SINCE I last wrote in these pages about postwar monetary plans [i] events have moved swiftly. The joint plan to which we then looked forward as the successor to the original Keynes and White plans was published in April in the form of a Joint Statement of Principles by the experts. This statement was made the basis of the Bretton Woods Conference, which began July 1 at the call of President Roosevelt and ended July 22 with the unanimous adoption by the delegates of 44 nations of the projects for both the International Monetary Fund and the Bank for Reconstruction and Development. The "Final Act" of the Conference embodying the plans concludes with the statement that "proposals formulated at the Conference for the establishment of the Fund and the Bank are now submitted, in accordance with the terms of the invitation, for consideration of the governments and people of the countries represented."

Thus the next and the decisive stage, so far as the democratic countries are concerned, will be that of legislative action. In this country it seems generally expected that the matter will go over to the new session of Congress in January. Presumably there will be weeks of discussion in committee and public hearings. As our system of government works, this will be the first and the only opportunity for debate. We have not yet found a way to keep the process of making up our national mind abreast of the process of international negotiation, though efforts in that direction are now being made with regard to the political aspects of postwar coöperation. The failure to do so after the last war had tragic consequences, and the chief hope of all of us is to avoid a repetition.

Congress will face a difficult dilemma. These monetary plans will present one of a series of major decisions about postwar international arrangements, and our action on them will be taken as an omen of things to come. After some two years of study and negotiation by the experts, ending in a formal conference of 44 nations, it will not seem satisfactory to other countries, or to great numbers of our own people, to be told that because our governmental machinery works as it does there has been no opportunity for consideration of the problem at the legislative level, or indeed even at the policy-making level of the administrative branch of the government, the plans having gone, in effect, straight from the hands of the technical experts into a formal international conference. Still less will it be understood that, as our governmental machinery works, only a few of those most intimately concerned, even among the experts, have been able to devote continuous time to the task. A strong presumption will have been created that we have by now a finished product, that we have had plenty of time for national consideration of it, and that rejection of it at this stage can mean only that, once war pressures are removed, we are still at heart a nation of isolationists. In comments which have been made in the press on the results of the Bretton Woods Conference, this note has already been sounded.

We are thus caught in the web of time and circumstance. I entirely agree with Lord Keynes's statement at the Conference that at this stage the critics must do more than criticize; if the plans are defective we must find better ones. But it will not seem constructive to insist in 1945 upon some wholly new approach and to start the whole process of international negotiation over again. The realistic and helpful approach now, whatever one's earlier preferences may have been, is to see whether out of these plans a solution can be found which is technically adequate, which is acceptable as a basis for coöperation among countries with different attitudes and problems, and which is sufficiently within the pattern and the general intent of the previous negotiations to avoid the danger of prolonged delay in further negotiation.

The Bretton Woods Conference made the Bank for Reconstruction and Development the adjunct of the International Monetary Fund and made membership in the Fund the prerequisite to participation in the Bank. I think it would be wise to separate the two, to adopt the Bank as soon as possible consistent with careful study, and to withhold for the present a decision on the Fund. This suggestion is the result of my persistent doubts about the Fund, together with a growing appreciation of the possibilities of accomplishing through the Bank much of what is desired from the Fund while avoiding much that in the latter still seems to me defective.


Apart from details of organization, the major questions to be asked about the Monetary Fund have to do with: (1) the extent, the character, and the time of the need for it; (2) its monetary mechanics; and (3) the basic economic principles of its operation.

On the first set of questions, the development of the discussion over the past year or more has pointed increasingly toward the conclusion that the Fund is intended primarily as a long-run agency of monetary regulation. Most important has been the recognition, which appeared first in the Joint Statement of Principles and has been carried over into the Bretton Woods Agreement, of the special character of the transitional problems and the unsuitability of the Fund for handling them. The problems of relief, reconstruction and settlement of international indebtedness arising out of the war are specifically excluded from the range of the Fund's operations. In both my previous articles in FOREIGN AFFAIRS I argued for this change, and the same point was made by Jacob Viner. The Agreement further provides -- and this, too, I have favored -- for the retention of exchange controls until these emergency problems have been solved. It seems probable that many member countries will continue their controls, and Great Britain has already given notice that she will do so. The Agreement seems to contemplate that the period of these transitional arrangements will last at least five years.[ii] These provisions seem to me wise, but they do raise questions about what is to be the role of the Fund during the transition period, and whether it is desirable to set up on paper a system calling for multilateral trade and free exchange convertibility (except for capital transactions) so far in advance of any reasonable expectation of their being carried out. The Bank, on the other hand, could be very useful in the transition period itself and could help to create the more normal long-run conditions which are prerequisite to the successful operation of the Fund.

The purpose of an international monetary fund is to supply the working balances of foreign exchange necessary to meet temporary changes in the international balances of payments of the member countries, on the assumption of a tendency toward an average even-balance position. How great and widespread Lord Keynes thought the need for exchange would be was indicated by the size of his original Clearing Union which called for some $30-$35 billion. But Keynes had in mind a multiple purpose plan. He clearly wanted to use it for the transition period as well as for the longer run. The purpose he most emphasized was that of getting the world off on a wave of expansion of production and trade immediately after the war. He specifically included relief expenditures, and there seems little ground for doubting that the original intention was to use the Clearing Union for liquidation of war balances.[iii] With these purposes removed, it is far from clear that there will be a general need for foreign exchange resources. Yet the assumption persists. Louis Rasminsky, for example, in his paper in the July issue of FOREIGN AFFAIRS takes it as his main thesis. Although at the conclusion of his paper he recognizes that the special transitional needs for exchange must be met outside the Fund, he does not relate this fact to his contention that there will be a general need for foreign exchange resources and that the best way to meet it will be through the Fund.

In actuality, and taking account always of these exclusions from the Fund's operations, it seems clear that the need for exchange resources will be specific rather than general. About the enemy countries we cannot yet speak, and the plan as yet makes no provision for them. About the European occupied countries, we must bear in mind that France, Belgium and the Netherlands will still have very large gold reserves; their needs for reconstruction will be excluded from the Fund, though they might well be met through the Bank. The European neutrals -- Switzerland, Sweden, Portugal and Spain -- will come out of the war with greatly increased reserves of gold and exchange. As to the Latin American countries, they have increased their holdings of gold and dollar balances from about $900 million in 1939 to about $3½ billion at the present time.[iv] These increased holdings of foreign exchange in so many countries have resulted mainly from our military expenditures;[v] they are the international counterpart of the increased flow of money incomes here at home, along with the lack of a corresponding increase of goods on which to spend them. This, indeed, is a chief reason why so many countries should continue their exchange controls. Many of them will need controls not because they will lack exchange resources but because they will have too much in relation to the goods available and to prudent standards of national housekeeping.

So far as my first set of questions is concerned -- the extent, the character, and the time of need of exchange resources -- the Monetary Fund seems poorly suited to deal with the problem. It would supply working balances of foreign exchange under circumstances when what is chiefly needed is loans or gifts for purposes excluded from the Fund's operations. It would supply these balances indiscriminately to all the United Nations and would make them available on a time schedule and as a matter of automatic right. For some countries whose need for working balances is urgent the amounts provided would be inadequate, while for many others they would be superfluous and even dangerous. The operations of the Bank, on the other hand, would be selective and would carry no implication of automatic right to credit. The Bank could supply the kind of credit needed, to the countries needing it, and at the time of need. How the Bank's functions would need to be broadened if it were used as the single agency of credit supply in the transition period I will consider later.


My questions about the mechanics of the Monetary Fund and about the principles of its operation relate to the longer-run conditions as well as to the transition period. To get a clear conception of how the mechanics of the Fund have developed, one must start with Keynes's Clearing Union. This was an attempt to create a new international monetary system. The Clearing Union, based on the overdraft principle, with quotas based on the size of each nation's prewar trade (international transfers taking the form of debit and credit entries on the books of the Union, and the accounts being kept in terms of a new unit of account, the bancor) would have provided a beautifully simple and an entirely logical monetary system. It would have made possible a net clearing of each nation's balance with all others combined, as a monetary system should do, and it would have made unnecessary the holding of a great miscellany of national currencies, as in the proposed Monetary Fund.

But the Clearing Union encountered a number of difficulties. The first was the fact that it could not divorce itself from gold. The world was not ready to give up gold as an international money -- least of all the British, the Russians and ourselves. But using both gold and the Clearing Union meant leaving open the possibility of a dual monetary system. If nations were left free to go round the Clearing Union, the basis for effective monetary regulation through the Union might be lost.[vi] From the outset also there was a second major difficulty. The general clearing of accounts in terms of bancor, though logical and indeed strictly necessary in a monetary system, would have exposed this country to a world claim on dollars limited only by the size of the Clearing Union. This was decisive. The idea of the Clearing Union was dropped at an early stage of the negotiations in favor of the White Stabilization Fund. As I look back over what was done, this decision seems to me crucial. One difficulty of course was the great size proposed for the Clearing Union, some $30-$35 billion. My original criticism of it was partly on this ground and was, I believe, very widely shared. But the great size was designed to take care of the special problems of the transition period. Once those were dropped, we might still have asked ourselves whether a Clearing Union of more moderate size was not a better approach than the Stabilization Fund.

Any international monetary mechanism must be looked at from two sides, the demand for foreign exchange and the ability and willingness to supply it. Any workable mechanism that can be devised must take into account the fact that while the need for exchange is common to all the trading countries, the supply must take the form of those few currencies that are internationally used as means of payment. In the gold standard system the answer is found in the fact that gold will be accepted without limit by the "key currency" countries, as I have called them, and the economic effects of the gold movements upon the trading countries are supposed to preserve a general equilibrium -- the tendency, as I have called it, toward an even-balance position. These are the necessary conditions of any international monetary mechanism.

Apart from gold, the attempt to set up a new mechanism must proceed on the assumption that all currencies are multilaterally convertible, each one serving as both demand for and supply of exchange, which is manifestly false, or must provide assurance that the currencies that are actually used as means of international payment will be made available to meet a world demand which arises not merely out of the trade of all the other countries with the key countries but out of the settlement of the trade of all the other countries with each other. This the Clearing Union could have done through its provision for a general settlement of accounts in terms of a common unit, the bancor; but a necessary condition was that the key currency countries must accept an obligation to supply their currencies in exchange for bancor up to any amount to which the demand for them might develop within the size of the Clearing Union. The decision to limit the commitment to supply dollars, which will be the most desired key currency, disposed of the Clearing Union idea and gave us instead the proposed Fund.

But the nature of the problem remains unaltered, and what we face now is a disparity between a total Fund made up of 44 currencies aggregating $8.8 billion, and representing demand for exchange, and an American commitment to supply dollars up to $2¾ billion wherewith to meet this demand. It does not follow necessarily that the gap cannot be bridged. Just as in a gold standard system it is not expected that all the gold can flow to one country without the system's collapsing, so it should not be expected that the demand for dollars under the Monetary Fund could ever rise to $6.05 [vii] billion without a breakdown of the Fund. Nevertheless the defining of the American commitment was a fundamental departure from the requirements of an international monetary mechanism and raises the most serious questions about the workability of the proposed Fund.

I cannot escape the conclusion that in the beginning the experts, even those advocating the Clearing Union, failed to see the nature of the problem and were proceeding on the assumption that in setting up an "international" system, as distinct in their view from a "key currencies" system, there would somehow result a general interconvertibility between each currency and every other. But that they have been drawing closer to the real nature of the problem began to be apparent for the first time in the Joint Statement of Principles last April and is now much more apparent in the elaborate "repurchase provisions" of the Bretton Woods Agreement.[viii] These provisions reveal a growing anxiety about a possible scarcity of key currencies, and this means especially the dollar. Their main purposes are to attract gold into the Fund as a means of access to key currencies and to recapture key currencies that may escape from the Fund. Any member desiring to obtain the currency of another member for gold shall, provided it can do so with equal advantage, acquire it by the sale of gold to the Fund. A member country may repurchase for gold any part of the Fund's holdings of its currency in excess of its quota.[ix] Each member must at the end of each financial year repurchase from the Fund with its monetary reserves one-half of any increase that has occurred during the year in the Fund's holdings of its currency, plus one-half of any increase (or minus one-half of any decrease) that has occurred during the year in its monetary reserves. There is a further important provision that if after these repurchases a member, as a result of its trade with third countries, still has a net increase in its holdings of another member's currency (e.g., dollars) or of gold acquired from that country, it must surrender the entire increase to the Fund against its local currency; this is designed to recapture key currencies used for financing trade between third countries, such as Mexico's paying Cuba in United States dollars. But none of these operations shall be carried to a point at which (a) the member's monetary reserves are below its quota, or (b) the Fund's holdings of its currency are below 75 percent of its quota, or (c) the Fund's holdings of any currency required to be used are above 75 percent of the quota of the member concerned.

These repurchase provisions are obviously among the most important in the new Agreement. Along with the scarce currency provisions, which I will discuss later, they represent the most significant work done on the Monetary Fund at Bretton Woods. Their purpose is to keep the Fund, so far as possible, on an even keel, assuring an effective balance between the supply of key currencies and the access of the member countries to this supply through their quotas. Thus it is hoped that the Fund will not become waterlogged with domestic currencies for which no natural world demand exists. How far they would succeed is a difficult question. They suggest reliance on gold and foreign exchange resources outside the Fund to correct the Fund, whereas the purpose of the Fund is to correct the previously existing gold and exchange situation. But it is true that the two could and should react upon each other.

The provisions about gold might somewhat lessen my worry about a dual monetary system; but they would probably result mainly in attracting gold, via the Fund, to the United States, and not in a two-way movement. As a key currency country, the United States does not "desire to obtain" other currencies, in exchange for gold or otherwise, but makes payment in dollars, so that the Fund could not hope through our action to get rid of its unusable currencies. The difficulty, moreover, is that it would be the countries with inadequate gold and exchange resources that would most probably resort to the Fund, and it would be the currencies of such countries with which the Fund would become glutted. In discussions of this point with some of the official delegates, the best answer I have received is that there would not be enough of such countries, and their quotas would be too small to wreck the Fund. But this is shaky reasoning. If not enough countries really need exchange resources from the Fund, why is the Fund needed? We are back to one of the questions with which I started.

The great weakness of the Fund, from a mechanical standpoint, is that while other countries in paying for our exports would use up the Fund's supply of dollars, our own payments for imports would not replace these dollars. Thus, even though this country had an even balance-of-payments position, the Fund's holdings of dollars would be rapidly exhausted. This follows from the fact that the dollar is a key currency. We do not pay for our imports by buying foreign currencies but with dollars,[x] and would therefore have no occasion to go to the Fund for foreign currencies. To change our practice it would be necessary to revolutionize the entire foreign exchange market. Foreign exporters to the United States, who have habitually invoiced in dollars, would have to invoice in local currency, and the American importer, who has never bothered about foreign exchange, would suddenly find himself required to purchase foreign currencies. And it is not merely a matter of traders' habits and preferences. Behind these is the fact that only in New York, and in London, do we find the great banks and the rest of the machinery for financing the world's trade. This indeed is why trade is financed in key currencies.

Thus the Fund, constantly threatened with a shortage of dollars and constantly in danger of being glutted with other currencies, would be compelled to fall back on the roundabout and doubtfully effective repurchase provisions. It must require the other countries to buy back their own currencies from the Fund with such gold and dollar resources as they may possess outside the Fund. One point on which I am not clear is whether the provision for repurchasing 50 percent of a country's currency in excess of its quota does not permit of a gradual seepage of dollars and other key currencies from the Fund, and why it was not made 100 percent. But perhaps this evens up through the provision about giving up 50 percent of any increase in monetary reserves.[xi]

A much larger question is whether dollars would not seep out of the Fund into private hands. If we follow an exchange operation through, we see that it is not merely a question of a transaction between the Monetary Fund and the central bank of a member country; the whole purpose is to take money from importers in one country and pay out money to exporters in the other country. This would be true not only for American exports but for all the exports round the world for which dollars are the means of payment. It must, therefore, be an unstated assumption of the new Agreement that there will be a general retention of the machinery of exchange control not only for the transition period, but permanently, for only by a general system of foreign exchange reporting and policing could there be an effective recapture of the dollars moving into private hands.

These provisions about recapture of key currencies must be considered in connection with what the new Agreement says about scarce currencies in Article VII. Again, it is the dollar that is specially in question. These provisions also made their first appearance in the Joint Statement of Principles last April and have now been further elaborated. If, despite the repurchase provisions, a currency becomes scarce, the Fund may, but only with the consent of the country, borrow that currency from the member country or its money market or from any other source inside or outside the country.[xii] As in the Joint Statement, the Fund is empowered to declare a currency scarce and to ration its supply among the members, and this declaration shall operate as an authorization to any member to impose exchange controls upon its transactions in the scarce currency. As compared with the Joint Statement, I find two changes which seem specially significant. According to the new Agreement (Article VII, Section 1), there must be a general scarcity of the particular currency. This seems a wise change, for it evidently means that the currency must be scarce not only in the Fund but in the foreign exchange market generally, and thus provides some opportunity to ascertain whether the scarcity is due to the defective operation of the Fund, despite the repurchase provisions, or is a genuine scarcity traceable to wrong economic policies of the scarce currency country (or -- I must insist on adding, though there is nothing about this in the Agreement -- to the wrong policies of other countries).

The other major change is one of great significance. For the first time, so far as I know, it specifically relates the provisions of the Monetary Fund to American commercial policy. Section 5 must be quoted in full:

Effect of Other International Agreements on Restrictions: Members agree not to invoke the obligations of any engagements entered into with other members prior to this Agreement in such a manner as will prevent the operation of the provisions of this Article.

As I read this section, it specifically provides that Article VII shall have priority over all existing commercial agreements which may forbid exchange and trade discriminations against the United States. It is my impression that there is such a prohibition in most of the Hull trade agreements. It is further provided (Article VIII, Section 6) [xiii] that in these circumstances "the parties to such engagements will consult with one another," but the priority of Article VII over the trade agreements is made unconditional. The linking of the monetary plans to commercial policy is, of course, to be welcomed. One of my basic complaints has been that the successive drafts of the plan have watered down and finally left out altogether any reference to corrective economic measures essential to its operation. But these provisions indicate strikingly the necessity of having both a mechanically sound monetary plan and effective economic principles for its operation. Neither can stand without the other. It would be most unfortunate to consent to these provisions if (a) the causes of the dollar scarcity were mechanical defects in the plan itself, and (b) no corrective economic measures were imposed likewise on the deficit countries.

All in all, as I review these provisions designed to improve the mechanics of the Fund, I am still dubious. I welcome, of course, the belated recognition of the key currencies principle,[xiv] but I doubt whether it can overcome the fundamental defect of the limitation on the supply of dollars; and it ought at least to be brought out clearly that the effective enforcement of the repurchase provisions will require the permanent retention of the machinery of exchange control.[xv] I have not sympathized with the view that the monetary plan should be judged from the standpoint of its money cost to this country. If the plan could assure postwar international stability, or anything like it, the American quota of $2¾ billion would be a small price to pay for it. As I have said above, a currency union of moderate size, even though it had called for a substantially larger commitment of dollars, would have been mechanically a better approach. The trouble in the present scheme lies in the discrepancy between the relatively large demand for exchange as represented by the quotas and the limited supply of dollars with which to meet it.[xvi] Psychologically as well as mechanically, the effect is bad. It does not seem fanciful to imagine a "dollar crisis" and dollar hoarding round the world under the Fund as modern counterparts of the breakdown of the gold standard that occurred whenever there were large and persistent one-way gold movements.

It is an interesting fact that we accept without question an unlimited obligation to receive gold, even though this is but the reverse aspect of an unlimited obligation to supply dollars in exchange for it. One reason, no doubt, is that we have grown used to receiving gold, even though we merely store it in Fort Knox. But underneath -- and this is deeply significant -- is the fact that we became used to gold as part of a system which promised, and sometimes for considerable periods reasonably well provided, two-way gold flow and a stable international system. And with the Monetary Fund as well, this is the basic question. With assurance that the Fund would tend to stay in balance, no limitation on the supply of dollars would be necessary; without it, it is idle to ask this country for an indefinite commitment to supply dollars.


On the principles of adjustment I have little to add to my earlier papers. The crux of the problem is still the divergence of American and British attitudes. The Joint Statement of Principles last April, which removed all references to corrective measures, greatly liberalized the provisions for exchange rate variation, and put on the United States the sole responsibility in the event of a dollar scarcity, was widely hailed in England as a victory for realism and common sense. Sir John Anderson, Chancellor of the Exchequer, was emphatic in his statement that it would not mean the gold standard. The London Economist said it meant that currency depreciation would be the "usual method" of international trade adjustment. Lord Keynes explained in his House of Lords speech that it was the "precise opposite" of the gold standard:

Was it not I, when many of to-day's iconoclasts were still worshippers of the Calf, who wrote that 'Gold is a barbarous relic'? . . . The plan introduces . . . an epoch-making 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. That is why I say that these proposals are the exact opposite of the gold standard. They lay down by international agreement the essence of the new doctrine, far removed from the old orthodoxy. If they do so in terms as inoffensive as possible to the former faith, need we complain? [xvii]

I have the impression that at Bretton Woods the British delegates took a less extreme position. Lord Keynes was reported as saying that in the new Agreement gold would be the "constitutional monarch," which does seem to me much less extreme. The experts are confronted with the difficult task of getting their document accepted on both sides of the water. There is an understandable tendency to shade the emphasis and adapt oneself to the climate. But in these days of rapid communication all statements are bound to be compared.

The clear fact, I think, is that a mutually satisfactory statement of principles cannot at present be devised, and we have a choice between going on without it or postponing the attempt. One advantage of the Bank, as against the Monetary Fund, is that no statement of monetary principles need be made. This is a primary reason why I favor postponing a decision on the Monetary Fund and proceeding with the Bank. Perhaps later on we might achieve a better statement of principles, and it would be highly desirable for the experts and the policy-making agencies of government to continue working on it. We are perhaps all now too much under the spell of what we think to be the lessons of the inter-war period; I tried to show in my January paper what different lessons have been drawn in this country and in England. But even more we are under the spell of the unprecedented uncertainties involved in postwar domestic policies. Until these uncertainties are reduced and the world comes into a more normal condition, it seems idle to expect very much concession from complete autonomy in the domestic sphere; and an international agreement on national freedoms comes close to being a contradiction in terms.

In the Bretton Woods Agreement efforts were made to get into the Fund some powers of correction. There is a new provision for charging interest at a graduated rate on credits granted by the Fund. This introduces the language and technique of banking into what should be thought of as monetary transfers (like gold under the gold standard) rather than credits, and again suggests to me that what is really needed is a Bank and the corrective powers it exercises through interest rates and through discretion. There is also a "waiver provision," whereby the Fund may vary for any country at its discretion the standard automatic pattern of credits up to 25 percent of the quota per year and up to 100 percent of the quota as a maximum.[xviii] In waiving the automatic schedule the Fund can take into account the good behavior of the country in the past. This again is a familiar principle of banking.

The sections on exchange rates have been reworded. I think they give the Fund more discretion than did the Joint Statement. The Fund would have to agree with a country that there exists a "fundamental disequilibrium" (though this phrase is still undefined) which would warrant currency depreciation (beyond an initial 10 percent). I think the new wording means, too, that the Fund must agree that depreciation is the proper cure and must approve of the amount of depreciation requested. There is still the provision that the Fund cannot question a disequilibrium on the ground that it was caused by domestic social and political policies. As these provisions are now worded I have not much quarrel with them. What counts is how they are interpreted. I have always favored liberal provisions about exchange rates, but on the understanding that they are to be the rare resort and not the "usual method" of adjustment. I suspect that many of the experts, including the British, have a not greatly dissimilar view. They want their governments to have autonomy in exchange rates but not to use it much. Thus the Fund, they hope, would evolve gradually under wise management into an effective instrument of policy.

But there remains the fundamental fact that national attitudes are very far apart, so much so that in efforts to get their plan adopted the experts have to engage in what comes dangerously close to double talk. Given this fact, and the fact that the mechanics of the plan are such as to pose a constant threat of a shortage of dollars, and to place on this country the sole responsibility for removing it when it occurs, or face recriminations for having forced a return to exchange control and restrictive trade practices, I am driven to the conclusion that adoption of the Monetary Fund at this time would be premature and unwise and would hurt more than it would help the cause of international coöperation. The facts that I brought out earlier -- that the Fund is designed mainly for the longer run rather than for the transition period, and that the need for exchange is not nearly so widespread as the plan assumes -- indicate that we can afford to be deliberate in our action.


Meantime, I have become increasingly interested since Bretton Woods in what might be accomplished through the Bank. The work done on it seemed to me the most constructive part of the Conference. Credit for the basic conception of the Bank belongs to our Treasury experts, but the Conference, developing and in important ways modifying the original draft, made it seem to me a much more feasible project than previously.

I can comment only briefly in this paper. The Bank Agreement faces up squarely to the fact that the bulk of the lending would have to be done by the creditor countries, and mainly by the United States. Of the capital of $10 billion (of which $9.1 billion is allotted) it would call up only a fifth for direct lending. The rest would serve as a contingent guarantee fund to guarantee issues marketed either by the Bank itself (its own debentures) or by other public or private agencies. Since the guarantee would in practice mean insuring annual interest charges and amortization, it should be well within the capacity of member countries, even though most of them would be unable to make loans themselves; and since the liability would be joint and several, there could be little doubt of the Bank's ability to bear it, even though some individual countries might not be able to meet their share. Holding down the total commitments of the Bank, as is provided, to the very conservative ratio of 100 percent of capital, reserve and surplus would further increase the value of the guarantee to the lender as well as protect the member countries from assuming undue burdens. For the first 10 years provision is made for a commission of 1 to 1½ percent on guarantees, out of which to build up a reserve against future commitments.

It has been widely held that international lending, while it should come as far as possible from private sources, will need some form of insurance. To have the insurance take an international form would have many advantages. Besides the fact that it is equitable that all countries should share in the risk, it opens up the possibility of developing, through the collective action of borrowers and lenders, standards and procedures of sound investment which were badly lacking after the last war. The Bank, according to its provisions, would avoid the practice of "tied loans," would require written reports by its own committees on loan projects, would control the loan expenditures and confine loans, with rare exceptions, to the financing of capital goods actually needed from abroad. In these and other ways it could serve as an agency for continuous international consultation and coöperation.

My growing appreciation of these advantages in the Bank, combined with doubts about the Fund, has led me to wish to explore the possibilities of expanding the Bank's functions to include some part of what is desired from the Fund. For the transition period, in particular, I think it could be the better instrument. It would not, like the Fund, distribute foreign exchange resources indiscriminately, to the many countries that do not need them as well as to those that do. It would operate selectively, and with discrimination, both as to place and to time. I have already commented on the fact that the new features brought into the Monetary Fund at Bretton Woods in an attempt to give it some powers of correction, such as the interest charges and the waiver provisions, are really banking procedures. One of the chief advantages of the Bank would be the lack of necessity for laying down formal monetary principles of adjustment. The mechanical difficulties I have outlined would also be lessened; the rigid limitation on the supply of dollars which is the worst feature of the Fund would disappear, and along with it the scarce currency provisions which I feel sure will be a chief center of controversy in Congress once their implications have been thoroughly grasped.

So far as the transition period is concerned, which means at least the first five years after the war, the monetary problems to be dealt with will be mainly two. There should be provision from the outset (1) for agreeing upon initial rates of exchange, and (2) for changing them as conditions warrant by a process of mutual consultation and assistance. With most countries planning to continue exchange controls, the first will be largely a stand-by function and could, I believe, be performed quite as well by the Board of Governors and the Executive Directors of the Bank as by the governing bodies of the Fund. But in providing foreign exchange support for weak currencies when rate adjustments are being made, which would probably come toward the end of the transition period, the Bank's operations, as now defined, would need to be expanded. At present the Bank is intended to finance specific projects of reconstruction or development. There would need to be added an exchange stabilization loan department. But since this would operate selectively, and provide exchange only where needed, it would require a much smaller sum, and at the same time probably be much more flexible and effective, than the proposed Monetary Fund. As the authors of these plans themselves recognize, it will be on the Bank (and the other parts of a general international plan, including commercial policy and commodity price stabilization) that the main task of international adjustment must fall. If that work is well done, monetary regulation will be less difficult and less costly. The experts have insisted that their Monetary Fund cannot work without the Bank. I raise the question, if the Bank's work is well done and is supplemented as I suggest, how much need there will be for the Fund.


In concluding this article I should like to summarize briefly its relation to the views expressed in my earlier ones. I have been striving to find a solution within the framework of the official plans and have become impressed by the possibilities of the Bank. With regard to monetary stabilization my views have not greatly changed. I believe not only that the solution must be found through the key currencies principle, as seems now to be recognized, but also that it must be a gradual process and must be built upon the stabilization of the two key currencies, the dollar and the pound, with respect to each other. As a matter of logic as well as of mechanics, it seems to me inescapable that in a world practically all of whose trading is done in one or the other of these currencies, the central fact must be the establishment between them of exchange stability around which other national currencies can be grouped. But I have never meant by stability exchange rate rigidity, and I need not repeat what I have already said on this at such length. I have always intended, also, to state my point in purely technical terms, without any of the implications about the Great Powers doctrine or anti-democratic processes that have sometimes been read into it.

This, in my eyes, makes the solution of England's special difficulties the central postwar problem, more important than the Bank or the Monetary Fund, and certainly essential for the proper functioning of either. But with this problem we have made no headway. The $12 billion accumulation of sterling war balances in London, though directly an intra-Empire problem in the main, is not dissimilar in nature or in magnitude from the Inter-Allied debt or the Reparations problem that bedevilled international relations during the inter-war period. That England should have to bear it alone is just as questionable from the standpoint of equity as was the Inter-Allied debt. It is the result largely of the fact that we got into the war late and that lendlease has not had the effect of an equitable sharing of the war costs to the extent that it should have had. Meanwhile England's capacity to carry such a burden has greatly declined, through the loss of her foreign assets and markets. She will need a great expansion of her export trade, probably by 50 percent beyond prewar, and there will be the special difficulty, as was true in connection with the German reparations transfer problem, that her manufactured exports are dependent on prior imports of raw materials and the margin between exports and imports is hard to manipulate in the way demanded by her changed balance-of-payments position. It seems essential to know how England's problems are to be dealt with before other financial or monetary plans can be made.

[i] "Currency Stabilization: The Keynes and White Plans," FOREIGN AFFAIRS, July 1943, and "Currency Stabilization: American and British Attitudes," FOREIGN AFFAIRS, January 1944. These and two later papers are included in my recent book, "Postwar Monetary Plans and Other Essays" (New York: Knopf, 1944).

[ii] It is provided that five years after the date on which the Fund begins operations, and each year thereafter, any member still retaining exchange restrictions must consult with the Fund as to their further retention; in the Joint Statement the period had been fixed at three years.

[iii] The original White plan provided for a gradual liquidation of war balances.

[iv] For a fuller statement of these changes see the National City Bank Letter, August 1944, p. 92-95.

[v] British international expenditures have had a similar result, but with the important difference that the sterling war balances, now amounting to $12 billion according to Lord Keynes's statement at Bretton Woods, will not be available to the countries which own them (mainly British Empire countries) and present probably the most serious single problem of the transition period.

[vi] This is equally applicable to the Stabilization Fund approach.

[vii] Counting out the United States quota, the demand for exchange would be $6.05 billion. It should be further noted that 25 percent (as a maximum) of the quotas is to be in gold; but this affects both sides. By increasing the Fund to $8.8 billion from the $8 billion earlier proposed, the Bretton Woods Agreement widened the discrepancy between demand for and supply of exchange.

[viii] See Article V, Sections 6, 7, and the very detailed "Schedule B" pertaining to Section 7, of the "Articles of Agreement of the International Monetary Fund" signed at Bretton Woods.

[ix] This provision should be read in connection with the provision for interest charges (Article V, Section 8) now introduced for the first time. It is provided that if a member country "borrows" from the Fund (that is, puts up its own currency in excess of its quota to get another currency) it must pay interest on a graduated scale of rates. This should provide an incentive for a country to repurchase with gold or convertible currencies, if it can, the Fund's excess holdings of its own currency.

[x] It should be understood, of course, that the Fund is designed to provide exchange only as needed to cover each country's net debit balances. Apart from these net deficits, trade would be financed as before, which would mean that we would pay for our exports in dollars, and foreign countries would pay for their imports from us out of these dollar balances. Trade between third countries would likewise be financed by the transfer of dollar balances in the exchange market. Theoretically, it would be only when these balances became deficient in the general market that resort would be had to the Fund. Under the gold standard, the method of replenishing the key currency would be through gold flow. Under the Fund, whenever a nation was short of dollars wherewith to make payment it would put up its own currency with the Fund and receive dollars from the Fund.

My point in this paragraph is that there is no way, under the Fund mechanism, for us to replenish the dollars in the Fund. The dollars with which we pay for imports would not be supplied to the Fund but to the foreign exporters, in the form of dollar balances placed to their account outside the Fund in the foreign exchange market. Thus, as foreign countries used the Fund to finance their net debit balances, there would be a net movement of dollars from the Fund to the outside exchange market. The difficulties of recapturing dollars which thus get into private hands are discussed further on in the text.

[xi] Monetary reserves are defined as net official holdings of gold and "convertible currencies." Convertible currencies are defined as the currencies of other members not exercising exchange control over current account transactions, together with such non-member currencies as the Fund might from time to time specify. The term "currency" includes coin, paper money, bank balances, bank acceptances and government obligations with less than one year maturity. Reading these definitions I feel that the experts still have not carried the key currencies concept far enough. The only really relevant reserves would be gold and internationally usable currencies.

[xii] The member is also required to sell its currency to the Fund for gold.

[xiii] "Consultation Between Members Regarding Existing International Agreements."

[xiv]Key Currencies. There is not space to comment further on the key currencies approach. It has become overlaid with secondary, and not strictly relevant, considerations, such as the Great Powers doctrine versus the United Nations doctrine, a gradual versus a once-for-all approach, and perhaps others. The main point to emphasize is that it is not merely an alternative approach but must be the central feature of any possible approach to a workable monetary mechanism. Some of the comments I have been unable to follow, such as Lord Keynes's statement at Bretton Woods that it meant that the United States would lend Great Britain $5 billion and "let the rest of the world go hang" (New York Times, July 7, 1944).

Some of Louis Rasminsky's comment in his article in the July FOREIGN AFFAIRS (p. 600-601) I can make nothing of, such as his statement that in the wheat trade the Canadian dollar is a key currency and so are the Argentine peso and the Australian pound. "Examples could be repeated at will; so far as bacon producers are concerned the New Zealand pound and the Danish crown are 'key' currencies; so far as newsprint producers are concerned the Canadian dollar and the Swedish crown are key currencies." Surely, he has missed the point that the key currencies are those which are used as international means of payment.

[xv]Exchange Control. Another very different aspect of the problem of exchange control would be how to differentiate between capital transactions and current account transactions. According to the Agreement, exchange control over the former is to be retained and the objective is to relax the controls over the latter during the course of the transition period. But member countries would not go to the Fund with specific requests for exchange, but only for amounts as needed for all purposes. As any foreign exchange operator would recognize, it is a matter of the utmost difficulty to differentiate between current account and capital transactions, and, as I interpret the operations of the Fund, the differentiation would have to be made after, rather than prior to, the fact. Not only would this mean a complete retention of the machinery, as distinct from the exercise, of exchange control, but it could well mean closing the barn door after the horse has escaped.

[xvi] This mechanical defect should be considered also in conjunction with exchange rate variability. If speculators believed exchange rate variation was to be the "usual method" of adjustment they would tend to be short of sterling and long of dollars, which would increase the difficulties of the Fund and accentuate the need for exchange control.

[xvii] Speech by Lord Keynes on the International Monetary Fund in the House of Lords, May 23, 1944.

[xviii] This means the country can borrow up to 100 percent, not 200, since the quota is put up to constitute the Fund. The 25 percent of the quota which is in gold could, of course, be used whether the country joined the Fund or not and so is not a net gain.

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  • JOHN H. WILLIAMS, Professor of Economics at Harvard University and Dean of the Graduate School of Public Administration; Vice-President of the Federal Reserve Bank of New York; author of "Post-War Monetary Plans"
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