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On November 23 the treasury publicly released the full text of its
draft for a United. Nations Bank for Reconstruction and Development. (Previously only a summary of the plan ha<3> been made available to the public #)
The following notes discuss the bhanges which have been made in this latest
draft of the plan as compared with the October 1 version which I analyzed in
an earlier memorandum**/
In earlier versions of the plan, the operations of the proposed
bank were to be concerned with granting, guaranteeing, or participating in
investments exclusively of a fixed-interest-bearing character, and there were
no references to the desirability of encouraging the expansion of equity investments, e«g«, direct investments, or to the participation of the bank in
such* Foreign investments of an equity character, however, have a distinct
advantage over bond investments in that the country in which such investments
are located is subject, not to fixed interest and amortization payments, but
to payments which vary with the domestic level of national income and which
tend to be adjusted to the balance of payments position of that country* The
absence of any reference to equity investments seemed, therefore^ as I pointed
out in ray earlier report, to have been a notable omission in the draft of the
plan# In the latest version, however, specific methods are now suggested
to stimulate such investments•£/ i n


new clause, the bank is empowered (a)

to encourage and facilitate international investment in equity securities by
securing government guarantees covering the conversion into foreign exchange

1/ Cf# -The Proposed United Nations Bank for Reconstruction and
Development, dated October 18 S JL943«
2/ Judging from a recent statement of Secretary Morgenthau, moreover,
the Treasury seems to be of the opinion that, even in the absence
of special action by the bankf direct investments will tend to be
resumed on a substantial scale with the return of peace•

of the current earnings of such foreign held investmentsj and (b) in promoting this objective, to participate itself in such investments, though
only up to a maximum of 10 per cent of the bank!s paid in capital•
Daring the f 30 f s one of the major obstacles to the growth of direct
investments was the widespread extension of exchange controls, which had the
effect of blocking the earnings from such investments, making it impossible
for the foreign owners to repatriate such income• Under the new provision
referred to above under (a), it is intended to remove this particular obstacle

by obtaining from the governments in the countries in which such investiuents

are located a guarantee that earnings may be freely transferred# It is not
specified, however, in what way the bank will be able to induce the governments concerned to make these guarantees* It would seem to be necessary for
the bank to offer a tangible concession in the form of special access to
foreign exchange, since it is presumably the inadequacy of such exchange which
would cause the country concerned to block the earnings• If such facilities
were made available to unfreeze blocked earnings, however, it would seem to
involve sn illegitimate extension of the primary objectives for which the
bank is presumably to be set up and s&ght, moreover, give rise to embarrassing
demands upon the bank for the unblocking of other forms of frozen balances*
Sven if guarantees were secured that earnings from direct investments would
not be blocked, moreover, there would still remain other obstacles hampering
the expansion of direct investments, notably, hostile action by governments
against foreign-owned properties in the form of discriminatory tax legislation,
expropriation, etc* This hostility, in fact, may probably have been a more
potent deterrent to direct investments during the f 30 f s than was the blocking
of earnings from such investiaents • An appreciable revival of direct investments would thus also seem to necessitate obtaining from the governments of the
countries participating in the proposed bank guarantees of "equal treatment11
for foreign^controlled as compared with domestic-controlled enterprises•

The provision described under (b) above, that the bank may itself
participate in foreign equity investments up to 10 per cent of its paid-in
capital, may have two beneficial effects: (1) It will probably stimulate to
a degree private investment in certain foreign enterprises from' a belief
that the participation therein of the bank will be a factor making for the
stability of the enterprises and the safeguarding of their rights) (2) It
may pave the way for the creation of truly international corporations in
those cases where the international bank itself holds the controlling ownership in the enterprise*

(Many students in fact advocate international

corporations as the ideal form of foreign investment because of their purely
denationalised character, which minimize the possibility of international
political friction*) The fact that the bank*s participation in foreign enterprises is limited to a maxiimim of 10 per cent of its paid-in capital probably
reflects a belief that investments of this character may be more risky, and
subject to greater possible abuse, than carefully selected fixed-interestbearing obligations•
In the October 1 version of the plan there had been a clause which
stated that when a loan project gave rise tfto an increased need for foreign exchange resulting from that program," the bank would provide an appropriate part
of the loan in gold* As worded, however, that clause was ambiguous and directly
inconsistent with the provisions in the plan which stated that the bank would in
any case normally provide its loans to a given country only in the form of foreign currencies and only to finance that part of the developmental program which
would involve purchases of goods or services from a foreign country* In the
latest draft of the plan this ambiguity is to a degree cleared up, but by no
means removed, by a more specific wording of the clause in question* It is now
provided that where the developmental program gives rise to an increased demand
for foreign exchange for purposes not directly needed for that program yet
resulting from it the bank will provide an appropriate part of the loan in

gold or in desired foreign exchange (underlining mine)* Reference is undoubtedly made here to the so-called secondary, or multiplier* effects resulting from
the program, i«e#, to the increased demand for imports arising from the higher
level of national income caused when part of the expenditures in.connection
with the project is directed to domestic goods and services. But if this is
what is actually meant, then it is still not clear why reference is merely
made to the fact that the bank will in this case provide part of the loan in
gold or foreign exchange• #(Is not all of the loan in any case to be made in
foreign exchange?) It would appear rather that an amount (of foreign exchange
or gold) in excess of the loan proper should be extended so as to enable the
borrowing country to finance, not merely the demand for imports in connection
with the borrowing project itself, but the increased demand resulting from the
higher level of national income*
The other "major" revisions in the latest draft of the plan relate
to the omission of several clauses which had appeared in the earlier drafts•
The following clauses do not appear in the latest version of the plan.
1* The provision that any loan guaranteed, par~
ticipated in, or made by the bank could be repaid, at
the option of the borrower, in-whole or in part, at any
time prior to its maturity/ and the provision that the
bank may arrpjige for the refunding through government or
private financial channels of any loan guaranteed, participated in, or made by the bank#
29 The provision that no country shall be obligated
to increase its subscription to the shares of the bank, but
that it may at any time acquire additional shares from the
3* The provision that the bank may postpone for a year
or more action on a proposed loan at the request of the
representative of the country in which that loan is to be
spent* This provision was presumably dropped because it
was already covered in large part by the clause that the
bank would, in making a loan, provide the foreign exchange
requested by the borrower only with the consent of the
country whose currency was thus made available*
Foreign Research Division
December 7, 1943#