. But there are restrictive and deflationary measures
over which the Fund has no actual control. The important question is
whether member countries themselves will be inclined to avoid restrictive
measures in general because of their ability to draw on the Fund. One
view is that the ability to borrow from the Fund will have little or no
effect on the policies of any country unless it is an automatic right to
borrow rather than a conditional borrowing privilege. Mr. Nurkse says
that "conditional liquidity is not liquidity at ail.»l/ Aad Mr.. Williams
says, n I have never sympathized with the idea that the way to protect the
Fund is to make it operate like a bank. Critics of this general line of
suggestion seem to me quite right in maintaining that this type of restriction on the use of the Fund will only undermine its usefulness. If the
Fund is to operate as a common pool of foreign exchange resources, equivalent to gold, there must be the seme freedom of access that pertains to
gold itself ."2/ The implication is that a cotintry will not postpone restrictive measures or adopt offsetting policies on the assumption that it
may be able to borrow, but would if it were sure it could borrow. If this
is true the lending operations of the Fund will be of little importance
since the Fund must exercise discretion.
1/ 0£. cit., p. 17.
2/ Johij H. Williams, The Brett on Woods Agreements 4 Address before the
Academy of Political Science, lt>ril 4f 1945,' y. *?•
i* 6
-
It seems likely, however, that monetary authorities will be able
to act with increased confidence if they can reach a general understanding
v/ith the Fund on the circumstances under which Fund assistance will be
forthcoming. Certain situations in which the Fund clearly should not continue lending can perhaps be defined at once. A member experiencing a
rapid inflation should not continue to borrow unless drastic steps are being
token to curb the inflation, A country which has a substantial and continuing deficit because it is undergoing a rapid process of development or
reconstruction should finance such a deficit by long-term borrowing rather
than through the Fund. Again, continued use of the Fund is obviously voxwise if costs and prices are seriously out of line with those abroad and
a change in exchange rates is necessary. The principal feature of the under standing reached, however, must be not a ruling out of extreme or specific
cases but a recognition that the Fund is intended to give only temporary
assistance and that other ways must be found of meeting and correcting
deficits which promise to beoome chronic. Members should be able to borrow for a time in order to plan corrective measures, and, if possible, to
meet the deficit until such measures take effect.
Will the ability to borrow from the Fund do little more than take
the place of private international short-term capital movements? Before
1914 such movements, sensitive to interest rate differentials, served a
useful function, at least in relatively ujadlsturbed conditions and for
certain countries. Even if tho Fund merely takes the place of such private
capital movements, therefore, it will be of considerable importance since
the prospects of such private capital movements in the future are extremely
limited*
It seems likely, however, that the Fund will be more useful than
private capital movements irt preventing restrictive measures. Many countries
. 7 have been unable to attract private capital and private capital in any case
is subject to sudden withdrawal. Although controls may be used to prevent
withdrawal such measures tend to restrict future capital inflows . In
general, it is necessary, also, to raise interest rates to attract foreign
capital. By contrast all members will be able to borrow from the Fund, no
rise in interest rates will be involved, and the Fund can not withdraw its
support suddenly .1/
Cost of Borrowing from the Fund
The attitude of countries toward borrowing from the Fund will be
affected, by the cost of borrowing. A service charge of 3/4 of 1 per cent§/
must be paid on all amounts of foreign currencies obtained from the Fund.
This is more than it costs to ship gold between most countries, which means
that members are not likely to use the Fund to meet small day to day deficits. Such needs will be met by use of gold and foreign exchange reserves,
perhaps through national stabilization funds. The charge would not be excessive if the funds were needed to meet a seasonal deficit,and the Fund
may be used for this purpose. But the deficits of uncertain duration are
those the Fund is really intended to help meet, and in such cases the service charge may be considered as a reasonable initial borrowing cost and
should not be a serious deterrent to use of the Fund.
1/ The fund can refuse to lend additional support but it cannot suddenly
require repayment of past borrowings. If a member1s reserves increase
in a given year, and exceed its quota, it wust use half the increase
to repay the Fund at the end of the year, but in such circumstances
the required repayments will not be difficult. A member may also be
required to make repurchases if it has not drawn on its reserves at
the same rate as it has* borrowed from the Fund but such repurchases
ore known in advance and can be avoided.
2/ This charge may be reduced to 1/2 or raised to 1 per cent.
- 8 Other charges, levied on net borrowingsi/ from the Fund, increase
with the amount borrowed and the period over which it is used* These charges
are designed to discourage excessive borrowing and encourage speedy repayment. They are very low as is shown in Table I. The table assumes a member borrows up to the normal maximum of 25 per cent of its quota in successive years. At the left is the rate paid on each 25 per cent borrowed in
the year indicated, assuming no repayments 4:- it is these marginal rates
which a country would consider in deciding whether to postpone repayment
or borrow morc.^/ At the right is the average per annum rate paid on the
total amount borrowed, assuming repayment ifc full in the year indicated.
Neither the marginal nor the average rates paid on borrowings up to 5 years
at least are as high as those paid for private funds in the past and they
are probably lower than those at which private funds will be available in
the future.
^ Privileges Compared to Independent Reserves
To what extent borrowing from the Fund may help to avoid restrictive measures depends partly on the size of the total normal borrowing
privileges of countries as compared to their independent reserves. If
borrowing privileges are small by comparison thfey will probably have little
effect on the policies adopted. Table II shows the relation between total
1/ These charges are levied on the Fund's holdings of a country*s currency
in excess of its quota. In other words they are not levied until after
a country has obtained foreign exchange from the Fund up to the amount
of its gold subscription. A country is a net borrower from the Fund
when the Fund's holdings of its currency exceed its quota. Both interest and service charges are pryabie in gold.
2/ The marginal rate charged increases by 1/2 per cent for each upward
step in amount and in time. When the rate reaches 4 per cent members
must consult with the Fund with a view to finding ways to repay the
Fund. After 5 per cent is reached the Fund may impose such charges
as it deems appropriate. The whole scale of charges may be altered
by a 4/5 vote.
Table I
INTEREST RATES PAID ON BORROWINGS PROM THE FUND
Assumed Net Borrowing
25 per pent of quota at
beginning of year 1
An additional 25 per cent of
quota at beginning of year 2
I
Average Interest Rate J&ih
Interest Rate Paid Per Annum on Amount Per Annum on Total Amount Borrowed
of Met Borrowing Indicated During:
Assuming All Borrowing Repaid
at End of Year Indicated
Year
2
Year
3
Year
4
Year
5
Year X
Tear T Year 2 Year 3 Year 4 Year 5
y.4
1
1.5
2
2.5
1
1.5
2
2.5
.4
.7
1.0
1.2
1.5
.8
1.1
1.3
1.6
CO
t
An additional 25 per cent of %
quota at beginning of year 3
1.5
An additional 25 per cent of
quota at beginning of year 4
l/ No charge first S months, l/2 per cent next 9 months•
2
2.5
2
2.5
1.3
1.4
1.7
1.5
1.8
- 10 normal borrowing privileges (equal to their quotas) and estimated gross
official gold and dollar reserves!/ as of the end of 1945 for all members
other than the United States and Canada* The countries are grouped according to the percentage of their normal borrowing privileges to their reserves.
The percentage of the exports of each group to the total in 1938 is used as
a rough measure of the importance of the group in world trade* The borrowing privileges of countries accounting for 93 per cent of the 1938 exports
of the countries analyzed are equal to 20 per cent or more of their independent reserves, and the borrowing privileges of countries accounting for
51 per cent of 1938 exports equal 51 per cent or more of their independent
reserves. The total normal borrowing privileges are largo enough to be of
some significance for all countries in the more than 20 per cent range and
of very considerable significance to all countries in the more than 50 per
cent range. With special permission of course the normal limits on borrowing privileges may be exceeded.
1/ It would be preferable to include holdings of currencies other than dollars, especially those which are likely to be convertible, but data on
such holdings is not readily available. For most countries they are
not of great importance but the accumulated sterling balances of some
of the Ikapire countries may represent an important addition to their reserves if they become convertible or if these countries have sterling
deficits.
The official gold and dollar reserves at the end of 1945 include
amounts which must be paid to the Fund in gold as part of each country1 s
subscription. Estimated gold subscriptions v/ere not deducted because
each member can obtain foreign currencies from the Fund up to the amount
of its gold subscription in addition to borrowing up to the full amount
of its quota. No account is token in the table of estimated new foreign
gold production which will undoubtedly continue to add substantially to
foreign international means of payments* Countries other than the
United States, Canada, and Russia wore producing between 8 and 9 hundred
million dollars worth a year from 1938-1941. A large part of this gold
production, however, will presumably find its way very quickly to the
surplus countries rather than load to an increase in the level of foreign holdings*
Table II
CLASSIFICATION OP MEMBERS ACCORDING TO PERCENTAGE OP THEIR TOTAL BORROWING PRIVIISGJsS i'O THEIR RESERVES 2 /
(1)
Groups
I
(2)
Percentage of Total
Borrowing Privileges
of Individual
Countries to
Their Reserves
(3)
Countries
(4)
(5>
Value of 1938 Exports
of Each Group as
Column (4)
Percentage of Exports Percentages
Cumulated
of All Countries
Analyzod
13
13
Costa Rica, Dominican Republic,
Egypt, Yugoslavia
3
16
56 to 75
China, Paraguay, Peru
4
20
IV
51 to 55
Greece, United Kingdom
31
51
V
36 to 50
Bolivia, Chile, Philippine Commonwealth
3
54
VI
26 to 35
Belgium, Brazil, Colombia, Mexico,
Hetherlands
24
78
VII
20 to 25
Cuba, Prance, Nicaragua, Horway,
Panama
15
93
7
100
Over 100
CtechoSlovakia,Denmark, Ethiopia, Ionduras* India* Iraq* Eoxeinbourg, Poland
76 to 100
III
II
VIII
Less than 20
Ecuador, Guatemala, Iceland., Iran,
El Salvador, Union of South Africa,
Uruguay
l/ Total borrowing, psivilqges. are total noraal borrowing privileges, i*e* equal to a member's quota*
~" Reserves aro/grc^fe12l®^%ial gold and dollar reserves as of the end of 1945. The table analyzes all
members of the Fttnd other than the United States and Canada, which presumably will not borrow* The
data for 'Belgium, Franco, Netherlands, and the United Kingdom include data for their respective
colonies* No data is available on exports of Luxembourg and Ethiopia* The figures for Belgian
exports include Luxembourg*
- 12 Borrowing from the Fund versus Psiny Reserves
The ability to borrow from the Fund may make a real difference in
the policies even of countries whose normal total borrowing privileges are
less than 50 per cent of their independent reserves. Many of these are
countries which have relatively large independent reserves, but their borrowing privilegos are also large and borrowing from the Fund may be regarded
differently by theto and have substantially different effects than those
which follow from the use of reserves. For various reasons, partly psychological and political, most countries seem loath to use their reserves.
and the Netherlands
Even the war-devastated countries, with the exception of France,/have shown
little inclination to draw heavily on reserves to meet their urgent needs.
Borrowing from the Fund may be regarded differently since it involves talcing
advantage of a privilege which might not be available at another time or for
other purposes, whereas a country may use its own reserves at any time and
for any purpose. The internal monetary effects of borrowing from the Fund
may also be different from those of a loss of reserves. Monetary authorities
should regard borrowing from the Fund as equivalent to a loss of reserves in
the sense that it indicates a deficit which must be watched and may have to
be corrected but differences arise in other respects. The effect on confiand
dence may be quite differentrhow9*ar,A&e effect on domestic monetary policies
may be much less as long as gold continues to be needed to meet legal reserve requirements and the net position of a member vis-a-vis the Fund is
not token into account in the calculation of legal reserves.
It is important to bear in mind that countries with reserves in
excess of their Fund quotas I/do not have a choice, over a period of a year
1/ See Table V. Countries accounting for 83 per cent of 1938 exports had
reserves in excess of their quotas at the end of 1945.
- 13 or more, between using only their reserves or only the Fund to meet a deficit. The repurchase provisions, described below, require member countries
year by year to draw on their reserves at the same rate that they borrow
from the Fund. It is possible, however, that a loss of reserves will be
regarded so differently from use of the Fund that a halving of the loss of
reserves will enable a member to pursue different policies. Furthermore, a
lump payment of gold or foreign currencies to the Fund at the end of the
year in discharge of repurchase obligations may have quite different effects
from a steady loss of reserves.
Borrowing Privileges as Compared to Probable Needs
The extent to which the ability to borrow from the Fund will affect
the policies of individual countries depends also on whether borrowing privileges are large enough in relation to probable needs to be significant. The
quotas which determine the maximum normal borrowing privileges of members
could not be determined solely on the basis of need. They govern both borrowing privileges and lending obligations and were determined partly on the
basis of the ability of members to lend through the Fund. To some extent,
then, the distribution of quotas reflects the wealth and balance of payments
position of countries in the same way as the present distribution of independent gold and dollar reserves.
A satisfactory measure of the need of member countries for foreign
'exchange assistance would be a measure of the probable size of the deficits
on current account which they are likely to face. It would be extremely
difficult to obtain reasonable estimates of probable future deficits. It
may be useful, however, to compare the normal annual borrowing privileges
of members with a ro^igh estimate of the value of their ersports in a post*
transition period year. The value in current dollars of their exports in
- 14 1938 may be taken as this rough estimate. Table III classifies member countries according to the percentage of their annual normal borrowing privileges
(equal to 25 per cent of their quotas) to the value in current dollars of
their exports in 1938. The table shows that countries accounting for 88 per
cent of 1938 exports have annual borrowing privileges equal to 10 per cent
or less of their exports, countries accounting for 88 per cent of the 1938
exports have annual borrowing privileges equal to 7.5 per cent or less of
their exports, and countries accounting for 21 per cent of the 1938 exports
of the countries analyzed have annual borrowing privileges equal to less
than 5 per cent of their exports. This suggests that tho members which will
be able to meet a 10 per cent or even a 7.5 per cent decline in the value of
their exports by using their normal annual borrowing privileges are few and
relatively unimportant. A 10 per cent decline in the value of a country's
exports might well occur as a result Qf crop failures, a decrease in the
price of major exports, or for other reasons. Annual normal borrowing
privileges, therefore, seem to be quite small compared to possible needs.
To increase the normal annual borrowing privileges to more than
25 per cent of the quotas of members would probably be unwise because members should be able to count on assistance over a period of a few years and
higher annual borrowing privileges would encourage them to exhaust their
privileges too quickly. It seems reasonable to require special Fund permission to exceed 25 per cent of the quota in a single year. Furthermore,
an increase in the annual privileges to 33-1/3 or even 40 per cent of the
quota would not change the relation between annual borrowing privileges
and exports sufficiently to alter the general conclusions reached as to
the adequacy of annual borrowing privileges. However, the Fund will
- 14a -
undoubtedly be willing to exceed the normal borrowing limits in some cases*
Furthermore| members adequately supplied with reserves are required to use
their reserves at the same rate they draw on the Fund* Borrowing privileges
equal to half such deficits as tend to develop would enable them to make
maximum possible use of the Fund*
A more interesting problem to consider in many ways is the role
which the Fund might play in a period of widespread balance of payments
difficulties resulting from the onset of a world-wide depression* It is
obvious that the Fund could not finance deficits of the size which most
countries experienced in the course of the 1929-1933 depression* But it
is hoped that borrowing from the Fund will act as a buffer and prevent the
Table III
CLASSIFICATION OF MEMBERS ACCORDING TO PERCENTAGE OF THEIR
,
ANNUM, BORROWING PRIVILEGES TO THE CURRENT DOLLAR VALUE OF THEIR EXPORTS IN 1938 2/
ft)
Groups
(2)
Percentage of Annual
Borrowing Privileges
of Individual Countries to Current
Dollar Value of
Their 1938 Exports
(3)
Ji)
(5)
Countries
Value 1938 of Exports
of Each Group as
Percentage of Exports
of All Countries Analyzed
Column (4)
Percentages
Cumulated
I
Less than 5
El Salvador, Iceland, Iran, Netherlands, Norway, Panama, Paraguay,
Philippine Commonwealth* Union of
South Africa, Uruguay
21
21
II
5 to 7#5
Belgium, Bolivia, Chile, Cuba,
Chechoslovakia,'Denmark, Dominican
Republic, Egypt* France, Guatemala,
Honduras, Nicaragua, Peru, United
Kingdom.
61
82
III
7#6 to 10
IV
Over 10
Brazil;, Costa Rica, Ecuador,
Greece, Iraq, Mexico, Yugoslavia
China, Colombia, India^ Poland
I
7
12
100
1/ The dollar value of each country's exports in 1938 was multiplied by the ratio of "wholesale prices in
~" the United States in 1945 to -wholesale prices in the Tfciited States in 1938 • The table analyzes all
member countries other than the United States and Canada which'are not expected to borrow, and Ethiopia
and Luxembourg for which export data was not readily available • In the case of 'Belgium* Prance, the
Netherlands, and the United Kingdom, the data include their respective colonies+
2 / This figure does not correspond with the figure in Column (4) because of rounding•
- 16 spread of balance of payments difficulties ana deflationary
influences in the event of the development of serious disturbances in certain countries* Timely use of the Fund to enable members to maintain their
imports while avoiding deflationary faeasures and, in fact, adopting measures
to offset the effect of reductions in exports due to deflationary pressures
abroad* should help to prevent a recurrence of the cataclysm of the thirties*
A comparison of the annual borrowing privileges of members with
a rough estimate of the possible decline in their exports in the first year
of a depression may be of interest. The value in current dollars of the
decrease in their exports from 1929 to 1930 may be taken as such a rough
measure, From the point of view of any individual country this is obviously
a very poor measure of its possible needs in the first yoar of a future depression. In the 1929-1933 depression some countries ran into difficulties
later than others and some encountered more serious difficulties than
others. There is no ground for anticipating that the same pattern would
be repeated in a future depression. But tho general impression as to the
adequacy of borrowings from the Fund as a means of meeting such a situation
may be meaningful. It is important to realize, of course, that the cessation of foreign lending was a very important factor in the development of
current deficits in the 1929^1933 depression and the measure used here
takes no account of this factor* On the other hand, use of the decline in
the value of exports as a rough measure neglects the fact that falling
prices may enable a country to import the same amount of goods at a lower
money cost.
Table IV classifies members according to tho j>ercentage of their
annual borrowing privileges to ths current dollar value of the decrease in
their exports from 1929*1950• It shows that members accounting for 40 per
:>, increase annual borrowing privileges \
to 33 or 40 per cent of the quota would V 17 ~
not alter the general conclusions reached.)
cent of the 1938 exports of the countries analyzed have annual borrowing
privileges equal to less than 25 per cent of the current dollar value of the
decline in their exports from 1929-1930, countries accounting for 82 per cent
havd annual borrowing privileges
of 1938 exports/of 35 per cent or less, and countries accounting for 88 per
have annual borrowing privileges
cent of 1938 exports/of 50 per cent of less. This suggests that few countries
could make up for even half of the decline in their exports during the first
year of a future world-wide depression by drawing on the Fund up to the
amount of their normal annual borrowing privileges. In a period of widespread difficulties, furthermore, it is doubtful if many countries would be
allowed to exceed the normal limits^ However, timely use of the Fund to sustain the level of imports of members aa that thoy can avoid deflationary measures and actually adopt offsetting policies might prevent the development of
deficits within the year of the size of those experienced in 1929-1930.
Conclusions on Significance of Borrowing Privileges
On the whole, total borrowing privileges tend to be large compared
annual borrowing privileges are
to independent reserves but/ small compared to possible deficits. Many countries vd.ll be much better able to meet deficits than they would be without the
Fund but borrowing privileges may not be large enough to affect substantially
the policies of member countries. On the other hand, if the effects of and
attitude toward ton/owing from the Fund ire quite different from the effects
of and attitude toward using gold and dollar reserves, the ability to borrow
from the Fund may help to avoid unnecessary exchange rate changes, restrictions on trade, and deflationary pressures. For most countries, however,
borrowing from this Fund and use of reserves must be at the same rate.
It may be suggested that the total borrowing privileges of members
should be increased so that total and annual borrowing privileges will be
large enough to meet such deficits as are likely to occur. But as long
as demands are likely
to
concentrate
on
dollars
Table IV
CLASSIFICATION OF MEMBERS ACCORDING TO PERCENTAGE OF THEIR ANNUAL
BORROWING PRIVILEGES TO THE VALUE IN CURRENT DOLLARS OF THE DECREASE
IN THEIR EXPORTS FROM 1929 TO 1930 1/
(1)
Groups
(3)
(4)
Countries
Value of 1938 Exports
of Each Group as
Percentage of Exports
of All Countries
Analyzed
Column {4)
Percentages
Cumulated
Bolivia, Brazil, Chile, Cuba, Dominican Republic, Egypt, SI Salvador,
,
Iceland, Nicaragua, Panama, Peru,
Philippine Connonwealth , Ifaited Kingdom
40
40
42
82
6
88
(2)
Percentage of Annual
Borrowing Privileges
of Individual Countries to Current
Dollar Value of
Decrease in Exports
from 1929-1930
I
Less than 25
II
26 to 35
Belgium, Czechoslovakia, Prance;
Iran, Iraq, Mexico, Netherlands,
Union of South Africa
III
36 to 50
India, Paraguay
rv
51 to 75
China, Costa Rica, Denmark, Greece,
Norway, Poland, Yugoslavia
V
Over 75
<5)
I
*/
Colombia, Ecuador, Guatemala,
Uruguay
11
2
98 y
100
The dollar value of the decrease in exports from 1929 to 1930 was multiplied by the ratio of wholesale
prices in the United States in 1945 to wholesale prices in the United States in 1929 • The table analyses
all members other than the United States and Canada which are not likoly to borrow, Ethiopia and Luxembourg for which export data is not readily available, and Honduras the exports of which were higher in
1930 than in 1929•• In the case of Belgium, Prance, tho Netherlands, and tho Tfeited Kingdom, the data
include their respective colonies• Annual borrowing privileges are normal annual borrowing privileges,
i # e # equal to 25 per cent of each member1 s quota•
This figure doos not correspond with the figure in Column (4) because of rounding•
• 19 substantial increases in the quotas of potential borrowers would be unwise
unless the quota of the United States was correspondingly increased and there
is little prospect of raising the United States quota. There is
also some limit to the size of the quotas which it would be desirable to have
in the sense that excessive borrowing from the Fund might postpone corrective
measures and make the eventual adjustments much more difficult.
The Fund's lending operations may have important effects on the
policies of members even in cases in which yboxrowing privileges are small
* . , ,
»aauax
annual Dorrowing
borrowing privilejgjesjare
privileges jore small
small camnared to
A A
compared to independent
reserves andyprobaole needa. iTmemoerl
convenient to use the Fund frequently, close relations may be built up between national monetary authorities and the officials of the Fund, Through
establishing this banker relationship the resources of the Fund may substantially increase the Fund's influence month by month over the policies of
members. The weight attached to the.Fund's advice and recommendations may
reflect the fact that it is in a position to give or withhold financial
assistance• The banker relationship rests on the discretionary, rather than
automatic, character of the Fund's lending operations.
Borrowing Privileges and the Fund's Ability to Supply Dollars
It has been assumed in considering the size of the borrowing
privileges of members that the Fund would always be able to meet the demands
upon it in whatever currency was neoded. It is possible, however, that one
or more currencies will become scarce in the Fund. If a member could not
borrow the currency needed to make payments — e.g. dollars •• the borrowing
privileges would be of little use. As a matter of fact the American dollar
and, to a lesser extent, the Canadian dollar are the currencies of present
members on which demands are most likely to concentrate•!/
1/ The currencies of certain other members may be in demand especially if
countries such as Sweden and Switzerland become members.
- 20 The initial dollar position of the Fund and the repurchase and gold
sales provisions indicate that members will probably be able to borrow up to
the amount of their total maximum normal borrowing privileges in American or
Canadian dollars. This does not mean that there may not be a general scarcity of dollars. But it does mean that the Fund will probably be in a position for some years to come in which it can meet all demands within the
normal borrowing privileges in dollars.
The Fund will hold at the outset gold, United States dollars and
Canadian dollars equal to 76 per cont of the total normal drawing privileges
of members other than the United Statos and Conada.i/ As additional members
which are potential borrowers are admitted, the percentage of gold and currencies in demand to drawing privileges will be reduced. On the other hand,
other countries may be admitted to membership the currencies of which will
be in demand. Unless Russia enters, the borrowing privileges of new members
will probably not be large enough to affect substantially the ratio of gold
and dollar holdings to total drawing privileges.
The Fundfs ability to supply dollars does not depend only on its
initial gold and dollar position. The repurchase provisions will help to
maintain balance in the Fund f s holdings of various currencies in a more or
less automatic fashion. Those complicated provisions may be briefly summarized as follows:
(1) A country with monetary reserves^/ in excess of its quota
must use its own'reserves at the same rate, year by year, as it borrows
1/ Total normal drawing privileges aqua! total normal borrowing privileges
plus the original gold subscriptions of members. See footnote 1, page
Zj Monetary reserves are described as xiet official holdings of gold and
convertible currencies.
~ 21 ~
from the Fund, At the end of each year it must in general repurchase its
own currency from the Fund with gold or dollars^/ to the extent necessary
to bring about this result.2/
This provision does not necessarily lead to a movement of gold
and dollars into the Fund since members may use their reserves during the
year at the same rate they borrow from the Fund. However, the question of
whether or not actual repurchases take place is relatively unimportant.
The purpose of this provision is to reduce the rate at which mombers use
the Fund year after year. If a country's total deficit is less than twice
its normal borrowing privileges it will be prevented from using the Fund up
to the full amount of its annual borrowing privileges. Furthermore, countries which are reluctant to draw on their reserves will be restrained from
borrowing from tho Fund,
(2) Any country with monetary reserves in excess of its quota,
which is a net debtor to or has borrowed from tho Fund and adds to its gold
or dollar reserves durixig any year must, in addition, use half the increase
to reduce its indebtedness to the Fund.2/ Any country, then, which develops
a favorable balance of payments is required to take advantage of the opportunity to repay past borrowings.
This provision will tend to lead to direct movements of gold or
dollars into the Fund. If countries whioh borrow to meet deficits later
1/ The term dollars is used in the above summary of the repurchase provisions as a short cut to describe any convertible currency of which
the Fund holds less than 75 per cent of the country's quota.
2/ Actual repurchases may not be required in full. The repurchases are
due in gold or convertible currencies in proportion to the amounts held
and no repurchases are required in currencies whicii are not in short
supply on the Fund.
3/ Countries which originally subscribed less than 25 per cent of their
quotas in gold must also use half the increase to repurchase the excess
amount of currency originally subscribed.
- 22 develop surpluses, the Fund's holdings of gold and dollars will be steadily
replenished*
It is possible, of course, that countries using the Fund in
substantial amounts in certain years will not succeed for long periods of
time in developing a surplusfA/
It has been suggested that the repurchase provisions will not be
Yery effective even if borrowing countries later succeed in developing surpluses because the members which will borrow most from the Fund will be
those whose reserves are smaller than their quotas and, therefore, exempt
from the repurchase obligations. Table V classifies members other than
the United States and Canada according to the percentage of their reserve^
to their quotas with a view to analyzing to what extent the Fund quotas
belong to members which will be subject to the repurchase provisions. The
table shows that the countries with reserves equal to or less than their
quotas, and therefore not now subject to the repurchase obligations^ have
only 16 per cent of the quotas or total normal borrowing privileges of the
1/ There is a third type of repurchase obligation. If a country is a net
debtor to the Fund and has reserves in excess of its quota, it must use
any increase in its holdings of a particular currency, e.g. dollars, (or
of gold purchased in that country) during any year to repay past borrowings, provided the increase in dollars is due to payments in gold or
dollars received as a result of net exports to a country other than the
United States. The increase in holdings is measured after the repurchases
described above have been made, This provision applies regardless of
whether or not the country has experienced a net increase in its total
reserves.
This provision will also tend to lead to direct movements of gold
or dollars into the Fund. It is designed to prevent currencies in short
supply in the Fund from being used to settle net payments due between
countries other than the country of the currency in short supply and then
entering into the reserves of such countries. If may not be very effective in doing so since it only applies if the country adding to its reserves is in debt to the Fund and if its reserves exceed its quota.
2/ The table uses gross official gold and dollar holdings as of the end of
1945. Since monetary reserves equal net official holdings of gold and
convertible currencies, the percentages in the table are not an accurate
measure of whether or not a country is now subject to the repurchase obligations. On the whole, however, additions due to holdings of convertible currencies will much more than offset deductions due to obligations
due in gold or dollars.
Table V
CLASSIFICATION OP MEMBERS ACCORDING TO PERCENTAGE OP THEIR RESERVES TO THEIR FUND QUOTAS
(1)
Groups
(2)
(3)
Percentage of Reserves
of Individual
Countries to
Their Fund
Quotas
Countries
(4
Borrowing Privileges
of Countries in Group
as Percentage of
Total Borrowing
Privileges of
Countries Analysed
(5)
Column (4)
Percentages
Cumulated
400 and Over
Cuba, E c uador, El Salvador,
France, Guatemala, Iceland, Iran,
Nicaragua, Norway, Panama, Union
of South Africa, Uruguay
16
16
II
301 to 400
Belgium, Brazil, Colombia, Mexico
12
28
III
201 to 300
8
36
IV
151 to 200
Greece, Paraguay, Peru, Philippine Commonwealth, United Kingdom
32
68
V
101 to 150
China, Egypt, Yugoslavia
15
83
VI
100 or Less
Costa Rica, Czechoslovakia,
Denmark, Dominican Republic,
Ethiopia, Honduras, India, Iraq, .
Luxembourg, Poland
17
100
I
.
Bolivia, Chile, Netherlands
Reserves aro gross official gold and dollar reserves as of the end of 1945. The table analyzes
all members of the Fund other than tho United States and Canada, which arc not expocted to borrow.
to
i ca
- 84 countries analyzed. Countries with 83 per cent of total quotas or normal
borrowing privileges have reserves larger than their quotas, countries with
68 per cent of total normal borrowing privileges have reserves equal to 151
per cent or more of their quotas, and countries with 36 per cent of normal
borrowing privileges have reserves equal to 201 per cent or more of their
quotas.
In considering how long countries will be subject to repurchase
obligations it is important to bear in mind tbat once countries have borrowed and used reserves to repay the Fund they may borrow again and, their
reserves being reduced meanwhile, not be subject to the repurchase obligations the second time. However, new gold production will probably continue
to add almost a billion a year to foreign reserves* Unless the new gold
production goes entirely to countries which have not borrowed and are not
likely to borrow, it will constantly increase the probability that members
will be subject to the repurchase provisions.
There is a further question as to whether the independent reserves
used by a member will flow through the Fund or not. The repurchase provisions do not require them to do so but there is another provision saying
that members must sell gold through the Fund if they wish to obtain foreign
currencies with gold and can do so through the Fund with equal advantage.
If Aembers find it equally advantageous to sell gold through the Fund, the
Fund f s position will be strengthened to the extent that the currencies purchased with gold through the Fund are not scarce currencies.
The initial gold and dollar holdings of the Fund, equal to 76 per
cent of the total normal drawing privileges of members other than the United
States and Canada, equal the maximum normal demands of all members other
than the United States and Canada for 3-3/4 years. Actually, there is little
- 25 prospect that all members other than the United States and Canada will borrow
the maximum each year. Some members will not have deficits during some of
the years and others which borrow in the first year or two will develop farnrable balances later and be subject to the repurchase provisions^ It seems
likely, therefore, that the Fund will be able to meet all normal/demands for
Borrowing Prlvllegoa ana Revolving Fupd
^ t ^ J ^ ^ l ^ l ^ - - - -
The Fund can only continue to be of use to m«moers it wembers
normally have a substantial proportion of unused borrowing privileges* Members are intended to borrow for short periods and repurchase their currencies with gold or currencies in demand as soon as they are in a position to
do so* If the Fund is properly managed, then, it will be a revolving Fund
and its holdings of strong currencies and currencies in demand will constantly be replenished*
If the Fund succeeds in seeing that its resources
are used properly, that corrective measures are taken, and that countries
repay the Fund as soon as possible, members will normally be able to borrow
from the Fund and the Fund will be in a position to meet demands on it* It
does not seem likely that the repurchase provisions alone will succeed in
securing such a revolving fund*
If countries which borrow do not later de-
velop surpluses in their balances of payments the only way to ensure replacement of strong currencies in the Fund is through pressure by the Fund for
repayment rather than tho automatic working of the repurchase provifcip&s
The higher interest charges levied, and the possibility of being excluded
from future use of the Fund, should act as strong incentives to repayment.
Principal reliance must be placed, however, on recognition by member countries of their obligation to repay the Fund as soon as possible, and to take
sufficient corrective measures-to balance their international transactions
and thus enable them to do so*
June 19, 1946
@FedFRASER