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(letterhead of)
FEDERAL RESERVE BANK OF N M YORK

7
June 19>
Board of Governors of the
Federal Reserve System,
Washington 25, D* C*
Dear Sirs:
On July 15, 1943, and on October 7, 1943* we sent you
our views on International Currency Stabilization, and on the
stabilization proposals which were then under discussion* In the
intervening months we have continued to study this problem and,
since its publication in April, we have concentrated our attention
on the jointr statement by experts on the establishment of an
International Monetary Fund* As a result of our studies, and discussions with the directors Committee on Foreign Relations,
(including Mr* S* Sloan Colt, Chairman, Mr* Donaldson Brown,
Mr* Carle C* Conway and Mr, Beardsley Rural, members), and the
board of directors, the enclosed statement has been prepared and
approved as a general consensus of the present views of this bank
on International Currency Stabilization.
We have in mind that the Board, in its letter of June 8,
1944, invited our comments on certain aspects of currency stabilization proposals and on the proposal for an International Bank for
Reconstruction and Development* We hope that we shall be able to
respond to these requests shortly*




lours sincerely,
(signed) Allan Sproul
President*
S*. For your convenience, additional copies of the statement are
enclosed herewith so that each member of the Board may have
a copy*
A.S.

June 19, 1944
INTERNATIONAL CURRENCY STABILIZATION
On October 7, 194.3 , this Bank sent to the Board of Governors a statement of its views on the proposals for international monetary stabilization then
under discussion, On April 21, 1944* there was released in Yvashington and London
a wJoint Statement by Experts on the Establishment of an International Monetary
Fund/1 and on May 26th President Roosevelt issued a call for a formal international conference to meet at Bretton Woods, New Hampshire, on July lst # In
view of these developments, we feel we have a responsibility to state our present
views. We have taken a deep interest in these proposals ever since the original
American and British plans were published in April 1943, and our present views
are the result of continuing study by our officers and staff, and of consideration
which has been given to the problem by our directors Committee on Foreign Relations
and by our Board of Directors.
We believe that enlightened American self-interest will require post-war
international economic cooperation on many fronts. We believe that international
currency stabilization, and an international institution to promote currency
stabilization should play an important part in this cooperation. The present
draft proposals, while evidencing much progress as compared with earlier drafts,
do not meet the test of American self-interest and, taken as a whole, are disappointing in their approach to currency stabilization. Our main conclusion is
that these defects are the product, or chiefly the product, of attempting a global
solution of a problem which cannot be solved in this way at this time. The basic
difficulty is that in signing a stabilization agreement now countries must preserve for themselves so much freedom to deal with the uncertainties of the period
of transition from war to peace that any longer-run stabilization plan can be one
in name only. Our view, therefore, is that the forthcoming international conference should postpone consideration of the monetary plan for the longer-run period,
except to create a consultative body, and should concentrate on measures for the
transition period designed to produce those more normal conditions in which
currency stabilization can be considered with a better prospect for success#
As we have said, the present statement of principles is in some ways a
marked improvement on earlier draft proposals. It recognizes the distinction
between the transition period and the longer-runj it retains exchange control
for the transition period; it provides for greater exchange rate variability.
These are three major constructive steps, although all three would need further
definition.
We have particularly emphasized our view that a currency stabilization
fund should not be used to finance relief, reconstruction, or the liquidation of
indebtedness which has been accumulated during the war, and the new draft proposals expressly provide that the fund is not intended to be used for these purposes. But we would still insist that plans for meeting the needs of the transition period must come first. If this is not done the currency plan might be the
catch-all for any inadequacies of the transition program and thus run the risk
of being wrecked in the early years. If the special needs of the transition
period and the proposed monetary fund exist side by side, it will almost inevitably lead to a confusion of the short-run problems of transition from war to peace
with the long-run requirements of currency stabilization.
Fortunately it is now accepted that an international monetary fund is
not needed to avoid currency chaos in the transition period. The retention of
exchange controls in the new statement of principles is a recognition of this



fact and a necessary consequence of the decision that the fund should not be used
to finance the special requirements of, transition. We approve of this change,
and have argued that exchange controls should be the main reliance for exchange
stability in the transition years, and can be relaxed only carefully and gradually.
The present statement of principles leaves more uncertainty, however, than seems
to us desirable in an international compact as to when free exchange convertibility, at least by the major countries, will be resumed. The Explanatory Notes
released by the British expert^, to accompany the publication of the text of the
statement in London, explain tHat while member countries must consult with the
fund within three years about their exchange controls, and the fund may v&thin
that period suggest that the time has come for further withdrawal of Restrictions,
"no member is committed to any £ixed date for their final removal and is entitled
to use its own judgment as to when it is strong enough to undertake the free
convertibility of its currency which it has accepted as a desirable aim*11 On
this interpretation, exchange controls and even bilateral agreements could be
continued for an indefinite period* This indicates again, in our judgment, the
need fo!r concrete plans fof the transition period before any longer-run monetary
agreement can take definite shape#
One question, for example, is whether in the liquidation of the balances
that have accumulated in London during the war, which must by now amount to
approximately $8 billion, the British may not feel impelled, unless some funding
arrangement is made, to continue exchange controls, and even bilateral agreements
with some of the countries to whom these balances belong. That has been the
history of blocked balances in the past, and in view of the large amount involved
the policy might in this case persist well beyond the three-year period. It would
be unfortunate if the major countries, while indicating adherence in principle
to multilateral trading in a free exchange market, should with official international sanction carry on indefiriitely and perhaps for a prolonged period, policies and practices which run directly counter to those principles.
The section on exchange rates is, perhaps, the most significant part of
the new draft. Mo satisfactory proposal for fixing a large number of exchange
rates, under present or immediate post-war conditions has yet been advanced, nor
do we think one can be advanced. We favor the provision of greater exchange rate
variability than was provided in the earlier drafts. The period of relaxation
of exchange controls will probably be particularly difficult and require considerable adjustment of exchange rates. As we saw in the twenties, after a great war
the previous exchange rates are largely meaningless, and what is required is not
only substantial latitude in finding new equilibrium rates but close and sympathetic international consultation and cooperation in the process. It is entirely
understandable also that Britain and other countries should require that "domestic
social and political policies" should be taken into account while this process of
adjustment is taking place. Even after new equilibrium rates have been found,
there may well be occasions when further adjustments of exchange rates will seem
the most reasonable and desirable method of international adjustment. But these
variations must not be resorted to so often or be pushed so far as to submerge
the principle of two-sided international adjustment, through the use of external
and internal corrective measures, which is the foundation of a workable international monetary standard.
One of the greatest weaknesses in the earlier plans, in our judgment,
was their sketchy treatment of the corrective measures to ensure stability. In
the present statement of principles this weakness stands out strikingly. It would
seem that the experts have gone carefully through it and struck out every reference




which might seem, expressly or even by implication, to require corrective adjustments to preserve stability of exchange rates. As we interpret the present draft,
exchange rate variation is not merely a permissible method of adjustment under
appropriate circumstances but is to be the favored method* That this is the
interpretation which the British place upon it themselves is indicated by the
comments in the British press and Parliament, and most notably by Lord Keynes
in his statement to the House of Lords on May 23rd:
"In fact, the plan introduces in this respect an epochmaking innovation in an international instrument, the object of
which is to lay down sound and orthodox principles. For instead
of maintaining the principle that the internal value of a national
currency should conform to a prescribed de jure external value, it
provides that its external value should be altered if necessary so
as to conform to whatever de facto internal value results from
domestic policies, which themselves shall be immune from criticism
by the Fund. Indeed, it is made the duty of the Fund to approve
changes which will have this effect,"
We doubt, however, whether even this statement by Lord Keynes completely
describes the British interpretation of the new proposals, The draft contains
also a section on "scarce currencies," which has been widely commented on in the
British press. This section obviously has particular reference to the dollar*
Both the earlier American and British plans had attempted to deal with this
problem through corrective action by the creditor country, but now this provision
is dropped, and in its place it is provided that whenever the dollar is scarce
the countries affected may "restrict the freedom of exchange operations" in
dollars and that in determining the manner of restricting the demand and rationing the limited supply of dollars among their nationals, they shall have complete
jurisdiction. British comment has made it clear that the purpose of this change
is to put the onus of international adjustment upon the United States, This is
entirely in keeping with the British view, steadfastly maintained from the beginning of the discussions, that the gold standard method of adjustment was one that
worked one-sidedly, through adjustments by the deficit countries, and that what
is needed in the future is a method of adjustment which will put the responsibility exclusively upon the creditor country. The British have made it clear that
the new statement of principles, in their view, contemplates an international
agreement to this effect, supported by official sanction to resort to whatever
measures they may select in order to prevent any part of the burden of adjustment
from falling upon them.
It is our belief that the essential principle of monetary stabilization
is two-sided adjustment, through external and internal corrective measures, at
reasonably stable exchange rates in a free exchange market. We recognize-the
need for modifying this principle at particular times and in particular circumstances. We recognize that the degree, character, and occasion for the use of
these modifications constitute the crux of the problem, and that the considerations involved are so difficult that there may well be grounds for differences
of emphasis. We are far from wishing to identify ourselves with the extreme view
held by some sections of American opinion that currency stabilization requires
the straight-out restoration of the gold standard of earlier years. But neither
can we accept the extreme opposite view, which seems now to be the official
British view. Even less can we accept the yiew that in so far as international
adjustments are to be made, by methods other than exchange rate variation and
exchange control, they must be made through one-sided action by the creditor
country*



We believe, therefore, that it would be a great mistake for the United
States, to give adherence to an international agreement which the British interpret
in this fashion. In our judgment, far from having a stabilizing effect upon
currencies and an expansive effect upon world trade, it would lead to endless
recrimination, would saddle us with the sole responsibility for international
maladjustments, and quite possibly, in the end, for the breakdown of the plan
itself* This would be in the best interests neither of the United States nor of
the world. •
There are other questions concerning these recent proposals for an
international monetary fund which we need not discuss here, because of our more
fundamental objections, and because these questions largely grow out of the
attempt to create a fund before the needs of the transition period have been met
by more satisfactory means. There are such questions as the size of the fund,
the substantial control of the fund by debtors although it is primarily a creditgranting institution, and the use of quotas to determine in advance the amount of
a country's need, with its accompanying right to borrow.
We cannot avoid the conclusion that, as regards currency stabilization,
the attempt is premature. What is first needed is a more concrete program for
dealing with the problems of the transition period, a program designed to produce
those more normal conditions in which an international currency stabilization fund
can be established with a better prospect for success. These transitional
problems comprise expenditures for relief and reconstruction, some plan for dealing with sterling war balances, and at a later stage the steps to be taken in
relaxing exchange controls. In connection with these problems it will be desirable to devise special means of extending international credits and to provide
machinery for international consultation which would help to make the problem of
finding equilibrium exchange rates an orderly and non-competitive process* And it
may well be that out of this experience there could develop a genuine stabilization program*
We still believe, however, that the actual process of stabilization
must be one beginning with a few of the major international currencies, tying in
the lesser currencies as conditions warrant. In particular, attention should be
given the dollar-sterling rate and the international financial position of the
United States and Great Britain at the close of the war. This is a matter which
it would seem to us can best be pursued by these two countries, having regard for
their own interests and in the light of their responsibilities to the rest of the
world, rather than a matter for determination by an international fund. We have
stated our view (in our earlier memorandum) that, at the close of the war, the
international position of Great Britain will be badly unbalanced on current account and that there will be a very large volume of foreign funds blocked in her
markets which will gradually have to be unfrozen. We have also stated that the
obvious course for the United States to pursue, as the principal creditor nation
of the world, as the prospective associate of Great Britain and other principal
powers in maintaining world peace, and as a country desirous of expanding world
trade, is to help restore Great Britain to a position of balance in her current
accounts. This we have said is an international action of concrete, constructive
and comprehensible character which will at once benefit ourselves, Great Britain
and other countries, and is more likely to appeal to the American people than
attempting to deal with it, in whole or in part, anonymously through an international fund.




5
The British experts apparently have not been receptive to such direct
arrangements. They are evidently afraid that we shall not be able to exercise
a measure of control over our economic life so as to avoid severe booms and
depressions^ that we shall permit our international accounts to get out of
balance by not importing enough.goods and services or lending enough abroad,
and that to link sterling with the dollar may be to expose their domestic
economy to violent and unnecessary ups and downs which they believe they can
otherwise avoid.
Admittedly, one of the chief uncertainties of the transition period is
the maintenance of high production and emplojnnent in the principal countries.
Obviously these uncertainties have played a major role in shaping the British
attitude toward plans for currency stabilization. But our own domestic program
presents no less uncertainty for us than for them. If, in addition to finding
solutions for some of the abnormal international problems of the immediate postwar years, we could have a demonstration in both countries of their ability to
achieve and maintain economic stability at a high level of national income and
employment, it seems practically certain that much of the fear of international
currency stabilization which characterizes the present joint draft might be allayed
and that a genuine stabilization fund could then be developed.
Despite the fact, therefore, that negotiation and present plans have
advanced a considerable way, we think it fortunate that our Government is not yet
committed to them. And we feel it an obligation to repeat our suggestion that,
in a world in transition from war to peace, the first step toward international
currency stabilization should be to establish a direct working agreement with
Great Britain looking toward:
1 # Achieving and maintaining internal stability and a high level of production in these two principal commercial nations. Great Britain has already
published a white paper discussing British plans for this purpose. Various
Government agencies and private groups have been working on this problem in the
United States, but apparently not with the energy which has been devoted to
international monetary problems, and with inadequate liaison between the
agencies and groups.
2 # Achieving and maintaining stability of the dollar-sterling rate. This
would involve considerable freedom in seeking an equilibrium rate in the
transition years, and would not mean rigidity in the later years.
Other countries could adhere, at its inception, to whatever currency
stabilization agreement is developed or/as their circumstances would permit.
later
Tfliat can be done now in a vrider field of currency stabilization is to
set up an international consultative body, which would establish the principle
of continual consultation on exchange rates and other monetary matters; which
would collect and disseminate information which, perhaps, could help to
arrange credits through stabilization funds or central banks, where necessary
to care for temporary disequilibria in payment balances; and which would form
the basis for an international stabilization fund to be established when it has a
reasonable prospect of successful operation. The real borrowing and lending
i-robleras of the transition period and the longer-run problems of currency
stabilization should not and need not be mixed, and international currency chaos
is not a danger so long as exchange controls exist.




In reaching the various conclusions which are presented above we have
considered carefully the view that the only time, if ever, nations will agree
upon an international currency stabilization plan is during the war before the
desire for cooperation has evaporated, and that it is, therefore, better to adopt
the presently suggested plan rather than none at all* We do not believe these
are the alternatives. There is an inherent contradiction involved in appealing
to the spirit of wartime cooperation as a basis for an agreement which, as it
stands, is an agreement upon national freedom of action in the post-war period.
And yet we entirely understand why in the face of the many and great uncertainties,
both domestic and international, that lie between the present and the more normal
conditions which are the essential prerequisite,for international monetary stabilization, nations should feel disposed to insist upon freedom even to the extent
of submerging basic principles• The lesser urge to cooperate later on must be
measured against the lesser hazards involved* Meanwhile, the possibilities of
international economic cooperation in other and more important directions still
lie open.
The pressing need now is to provide the special kinds of international
credit which will be effective and useful in the transition period, assuming that
other and important questions of international political and economic collaboration will also be under development We suggest, therefore, that the forthcoming
international monetary conference should not try to proceed with the establishment of the international stabilization fund outlined in the joint statement of
experts, but that it should address itself vigorously to the development of means
and methods of providing the special lending and borrowing facilities needed
during the transition from war to peace. The monetary conference could also prepare plans for an international consultative and cooperative body which would
help to make the process of finding equilibrium rates of exchange during the
transition period an orderly and non-competitive process. Meanwhile, the United
States and Great Britain should jointly re-examine their international financial
position with a view to facilitating the unfreezing of the British blocked balances and the stabilization of the doliar-sterling rate as a nucleus of international currency stabilization; and should explore the possibility of parallel
programs of internal economic stability at a high level of production* These
suggestions recognize the need for international economic cooperation, but they
also recognize the danger of premature proposals for the creation of an international currency stabilization fund which risk rejection, or failure in operation.,
either one of which would seriously endanger the cause of international collaboration.

Federal Reserve Bank
of New York