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Deceraber 21, 1944
Board of Governors of the
Federal Reserve System,
Washington 25, D. CSirs:
Since the publication of the Final Act, and its annexed Articles
of Agreement, drawn up by the United Nations Monetary and Financial Conference held at Bretton loods last July, we have carefully reviewed our discussions of previous proposals for international currency stabilization and
monetary reconstruction, and we have studied the specific proposals for an
International Monetary Fund and an International Bank for Reconstruction and
Development, which came out of the Bretton Woods Conference.
Enclosed is a statement concerning these latest proposals which,
after consideration by the Directors' Committee on Foreign Relations (Mr.
S. Sloan Colt, Chairman, Mr. Donaldson Brown, Mr. Carle C. Conway, and Mr.
Beardsley Ruml, ex officio), was presented to the board of directors at its
meeting today.

The statement can fairly be said to represent a consensus

of the present views of the directors and officers of this bank based on
the information which has been available to us. We are sending it to the
Board of Governors as one of the series of communications (July 15, 1943,
October 7> 1943, &nd June 19, 1944) which we have addressed to it in response
to its request of June 25, 1943*
Yours sincerely,
P. S.

Additional copies of the statement are enclosed for the convenience
of the Board.

December 21, 19
Following the request of the Board of Governors for a statement of our
views on the international monetary plans, the directors and officers of this
Bank have on three previous occasions - July 15, 1943* October 7, 1943 > and June 19 >
1944 -sent to the Board a statement of their views. These statements set forth the
reasons vrhy, in our opinion, the problem should not be dealt vath in the manner
proposed in the plans which vrere then the subject of discussion between experts of
the United Nations• They also set forth, broadly, our ideas as to a wiser procedure which would hold out more promise of genuine and durable success.
Since our last statement of views was sent to you> a formal conference
of delegates of the United Nations has been held at Bretton Woods and detailed
agreements on an International Monetary Fund and an International Bank for
Reconstruction and Development have been drafted and submitted for the consideration of the governments concerned. These agreements have been the object of close
study on our part, and we feel sure that, before the stage of legislative discussion
is reached, the Board will wish to know our further views with respect to the merits
of the Bretton Woods proposals•
In our statement of October 7, 1943*


listed what seemed to us important

drawbacks to the plans for international currency stabilization which had been put
forward for public discussion at that time. To restate these objections in the
briefest fashion, we felt: (1) that the plans were far in advance of even an
approach to solution of some of our domestic economic problems, without which oui<
contribution to international stabilization would probably be a negative factor;'
(2) that the plans might facilitate avoidance or postponement of solution of more
difficult and even more important international problems, such as agreement on
international trade and investment policy, world commodity and price regulation^
etc.; (3) that it was impossible to pass intelligent judgment upon monetary plans

in vacuo, and that the monetary organizations proposed would in effect be an
instrumentality of world government when there was no world governmentj

(4.) that

the plans confused the long run requirements of currency stabilization with the
shorter run problems of the transition period; (5) that it was impracticable to
attempt to fix exchange rates simultaneously for all or most countries, without
the continuance of exchange control, during the immediate postwar period; (6) that
the plans offered too influential a role to small and debtor countries, who should
not be permitted to control such a credit organization and should not, by mere
right of membership, be entitled to an autonjatic dollar credit linej (7) that,
rather than try to impose a global solution, one should break the problem down into
its parts and build on the best materials available, with particular attention to
first assuring internal stability and high income and employment in the leading
countries and a stable exchange rate between the key currencies, sterling and the
dollar; .and (8) that further exploration was needed of the domestic controls which
might have to be forsworn or moderated by countries participating in the currency

Alternatively we stated, in the October 1943 outline of our views, that
a better procedure would be the following:

(l) extension of rehabilitation and

reconstruction credit; (2) continuance of exchange controls as an emergency means
of assuring currency stability, while applying pressure through our extension of
credits toward the gradual relaxation of such controls; (3) establishment of a
working relationship with Great Britain for achieving dollars-sterling stability and
internal economic stability at a high level of production; (4) arranging for the
adherence of other countries to the British-American stabilization agreement, as
their political and economic status permitted, and pending such adherence dealing
with special situations by special stabilization loan agreements or through existing or transition credit agencies; (5) encouraging the development of the conditions and the knowledge which would favor the successful functioning of an

international stabilization fund, by establishing an international organization for
the continuous consideration of the problem and the centralization of information
concerning it.
Our second statement of views on this subject was prepared in June 1944
following the publication of the "Joint Statement by Experts on the Establishment
of an International Monetary Fund." We considered the "Joint Statement" to be,
in some ways, a marked improvement on previous plans. For example, it specifically
recognized the difficulty which would arise from a confusion of long run and
transition objectives, and specified that the proposed Monetary Fund wa$ not to
deal with problems of relief, reconstruction and war indebtedness• It went far
toward meeting our contention that continuance of exchange controls during the
transition period would be necessary and that progressive relaxation of such controls is all that can be expected. It recognized the difference between exchange
rigidity and exchange stability, and the difficulty of trying to fix lasting rates
for a large number of currencies, by providing for greater exchange rate variability
particularly during the transition years.
While we felt that constructive steps had been taken, it nevertheless
seemed clear to us that the Joint Statement did not meet the test of American selfinterest and, taken as a whole, was disappointing in its approach to currency
stabilization. It retained several of the drawbacks which we had found in the
original plans, and in two respects seemed to us to be retrogressive: (1) in its
omission of all references to corrective measures to ensure the two-sided international adjustment which would keep the prospective Fund in reasonable balancej
(2) in its "scarce currencies" provisions which, by authorizing deficit countries
to apply exchange discrimination against the United States whenever a shortage of
dollars develops (and whatever the cause of its development), placed the onus of
international adjustment upon this country alone# The implication of these two
provisions was that the Monetary Fund would be an instrument, not for achieving

free and stable exchanges, but rather for enabling deficit countries to make
adjustments to external influences through exchange depreciation and control rather
than through the two-sided international adjustment - the use of internal and external corrective measures - which is the foundation of any workable international
monetary standard.
Affirmatively, in our memorandum of June 19> 1944, we repeated most of
the constructive recommendations contained in our memorandum of October 1943* and
we said specifically:
"What can be done now in a wider 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 balancesj 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 problems of the transition period and the longer-run
problems of currency stabilization should not and need not be
mixed, and international chaos is not a danger so long as
exchange controls exist."
We added the further recommendation that the Bretton Woods conference, instead of
proceeding with plans for an international stabilization fund, address itself
vigorously to the development of special credit facilities for the transition
While the Bretton Woods conference actually placed most of its emphasis
on the International Monetary Fund (no longer called stabilization fund) it did
work out a detailed plan for an International Bank for Reconstruction and
Development which we think has prospective value. This new bank - with some
modifications discussed later - and the United Nations Relief and Rehabilitation
Administration, could,if well managed and adequately supported by the nations
concerned, provide a satisfactory solution of many, though not all, of the financial problems of the transition years* Such further need as there might be for
special financial facilities to help restart world trade, could probably be found,

so far as this country is concerned, through such means as expansion of the
Export-Import Bank,
On the purely monetary side, the results of the Bretton Woods conference
are much less acceptable. The conference, restricted by its terms of reference,
could do little more than elaborate the provisions of the Joint Statement* Moreover, the few new provisions which were introduced into the monetary plan at
Bretton Woods give no cause for reassurance to those who, like ourselves, have
found the plain defective in important respects. On the Contrary they seem to
represent an attempt to patch a mechanism the design of which does not fit the
facts of world monetary operations. One of the major defects of the global fund
approach is that it is based on a theoretical equality of all of the world1s
currencies which simply does not exist. The fact is that the fund will tend
increasingly to be long of the weaker currencies and short of the key currencies
(at least the dollar) in which practically all international transactions are
actually carried out.
The evidence of the increasing realization of this defect in the global
approach is to be seen in certain amendments and amplifications of the Fund provisions, which were adopted at Bretton Woods, especially in the expanded recapture
clauses, designed to ensure the return to the Fund of larger amounts of the currencies which will be most in demand (at any rate, the dollar) in order that they
may not become too scarce too soon. This dilemma of the Fund is one of the principal reasons why we have recommended that the first step in world currency stabilization should be a working agreement between the United States and Great Britain
with respect to dollar-sterling stability and coordination of economic policies.
With such an agreement as a starting point, it would be possible to work out
arrangements between.the key currency countries, on the one hand, and the countries
of lesser currency weight on the other, whereby the key currencies would be made
available under suitable conditions.

In the Bretton Woods Fund Agreement there have also been incorporated
certain new or amended provisions (service charges and a graduated interest charge
on average borrowings, etc.) which are intended to discourage excessive and continuous borrowing and thus help to maintain the Fundfs liquidity and equilibrium.
The extent of the Fund's control over its loan operations, however, remains in
serious doubt• This is not a question of whether the Fund!s lending should or
should not be called "automatic"j there can be no question that all the forces of
inertia, in the case of the Fund, weigh heavily in favor of the borrower. Indeed
one of the arguments advanced for the Fund is that it provides its members with
additional international reserves which can be freely relied upon to support
domestic and international measures looking toward an expansion of world trade.
Yet the likelihood of a large demand concentrated upon a few currencies (chiefly
the dollar) during the transition period makes control of lending a prime necessity.
It may become appropriate, at a later date, and in a situation where balances of
payments fluctuate freely, and are subject only to the indirect and slow influence
of monetary and fiscal policies to have automatic or largely uncontrolled lending
by an international stabilization fund. Under exchange control (which the Fund now
realizes must be widely maintained in the transition period), however, borrowing
is a deliberate actj. the authorities decide whether or not to license imports in
excess of exchange receipts, and thus determine directly the character of the
balance of payments. This type of borrowing should be matched with equally
deliberate lending. The devices incorporated in the Bretton Woods agreement to
control borrowing can hardly be effective;

the burden of proof is still on the

Fund to show that a member is not entitled to borrow within the limits of its quota#
The underlying assumption of the proposed Fund is that there will be a
general need for foreign exchange resources on the part of members, but that these
resources will be demanded from the Fund only for specific purposes other than
relief, reconstruction and war debt liquidation. In reality, the situation wilt be

just the opposite# Only specific countries will actually need to borrow (in view
of the. large gold and dollar holdings which many have accumulated)> while whatever
is borrowed + in the absence of strict exchange control «* will be of a general
nature| representing the residue deficit in the borrower's balance of payments*
Even with Strict exchangefeoritfcolit would be impossible to tell conclusively that
a stabilization loan is not being used for the declared illicit purposes• The
simple declaration that "the Fund is not intended to provide facilities for relief
and reconstruction,#tu cannot be effective• To avoid all possibility of indirect
use of the Fun4 for such purposes the Fund would have to bar reconstructing
countries from obtaining any aid, and it seems safe to assume that the war damaged
countries did not sign the Bretton Woods Agreement with any such understanding.
The moderate use of the Fund's resources for reconstruction might not necessarily
be an evil. The soundness of the Fund*s loans would depend, not upon the purpose
for which they are employed, but upon their magnitude and upon the general balance
of payments position of the borrowing country. The trouble is that, in the transition period the assumption of normal swings in the balance of payments * upon which
the Fund is based - will not hold good. For many countries several years and a good
deal of belt tightening will be necessary before they can get back to equilibrium.
This is the period in which, from the beginning, we have recognized that
exchange stability would have to be maintained largely through exchange controls.
But careful study of the Bretton Woods Fund plan suggests that certain of its
features, far from leading to the gradual relaxation of exchange control as the
plan is supposed to do^ actually would encourage or necessitate continued exchange
control on the part of members beyond this period and into the indefinite future.
The recapture provisions of the proposed Fund, to be fully effective, would seem
to require the use of permanent exchange control by all members; indeed, the
question might well arise whether the Fund would not have to control or audit the
national exchange controls* And the "scarce currency" provisions envisage the

invocation of discriminatory exchange control against a country whose currency
becomes "scarce", in circumstances which are peculiarly applicable to the United
Finally a serious drawback of the Bretton Woods Fund plan seems to us
to be the wide difference in the way its objectives and operations are interpreted
abroad and here* There is no agreement as to what the plan really represents and
how it will be made to function^ Lord Keynes has said that
"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
sliould 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. That is why I say that these
proposals are the exact opposite of the gold standard*"**
Others, both here and in England, are just as certain that the proposals are
merely a modernized version of the gold standard. While on this side of the
Atlantic there has been a general tendency to view the Monetary Fund as a currency
stabilization device (although some official quarters have privately said that it
is primarily a credit granting mechanism), in England the Keynesian view seems to
predominate, namely, that exchange rate alterations, and not two-way internal and
external adjustments, are to be the usual practice. With national attitudes so
far apart, it would be unwise to adopt a plan of this sort in the vague hope that
viewpoints.will later be reconciled.
We are, therefore, of the considered opinion that the plans for an
International Monetary Fund, which have culminated in the Bretton Woods Agreement
are not only based on mistaken principles but risk eventual failure which would
bring further discredit upon the cause of internationalism. Fortunately, in the
light of the world wide effort which brought forth the Bretton Woods proposals,the
proposed International Bank for Reconstruction and Development is not subject
Speech by Lord Keynes in the House of Lords, May 23,

to the same defects. We believe that this project has possibilities of usefulness
which warrant our adherence to it, with amendments which would empower the Bank to
carry on currency stabilization operations - when the time is ripe - and meanwhile
to serve as a center of consultation and cooperation in currency and exchange rate
The advantages of using the Bank for this purpose during the transition
period, as well as for reconstruction and development loans, seem to us obvious.
The Bank would be what it purports to be, a lending institution* It could obtaih
and provide the currencies which were actually needed for stabilization purposes,
instead of trying to make a conglomerate of currencies, mostly weak ones, serve a
host of demands for one or two key currencies• It could extend credit for stabilization purposes on a selective basis, after careful investigation of the merits
of each case, instead of indiscriminately and semi-automaticully as the Fund would*
It would have other and urgent immediate 'jobs to do, and its organization would
not require an attempt to formulate and adopt international monetary principles
in circumstances which require a maximum of uncertainty in commitment and a
maximum reservation of national freedoms. It could readily serve, as a consultative
and cooperative body on exchange rates and other international monetary matters,
and as a collector and disseminator of data. Out of its experience there could
develop an international stabilization fund which would really operate as a
clearing mechanism, and in a more orderly world would have a reasonable prospect
of success.
It has been argued that in the absence of virtually assured loans, as
under the proposed Fund, countries not in immediate need of assistance might well
refuse to adhere to the proposed Bank agreement in order to avoid the guarantee
risk and to escape the policy obligations which are contemplated* It seems to us
that international cooperation in this sphere can only be effective if there is a
real desire for it and a will to make it work; that it cannot be purchased* If

various countries must be bribed to entei* into a world financial organization, it
is out of harmony with the real forces at work in the world and should be abandoned.
There is one major recommendation, which we have made in our previous
statements, which has not been discussed here. We still believe that a specific
first step toward international currency stabilization, as such,, would be for this
country to attempt to establish a direct working agreement with Great Britain,
looking toward achieving and maintaining stability of the dollars-sterling rate.
The United States and Great Britain phould jointly re-examine their international
financial situation with a view to setting the stage for the stabilization of the
dollar-sterling rate as the necessary nucleus of international currency stabilization}
and they should explore the possibility of parallel programs of internal economic
Stability at a high level of production. Admittedly, one of the chief uncertainties of the transition period as well as the more distant future, is the
maintenance of high production and employment in the principal .countries• Obviously,
these uncertainties have played a major role in shaping the British attitude toward
agreement with us. But our ovm 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 dem^
on stration in both countries of their ability to achieve and maintain economic
stability at a high level of national income, it would be a major if not a
decisive contribution to genuine currency stabilizationf
Finally, it cannot be reiterated too frequently, as was recognised in a
resolution adopted at the Brctton Woods Conference, that no international monetary
mechanism vail be able to function properly and for long if world trade in goods and
services is distorted and reduced by artificial barriers and hampering restrictionsj
nor, it might be added, if overhanging debts of past and present wars find no means
of definite settlementf Further and prompt progress in the reduction of obstacles
to expanding international trade is essential to the success of any and all inter*national financial devicesf

Federal Reserve Bank