Chapter 12: New Functions (1951–52)
- International Monetary Fund
- Published Date:
- February 1996
Article XIV of the Fund Agreement requires that five years after the Fund begins operations, and in each subsequent year, members maintaining exchange restrictions under that Article shall consult with the Fund as to the retention of these restrictions. The five-year period expired on March 1,1952, and accordingly a major feature of Mr. Rooth’s first year as Managing Director was the inauguration of the annual consultations, which today form a large part of the work of the Executive Board. Simultaneously, the achievement of an agreed basis for the use of the Fund’s resources made it possible to place these more freely at the disposal of member countries if they needed such assistance to enable them to reduce their reliance on artificial restraints on the balance of payments. An important result of the new basis for drawings was to shorten the period between the time a drawing was made and the time when the member was required to consult the Fund about ways for reducing the Fund’s holdings of its currency. Thus in two different ways the Board expected to maintain closer and more regular contacts with its members. The establishment of such contacts was undoubtedly the main feature of 1952 for the Fund.
Membership, Board, and Staff
Membership and Board
Four countries joined the Fund during the year: Burma on January 3, 1952, Japan on August 13, Germany on August 14, and Jordan on August 29. This brought the total membership to 54, and the number of votes that Directors could cast to 100,865. Deducting the votes of the appointed members, and of the two Directors elected for Latin America under Article XII, Section 3 (b) (iv), the number of votes to be cast by the remaining elected Directors was 35,005. The corresponding figure in 1950 had been 26,775. In accordance with the precedent set in 1947, the Board proposed, and the Governors approved, that the number of Directors to be elected, including the two by the American Republics, should be increased from nine to eleven. Both Mr. Martínez-Ostos (Mexico) and Mr. Paranaguá (Brazil) expressed concern that there should be this further increase in the number of elected Directors while the number representing Latin America remained fixed. However, they agreed to the Board’s recommendation to the Governors on the understanding that in future elections there could be an increase in the number of Directors representing Latin America if the number of votes cast by these countries should be substantially expanded. The election was held on September 11, 1952 during the Annual Meeting, and is reported in the next chapter.
During the year there were two changes among the appointed Directors: Mr. W. R. Natu (India) succeeded Mr. Joshi from November 30, 1951, and Sir Edmund Hall-Patch (United Kingdom) succeeded Sir George Bolton, who resigned on May 19, 1952.
At the end of January 1952 Honduras asked that its quota, which in 1948 had been reduced at its request from $2.5 million to $0.5 million, should be restored to the original figure. Its Government explained that a complete reform of its monetary system, which had meanwhile been effected, enabled it to ask for a reversal of this temporary decrease. This was agreed by the Executive Board in March, and became effective in May after approval by the Board of Governors.
On January 24, 1952, Mr. Overby resigned as Deputy Managing Director in order to become Assistant Secretary of the U.S. Treasury. Mr. H. Merle Cochran, long a career officer in the Foreign Service of the United States, retired from that Service and resigned as Ambassador to Indonesia to succeed Mr. Overby in March 1953. It may be noted here that Mr. Cochran concentrated more than either his predecessor or his successor on administrative and staff matters.
During his first few months as Managing Director, Mr. Rooth made considerable use of the Staff Committee set up by his predecessor. The committee met 35 times in the twelve months from September 1951 to August 1952 and about once a week in the last two months of 1952. Thereafter, however, less formal machinery largely took its place; the committee, as such, met only three times in the second half of the calendar year 1953, five times in the whole of 1954, six times in 1955, and six times in 1956. Its existence as a constitutional body ended with the termination of Mr. Rooth’s tenure as Managing Director.
On April 30, 1952, the active staff numbered 426. A further ten were on leave without pay, 15 on military leave, and one on loan to another organization. Of the 43 most senior posts, 18 were held by citizens of the United States. The remainder were filled by five officers from the United Kingdom, four each from China and the Netherlands, two each from Czechoslovakia and France, and one each from Belgium, Canada, Chile, Egypt, India, Nicaragua, Pakistan, and Sweden.
Gold Transactions Service
In February 1952, as a result of a suggestion by Mr. Martínez-Ostos, the staff proposed to the Board that a new service should be offered to Fund members. Members seeking to buy or sell gold should be invited to notify the Fund of their wishes, and the staff should endeavor to “marry” requests for purchases and sales in any given market. For this service the staff suggested that a fee of 1/32 of 1 per cent should be charged to each partner, to cover cable costs, etc.; this was lower than the charges made for similar services elsewhere. The Board approved, and a letter was sent to all members on March 21, 1952, offering the Fund’s assistance in the way suggested. 1
In his address to the Governors at the ensuing Annual Meeting, the Managing Director was able to say that a number of such transactions had already been arranged. 2 There had in fact been 11 transactions, for $78 million. The success of the arrangements depended very much upon the use made of them, since any material delay in finding a buyer for a prospective seller of gold meant a potential loss of interest to him; it was calculated that if the delay was as much as a month, the seller would have found it more worth his while to have sold to the Federal Reserve Bank of New York, even though the Federal Reserve Bank charged a fee of ¼ of 1 per cent. The service has, however, remained in operation. During the nine fiscal years 1951/52 to 1960/61, 114 transactions for rather more than $1 billion were concluded, but the demand for the service then diminished, and between 1960/61 and 1965/66 there were only 6 further transactions, for $37 million.
Investment of Fund’s Assets Considered
In only one of the first five years of the Fund’s work—in fiscal year 1947/48—did its receipts exceed its expenditure. Almost the whole of its income was derived from charges on its holdings of members’ currencies and securities in excess of their quotas; and drawings were smaller than had been expected. The exceptionally low level of drawings in 1949–51, on which a comment was made in the previous chapter, meant that the financial position steadily deteriorated. For the fiscal years 1949/50 and 1950/51, taken together, the Fund’s income was $5 million and its expenditure $8.5 million. In 1951/52 income was $3.25 million and expenditure $4.77 million. By April 30, 1952, there was a cumulative net deficit of $7.24 million—equivalent to 0.1 per cent of the balance-sheet total. This caused some anxiety in the Board, and influenced its decisions on such matters as the size of the staff and the amount of traveling that was undertaken. It was also the subject of discussion by the Finance and Organization Committee of the Governors at the Annual Meeting, 1952. The Governor for the United Kingdom criticized the steady increase in the Fund’s annual expenditure, and the Governor for Iran, supporting him, suggested that too much paperwork was being done. The cumulative deficit was not, in fact, wiped out until 1957/58, and not until then did it become possible for the Fund to put aside reserves, as contemplated in Article XII, Section 6.
The possibility of investing some of the Fund’s assets in order to increase its income, first mooted by Mr. White (United States) in October 1946, was revived in April 1951. The Board then discussed briefly the legal and policy implications of such an investment, and appointed a committee, under the chairmanship of Mr. Martínez-Ostos (Mexico), to review the matter thoroughly. The committee held two meetings, one in May 1951 and one in July 1952. At the first of these, two memoranda by the Legal Department were discussed. One dealt with the question whether the Fund had legal authority to invest its assets—the main difficulty being the prohibition in Article V, Section 2, against transactions other than those listed (which did not include the investment of assets). This memorandum elaborated the advice given to Mr. White in 1946, to the effect that Section 2 dealt with the basic transactions for which the Fund was established in order to serve its members, but did not cover activities of an administrative kind. The latter would include the investment of gold in order to earn an income to cover a deficit. In addition, the memorandum pointed out that under Article XII, Section 2 (g), the Board of Governors, and the Executive Directors to the extent authorized, had power “to adopt such rules and regulations as may be necessary or appropriate to conduct the business of the Fund.” This, it was contended, would authorize administrative decisions of the kind mentioned.
However, the fact that the proposed transaction would be an administrative one meant that it would be subject to certain limitations and require the exercise of certain safeguards. These were discussed in the second memorandum. The amount of gold invested would have to be reasonably proportioned to the expenditures for which it was intended to produce income; also, the amount and duration of the investment would have to be such as not to hamper the Fund in selling currencies to its members. In practice, since the possession of gold enabled the Fund to replenish its stock of needed currencies, the terms of the investment should be such as to permit the Fund to transform back into gold at will the securities which it held. Moreover, such a transformation would have to be protected against loss, which meant that the gold value of the securities would have to be guaranteed. The fact that the Fund’s deficit was being incurred mainly in dollars suggested that the securities which might most appropriately be considered were U.S. Government issues. The Legal Department advised that if the Fund invested gold in such securities the U.S. Government would be obliged to guarantee their gold value under Article IV, Section 8 (a), should there be any depreciation of the U.S. dollar during the term of the investment.
One main question to be resolved was whether prudent management would be better advised to retain the gold that the Fund held, at the expense of running a relatively small operating deficit, than to invest the gold in order to eliminate the deficit. Looking further ahead, the Legal Department suggested that similar management considerations at some future date might dictate investment in the securities of some other country. This might involve the invidious task of assessing the creditworthiness of a member government. A third point made was that nothing in the Articles of Agreement required the Fund to obtain the consent of the member in whose securities the investment was made; nevertheless, the size of the investment might well affect that member’s money market, so that as a matter of policy it would be well to enter that market only with the approval of the government concerned. On two less important issues the Legal Department saw no difficulty. It could not be argued that an investment of the kind considered would give financial assistance to the member in whose securities it was made, since the investment was designed to benefit the Fund, and not that member. Finally, while the investment of currency held by the Fund would involve some loss to the member concerned, since it had the option of providing to the Fund noninterest-bearing securities instead of currency, no such problem arose if what was invested was the Fund’s gold.
In sum, therefore, the Legal Department saw no obstacle to the investment of the Fund’s gold in U.S. Government securities under proper safeguards. When its memoranda were discussed by the committee of Directors in May 1951, however, opinion was divided. Mr. Southard (United States) said that while he was inclined to agree with the Legal Department on the legal question, he was undecided on the policy issues; in any case, his Government had not yet reached a conclusion on the matter. Mr. Stamp (United Kingdom) questioned whether it would be wise for the Fund to incur an uncovered exchange risk by investing gold in order to earn a few dollars. Mr. Melville (Australia) urged that it was essential that the Fund should always be in a position to recover the gold invested. Mr. de Selliers (Belgium) took exception to the Legal Department’s argument that the investment would be an administrative act, and therefore not excluded by Article V, Section 2; in Mr. de Selliers’ view, this was an untenable distinction. Mr. Beyen (Netherlands) largely shared Mr. de Selliers’ doubts, and neither he nor Mr. de Selliers was reassured by the General Counsel’s advice that there was an implied power in the Articles of Agreement to make an investment to cover an operating deficit, provided that it was good management to do so. Several Executive Directors also had difficulty in accepting the Legal Department’s view of the effect of Article IV, Section 8 (a). The committee was therefore unable to reach any conclusion.
Unfortunately, time proved no solvent for these difficulties, although during the next several months the chairman of the committee continued to explore the possibilities. He was unable to obtain any definite indication of the position of the U.S. Government as to an investment in dollar securities. An attempt to interest central banks in a plan to purchase from them with gold some of their holdings of securities, subject to a guarantee of the convertibility of these holdings back into gold, foundered despite an initial expression of interest by some Latin American central banks. Discussions with the World Bank showed that there was no practical opening for an investment of gold in World Bank securities. When, therefore, the committee met for a second time in July 1952, it was only to agree that it must report to the Board its inability to put forward any recommendation. This was done in August, and the committee was discharged from any further consideration of the proposal until the Board decided that it was time to take it up again. Three years were to elapse before this came about.
The Seventh Annual Meeting of the Board of Governors, held in Mexico City from September 3 to 12, 1952, was marked by an unusually large number of speeches, covering a wide variety of problems, most of which are dealt with elsewhere in this Chronicle. One of the major contributions to the discussion was made by Mr. Pierre Mendès-France, the Governor for France. 3 He addressed himself to the problems of restoring convertibility, and was especially concerned to challenge an argument, adduced incidentally earlier in the day by Sir Percy Spender, Governor for Australia, that discriminatory regional arrangements were inimical to the attainment of general convertibility. 4 Mr. Mendès-France believed that, on the contrary, arrangements such as the EPU were a necessary step toward convertibility—necessary because of the danger that without these mutual links countries might revert to economic isolationism. He made it clear, however, that he looked for the “active intervention” of the Fund, and it became evident, to an extent somewhat greater than in earlier Annual Meetings, that Governors generally visualized the Fund as having an important role in guiding its members along the path of economic stability and international cooperation. (It may be mentioned that the principal theme of Sir Percy’s address was one regularly taken up at Annual Meetings by the Governors for South Africa—the need for an increase in the price of gold.)5
The meeting in Mexico City was also the scene of an experimental session at which Mr. (later Sir) Roy Harrod, at that time acting as a consultant to the Fund, and four regular members of the Fund’s staff presented a series of papers on the world payments situation and outlook. Each paper comprised a group of charts illustrative of one facet of the general problem, together with a short commentary. Five Governors took part in a brief discussion that followed. After the meeting, the papers were reproduced in a brochure entitled The World Payments Situation.
It is convenient to record here that in the following year, 1953, a feature of the Annual Meeting was a similar symposium on “The Revival of Monetary Policy.” Addresses by five members of the Fund’s staff were followed by comments by four Governors. The addresses were reproduced in printed form and sent to all recipients of the International Financial News Survey (then some 14,000) as well as made available to those attending the Meetings.
The organization of the Annual Meeting, 1952 (as of all such Meetings held away from Washington) involved extensive preparatory work by a joint team from the Fund and the Bank, in conjunction with officials of the local Government. In addition to the formal sessions, with their requirement of adequate accommodation, documentation, and press services (and, more recently, simultaneous interpretation), provision had to be made for meetings of delegations among themselves, and for discussions between delegations and the staff and management of the Fund. The greater size of the Fund, the increasing activity of delegations, and the need to conduct parts of several consultations during the Meeting, all added to the complexity of the organization that had to be provided. The growing number of speakers at the formal sessions increased the problem of framing a timetable which would accommodate them all and correspond as far as possible to the times at which they wished to address their fellow Governors. All this was primarily the responsibility of the Secretary’s Office, but on this occasion the Secretary himself could not be present. He was a U.S. citizen but, by an ominous foreshadowing of the troubles to be mentioned in the next chapter, the State Department had refused to give him a passport.
While the consultations with member countries under Article XIV, which became mandatory in 1952, began to provide opportunities for the systematic review by the Board of the economic position of those countries, they did not eliminate the examinations of individual members’ problems that had characterized the Directors’ work in earlier years. Indeed, the agendas of 19 of the 62 meetings held by the Board between the end of the 1951 Annual Meeting and the commencement of the consultations in July 1952 included the study of one or more member countries. Some of these discussions were devoted wholly to an economic review: for instance, the balance of payments of the United States was examined in October 1951 and recent developments in the U.S. economy in the following month. On something like half the occasions, however, the main purpose of the review was to decide upon the merits of an exchange arrangement submitted for the Fund’s approval—this being a function of the Board which of course remained unimpaired by the consultation procedure.
The initiation of the annual consultations is discussed in the next section. Here we may look briefly at the Board’s activities in connection with more general problems. It will not be necessary to consider individual cases in detail, but we may usefully summarize two full-dress studies which the Board undertook, and which had a bearing on its attitude during the consultations. One of these concerned the appropriateness of tariffs as a substitute for exchange surcharges, and the other the disadvantages of broken cross rates. It is noteworthy that in neither instance was a hard and fast decision reached. The Board decided instead that each case where these problems arose must be considered on its merits.
The Fund’s interest in the possibility of substituting tariffs for exchange surcharges (i.e., fixed levies on the sale of exchange) arose from discussions between the staff and the officials of several member countries that were being urged to eliminate these surcharges. Some of these members were already considering increasing their tariffs; in others the staff felt that such increases might be the best way to free the exchange rate from the complications of surcharges. Submitting the problem to the Board, the staff suggested that the most appropriate use for tariffs as a substitute for exchange surcharges would arise where the latter were serving to protect domestic industries. Where the surcharges were expected to be temporary only, or where their long-run purpose was to restrain a demand for imports stimulated by inflation, the staff proposed that an increase in tariffs should not be recommended. In the first situation, tariffs would be likely to prolong the restriction of imports more than was necessary; in the second, the appropriate substitute for exchange surcharges was a more stringent domestic anti-inflationary policy. Perhaps the most difficult decisions would arise, the staff considered, where exchange surcharges provided the country with a significant source of revenue. Whether a tariff would then be a suitable substitute would have to depend upon the probable effects of the tariff as such; if these would be undesirable, other sources of revenue should be found. In the light of these varying considerations, the staff suggested that no general rule could be propounded.
The first reaction of several Directors when this memorandum was discussed in December 1951 was to question whether exchange surcharges were in fact undesirable. They suggested that surcharges were more flexible than tariffs and in every way to be preferred to them. However, other Directors regarded the growth of monetary devices to restrict international trade as an alarming development. The very flexibility of exchange surcharges, and the ease with which they could be unilaterally introduced, presented dangers. They thought that the Fund, as the only international organization with jurisdiction in this field, should be especially vigilant to prevent the abuses of multiple rates. There was general agreement with the staff’s view that the problem was a complex one, but particular aspects of its analysis were questioned. Some Directors, for instance, suggested that even in the long run there might be a case for protective measures instead of, or as well as, domestic controls over inflationary tendencies. After further discussion the Board decided to note the analysis put forward by the staff, and to rule that each case involving the substitution of customs tariffs for exchange surcharges must be considered as it arose.
The problem of cross rates was brought before the Board in April 1952 by Mr. de Largentaye (France). At his request the staff had produced, some six months earlier, an analysis of the economics of broken cross rates, which elaborated the argument that these were undesirable because they tended to undermine the stability of the inconvertible currency involved and to encourage diversions of trade by commodity arbitrage. Moreover, a broken cross rate was equivalent to the devaluation of the weaker currency in that particular market, and this affected the competitive position of others.
Mr. de Largentaye said that he had asked for the discussion because the condemnation of broken cross rates, which had led in 1948 to the debarring of France from access to the Fund’s resources, was apparently still Fund policy. He himself did not see how it would be possible for the Board during the forthcoming consultations to advise members to suppress discriminatory restrictions and at the same time to maintain orderly cross rates if the latter could be achieved only by discriminating. In his view, broken cross rates were permissible under the terms of Article XIV, Section 2, which (as he had previously argued) overrode Article IV. Mr. de Largentaye did not accept that there was any good economic reason for preferring orderly cross rates to discrimination; for one thing, broken cross rates arose naturally, while orderly cross rates required to be maintained by controls. Mr. de Selliers (Belgium) and Mr. Martínez-Ostos (Mexico), concurring, said that they did not regard orderly cross rates as an appropriate objective for the Fund.
Mr. Stamp (United Kingdom) replied that while Mr. de Largentaye’s theoretical position might be sound, the practical problem for the Board was what to do about specific rates. In his view, broken cross rates were a particularly serious breach of the concepts of Bretton Woods because they involved competitive depreciation. He urged that the basic cause of broken cross rates was the dollar shortage, which was of special concern to the United Kingdom. While it was the intention of the British authorities to make sterling convertible as soon as possible, their ability to do so depended partly upon the actions of other countries. Messrs. Melville (Australia) and Natu (India) agreed generally with Mr. Stamp.
Mr. Southard (United States) found Mr. Stamp’s comments disturbing. While he agreed that U.S. import policy could be improved, he believed that the convertibility of sterling could only be brought about by the adoption in the United Kingdom of the necessary hard adjustments in economic policy. As to the action to be taken in relation to a broken cross rate, he thought there was no need to reach a decision in vacuo. Mr. Rasminsky (Canada) shared Mr. Southard’s views; he attributed inconvertibility primarily to inflation.
After an adjournment of the discussion, Mr. de Largentaye said that he did not disagree with the legal position put forward by the staff, that the Board’s decision in connection with the French exchange rate in 1948 involved the proposition that a broken cross rate was a multiple currency practice. He was concerned only to make it clear that the Fund could legally approve such a practice. The representative of the Legal Department agreed that this would be possible, but pointed out that the Fund’s approval must be specifically sought. The Board then accepted Mr. Southard’s proposal not to attempt to decide in advance what could be done when broken cross rates came to light.
In anticipation of the start of consultations with members under Article XIV, an attempt was made to decide upon the exact meaning of the phrase “restrictions on the making of payments and transfers for current international transactions” (Article VIII, Section 2 (a)). The need for a definition had become apparent at a meeting of the Board in April 1951, when Mr. Melville (Australia) challenged a description of the Australian system of exchange restrictions which had been prepared for inclusion in Part II of the Second Annual Report on Exchange Restrictions. Mr. Melville proposed an alternative form of words which implied that the restrictions described were a by-product of the Australian import restriction system. This was not acceptable to Mr. Saad (Egypt) or to some other Directors, who believed that the Australian measures involved both import restrictions and exchange restrictions. As a result, the Committee on Interpretation was asked to consider and report on the meaning of the phrase quoted above. The committee looked into the matter in June 1951, and had a further meeting in January 1952 to consider a staff memorandum on the subject.
There was no question in anyone’s mind that the exchange restrictions over which the Fund had authority were those affecting the financial, as distinct from the material, aspects of transactions. Without attempting a precise definition, the staff proposed the following as part of “a set of guiding principles”:
Restrictions on the making of payments and transfers for current international transactions comprise governmental measures and practices (whether legislative or administrative, whether or not formally promulgated) which have the effect of limiting, in a specified way, the ability to agree on and to perform the financial settlement in connection with international current transactions. The restrictive measures on payments and transfers may involve suppression (or delay) of the transaction, or limitations as to its volume, direction or terms.
Restrictions on the making of transfers for current international transactions include measures preventing (or limiting) the foreign payee from converting into his own currency payments received in the currency of the payor or in that of a third country.
This was followed by an analysis of the circumstances in which the specification of currencies became an exchange restriction.
As the staff memorandum explained, there were borderline cases where both exchange and import restrictions were created by a single governmental measure. Moreover, while the Fund was not authorized to require a member to do anything about its import restrictions, the Fund was entitled to concern itself with import restrictions to the extent that they affected international payments in general and the external financial positions of its members in particular. These considerations obviously bore heavily upon the issue of the Fund’s responsibilities toward the GATT, and were therefore controversial. The committee saw no prospect of reaching agreement on a form of words which would dispose of this controversy, and preferred instead to leave the matter to be solved ambulando. The legal view, expressed in the staff memorandum, though used as guidance by the staff, has thus never been officially adopted by the Board, although it is reflected in a decision taken eight years later on the transition from Article XIV to Article VIII. 6 In practice, as the Committee on Interpretation foresaw, the absence of a detailed definition has not created any serious difficulties.
Accordingly, when the question arose—as it did during the consultations with Belgium and Colombia—whether the Board was entitled in its review to consider the whole of the country’s restrictive system, or could deal only with exchange restrictions in the narrow sense, the Board discussed this issue as it concerned the individual member, and not as a general problem. Mr. Melville, who sought to limit discussion to exchange restrictions per se, urged that trade restrictions were a matter for the GATT and should not enter into the Board’s consideration. Mr. Southard (United States), on the other hand—and in this he was supported by Mr. Saad—argued that the Board could not adequately examine the restrictive system of a country unless it looked at all its aspects. The Board agreed with the latter view.
Active preparations for the consultations began in January 1952 with the approval by the Staff Committee of a draft procedure. This called for the collation of all available data on members’ restrictions, supplemented by a questionnaire to be sent to each member country before consultations with it began. The data would be discussed with representatives of the country by senior staff members, as far as possible in Washington. A memorandum would then be prepared for the Board, setting out the data and recommending the course to be followed during the consultation by the Board, at which the member would be entitled to be specially represented if it so wished.
This procedure was discussed by the Board on January 24, 1952 and received general approval, although there were considerable differences in emphasis in the comments made by individual Executive Directors. For example, one Director stressed that the initiative for consultation should come from the member, not from the Fund, but others felt that consultation was necessarily a two-way process. Again, some Directors were desirous that possible legal issues—such as the power of the Fund to recommend the removal of exchange restrictions—should be settled in advance, but others believed that member countries were less concerned with their formal rights than in knowing what the procedure for the consultations was to be. One Executive Director urged that the representatives of each member with whom the staff discussions were held should be at as high a level as possible, and hence that the setting for these should be the member’s own country rather than Washington. The staff replied to this that they would try to meet members’ wishes, but that there were too few senior officers available to enable such discussions in general to take place outside Washington.
Questionnaires asking for details of members’ restrictive systems were sent out in February, and inquiries were also made to bring up to date the staff’s information about each country’s economic situation.
The 51 countries that were members of the Fund at the end of January 1952 included only six that had accepted the obligations of Article VIII, Sections 2, 3, and 4, and consequently did not need to consult the Fund—El Salvador, Guatemala, Honduras, Mexico, Panama, and the United States. Canada joined this select group on March 25, 1952, and as Burma had not yet decided whether to accept Article VIII or to rely on Article XIV, there remained 43 countries with which consultations had to be arranged. By the end of August the staff had concluded discussions with 23 of these, and those with three more were in progress.
For its part, the Board received the first staff report on July 9, and had been given reports on 21 members by August 12. By the end of August, consultations with 18 of these 21 had been completed, and those with two others, on which some discussions had been held, had been reserved for further review after the Annual Meeting. Thus, in the first six months after the deadline of March 1, 1952, consultations had been effectively held with almost half the members to whom the requirements of Article XIV, Section 4, applied.
After the Annual Meeting the Board resumed work on the consultations, and eventually completed these with 35 of the 43 members mentioned above, and also with Germany, which had joined the Fund since the procedure began. The consultation with South Africa, adjourned in August 1952, was never completed, and consultations with seven other countries could not be carried through for lack of essential information. The countries concerned were Bolivia, Chile, Czechoslovakia, Egypt, Iran, Turkey, and Uruguay. These were included instead in the 1953 program and, with the exception of Czechoslovakia, for which data were still lacking, consultations were then completed with all of them.
The First Consultation
It was natural that, as the year progressed, the process of consultation should raise fewer and fewer questions in the Board. It was, however, perhaps unfortunate that the very first consultation to be undertaken should raise important and difficult issues which resulted in its final disposition requiring a formal vote.
This consultation was with Belgium and Luxembourg. The Governments of the two countries had appointed Mr. de Selliers, Executive Director (Belgium), to conduct discussions with the staff on their behalf, and seven meetings for this purpose had been held in Washington. In its memorandum the staff reviewed the economic position and prospects of the two countries together with the exchange restrictions which they maintained, and recommended that the Board should decide that
in view of the uncertainties, the Fund considers that it should not suggest to Belgium and Luxembourg the withdrawal or relaxation of these transitional arrangements at this time. However, the Fund considers that should some of these unfavorable uncertainties disappear, Belgium and Luxembourg should during the coming months re-examine their need for the present level of dollar restrictions.
The staff also recommended that the Fund should give temporary approval to the free market in EPU currencies (which it characterized as a multiple currency practice), but should urge the elimination of this free market as soon as possible. Finally, it proposed that the Fund should invite Belgium and Luxembourg to substitute alternative measures for the partial blocking of current receipts from EPU countries, which was formally a discriminatory currency arrangement.
When these recommendations came before the Board, on July 15, it immediately became clear that two schools of thought existed among Executive Directors; one would have approved the staff’s recommendations as they stood, but the other felt that the retention of restrictions by Belgium and Luxembourg was not justified. The views of the latter group were first clarified by Mr. G. Neil Perry (Canada), Alternate to Mr. Rasminsky. Mr. Perry, who until April 1, 1952 had been a member of the staff of the Exchange Restrictions Department, enunciated three criteria which in his view would alone justify tolerance of the continuance of exchange restrictions in a member country. These were (1) that specific balance of payments difficulties existed; (2) that the retained restrictions were not excessive; and (3) that the restrictions were in fact temporary. He and Mr. Southard (United States) doubted whether Belgium and Luxembourg met these criteria. Commenting on the fact that the staff recommendation was based on the existence of uncertainties, these Directors urged that the retention of restrictions could be justified only by the existence of a real and imminent threat to the country’s balance of payments.
On the other hand, Mr. Stamp (United Kingdom) argued that Mr. Perry’s criteria were incomplete. A country might have a balance of payments that was satisfactory over-all, and yet have difficulties with its dollar balance. Moreover, a member’s borrowing and debt position was also important. He stressed that the burden of proof did not rest on the member consulting.
This last point was also taken up by Mr. de Selliers, who contended that in the consultations the Fund was acting in an advisory, and not in a judicial, capacity. He repeated the argument, first heard five years earlier, that it was only if exceptional circumstances existed that the Fund could make representations under Article XIV, Section 4. However, he thought that if such representations were made, the effect was to end the transitional period for that member. Agreeing with this last suggestion, Mr. Southard said that the Fund could terminate the transitional period for an individual member and could also, if it wished, declare it to be at an end for all members. (This contention was not pursued at the time, but some years later it was taken up and the Board decided against it.)
At a second meeting, on the following day, Mr. de Selliers proposed that a further criterion should be added to Mr. Perry’s list, viz., that there was no feasible alternative to the restrictions being maintained. Messrs. Stamp and Cigliana-Piazza (Italy) also spoke in support of the Belgian position. On the other hand, Messrs. Martínez-Ostos (Mexico) and Paranaguá (Brazil) pointed out that the Fund had been very strict in criticizing multiple currency practices in the countries that they represented; they thought that similar treatment should be accorded to Belgium and Luxembourg, whose techniques had the same effect as multiple currencies.
The discussion was then adjourned for a month, but when it was resumed the positions of the two main groups of Directors were found to be unchanged. Messrs. Natu (India) and van der Valk (Netherlands) concurred with Mr. Stamp in proposing that the Board’s decision should invite Belgium and Luxembourg to keep the possibility of removing restrictions under consideration. Mr. Southard, however, considered this inadequate, and proposed a decision which made two points: (1) that the Fund considered a relaxation of exchange restrictions by Belgium and Luxembourg to be feasible, and accordingly requested the two Governments to reconsider the need for the existing level of restrictions; (2) that the Fund was examining the discriminatory arrangements in vogue in Europe, and would defer its conclusions on these aspects of the Belgian system until this examination had been completed. (The latter recommendation is further considered below.) On August 15 Mr. Southard called for a vote on his proposal, and it was adopted by 53,025 votes to 34,610.
It would not be useful to discuss in detail the reviews by the Board of the other consultations held during the summer of 1952. Instead, it is proposed to bring together some notes on the main policy issues which emerged, the decisions on which guided the staff in its approach to subsequent consultations.
Retention Quota Systems
The problem of European discriminatory arrangements, mentioned above, arose several times in the consultations. During that with Denmark it was mentioned that a “retention system” was being planned, such as was already in use in some other European countries. To explain why such a system was of serious concern to the Fund, a digression will be necessary.
Retention quota systems usually permitted traders to retain a fixed proportion of their earnings in convertible currencies, obtained from sales to the United States or to any country in the dollar area. The retained exchange, often referred to as an export bonus, could be transferable or not. In either case, it could be used to import from the dollar area commodities that could be sold profitably in the holder’s country, since their supply in that country was limited by discriminatory import restrictions. Even if the retained exchange was not transferable it still saved the holder the charges and commissions levied on purchases and sales of foreign currencies and, perhaps, the need to go through administrative screening procedures to obtain import and exchange licenses. Similar in effect to export bonuses were “import rights,” which were rights to import specified commodities.
These were granted to certain exporters, particularly those selling to the dollar area.
Retention quotas were widely used in “transit trade,” i.e., the purchase of commodities in one foreign country and their sale in another foreign country. They made possible what were known as “switch transactions,” for which the procedure was as follows: Merchants in soft currency country A bought commodities in soft currency country B, for soft currency (e.g., sterling); they sold these commodities at a discount in hard currency country C, and were permitted to use a portion of the hard currency proceeds to buy commodities grown or manufactured in C, which they then resold at a premium in any soft currency country D. The profit made on the last leg of this process normally more than offset the loss sustained earlier.
The results of transit trade for the countries involved were as follows: For country A there had been a conversion of soft currency holdings into hard currency (in respect of the hard currency earnings not used for purchases in C). For country B there had been a loss of potential hard currency exports. Country C had imported at a better price than would have been payable for direct imports from B. Country D had, at a premium, obtained dollar imports against payment in soft currency.
These and similar arrangements aroused general concern that trade and dollar earnings were being diverted. The Fund was especially concerned because the retention quota system could involve multiple currency practices and discriminatory currency arrangements, and have adverse effects on exchange stability. The economic effect of certain retention quota systems was to create open or concealed cross rates, putting a higher valuation on hard currencies than on soft currencies. Retention arrangements also involved a high degree of administrative discretion, and were subject to frequent variation.
Retention quota systems were also brought to light in the French and Austrian consultations, and it was agreed that no approval should be given to them until the Board had been able to make a general review of the European arrangements. At the Annual Meeting, 1952, the Governor for Belgium proposed that the Executive Directors should make a special study of the dollar retention quotas and other similar practices, and on September 9 the Governors passed a resolution as follows:
That the Executive Directors of the Fund shall make a special study of the dollar retention quotas and other similar practices in member countries. In particular this study will take into account the situations which give rise to these practices, their magnitude in each country, the methods used for their application, their impact on other members of the Fund, and possible alternative measures. The study shall include such conclusions and recommendations as may be appropriate. 7
Two days later Mr. Rooth entertained at luncheon representatives of nine European countries in order to discuss how best to proceed with the study which the Governors had requested. While the speakers at this luncheon generally deprecated the retention quota arrangements, their remarks served mainly to illustrate the complexity of the problems which these arrangements presented. In addition to straightforward retention quotas and the artificial stimulation of transit trade, a number of related subjects were suggested for investigation, among them being cheap sterling, the structural shortage of dollars, the role of inflation, and the restrictive policies of the United States.
Against this background the staff, who had already supplied to the Board a highly critical study of retention quota arrangements, produced in February 1953 a full analysis and description of them. This suggested that retention quotas were very poor mechanisms for the adjustment of exchange rates, avoided fundamental corrective measures, and were of no help toward the relaxation of restrictions or the reduction of discrimination against dollar exports. Moreover, they harmed third countries, being, among other things, tantamount to the official facilitation of commodity arbitrage. The report was supported by detailed studies of the retention quota arrangements in Austria, Denmark, France, Germany, Italy, Japan, the Netherlands, and Sweden. A draft recommendation was put forward which would have required the abandonment of these practices and obligated the staff to work out with each member using them a specific program designed to eliminate them as soon as practicable.
The staff’s memorandum was discussed at the Board on February 19, 1953, but had rather a mixed reception. Several speakers supported the staff’s view and would have wished to see strong action taken along the lines of its recommendations. Other Directors, however, were less positive, their views ranging from a doubt whether it was possible precisely to define a retention quota arrangement, through a belief that other exchange practices might well be even less attractive, to a firm statement that retention quotas had real merits, and in any case were symptoms rather than root causes of trouble.
In the face of these conflicting views it proved difficult to agree on a decision, and the discussion was adjourned on three occasions before a compromise could be reached. The final text, approved on May 4, 1953, called upon members to work toward and achieve as soon as possible the removal of retention quotas and similar practices, and said that the Fund would consult with each member with a view to agreeing on a program for this purpose, including appropriate attention to the timing of such a program. It added that the Fund did not object to practices which were designed merely to simplify the administration of official exchange allocations. 8 The Managing Director was asked to transmit this decision with a covering letter, reflecting the diversity of views expressed by Directors but calling attention to the fact that, insofar as the retention quota arrangements constituted exchange restrictions or multiple currency practices, they were covered by earlier decisions of the Fund. 9 The decision and covering letter were reproduced in the Annual Report for 1953. 10
Retention quotas were also discussed during the Board’s review of the draft Exchange Restrictions Report. One Director, who had dissented from the decision on May 4, asked on May 21 that his dissent should be recorded in the passage in the Report in which retention quotas were dealt with. This was resisted by other members of the Board, who urged that when the Board’s decisions were publicized they should be expressed as the decisions of the Fund, and not of individuals. In the light of this, the Director agreed that it would suffice to record his dissent in the minutes. Subsequent research by the staff showed that only on one occasion had any indication of the support for a decision of the Board been publicized; that was in the announcement made on March 12, 1951 that the Board “by unanimous vote” had offered Mr. Gutt an extension of his contract.11 The tradition that decisions are announced only as the decisions of the Board as a whole has been continued to the present time, although information concerning the voting line-up has leaked out to the press in a few instances.
Other Policy Issues
The consultations with the Dominican Republic and with Venezuela raised the question of the relationship between Article XIV and Article VIII. The Dominican Republic had no restrictions of any kind, and the staff remarked that if at a later stage the member wished to introduce restrictions, these would have to be authorized under Article VIII and not Article XIV. Some Executive Directors questioned whether in these circumstances the Dominican Republic should not be regarded as being already subject to the provisions of Article VIII. The staff, however, pointed out that the initiative in this respect lay with the country concerned, since by Article XIV, Section 3, the country was required to notify the Fund whether it was prepared to accept the obligations in question.
Venezuela had a multiple currency system for which there was no balance of payments justification. It was therefore necessary for approval to be sought under Article VIII and not under Article XIV, and the staff took the opportunity to suggest that the Board might invite Venezuela to consider accepting the obligations of Article VIII generally. Mr. Martínez-Ostos, however, reminded the Board that when Venezuela joined the Fund it was given the right to rely on Article XIV; this right could not now be abrogated without the member’s consent. The Board agreed, and decided not to make the recommendation which the staff had suggested.
Survey of Results
In August 1952, during the consultation with Belgium and Luxembourg, Mr. Martínez-Ostos put forward for later consideration a draft statement, to be issued when the year’s consultations had been completed, explaining why few countries had been asked to remove restrictions. Reverting to the subject in October, he pointed out that so far the Board had not made representations to any member to remove its restrictions, and he thought it unlikely that this would be done in any of the remaining consultations. It seemed to him that expectations aroused before the consultations began, by comments then made on the desirability of removing restrictions, would be disappointed by the Board’s inaction. Other Directors, however, pointed out that the Articles of Agreement did not require countries to make their currencies convertible at the end of five years, but only to enter into consultations looking toward the abolition of restrictions when practicable. Hence, there was no need to apologize for the fact that the Fund had not asked any member to remove its restrictions. The staff suggested that it would be premature to make a statement at that point, since only about half of the 1952 consultations had been completed; the proper place to do so would be in the 1953 Exchange Restrictions Report.
This Report was issued in May 1953. It pointed out that much of the emphasis during the consultations had necessarily been placed on confirming the essential facts, and on ascertaining from the member countries the reasons why restrictions were maintained and the problems which they faced when seeking to eliminate restrictions.12 Possible solutions to these problems had also been discussed. Nevertheless, the Fund had taken the opportunity to express its views, both formally at the conclusion of each consultation, and less formally during the discussions between staff and member.
These views were summarized in a couple of general paragraphs preceding a detailed study of the outcome of the consultations. Two main points emerged. On the one hand, it seemed to the Board that more could be done to eliminate restrictions if some members did not regard restrictions as a relatively easy way out of their difficulties. On the other hand, the Board recognized that even the elimination of inflation would be insufficient to enable some members with particularly acute balance of payments problems to remove their restrictions. This did not mean, however, that there was any the less need to stress the importance of monetary and fiscal policies; and also of appropriate complementary action by countries with balance of payments surpluses, especially in the field of commercial policy.
It will be realized that a procedure as complex and extensive as that described above involved a very large amount of work, not only for the Fund’s staff but for the countries being consulted. Some members of the staff participating in the preparation of the consultations reports had grave doubts about the value of some of the documentation prepared—documentation so extensive that they thought it almost impossible for the senior officers conducting the discussions with members to digest, and unlikely to be of great help to the Board. It was partly for reasons such as these that after the extreme activity in July and August the remainder of the consultations program was taken at a much slower pace. Nevertheless, voluminous documentation has continued to be a characteristic feature of all subsequent consultations. Its value to Executive Directors has been questioned, but its value to member countries has been repeatedly attested and is held to outweigh its disadvantages.
The plan to hold as many as possible of the discussions between the members and the staff in Washington naturally involved problems of representation for many countries. In the event, the discussions for 25 of the 35 completed consultations were held at the Fund’s headquarters; 9 took place in the countries concerned, and one at Mexico City during the Annual Meeting. Nine of the 25 countries attending in Washington (including Belgium and Luxembourg, as noted above) appointed their Executive Director and/or his Alternate to represent them, assisted in some instances by officials from home. Nine countries were represented by members of the staff of their Washington embassies, although seven of these countries also provided supporting staff from home. Eight countries were wholly represented by officials sent ad hoc to Washington. Of the 24 persons who visited Washington for this purpose, and whose affiliation was noted in the consultations reports, 17 were drawn from central banks and 7 from ministries (all but one from Ministries of Finance).
A contrast between two extreme types of representation was shown in the discussions with the United Kingdom and with Germany. For the former, which took place in Washington, Mr. Stamp, Alternate Executive Director, was the sole British representative; for the latter, which was held in Bonn and Frankfurt, the German delegation numbered 32 persons, headed by the Minister of Economic Affairs and a member of the Direktorium of the Bank deutscher Länder. The latter type of discussion was obviously likely to be more effective, and it is this consideration which in subsequent years has motivated the Fund to arrange to hold staff discussions nearly exclusively in the country concerned.
In March 1953 the Board reviewed the consultations program for the past year and concluded that basically the system then adopted had been an appropriate one. It was thought that with reasonable flexibility the system could be adopted for the 1953 consultations as well. Significantly, however, the Board’s decision also pointed out that the preparatory work done for the 1952 consultations would stand in good stead for those in 1953; and concluded that instead of repeating the basic review of members’ economic positions which had underlain the 1952 review, the consultations in the ensuing year could concentrate on changes in these positions and in members’ restrictive systems.
A Drawings Policy Achieved
During the year September 1951 to September 1952, five countries drew a total of $87,125,000 from the Fund; there was a drawing of $37.5 million by Brazil and one of $30 million by Australia. In the same period repurchases totaled $114.6 million, including $65.5 million by Brazil and $27.35 million by the Netherlands. In addition, the Fund entered into its first stand-by arrangement, for $50 million, with Belgium. The evolution of the Fund’s policies which contributed to the larger drawings will be described first; a number of other policy questions are reviewed in later subsections.
An initial step toward the reconsideration of the Fund’s policy on drawings was taken in October 1951, when Mr. Rooth presented to the Board a staff proposal to alter the scale of charges. There were four main points in this proposal. (1) The charges for longer-term use of the Fund’s resources would be increased. (2) The flat-rate service charge would be lowered from ¾ of 1 per cent to ½ of 1 per cent. (3) The point at which it became obligatory for the Fund and the member to discuss means of reducing the member’s outstanding drawing would be lowered from that at which the charge reached 4 per cent to that at which it reached 3½ per cent (this point would be reached after three years for drawings raising the Fund’s holdings to not more than 125 per cent of quota, and after progressively shorter periods for larger drawings). (4) The point at which charges ceased to be prescribed and were left to the decision of the Fund was put at 4 per cent instead of 5 per cent (although there was a limit of 4½ per cent for the first six months after that point, and one of 5 per cent for the next six months). Table 3 compares the new scale with that established at Bretton Woods.13
|Number of Bracket and Proportion of Quota Held by Fund|
|1944 Scale 2||1951 Scale|
|2-2½||years||1½||2||2½||3||2½||3||3½ 3||4 4|
|2½-3||years||1½||2||2½||3||3||3½ 3||4 4|
|3-3½||years||2||2½||3||3½||3½ 3||4 4|
|6-7||years||3½||4 3||4½||5 5|
|7-8||years||4 3||4½||5 5|
These charges are in addition to the service charge (¾ per cent in 1944 and ½ per cent in 1951).
As formulated at Bretton Woods (Proceedings, p. 464), the scale included two more columns, covering respectively 201-225 per cent of quota and 226-250 per cent of quota. In the first of these each rate was ½ per cent higher than for 176-200 per cent of quota, and in the second each rate was ½ per cent higher again, subject, however, to a maximum of 5 per cent in both columns.
At this point the Fund is obligated to consult with the member on means to reduce the Fund’s holdings of the member’s currency.
If the Fund decides to raise the interest rate, it may do so only to 4½ per cent for one semiannual period and 5 per cent for a second semiannual period. Thereafter the Fund may levy such charges as it regards appropriate.
Thereafter subject to such charges as the Fund regards appropriate.
These charges are in addition to the service charge (¾ per cent in 1944 and ½ per cent in 1951).
As formulated at Bretton Woods (Proceedings, p. 464), the scale included two more columns, covering respectively 201-225 per cent of quota and 226-250 per cent of quota. In the first of these each rate was ½ per cent higher than for 176-200 per cent of quota, and in the second each rate was ½ per cent higher again, subject, however, to a maximum of 5 per cent in both columns.
At this point the Fund is obligated to consult with the member on means to reduce the Fund’s holdings of the member’s currency.
If the Fund decides to raise the interest rate, it may do so only to 4½ per cent for one semiannual period and 5 per cent for a second semiannual period. Thereafter the Fund may levy such charges as it regards appropriate.
Thereafter subject to such charges as the Fund regards appropriate.
It will be seen that one effect of the changes was to reduce from a maximum of seven years to a maximum of three years the period during which the Fund’s holdings of a member’s currency might exceed its quota, before it became necessary for the member to consult the Fund about ways of reducing these holdings. This shortening of the time was one of the main purposes of the changes; as was noted in Chapter 11, the Fund was dependent upon the consultations prescribed by Article V, Section 8 (d), to ensure that its resources were kept revolving, and seven years was regarded as too long a time to elapse before these consultations were held.
The Managing Director, when commending his proposals to the Board, expressed his belief that they would help to make it possible for the Fund to extend the use of its resources. He suggested that the new rates should apply only through 1952, but their application was subsequently extended and they remained in force until December 1953. The new scale was generally acceptable to the Board, although Messrs. Joshi (India), Melville (Australia), and Stamp (United Kingdom), while approving the idea of increased reliance on automatic controls through the rate of interest, felt that a change in charges would be merely an academic exercise unless something specific were done to remove the tacit freeze on drawings. A change in charges requires, by Article V, Section 8 (e), the approval of three fourths of the total voting power. The minute recording the Board’s decision on November 19, 1951, therefore, noted that it was supported unanimously by those Directors present at the meeting, casting 78,455 out of a total of 91,115 votes.
After general approval had been given to the new scale of charges, but before it had been formally adopted, the Managing Director outlined to the Board, on November 7, 1951, a series of principles which, he suggested, might further facilitate drawings. These included the following: repurchases to be normally effected within three years, and at the outside within five years; any member drawing from the Fund to be required to undertake or agree to repurchase within a specified time; consideration to be given to methods of making the automatic repurchase provisions work in those cases where they had not previously done so; special provision to be made for very short-term drawings, up to eighteen months; and special provision to be made for drawings within the “gold tranche” (i.e., drawings that would increase the Fund’s holdings of the member’s currency up to a sum no greater than 100 per cent of its quota). This last proposal, of course, represented a departure from the attitude to the gold tranche expressed by Mr. Gutt in his reply to Chile in September 1946.14
It may be mentioned here that the expression “tranche,” meaning 25 per cent of the member’s quota, is applied not only to that part of the Fund’s holdings of the member’s currency that lies between 75 per cent and 100 per cent of its quota, but to larger holdings also. Such holdings are said to lie in the “credit tranches”: holdings equivalent to between 100 per cent and 125 per cent of the quota are in the first credit tranche; holdings between 125 per cent and 150 per cent in the second credit tranche; and so on. Holdings equivalent to less than 75 per cent of the quota are sometimes said to be in the “super gold tranche.”
Mr. Rooth’s proposals were generally welcomed by the Board, although a few reservations were expressed. Only Mr. de Largentaye (France) felt that the Managing Director’s suggestions were misconceived. In his view, drawings in the gold tranche had to be considered a matter of right, and not as a special privilege. Moreover, Mr. Rooth’s plans for very short-term drawings were inconsistent with the Articles of Agreement, which permitted the imposition of special conditions as to repurchase in accordance with Article V, Section 4 (Waiver of conditions) only for drawings above the limits of 25 per cent of quota a year or 200 per cent of quota in all. Mr. de Largentaye believed that where such special circumstances did not exist, it would be very difficult for members to surrender the rights which were given to them by Article V, Section 3. In the light of these and other comments, the Managing Director appointed a new staff working party, drawn from all departments, to prepare definite recommendations.
The working party’s report, circulated to the Board in January 1952, was discussed at a series of Board meetings. From these was evolved, after several trials, a procedure, agreed on February 13, of which the following is a condensation. It became known as the “Rooth Plan”: 15
Par. 2 (a). Exchange purchased from the Fund should not remain outstanding beyond the period reasonably related to the payments problem for which it was purchased from the Fund. This period “should fall within an outside range of three to five years.”
Par. 2 (b). When discussing a prospective drawing with a member, the Fund would agree with the member upon appropriate arrangements to ensure the repurchase as soon as possible, within a maximum of five years from the date of drawing.
Par. 2 (c). If a member whose drawing had increased the Fund’s holdings of its currency to not more than 100 per cent of its quota had not repurchased within three years, it would be asked to agree upon a schedule of repurchases to be completed within the next two years.16
Par. 2 (d). If unforeseen circumstances beyond a member’s control should make the foregoing limits unreasonable, the Fund would consider an extension of time.
Par. 2 (e). A member seeking to draw would be expected to state that it accepted the foregoing principles.
Par. 2 (f). These principles would be an essential element in any determination by the Fund as to whether the member was using the resources of the Fund in accordance with the purposes of the Fund.
Par. 3. A member seeking to draw from the Fund an amount which would not increase the Fund’s holdings of its currency beyond the amount of its quota could count on receiving the overwhelming benefit of any doubt respecting that drawing.
It will be noticed that two of the subjects mentioned by the Managing Director in November were not covered by this decision. No provision was included for making the automatic repurchase obligations more generally applicable. On this, the working party reported that, while it was true that these obligations would not necessarily apply to the sterling area or to state-trading countries, the proposed universal requirement to undertake to repurchase within three to five years would effectively place these countries on the same footing as other members. As regards very short-term drawings, a proposed procedure involving a special agreement by the member to repurchase within the set term was put forward by the Managing Director and supported by Mr. Southard (United States). However, some other Directors expressed a fear that the special repurchase arrangements thus proposed might become the norm, replacing the more general obligation to repurchase within three to five years. As a result, the proposed special provision in the text of the decision was replaced by a reference to the possibility of such drawings in a covering memorandum by the Managing Director, which the Board approved at the same time (as par. 1 of the decision).
To all the Managing Director’s other suggestions, however, the decision gave concrete form. For instance, it sharply differentiated “gold tranche” drawings from others, by stating that members seeking to make such drawings would be given the overwhelming benefit of any doubt. This formulation was first suggested by Mr. Stamp during an informal session of the Board on February 8, 1952. It did not appear in a draft decision prepared for that meeting, but was incorporated during the process of redrafting. It is a rare example of a highly significant phrase having been adopted by the Board as a result of oral interchanges, and without Executive Directors having had a written draft to consider in advance.
The most controversial element in the Board’s decision was probably that in par. 2 (b), viz., the requirement that the negotiation of a drawing should include agreeing with the member on the period within which repurchase would be completed. This had been the subject of some prior discussion, apropos a request for a drawing received by the Board in December 1951. The request was one from Ethiopia, which sought to draw $500,000. Mr. de Largentaye and Mr. Melville had then commented on the fact that Ethiopia had made a voluntary offer to repurchase the amount drawn, and asked the reason for this, since no such offer was called for by the Articles of Agreement. On that occasion Mr. Southard had said that he was glad that Ethiopia had offered such an undertaking: in the absence of a general policy respecting members’ obligations to repay, the undertaking would enable him to approve the drawing. (As it happened, however, Ethiopia withdrew its request and did not again draw from the Fund within the years covered by this history.)
It was natural, therefore, that when the Board was considering the report of the working party, and several Directors had expressed a dislike for the proposal to require undertakings to repurchase, Mr. Southard supported the plan. He said that in his view this did not modify the terms of the Articles of Agreement.
Experience had shown that some safeguards for the Fund’s resources were required, for if there had been none up to that time, little of the Fund’s convertible assets would have remained in its hands. Furthermore, it was necessary to stipulate the acceptance of such an obligation with each drawing, as few members had any detailed knowledge of the Fund’s procedures and decisions or of the implications of drawings. He agreed that “the procedure was not precisely what certain countries had envisaged at Bretton Woods,” but he insisted that international institutions had to be flexible to meet changed conditions. Several other Directors concurred.
The General Counsel, appealed to for advice on the legal position, said that he agreed entirely with the proposition that the Fund could not impose on drawings under Article V, Section 3, any conditions which were not included in that provision. However, the proposed decision did not have such an effect. As a whole it constituted a statement of policy by the Fund, and as such, generally speaking, could not be understood or interpreted in a manner inconsistent with the Fund Agreement. It was principally aimed at indicating what the Fund meant by the “temporary” use of its resources. If any member felt that its rights under the Agreement were being prejudiced, it was free to raise questions with the Fund, and if necessary to call for an interpretation under Article XVIII.
Dealing with an allied objection which some Directors had raised against the requirement in par. 2 (c) of the decision, that members wishing to draw must declare their agreement with the principles of the decision, the General Counsel said that he understood this to be the expression of a course of action which the Fund invited members to follow when they wished to use its resources, and not the addition of a condition to those included in Article V, Section 3 (a), of the Articles of Agreement. The nonfulfillment of this requirement would not of itself invalidate a member’s request for a drawing. It was in the light of these assurances that Executive Directors, with Mr. de Largentaye abstaining, approved the decision summarized above, to take effect for a two-year trial period.
A corollary was added a month later, in March 1952, when Mr. Beyen (Netherlands) asked whether it could be assumed that the so-called “ERP Decision” of 1948 was superseded by the new arrangements. Mr. Southard said that while he had not sought the view of his Government on the point, he believed that because of changes in the structure of U.S. assistance to Europe the ERP decision had in effect ceased to operate, in the sense that any European country wishing to use the Fund’s resources might apply to do so under the terms of the new arrangements just like any other member. The Managing Director accordingly said that he would take it for granted in his discussions with members that the “ERP Decision” no longer applied.
Drawings in Inconvertible Currencies
Among the topics remitted to the working party in November was the possibility of finding means of using the Fund’s holdings of currencies other than dollars. While the working party was still considering this, Sir George Bolton (United Kingdom) suggested to the Managing Director a technique by which drawings in inconvertible currencies might be made possible. The problem to be overcome was the requirement in the Articles that repurchases should be made with gold or convertible currencies; this naturally deterred members from drawing inconvertible currencies. Sir George suggested, as a solution, an arrangement between two members, A and B, by which A drew B’s currency from the Fund on the understanding that at the end of an agreed period B would draw a corresponding amount of A’s currency (thus restoring the position of both currencies in the Fund). A would then purchase B’s holding of its (A’s) currency—for which purpose, of course, A would have meanwhile to develop a balance of payments surplus vis-à-vis B.
The working party took account of this suggestion in its report. Although it had some doubts whether there was in fact much scope for such arrangements, it suggested that steps should be taken to explain to possibly interested members the procedure which had been outlined. The working party also commented that the possible disadvantages to participants of such arrangements (including the need for bilateral agreements) could theoretically be overcome by multilateralizing the transaction; but that this would certainly be much more difficult to arrange.
This part of the working party’s report was separately considered by the Board at two meetings in March and May 1952. The discussion showed that there were differences of opinion among Directors both on the desirability of drawings in inconvertible currencies and on the effect of such drawings on the position of the member whose currency was drawn. On the former point some Directors would have discouraged such drawings on the ground that countries with inconvertible currencies were ipso facto not in a position to extend credit to others. They also questioned whether it would be practicable to expect that a bilateral balance would be reversed within a limited period, as the proposal would require. On the other hand, some Directors welcomed the plan because they thought that some countries with inconvertible currencies could, in fact, afford to extend credit, and for them to do so would be beneficial to international trade.
There being no agreement in sight, the Board decided to defer further consideration of the plan to facilitate drawings of inconvertible currencies. Subsequent examination disclosed complications that were not brought out at the discussion by the Board. Two examples may be given. (1) Under the provisions of the EPU, member countries did not accumulate balances of each other’s currencies, but threw all their holdings into the monthly settlements. Thus if A, a member of EPU, drew the inconvertible currency of B, another member, it would not be able to accumulate subsequently a supply of B’s currency to enable it to reverse the transaction at the end of the agreed period. It could only do so if the terms of the EPU were specially varied to enable it to accumulate a holding of B’s currency. (2) What was to be the relation of drawings of inconvertible currencies to the Rooth Plan? If the Rooth Plan applied, no difficulty would be created for A, because the subsequent drawing by B would extinguish its liability to repurchase. But, other things being equal, B would be obliged to undertake to repurchase from the Fund, in gold or convertible currencies, and within three to five years, the amount of its currency which it used to buy A’s currency to close the transaction. And while it would no doubt be possible in principle to exempt both drawings from the requirements of the Rooth Plan, there was the possibility that by the time B came to make its agreed reciprocal drawing, it might itself be in difficulties and having to use the Fund’s resources under the Rooth Plan.
How far these various problems weighed with individual Executive Directors cannot be known, but their collective effect made it seem useless to bring the matter again before the Board. Eventually the plan was rendered nugatory by the extension of convertibility to most currencies used in international trade, but in the meantime the idea remained in limbo.
There can be little doubt that the invention of stand-by arrangements in 1952 constituted one of the most important forward steps taken by the Fund since it began operations. The possibility of such arrangements had been foreshadowed by the Managing Director in a memorandum to the Board in January 1952, when he had said:
At other times discussions between the member and the Fund may cover its general position, not with a view to any immediate drawing, but in order to ensure that it would be able to draw if, within a period of say 6 or 12 months, the need presented itself.17
It will be recalled that Mr. Bernstein had adumbrated such a suggestion in 1943.18 In 1949 the Board in effect granted Mexico a stand-by arrangement when it decided not to object to drawings of $22.5 million within the ensuing twelve months. However, this proved to be an isolated example.
Mr. Rooth’s idea was no doubt in Directors’ minds when Australia came to the Fund in April for a drawing of $30 million, and the Board decided to permit the drawing to be made at any time before September 30, 1952. At a subsequent meeting this was referred to as a stand-by arrangement. However, it was in reality merely a deferment of the drawing, which in fact was made in August. It was in no sense an arrangement in the form of a line of credit, designed to give a member confidence without actually adding to the reserves in its possession. The occasion for a stand-by arrangement in the latter sense did not arise until June.
Early in that month representatives of the Belgian Government and of the National Bank of Belgium approached the Fund with a request for an assurance of the contingent use of the Fund’s resources. The occasion was a settlement in the EPU which included provision for a balance of $50 million due to Belgium to be liquidated over five years. A secondary problem was that the position of the Belgian Treasury had been straitened by earlier credits granted through the EPU, while the advances that could be made to it by the National Bank had reached their ceiling. The proposal originally put to the Fund was that $50 million in addition to Belgium’s gold tranche ($56 million) should be made available to be drawn within the ensuing twelve months if this should prove to be necessary. However, after negotiations in Washington, a modified request was made in terms that conformed to the conditions laid down in the Rooth Plan.
This was put forward by Mr. Frère, the Governor of the Fund for Belgium, on behalf of the Belgian Government. The proposal was that Belgium and the Fund should enter into a stand-by arrangement for six months, under which the Fund would undertake to grant requests for drawings by Belgium as long as such drawings did not increase the existing level of the Fund’s holdings of Belgian francs by more than the equivalent of $50 million. Belgium and the Fund would remain in consultation, and the stand-by arrangement would be renewed for subsequent periods of six months each, provided that neither party determined that conditions had materially altered. The Government undertook that it would repurchase on July 1 of each year, beginning in 1953, the equivalent of $10 million of such additional Belgian francs as the Fund might be holding as a result of drawings under the stand-by arrangement.
Commending the proposal to the Board on June 19, 1952, the Managing Director called attention to Belgium’s excellent record as a Fund member, and to the key position which its surplus vis-à-vis other European countries held in the EPU. Mr. de Selliers (Belgium) explained that his Government had agreed to the settlement in the EPU, mentioned above, only on condition that Belgium could have corresponding access to the Fund’s resources if necessary.
Mr. Southard (United States) approved the proposal on the understanding that Belgium would pay a commitment fee for the facility requested. Mr. Albert Barraud (France), Alternate to Mr. de Largentaye, Mr. Melville (Australia), and Mr. Stamp (United Kingdom) supported the request, but inquired whether the Fund had power to impose a commitment fee—an inquiry which the representative of the Legal Department answered by saying that the charges set out in the Articles of Agreement were not necessarily comprehensive. Mr. Martínez-Ostos (Mexico) also spoke in favor of the proposal, as did Mr. Beyen (Netherlands), who expressed the hope that it might bring the EPU and the Fund into closer contact. The request was then approved, the commitment fee being set at ¼ of 1 per cent, and the staff was asked to consider a general procedure for stand-by arrangements.
It may be noted here that the stand-by arrangement with Belgium was renewed every six months until December 1954, and then extended for two and a half years to June 1957, completing the five years over which the EPU settlement had been stretched. No drawing was made under this arrangement until, almost at the end of the period, Belgium drew $50 million in April 1957.
The staff’s proposals for standardized stand-by arrangements came before the Board in August 1952 and produced a considerable debate. The main recommendations were that when approving a stand-by arrangement the Board should apply the same standards as it would if the member wished to draw immediately; that thereafter the member should be free to draw automatically, within the limits of the arrangement, unless it was formally declared ineligible; that the duration of the arrangements should be six to twelve months and renewable; that normally the amount of the stand-by credit should be limited to 25 per cent of quota; and that no charge should be made for the facility.
Mr. Barraud said that Mr. de Largentaye maintained his view that the Fund had no right to prevent a member from drawing unless it was declared ineligible to draw under Article V, Section 5. Nevertheless, since the practice of the Fund had developed differently, he was prepared to consider the proposals put forward. Mr. Southard said that the procedure adopted when considering a request for a stand-by arrangement should be the same as when considering a request for a drawing, and that such an arrangement should not last more than six months, since it was not practicable to foresee developments for longer ahead. Mr. Saad (Egypt) concurred in these views.
Mr. Perry (Canada) thought that the idea was premature, and that credits granted under stand-by arrangements would merely enable members to postpone necessary adjustments. He also urged that no credit should exceed 25 per cent of quota. Several Executive Directors thought that Mr. Perry’s doubts were unjustified, and suggested that some quotas were so small that a credit limited to 25 per cent would be of no real assistance. Mr. Melville, supporting these Directors, said that the arrangements should be helpful to countries contemplating the removal of restrictions; he thought that the Fund should give a firm assurance of access to its resources and be willing to extend this beyond 25 per cent of quota. Mr. Natu (India) emphasized the same points.
The question whether a charge should be made was then debated. The general feeling was that there should be a charge; some Directors suggested that it should be ¼ of 1 per cent, others less. The staff thought that if any charge was made it should not exceed ⅛ of 1 per cent, and should be credited against the charges for any drawing made under the arrangement.
Three weeks later the Board met again to consider a revised proposal put forward as a result of the meeting summarized above. The principal change from the original staff plan was that the new draft called for a specific decision by the Board for the continuation of any stand-by arrangement beyond six months (instead of six months to a year, as originally proposed), and for a charge of ⅛ of 1 per cent, to be repeated on each renewal of the arrangement.
It is significant of the doubts which the proposed arrangements engendered that in putting forward this revised proposal the Managing Director found it necessary to allay two fears: that stand-by arrangements, once granted, would be continuously renewed until every member country had one; and that the arrangements would immobilize a dangerously large proportion of the Fund’s resources. In refutation he pointed out that the renewal of an arrangement would not be automatic, and that if drawings were made under an arrangement the Board’s scrutiny would become progressively more severe as the amount drawn reached higher tranches of the member’s quota. Moreover, any stand-by arrangement for a larger proportion of the quota than 25 per cent would require a waiver by the Board of the limitations in Article V, Section 3 (a) (iii). The charge would also be a deterrent.
The discussion was continued on October 1, 1952. It centered on three points: the duration of the arrangements, charges, and the criteria to be applied. On the first of these, several Directors felt that a limit of six months would considerably reduce the attractiveness of stand-by arrangements to countries that might otherwise benefit from them. However, Mr. Southard stressed the importance that the United States attached to a limit of six months, in view of the uncertainty of forecasting beyond that period, and it was agreed that the decision should specify periods of not more than six months. On the second point, a charge of ¼ of 1 per cent per annum was adopted. On the third, a general formulation covering “the member’s position, policies and prospects in the context of the Fund’s objectives and purposes” was approved. With these amendments, the plan was adopted, to be effective until the end of December 1953.19 As will be seen in Chapter 14, a new decision was then taken which modified the plan and in so doing adopted some of the suggestions which had been made during the discussions reported above.
Because of their importance for subsequent discussions, it will be advisable to reproduce here two paragraphs of the decision taken on October 1, 1952.
1. Stand-by arrangements would be limited to periods of not more than six months. They could be renewed by a new decision of the Executive Board.
5. A member having a stand-by arrangement would have the right to engage in the transactions covered by the stand-by arrangement without further review by the Fund. This right of the member could be suspended only with respect to requests received by the Fund after: (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions either generally (under Article XVI, Section 1 (a) (ii)) or in order to consider a proposal, made by an Executive Director or the Managing Director, formally to suppress or to limit the eligibility of the member.
These paragraphs were retained unaltered in 1953, except for the replacement of “would” by “will” and “could” by “can.” 20
Drawings under stand-by arrangements fall due to be repurchased within three years of the date of drawing. This obligation was not decided by the Board as a general principle, but was established as a working rule in connection with stand-by arrangements almost from their inception.21 The rationale for a three-year period was that stand-by arrangements tended to tie up the Fund’s resources for the period for which they were effective, plus the period for which the drawing was outstanding. These two periods, which might reach to four years if the stand-by were to be granted for a year and the drawing made toward the end of that time, constituted together an approximation to the three to five years within which repurchases under ordinary drawings had to be completed.
Economic Stability Report
The UN experts’ report on National and International Measures for Full Employment, to which reference was made in Chapter 11, did not gain wide acceptance because its main proposals were regarded as impracticable. The United Nations therefore appointed a second group of experts in 1950, with the task of formulating alternative ways of reducing the international impact of recessions. In March 1951 these experts were asked to advise also how to reduce fluctuations in international markets affecting primary producing countries. The report of this second group (E/2156), entitled Measures for International Economic Stability, contained a number of recommendations of direct concern to the Fund, which may be summarized as follows.
(1) The Fund should be ready in recessions to grant waivers freely in order to allow members to draw from the Fund in excess of the limits of 25 per cent of quota annually and 200 per cent of quota in all (Article V, Section 3 (a) (iii)).
(2) The repurchase provisions should be modified so as to permit the replacement of automatic repurchases by contractual repurchases which could be modified if a recession developed.
(3) In a recession the Fund should not deny a member the use of its resources on the grounds either that repurchase might be difficult, or that the recession was a healthy adjustment, or that the member was pursuing restrictive policies.
(4) The Fund’s resources should be increased to the point at which it could meet its share in the task of offsetting a decline in the supply of dollars amounting to $10 billion over two years. (It was estimated by the Fund staff that this would necessitate at least doubling the Fund’s assets.)
(5) It should be made possible to repurchase drawings of inconvertible currencies in the same currency.
(6) Charges should be revised along the lines of the decision taken in November 1951.
The report was discussed at three meetings of the Board in April 1952, in order to instruct the Fund’s representative at the meeting of ECOSOC at which the report was to be debated. There was considerable sympathy in the Board for the view that the Fund should make its resources and facilities available to offset a recession; as some Executive Directors pointed out, the Fund’s resources had been conserved for just such an occasion. On the other hand, it was felt that these resources were too limited for the Fund to accept major responsibility for antideflationary measures, and that in any case short-term credit was not a cure for a depression. As a result, the Board decided that ECOSOC should be told that the Fund conceived itself to have three functions in relation to a recession: to make its resources available; to make it known that these resources could be drawn upon (knowledge that would itself have a stabilizing influence); and to provide a forum for the discussion of economic problems. On the other hand, it had to be pointed out that the Fund’s resources were limited; and that while an increase in quotas had been under consideration for some time, it seemed as if this would be inhibited by members’ difficulty in making the necessary additional gold payments, and also by the limited demand for drawings so far. The Board decided further to inform ECOSOC that the other recommendations of the experts would be studied, but that it was thought that the Fund already had sufficient flexibility to deal with problems likely to arise.
An exposé made to the Board after the ECOSOC meeting mentioned that the French and Belgian delegations to ECOSOC had taken the opportunity to criticize the inadequacy of the Fund’s resources, and also to stress that these could not be treated as a part of the member countries’ reserves. The French delegation had opposed the experts’ report on the ground that, if the Articles were correctly interpreted, no recommendations on the use of the Fund’s resources, such as those made by the experts, would be needed. The British delegation had introduced a draft resolution urging the Fund to be prepared to waive the limits in Article V, Section 3 (a) (iii), and not to be deterred from doing so by a fear that its resources might be exhausted. The British delegation had also suggested that the Fund should be asked to examine the adequacy of world reserves.
In the outcome, ECOSOC passed Resolution 427 (XIV) embodying a number of references to the Fund. These may be summarized as follows:
Par. 9. ECOSOC noted the experts’ views that world reserves were inadequate even after allowing for access to the Fund’s resources.
Par. 13. ECOSOC noted the Fund’s decisions as to the use of its resources, and expressed confidence that the Fund would act with determination to assist its members in any future recession.
Par. 14. ECOSOC urged the Fund (a) to apply its rules flexibly, and to attend to the experts’ suggestions in this regard; (b) to be prepared to use its resources as promptly and as fully as was consistent with the Articles.
Par. 15. ECOSOC asked the Fund to keep under continuing review the adequacy of monetary reserves, and to furnish an analysis on the subject for the meeting of ECOSOC in 1953.
When this resolution was circulated in July, the Board, which was then immersed in consultations, did not consider it necessary to take any decision on it. However, in pursuance of the request in par. 15 of the report, the staff prepared in April 1953 a draft study, some twenty thousand words in length, entitled “Adequacy of Monetary Reserves.” This surveyed in detail the complexity of the concept of reserves and the varied factors entering into the determination of their adequacy. It also provided comparisons between the principal monetary reserves data for 1928, 1938, and 1951, and discussed the influences which during these years had made a given amount of reserves more (or less) adequate than previously. It concluded that in each of the regions used for the purposes of the analysis (except the United States and Canada) and in the majority of countries in each region, reserves were inadequate to maintain multilateral trade without recourse to the imposition of restrictions to safeguard the balance of payments.
This draft report was considered by the Board on four occasions. Some Executive Directors were inclined to feel that it was too controversial to be issued as a Fund document, but others argued that ECOSOC would look to the Fund for a realistic study; if this was not forthcoming, the Fund would be criticized. The staff pointed out that most of the points made in the draft were similar to statements made by the Board in past Annual Reports. As a result of the Board’s review the draft was considerably altered in detail, and eventually presented its conclusions in the form of four alternative definitions of “adequacy.” At the one end, (i), reserves might be considered “adequate” if they enabled a country in bad years, by recourse to intensified restrictions, to maintain its external debt payments and to purchase the goods and services necessary to avoid hardship to the population or dislocation of its economy. At the other extreme, (iv), reserves might be considered “adequate” if they permitted a country to maintain currency convertibility even through severe depressions (though not through prolonged periods of international deflation such as occurred in the 1930’s) without the need to resort either to restrictions or to domestic deflation. Two intermediate definitions would have linked “adequacy” to the maintenance of currency convertibility, except in a severe depression, (ii), with, and, (iii), without, the use of restrictions. The report suggested that almost all countries, assuming the adoption of appropriate policies, would have reserves that were adequate under definition (i), many would qualify under definition (ii), some under definition (iii), and a few under definition (iv). The report, thus revised, was sent to ECOSOC in June 1953, being described as a technical analysis, not a statement of Fund policy. An updated version was printed in Staff Papers for October 1953.22
E.B. Decision No. 103-(52/12), February 21, 1952; below, Vol. III, p. 274.
Summary Proceedings, 1952, p. 20.
Summary Proceedings, 1952, pp. 96–107.
Ibid., p. 89.
Ibid., pp. 85–94.
E.B. Decision No. 1034-(60/27), June 1, 1960; below, Vol. III, p. 260.
Summary Proceedings, 1952, pp. 169–70.
E.B. Decision No. 201-(53/29), May 4, 1953; below, Vol. III, p. 258.
For example, E.B. Decision No. 237-2, December 18, 1947; below, Vol. III, p. 261.
Annual Report, 1953, pp. 80, 97–98.
Annual Report, 1951, p. 89.
Fourth Annual Report on Exchange Restrictions (1953), pp. 11–12.
See above, pp. 103–104, 229.
See above, p. 192.
E.B. Decision No. 102-(52/11), February 13, 1952; below, Vol. III, p. 228. The text embodies provisos, omitted here for the sake of clarity.
This provision was necesary because no charge, other than the service charge, was made on drawings within the gold tranche, so that the schedule of charges did not indicate when consultations on nonrepayment should take place, as it did for larger drawings.
E.B. Decision No. 102-(52/11), February 13, 1952, par. 1; below, Vol. III, p. 229.
See above, p. 69.
E.B. Decision No. 155-(52/57), October 1, 1952; below, Vol. III, p. 230.
E.B. Decision No. 270-(53/95), December 23, 1953; below, Vol. III, p. 231.
Cf. Annual Report, 1954, p. 107; Annual Report, 1958, p. 24.
Staff Papers, Vol. III (1953–54), pp. 181–227; reproduced below, Vol. III, pp. 311–48.