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On October 8 the Treasury made public the main outlines of its
plan for a United Nations Bank for Reconstruction and Development* This
move, though prematurely precipitated by the release in London of details
of the plan a few days earlier, followed hard upon the heels of a series
of revisions in the plan, dated September 8, 13* 16, and 24* and October 1,
indicating that the Treasury in any case was presumably getting the plan
into final shape pending its early public release• The publication of the
plan is of particular interest to us at this time in view of the sharp emphasis which Dr. Williams has recently drawn on the distinction between the
problems of international financing in the transitional and in the long-run
periods, and between short- and long-term credits* This memorandum, which
is based upon the revision of October 1, will analyze the structure and
powers of the proposed Bank with special reference to its relationship to
the International Stabilization Fund and to the post-war foreign investment
problem in general. Since the present Treasury draft differs substantially,
both in form and content, frdm the original scheme submitted to Secretary
liorgenthau by Dr. White in April 194-2 (which was summarized in a memorandum
of this Division, dated January 21, 194-3)* it seems advisable to re-examine
the plan in its present form in some detail,
It is agreed by all post-war planners that one essential element
in a satisfactory post-war pattern of international economic relations must
be a large-scale revival of long-term capital movements»

Such a revival is

necessary, not only to take care of the immediate post-war problem of the

reconstruction of devasted areas,2/ but more particularly from the longerrun developmental point of view* There are still large undeveloped areas of
the world, to mention merely China, Latin America and much of Asia, where
such large-scale developmental projects could be undertaken to the benefit
not only of the countries concerned—in the form of increased productivity
and higher living standards—but to the world as a whole»

Resumption of

the international flow of long-term capital will not only contribute to a
progressive widening of world trade, but will prove an essential adjunct to
any successful scheme for long-rtin international monetary stabilization•
In the past, the large-scale volume of international long-term investment which played so important a role in the opening-up and development
of the world econon$r before 1914 and during the decade of the 20 ! s was almost exclusively undertaken by private investors, both individual and corporate, either in the form of purchases of new or outstanding foreign
(governmental or corporate) securities or in the form of direct investments.
Governmental foreign long-term lending, with a few exceptions^ such as the
American government loans to the Allied Powers from 1917-1920, was relatively
unimportant, although governments did play an important part in stimulating
or deterring private foreign lending• It is now recognized, however, that
private long-term foreign investment on a substantial scale cannot be counted
on for several years to come, and in the early post-war years will most
certainly not be forthcoming in a volume adequate to meet the heavy
1/ I shall not discuss in this memorandum the question of relief and
salvage proper in the immediate post-war years. These matters should
be handled on a strict gift or lend-lease basis, and do not fall within the range of reconstruction or development loans proper. Such
assistance may well be undertaken by the proposed United Nations
Relief and Rehabilitation Administration and perhaps by the Office of
Lend-Lease Administration.


There are various reasons for this*

The unhappy experience

of private foreign investors during the 30!s with such factors as largescale foreign bond defaults, hostility of governments in debtor countries to
foreign capital investment, fluctuating exchange rates, exchange control,
political uncertainty, etc., is likely to make private foreign investment
unattractive for some time. To these deterring factors must be added the
great economic and political unsettlement and confusion which will prevail
in the early post-war yearsj this factor alone will undoubtedly make longterm private foreign lending to most countries of the world highly unattractive. Moreover, it will be in those regions most in need of capital where
the uncertainty will be greatest, and where consequently private foreign
capital will be most unwilling to venture• While these factors will be most
detrimental to the international flow of long-term capital through the new
issue market, they will also adversely react upon the expansion of foreign
direct investments.
It is clear, then, that if long-term lending, both for reconstruction and developmental purposes, is to take place on an adequate scale for
some years after the war, it will to some extent have to be undertaken either
directly by, or through the auspices of, the governments of the lending
countries• There are, however, other reasons why public foreign investment,
particularly through an international organization, will be desirable. The
record of private foreign lending during the 20fs was on the whole a rather
shameful one, and its shortcomings should certainly be avoided in the
future through governmental control and through its supplementation by
direct governmental lending• The major shortcomings were as follows:
(1) Many foreign loans were floated at rates exorbitantly high in relation
to the capacity of the borrowing countries to pay, most of the American loans

to the continent of Europe, for example, bearing rates ranging as high as
from 6 to 8 per cent.

(2) Moreover, much of the lending was reckless and

excessive in character, reflecting not only wasteful and unnecessary borrowing on the part of debtor countries and their injudicious application of the
loan proceeds, but also high-pressure salesmanship on the part of the underwriting houses and their failure adequately to check the underlying merits
of the proposed flotations•

(3) The international flow of long-term private

capital also showed itself erratic and irregular in character, subject to
shifting winds, as is amply illustrated by the drastic and sudden decline in
the volume of American long-term loans late in 1928 which played a major
part in bringing on and intensifying the world depression*

(4) Finally,

under the regime of private foreign investment many countries in genuine need
of long-term capital were unable to obtain it, except at impossibly high
rates, while many necessary socio-economic developmental projects, such as
public sanitation, conservation of natural resources, eradication of diseases,
etc., not yielding direct economic returns, were unattractive to private
foreign investors•
Under an international investment organization owned and controlled
by member governments, most of these shortcomings can be eliminated. Such
an organization would be guided by much broader considerations than the
strict profit and market calculations which motivate the behavior of private
foreign investors* As such, it would be in position to extend long-term
loans to needy borrowers at rates more closely approximating their ability
to pay and would be able to extend loans for projects of a socio-economic
character, which bear no direct monetary returns, but which contribute ultimately to a higher productivity and living standard in the borrowing
countries and which benefit other countries in more subtle ways*


international governmental frank, moreover, would be in a position to subject
each proposed loan project to a more careful scrutiny, both as to its
potential effects on the borrowing country1s productivity and on its balance
of payments position, than would private underwriting syndicates. Another
advantage of such a Bank would be that the erratic fluctuations which have
characterized private foreign investment in the past could be largely avoided* The flow of capital, in fact, could be used as an anti*cyclical device
rather than as a factor potentially intensifying cycles. In time of depression, for example, such a Bank could launch upon an intensive program of
international lending. It would also be in more of a position to concede to
a temporary suspension of amortization payments with respect to a debtor
country experiencing exchange difficulties than would be the case if the
bonds were held by a large number of anonymous and scattered owners• There
is, in addition, the consideration that governments, if themselves lenders,
may prove more willing to accept the truism that in the long run inters
national debts can be liquidated only in goods and may be willing to adjust
their trade policies correspondingly.
There are special reasons why an international governmental lending agenpy (as contrasted with a purely national one) has distinct advantages.
In the past private foreign investment has probably been the major vehicle
for imperialist expansion on the part of the leading powers and, by the same
token, one of the major sources of international friction and war f

(We do

not go into the controversial question of whether more commonly it was
foreign investors which enlisted governmental political and military aid in
th§ expansion and the protection of their investments, o? whether it was
governments which played the active role in using private investments as a
tool with which to achieve their imperialistic ambitions•)

By "denationalize

ing!f foreign investment, i f e., ty extending long-term loans through an

impersonal international organization, the dangers of political clashes
between debtor and creditor countries, or between creditor countries themselves , would be greatly narrowed• A final advantage of an international
organization for long-term lending lies in the pooling of investment resources which it achieves, and in the fact that debtors, by being members of
the organization, would probably have a greater incentive to honor their
international obligations*

The proposed United Nations Bank for Reconstruction and Development is to be set up in the form of what might be termed an international
public corporation, or an RJF,C» on international lines, whose capital stock
is to be owned entirely by the participating governments and whose purpose
is to serve public, and not private, ends. In brief, the Bank is empowered
to make loans directly, or to guarantee or participate in loans granted by
private agencies, for purposes of reconstruction and development, of facilitating a smooth transition from war to peace, of raising world productivity
and of promoting the growth of international trade•
1» Organization of Bank: The authorized capital of the Bank is
to be equivalent to $10 billion, consisting of shares of a par value of
$100,000, making a total of 100,000 shares* Membership is open to countries
which are members of the International Stabilization Fund, and such countries
may subscribe to a number of shares to be determined by an agreed-upon
formula which will take into account such factors as national income and
international trade 3/

It is stated that this formula would make the

2/ It is to be noted that no reference is made to gold and free foreign
exchange holdings as a factor in the computation of the quotas as
in the case of the International Stabilization Fund*

American contribution about one-third of the total, or $3#3 billion, (which
would compare with an American contribution of roughly $2 billion under the
Stabilization Fund scheme)• The liquid assets at the disposal of the Bank
may be further increased by the &nk f s power to issue, pledge or discount
any of its own securities, or obligations taken from its portfolio, and
also to borrow from member governments, central banks, stabilization funds,
private financial institutions, or international financial agencies»
Subscriptions to shares are to be paid in the form of gold and
local currencies* Initiallyfeachmember is to pay in 20 per cent of its
subscription, not more than 20 per cent of which is to be in the form of
gold (the proportions of gold and local currencies to be graduated accords
ing to a schedule taking into account the adequacy of each members gold
and free foreign exchange holdings)• The remainder of each dountry?s subscription is to be paid at such times and in such amounts as the Bank may
desire, although not more than 20 per cent of subscriptions may be called
in any one year.

The proportion of these subsequent payments to be made

in gold will be the same as in the case of the initial payments. It is also
provided that no calls are to be made unless funds are needed, and if the
Bankfs resources substantially exceed at any time its prospective needs,
part of the subscriptions may be returned to the members on a uniform basis»
Another provision is* that each member is to repurchase annually, with gold,
its local currency held by the Bank, up to 2 per cent of its subscription,
but not in excess of one-half of the addition to its official gold holdings
during the preceding year.

This repurchase requirement may be suspended

for any year by a three-fourths vote by the Bank* The Bank's accounts are
to be kept in terms of unitas and the unitas value of its local currency
assets are to be guaranteed against any depreciation in the value of a

member currency in terms of unitas, presumably according to the method
provided for under the International Stabilization Fund scheme.
It is evident from the above that the structure of the United
Nations Bank is patterned to a degree on that of the Stabilization Fund in
that members are to make contributions in gold and local currency (though
not securities), and that these contributions.are to be based on quotas determined by a given formula• Although the provision for gold contributions
is less strict than under the Stabilization Fund proposal, it would appear
that this provision will meet sharp opposition from most of the prospective
members* Opposition to the heavy gold contributions in the revised White
Plan has already been strongly registered and there can be no doubt that the
necessity of making further gold payments to the proposed banlc will xn~
tensify this opposition unless, of course, the requests for gold contributions are made very small* The repurchase principle would Seem to indicate
that the Bank* i ultimate objective is to have its assets completely in the
form of gold without, however, imposing any undue hardships on the member
countries, this being evidenced by the qualifications made to the principle*
2. Powers and Operations; The Bank is given a wide range of
powers to make, participate in, or guarantee long-term loans to member countries* These loans are to be made either directly to the respective national
governments or through these governments to political sub-divisions or corporations*^ The Bankfs lending powers are subject to a rather wide list of
qualifications, which define both the conditions and the terms of the loans*
Some of these qualifications are calculated to protect the Bank against loss*
3/ The Bank may also make, participate in, or guarantee loans to inter"
national governmental agencies provided that member governments representing one half of the shares of the Bank are participants in these

For example, payment of interest and principal on any of the loans undertaken by or through the Bank must be fully guaranteed by the national
governments to which, or through which, the loans are granted#2/

More im-

portant, a competent cotonitiee of the Bank must first make a careful study
of each proposed loan project and must satisfy itself, if the loan is to
be granted, that it will serve directly or indirectly to raise the productivity of the borrowing country and that the country^s budgetary and balance
of payments position ar£ favorable to servicing the loaiuJsr

This provision

has as its object, not merely the protection of the Bankfs assets, bUt also
the prevention of unwise or wasteful loans which would subject the borrowing
country to repayment difficulties* It is not clear what is meant here by
the term productivity, but if this term is interpreted broadly (as it should
be) it would seem to leave room open for the Bank to extend loans for socioeconomic purposes, although presumably in this case the payment period and
conditions of payment would have to be easier than in the case of the loan
directed to the creation of a project yielding a direct economic return.
This could be effected under the Bank*s broad powers to make loans at
reasonable rates of interest and with a schedule of repayment appropriate
to the character of the project and the balance of payments prospects of the
borrowing country. Much flexibility is thus permitted in individual cases.
As further protection to the assets of the Bank, it is provided that the
Bank must also make arrangements to assure the use of the proceeds of any of
its loans for the purposes for which the loan was approved. This clause
should serve to prevent the wasteful application of loan proceeds and their

4/ Such a guarantee, however, will not assure "payment if the national
governments concerned are themselves unable to raise the necessary
local currency and/or foreign exchange.
5/ Presumably this provision should also be read to mean that the loan will
eventually make possible increased exports and/or reduced imports,
thereby facilitating the servicing and ultimate repayment of the loan.

diversion to au<*h uses as covering budgetary deficits or the adoption of
unwise budgetary procedures which characterized much of the lending during
the 20«s.
It is made amply evident in the preamble and in the text of the
plan that the purpose of the proposed Bank is not to supplant private longterm foreign lending, but merely to supplement it#

(Analogously, the

International Stabilization Fund is so framed as not to disturb ordinary
banking operations in the settlement of international balances*) It is
specifically provided that the Bank may make, participate in, or guarantee
loans only if borrowers are otherwise unable to secure the necessary funds
from private sources "under conditions which in the opinion of the Bank are
reasonable•" Not only will the Bank avoid competing with private agencies
when the terms offered by the latter are deemed satisfactory, but, by
guaranteeing and participating in loans made by such agencies, the Bank will
do much to encourage thfe international flow of private capital• This is
not to imply that the Bank will be an impermanent institution and will be
dissolved when an adequate volume of private capital is forthcoming, since
there will always be certain projects and certain borrowing countries which
will have to be financed through the Bank, but it does indicate that the
greater the ultimate resumption of private capital movements, the smaller
will be the scale of operations to be undertaken by the Bankt
As noted above, the Bank in making loans will charge reasonable
rates of interest and specify a schedule of repayment appropriate to the
nature of the project and the balance of payments prospects of the borrowing

This should remove one of the most glaring shortcomings of the

foreign lending of the 20*s. In the case of loans in which the Bank participates,, however, the rate of interest may be higher than if the loans were

guarantee by the Bank* In the case of the latter, the Bank is to be compensated for its risk.
In making loans, the Bank will provide the foreign exchange required by the borrower in the currencies of the countries in which the loan
proceeds are to be spent (but the provision of such currencies can be made
only with the approval of such countries), and these sums will be credited
to the borrower's account, upon which drafts can be drawn. On the other
hand, it is specifically provided that no condition shall be imposed by the
Bank as to the particular member countries in which the proceeds of the loan
must be spent, i.e., tied loans are outlawed, "What these two apparently
contradictory provisions presumably mean is that a prospective borrower may
first specify the countries in which he wishes to spend the proceeds of his
loan and the Bank will thereupon credit him with the currencies of those
countries* It seems to me, however, that freedom of choice on the part of
the prospective borrower as to the country in which-<he may spend his loan
proceeds, i.e., whose currency he may acquire, cannot always be adhered to
once a currency (or currencies) in demand held by the Bank becomes )!scarce•"
In such a case the Bank will be forced to ration the supply of these currencies, and by the same token will have to inform prospective borrowers
that they will have to take the loan proceeds in the form of currencies of
which the Bank has a more ample supply, i.e., that they will have to buy the
necessary goods and services in specified countries.

This, in effect,

would amount to a tied loan, since loans will be granted contingent upon the
spending of the proceeds in particular countries. In view of the heavy
demands which will unquestionably be made upon the Bank for American dollars
in order to purchase American goods in connection with specific reconstruction

or development projects in the early postwar years, it may well be that
rationing of American dollars will have to commence within a relatively
short period after the Bank is set up # As a result, the proposed outlawing
of tied loans by the Bank may well become a virtual impossibility•
The purpose of providing, in effect, that a borrowing country may
spend the proceeds of its borrowings only upon the goods and services of the
country whose currency is provided to it by the Bank is presumably to assure that membership in the Bank will not impose pressure upon the balance
of payments of individual countries* This may be an important factor in
inducing the adherence to the Bank of certain countries whidh would be prepared to lend on long-teftn to other countries only if they had some assurance
that such lending, by being directed to their own goods, would not put pressure upon their balances of payments• But this, however, does not cover the
whole picture, for even though the borrowing country spends its loan proceeds upon the goods of the country whose currency has been made available,
the increased exports from the latter will probably require some increased
imports from other countries of materials, etc., used in producing these
exports• There will, therefore, in most cases be a tendency for some
pressure to be put upon the balance of payments of the countries whose currencies are being made available through the Bank to other countries. This
pressure may perhaps be handled through the facilities of the International
Stabilization Fund should the country in question be unable to meet it
An important provision is that local currency requirements in connection with any loan project must be financed, at least in the main,
locally without recourse to the Bank# That is, no country will presumably
be permitted to use foreign exchange proceeds derived from borrowing from

the Bank for conversion into local currency for purchases on goods and
services at home* (In exceptional cases where the local part of the project
can be financed at home only on very unreasonable terms, the Bank will provide the needed funds out of the local currency of the country held by the
Bank, i.e., foreign currencies will not be provided for this purpose*) This
provision should do much to prevent unnecessary drains on the Bank's resources, and in particular to prevent the accumulation of foreign debts by
countries when they are able to finance part or all of their capital needs
It must not be overlooked that those loan projects which are part-*
ly financed at home will, by creating a demand for local goods and services
on the part of the government or corporation -undertaking the project, cause
an expansion of domestic incomes, not only to an amount equivalent to the
funds spent, but to an even greater amount via the familiar multiplier
process. Part of this increased income in the hands of residents of the
country will tend to be drained away in purchases of foreign goods and
services, to a degree depending upon the country1 s marginal propensity to
import. Such a drain will, in the absence of new restrictions upon imported goods, cause pressure upon the country1s balance of payments. In
granting long-term loans to foreign borrowers in order to enable them to
purchase the goods and materials required abroad in connection with the
project, the Bank should thus also take, into account these secondary demands for imports resulting from the higher level of income within the borrowing country when part of the project is financed at home* It would thus
appear that the Bank should extend to each borrower an amount of foreign
currency somewhat in excess of the amount which will be immediately re-*
cuired to finance imports in connection with the project itself* On the



other hand, it may be that* if the anticipated secondary demand for imports
is not too large, such demand might be handled through the facilities of the
International Stabilization Fund (assuming that such an institution is also
set up) c
The interest and principal on loans participated in or made by the
Bank-&re to be paid in gold, although with the Board1 s consent payments may
be made in currency actually borrowed or in other member currencies* This
again indicates that it would seem to be the ultimate objective of the Bank
to have its. liquid assets completely in the form of gold. In all cases, the
amount repaid must be equivalent to the unitas value of the loan and of the
contractual interest. Flexibility in loan repayments is made, however,
through the provision that in case of an acute exchange stringency the Bank
may for a period not exceeding three years accept payment of principal and
interest in local currency which the borrower agrees to repurchase over a
period of years. Special provisions are also made whereby the Bank may arrange to refund any loan which it has guaranteed, participated in or made.
This provision should do much to remove one of the more objectionable features
of private foreign lending in the past, namely, the fixed annual amortization and redemption schedules.
An interesting provision in the plan is that a certain degree of
"protection" is given to countries in which the loan proceeds are to be
spent. As noted above, foreign currencies will be made available to a borrower only with the approval of the countries concerned. Moreover, at the
request of a representative of any such country, the Bank may postpone
action on a proposed loan for a year, and longer should the representative

so request#2'

This provision vdll have the effect of preventing an ex-

cessive convergence of demand upon the goods of certain member countries at
a time when such convergence might provoke an undesirable inflationary
situation in those countries.
It is important to draw attention at this point to a significant
difference between the operations of the Treasury's proposed Bank for
Reconstruction and its International Stabilization Fund, Unlike the Fund
proposal, there is no reference to the amount of long-term loans which any
member may be permitted to obtain from the Bank for Reconstruction#- The
quotas are presumably to be used merely to measure the amount of each member
country1s subscription, i»e P , the degree to which it may have potentially to
make its currency, and consequently its resources, available to other member
countries,, There is theoretically nothing in the plan to prevent any individaal country from requesting and obtaining an amount of loans equal to
the total liquid assets at the Bank*s disposal* It may be that this omission
was deliberate in order to give a wider flexibility to the Bank's operations
and greater powers to the Bank's directors in deciding upon the volume of
loans to be granted to any individual country• It would certainly seem to
be advisable, however, particularly from the viewpoint of those members who
are likely to have to borrow heavily in the early post-war years, that some
broad understanding should be made as to the amount of aid which such countries may potentially receive from the Bank*
Whereas the International Stabilization Fund is on the order of a
revolving fund in that members which acquire foreign currencies have to pay
for them in their own currencies, under the Bank scheme members which

The borrower may at any time, however, amend the loan application to
provide for the expenditure of the loan in a currency or currencies
other than that of the country whose representative requested the

acquire foreign currencies merely turn over securities, or presumably

Eventually, of course,, as the loans are repaid in the form of

gold or local currencies, the Bankfs liquid assets m i l be replenished, and
available for further loans* Thus, whereas the local currency assets of the
Stabilization Fund are being constantly "turned over" for other local currencies, the Bank!s supply of local currencies and gold will be gradually
replaced by securities and I»0#U#fs which will not be reconverted into local
currencies and gold for some time*

This difference, however, is admittedly

more apparent than real, for, assuming that in both cases the demand
(certainly for some years after the war) will be primarily for American dollars, under both plans the supply of that currency might be exhausted
relatively quickly, and the two institutions will soon be filled up with
other local currencies not in demand, on the one hand, or with securities
and I O G O L V S O on the other*

It has already been noted that as the supply

of any one currency in the Bank becomes scarce, the Bank will presumably,
in tiie seme fashion as the Fund, have to ration that currency. This rationing will presumably be guided primarily by the principle of making the supply of the scarce currency available to the "neediest" borrowers from the
viewpoint of the international situation.
It is to be noted that the loans made by the Bank are all in the
nature of fixed-interest-bearing obligations, i»e«, they are the counterpart
of bonds floated on foreign capital markets and denominated in the currency of the lending country. It has been recognized for some time, however, that international investments should as far as possible be of an
equity character in order that the country in which the investments are
located may be subjected, not to fixed interest payments, but to payments
which will vary with the domestic level of national income, and which wi

tend to be adjusted to the balance of payments'position of that country.
For this reason, direct investments have been looked upon by many students
as a more desirable form of international investment than bond flotations
or other acquisitions of fixed*dnterest obligations• To a degree, however,
the operations of the Bank, while not involving any direct investments, will
achieve some of the flexibility provided by those investments, namely, by
carefully examining the potential effects of each proposed loan project upon
the productivity, budgetary position, and balance of payments of the borrowing country, by making the rate of interest and the conditions of payment
more closely approximate the capacity of the borrowing country to pay than
would be the case in the absence of the Bank,and tgr permitting temporary suspensions, in whole or in part, of debt payments when a borrowing country faces
an exchange stringency.

Some writers havetsuggested that an international

investment agency should itself undertake some developmental projects,
thereby relieving the countries in which such projects are undertaken from
a fixed interest amortization schedule• There is nothing in the Treasury's
proposed plan, however, which would seem to permit of such operations»
There is one final point which remains to be raised concerning the
loans to be extended by the Bank, The Bank will be faced with requests for
three broad types of long-term loans: relief, reconstruction, and development • As noted before, relief loans should not be made by the Bank since
such loans are not of a productive character in the accepted sense of that
term; relief should be handled by suph agencies as the United Nations Relief
and Rehabilitation Administration and the Office of Lend-Lease Operations
and should be made on a straight gift or "lend-lease" basis. The distinction
between gifts for reconstruction and for development cannot be easily drawn
in all cases, but broadly the former relate to loans for the reconstitution

of capital equipment^ factories, houses, etc., damaged, destroyed, or otherwise lost during tha W$tt*, while development loans would include those whose
purpose it is to develop natural resources or to construct plant or equipment not previously in existence•

The Bank will have-to face the task of

allocating its funds between these two broad types of loans, and this allocation will require much careful decision and planning on the part of the
Bankfs directors* It would appear, however, that prioritiesvshould be given
primarily to reconstruction loans in the immediate postwar period rather
than to loans for long-range developmental purposes. If the Bank should
attempt to extend loans freely for both types of purposes, its resources
may well be drawn down too rapidly* There is also the question of whether
the assets of the Bank, consisting of about $10 billion, Will be sufficient
for the purposes for which it was set up, particularly since the demand will
be primarily for American dollars of which approximately but &3#3 billion
will be in the Bank1s possession This is a matter which cannot be gone
into here*
3# Management of the Bank; The administration of the Bank
broadly follows that of the International Stabilisation Fund* There is to
be a Board of Directors composed of one director and one alternate appointed
by each member government.
of three years.

These representatives shall serve for periods

The director or alternate of each member country shall be

entitled to cast 1,000 votes, plus one vote for each share of stock held,
but no country shall cast more than 25 per cent of the aggregate votes• All
decisions, except as otherwise provided, shall require a simpletaajority.
The Board shall select a president of the Bank and one or more vice presidents, to hold office for periods of four years• The Board shall also choose
from among its members an executive committee not exceeding nine members

which shall be continuously available at the Bank, and an advisory council
of seven members, all experts in foreign investment, which shall advise the
Board on general policy*
A member country failing to meet its financial obligations to the
Bank may be declared in default and suspended from membership* During its
suspension it is to be denied privilege of membership, but will remain subject to its obligations, and member governments agree not to extend any
financial aid to it without the Bankfs approval* At the end of a year it
will be automatically dropped from membership unless restored to good
standing by a majority vote* If a country withdraws or is expelled from
the Bank, its shares of stock will, if the Bank has a surplus, be repurchased
at the price paid* If the Bankfs books show a loss such country is to bear
a proportionate share of it t
The Treasury's decision to go ahead with its plans for a United
Nations Bank for Reconstruction and Development, as evidenced by its publication of the text of the scheme, is of special interest to us, as noted at
the beginning of this paper, in view of the. position taken by Dr* Williams
regarding international financing problems in the transitipnary and the
longer-run periods.

The argument is that if the International Stabilization

Fund is used to meet the abnormal requirements for foreign exchange in connection with reconstruction in the early post-war years, borrowing countries
will soon have run through their quotas and the Fund will in addition face
an acute shortage of American dollars (and perhaps a few other currencies
heavily in demand). It is highly unlikely that the Fund's shortage of these
currencies could be replenished within a short time by the emergence of sufficiently large active balances on the part of the borrowing countries. The

result would be that the Fund would remain in a lopsided position which would
greatly limit its effectiveness or cause it to collapse altogether. The
very essence of the Fund, as a currency stabilizing mechanism, is that its
assets should be used to finance temporary exchange shortages and not longterm loans which can be liquidated only over a lengthy period of years JJ
Dr. Williams1 conclusion is that the problem of financing abnormal reconstruct
tion requirements in the transition period should be handled by a separate
credit agency, by lend-lease, etc f , and that the International Stabilization
Fund should, if established at all, be set up only after the transition*
Iii the interim, exchange rates could be maintained by the continuance of
exchange controls and perhaps by informal credit arrangements between a few
key countries.
The proposed establishment of a United Nations Bank for Reconstruction and Development goes a long way, I believe, toward meeting these
criticisms, irl that such a Bank should theoretically remove the burden of
the long-term financing problem of the transition from the shoulders of the

On the other hand, a series of new questions of importance arise

which will have to be answered• These questions, which can be treated only
briefly here, are as follows:
(1) Granted that long-term financing, particularly
during the transition period, should be the function of
a separate institution, is an international bank, comprising a large number of potential lending and borrowing
countries, the appropriate agency for such financing?

7/ Professor Viner has also lent his weight to this point of view recently,
as follows: "To put on what is intended to be a long-iun monetary
stabilization agency any important responsibilities with respect to
the handling of the emergency problems of the transitional period. . •
would be to put a curse on the agency from the start. • .The emergency
salvage and rehabilitation tasks should be left to other agencies
specially designed for such purposes. The intermediate and long-term
capital needs of non-relief countries should be provided for* • #by
agencies appropriateibr such functions." Cf. "Two Plans for International Monetary Stabilization," Yale Review,Autumn 1943>pages 28-29•

(2) Assuming the existence of a United Nations Bank
for Reconstruction and Development, will there by a role
for an International Stabilisation Fund during the
transition period?
(3) Assuming that the International Stabilization
Fund is set up simultaneously with the International Bank
for Reconstruction and Development, what will be the
respective fields within which each will operate, both in
the transition period and in the longer run?
Question (1) is controversial in character, and has as its analogy
an International Stabilization Fund versus a key country approach to the
problem of currency stabilization* If I understand him correctly,
Dr, Williams1 opinion on this subject would probably be that such long-term
loans should preferably be made, particularly in the transition period, not
through a full-blown international bank, comprising a large number of borrowing and lending countries, but directly on a bilateral basis hy the
countries in a position to lend long-term capital, notably the United States,
to the countries in need of such capital. The existence of a world bank
could not camouflage the fact that during the transition period it would in
fact*be primarily the United States which will be doing the lending. It
must be admitted that, not only would an international organization be
politically difficult to establish, but it would put potential borrowers in
the position of having an important vote in the Bank's decisions, even
though the loans for some years would actually be extended by only a few
countries9 This general issue of an international organization versus a key
country approach has already been discussed in some detail by Mr. Wallich
and myself in connection with the problem of international exchange stabilization, and there is no point here in going over the matter again. Since my
own bias is to establish as many "bigger and better11 international organizations as possible, even in the transition period, my preference would be for

the establishment of & world bazlki Perhaps, however, a distinction might be
drawn between long-term finanping in a transition period and in the longer
run r

In the first case, direct loans on a bilateral basis or through an

arrangement between a few key countries might admittedly be preferable* In
the long run, however, the international bank would definitely seem to be
the appropriate agency, particularly for the reasons elaborated upon in
Section I above«
Questions (2) and (3) might perhaps be appropriately discussed together*

It seems to me that the existence of a Bank for Reconstruction

and Development and of such agencies as the United Nations Relief and
Rehabilitation Administration and the Office of Lend-Lease Administration
would certainly not obviate the nedd during the transition period for an
agency to provide what would in effect amount to essentially short-term

For, in addition to relief requirements and to loans for specific

reconstruction purposes, there would still be a "shortage" of foreign exchange for other purposes* The balance of payments structure of many
countries, most notably Great Britain, has been seriously disrupted by the
war due to such factors as the (presumably temporary) loss of export markets,
the loss of overseas investment income, etc**, and this fact, in conjunction
with a "shortage11 of gold and foreign exchange reserves on the part of such
countries, will create a balance of payments problem apart from that connected with demands arising out of relief and reconstruction«

Since long-

term loans through the Bank are to be limited to specific reconstruction or
development projects and to the financing of imports required in connection
with such projects, there will be a whole range of imports required for the
maintenance of reasonable living standards (not to be confused with mere
relief) which will have to be financed, unless one assumes that lend-lease

aid will be extended for such purposes.

In shorty until the balance of

payments structures of such countries as Britain are restored by the reconquest of export markets lost during the war and/or by some improvement in
foreign investment income, temporary aid will be needed to tide over the
balance of payments deficit•

This aid would properly seem to be the terrain

for a currency stabilization mechanism such as the International Stabilization Fund and not for a long-term investment bank*
In the long run, however, when the so-called transition period is
completed, the appropriate fields of activity of the international Stabilization Fund and the world bank will stand out more clearly delineated, the
former concerned with providing foreign exchange to countries facing ostensibly temporary deficits in their balances of payments, and the latter with
the extension of long-term credits to foreign governments and corporations to
provide them with the foreign exchange needed in connection with the construction of specific projects* It seems to me, however, that there is
still much work to be done by the Treasury, and a vast field to be explored,
in connection with the relationships of these two organizations with each
other* It is obvious that the success of the one will be intimately dependent upon that of the other, and it seems to me that because of this the
two blueprints which have been drawn up should be more closely synthesised
and the respective rules, policies, and operations of the two organizations
more closely harmonized. Out of a wide range of problems which might be
examined in this sector, particular attention should be directed to the way
in whiqh the activities of the one will affect those of the other.* As
mentioned earlier, long-term lending through the Bank will exert some pressure upon balances of payments, and this pressure may in part be diverted to
calls upon the resources of the International Stabilization Fund, Similarly,

the operations of the Fund may require that long-term loans at times be
canalized more sharply towards certain countries• I hope to be able to explore some of these issues in a later memorandum*

Foreign Research Division

October 18, 1943•