Chapter 11: The End of the Beginning (1949–51)
- International Monetary Fund
- Published Date:
- February 1996
In the First Months succeeding the devaluations of September 1949 the adjustments consequential on these changes were proceeding throughout the world. They had not been completed when in June 1950 the outbreak of hostilities in Korea introduced a new source of economic disturbance, of which the magnitude could not be foreseen. The effects of these events on the work of the Fund were slow to develop, and the Board was meanwhile obliged to “wait and see.” Furthermore, in the early part of 1951 there was a change in the Managing Directorship. It seems best, therefore, for the present chapter to carry the chronicle of the Fund’s activities through two years, from September 1949 to the Annual Meeting in 1951.
During these two years the Board held 250 meetings, 22 of which were in informal session. An increasing proportion of its time, averaging about one third, was devoted to a wide range of questions on exchange rates and exchange systems. Another third of its time, or rather less, was occupied by domestic matters, including prolonged discussions each year of the contents of the Annual Report and the Exchange Restrictions Report. For the remainder, consideration of the use of the Fund’s resources and of gold each took up some 10 per cent of the Board’s attention, while relations with other international bodies (mainly the GATT) absorbed rather more. In what follows, the discussion is necessarily confined to major issues; it is impossible even to refer to the innumerable minor questions that came constantly before the Board for settlement. This selectivity, which will become increasingly necessary as this history progresses, must be borne in mind if a true picture of the activities of the Fund is to be gained.
Membership and Board
Two countries joined the Fund in 1950, Pakistan on July 11 and Ceylon on August 29. On August 31, 1951, Sweden became the fiftieth member. The quota of Pakistan was fixed at $100 million, that of Ceylon at $15 million, and that of Sweden at $100 million. Poland resigned its membership on March 14, 1950, alleging that the Fund had failed to fulfill the expectations of its founders and had become instead “a submissive instrument of the Government of the United States … which lately forced upon a number of member countries the devaluation of their currencies.” This allegation was refuted by the Managing Director in a reply which drew attention to the work that the Board had in fact done in pursuance of the Fund’s objectives.
In February 1950 Mr. Sucharda (Czechoslovakia), speaking for two of the countries (Czechoslovakia and Poland) that he represented, challenged the right of Generalissimo Chiang Kai-shek’s Government to be treated as a member of the Fund. The Board considered this, but resolved that it was a matter for the Board of Governors to decide. Mr. Sucharda then announced that he would be unable to take any further part in the work of the Board. Subsequently, the Czechoslovak Government appointed Mr. Sucharda Governor of the Fund for Czechoslovakia, but stated that he would not take any part in the Annual Meeting, which was to be held in Paris.
In August 1950 Mr. Gutt received a cable from Chou En-lai claiming that the Central People’s Government of the People’s Republic of China was the sole legal Government representing the Chinese people, and seeking the exclusion from the Annual Meeting of the Chinese Governor, Executive Director, and Alternates. The Czechoslovak delegation to the Annual Meeting proposed a resolution to the same effect, which was supported by the Governors for India and Yugoslavia.1 It was resisted by the Governor for China, who claimed that his Government was the only legally constituted Chinese Government, and by the Governor for the United States, who pointed out that his Government, with many others, had recognized the Chinese National Government. After the Governor for the Philippines had suggested that the Czechoslovak resolution was out of order because it dealt with a purely political issue then before the United Nations, it was put to a vote and lost by a show of hands.
A similar resolution was introduced by the Czechoslovak Governor at the Annual Meeting, 1951, but was opposed by the Governors for China, the Philippines, the United Kingdom, and the United States, and the Meeting decided to take no action on it.2
In July 1950 Honduras accepted the obligations of Article VIII, Sections 2, 3, and 4, the first country to do so since members made their initial determinations in November 1946.
At the beginning of 1950 Mr. Joshi (India), who had been the Executive Director appointed by India from 1946 to October 1948, returned to the Board, replacing Mr. Madan. On March 20, 1950, Mr. Koo, Executive Director appointed by China, resigned to become Deputy Treasurer of the Fund; he was succeeded in July by Mr. Beue Tann (China).
At the biennial election of Executive Directors on September 13, 1950, which took effect from November 1, Mr. Sucharda was replaced by Mr. Nenad Popovic (Yugoslavia), who was elected by Ceylon, Thailand, Turkey, and Yugoslavia. Mr. McFarlane was succeeded by Mr. Leslie Galfreid Melville (also of Australia), and Mr. D’Ascoli (Venezuela) by Mr. Martínez-Ostos (Mexico), who had been Alternate to Mr. Gómez from 1946 to 1948. Pakistan joined the group of countries which re-elected Mr. Saad (Egypt). Czechoslovakia did not vote and was consequently unrepresented thereafter on the Executive Board. Special arrangements were, however, made to keep Czechoslovakia in touch with the Board’s decisions and to supply it with copies of Board documents.
In January 1950 the Board adopted a proposal by Mr. Southard (United States) that it meet from time to time in informal session to discuss policy, the purpose being to allow Directors to express their views without necessarily committing the countries that they represented. Formal minutes were therefore not circulated, though an informal record was maintained in the Secretary’s Office for purposes of reference. The device proved useful at that time, and has since been frequently utilized for the purpose of preliminary discussion of a topic on which Board opinion has not yet crystallized.
Later in 1950 the Board considered the meaning of Article XII, Section 3 (c). This provided for the appointment of an Executive Director by “the two members, the holdings of whose currencies by the Fund have been, on the average over the preceding two years, reduced below their quotas by the largest absolute amounts in terms of gold as a common denominator.” The Legal Department advised the Board that the evident intention of the drafters of the Article had been to permit the two countries whose currencies had been the most used by the Fund to appoint an Executive Director if they were not already entitled to do so. To give effect to this intention, however, it would be necessary to read the Section as if, instead of the words “below their quotas,” the text had read “below 75 per cent of their quotas,” since the normal holdings by the Fund of a member’s currency were equivalent not to the whole quota but to 75 per cent of it.
The staff pointed out that a literal reading of the text of the Section would favor a member that had originally paid less than 25 per cent of its quota in gold. Such a member might then qualify under Article XII, Section 3 (c), to appoint an Executive Director even though a decrease in the Fund’s holdings of its currency was due solely to the fact that the member had repurchased its currency as it was required by the Articles to do. It need not even be a “creditor” of the Fund; i.e., the Fund might hold more of its currency than 75 per cent of its quota. Other anomalies of the same kind were pointed out. In consequence, the Board, except for Mr. de Largentaye (France) and Mr. de Selliers (Belgium), agreed with the staff interpretation.3 Mr. de Largentaye formally dissented from the decision; Mr. de Selliers contented himself with saying that he did not see how the staff interpretation could be supported in view of the clear text.
Section 18 of the By-Laws requires the Managing Director to notify all members of the names of any members qualifying for the appointment of a Director under Article XII, Section 3 (c), at least a month before the ensuing election. For this reason the Board decided in 1948 that the phrase “the preceding two years” must be understood to be the two years ending on July 31, 1948. In order to settle the matter permanently, the Board decided on July 28, 1950 that
the phrase “the preceding two years” as used in Art. XII, Sec. 3 (c), shall be deemed to be the two-year period ending on the July 31 preceding the dates of regular biennial elections of Executive Directors. However, this decision shall be reconsidered if such regular elections are held in other months than September.4
It may be added that the Legal Department advised the Board that a member entitled to appoint a Director under Article XII, Section 3 (c), had a duty to do so, and could not opt instead to participate in the election of Directors under Section 3 (b) (iii) and (iv).
Managing Director and Staff
The five years of Mr. Gutt’s contract expired at the beginning of May 1951. The Executive Directors, concluding that it would be desirable to set an age limit for Managing Directors, decided at the beginning of March that, in future, Managing Directors should retire not later than April 30 of the year in which they reached their seventieth birthday.5 In consequence the Board offered Mr. Gutt, who was then aged 66, an extension of three years, to April 30, 1954. Mr. Gutt, however, preferred not to accept this offer, and retired from the Fund in accordance with his contract. His last attendance at a Board meeting was on March 19, 1951.
On April 10 Mr. Southard (United States) proposed to the Board that Mr. Ivar Rooth, of Sweden, should succeed Mr. Gutt. Mr. Rooth, who from 1929 to 1948 had been Governor of the Riksbank and since then Chairman of the Economic Research Institute of Sweden, was at that moment heading a World Bank mission to Iraq. The Board agreed to the nomination and Mr. Rooth accepted the offer, with effect from August 3, 1951.
In March 1950 the first major reorganization of the staff was undertaken. When presenting his proposals to the Board, Mr. Gutt pointed out that the Research Department was overburdened with too many different duties, that there was some overlapping between the activities of the departments, and that functional and area responsibilities were combined in them. He therefore proposed to create two area departments, which would handle relations with members. At the same time, the duties of the Operations Department would be reduced. For the future it would execute the exchange operations of the Fund, compute the data of monetary reserves of member countries, and supervise gold operations and practices. It would also be responsible for the financial, banking, and accounting functions of the Fund. In accordance with these changed responsibilities, it would be renamed the Treasurer’s Department.
The Managing Director also proposed to create a new functional department, the Exchange Restrictions Department, to watch over an area of the Fund’s work which was becoming of increasing importance. This department would be concerned with exchange restrictions, multiple currency systems, and related practices, and it would be responsible for relations with the GATT. The two area departments would be responsible, respectively, for member countries in Europe and North America, and for those in Latin America, the Middle East, and the Far East. The Research Department would retain the remainder of its previous functions, and the other departments and offices would continue unaltered.
These proposals were approved by the Board in March and took effect from March 20. The first Director of the Exchange Restrictions Department was Mr. Irving S. Friedman. The European and North American Department was headed by Mr. G. A. Ph. Weyer, and the Far Eastern, Middle Eastern, and Latin American Department by Mr. Luthringer. The number of departments has since increased, but the principle of the division of responsibility between the area departments and the functional departments has remained unchanged. An Office of Public Relations was also created as part of the reorganization, to handle relations with the United Nations and other international organizations. In 1952, these functions reverted to the Office of the Managing Director, where they had previously been located.
It was while this reorganization was being discussed by the Board that Poland withdrew from membership. This raised the question of the retention on the Fund staff of the six Polish nationals then employed. Rule N-2 required the Board to authorize exceptions to the principle that persons on the staff of the Fund should be nationals of members of the Fund. The Board agreed that the six staff members in question should be retained.
At the end of April 1951 the staff totaled 456, including 16 on military leave or leave without pay, and was composed of nationals of 36 countries.
Prior to the reorganization, the responsibility for the activities of the staff vis-à-vis the Fund’s members lay with two men only—the Directors of the Research Department and the Operations Department. After March 1950, however, five departments supervised these activities, and it immediately became clear that some coordinating machinery would be necessary. Mr. Gutt therefore set up a formal Staff Committee, consisting of the heads of departments, with himself in the chair. This committee was charged with considering all major items of business coming before the Fund, with reviewing staff memoranda dealing with questions of policy, with concerting the staff’s advice to the Board, and with coordinating the actions of the staff in carrying out the Board’s decisions.
The Staff Committee met first on March 22, 1950, and held 26 meetings in the next three months. After that it convened somewhat less frequently until the arrival of Mr. Rooth, but all policy issues, as they arose, continued to be canalized through it, as did major documents such as the Annual Report. The committee’s usefulness was enhanced by the fact that junior members of the staff dealing with particular issues were able to attend sessions at which those issues were discussed. This ensured, on the one hand, that the committee was apprised of all relevant details and, on the other, that the staff members in question were fully acquainted with the reasons for the committee’s recommendations.
There was at first some tendency among members of the Board to fear that the existence of the Staff Committee portended an attempt to undercut the Board’s responsibilities for policymaking. And there was perhaps this much justification for the fear, that the existence of the committee permitted a fuller and more formal exploration within the staff of policy questions before these were brought to the Board, resulting in somewhat more assured presentations of the issues in Board memoranda. Nevertheless, a few weeks later, in June 1950, there occurred one of the rare occasions on which the work of the staff was criticized by a member of the Board for being insufficiently independent. As the comments then made included a redefinition of the relationship between Board and staff, the incident is worth describing.
The subject of Mr. Southard’s criticisms was a memorandum describing the European payments plan then under discussion in Paris. Mr. Southard said that the staff might have taken a more forthright position, stating clearly how they thought the plan squared with the criteria which had been laid down by the Board, and what were the likely developments in the future with which the Fund would have to be concerned. He, personally, would have welcomed such a paper. He stressed that the staff was given great freedom to analyze problems as it thought best and to state completely and frankly its position on important issues confronting the Fund. It was important to the Board that the staff had this freedom and made use of it. Mr. Southard went on to say that, as Executive Directors were often bound by the views of governments, it was not to be expected that they would always accept the views of the staff. Even if they did not, however, these views would be helpful to the home governments, to whom Executive Directors would be likely to transmit them.
The reader will recall that the dichotomy between Executive Directors and staff to which Mr. Southard referred had been clearly brought out at the initial Governors’ Meeting at Savannah. The future course of this history will show how far the staff has succeeded in filling the role there allotted to them.
In April 1950 the Board approved recommendations by the Managing Director for the inauguration of a formal Training Program. For some months previously a few student trainees had been attached to the various departments to enable them to become acquainted with the Fund’s work. It was expected that some of these trainees would return to their home countries better equipped to handle questions of international economic relations; others would be recruited to the Fund’s own staff. Mr. Gutt now proposed that three set courses should be established: one to give broad training on matters of concern to the Fund at a junior level; a second to give specialized training, particularly in balance of payments techniques, to employees of member countries; and a third to provide a high-level course for senior officials. The Board approved the plan, and authorized financial assistance to trainees in the first two types of course. No assistance was authorized for the third type because it was felt that training of such a kind would be wholly for the benefit of the government employing the official, which should therefore pay for it. At the end of May, invitations were sent to member countries to nominate suitable persons for the courses of the first two types. The first general course, with ten trainees, began in January 1951. The first specialized course, in balance of payments techniques, began in September 1950 with five trainees, and a second, similar, course in March 1951. The Training Program continued to operate on a small scale until 1964, when it became the IMF Institute.
Three new publications were inaugurated in 1950. The first of these was the Annual Report on Exchange Restrictions, which was called for by Article XIV, Section 4. The Board discussed in November 1949 the scope of the Report and decided that, in addition to a factual survey of the restrictions in force (which was not to be limited to those under Article XIV, Section 2), the Report should include conclusions and recommendations. It should be drafted in the expectation that it would be published.
A first draft came before the Board in February 1950, and in the second half of that month the Directors devoted much attention to it. The Report as published contained a substantial discussion of the forms of exchange restrictions in use and the problems which these raised.6 It concluded with considering how and in what way restrictions should be relaxed. Part II of the Report described in detail the nature of the restrictive systems in the sterling area, Europe, the Western Hemisphere, and the Middle and Far East, covering, in all, 42 countries.
In the following year the preparation of the Report was undertaken at a time when the effects of the Korean War on international trade were altering the character of the problem of exchange restrictions. Export controls were becoming increasingly important in determining the pattern of world trade.7 At the same time, the Board discerned in the improving balance of payments situation of many countries an opportunity to relax exchange restrictions. It concluded that “many countries are in a position to undertake substantial removal of discrimination and relaxation of non-discriminatory restrictions and to make significant progress toward convertibility.” The same point was stressed in Chapter III of the Annual Report for 1951, and at the Annual Meeting there was considerable support for the Board’s arguments, although some Governors stressed the difficulties which still faced their countries.8
On February 27, 1950, the first number of a technical journal, entitled Staff Papers, was distributed. Its introduction had been advocated by Professor Dennis Robertson, who had become concerned that so many young economists had, by joining the Fund’s staff, lost the opportunity to continue to write under their own names. He suggested to Mr. Bernstein that the Fund should provide an outlet for this purpose. Announcing the new venture, the Managing Director pointed out that this was the first time that the Fund had made studies undertaken by the staff available to governments and the public. The first issue contained articles on latent inflation, on the measurement of inflation, on the effects of exchange depreciation, on the role of the ECA program in imports and exports, on the local currency proceeds of an import surplus, on the terms of trade in Latin America countries, and on cooperation between the Fund and the ITO. It will be recognized that all these papers were closely related to the problems that had come before the Board in the preceding year. The journal was offered for subscription at $3.50 per volume of three numbers. It had originally been intended that three numbers should be issued each year, but the supply of nonconfidential material which was of sufficiently high quality proved inadequate to furnish more than two issues a year until 1962. Staff Papers is at the present time probably the only fully professional publication in the economic field issued by an international organization.
A third publication begun during the year was a monthly statistical compilation, entitled Direction of International Trade, which gave country-by-country trade statistics. The first issue, which was distributed in September 1950, covered international trade in 1948, 1949, and the first quarter of 1950. This journal was a joint venture of the Fund, the World Bank, and the UN.
Rates for Fund Communications
In May 1949 the cable companies operating in the United States filed with the Federal Communications Commission revised tariffs, effective from July 1, 1949, which would have required the Fund and the Bank to pay the full rates applicable to messages sent by private persons instead of the lower rates paid by the U.S. Government. Thereupon the Bank and the Fund filed a joint complaint with the Commission, alleging, inter alia, that the revised tariffs were illegal. The basis for this assertion was Article IX, Section 7, of the Articles of the Fund, and a corresponding provision in the Articles of the Bank, which required that the official communications of the Fund and the Bank should be accorded by members the same treatment as the official communications of other members.
On November 4, 1949 Mr. Southard (United States) asked the Fund Board for an elucidation of Article IX, Section 7, and the U.S. Executive Director on the Board of the Bank put the same question to that Board. Specifically, they inquired whether the Section applied to the rates charged for the official communications of the Fund; whether a member exercising regulatory powers over such rates was relieved of the obligations of the Section by reason of the fact that the communication facilities being used were privately owned or operated; and whether the member’s obligation would be satisfied if the Fund’s official communications could be sent only at rates which exceeded the rates accorded to the official communications of other members in comparable situations. It was agreed that a joint committee of Directors of the Fund and the Bank should be set up to consider these questions.
Ten days later this committee reported that the answer to Mr. Southard’s first question was in the affirmative and to the other two questions in the negative. This report was considered by the Board in February 1950, and the doctrine expressed was officially adopted.9 In consequence, the U.S. Government took the necessary steps to ensure that the rates charged for the telephonic and telegraphic communications of the Fund were limited to the concessional rates accorded to diplomatic missions in Washington.
Article III, Section 2, requires the Fund at intervals of five years to review and, if appropriate, to propose an adjustment of the quotas of all members. In March 1949 the Board decided that for the purposes of this Article the first five-year period began on December 27, 1945.10 Rule D-3 of the Fund required the Board at least one year before the time when quotas must be reviewed to appoint a committee to study the problem and prepare a written report. Accordingly, in December 1949 the Managing Director proposed to the Board that a committee should be appointed, but in view of the evident interest of all Directors in the problem, he suggested that it should be a Committee of the Whole. Mr. de Largentaye (France) objected to this on the ground that there was no precedent for such a committee in the Fund and that the Managing Director could not chair a Board committee. He said that he would not serve on such a committee, and that therefore it could not be constituted. The point was deferred for legal opinion, but the Legal Department advised the Board that a Committee of the Whole was a fully constitutional method of meeting the requirements of Rule D-3 and that it could be constituted even if one member of the Board was unwilling to participate. Mr. de Largentaye maintained his objections, but said that if the majority of the Board decided that membership of a Committee of the Whole was compulsory, he would have to abide by that decision. The Board then accepted the Managing Director’s proposal.
In May 1950 Mr. Gutt appointed a staff working party to review the problem of quotas. Its report, sent to the Board on December 6, 1950, recommended that the size of the Fund’s resources should be doubled to take account of the change in economic circumstances since the original quotas were fixed. However, the Managing Director, in submitting this to the Committee of the Whole, suggested that, in view of the uncertain conditions prevailing in the world at that time, it was inopportune to revise quotas. The committee agreed with Mr. Gutt, and so recommended to the Board. On March 8, 1951, the Board concurred in this recommendation. The decision taken was that “under present international circumstances, it is difficult to reach a conclusion on this question at this time and [the Board] looks forward toward discussing the question further at as early a date as may be practicable.” The opportunity did not, however, arise and nothing further was done about increasing quotas at this first Quinquennial Review. It is probable that the Board was strongly influenced by a conviction that the U.S. Congress would not agree to an increase in the U.S. quota, and that therefore the 80 per cent of the total voting power required by Article III, Section 2, for a revision of quotas would not be forthcoming.
Annual Reports and Annual Meetings
The Annual Report for 1950 devoted much of its space to a discussion of the causes and effects of the devaluations of 1949. Shorter chapters discussed developments in exchange restrictions, in gold markets, and in the use of the Fund’s resources. At the Annual Meeting, 1950, as in 1949, the discussion of the Report was divided between four Committees, dealing respectively with Exchange Policy, Exchange Restrictions, Finance and Organization, and Gold. Proceedings in the last two of these are briefly referred to in other sections of this chapter. In the Committee on Exchange Policy the most notable contribution was made by the Governor for the Netherlands, who expressed apprehension at the effects of rearmament and urged international cooperation to prevent increases in the prices of raw materials. The Governor for Czechoslovakia criticized the Report’s treatment of devaluation as exaggerating its spontaneity, its importance, and its beneficial effects. He was answered by the Governor for the United States, who stressed that the devaluations had been justified, and the attention to them in the Report fully warranted.
The Committee on Exchange Restrictions heard from the Governor for the United States a warning that prolonged restrictions tended to distort trade, and that in such conditions restrictions tended to be self-perpetuating. On the other hand, the Governor for the United Kingdom pointed out that, in the situation in which his country found itself, it had no alternative but to maintain restrictions. The only other Governor to speak was the Governor for Belgium, who stressed that the first requisite to the ending of restrictions was to eliminate inflation.
The Annual Report for 1951 devoted a long first chapter to a careful analysis of the world economic situation. This was followed by briefer discussions of par values and exchange rates, of exchange restrictions, of the Fund’s gold policy, of its transactions, and of organizational questions. The consequences of the Korean conflict were examined in detail, leading to the conclusion that the situation was not a stable one, and that to re-establish equilibrium it would be necessary for production outside the United States to increase and for “some readjustment” to take place between the prices of primary and industrial goods.11
This last conclusion was challenged by the Governor for Mexico during the discussion of the Annual Report at the Annual Meeting. He said that if “some readjustment” meant that the terms of trade of primary producing countries would have to deteriorate for world equilibrium to be established, he was unable to accept such a prospect. With this exception, however, the Governors offered little comment on the chapters dealing with world payments, par values, and gold; the committee to which these were remitted gave emphasis in its report to the problem of controlling inflation. It mentioned, however, that the Managing Director had explained that the sentence to which the Governor for Mexico had referred was not to be construed as advocating any particular terms of trade.
The other two committees set up to review the Annual Report were the scene of considerable controversy. In the Committee on Exchange Restrictions and Fund Transactions, the Governor for the United Kingdom suggested that the optimistic tone of the Annual Report in relation to the removal of restrictions was unduly influenced by the favorable experience of 1950. He indicated that the problems confronting his country in the fall of 1951 might call for a strengthening rather than a relaxation of restrictions, and said that he saw little prospect of any appreciable improvement in 1952 or 1953. Criticisms voiced in this committee on the subject of Fund transactions are reported later in this chapter.
The Committee on Finance and Organization heard from the Governor for the United Kingdom a plea that the Fund budget should be squeezed to correspond to the belt-tightening which members were undergoing as a result of rearmament. Spirited replies to this appeal were made by the Governor for Mexico and the Governor for Egypt (Mr. Saad), defending the efficiency and economy with which the Fund was run and urging the need to attract qualified staff.
It was in the third general session, rather than in committee, that the sharpest speeches were made. The Governor for Australia led off by stating that the standing of the Fund fell below members’ hopes, and that one cause of this was a disregard of the rule of law by members casting a majority of votes on the Board. He repeated the statement frequently made by representatives of Australia, that members had joined the Fund after carefully weighing up the advantages of membership, and went on to say that they had accepted that there should be no right of appeal in the Fund on the assumption that the Articles would be administered “with close regard for the rights of members.” His contention was that, on the contrary, the practice had developed of seizing upon the purposes of Article I and trying to derive from them obligations which overrode specific rights and duties in the rest of the text. Nor was the staff exempted from his animadversions. The Governor decried what he called the
tendency of the Fund, which according to my information is constantly pressed on the Executive Board by a section of the staff, to interpret the law in such a way as to expand the functions of the Fund, and thus indirectly the influence of the staff.…
Mr. Saad, again in his capacity as Governor for Egypt, replied. He made two points: firstly, all questions of interpretation were the subject of the closest examination, by the Committee on Interpretation and subsequently by the Board itself; secondly, the only way to resolve differences of view in the Board was by vote, and the Articles had provided for weighted voting. The Governor for Canada supported this latter argument. However, the Governor for Australia was not satisfied; he was not, he explained, criticizing the Board for having departed from the letter of the Articles, but he thought that its actions had ignored their spirit. The Governor for South Africa spoke in similar terms.
These criticisms have been reported here not because they are characteristic of the remarks of Governors at Annual Meetings, but on the contrary because they were exceptional. In scarcely any other year’s proceedings is it possible to find comparable attacks on the Board. The fact that they found little reflection in the speeches of other Governors suggests that the dissatisfaction voiced was limited to a few members who attached particular importance to the issues cited by the Governor for Australia—drawing rights and the Fund’s role in the discussions in the GATT.
Multiple Rates and Fluctuating Rates
The restrictions that surrounded the use of foreign exchange at the end of the 1940’s were of immense complexity. The ingenuity of monetary authorities had for years been directed on the one hand to shaping controls in such a way as to encourage exports, especially to hard currency countries, and on the other to blocking loopholes through which hard currencies could leak away from monetary reserves. So complex a structure of restrictions cannot be summarized in this volume; all that can be attempted in these pages is to look briefly at a few of the types of restrictions which, from time to time, were of particular concern to the Executive Board.
The subjects of exchange rates and exchange systems came before the Executive Directors in many forms. The Board’s activities in connection with the devaluations in 1949 were described in the last chapter. Subsequently, many of the countries that did not devalue found it necessary to make changes in their exchange systems as a consequence of these events or of the outbreak of the Korean War. Executive Directors were thus faced with a series of problems so extensive that in the course of 1950–51 they reviewed the exchange systems of no less than 38 of the 50 members, several of them more than once. Many of these reviews involved comprehensive studies of the members’ exchange structures; others were confined to examining the case for shifting some commodities from one to another of the categories in the members’ multiple rate systems. Out of their experience in these reviews the Directors undertook two detailed studies of (1) the case for multiple rates as distinct from a single par value, and (2) the arguments for a fluctuating rather than a fixed exchange rate. The outcome of these two general reviews is described below; but the reader must remember that the discussions were not conducted in vacuo—rather, that the Board had in mind all the time the specific problems, affecting two thirds of the Fund’s membership, that it had spent so much time reviewing.
The starting point for the Board’s discussion of multiple rates was a memorandum by the Director of Research, which was in origin a paper prepared for a meeting of the technicians of Latin American central banks late in 1949. Contending that countries were not likely to obtain with multiple rates the best pattern of consumption or the best system of taxation, the memorandum at the same time recognized that some countries were unwilling to apply to all their imports exchange rates that would appropriately discourage imports, or to apply sufficiently encouraging export rates to all their exports. In such circumstances, the memorandum suggested that it might be better to apply the appropriate rates to 50 per cent or 60 per cent of imports or exports rather than to continue to apply inappropriate rates to the country’s whole trade. This memorandum was supplemented by two comprehensive studies of the multiple rate systems actually operated by Fund members.
In January 1950 the subject was taken up by the Board in three meetings in informal session. Directors and members of the staff explained the objects which multiple rates were designed to serve, and their advantages relative to other techniques, especially quantitative restrictions. The point was made that multiple rates were in general more harmful to the country using them than to its trading partners. Their attractions lay chiefly in the relative ease of their administration; they also provided a useful means of taxation. From the Fund’s point of view they were less objectionable, because less discriminatory, than more direct restrictions.
In the third meeting the discussion concentrated on a model, proposed by one Executive Director for consideration, which provided for one export rate and one import rate, with a spread between them wider than the traditional 1 per cent, together with a legal free market for invisibles into which the government would feed a large proportion of export receipts. There was wide agreement in the Board that such a model would be the least objectionable of any multiple rate system. Even so, several Directors were concerned at its prospective adverse effect on international trade compared with the par value system provided for in the Fund Agreement.
No formal decision was taken as a result of the discussion briefly summarized above. However, in the Annual Reports for 1950 and 1951 there were passages which reflected the Board’s general view of the problem.12 Recognizing the reasons, other than balance of payments difficulties, which might commend multiple rates to members, the Reports concentrated on the desirability of simplifying as far as possible the complexities of the systems that were then in existence. Some progress in this direction was recorded.
The only general decision taken on multiple rates within the period with which we are now concerned resulted from the submission to the Board for approval of numerous minor changes in the coverage of categories of commodities in certain multiple rate systems. The Board decided that it was normally unnecessary for such minor variations to be approved by Executive Directors at a Board meeting. Mr. Gutt was accordingly asked to arrange to notify the Board of each such proposal as it was received, but not to put it on an agenda for the Board unless requested to do so by an Executive Director. If no such request was received within a limited period, to be set by the Managing Director, the proposal would be deemed to be approved. This “short-form” or “lapse of time” procedure was used for the first time a month later to approve some minor changes in the exchange system of Lebanon. It has since been found useful for dealing with a variety of other questions which, though in form requiring to be approved by the Board, do not justify full-scale discussion there.
The problem of the attitude that the Fund should take toward fluctuating exchange rates had of course arisen during the devaluations in September 1949, being posed by Belgium’s initial decision to abandon its par value and allow its exchange rate to “float.” At that time the Legal Department had advised the Board that the Fund had no power to approve the adoption of a fluctuating rate as a transition from one agreed parity to another. The department pointed out that the provisions in Article IV, Section 5, for a shift from one par value to another reproduced almost unchanged the provisions of the Joint Statement. It was impossible to conceive that the experts at Bretton Woods had overlooked that in the 1930’s the values of several important currencies were changed to new fixed amounts only after a period of fluctuation; the absence of any provision in the Articles for a period of transition must therefore be regarded as deliberate. The Legal Department also advised that the provisions of Article XVI for a temporary suspension of some of the obligations of the Articles could not be used to release a single member from such obligations; they were intended only to deal with a situation in which it might be desirable to relax requirements for all members.
The establishment by Belgium of a new par value on September 21, 1949 meant that the issue ceased to be one of urgency for the Board. However, during the next few months there were some disturbing indications that in Europe the idea was taking hold that fluctuating rates would be a useful expedient to smooth the path toward a new equilibrium. Press comment to this effect was brought to the notice of the Board in October 1949, and in January 1950 Mr. Beyen (Netherlands) submitted a memorandum in which he emphasized the dangers of any such move. He distinguished between the proposal to allow European currencies to fluctuate and the abandonment of a fixed par value by a country like Peru. The latter might fairly be attributed to force majeure; the former suggested a doctrinaire attachment to freedom of currencies to fluctuate, which was directly contrary to the concepts of the Fund Agreement and threatened the achievements embodied in it.
Mr. Beyen’s memorandum was written in the expectation that there would shortly be a discussion of the problem in the Board. This was, however, deferred, and the question did not arise again until the end of September 1950, when the Canadian Government decided that it could no longer hold the exchange rate from rising. Presenting the Canadian case to the Board, Mr. Rasminsky (Canada) explained that the main problem was the inflow of capital from the United States, which it was administratively impracticable to restrict and which was creating such easy money conditions in Canada as to threaten an inflation there. On the other hand, his Government feared that if it revalued the dollar, as it had done in 1946, it would, as then, lose reserves to a greater extent than could be afforded. The Government could see no alternative but to allow the exchange rate vis-à-vis the U.S. dollar to find its own level; the cross rate with sterling would, however, be maintained.
The Canadian proposal was received with concern, not only because of the importance of the Canadian dollar in world trade, but even more because it suggested some loosening of the convictions of Fund members that fixed par values were the proper basis for international transactions. Executive Directors and members of the staff suggested that, instead of freeing the exchange rate, Canada should either absorb the additions to its reserves by open market operations or should control the capital intake. Mr. Rasminsky repeated that the capital inflow could not, in the nature of things, be effectively controlled, and said that to absorb the increase in reserves by open market operations would entail the creation of debt by the Canadian Government on a scale which it was not prepared to undertake. Mr. Southard (United States), Mr. Beyen, and Mr. Leslie F. Crick (United Kingdom), Alternate to Sir George Bolton,13 found Mr. Rasminsky’s arguments persuasive, and the Board decided to announce that
the Fund recognizes the exigencies of the situation which have led Canada to the proposed plan and takes note of the intention of the Canadian Government to remain in consultation with the Fund and to re-establish an effective par value as soon as circumstances warrant.
The terms of this decision were substantially similar to those with which the Board had accepted the temporary Belgian proposal, with the significant difference that they omitted the words “an appropriate step.”14 Mr. Southard said that he would have preferred a decision in which these words were used, but that he would concur in the view of the majority of the Directors.
An informal discussion in the Board in February 1951 showed that Executive Directors were aware both of the arguments for fluctuating rates and of the dangers of any spread of them. There was general recognition that in special circumstances it might be extremely difficult, if not impossible, for a country to adhere to a regime of fixed rates. But Directors agreed that in principle such a regime was preferable; the example of the 1930’s made this clear. When, therefore, Mr. Rasminsky reported in April on the first seven months of free rates in Canada, claiming that the outcome justified the Government’s decision, Directors expressed themselves satisfied that the experiment had worked out well, but relieved that the example had not spread.
The Board then resumed its informal discussions of the general problem. Mr. de Largentaye (France) contributed a lengthy argument in favor of fluctuating rates, in preference to fixed rates, as an environment beneficial to international trade. He thought that fixed rates were neither necessary nor sufficient for the maximum development of trade, and that fluctuating rates were more desirable than exchange restrictions, would eliminate “hot money,” and would contribute more than fixed rates to the stabilization of prices. These views were challenged by other Executive Directors and by the staff, who held that generalized fluctuating rates would harm both international trade and price stability.
As the discussion progressed it became clear that to most Executive Directors the main condition that would justify fluctuating rates was a temporary emergency in which a member country was unable either to hold its existing par value or to propose a suitable new one. Several criteria were suggested by which the acceptability of a fluctuating rate in such circumstances might be tested, such as the absence of hardship to other members and a dangerously low level of reserves held by the member concerned. The more general view, however, appeared to be that the only possible course would be for the member to satisfy the Fund that it would be necessary and tolerable for its exchange rate to fluctuate.
In the outcome, the Board decided on a statement of its views to be included in the Annual Report. This recognized that there might be occasional and exceptional cases where a member could not maintain any par value for a limited period of time, or where it was exceedingly reluctant to take the risks of a decision respecting a par value.15 Even in such cases, however, a member should recognize that its actions might adversely affect other members. As regards the Fund’s actions when faced with a proposal by a member to allow its exchange rate to fluctuate, the Report said that “if the Fund finds that the arguments of the member are persuasive it may say so, although it cannot give its approval to the action,” The member would then be asked to remain in close consultation with the Fund respecting exchange arrangements in the interim, and with a view to the early establishment of a par value agreed with the Fund.
Restrictions for Security Reasons
As the emergency in Korea developed, the United States decided that it would have to impose restrictions on the making of payments and transfers to Mainland China and North Korea. Explaining his Government’s proposals to the Board at a Saturday afternoon meeting, Mr. Southard (United States) said that Article VIII did not explicitly provide for such exceptional circumstances, but that
having in mind the precedent of GATT and ITO and the difficulties presented to the Fund in endeavoring to evaluate actions to which the economic and financial criteria embodied in the Articles do not apply, it was our tentative feeling that the Fund should not be expected to act on such restrictions.
Mr. Gutt commented that the proposed measures appeared to constitute a restriction and a discrimination in the terms of Article VIII, Section 3, but that he felt in the circumstances the Board would not hesitate to approve the U.S. measures. This view was supported by several Executive Directors. The Legal Department pointed out that legally the U.S. action was opposed to Article VIII, but said that the more important question was how any Fund authority should be exercised and what procedural arrangements could be made to ease the problem of consultation. Mr. Southard, in reply, urged that, while it was most undesirable in general that restrictions should be justified by pleas of emergency, a financial authority such as the Board was not a suitable forum for the evaluation of the need for restrictions on security grounds. He suggested that the Fund should merely note his Government’s action and this was done.
The problems mentioned by the Legal Department proved extremely difficult to resolve, and it was not until August 1952 that the matter was finally disposed of. The Board then, after considerable discussion, decided that when a member proposed to impose restrictions on security grounds it should notify the Managing Director, preferably in advance; that such notification should be circulated to Executive Directors; and that unless the member heard to the contrary within thirty days it could assume that its proposals were approved.16 The Fund would thereafter review the restrictions periodically, and reserved the right to modify or revoke, at any time, its approval or the effect of this approval on any restrictions that might have been imposed under it. In the light of this ruling, the Board decided to offer no objection to the U.S. measures described above, or to similar measures that had meanwhile been taken by Cuba.
It may be added that the procedure laid down was invoked in 1963 by the United States, which had imposed restrictions on transactions with Cuba, in 1965 by India in respect of restrictions against Pakistan, and in 1965 and 1966 by the United Kingdom and certain other countries in respect of restrictions against Rhodesia.
Progress Toward A Drawings Policy
There were no drawings from the Fund during the calendar year 1950, and the whole amount drawn from October 1949 through September 1951 was only $76.8 million. Meanwhile $67.7 million of earlier drawings were repurchased. To some extent the absence of drawings was due to the improvement in the balances of payments of less developed countries as a result of the Korean conflict, and, of course, the decision excluding European countries from drawing dollars still applied. But many people, both inside the Fund and in member countries, were disturbed at the small extent to which drawings were being made available to assist member countries in the kind of difficulties which the Articles had envisaged. A great deal of time and thought in the Board and among the Fund staff was devoted to attempting to formulate ways in which drawings could be safely increased. The breakthrough in this respect did not come until the following year, but the discussions of 1949–51 laid the foundations on which later policies were built. In the process the concept of an “automatic” right to draw on the Fund—a term for which Mr. Gutt accepted responsibility—disappeared, being replaced by the idea of progressive conditionality.
It will be recalled that in May 1949 Mr. Southard (United States) had put forward four criteria by which the Board should judge whether a proposed drawing would meet the test of being temporary. During the next few months he came to feel that these were insufficient, because the repurchase provisions of the Articles did not guarantee that drawings would be reversed within any limited time. The intention at Bretton Woods had been to ensure that, as a member recovered from the difficulties that had necessitated a drawing, it should share with the Fund the improvement in its reserves, rather than build these up to the full extent of the accretion achieved. This concept was, however, modified—as it had been in later versions of the Stabilization Fund and in the Joint Statement—by the imposition of certain limits, which eventually became those in Article V, Section 7 (c). As matters stood in 1951, the most important of these was Section 7 (c) (i), exempting from the repurchase obligation any member whose monetary reserves were below its quota. It had been foreseen in 1943 that, as a result, the obligation did not apply to the United Kingdom. Nor did it apply to any other country in the sterling area—for example, Australia—because the sterling area’s convertible reserves were held in London, and Australia’s reserves, being held in sterling, did not consist of a convertible currency. State trading countries, which could especially easily maintain their reserves below their quotas, could also escape from any repurchase obligations. Subsequently, as will be seen below, Section 7 (c) (iii) also came into play, preventing the use of both dollars and sterling in repurchases.
In these conditions, the Fund had to depend, to ensure the revolving character of its resources, upon the consultations prescribed by Article V, Section 8 (d). These became obligatory when the rate of charge payable by a member reached 4 per cent. There was, however, no charge (other than the service charge) payable by a member if the Fund’s holdings of its currency were less than its quota, and even for larger drawings the rate of 4 per cent was not reached for periods that might be as long as seven years.
By 1952 the effect of these limitations was fully apparent. The total of drawings from the beginning of operations through April 30, 1951 exceeded $800 million, including $400 million by the United Kingdom and India. But repurchase obligations under Article V, Section 7, accruing in the five years ending April 30, 1952 amounted to only $190 million. Part of this was due from members that had not drawn on the Fund but had repurchase obligations because they had paid gold subscriptions of less than 25 per cent of their quotas. None of the $190 million was due from the sterling area. Repurchases actually made in the same period totaled no more than $80 million.
We shall first review briefly the 17 memoranda and 19 meetings in which this problem of the use of the Fund’s resources was discussed between October 1949 and September 1951. The Board also dealt with some technical questions about repurchase obligations, and studied further the problem of voluntary repurchases which had arisen in November 1948. These subsidiary questions will be dealt with later.
Three stages may be distinguished in the Board’s search during these years for a solution to the problem posed by Mr. Southard, corresponding to three successive proposals to break the deadlock. The first of these, put forward by Mr. Southard himself in October 1949, would have required each member when drawing to enter into an undertaking to repurchase its currency from the Fund within five years. The second, put forward by the staff in May 1950 as the outcome of the studies of a staff working party, envisaged a system of preparatory screening, the results of which would be communicated to members so that they might know whether or not the Fund would agree to their drawing. The third plan, proposed by Mr. Gutt in November 1950, linked the right to draw to the presentation by the member concerned of a specific program of domestic action designed to help it to achieve the purposes of the Fund Agreement.
When pressing his argument for requiring members to undertake to repurchase drawings within five years, Mr. Southard said that this proposal was the outcome of an effort by the U.S. Government to find some way in which the Fund could prudently allow drawings. He felt that the present and prospective level of members’ reserves, together with the general inconvertibility of currencies, made a fresh look at the control of drawings necessary. At Bretton Woods the Fund had been conceived as a revolving source of financial aid to its members, but conditions were worse than had then been envisaged and it was impossible to rely on the automatic repurchase provisions to ensure that the Fund’s resources were duly reconstituted.
Mr. Southard’s proposal was criticized for a number of different reasons. Mr. Beyen (Netherlands) pointed out that the Articles of Agreement defined (negatively) the purposes for which drawings might be made, but not their term. He contended also that the repurchase provisions were not meant to be the normal way of ensuring the temporary use of the Fund’s resources. They were a corrective, to be applied when reduction of the Fund’s holdings did not otherwise come about. Mr. Southard’s proposal therefore cut right across the provisions of the Agreement.
In the view of the staff, the Board had no legal authority to set a term for repurchases unless this distinguished between members. If at the time of drawing it seemed inherently likely that a repurchase could be made reasonably soon, the Board had no power to impose conditions. If such repurchase could not be foreseen, the proper course was to refuse to allow the member to draw at all. After a drawing had been made, the Fund should remain continuously in consultation with the member, studying particularly any possible changes in its ability to repay. If it appeared that the member was not following appropriate policies, consideration should be given to cutting off its right to further use of the Fund’s resources under Article V, Section 5, or Article XX, Section 4 (i).
Mr. Southard’s proposal had been put forward in October 1949 and the staff comment cited above was circulated in December. Later that month the Board resumed discussion of the proposal and further criticisms were forthcoming. Some Executive Directors said that members’ reactions to it would be unfortunate because, before joining the Fund, they had carefully weighed the prospective obligations and benefits and had not intended to accept such a severe condition for drawing rights. Mr. McFarlane (Australia) emphasized in this connection that Australia and South Africa claimed that they had rights under the Articles of Agreement which could not be modified by administrative decisions. Some Directors, while accepting that it was right to expect members to take the proper steps to repurchase from the Fund, thought that the best way would be to invite members to make voluntary offers to limit the duration of drawings or to provide statements of intent as to the policies they planned to pursue. Mr. Rasminsky (Canada) agreed with the concept of the revolving character of the Fund, but thought that Mr. Southard’s proposal was neither appropriate nor necessary. The demand for drawings had dropped to a point at which they offered no danger to the Fund. Moreover, the proposed commitment would bind members to repurchase, even though they might be dependent on others for the power to earn dollars. He therefore supported the staff’s suggestions. At this point, Mr. Gutt said that the staff was giving further thought to the whole problem and would submit some suggestions as soon as possible.
The outcome of this review by the staff was brought before the Board in May 1950 in the form of a report by a working party composed of members of the Legal, Research, and Treasurer’s Departments and the Secretary’s Office. In substance, the recommendations of the report were as follows: The prime requirement was to enable members to know whether they could rely upon the use of the Fund’s resources in time of need. For this purpose there should be a system of prior review and assessment of the eligibility of each member, the outcome of which should be notified to the member. The essential criterion of eligibility to draw should be that the member was following policies which would restore its reserves by the end of the period of difficulty. Examples of inappropriate policies would be the maintenance of an overvalued currency and the persistence of domestic inflation. More positively, it was suggested that the Fund could recommend appropriate policies for the member to follow, the observance of which would be a prerequisite for the right to draw. It was open to the Fund in marginal cases to ask the member for an undertaking as to its policies or its plans for repurchase.
The report of the working party was debated in several meetings in the summer of 1950. Executive Directors saw considerable difficulty in the proposals. The Board was particularly concerned with the effect on members of a procedure which would divide them into white, gray, and black categories; such a categorization would, at best, be most difficult and invidious. Moreover, one Director suggested that the past record of a member as assessed in periodic reviews offered no guarantee that its policies would continue to be appropriate in the future. For these reasons, the view was expressed that the preferable course was that members should consult the Fund before drawing, and that the Fund must retain the right to challenge a proposed drawing at the time.
The Board agreed in July 1950 to adjourn its discussions until after the Annual Meeting, and no reference was made to the subject in that year’s Annual Report. During the Annual Meeting, the Governor for the Netherlands urged on the Governors’ Committee on Finance and Organization that the Fund should regard itself not as a bank, which might or might not lend, but as a secondary reserve, on which its members might count for assistance when needed. He suggested that opening up the Fund’s resources to its members was a necessary step toward assisting them to re-establish convertibility of their currencies, and urged that explicit criteria should be promulgated, so that members might know where they were. In reply, the Governor for the United States reiterated his country’s view about the need to ensure the temporariness of Fund drawings, which he distinguished in this respect from the longer-term loans made by the World Bank. Answering critics who had urged that members could not know whether they were regarded by the Fund as eligible to use its resources, the Governor said that there was in fact a simple procedure by which members could establish their position; they could inquire through their elected or appointed Executive Director.
On the same occasion the Governor for Canada, agreeing with the Governor for the Netherlands, expressed the hope that the Fund would not set such rigorous criteria as to make it almost impossible for any member to use its resources. The Governor for South Africa said that at Bretton Woods he had asked Professor Robertson the significance of the fact that Article V, Section 3, did not explicitly state that the Fund’s permission was needed to enable a member to draw. Professor Robertson, he recalled, had said that the provisions for the use of the Fund’s resources were intended to give members the “comfort” of knowing that they would not get into difficulty because they could not pay their foreign debts. The Governor for France remarked that the intervention of the Board was limited to a decision on the test of eligibility to draw; he believed that the criteria suggested by the United States would be very difficult to apply.
It was against this background that the discussion was resumed in the Executive Board. Perhaps the only clear-cut effect of the summer debate was a recognition, frankly stated by Mr. Beyen and implicitly accepted by most others, that “automaticity was a dead horse.” It seemed clear, however, that the staff proposals would not be acceptable and the way was open for the subject to enter its third phase.
Intervening in the debate in November 1950, Mr. Gutt suggested that the intentions of Article I (v)—to give confidence to members by making the Fund’s resources available to them under adequate safeguards—could be achieved by linking drawings to the engagement by members to enter upon specific actions to remedy their balance of payments difficulties. Enlarging on his proposal at a meeting in February 1951 devoted to a discussion of the role of the Fund in existing conditions, Mr. Gutt deplored the current tendency to write off the Fund as moribund. He felt, on the contrary, that there was every opportunity for the Fund to enter upon an increasingly active role, based primarily upon systematic consultations with its members. He urged upon the Board that the time had come to move away from theoretical and doctrinal issues to practical techniques. The plan which he had put forward in November seemed to him to offer just such a practical way out of the impasse in which the Fund found itself.
Mr. Gutt’s proposal was in general favorably received. Mr. Southard welcomed it as a useful and practical addition to the procedures already available, but he entered a caveat that the repurchase problem would still exist in relation to members of the sterling area and to planned economies. Mr. de Largentaye (France) challenged the legal basis of the Managing Director’s plan, saying that it tacitly assumed that members were ineligible unless they demonstrated to the contrary. Moreover, he thought that, practically, the plan would not work because no one could ensure that a member’s policies—however well intentioned—would remain appropriate to its problems. Nevertheless, Mr. de Largentaye viewed Mr. Gutt’s plan as preferable to the deadlock which had prevented use of the Fund’s resources, and said that in the circumstances he would abstain from opposing it.
Other Executive Directors also had doubts about the legality of the plan but thought it offered a useful technique for enabling members to resume drawing from the Fund. Only the Hon. Arthur Maxwell Stamp (United Kingdom), who had succeeded Mr. Crick as Alternate to Sir George Bolton, withheld approval, saying that the British Government believed that the Managing Director’s scheme would be prejudicial to the larger issue of the right of members to draw on the Fund. With his abstention, and that of Mr. de Largentaye, the Board decided to give effect to Mr. Gutt’s proposal in terms similar to those in which Mr. Southard had welcomed it. The plan was accordingly adopted, on May 2, 1951, “as a procedure for use in appropriate cases in addition to and without prejudice to existing procedures or policies respecting the use of the resources of the Fund.” A brief description of it was included in the Annual Report.17
At the Annual Meeting, 1951, the Board’s actions were criticized by several Governors. The Governor for Australia complained that the Directors had disregarded what Australia considered to be the clear meaning of Article V, Section 3 (a) (i). He said that the Annual Report had laid stress on the improvement in members’ payments positions, but that the real reason why there had been only one transaction, for £10 million, during the fiscal year 1950/51, was that a majority in the Board was preventing the use of the Fund’s resources except under its own conditions. The Governor for the Netherlands, recalling his comment in 1950, pointed out that in 1950/51 transactions had been even fewer than in 1949/50. He found the plan to relate the use of the Fund’s resources to “practical programs of action to help achieve the purposes of the Fund Agreement” to be obscure, disappointing, and unrealistic; and he compared unfavorably the small use made of the Fund’s resources with the large credits given by the members of the EPU among themselves.
Despite the doubts thus expressed by some Governors, the future was to show that progress had indeed been made in working out policies and procedures for the use of the Fund’s resources. But not until the landmark decision of February 13, 1952 was the replacement of automaticity by conditionality given a form which enabled members, Executive Directors, management, and staff to collaborate in a practical manner.
Several problems arose during 1949–51 in connection with the calculation of monetary reserves for the purpose of arriving at members’ repurchase obligations under Article V, Section 7. In general they were due to the understandable difficulty of applying general rules to the varying circumstances and accounting systems of different members.18 In two instances it proved necessary for a representative of the staff to visit the member country concerned in order to reach agreement on the figures, and one Director suggested the general conclusion that such visits might well be undertaken whenever serious difficulties arose in connection with repurchase obligations.
One issue of major importance which reached the Board was posed by the requirement in Article V, Section 7 (c) (iii), that no repurchase should be carried to a point at which the Fund’s holdings of a currency exceeded 75 per cent of that member’s quota. The general provisions of Schedule B set out the proportions in which a member was to contribute gold or convertible currencies when repurchasing its own currency held by the Fund. These were related to the proportions in which the member’s reserves contained such currencies or in which its reserves had increased during the year. But Schedule B, paragraph 1 (c), modified this requirement by providing that if repurchases so effected would, inter alia, cause the Fund’s holdings of a currency tendered for the purpose of repurchase to exceed 75 per cent of the quota of the member issuing it, “the Fund shall require such repurchases to be made by the members proportionately in such manner that the limits will not be exceeded.”
At first sight this imposed an obligation that the whole repurchase must somehow be effected in currencies which the Fund could accept, or in gold. However, an examination of the possible consequences of such a procedure led the Legal Department to feel that this could not have been intended. One problem was that a currency might be convertible for purposes of the Fund Agreement, but not convertible into gold. If a member’s reserves consisted largely of such a currency, and that currency was not acceptable to the Fund, the member might find itself incurring an obligation to repay the Fund in gold or in some currency convertible into gold without possessing either such a currency or the means of obtaining it in exchange.
The Legal Department also pointed out that, while paragraph 1 (c) of Schedule B referred to requiring repurchases to be made “proportionately,” it provided no guidance as to the way in which these proportions should be calculated—an omission quite unlike the precise formulation of requirements in paragraphs 1 (a) and 1 (b). Finally, it was of importance that paragraph 1 (c) covered not only the 75 per cent limit in Article V, Section 7 (c) (iii), but also the limits in Article V, Section 7 (c) (i) and (ii). The first of these provided that a repurchase should not bring a member’s reserves below its quota, and the second that it should not reduce the Fund’s holdings of the member’s currency below 75 per cent of its quota. But it was clear that if either of these limits was reached the repurchase obligation must be curtailed, not redistributed; hence it was impossible to conclude that paragraph 1 (c) effectively insisted that somehow the repurchase obligation must be discharged in full.
The conclusion drawn by the Legal Department was that a repurchase obligation which would involve the breach of any one of the three limits set in Article V, Section 7 (c), must pro tanto disappear. When this recommendation was considered by the Board, in January 1950, several Executive Directors said that while they questioned its implications, they had no basis on which to oppose it. The decision therefore was to adopt the Legal Department’s view.19 In practice this has had profound effects upon members’ repurchase obligations, especially in recent years when the Fund’s holdings of U.S. dollars and of sterling have both been above 75 per cent of the U.S. and British quotas.
The questions raised by the voluntary repurchase offered by Nicaragua—whether such repurchases could be accepted, and if so whether they had to be made wholly in gold—were answered by the Legal Department in two memoranda distributed in November 1949 and January 1950. The former suggested that voluntary repurchases could (but need not) be accepted at any time, within the limits set by Article V, Section 7 (c), provided that the member had no outstanding obligation to repurchase its currency under Article V, Section 7 (b). The proviso was necessary, as otherwise the member, by tendering a voluntary repurchase, might frustrate the requirements of the Article, and of Schedule B, as to the proportion in which its repurchase must be made in gold and in specified currencies. The Legal Department’s second memorandum distinguished the offer of a voluntary repurchase such as that made by Nicaragua from a tender of gold to the Fund under Article V, Section 7 (a), which obliges the Fund, at a member’s request, to sell to it for gold any excess of its currency above its quota which the Fund held. Since in the former case the acceptance by the Fund of an offer of repurchase was optional, it was unnecessary to hold that it must be made only in gold. If the Fund did not wish to accept the currencies proffered, it could refuse.
The Board decided that the problems raised by the Legal Department’s memoranda should be remitted for consideration to the Committee on Interpretation. When this committee took up the matter in February 1950 Mr. de Largen-taye (France) argued that voluntary repurchases in convertible currencies could not be accepted because they fell under the ban of Article V, Section 2, which provided that
except as otherwise provided in this Agreement, operations on the account of the Fund shall be limited to transactions for the purpose of supplying a member, on the initiative of such member, with the currency of another member in exchange for gold or for the currency of the member desiring to make the purchase.
Mr. van Campenhout, General Counsel, replied that the “operations” contemplated by Article V, Section 2, could be single or complex. They could, for example, consist of a combination of a purchase of dollars from the Fund and a repurchase of the member’s currency with dollars. The legislative history of the provision supported this concept, since if an “operation” were interpreted to mean only the purchase aspect of the dual transaction it would be impossible for the Fund to accept the repurchase even in gold of that part of the Fund’s holdings of the member’s currency which lay between 75 per cent and 100 per cent of its quota; such a transaction was not contemplated by the obligatory provision of Article V, Section 7 (a), and would therefore have to be treated as not “otherwise provided in this Agreement.”
This argument was found by most Directors to be persuasive. Mr. Crick (United Kingdom), however, was disturbed at the possible effect on the position in the Fund of a member whose currency was used for repurchases. The Fund’s holdings of that member’s currency would of course be increased by the transaction (though not above 75 per cent of its quota) and to that extent its position in the Fund would be worsened without its being able to do anything about it. This could undermine the safeguards provided in Article VIII, Section 4 (b), and to that extent might discourage members from moving from Article XIV to Article VIII. He agreed, however, that this was not a legal point; it was one affecting the policy of the Fund toward its members. As such it was not pursued by Mr. Crick or his successors, and the staff thought it unnecessary to press for a decision until the need arose. The point disappeared when in 1962 the Board adopted a comprehensive policy on the selection of currencies to be used in repurchases.
When the report of the Interpretation Committee, which adopted the view of the Legal Department, was considered by the Board on March 8, 1951, Messrs. de Largentaye and Crick repeated the arguments mentioned above. The Board, however, decided by 76,725 votes to 9,910 to accept the committee’s report. The decision as adopted made three points.20
(a) A member that had an outstanding obligation under Article V, Section 7 (b), and Schedule B must discharge that obligation in gold or currency as prescribed in those provisions.
(b) A member that did not have such an outstanding obligation might offer in voluntary repurchase, and the Fund could accept, gold or convertible currencies, subject to the limits in Article V, Section 7 (c) (ii) and (iii).
(c) It was not legally necessary for the consent to be obtained of the member whose currency was offered.
Mr. Crick proposed a rider to the effect that the member whose currency was used for a repurchase should be consulted, but this was not pressed.
Meanwhile the collection of data on monetary reserves, on which the calculations of repurchase obligations had to be based, was still running into difficulties. In July 1950 the Board revised the Rule (I–6) covering the provision of such data in such a way as to require members in future to provide the necessary figures within six months of the end of the fiscal year. However, on November 7, 1950, the staff reported to the Board that twenty members had so far failed to provide data relating to the previous April 30, and that fourteen of these had also omitted to supply the figures for earlier years. Executive Directors were asked to urge the members which they represented to supply the missing data as quickly as possible. Six months later the number of members from which information was still needed had been reduced to ten, and by the end of the period covered by this chapter the number was down to eight. The Board invited the Managing Director to convey to these members the Board’s concern that the necessary data had not been provided, and to offer the services of the staff to assist in the compilation of the figures if this was causing difficulty.
During 1949 the United Nations undertook a series of discussions with eight specialized agencies, including the Fund and the Bank, on the need for more technical assistance for economic development. One outcome was the establishment of a Technical Assistance Board (TAB) under the terms of General Assembly Resolution 304 (IV) passed on November 16, 1949. This body was set up, as an agency of the United Nations, to administer special funds to finance an extended program of technical assistance. The Fund and the Bank were invited to participate as members in the work of TAB. Neither, however, felt able to do so, partly because neither needed to have access to outside funds to finance such operations, and partly because each had special responsibilities for technical assistance in its own field, entrusted to it by its Articles, which it could not properly relinquish to another body. The Fund agreed, however, to be represented by an observer at all meetings of TAB and its subsidiary bodies; to cooperate fully with TAB; and, on the principle of reciprocity, to supply its own technical assistance wherever compatible with the Articles of Agreement.
The concept of TAB held by the UN authorities was that of a centralized agency controlling and financing all kinds of technical assistance. The specialized agencies, on the other hand, tended to emphasize their special qualifications in their own fields. Accordingly, the new body took some time to settle down. The kind of problem that arose may be illustrated by two that were discussed at sessions of TAB in the early months of 1950. One concerned the responsibility for advice and assistance given by technical assistance missions; the other the relationship of the members of a joint mission to the chief of that mission.
On the first of these, the Fund’s view was that advice and assistance given by the Fund’s missions were the responsibility of the Fund. The other specialized agencies and the UN authorities were disposed at first to feel that the responsibility they incurred toward a country to which they gave technical assistance was limited to choosing competent experts to give the advice. However, after further discussion it became clear that several of the other agencies had come to adopt the Fund’s viewpoint. The point was not formally clarified in TAB, but technical assistance practice has tended to conform to the concept put forward by the Fund. When the Fund’s staff advises a member on any subject within the competence of the Fund, the Fund assumes responsibility for this advice. Since 1964, this responsibility extends also to the advice given by outside experts lent, through the agency of the Fiscal Affairs Department, to assist members in dealing with fiscal problems. Exceptionally, however, when central banking experts who are not members of the Fund’s staff are made available through the agency of the Fund’s Central Banking Service, the Fund does not hold itself responsible for the advice given. This is because such experts are typically engaged in an operating capacity in the service of the member seeking help, and assume personal responsibility for their actions as officials of the employing government or central bank.
On the second question—the responsibility of the members of a mission toward the head of that mission—the Fund has consistently held that members of the Fund’s staff made available to participate in a joint mission remain responsible to the Fund; and, moreover, that responsibility for those parts of a joint report that deal with subjects in the Fund’s sphere must be approved by the Fund. Directors felt it to be imperative that whatever advice was given to governments on monetary and banking policy should always reflect the needs of their countries’ balances of payments. For most members at most times in the Fund’s history this has necessitated stressing the control of inflation. The Board was concerned lest the natural urge of its members toward higher standards of living should cause them to yield to pressure to inflate rather than heed advice on how to progress steadily. It could not be sure that the need to combat this tendency would be asserted with equal force by advisors from some other organization.
On these terms joint missions have proved very difficult to arrange, and have largely been replaced by parallel missions, each of which is responsible to the organization that commissioned it. Arrangements of this kind were formalized in 1952 by an agreement between the Secretary-General of the United Nations, the Managing Director of the Fund, and the President of the World Bank.
Full Employment Report
It was the problem developed in the preceding paragraphs which partly underlay the Board’s reactions to the report of the experts appointed by the United Nations in August 1949 to recommend national and international measures to achieve full employment. The “national measures” recommended involved the expansion of demand in a way, as the experts themselves recognized, that might have inflationary consequences. Moreover, the recommendations of the experts touched on the work of the Fund in several other respects. On the one hand, they proposed that ECOSOC should convene a meeting of interested governments to devise methods of producing a new structural equilibrium in world trading relationships, to be followed up by further meetings at frequent intervals to adjust the targets set, in the light of progress made. This program was to be supervised by an Expert Advisory Committee responsible to ECOSOC—a procedure which the Board felt would unnecessarily duplicate the activities of the Fund itself. On the other hand, the experts proposed to entrust to the Fund additional resources to be made available to both members and nonmembers to counteract cyclical fluctuations in demand—a proposal which would involve the amendment of the Articles of Agreement. Broadly speaking, and subject to detailed qualifications, these resources were to be provided by surplus countries, which were to deposit with the Fund the equivalent of any shortfall in their imports not offset by a fall in their exports. The deposits would be sold by the Fund to deficit countries to the extent of the fall in the latter’s exports to, less any decrease in their imports from, the surplus countries. The proceeds of the sales would be made available to the surplus countries to the extent that their monetary reserves might diminish in any subsequent period.
While Executive Directors welcomed the experts’ recognition of the Fund’s responsibilities in connection with balances of payments, they considered that the plan put forward had both weaknesses and dangers. On the technical side they foresaw great difficulty in determining with any promptitude the amount which a surplus country ought to contribute, and the amount to which a deficit country would be entitled. More fundamentally, the Board feared that the proposed transfer of resources would prove a palliative which would encourage deficit countries to postpone necessary adjustments in their international payments. While, therefore, at least one Director would have welcomed the plan as dealing with the possible effects of deflation in surplus countries, thus filling what he regarded as a gap in the scope of the Articles of Agreement, Executive Directors generally were disposed to deprecate the experts’ ideas.
The Board accordingly decided that when the report of the experts was discussed at ECOSOC the Fund’s representative should say that the Fund, while concerned at the existence of unemployment due to inadequate international demand, could not consider full employment more important than a freely operating multilateral trading system; that technically and administratively the experts’ plan for additional Fund operations seemed defective; that the Fund was already free to use its resources to assist its members in temporary balance of payments difficulties, and if these resources were inadequate there were better ways of increasing them than by setting up a separate mechanism; and that insofar as the proposed scheme would involve the Fund in providing resources to perpetuate a state of international disequilibrium, this would be directly contrary to its obligations under its Articles. The Board’s decision concluded by referring to the availability of the “scarce currency provisions” of Article VII, saying that the experts’ plan was perhaps best considered as an alternative to these provisions, and that the latter deserved more careful study.
European Payments Union
A new stage in the evolution of payments arrangements in Europe began with the issue in December 1949 of a draft working paper, prepared by the U.S. Economic Cooperation Administration (ECA).21 This paper recommended the establishment of a clearing union, the adoption of a common unit of account, the prior allocation of ECA dollars in accordance with estimated needs, and the use of ECA funds to cover the probable net outgo of dollars from the system. It also advocated the adoption of a scale of payments in gold and dollars by debtor to creditor countries, graduated in proportion to the relation of the debit balance to the country’s quota in the proposed European Payments Union (EPU).
Drawing this to the attention of the Board in January 1950, Mr. Gutt stressed the vital interest of the Fund in the new arrangements proposed. He recommended that the Fund should participate in the forthcoming discussions, both in technical and in policy matters; that members should consult the Fund before adopting any new plan; and that the Fund should provide any new regional monetary organization required. In reply, Mr. de Selliers (Belgium) emphasized that the new proposals were the outcome of two years’ experience, and that as the Fund had hitherto taken a negative attitude toward Europe’s plans it was inappropriate now to request European Governments to suspend action pending consultation with the Fund. Another Director pointed out that, in any case, the staff memorandum which the Managing Director had presented to the Board would reach all Fund members. The Board then decided to note the views of the Managing Director and staff and to agree to their transmittal by Executive Directors to the member countries concerned. However, a month later it approved a proposal by the Deputy Managing Director, following a visit by him to Europe, that a strong staff mission should be made available to participate in the forthcoming discussions.
The subject was resumed in March, when the Board had before it draft instructions to the staff mission. Specific points in these instructions were criticized by the Board. Mr. Joshi (India) and Mr. Falaki (Egypt), for instance, objected to the staff’s stress on the difficulties caused by the overabundance of sterling, although the staff continued to argue that the existence of large sterling balances was partly responsible for the United Kingdom’s reluctance to dispense with bilateral arrangements in Europe. Several Executive Directors drew attention to the difficulty faced by the Board in instructing a staff mission to a series of meetings at which the Governments represented on the Board would be instructing their own delegates. Mr. Crick (United Kingdom) urged that the only guidance given to the mission should be to assist in formulating payments arrangements compatible with the Fund’s objectives.
The draft instruction to the staff that they should support a system by which intra-European settlements should increasingly be made in gold and dollars was challenged by several Directors and taken to a vote. This resulted in the instruction being confirmed by 51,040 votes to 28,260. The instructions to the staff were then agreed. They were, in summary, as follows:
The Fund should assist in formulating satisfactory payments arrangements compatible with its purpose.
Regional payments arrangements should facilitate the attainment of convertibility, avoiding tendencies toward a closed monetary area.
While inflation threatens, the element of credit should be moderate; settlements should be increasingly in gold and dollars.
The Fund mission should stress that the conditions needed for convertibility were the same as those needed for the functioning of a satisfactory payments agreement.
Subsequent developments may be briefly noted. Mr. Gutt visited Paris in April and June and the Deputy Managing Director paid a second visit in May. As the negotiations progressed a note of disillusionment crept into the Board’s discussions. Difficulties became increasingly apparent. Some were created by the fact that four of the members of the OEEC were not members of the Fund, and others by the unwillingness of European members to have European problems discussed in the Fund Board, where non-European members participated. The “ERP Decision” on the use of the Fund’s resources, making it impossible for European members of the Fund to rely on access to drawings, was cited as precluding any plan for the association of the Fund with settlement arrangements. The fact that the Board was simultaneously examining proposals by the staff for a new policy on the use of the Fund’s resources raised difficulties of a similar kind. One Executive Director questioned whether it was wise for the Fund to seek any special relations with the EPU, since the latter was so far removed from the kind of system which the Fund wanted. Eventually it was decided that the Fund representatives should not seek any special arrangements with the EPU, except to ensure that observers on behalf of the Fund might attend meetings of the EPU Management Committee.
The text of the new plan (which came into force on July 1, 1950) was circulated to the Board on August 15, and on the following day the Board held a preliminary discussion on proposals for the association of the Fund with the new body. The debate was inconclusive and was adjourned until after the 1950 Annual Meeting. Discussions were not, however, resumed and, while the Board was given regular reports from Paris on the working of the new plan, it did not again consider associating the Fund with it.
Gatt: The Fund’s Role
During the last quarter of 1950 the GATT held a series of consultations at Torquay. In accordance with the agreement between the GATT and the Fund, the latter was invited to advise the Contracting Parties on the justification for trade restrictions imposed for balance of payments reasons. This involved the Fund in an intensive study of the economic situation of the nine countries concerned—Australia, Ceylon, Chile, India, New Zealand, Pakistan, South Africa, Southern Rhodesia, and the United Kingdom. The delegation to Torquay was led by Mr. Saad (Egypt).
In the course of briefing the delegation the Board reached decisions on two major issues: that the economic situation on which the Fund’s advice was to be given was the current one, not that at the time when the restrictions in question were imposed; and that the advice given should include not only facts but conclusions drawn from these facts. Both these decisions were taken to a vote. That the advice should include current conditions was decided by 64,090 votes against 21,000. The decision to put forward conclusions was adopted by 60,580 votes to 30,010. A third vote, formally approving the report to the GATT, was also decided by 60,580 to 30,010.
Opposition expressed by Australia in connection with these decisions was often reflected in later discussions of GATT matters in the Fund, and it may be useful to remark that its underlying purpose was to seek to expand the role of the GATT, and diminish that of the Fund, in the borderland where both had responsibilities. For this wish, two reasons may be discerned. On the one hand, voting in the GATT was on the basis of one country, one vote, so that Australia’s voice was relatively larger than in the Fund, where it was outweighed by members with larger voting powers. In the second place, the Australian authorities appear to have felt that their representatives in the GATT had somewhat greater freedom of maneuver than in the Fund, both because countries’ positions there were somewhat less firm and because the economic doctrines prevailing in the GATT were less strictly orthodox than those in the Fund. A recognition of Australia’s interest in GATT matters led in later years to the appointment of the Australian Executive Director as chairman of the Board Committee on Relations with the GATT.
This, however, was in the future. At Torquay the actual consultations were protracted and at times acrimonious. Although the authority of the Fund as financial advisor to the GATT was not questioned, and its submission of current data accepted, the propriety of its submitting conclusions was contested with some acerbity. The U.S. and Belgian delegations at Torquay supported the position taken by the Fund, but those from Australia and the United Kingdom were dissatisfied.
The Australian view of the Fund’s role in GATT consultations was that this was limited in three respects. Firstly, it was suggested, the Fund’s concern was exclusively with exchange and other financial matters, and not at all with import restrictions or trade controls. In pursuance of this argument, Australia had refused to allow the Executive Secretary of the GATT to send to the Fund copies of certain documents related to trade restrictions, for which the Fund had asked in connection with its preparations for the consultations. Secondly, Australia still contended, as it had done at the Board, that the Fund’s advice should be concerned only with the need for intensifying restrictions at the time that step was taken, and not with the current position at the time of the GATT discussions. Thirdly, Australia considered that the Fund’s contribution to the consultations should be limited to detailed factual information, and that it should make judgments only in relation to monetary reserves, balances of payments, and foreign exchange arrangements. In a speech to the Contracting Parties on December 9, 1950, the Australian delegate emphasized all these points and requested that the invitation to the Fund to consult on future occasions should be drafted by the Contracting Parties. His delegation also gave notice that it would submit to the next meeting of the GATT detailed proposals for the procedure in later consultations. However, by the following August the Government judged that, because of proposals then being discussed for the establishment of a Secretariat and a Standing Committee for the GATT, it was appropriate to withdraw the request for a discussion of the procedure. Although at the Annual Meeting in September 1951 the Governor for Australia criticized the Board for transmitting “conclusions” to the GATT on matters which the GATT was called upon to decide, the point was not pressed. Since then the Fund’s participation in GATT consultations, along the lines proposed by the Board, has not effectively been challenged.22 A working party set up at Geneva in October 1951, under Australian chairmanship, to draft a procedure for consultations in and after March 1952, recommended only that a consultation with the GATT should not take place until the Fund had completed its consultation under Article XIV with the same member country, and that the Fund should make available to the Contracting Parties the results of its consultation with the member.
Premium Prices for Gold: Last Phase
Between October 1949 and September 1951 the Board on 30 separate occasions reviewed its policy, first enunciated in 1947, which deprecated the sale of gold at premium prices. The occasion for the first discussion was the resolution on the subject passed at the Fourth Annual Meeting, as described in the previous chapter. The final review arose from an attempt to find ways in which to implement the policy more effectively; from this there emerged the last decision which the Board has ever taken on the general question of sales of gold at premium prices. In the course of the two years the Board came reluctantly to adopt a view which it had at first repudiated. How this came about can only be indicated in summary. Difficult questions were involved, and the arguments adduced can only be briefly surveyed; for the sake of cogency many subsidiary issues are here omitted altogether.
South African Proposal
On October 12, 1949, the Board took into consideration the resolution passed by the Governors at the Fourth Annual Meeting, which transmitted to the Executive Directors “for study of all relevant considerations and report to the Board of Governors” a South African proposal that members should be free to sell half their gold output in free markets. The Board had some difficulty in deciding what were the “relevant considerations” to be borne in mind: among the topics mentioned were the price of gold, subsidies to gold production, domestic sales of gold, and the circulation of gold coins. However, the staff was asked to draft a report.
The staff report, a document of some sixty thousand words, reached the Board in February 1950. Part I contained a general description of premium gold markets, a study of the economic and legal aspects of the South African proposal, and an evaluation of Fund policy on premium gold markets. Part II reviewed the nature and scope of the principal gold markets individually, and was accompanied by extensive tabular material. The conclusions of the report may be summarized as follows: (a) Nearly everywhere the importation of gold at premium prices was a species of capital flight which diverted foreign exchange resources from reserves to less important uses. However, the total supply of gold to premium markets in 1948 was estimated to be only about 6½ per cent of the deficit of the rest of the world toward the United States on current account. (b) It was unlikely that the demand for gold for hoarding would continue at the level currently reached; the premium price had recently decreased quite sharply. (c) The control of exports by distinguishing fabricated gold was difficult because the cost of fabrication was relatively small, (d) The profit position of the gold mining industry was not unfavorable, even before the devaluations in 1949, while it seemed probable that the reduction in the premium which would follow if the South African proposal were adopted would be such as to eliminate any extra profit from that source.
Summing up, the report suggested that the facts justified the Fund’s policy and offered little support for its abandonment on the ground of supposed hardship to gold producing countries. Nevertheless it had to be considered whether it was worthwhile for the Fund to continue to exert moral suasion in support of the policy. Premium markets were a symptom of a deep-rooted malady—the persistence of inflation. Until that malady was cured the symptom would persist, and policies such as the deprecation of sales in premium markets would be palliatives only. The staff recommended that the Fund policy should be modified by leaving gold exporting countries free from any restrictions other than those inherent in the obligations of Article IV, Section 2, of the Fund Agreement (which prohibits the purchase of gold above parity or its sale below parity) and in members’ undertakings to cooperate in maintaining orderly exchange arrangements. It suggested that this modification should be coupled with offers to assist any member whose reserve position was threatened by gold transactions to find more effective means of preventing unauthorized sales and to enlist the cooperation of other members in helping to prevent the undesirable practices.
Presenting this report at two informal sessions of the Board in February 1950, the staff explained that its views on the desirability of preventing premium gold sales were unchanged; it suggested a change in the Fund policy only because this was being flouted, which was bad for the Fund. The Board was, however, reluctant to modify its policy in the way suggested, Mr. Crick (United Kingdom) in particular urging that free dealings in gold might jeopardize the official rate for sterling.
Resuming the discussion in April, the Board heard Mr. J. E. Holloway, Alternate Governor for the Union of South Africa, argue for the South African proposal. When signing the Articles of Agreement, South Africa had understood that Article IV, Section 2, permitted members to sell gold above parity; in any case, South Africa had only entered the premium markets after finding that other countries were doing so, and by agreement with the Fund. Mr. Holloway was unable to see that official hoarding of gold was any better than private hoarding. He urged that the Board should face the question of an increase in the price of gold.
Mr. Holloway’s statement was debated at some length, but found no support except from Mr. McFarlane (Australia), although Messrs. de Largentaye (France) and de Selliers (Belgium) thought that the Fund’s existing policy was legally untenable and economically unwise. Messrs. Crick, Joshi (India), Falaki (Egypt), Rasminsky (Canada), and Southard (United States) all supported the Fund’s policy, which Mr. Crick thought should if anything be strengthened. At the end of the discussion the proposal made by South Africa at the Annual Meeting was defeated by 51,740 votes against 7,280.
Turning then to the staff’s recommendation, the Board decided to maintain the 1947 policy by 55,290 votes against 16,530. On the price of gold, the staff’s advice was that an increase was not justified. Mr. de Largentaye argued for an increase in order to avoid the onset of a depression, but Directors generally accepted the staff’s view. Accordingly a brief report was sent to the Governors on April 24, advising them to reject the South African proposal and stating that the Directors saw no reason to alter the existing policy.23 Chapter IV of the Annual Report was devoted to an exposition of the policy and to a review of recent tendencies in gold production and premium markets.24
The subject was discussed at the Annual Meeting, 1950, in the Governors’ Committee on Gold. Views were expressed by the Governors for India and the United States supporting the Board’s report, and by the Governors for France and Belgium advocating an increase in the price of gold. Mr. Havenga, Governor for South Africa, briefly addressed the committee in support of such an increase, and subsequently made a statement to the Governors as a whole in opposition to the Executive Board’s views.25
Implementing the Policy
There the matter stood until, in February 1951, the staff presented to the Board a review of premium gold markets in 1950, which showed that sales in these markets had increased very sharply in the second half of the year. The staff suggested that the volume of transactions was such as to make it desirable to take steps to make the Fund’s policy more effective. Special attention was drawn to the large sales by South Africa. The Board considered this review, and after a postponement to allow governments to be consulted, reached a decision in the following terms:
Since the amount of sales and purchases in the world markets of gold for jewelry, artistic and industrial purposes has recently been increasing at a rate indicating that at least a part of it finds its way to private hoards, contrary to the gold policy of the Fund established in June 1947, the Board considers the existing arrangements and practices of several countries, including South Africa, are no longer a satisfactory basis to implement the Fund’s gold policy and directs the staff of the Fund urgently to elaborate, after consultation with the countries concerned, more effective methods than the existing ones.
This decision was made public on March 7, 1951, and was cited in the Annual Report for 1951 in connection with a discussion of developments in premium markets during the previous year.26
The Annual Report was approved for printing on July 12. Six days later Directors received copies of the staff’s report, prepared in pursuance of the Board’s directive. This recommended that, as a matter of principle, countries should permit the export and import of gold in any form only in order to satisfy legitimate industrial and artistic demands, or for refining, processing, or fabrication; and that except for movements of gold between monetary authorities, no country should permit the export of gold in any form to another country that had not subscribed to the principle mentioned. Subsidiary recommendations were that statistics of gold movements should be supplied to the Fund, that exporting countries should require evidence of the actual import of gold into the country to which it was directed on export, and that countries should not admit gold for safekeeping.
The Board did not have an opportunity to discuss this report before the 1951 Annual Meeting, but it was the subject of a somewhat scathing comment by the South African authorities. Remarking that “it is a common disease of bureaucracies to move on from one control to another,” they condemned the proposals as administratively impracticable, as failing to command public support in many important countries, and as having no clear objective.
Immediately after the Annual Meeting the Board took up the staff’s report. After considerable debate, in which the merits of the Fund’s policy were again challenged, the Board tacitly accepted the criticisms put forward by South Africa, that the additional controls recommended by the staff were unworkable. The staff was accordingly invited to make further recommendations. This it did in a memorandum which briefly argued that the enforcement of the Board’s policy was impracticable without the kind of detailed supervision which had been recommended. If this were thought to be administratively impossible, the staff suggested that the only alternative was for the Board to withdraw its request to members to observe the policy.
Directors showed considerable reluctance to accept proposals which seemed to be tantamount to abandoning the 1947 decision, but agreed in general with Mr. Southard that no uniform code for controlling gold sales appeared to be feasible, and that it would be necessary to leave to members the decision how to carry out the Fund’s policy. Some difficulty was experienced in drafting a statement that carried general approval, but on September 28, 1951, the Board decided on a public announcement. This referred to the June 1947 decision, and stated that it was still desirable for gold to be held as far as possible in reserves. It went on, however, to intimate that, because it was impracticable to expect governments to take uniform measures to achieve the objectives of the policy, the Fund was leaving to its members the operating decisions necessary to do so.27 This was the last occasion on which the Board considered what its policy should be in connection with sales at premium prices. By then, of course, Mr. Rooth had become Managing Director, and it is to his term of office that we shall now turn, after a brief retrospect.
A Summing-Up, 1946–51
Looking back over the Fund’s first five years, the observer is bound to be impressed chiefly by what was not achieved. In 1951 member countries had not yet fully grasped what was needed from them if the Fund was to be an effective instrument. Multiple currency practices were still prevalent, and the attractiveness of a freely fluctuating currency seemed, if anything, to be on the increase. No solution had been found for the problem of reconciling access to the Fund’s resources with the protection of those resources from premature dissipation. No working relationship had been established with the intercountry organizations arising in an economically united Europe, and the attempts to create one had shown that some at least of the countries concerned tended to rate their interests there above their interest in the Fund. Even the policy deprecating the sale of gold at premium prices, in which much effort had been invested, was shortly to prove unfeasible.
Yet it would be a mistake to assess the five years 1946–51 in these negative terms. International cooperation in economic matters was still in its infancy; that it progressed as far as it did was due in no small degree to the effectiveness of the Fund as a forum for the discussion of international problems. The concept of an international staff, owing its allegiance only to the Fund, had been realized, and this staff, ably led by the Director of Research, was gaining influence. Given that the Board was sometimes unable to take an international view where the interests of the Fund’s largest members were involved, it had yet acted as an international conscience in many other matters. Given that the Board had little say in fixing the new exchange rates established in 1949, these devaluations had been brought about partly by the pressure which it had exerted, had been coordinated through its means, and had been accepted, under its auspices, without provoking retaliation.
In all this, the Managing Director played no small part. He supported the staff and encouraged its advocacy of forward-looking policies. Disappointed though he became because the Board was unready to take the lead which he wished it to assume, he continued to urge the importance of its potential role. It was with justification that on the occasion of his retirement the Directors expressed
their appreciation of Mr. Gutt’s wise conduct of the affairs of the Fund during its first five years, of his clear-sighted statesmanship in the field of international finance, and of the invaluable service he has rendered to the Fund and its members.
The emphasis which Mr. Gutt personally placed on the need to control inflation helped to set the tone of the Fund’s most insistent thesis. Without the foundations which were laid under his leadership during the first five years of the Fund, the developments of its later years could never have come to fruition. Despite the conditions which existed in 1946–51 within the Fund, and the economic circumstances in which its work had to be done, Mr. Gutt achieved much in building up the organization and the policies which the Fund needed. In particular, the Fund had been brought by 1951 to the threshold of effective policies and procedures for the use of its resources—a development which made it possible to take in 1952 the decisive remaining steps.
Summary Proceedings, 1950, pp. 63–72.
Summary Proceedings, 1951, pp. 66–73.
E.B. Decision No. 574-2, May 18, 1950; below, Vol. III, p. 268.
E.B. Decision No. 597-4, July 28, 1950; below, Vol. III, p. 268.
Approved by Resolution 6-4, Summary Proceedings, 1951, p. 54.
First Annual Report on Exchange Restrictions (March 1, 1950), pp. 3–37.
Second Annual Report on Exchange Restrictions (April 1951), pp. 1, 14.
Summary Proceedings, 1951, pp. 44–45.
E.B. Decision No. 534-3, February 20, 1950; below, Vol. III, p. 266; Annual Report, 1950, pp. 118–19.
E.B. Decision No. 408-2, March 11, 1949; below, Vol. III, p. 220.
Annual Report, 1951, p. 32.
Annual Report, 1950, pp. 42, 54, 67; Annual Report, 1951, pp. 67–68.
Mr. Bolton had been knighted in January 1950.
Cf. above, p. 241.
Annual Report, 1951, pp. 36–41.
E.B. Decision No. 144-(52/51), August 14, 1952; below, Vol. III, p. 257.
Annual Report, 1951, pp. 81–82.
E.B. Decisions Nos. 493-3, November 4, 1949, and 510-2, December 16, 1949; below, Vol. III, pp. 272, 273.
E.B. Decision No. 521–3, January 16, 1950; below, Vol. III, p. 273.
E.B. Decision No. 7-(648), March 8, 1951; below, Vol. III, p. 244.
For the Fund’s previous relations with European payments arrangements, see above, pp. 212–23.
Gerard Curzon, Multilateral Commercial Diplomacy (London, 1965), pp. 138, 144. For a description of the working arrangements between the Fund and the GATT that have been developed since 1952, see below, Vol. II, Chapter 16.
Annual Report, 1950, pp. 90–94.
Ibid., pp. 70–74.
Summary Proceedings, 1950, pp. 93–98.
Annual Report, 1951, pp. 73–80.
E.B. Decision No. 75-(705), September 28, 1951; below, Vol. III, p. 225.