Chapter 2: Reshaping the Plans (1942–43)

International Monetary Fund
Published Date:
February 1996
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When the Stabilization Fund proposals reached London in July 1942, Keynes was on the whole very favorably impressed with them. He found them somewhat diffuse and in need of some tightening up, but he thought it “striking and encouraging that the general objects” of the White Plan were the same as those which he had been pursuing. In particular, he pointed out that the concessions of national sovereignty recommended were the same as, or greater than, in the Keynes Plan, and that the White Plan’s attitude toward laissez faire and the regulation of foreign trade did not differ materially from that of the United Kingdom. The proposals that members should refuse to accept investments from abroad except with the permission of the investing country, and should make all such investments available to the government of the investing country on reasonable terms, were welcomed as likely to solve the problem of the control of capital movements. Keynes also commented most favorably on the proposal to absorb the blocked balances into the Fund, pointing out that the liquid resources which this proposal would make available would be greater than those offered through the normal operations of the Fund.

On the other hand, he felt that the White Plan would be helpful only to countries that had a gold reserve already, and helpful to them in proportion to the amount of this reserve.1 “To him that hath.…” Further, he noted that there was no provision for altering the volume of international currency in accordance with need; it would remain mainly dependent on the volume of gold mining and the policy of those countries that already had large gold reserves. Keynes also thought that the proposals for subscriptions and voting foreshadowed some curious results: the minor Latin American countries would be able to outvote the United States, while the United States could outvote the British Empire, the Netherlands Empire, Russia, and China, all added together.

The Keynes Plan Revised

As a result of his reflections on these matters, Keynes produced, in August 1942, a fifth draft of the Clearing Union proposals. Most of the changes introduced were drafting. However, as a preamble, Keynes set out eight requisites for a successful international currency plan, which, it will be seen, specifically reflect some of the deficiencies which he had diagnosed in the Stabilization Fund proposal. What was required was, in summary:

  • (1) a generally acceptable international currency for international clearing, making blocked balances and bilateral clearings unnecessary;

  • (2) an orderly and agreed method of determining exchange rates;

  • (3) a quantum of international currency not dependent on gold production or gold reserve policies, but capable of deliberate expansion and contraction;

  • (4) a stabilizing mechanism to bring pressure to bear on a country in balance of payments disequilibrium;

  • (5) an agreed plan to start off each country after the war with appropriately large reserves;

  • (6) a method of employing unused balance of payments surpluses in the interests of international planning and relief and economic health;

  • (7) a central technical institution to aid and support other international economic institutions; and

  • (8) reassurance to a troubled world that any country conducting its affairs with due prudence would not be made anxious, by causes not of its own making, about its balance of payments, thus making unnecessary the methods of restriction and discrimination hitherto employed in self-protection.

In this fifth draft, Keynes suggested that the Fund should have executive offices not only in London but also in New York, with its Board of Managers meeting alternately2 in London and Washington. He proposed that the Board of Managers should consist of about 12 persons. The major States (including the founder-States) should each appoint a member of the Board, while the other members would be appointed by groups of minor States. Each member of the Board would cast votes proportionate to the quotas of those who had appointed him. He also introduced a discussion of the relationship of the Clearing Union to commercial policy—a subject which was beginning to attract the attention of the British Cabinet because of the stipulations in Clause VII of the Lend-Lease Agreement, as eventually signed on February 23, 1942, calling for “agreed action by the United States of America and the United Kingdom … directed to … the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers.…”

U.S. Views on the Keynes Plan

It was, of course, this fifth draft of the Keynes Plan which was brought to the United States late in August 1942 and handed to U.S. Secretary of the Treasury Morgenthau. It was given very careful consideration by the Treasury and by the Interdepartmental Committee that had been set up in May 1942 to consider the White Plan. There emerged from these reviews two documents—a detailed comparison of the provisions of the Stabilization Fund and the Clearing Union and a series of questions to Keynes on details of the latter.

The detailed comparison made it clear that the two plans had many common features. Nevertheless, some provisions in the Stabilization Fund were not paralleled in the Clearing Union, and some Clearing Union proposals were not matched in the Stabilization Fund; there were also important differences of treatment of common topics in the two plans. As a starting point for the process of assimilation which occupied most of the next two years, it may be worth examining in a little detail what these various points were.

The Stabilization Fund alone provided for the following elements: a contributed capital, a definite termination of bilateral clearing, the absorption of blocked balances, a qualified veto by the Fund on national monetary policies, provisions for the distribution of profits, and a requirement that members would provide the Fund with periodic reports and information.

On the other hand, the Clearing Union alone provided for furnishing to each member an immediate addition to its monetary reserves (in the form, of course, of the right to an overdraft), specific provision for a transitional period during which some of the ultimate provisions of the plan would be suspended, and a proposal for the location of the organization.

The following points were probably the most important ones on which different provisions were made in the two plans:

(1) The Stabilization Fund proposed that the Fund should operate in what later was to be called “a mixed bag” of currencies—that is, in the currencies of its member countries. The Clearing Union, on the other hand, would operate in bancor, an international currency which it would create ad hoc.

(2) The Stabilization Fund proposed, as an objective, to help to correct the maldistribution of gold, but the Clearing Union proposed to relegate geld to a secondary position in the international monetary mechanism.

(3) The Stabilization Fund proposed that exchange rates should be fixed by the Fund and changed only with the consent of 80 per cent of the voting power. The Clearing Union envisaged exchange rates being agreed between the Union and its members and provided for special consideration to be given to changes proposed in a transitional period. Further, there were to be automatic devaluations should debit balances exceed certain limits.

(4) The extent to which international clearing would be effected by the two organizations differed to some extent. The Stabilization Fund (although its provisions were not entirely clear) appeared to visualize daily clearing between central banks, but the Clearing Union specifically contemplated that the Union would clear residual balances only after normal transactions between central banks had been completed.

(5) There were considerable differences between the rights to use the Fund, on the one hand, and the Union, on the other, and in the penalties which the two organizations could impose on debtors or creditors. These differences have been elaborated in the previous chapter.

(6) The Stabilization Fund contemplated the abolition of exchange control, except when approved by the Fund. The Clearing Union, on the other hand, offered no objection to exchange controls and specifically advocated the control by member countries of capital movements.

(7) There were some differences, although partly in terminology, between the procedures for management envisaged by the two plans. The Stabilization Fund proposed a Governing Board comprised of one representative of each member, delegating some functions to an executive committee in permanent session. The Clearing Union visualized a Board of Managers representing all members, but designed to ensure that the management was permanently entrusted to the founder-States (United States, United Kingdom, and perhaps U.S.S.R.).

(8) The Stabilization Fund proposed a formula for voting which was deliberately intended as a compromise between a system under which each member would have one vote and a system under which voting power would be weighted in proportion to the contributions made by members. These contributions, in turn, would be based on a formula taking account of seven factors collectively indicative of the country’s economic strength and, to a minor degree, of its international trade. In the Clearing Union, on the other hand, votes would be proportionate to members’ quotas, which would be based on their international trade alone. But it was also suggested that the effective voting power should inhere permanently, or at least for five years, in the founder-States.

The questions which were put as a result of the deliberations of the Interdepartmental Committee may be roughly grouped into two sections.

The first four questions were concerned purely with clarification of the meaning of the Clearing Union proposals. They included the following inquiries: (1) Would the transactions of the Union be effected at par or at exchange rates varying within the gold points? (2) What was the exact role envisaged for bancor? (3) What was the membership envisaged for countries in the British Commonwealth? (4) Would not the special position allotted to founder-States conflict with the object of securing international collaboration?

More significant than the foregoing was a second group of questions, which indicated causes of concern to the U.S. committee. Perhaps the most important of these sought information about the total of quotas which the Clearing Union envisaged, about the potential liability of the United States within this total, and about the rights of creditors—who, it was pointed out, might well find themselves with a minority of votes. Other questions sought to ascertain how the Clearing Union proposals could prevent members from exhausting too soon the quotas allotted to them; and how, under the Union plan, it would be possible to contract the total of credit created should inflationary conditions make this desirable.

Of all the considerations which were adumbrated in the two documents summarized above, three appeared to the Interdepartmental Committee to be of overwhelming importance, and in each of these three it was felt that the Stabilization Fund had superior attractiveness for the United States. The first of these was the need to limit the liability of the United States as potentially the largest creditor in the postwar world. Secondly, and allied to the first, was the need to ensure that, in any organization that was set up, the main creditors would have sufficient power to prevent their being outvoted on major issues by the collective votes of debtor countries. The third issue was that of acceptability to Congress, and here it was felt that the Stabilization Fund, based as it was on concepts already familiar in the U.S. political scene, would be far more likely to secure congressional approval than the Clearing Union, which introduced the unfamiliar concepts of a new international currency and of overdrafts.

Activity in Washington

In October 1942 White visited London for discussions with Keynes and others in the British Treasury. On his return to Washington, he reported to the Interdepartmental Committee that Keynes had urged three main points: (1) quotas should be proportionate to the volume of trade; (2) while it would be preferable to avoid the use of gold, it might be necessary to provide for its use because of widespread popular feeling; and (3) the United Kingdom and the United States ought to agree on a plan before any other country was approached. White said that he had explained why the United States favored quotas related to the assets made available to the Fund, but that he had agreed that the contribution in gold could be scaled to the availability of gold in member countries.

Shortly after his return, White received a copy of a new draft of the Keynes Plan, dated November 9, 1942. Thereafter, the Stabilization Fund proposals were intensively examined and redrafted. A draft dated November 25, 1942 was redrafted three times in December and three times in January 1943. Some evidence of the priorities accorded by White at this time to the different features of his plan may be found in a paper on “Postwar Currency Stabilization” that he delivered to the American Economic Association on January 7, 1943.3 This listed four tasks for an international monetary agency, three of them related to exchange rates and the fourth to loans for reconstruction.

At the beginning of February 1943, the third January draft was transmitted by the State Department to the British Treasury and, on March 4, it was sent to the representatives of 37 countries with an invitation to an informal conference to discuss the proposals.4 On March 17, Secretary Morgenthau told the President that the Keynes Plan was shortly to be published, and suggested that the White Plan should also be released to the press. On April 1, the President decided against this, but on April 5 the London Financial News contained a full summary of the White Plan, and as a result the decision not to publish it was rescinded. On the same day Secretary Morgenthau communicated to the U.S. Congress a slightly revised version of the plan, which was published in Washington on April 7 and in London shortly afterward. On April 7 a White Paper containing Keynes’ Proposals for an International Clearing Union was published in London.5

The White Plan was further revised and new versions were produced on May 8, June 15, June 26, and July 10, 1943,6 following discussions with a number of different countries. A summary of the final version was issued on August 19.

In May, the representatives in Washington of 46 countries were invited to discuss the White Plan and to answer a questionnaire calling for comment on it. For the purpose of these discussions an extensive document, setting out replies to a number of questions which had been raised, was produced and circulated. On June 1, the formula for the calculation of quotas in the form which was eventually used at Bretton Woods was produced in the U.S. Treasury and a few days later this was sent to the United Kingdom. From June 15 to June 17 informal group discussions took place in Washington, being attended by representatives of 18 countries: Australia, Belgium, Brazil, Canada, China, Czechoslovakia, Ecuador, Egypt, France, Luxembourg, the Netherlands, Norway, Paraguay, the Philippines, Poland, the United Kingdom, the U.S.S.R., and Venezuela. On June 22–24 there were further meetings with the United Kingdom alone. Subsequently, Professor Dennis Robertson, a wartime recruit to the British Treasury, who was at that time attached to the British Embassy in Washington, had discussions with representatives of the U.S. Treasury and the Federal Reserve Board to clarify some outstanding points.

These official activities did not, of course, take place in an intellectual vacuum. The publication in April 1943 of the two sets of proposals was noted in almost every serious journal in the English-speaking world, and in a host of speeches and pamphlets.7 Most commentators contented themselves with summarizing the two plans, but, in those articles that attempted to draw conclusions, it is possible to detect something approaching polarization: the British journals tended to criticize the White Plan and the U.S. journals to decry the Keynes Plan. This was, of course, natural to the extent that the two plans reflected the needs and aspirations of the two countries that had produced them. But this negative response was not necessarily accompanied by wholehearted support for the plan emanating from the writer’s own side of the Atlantic. More support was forthcoming in the United Kingdom than in the United States, where the “key currency” plan rivaled both the Stabilization Fund and the Clearing Union for attention and where (for this and other reasons) writers were prepared to find serious faults in both plans. On the other hand, it is difficult to discover, in all the technical comments that were poured out in 1943, any British writer who preferred the White to the Keynes Plan, or any American one who thought better of the Clearing Union than of the Stabilization Fund.

Before going further with an analysis of the two competing plans, we may pause to examine the outcome of the activities noted above. This will involve anticipating to some extent changes in the White Plan not yet detailed, since these were introduced while the consultations with other countries were proceeding. However, the alternative of describing the revisions of the plan first would have the disadvantage of examining these revisions in advance of describing the suggestions which may have influenced the framers of the Stabilization Fund to effect them. Accordingly, the next section of this chapter summarizes the suggestions made by the representatives of the countries (other than the United Kingdom) consulted by the U.S. Treasury in 1943. The three following sections survey three alternative plans put forward. We shall then return to a consideration of the redrafting of the White and Keynes Plans, leading to the form which they eventually assumed in the summer of that year.

From September 15 to October 9, 1943, a definitive series of meetings between a group of U.S. officials and a British delegation was held in Washington. These meetings and the Joint Statement of Experts, a first draft of which was prepared at them, are discussed in Chapter 3.

Changes Proposed in the Plans

Not all the countries consulted by U.S. officials during 1943 proposed specific changes in the draft Stabilization Fund, and in many instances the same suggestion was put forward by more than one country. It seems therefore convenient to summarize these suggestions by subject rather than by country of origin. This is the more appropriate in that changes introduced in the Stabilization Fund as a result of the discussions were presumably the consequence of the cumulative pressure of the several opinions expressed rather than being a response to criticisms uttered by any one country’s representative. In what follows, the recommendations listed are attributed to the country whose representative propounded them, but this is of course done only for the sake of convenience; the recommendations made did not necessarily represent the considered view of the government of the country mentioned. We shall discuss the main subjects in descending order of the number of countries which expressed views about them.

Quotas, Contributions, and Votes

A larger total than the $5 billion proposed in the Stabilization Fund plan was recommended by Poland ($15 billion), by Belgium, Canada, France, and Norway ($10–12 billion), and by Australia (no figure mentioned). On the other hand, Bolivia, Czechoslovakia, and the Philippines thought that $5 billion would suffice. Australia and Norway asked for larger shares, requesting respectively 5 per cent and 1 per cent of the total, while Panama, representing that the Fund would be of no service to it, asked that its quota should be purely nominal. Australia, Belgium, Bolivia, Brazil, Chile, Czechoslovakia, France, the Netherlands, Norway, and Poland suggested changes in the formula, mostly designed to include elements favorable to the country making the suggestion. Australia and the Netherlands suggested that the quota used as a basis for drawings and votes should be different from that used for calculating contributions.

As regards the composition of contributions, Belgium, Bolivia, Czechoslovakia, France, and Norway thought that the proportion of gold was too high, and the Philippines suggested that no country should be required to contribute gold to an extent greater than 20 per cent of its own gold and dollar balances. Bolivia and Cuba thought that part of the quota should be paid in silver. Brazil and France objected to part of the subscription being in the form of negotiable securities. Canada suggested that 85 per cent of the quota should be paid in the member’s own currency. Finally, Belgium, Bolivia, Haiti, and Norway proposed that at least part of a country’s contribution should be includable in the country’s own reserves.

On the subject of voting rights, Australia, Belgium, and Norway objected to the provision giving the United States an effective veto, and the Netherlands thought that the requirement that certain decisions would have to be supported by 80 per cent of the members’ votes would introduce an undue rigidity into the system. Brazil suggested that a member’s votes should be related to its population or trade, and China that they should take account of the sacrifices endured by the member during the war. Cuba and Mexico preferred that decisions should be taken by a majority of the number of members, although Mexico was prepared to agree that, except where the “dignity” of a member was involved, one half of the total votes should be weighted according to quotas. Norway put forward three variations on the weighting formula included in the Stabilization Fund draft. Bolivia and Norway objected to a proposal, copied from the Keynes Plan, to augment the voting strength of creditor countries and reduce that of debtor countries.

Exchange Rates

The establishment of initial exchange rates was widely regarded as likely to be difficult. Belgium, Bolivia, Canada, France, Norway, and the Philippines thought that it would be necessary for the initial exchange rate to be negotiated, and several of these countries assumed that the first step would be for the United States and the United Kingdom to agree on the dollar-sterling rate. Czechoslovakia and Mexico suggested that a technical appraisal of the appropriateness of any suggested rate would be essential. Brazil, Chile, and Mexico pointed out that the proposal in the Stabilization Fund plan to fix the initial rate at the level prevailing on July 1, 1943 would be inappropriate to the conditions in these countries. Greece and Norway thought that any initial exchange rate should be provisional; Norway wished the period allowed after joining the Fund for the establishment of the exchange rate to be six months, instead of the three months proposed.

Australia, Canada, Mexico, the Netherlands, Norway, and the Philippines criticized the provision for changes in the exchange rate. Australia thought that a conservative management would be likely to resist a request by a member country for authority to devalue. The Netherlands and Norway thought that for a limited period after joining—Norway suggested two years—a country should be free to alter its exchange rate if it needed to do so, and Canada and Norway would have preferred a provision for an automatic devaluation if a country got into difficulties. The Philippines drew attention to the problem of re-establishing a stable rate in an occupied country and thought that it would be necessary to allow a wider margin of fluctuation than the plan proposed. Finally, El Salvador and Panama both objected to the Fund having power to impose a devaluation.

Drawings and Repurchases

The limitation on the quantum of drawings was criticized by Bolivia, Brazil, Canada, and Norway. Canada (as subsequently in its own plan) suggested permissible drawings of 50 per cent of quota per annum, the maximum amount that could be drawn being equal to 200 per cent of quota. Australia, Czechoslovakia, France, Greece, Haiti, and Paraguay also objected to the requirement that countries with adequate reserves should pay in gold for 50 per cent of amounts drawn. The “policing” of drawings was criticized by Belgium, El Salvador, Norway, and the Philippines. All four countries disliked the Fund’s power to impose obligations as a condition of drawings, and the Philippines proposed that the Fund’s power should be limited to making a report. Panama thought that the charges proposed to be levied were exorbitant.

On the other hand, Canada, the Netherlands, and South Africa suggested that the Stabilization Fund should exert greater pressure on debtors; the Netherlands thought that there should be a specific prohibition on the use of amounts drawn from the Fund for certain types of international expenditure. South Africa thought that a member should be required to exhaust its reserves before coming to the Fund.

The provisions for using accretions to members’ reserves to repurchase drawings from the Fund were disliked by Bolivia and France. Norway thought that they should not apply if the accretions were less than $50 a head of the population, and the Philippines commented that, because of their monetary legislation, the requirement would involve them in a budgetary problem.

Scarce Currency

A variety of points was raised about the provision for exerting pressure on creditor countries. Belgium, Bolivia, Brazil, France, Greece, Norway, and the Philippines all put forward proposals for this purpose, most of which concentrated on reducing tariffs and stimulating foreign investment. Australia also thought that greater pressure ought to be exerted on creditors, and Greece argued that the Stabilization Fund showed too much consideration for a country whose currency was becoming scarce. Proposals to increase the ability of the Fund to avoid the development of scarcity were made by Canada, the Netherlands, and Paraguay. Belgium proposed that, when a currency did become scarce, it should be allocated in the first place to countries that had not drawn more than 25 per cent of their quota.

Administrative Proposals

A number of countries suggested additional provisions in the area which may be broadly described as administration. Norway advocated that, as in the Clearing Union plan, the Executive Offices of the Fund should be located in London and New York, and proposed that the Fund should have extraterritoriality. Replying to a question by the U.S. officials as to the matters which should be delegated to the Executive Committee, Norway thought that these should be limited to those needing only a simple majority for decision. Bolivia, France, and the Philippines favored a broader delegation of authority. South Africa suggested that Executive Directors should be paid by the Fund, and not by the members appointing them, in order to strengthen their independence. Mexico drew attention to the need for a highly qualified staff, and Norway recommended that at least one member of the staff should be drawn from each member country. Finally, Belgium put forward a detailed proposal for the liquidation of the Fund, should this become necessary.

Other Proposals

In addition to the foregoing, a considerable number of minor aspects of the Stabilization Fund were criticized. Belgium and Poland wished to be satisfied that the provision for dealing with blocked balances would cover the debts owed to them by Germany. Norway wished the Fund to have powers to borrow, in order to ensure that its resources would be adequate to cover blocked balances. Bolivia thought that the charges proposed to be made for handling such balances were too large.

Little was said in the discussions about unitas, the proposed international currency. Mexico, however, did propose that part of the metallic backing for unitas should be silver, and Norway suggested that a unitas should be worth $2 (not $10) and that it should be called bancor because the word unitas was pronounced differently in different countries. Norway also deprecated the acceptance of deposits in unitas, on the ground that the Fund was not a bank.

Bolivia, France, Greece, the Netherlands, and the Philippines thought that the Stabilization Fund should have specific provisions for regulating relations between members and nonmembers. Belgium wished to exclude the Belgian-Luxembourg Economic Union from the scope of the Fund’s prohibition of bilateral arrangements. Belgium and Panama considered it impossible to provide the information about foreign investments for which the Fund called, and Norway suggested that the objectives of the Fund should be set out more elaborately than had been done in the draft. Finally, the Netherlands submitted two lengthy memoranda arguing against the international basis for the Fund and in favor of the key-currency approach advocated by Professor Williams (see Chapter 1 above).

The French Plan

In the early spring of 1943, two French economists, Mr. André Istel and Mr. Hervé Alphand, put forward an alternative to the Keynes and White Plans.8 This proposal closely resembled that in the van Zeeland report of 1938.9 It consisted essentially of seven points. The first four of them—covering agreements on exchange rates and an undertaking to exchange currencies, within fixed limits, with other member countries—corresponded closely to the obligations of the Tripartite Agreement, which would be extended to all countries willing to participate. The other three points were as follows: each participating country would deposit approved collateral to cover an agreed proportion of the amount of its currency held by other members; each would sterilize the inflow of foreign exchange during periods of inflation; and some method of international consultation should be set up, preferably (but not necessarily) in the form of a permanent organization—a “Monetary Stabilization Office” or, in a version of the plan published in the New York Times, an “International Clearing Office.”

The defects of any such plan for a less than comprehensive scheme were exposed in a speech by Professor Robertson on August 26, 1943.10 His main criticisms, which applied also to the key-currency plan of Professor Williams, were that it was impracticable to leave to chance the linking of European currencies to an Anglo-American system; that Europe could in any case make important contributions to the new order if fully integrated into it; and that it was politically unwise to appear, in any scheme put forward, to impose Anglo-American leadership. Similar criticisms had been made by White in discussions with the Netherlands representatives on April 23, 1943, and in a meeting at the Federal Reserve Board on August 11, 1943.

The Canadian Plan

Following the discussions between Canadian officials and U.S. officials in May 1943, the former concluded that it would be better to produce a Canadian draft plan. This was in form to resemble the Stabilization Fund plan, but would embody those features of the Clearing Union proposals that Canada thought should be incorporated. Keynes was somewhat doubtful of the desirability of injecting another plan into the discussions, but on further consideration the Canadian officials decided that offering a third plan would be the best way to work toward what they regarded as a necessary compromise. A draft plan was thereupon prepared in Ottawa and sent to Keynes on June 3. A slightly revised version was given a limited distribution in Ottawa on June 9 and subsequently printed and made generally available.11 The principal novelties in this plan, some of which, it will be seen below, were incorporated in later versions of the Stabilization Fund, were as follows:

(1) The organization was called “International Exchange Union,” the word “Union” being used to distinguish the institution from the resources which it administered.12

(2) The aggregate of quotas was fixed at $8 billion and the Union would have power to require countries to lend, in addition, up to 50 per cent of their quotas (Sections II.1, II.2).

(3) It was proposed that the whole of countries’ quotas should be paid up at the outset, at least 15 per cent in gold and the remainder in local currency. There were to be no interest-bearing securities (Section II.1(b)).

(4) The initial fixing of an exchange rate was to require the country’s consent. In appropriate circumstances, a debtor member might devalue by 5 per cent without obtaining the Union’s approval (Sections IV.1, IV.2).

(5) The resources of the Union could be used to meet “an adverse balance on current account” not limited to the currency of an individual country with which an adverse balance was experienced (Section V.1(a)).

(6) Drawings might amount to 50 per cent of quota a year, within a total of drawings equivalent to 200 per cent of quota, but were not to be available to a member whose monetary reserves exceeded its quota (Section V.1 (a) to (c)).

(7) Drawings in excess of the limits in paragraph (6) might be allowed by a special vote of the Governing Board. For this purpose, and for the purpose of voting on changes in quotas, the voting strength of creditors would be augmented and that of debtors diminished in relation to their normal entitlement (Sections V.1 (c) and IX.3). (Keynes had suggested the former but not the latter application of this provision.)

In other respects, the Canadian Plan strongly resembled the Stabilization Fund proposals, including, though in a much shortened form, provisions for dealing with abnormal wartime balances, and containing also very similar provisions for a scarce currency. In the draft sent to Keynes, the international currency unit was entitled “monad,” but in the published version it was given no name other than “Unit” (Section III.1).

In principle the Canadian proposal remained on the table for consideration during the negotiations described in the next chapter, but it appears that, in practice, the modification of the Stabilization Fund proposals described below, together with the pressure exerted by the British delegation in support of the Clearing Union proposals, made it unnecessary to discuss the Canadian Plan separately.

The Federal Reserve Board Plan

The staff of the Board of Governors of the Federal Reserve System had been following the discussions about the Keynes and White Plans with close attention. As early as December 1942 they took occasion to urge the need to limit the U.S. contribution to $2–2.5 billion. In the spring of 1943, ideas had begun to crystallize at the Board for an improved version of the White Plan, and on June 1 such a plan was submitted to, and given the tentative approval of, the Board of Governors. On the next day, it was discussed at one of the meetings of the Interdepartmental Committee. A few days later, some features of the plan were modified. The following are the principal features of the modified plan.

(1) The aggregate contributions of the Fund (excluding Germany, Italy, and Japan) should be $14 billion.

(2) Each country’s quota should equal one third of its foreign trade, on average, for the years 1936–38, subject to some adjustment for abnormal conditions in individual countries. On this basis, the U.S. contribution would be $2 billion.

(3) All contributions were to be made in gold, up to a limit equivalent to one half or three fourths of each country’s gold holdings. This should bring some $7 billion of gold into the Fund.

(4) All countries were to be allowed to buy gold only from the Fund, and to sell gold only to the Fund, which would be obliged to buy all gold offered to it (subject to limits which it might set for newly mined gold).

(5) Each member had the right to purchase foreign exchange equal in amount to its original contribution, plus the value of all gold sold by it to the Fund.

(6) Each member should have one vote for each $1 million contributed to the Fund, plus one vote for each $1 million of its currency made available to other members.

(7) A debtor country might devalue its currency by 5 per cent when its deficit was equal to one fourth of its quota, and by a further 5 per cent when its deficit reached one half of its quota. It might be required by the Fund to devalue if its deficit exceeded one half of its quota.

(8) A creditor country might appreciate its currency by 5 per cent when its credit balance reached one fourth of its quota, and by a further 5 per cent when its credit balance reached one half of its quota.

(9) In addition to the power to require a devaluation, mentioned above, the Fund might require countries to control capital movements. It might also recommend the following:

  • (a) To debtors: control of excessive internal expansion; technological and management steps to reduce costs; control of wage increases causing income inflation; and imposition of exchange control on current account;

  • (b) To creditors: measures of internal expansion; appreciation of their currencies when such expansion threatened to become an inflation; international lending; tariff reductions; and increases in wage rates.

(10) The machinery of the Fund should start to operate at once, but the initial exchange rates set should be treated as experimental for a period of two to four years. During that period, exchange control would be permitted, but the Fund would advise countries on measures which would enable them to dispense with controls.

The two features of this plan to which most importance was attached were the obligation to buy and sell gold only through the Fund and the provision for augmenting the votes of creditor countries. The former was expected to induce all wealthy countries to join the Fund, and therefore to ensure that the Fund obtained an adequate stock of gold; the latter was intended to add rapidly to the influence exerted by creditor countries, and thus ensure that the Fund recommended measures that would effectively maintain stability in international monetary affairs.

However, the U.S. Treasury refused to consider the first of these proposals, or to allow it to be discussed at the meetings with 18 countries which were about to begin; the Treasury view was that such a monopoly of gold dealings would ruinously impair the prestige of gold. Lacking such an inducement to join the Fund, the Federal Reserve Board officials were unable to persuade the representatives of the 18 countries that their gold contributions should be stepped up as the Federal Reserve Plan required. The plan was therefore discarded, the Board’s officials being nonetheless gratified that the revision of the White Plan dated June 15 proposed to increase members’ gold contributions by relating them to the proportion which their gold reserves bore to their quotas, and that the Canadian Plan included a scheme of weighted voting, which, though less swift-acting than their own, was a step in the right direction.

Evolution of the White Plan

We now return to a consideration of the evolution of the Stabilization Fund. It is apparent from a comparison of the successive drafts that the changes made by the Interdepartmental Committee were partly designed to introduce features which had proved attractive in the several rival plans, and partly to give effect to the suggestions by other countries consulted, which were summarized above. It will be convenient to consider the redrafts by subject rather than chronologically. The following six groups of changes were the most important which can be distilled from the successive drafts.13


The April 1942 draft of the Stabilization Fund had no provision for an international currency such as the bancor underlying the Clearing Union. The accompanying draft proposals for an International Bank contained a lengthy argument to the effect that such a currency would be unhelpful, except as a money of account for notes issued by the Bank itself (Vol. III below, pp. 78–82). The November draft provided that the Stabilization Fund could “fix the gold equivalent of any international monetary unit which may be established.” In the next draft (December 11), a separate section was introduced under the title “Monetary Unit of the Fund,” citing this as the “unitas,” consisting of 137 1/7 grams of fine gold (equivalent to $10). The accounts of the Fund and the value of the currency of each member country were to be expressed in unitas. In the January, April, and May 1943 drafts, provision was made for deposits to be made in unitas. These were to be transferable and redeemable in gold or in the currency of any member country.

The significance of unitas in the Stabilization Fund was a source of some perplexity to the United Kingdom. After a number of discussions with U.S. officials, Sir Frederick Phillips cabled to London in May 1943 that it was merely a measuring rod except in the clause providing for deposits of gold; there it became “a warehouse receipt for gold.” Perhaps as a result of this clarification, or of the criticism by Norway, the clause in question subsequently disappeared, being replaced in the June 26 and July 10 versions by a requirement (Sec. III, par. 2) that countries must not buy gold at a price above par, nor sell it at a price below par.

Some insight into the reasons why U.S. officials were anxious to limit the role of unitas was given in a discussion between Professor Robertson and a representative of the Federal Reserve Board in July. It appeared that the U.S. officials had discussed whether bancor, if used, could be sterilized by government purchases, along the lines on which the British Exchange Equalization Account worked. They had concluded that there would be public opposition to such use of government funds, and that accumulations of bancor would have to be absorbed into the Federal Reserve system, with, as they feared, explosive effects.


The outline of the proposed Articles in the April 1942 draft did not mention any formula to be used to calculate contributions, although a reference to one was made in the accompanying commentary. The first mention in the Articles came in the December 24 draft, where it appeared in a quite general phrase. Although by June 1, 1943, the U.S. Treasury had evolved the formula subsequently used, this was not incorporated in any of the drafts. Instead, these continued to quote a much simplified version, which by July 1943 became “e.g., a country’s holdings of gold and free foreign exchange, the magnitude and the fluctuations of its balance of international payments, its national income, etc.” (Sec. II, par. 4).

The provision that the member’s initial contribution should be 50 per cent of its subscription was maintained in all drafts through May 1943. This initial contribution consisted normally of 12½ per cent in gold, 25 per cent in its government’s interest-bearing securities, and the remaining 12½ per cent in the member’s currency. If the member wished, it might contribute a larger proportion in gold, thus increasing its drawing rights. However, as noted earlier, White had agreed with Keynes in November 1942 that the gold contribution to be made by members might be reduced where appropriate. In the November draft this agreement was reflected in a provision that a country having less than $100 million of gold might pay 5 per cent (instead of 12½ per cent) of its subscription in gold, and a country having more than $100 million and less than $300 million of gold might pay 7½ per cent (instead of 12½ per cent) of its subscription in gold. With some later redrafting, this provision was retained until May 1943. From December 24 the subscription was called the member’s quota.

The provision for the payment of the second half of the quota was as follows:

The member countries … may be called upon to make further provision toward meeting their quotas pro rata at such times, in such amounts, and in such form as the Board of Directors of the Fund may determine, provided that the proportion of gold called for shall not exceed [one fourth], and provided that a four-fifths vote of the Board shall be required for subsequent calls to meet quotas.14

From June 1943 onward it was stipulated that the member’s initial contribution was to be equal to its quota, and a somewhat complicated provision related the size of its gold contribution (up to a maximum of 50 per cent of quota) to the proportion which its gold reserves bore to its quota. The remainder of the quota was to be contributed in the member’s own currency or (up to a maximum of 50 per cent of quota) in its interest-bearing securities.

No provision was made in the early drafts of the plan for changes in members’ quotas, but in the December 16, 1942 draft it was provided that such changes would require the support of 80 per cent of members’ votes. In the draft of June 15, 1943, arrangements for the periodic review of quotas were included, and the stipulation as to 80 per cent of votes was attached to changes in the formula. Finally, in July 1943, it was provided that no member’s quota could be increased without its consent (Sec. II, par. 7).

Throughout the whole period, the estimated aggregate of quotas was “at least $5 billion,” of which the United States was expected to contribute $2–2½ billion, a sum related to the resources of the U.S. Government’s Stabilization Fund, which consisted chiefly of the profit—about $2 billion—derived from the increase in the price of gold in 1934. The concern of U.S. officials that the obligations of the United States should not exceed that amount stemmed partly from the belief (later proved unfounded) that the resources of the U.S. Stabilization Fund could be subscribed to the International Stabilization Fund without fresh authority from the Congress, and partly from the belief of the U.S. monetary authorities that something like such a sum could be made available without unmanageable inflationary effects, whereas any substantially larger sum might produce such effects. It should be noted, however, that while the text of the plan continued to quote “at least $5 billion,” a calculation of the effect of the proposed formula, handed to the British officials in Washington on June 13, 1943, showed a total of $10,064 million, the U.S. share being $2,929 million, that of the United Kingdom and colonies $1,275 million, and that of the U.S.S.R. $763 million.

Responding to a suggestion by the representatives of several countries, a paragraph was inserted in the July 1943 draft (Sec. II, par. 3 (a) (iv)) authorizing a member to include in its legal reserves the equivalent of its gold contribution to the Fund, less its net drawings.

Drawing Rights

It will be recalled that, in the April 1942 draft of the Stabilization Fund, the country’s right to purchase currencies from the Fund was limited by a provision that, after a purchase, the Fund’s holdings of the drawing country’s currency should not exceed its total contribution. Apparently as a result of White’s discussions with Keynes, this provision was liberalized in December, although the Fund was permitted to require collateral against large drawings. Subsequently, the limits were progressively tightened until May, after which (presumably in response to protests from the other countries consulted) they were again relaxed. The final version (July 10, 1943) permitted the Fund’s holdings of the member’s currency to rise to 150 per cent of its quota in the first year and to 200 per cent in the second and subsequent years. Since the member’s initial currency subscription was a minimum of 50 per cent of its quota, and might be more if its gold holdings were small, drawings were limited to a maximum of 100 per cent of quota in the first year and 150 per cent thereafter. The Fund was, however, authorized to restrict purchases by a member that was, in the judgment of the Fund, exhausting its quota more rapidly than was justified (Sec. V, par 2 (d)). On the other hand, drawings beyond the figures mentioned might be permitted on certain conditions, which included the deposit of collateral and the adoption of appropriate measures of reform by the member concerned.

In the draft of December 24, an explicit provision was introduced, recognizing a member’s right to purchase currencies from the Fund “to the amount of its quota,” subject to the “scarce currency” provisions noted below. However, by April 1943 this had become a recognition of such a right “only to the extent of its quota,” and in the June 26 and July 10 drafts it was replaced by a mere statement that the member’s right was limited by the “scarce currency” provisions (July, Sec. V, par. 5). Moreover, in the June 15 and subsequent drafts, the member’s rights were further curtailed by a requirement that if its reserves exceeded 50 per cent of its quota, it should pay for half the currency bought from the Fund in gold or foreign exchange acceptable to the Fund (July 10 draft, Sec. V, par. 2(a)).

The December 11, 1942 draft introduced for the first time a provision for a charge of 1 per cent per annum, payable in gold, on the excess of the Fund’s holdings over the country’s quota.

No provisions similar to the repurchase requirements, which later played so large a part in the Fund, emerged in this period. The only approach to these was a paragraph introduced in the December 16 and subsequent drafts by which each member country agreed that it would “offer to sell to the Fund for its local currency or for foreign currencies which it needs all foreign exchange and gold it acquires in excess of the amount it possessed when joining the Fund.” In order to effectuate this, members would agree to discourage the unnecessary accumulation of foreign balances by their nationals. This obligation was modified in June so as to require the payment of one half of any increase in reserves, and in July so as to apply only if the member’s reserves exceeded 25 per cent of its quota (July draft, Sec. V, par. 6). The Fund was free to accept or reject any foreign exchange offered to it. It was also provided in the second January draft and subsequently that the Fund might resell to a member country upon the latter’s request any excess of the Fund’s holdings of a member’s currency above its quota (July draft, Sec. V, par. 7).

Scarce Currency

When reporting to the Interdepartmental Committee on December 1, 1942, White had called attention to a paragraph in the November draft which would “make it easier for the Fund to use its assets to acquire needed foreign exchange.” This, he said, warranted the relaxation of limits on drawings mentioned above. The paragraph in question enabled the Fund to reinforce its holdings of a currency that it needed after such holdings dropped below 15 per cent of the member’s quota and after the Fund had expended on purchases of the currency (1) as much gold as the country had originally contributed, and (2) the 25 per cent of its quota contributed by the country in interest-bearing obligations. Thereafter, the Fund had “the authority and the duty to render a report to the country” analyzing the causes of the reduction in its holdings, forecasting the balance of payments of the country, and setting out recommendations designed to increase the Fund’s holdings. This report was to be made public and members were to agree that their governments would give immediate and careful attention to the Fund’s recommendations. In May 1943, the criterion of 15 per cent was supplemented by requiring the prescribed action to be taken if the Fund’s holdings became “excessively small in relation to prospective acquisitions and needs for that currency,” and in the June 26 and July 10 drafts the latter became the sole determinant (Sec. V, par. 4).

A curious feature of the provision described in the preceding paragraph was that (until June 1943) it was to operate “when the Fund’s holdings of any particular currency drop below 15 per cent of the quota of that country,” although (also until June) the member’s initial contribution of its own currency was normally limited to 12½ per cent of its quota. The seemingly most likely explanation, that “currency” included the equivalent of the securities which a member contributed, does not seem to tally with the implication that holdings could drop below 15 per cent before “the Fund has used for additional purchases of that currency [the gold and securities contributed].” Possibly in drafting this provision it was assumed that, before it was used, members would have completed the subscription of the whole of their quota, although, as noted above, the provision for the payment of the balance was somewhat restrictive.

In the December 16 draft, the foregoing arrangements were reinforced by the “scarce currency” clause. This provided that, when it appeared to the Fund that its holdings of a particular currency were likely to be exhausted, the Board of Directors should propose a method for the equitable distribution of the Fund’s holdings of that currency. It was to make every effort to increase the supply of the scarce currency by acquiring it from member countries, and the rights of members to purchase this currency were to be limited by a rationing arrangement. Apart from drafting changes, these provisions remained unaltered through July 1943 (Sec. V, par. 5). The British reaction to these proposals is described below.

The origin of the scarce currency clause is somewhat mysterious. It was not mentioned at any contemporary meeting of which the record has been preserved. Specifically, it was not among the points made by White in an exposé of the draft dated December 16, 1942, at a meeting of the official committee held by Secretary Morgenthau on the previous day. However, the climate of opinion in U.S. official circles at that time seems to have been such that the scarce currency provisions may have emerged as a natural precaution against a future scarcity of dollars. One indication of this is that a jeu d’esprit among U.S. officials produced the spelling “$carce ¢urrency.” More seriously, the Department of Commerce’s study The United States in the World Economy, which was at that time in draft, includes several passages like the following:

It would be tragic indeed if the United States … were to permit another abrupt fall in the supply of dollars to disturb the recreated international trading and financial mechanism, whether willfully through increased trade restrictions, carelessly through the misbehavior of foreign investment, or involuntarily through the improper functioning of the domestic economy.15

In a discussion with Australian representatives on May 15, 1943, the U.S. officials explained that they did not expect rationing ever to be necessary as, in their opinion, such a situation would indicate that the Fund had failed to achieve its objectives.

Exchange Rates

The original conception of the Stabilization Fund was that exchange rates would be fixed by the Fund (April 1942 draft, par. II.2.c.).16 To this, the November draft added a provision limiting changes in exchange rates to those essential to correct a fundamental disequilibrium, and requiring the consent of 80 per cent of members’ votes. As late as May 1943, the conception was still that the Fund would fix and alter exchange rates, as was stated in Question 11 of “Replies to Questions on the International Stabilization Fund,” dated May 1943. However, in the June 15 draft, this proposal was substantially modified. Initial exchange rates were to be based on those prevailing seven months before the Fund came into operation, subject to the Fund having power to call for a reconsideration of this rate if it was “clearly inappropriate,” and subject to special provisions for countries occupied by the enemy. Changes were to be “considered” only to correct a fundamental disequilibrium and would require the concurrence of 75 per cent of members’ votes; special consideration was again given to countries occupied by the enemy.

In the June 26 and July 10 drafts, the provisions for initial rates were loosened; they were to be based on the value of the currency on July 1, 1943, subject to adjustment by consultation between the member country and the Fund if this rate was judged “clearly inappropriate” by either party (Sec. IV, par. 2 (a)). Provisions for changing rates were left substantially unaltered from the June 15 text, except that during the first three years of the Fund’s operation changes might be made “at the special request” of the member with the approval of a majority of votes (Sec. IV, par. 5 (a)). Also, any member might change its exchange rate by not more than 10 per cent after consulting the Fund on the advisability of this action (Sec. IV, par. 5 (b)). This last was a concession to the British view that greater elasticity in changing exchange rates was necessary. The philosophy behind the changes in June and July was spelled out in the September 15, 1943 edition of Questions and Answers on the International Stabilization Fund: “The Fund proposal recognizes the special interest of a country in its own exchange rate and provides that a change in the exchange value of a currency shall require the approval of the country concerned” (Question 17).17


The provision in the April 1942 draft for an operating committee was dropped in the November draft, but reinstated in the December 11 draft in the form of an Executive Committee of not less than 11 members. The Executive Committee was to be continuously available at the head office of the Fund and to exercise authority delegated to it by the Board of Directors (i.e., the governing body comprising a representative of each member country). Each member of the Executive Committee was to have an alternate to act in his absence. The Board was to appoint a Managing Director and one or more Assistant Managing Directors. The Board was to hold an annual meeting and such other meetings as might prove desirable.

The provisions for voting were amended in the December 11 and later drafts to limit the votes of any one member to 25 per cent (after May, 20 per cent) of the total (July 10 draft, Sec. VI, par. 2). In the June 26 and July 10 drafts, arrangements were introduced to weight the votes of creditor countries more heavily, and those of debtor countries less heavily, than their basic voting entitlements when deciding requests for drawings. Also, when voting to suspend or restore membership, each country could cast only a single vote (Sec. VI, par. 3).

Except for the points mentioned above, the provisions of the April 1942 text continued largely unchanged, drafting alterations excepted. A preliminary paragraph detailing the purposes of the Fund, similar to that which had introduced the April 1942 draft, reappeared in January 1943—although the words used were less expansive than in the previous year—and an explanatory preamble was added in the June 26 and July 10 drafts. The somewhat elaborate provisions dealing with blocked balances continued to be included. In the second January and the April and May drafts, however, the word “blocked” was temporarily replaced by the words “abnormal war.” This was a British suggestion, prompted by a fear that the use of the word “blocked” might encourage countries to restrict balances in order to qualify them for funding. In June and subsequently, the text reverted to “blocked balances.”

The only other noteworthy changes related to the duties of member countries. That of avoiding defaults on external obligations was transferred, in and after the December 11, 1942 draft, to the plan for an International Bank. At the same time the requirement that export subsidies should be discarded was deleted from the text. In the next draft the obligation to remove trade barriers was similarly dropped. The reason for these two omissions appears to have been that planning for trade liberalization was a matter for the State Department and not for the Treasury.

Out of the flux of changes described above, certain minimum requirements for U.S. participation gradually crystallized. In the view of the Interdepartmental Committee, four stipulations would have to be accepted if congressional approval for any monetary plan was to be obtained. These conditions, as expounded by White to members of the staff of the British Embassy in Washington at a meeting on June 23, 1943, were as follows: (1) the United Kingdom must not alter its exchange rate until after the Fund had begun operations (later interpreted as requiring the exchange rate for sterling to be fixed at $4=£1); (2) the commitment of the United States must be limited to $3 billion as a maximum, and it might have to be limited to $2 billion; (3) the Fund must be based on initial subscriptions from its members and not on the principle of bank overdrafts; and (4) the United States must be able to veto any proposal to change the value of the dollar or of unitas.

Evolution of the Keynes Plan

In contrast to the extensive redrafting of the Stabilization Fund which took place between April 1942 and July 1943, only minor changes were made in the Keynes Plan from the draft (the fifth) which had been sent to Secretary Morgenthau in August 1942. Most of these changes emerged from consultations with representatives of Australia, Canada, India, New Zealand, and South Africa in London on October 26–29, 1942. At this conference, Keynes expounded the Clearing Union proposals, which he explained as having been designed to meet the four difficulties confronting any plan to tackle postwar problems:

(1) What was to be the source of the capital required? The Clearing Union short-circuited this by not requiring any.

(2) How were credit facilities to be shared out? The Clearing Union related them to the value of foreign trade in a recent period; it was not obvious that other, more complex, criteria would give better results.

(3) What was to be the “self-righting” element in the scheme? This was the most difficult problem; creditors needed to be disciplined, but, in order to attract them into the scheme, the pressures that might be exerted could only be slight.

(4) What was the code of good conduct proposed and how far would national sovereignty have to be surrendered? The Clearing Union proposed a somewhat far-reaching code of conduct, including eschewing bilateral currency arrangements and competitive depreciations, but did not involve any great surrender of sovereignty since no country could be forced to join the Union.

At the same conference, Sir Frederick Phillips reported that his discussions with U.S. officials had revealed fears that the open-ended obligation to provide credit, involved in the Clearing Union, might have an inflationary effect in the United States, with adverse results on the dollar. The conferees considered whether this problem might be met by limiting to the equivalent of the creditor’s quota the amount of bancor which a creditor must accept, but feared that this might lead to a lack of confidence in bancor as the creditor approached the point at which bancor would no longer be acceptable. Another possibility considered was to require the Union, at the request of a creditor, to pay off the excess balance in gold or in the currencies of debtors in proportion to the debtors’ debit balances. Neither of these proposals, however, was adopted.

The minor changes actually made in the next draft of the Clearing Union (dated November 9, 1942) presumably reflected Keynes’ discussion with White, who had returned to Washington by November 3. But these changes were also clearly directed to the problems discussed at the conference with the Dominions. They included a separate section on the liabilities which the plan should place on creditor countries, leading to the conclusion that these liabilities lay entirely within the countries’ own control. Several minor changes strengthened the Union’s ability to deal with an inflationary situation, including powers (1) to limit charges on creditors and increase them on debtors; (2) to require collateral on drawings exceeding 50 per cent of quota; (3) to declare a country in default if it failed to take action to reduce a debit balance which was “increasing at an excessive rate”; and (4) to reduce quotas if an inflation threatened.

On receiving the January 1943 draft of the White Plan, Keynes made a detailed comparison between his plan and White’s. He suggested that “from a practical point of view the most important questions under the Stabilization Fund are the nature of the provisions for exchange control, the adequacy of the quotas, and the workability of the proposed solution for dealing with scarce currencies.” A tabulated analysis of the main features of the two schemes, which he included in his survey, shows that in his mind the important advantages of the Clearing Union were its expansionist bias and its ability to bring pressure to bear on creditors. It shows also that he expected conditions in the postwar world to require the universal use of exchange controls.

Keynes concluded that, when it was decided which of the alternative provisions in the two schemes were preferable, the framework of either scheme could be used to set out the result. Later, he commented that the Stabilization Fund scheme “represents a big advance, and if it turns out that it is the sort of set-up which appeals to people, it will not be too difficult to make something of it.… The main point at the present stage is that America should get itself committed to some scheme.” In May he was reported to be planning to prepare a version of the Stabilization Fund which he thought would be reasonably satisfactory.

Keynes had some difficulty in knowing whether the scarce currency clause in the Stabilization Fund proposal could be taken seriously. His first idea was that rationing of this kind would be unworkable, but in a letter dated April 12, 1943 to a correspondent who had called attention to the clause, he said, “It is of course absolutely essential to the logic of the scheme. For under the American plan clearly a currency can become scarce, and some answer must be produced to the question what one then does about it.… If it really is a proposal to limit and ration American exports, it is, of course, of the highest significance.” But he wondered whether the full meaning of the proposal had been appreciated in the United States. It is perhaps noteworthy that Mrs. Joan Robinson, who had close intellectual links with Keynes, called attention in the summer of 1943 to an inconsistency between the provisions of the “scarce currency” clause and the emphasis elsewhere in the White Plan on the removal of restrictions and discrimination.18

Meanwhile Keynes’ Plan, which had been reprinted unchanged in February 1943, underwent further (and final) redrafting in preparation for its publication as a White Paper in April.19 Two features of the earlier drafts disappeared, viz., the concept of founder-States with special privileges, and the emphasis on members’ unimpaired rights to trade restrictions, export subside etc. The former was replaced by a provision that members’ quotas governed their responsibility for management as well as their access to the Union’s resources; the latter by a demonstration that the Union was not incompatible with the retention of exchange control. Two additional provisions were that members not directly represented on the Governing Board might appoint permanent delegates to watch their interests, and that the Union’s resources might not be used for long-term or medium-term loans.

After the publication of the two plans in April, Keynes continued to study the Stabilization Fund proposals, analyzing them in memoranda dated April 16 and 27 and June 22, 1943, and comparing them with the Clearing Union in a speech in the House of Lords on May 18, 1943.20 When the July draft of the Stabilization Fund became available, he produced further memoranda, dated July 19 and 26, which were the basis for an official submission to Ministers, seeking instructions for the delegation which was to visit Washington in September.

The principal conclusions which Keynes reached may be summarized as follows:

  • (1) The main feature of the Clearing Union was that it provided for multilateral clearing, and it was a defect of the Stabilization Fund that it failed to do so.

  • (2) Postwar conditions would make it necessary to provide countries with international reserves; however, it was possible that the quantum suggested in the Clearing Union—equal to 75 per cent of prewar exports plus imports—was too large and should be somewhat scaled down.

  • (3) Another essential was to combine penalties for improvidence by debtor countries with discouragement of hoarding reserves by creditors.

  • (4) An international currency, such as bancor or unitas, was essential.

  • (5) It was not timely to provide for the absorption of blocked balances by the Union or the Fund.

He would also have wished to see the “overdraft” principle of the Clearing Union maintained, but, after Sir Frederick Phillips had explained that this was completely unacceptable to American opinion, he abandoned this.

Of these conclusions, the Chancellor of the Exchequer, speaking in the House of Commons on May 12,21 had stressed in particular the fourth, but emphasized that, because unitas was exchangeable for gold and vice versa, its introduction would constitute a nearer return to the gold standard than would the introduction of bancor, which was obtainable for gold but for which gold could not be obtained.

The stress laid by the Chancellor and by Keynes on the need for an international currency may be traced to fears that the possession by the Stabilization Fund of supplies of countries’ currencies would lead to its dealing in these currencies in exchange markets. Keynes commented that

it is true that it [the Stabilization Fund] would only deal with Central Banks and not with the public. But it would exercise its discretion whether or not to accept or to supply particular currencies. It would purchase only those currencies which it decided (on no clear criterion) to be “in good standing” and (also on no clear criterion) the sale of which “is required to meet an adverse balance of payments predominantly on current account”; and it would ration scarce currencies.… Such a system could be so worked as seriously to jeopardise the international position of sterling.

The phrases quoted by Keynes in this comment were taken from the July 10, 1943 draft of the Stabilization Fund, Sec. V, pars. 1 and 2. The expression “in good standing” appeared in that draft for the first time, but must have been under consideration in Washington considerably earlier, because on May 17, 1943, British Treasury officials there, having inquired into its meaning, cabled to London that it signified the currency of a country “e.g., which had not drawn as much as 25 per cent of its quota.” In the same cablegram the use of the word “predominantly,” first inserted in the draft dated May 8, 1943, was explained as a concession to the Canadian view that it would not be practicable to limit drawing rights to adverse balances on current account, as had been proposed in the earlier drafts.

The decision not to accept the American proposal to absorb blocked balances into the Fund appears to have been reached at quite a late stage. Keynes pointed out that the Stabilization Fund proposals, although they purported to throw half the responsibility for paying off the balances in annual installments onto the country owning the balances, did not in fact do so. The United Kingdom would, in effect, have to foot the bill for this half as well as for its own half of the annual payments, since the sterling repurchased by the owning country would be free sterling in its hands, which it could immediately change for some other currency. Moreover, the disproportion between the blocked balances and the quotas under the Stabilization Fund, which at first he had welcomed as largely expanding the resources to be made available, came later to trouble him. He was afraid that the effect would be to increase the risk that the Fund would run short of scarce currencies. Nevertheless, in his view, the scheme provided a means whereby the sterling balances could be funded on easy terms, and in his memorandum of June 22, 1943, he commented that “something of this kind seems to me an indispensable feature of the Stabilization Fund.”

Official British opinion, however, viewed the matter differently, and at the Treasury Sir Wilfrid Eady preferred to “consider the problem of the abnormal war balances separately and in a different context.” Consequently the delegation to Washington in September 1943 was instructed “to go slow until we know more precisely what the financial conditions of the postwar period would be.” By June 1944, Keynes and Sir Wilfrid were jointly expressing the view that “it was essential for the United Kingdom that this problem should not be within the jurisdiction of an international body, but should remain for discussion and settlement between the United Kingdom and [the creditors].” They gave the significant reason that otherwise “convertibility of sterling might be indefinitely delayed.” As will be seen in Chapter 5 below, this was the line adopted by the British delegation at Bretton Woods. What had apparently happened was that the British Government had come to the conclusion that there would have to be a “Grand Assize” after the war, in which war debts would be pooled, and in the course of which the blocked balances would be scaled down,22 as was in fact provided for in the Anglo-American Financial Agreement in 1945.

Looking at the U.S. proposals as a whole, the British officials concluded, and advised Ministers, that the four stipulations made in June 1943 (see above) should be accepted, together with the proposals in the White Plan for quotas and voting power. On the British side, the minimum requirements for which the delegation must press should be as follows:

  • The Fund must not buy or sell currencies, but only transfer unitas in its books.

  • The initial subscription must include a small proportion of gold and the remainder in securities negotiable only in the event of default, withdrawal, or liquidation.

  • The size of the Fund must be adequate (e.g., $10 billion).

  • Member countries must not be deprived of reasonable facility to alter their exchange rates if they thought this necessary.

The directive to the delegation, in addition to covering these points, also provided that:

  • 5. The aim should be to agree with the U.S. officials on a clear statement of principles, which should be remitted to Ministers for consideration before being given to a drafting committee.

  • 6. The blocked balances should be excluded from the scheme.

Such were the terms of reference with which Keynes and his colleagues sailed for Washington early in September 1943.

John Morton Blum, From the Morgenthau Diaries: Years of War, 1941–45 (Boston, 1967), p. 236.

The word used was “alternatively,” but in the fourth and sixth drafts the word was “alternately,” and it seems likely that this was intended in the fifth draft also.

American Economic Review, Vol. XXXIII (1943), Supplement, pp. 382–87.

Report of the Secretary of the U.S. Treasury, Fiscal Year 1943, p. 349.

Cmd. 6437. Both plans were reproduced in the Federal Reserve Bulletin, Vol. 29 (1943), pp. 501–21, and this version of the Keynes Plan is reproduced below, Vol. III, pp. 19–36.

The last of these is reproduced below, Vol. III, pp. 83–96.

Bretton Woods Agreements: A Bibliography, April 1943–December 1945, Board of Governors of the Federal Reserve System (Washington, 1946), lists 162 articles, etc., on the Fund and Bank published in the last nine months of 1943.

The English version is reproduced below, Vol. III, pp. 97–102. The French version was published by the Bank for International Settlements as H.S. 99. The New York Times version appeared on May 9, 1943. See also Williams, “Currency Stabilization: The Keynes and White Plans,” note 11 (reproduced below, Vol. III, p. 126).

See Chapter 1 above.

D. H. Robertson, “The Post-War Monetary Plans,” Economic Journal, Vol. LIII (1943), pp. 352–60.

Reproduced below, Vol. III, pp. 103–18.

Footnote to Table of Contents.

The final version of the Stabilization Fund is reproduced below, Vol. III, pp. 83–96.

April 1943 draft.

Hal B. Lary and associates, The United States in the World Economy, U.S. Bureau of Foreign and Domestic Commerce, Economic Series, No. 23 (Washington, 1943), p. 25.

Below, Vol. III, pp. 42, 60.

For the final version (June 10, 1944) of the U.S. commentary, entitled Questions and Answers on the International Monetary Fund, see below, Vol. III, pp. 136–82. Question 17 is on pp. 155–57.

Joan Robinson, “The International Currency Plans,” Economic Journal, Vol. LIII (1943), p. 167. See also below, pp. 58–59.

Reproduced below, Vol. III, pp. 19–36. Professor Dennis Robertson stated on August 26, 1943 that the Keynes Plan was still being revised, but that no new version had been published (Economic Journal, Vol. LIII (1943), pp. 352–53). I have been unable to trace any draft of a revision subsequent to the printed version in April 1943.

Hansard, House of Lords, 5th Series, Vol. CXXVII, Cols. 527–37.

Hansard, House of Commons, 5th Series, Vol. 389, Cols. 645–62.

See E. F. Penrose, Economic Planning for the Peace (Princeton and London, 1953), p. 55.

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