- International Monetary Fund
- Published Date:
- February 1996
In preparation for the discussions at Atlantic City in June 1944 and at Bretton Woods in the following month, the U.S. Treasury issued Questions and Answers on the International Monetary Fund (June 10, 1944). While this was not an internationally agreed document, it usefully elaborates the U.S. view on many of the subjects which were being publicly discussed at the time.
Questions and Answers on the International Monetary Fund
(June 10, 1944)
PART ONE: THE FUND AND INTERNATIONAL ECONOMIC COOPERATION
Will the operations of the International Monetary Fund be limited to the immediate post-war period?
In the Foreword to the Joint Statement by the experts on the establishment of an International Monetary Fund, Secretary Morgenthau said:
“The tentative proposals that have been under discussion by the experts are part of a broad program for cooperation on international economic problems among the United Nations. The objectives of this program are the expansion and development of international trade, the revival of international investment for productive purposes, the establishment of orderly and stable exchange rates, and the elimination of discriminatory exchange practices that hamper world trade. The attainment of these objectives will go far toward preventing serious economic disruption in many countries during the critical decade after the war.”
It is still too soon to know the precise form and magnitude of post-war monetary problems. But it is certain that we shall be confronted with three inseparable monetary tasks: to prevent the disruption of foreign exchanges, to avoid the collapse of monetary systems, and to facilitate the restoration and balanced growth of international trade. Clearly, such formidable problems can be successfully handled only through international action.
While the Fund can be of enormous help in the solution of the monetary problems growing out of the war, it would be a serious mistake to regard the Fund as an agency designed exclusively or even largely for the immediate post-war period. To think of international monetary problems as simply an aftermath of the war is to overlook the fundamental realities. For two decades before the war the world suffered from serious monetary disorders without having any means to act together to prevent or to remedy the ills out of which they grew and the evils which were their fruit.
Long before the war, the necessary monetary and financial basis for international prosperity had been weakened by competitive currency depreciation, by exchange restrictions, by multiple currency devices, and by other discriminatory foreign exchange practices that hampered and even throttled world trade and the international flow of productive capital. Unless the United Nations cooperate to provide a sound foundation for the balanced growth of international trade, we must expect a recurrence of the same monetary disorders.
These are not transitory problems of the immediate post-war period affecting only a few countries. They are continuing problems of vital interest to all countries. There must be a general realization that world prosperity, like world peace, is indivisible. Nations must act together to restore multilateral international trade, and to provide orderly procedure for the maintenance of balanced economic growth. Only through international cooperation will it be possible for countries successfully to apply measures directed toward attaining and maintaining a high level of employment and real income which must be the primary objective of economic policy.
International monetary problems cannot be solved by occasional cooperation improvised among a few great countries to meet a threatened disaster. Such monetary difficulties can be met only by continuous cooperation, to prevent them if possible, to remedy them when necessary. It is for this reason that the International Monetary Fund of the United and Associated Nations is proposed as a permanent institution for international monetary cooperation.
Will the Fund provide resources for relief and reconstruction?
It is recognized that an International Monetary Fund is only one of the instrumentalities which may be needed in the field of international economic cooperation. Other agencies may be needed to provide long-term international credit for post-war reconstruction and development and to provide funds for rehabilitation and relief. Within the scope of its functions the Fund can and should collaborate with other international agencies. It is our view that the operations of the Fund can contribute to the solution of other economic problems and the operations of other international agencies can facilitate the work of the Fund. Because international economic problems touch each other at innumerable points, it is essential that there be some degree of collaboration of the Fund with other international agencies.
The question, therefore, is as to the form and degree of collaboration. The Fund is designed to help maintain stability of exchange rates by providing resources for meeting temporary adverse balances on current account, while giving a member country time to take appropriate measures to adjust its balance of payments. If in the judgment of the member country and the Fund such an adjustment can best be made through the alteration of the exchange rate, provision is made for the necessary adjustment through cooperative action. In this connection, it should not be overlooked that the primary objective of the Fund is to assure a pattern of stable and orderly exchange rates that will make possible the expansion of international trade and the maintenance of a high level of business activity.
The Fund is not designed to provide resources for relief, nor is it designed to provide capital for reconstruction. Such specialized types of economic aid can be best given by agencies designed for these purposes, and it is expected that provision will be made for such agencies. There is no advantage in burdening the Fund with duties it is not suited to perform and which might impair its usefulness for maintaining exchange stability and bringing about the restoration and balanced growth of international trade.
While the Fund cannot place any part of its resources at the disposal of the other international agencies, it can and presumably would cooperate with other agencies. Because of the close interrelationship of all important international economic and financial problems, it will undoubtedly be necessary to have consultation between the Fund and other international agencies. For example, it is quite clear that in dealing with the problem of persistent favorable or unfavorable balances on current international account, the Fund and a Bank for Reconstruction and Development would have to pursue related policies.
The mere establishment of international agencies will not solve the international economic and financial problems. While such agencies are necessary, their successful operation requires policies that will encourage the growth of international trade and the maintenance of a high level of business activity.
Is the Fund intended to provide for international expansion of production and exchange which is one of the objectives stated in Article VII of the Mutual Aid Agreement? Is it intended to introduce measures for controlling the trade cycle?
As is stated in the Joint Statement on the International Monetary Fund, the primary objective of economic policy must be the maintenance of a high level of employment and real income. It is recognized that only through international cooperation will it be possible for nations successfully to apply measures for achieving this end. It is a fundamental purpose of the Fund proposal to provide an agency for monetary cooperation among nations to aid in the securing of economic advancement and rising standards of living for all.
The operations of the International Monetary Fund are designed in the first instance to prevent discriminatory and restrictive exchange devices and to promote exchange stability through the cooperation of member countries. Obviously, a greater degree of stability of exchange rates is not an end in itself. It would be a complete inversion of objectives if a high level of business activity were to be sacrificed in order to maintain any given structure of exchange rates. Nor can we expect that a high level of production and employment will be automatically brought about through international monetary cooperation. But the Fund can contribute to the success of national policies intended to facilitate the attainment of a high level of production and employment by providing an international economic environment favorable to the development of such policies.
By helping to keep exchange rates relatively stable and removing the fear of large and sudden changes in exchange rates, the Fund will contribute to the revival of international trade and the resumption of international investment. With international cooperation on exchange policy, it will be possible to avoid the “beggar my neighbor” tactics of the 1930’s which contributed to the spread of depression from country to country.
By discouraging bilateral clearing arrangements and putting an end to the use of multiple currencies and other restrictive exchange devices, the Fund will make it possible for member countries to enjoy the advantages of multilateral international trade without which the possibilities for the balanced growth of international commerce can never be fully realized.
Finally, by providing member countries with exchange resources when they are needed to meet an adverse balance of payments on current account, the Fund will free member countries from the necessity of taking extreme measures that have the effect of contracting income and employment in order to restrict imports and adjust an adverse balance of payments.
Under the Fund, corrective measures can be taken to adjust an adverse balance of payments which need not involve domestic contraction and a drastic reduction of imports. Under adequate safeguards, the Fund will provide the necessary exchange to maintain imports while more fundamental adjustments are being made. Likewise, in the case of member countries with a favorable balance on current account, the operations of the Fund will enable them to maintain their exports while adjustments are made, instead of being forced to undertake a sharp reduction in exports with the resulting adverse effects on domestic employment.
The Fund is not designed directly to control business fluctuations. In our opinion no international agency could assume the responsibility for the control of the trade cycle. To a considerable degree the volume of international trade is a reflection of the internal economic health of the trading nations. The work of the Fund is confined to the provision of some of the conditions necessary for international prosperity.
The maintenance of a high level of employment and the expansion of production can be achieved ultimately only through the development of its productive capacity by each member country. We may reasonably assume that while national policy in each country should and would be concerned with such development, the principal purpose of the Fund is the creation of a healthy international monetary environment in which the economies of member countries can enjoy a high level of employment and production.
We believe that to the extent the Fund is successful in realizing its objectives, fluctuations in the trade cycle will be mitigated. The Fund can minimize the deflationary monetary pressure that adverse balances of payments have had in the past. It can eliminate competitive currency depreciation and a variety of discriminatory trade practices. In this way it will help prevent a recurrence of the unfortunate policies that have had the effect of intensifying international depression and spreading it from country to country through nationalistic policies designed to secure recovery of one country at the cost of depression in other countries. Because the Fund holds resources to which all member countries have access, member countries may more freely undertake policies designed to stimulate investment and employment during periods of recession, without fear that such policies will lead to a serious depletion of their exchange resources and imperil the stability of exchange rates.
PART TWO: QUOTAS AND COMPOSITION OF THE FUND
What are the aggregate quotas of all member countries of the International Monetary Fund expected to be?
The Joint Statement on the International Monetary Fund states that the aggregate quotas of the member countries shall be about $8 billion if all the United and Associated Nations subscribe to the Fund. This corresponds to about $10 billion for the world as a whole. The precise amount of the aggregate quotas cannot of course be determined until it is known how many countries will become members of the Fund.
The aggregate quotas represent the subscribed resources of the Fund. The primary consideration in deciding on this range of aggregate quotas is that resources of this magnitude will probably be sufficient for the purpose of the Fund. It should be borne in mind that the resources of the Fund are not intended to be used to finance flights of capital. Nor is the Fund expected to provide the resources for relief and rehabilitation, or for reconstruction and development. The needs for these purposes can more appropriately be met by international agencies designed to meet these specific problems.
In considering the adequacy of aggregate quotas of $8 billion for all of the United and Associated Nations it is necessary to bear in mind the prescribed purposes for which the resources of the International Monetary Fund may be used. The Fund is intended to provide exchange resources which may be purchased by member countries to meet their adverse balances on current account. But it is not proposed that the resources of the Fund be used to maintain indefinitely an unbalanced position in the economy of a country that has suffered a structural change in its relative international economic situation, though such resources may be used to facilitate the transition to a new position of internation equilibrium. There are adequate safeguards against the use of the Fund’s resources to prevent or unduly delay the establishment of a sound pattern in international balances of payments. When a member country persistently shows a considerable favorable or unfavorable balance of payments that affects adversely the distribution of the resources of the Fund, a committee of the Fund will study the problem and report upon possible corrective measures.
While the resources of the Fund are intended primarily for use by member countries in meeting adverse balances on current account, they may be used to a limited extent to facilitate a transfer of capital or repayment of a foreign debt. In some instances such transfers will reduce the need of member countries to purchase foreign exchange from the Fund with which to meet their adverse balances on current account. This point is further elaborated in the reply to Question 26.
The resources of the International Monetary Fund will be used to finance adverse balances on current transactions. The question to be considered is whether resources of approximately $8 billion for all of the United and Associated Nations will be enough for this purpose in the years after the war. A preliminary test of the adequacy of the aggregate quotas may be made on the basis of the prewar situation. Specifically, would the Fund have had resources sufficient to meet all of the calls on the Fund for foreign exchange?
An examination was made of the balance of payments on current account of all countries for which such data were available in the years 1936 to 1938. For other countries, trade data were adjusted to give an approximation of their balance of payments on current account. In the case of countries that are large producers of gold, their exports of gold were regarded as part of their current trade. For other countries, neither gold movements nor capital movements were included in their balance of payments on current account.
In 1936, the total of all debit balances on current account was approximately $1 billion. In 1936 and 1937, the total of all debit balances for the two-year period was approximately $1.8 billion, and for the three-year period 1936 to 1938, the total of all debit balances was approximately $2.5 billion. Allowance should be made for the fact that even with a Fund many countries with debit balances would have preferred to meet their adverse balances by drawing on their holdings of gold and foreign exchange, or by importing capital from abroad. On the other hand the magnitude of the volume of trade and fluctuations in the balances of payments would undoubtedly have been larger during the period if nations had not resorted to restrictive exchange practices and bilateralism during this period. The purpose of the Fund is to remove such restrictive and discriminatory practices and to obviate the need for them.
It would appear from the above analysis that an International Monetary Fund with resources of $8 billion for all the United and Associated Nations could have met without difficulty the calls that would have been made upon it by member countries for the sale of foreign exchange to meet their adverse balances on current account in the period 1936 to 1938. It should be added that shortages of specific currencies would not be likely to present a serious problem so long as the aggregate resources of the Fund are ample since a considerable portion of the Fund’s resources would be in the form of gold. This is particularly true if credit balances are widely distributed among a number of countries. If a serious one-sidedness in the balance of payments should develop in the post-war period, the Fund might be faced with the scarcity of an important currency. This problem is further discussed in the answers to questions 22 and 30. It is doubtful, however, whether the solution can be found in a general expansion of quotas.
The fact that a Fund with the amount and character of resources called for in the tentative proposal would have been in a position before the war to meet all calls to sell foreign exchange needed for adverse balances on current account does not prove that a Fund with the same resources would necessarily be in a position to meet all calls for this purpose after the war. Unquestionably, the distortion in the normal pattern of international trade will result in relatively large unbalanced positions during the early post-war period. Even so, a Fund with about forty-five member countries holding resources of approximately $8 billion, of which a considerable part is in gold, should be in a position to meet all legitimate calls for the sale of foreign exchange to meet adverse balances on current account. This is particularly so because it is not intended that the Fund continue to sell foreign exchange to any member country that uses the resources of the Fund to prevent or unduly delay the establishment of equilibrium in its international accounts.
In considering the adequacy of aggregate quotas of members of the Fund, it should not be overlooked that some countries already have relatively large reserves of gold and foreign exchange. Such reserves will be used along with resources of the Fund in meeting adverse balances of payments. The Fund will not have to provide resources for relief, a function it is not suited to perform. Furthermore, with the establishment of orderly and stable exchange rates, there will probably be a revival of international investment, particularly if encouragement is given to private investors through a Bank for Reconstruction and Development. Finally, no Fund can function successfully unless some measure of balance is attained in international trade. The maintenance of a high level of business activity, particularly in the United States, will contribute to the attainment of the necessary balance in international trade.
While it is expected that the Fund will hold adequate resources, provision is made for increasing the resources of the Fund if this should become necessary and desirable. The Fund may borrow the currency of any member country provided the country approves. It would appear, therefore, that the aggregate quotas will probably provide the Fund with adequate resources, and additional resources may be borrowed if and when they are needed under conditions that safeguard the member country and the Fund. Aggregate quotas may also be increased periodically in the future although no increase can be made in the quota of a member country without its consent.
How much foreign exchange can member countries purchase from the International Monetary Fund?
The amount of foreign exchange which a member country can generally purchase from the Fund is related to the total amount of its currency which the Fund is permitted to hold. According to the provisions of the Joint Statement, the Fund’s holdings of the currency of a member country may not exceed the quota of that country by more than 100 percent, unless additional local currency is acquired with the approval of the Board and on conditions that safeguard the interests of the Fund. In addition it is provided that the Fund’s total holdings of the currency offered, after having been restored, if below that figure, to 75 percent of the member’s quota, may not increase by more than 25 percent of that member’s quota over a period of 12 months.
The significance of these provisions and their relations to the facilities that may be put at the disposal of a member country can be brought out more clearly by a concrete illustration. Assume that a member country has a quota of $100 million and that it meets its quota by paying $20 million in gold and $80 million in local currency. The total amount of that member’s currency which the Fund can hold is $200 million. As the Fund will already hold $80 million in local currency it could acquire an additional $120 million in local currency before the country will have used up its maximum privilege to purchase foreign exchange from the Fund for local currency. Allowing for the gold contribution, $20 million, which could have been used to acquire foreign exchange without the Fund, the country can purchase $100 million in foreign exchange from the Fund for its local currency in excess of what it could get exclusively through use of its own resources.
A member country cannot, however, use up its total rights to acquire foreign exchange from the Fund over a short period of time. In the case of the example given above the member country could not acquire a net amount of foreign exchange from the Fund for local currency in excess of $25 million in any one year. The purpose of this provision is two-fold: It protects the member country from using up its privilege to acquire foreign exchange from the Fund before taking appropriate steps to adjust its balance of payments position; and it protects the Fund from a too rapid use of its resources. This provision is designed to prevent a member country from using the resources of the Fund to prolong an unbalanced international position.
While the normal amount of local currency of a member country which the Fund is permitted to hold is 200 percent of the quota of that member country the Fund is not rigidly limited to this amount and a member country is not assured that the Fund will necessarily be willing to hold this amount. The Fund may sell foreign exchange for additional local currency, even when its holdings exceed the prescribed limits, if the Board of Directors approves the sale and the member country is taking satisfactory measures to correct the disequilibrium or to reduce the excess local currency holdings of the Fund. In this connection, the Fund will prescribe the terms and conditions under which it will permit this, and it may require the deposit of collateral as one of the conditions. On the other hand, if a member country is using its quota in a manner contrary to the purposes and policies of the Fund, the Fund may give appropriate notice that the member is suspended from further use of the resources of the Fund.
By its very nature, the Fund cannot be called upon to provide all countries simultaneously with foreign exchange with which to meet their adverse balances on current account with other member countries. An adverse balance for some member countries must mean a favorable balance for other countries. If there were a fairly even distribution of favorable and adverse balances, there could be no question whatever of the Fund’s capacity to provide member countries with the maximum facilities each could call for under its permissible quota. The Fund would not only have available for such use its holdings of the currencies of member countries with favorable balances, but it could draw upon its gold holdings to acquire additional amounts of whatever member currencies it might need.
There is, of course, a possibility that only a few member countries will have favorable balances for some years, the great bulk of the member countries having adverse balances on current account during this period. Let us assume that the Fund would be willing to provide the countries having unfavorable balances with the maximum facilities they could request within their permissible quotas. Could the Fund provide such facilities?
To put the case more concretely, let us assume that with 45 member countries having aggregate quotas of $8 billion, only 4 countries—the United States, Canada, Mexico and Brazil—have favorable balances, the remaining 41 countries having unfavorable balances on current account. Let us assume further these four countries have aggregate quotas of $3.5 billion, and that the gold contribution to the Fund of all other member countries is $700 million. Then, the 41 countries with unfavorable balances could purchase from the Fund $5.2 billion before every one of the countries would have exhausted its normal rights to purchase exchange from the Fund. To meet these demands the Fund would have $4.2 billion in the currencies of the four countries and in gold. Under the assumption the Fund would either have to restrict by $1 billion the total demand of the 41 countries with unfavorable balances, or borrow an additional $1 billion in the four countries with favorable balances.
The assumed case is clearly an extreme one. Unfavorable balances are not likely to be so general and widespread, or so concentrated in time, without the Fund’s having previously taken steps to restore a greater degree of equilibrium. It is unreal to assume that the Fund must hold immediately available resources equal to the gross amount of foreign exchange all member countries could purchase from the Fund within their normal rights. The resources of the Fund may be considered as a revolving fund from which countries temporarily in need of foreign exchange resources can purchase what they require. There is no need, therefore, for the Fund to hold assets of a particular type equal to the aggregate of all individual demands which may be made upon it.
As a revolving fund, there is no definitive limit to the ability of the Fund to furnish foreign exchange to member countries. In the first place, the Fund does not lend foreign exchange-but sells foreign exchange to member countries in return for their own local currencies. As it depletes its holdings of some currencies, it builds up correspondingly its holdings of other currencies. If, therefore, the member countries of the Fund, in cooperation with the Fund, succeed in preventing large and persistent favorable and unfavorable balances of payments, the Fund will always be in a position to provide member countries with the facilities they require. Under such conditions, the resources of the Fund would be adequate to meet the needs of member countries for foreign exchange to help maintain the stability of their exchanges while they put into effect measures that will restore balance in their international accounts.
In order to place the Fund in as strong a position as possible, there are several provisions which make it possible for the Fund to mobilize as much gold as the members can reasonably be expected to take out of their independent reserves. Original subscriptions in gold are scaled to the capacity of each member country as determined by its gold and gold-convertible exchange holdings and its quota. A member country purchasing exchange from the Fund must pay for one-half of such exchange in gold so long as its holdings of gold and gold-convertible exchange exceed its quota. It is expected that a member country desiring to obtain another member currency with gold will do so, if it is equally advantageous, by the sale of gold to the Fund. Half of the increase in a member country’s official gold and gold-convertible exchange holdings in excess of its quota is to be used to repurchase its currency from the Fund. While exerting a minimum of pressure on the reserves of member countries, these provisions will serve to strengthen the Fund and will enable it to use all of its resources in meeting the needs of member countries for foreign exchange.
The Fund’s resources will probably be adequate for all ordinary needs of member countries. When the Fund has been strengthened and a larger proportion of its assets are in the form of gold it will undoubtedly be able to meet even extraordinary needs for any particular currency or currencies. In the meantime, if the Fund should find its holdings of any member currency inadequate, it may borrow the needed amounts of that currency with the approval of the member country concerned and on terms and conditions agreed between them.
In what form will the Fund hold the quota subscriptions of the member countries?
The subscriptions of the member countries to the Fund will be in the form of local currencies and gold. The Fund will keep a portion of its holdings of the currency of each member as a deposit in the Central Bank of that country, such portion being in accordance with the needs of the Fund for its current operations. It is the view of the technical experts of the United States that the balance of the Fund’s holdings of the member countries’ currencies should be in the form of bills, notes, or other forms of indebtedness, issued by the governments of the member countries. These securities would be non-negotiable, non-interest bearing and payable at their par value on demand by a credit to the deposit account of the Fund at the Central Bank of the member country.
Why is it desirable for the Fund to keep its surplus currency holdings in the form of securities of the member countries?
There are some countries for whom the required subscription of currency to the Fund can be made only with great difficulty. For such countries the problem is created by the existence of a monetary system under which the issue of currency (or the creation of central bank deposits) requires a high marginal reserve of gold.
For example, some countries can issue local currency only when secured in whole or in large part by gold or foreign exchange. It is not possible for such countries to issue local currency as a means of meeting the required subscription to an International Monetary Fund. Nor can such countries borrow at once the needed resources from the banks or the public except at rates of interest that would be burdensome. Such countries could, however, meet the subscription requirement if the Fund were to hold their subscriptions in the form of their own obligations.
There is another reason why some countries would find it desirable if a part of their subscription were held in the form of their own obligations. Clearly, the Fund is not going to use the entire local currency subscription of a country at the time operations of the Fund begin. For the Fund’s purposes it would be satisfactory to have an adequate working balance at the Central Bank of the member country, holding the remainder of the local currency subscription in the form of government obligations. This would avoid the appearance of inflation or illiquidity of the Central Bank, which might be mistakenly inferred from the sudden increase of its deposit liabilities.
To meet the needs of countries that would find it more convenient not to pay all of the local currency subscription at once, it is proposed that part of the quota subscription be held in the form of government obligations, redeemable at par on demand. Whenever the working balance of the Fund in local currency is depleted by its sales of such currency, the Fund can replenish the balance by presenting for redemption the securities it holds.
There is no reason for believing that the Fund takes any more risk in holding Government obligations than in holding local currency. When the Fund requires local currency for its operations, the national monetary authorities will presumably wish, as a matter of monetary policy, to redeem the securities held by the Fund and to borrow from the market.
In determining the Fund’s holdings of a country’s currency at a given date does “currency” include or exclude securities expressed in that currency?
The Fund’s holdings of a currency for purposes of determining the maximum amount of this currency which the Fund is normally permitted to hold are regarded as the net position of the Fund with respect to that currency. The Fund’s holdings of the currency may be defined, therefore, as all of the assets of the Fund in a given currency minus all of the liabilities of the Fund in that currency. Quite definitely, in calculations on the amount of foreign exchange which a country may normally purchase from the Fund, the security holdings of the Fund in any local currency should be included as part of the local currency.
It should be understood, of course, that the Fund is not authorized to deal in securities. The Fund is permitted to acquire securities redeemable on demand at par in part payment of the initial subscription. The Fund might require the deposit of securities as collateral when selling foreign exchange for local currency. The Fund cannot otherwise acquire securities.
The way in which the Fund acquires assets in terms of a given local currency does not affect the inclusion of the assets in the Fund’s holdings so far as determining the maximum permissible holdings of that currency by the Fund is concerned. Therefore, the Fund’s holdings of local currency include initial subscriptions in these forms, and currency acquired by the purchase of foreign exchange from the Fund. The Fund’s position in a local currency may be modified whenever the local currency is sold to the Fund or bought from the Fund by a member country. Devaluation does not affect the calculated holdings of the currency and securities of a member country as the gold value of such holdings are not affected by devaluation.
What is the formula for determining the quotas of member countries?
A formulation of a method to be used in measuring the participation of the various member countries was not included in the Joint Statement by the experts on the establishment of an International Monetary Fund. This was considered to be a matter on which a decision should be reached only after there has been ample opportunity for consultation with all of the prospective participants. Considerable attention has been given this matter in discussions among the technical experts of the United and Associated Nations.
After examining a great number of suggested bases for quotas, it is the view of the technical experts of the United States that no single factor can allocate participation among the various nations in a satisfactory manner. Several methods for combining a number of factors were tested. The method which is discussed below seems to combine the important relevant factors in a reasonable way and to give relative quotas that seem fair when applied to the approximate data available for a number of countries.
A satisfactory quota formula must give consideration to the multiple functions of the quota. The size of a member country’s quota determines the amount of the subscription which that country makes to the resources of the Fund and is the basis for determining the normal rights of that country to purchase foreign exchange from the Fund. The size of the quota is also one of the factors which determines the relative voice of that country in the management of the Fund. The aggregate size of the quotas will determine the total subscribed resources of the Fund.
In view of the functions of the quotas, it would seem that the formula for the determination of relative quotas for member countries should take into account the ability of a country to subscribe resources to the Fund, the need of a country for use of the resources of the Fund, and the economic significance of a country.
The ability of a country to subscribe resources to the Fund is best indicated by its national income. In a sense, participation in the Fund is an investment. The extent to which a country can devote resources to this or other purposes depends very largely on its national income. However, because the Fund is an international institution that can function more effectively if some of its resources are in the form of gold, it has been thought desirable to require payment of part of the quota subscription in this form. Under the circumstances, the ability of a country to subscribe resources to the Fund in the form of gold is also indicated by its holdings of gold and gold-convertible exchange.
The probable need of a country for use of the resources of the Fund is best indicated by the magnitude of the fluctuations in its balance of payments. There is a good deal of difficulty in dealing directly with fluctuations in the balance of payments. For this reason it was found preferable to utilize import and export data. A country’s need for foreign exchange generally arises from the fact that its imports may be maintained when its exports fall off. We have, therefore, made use of average annual imports and maximum fluctuations in exports as indications of a country’s need for use of the resources of the Fund.
The economic significance of a country in the world’s economy is an intangible factor impossible to measure even approximately. It depends on its national output, its foreign trade, its foreign investment, its economic and political strength. In the final determination of quotas allowance is made for this factor through use of a special allotment for the equitable adjustment of quotas, which is further discussed below.
In order to take account of the above factors it is suggested that the quota of a country be determined by the following formula:
(a) 2 percent of the national income of 1940;
(b) 5 percent of the holdings of gold and gold-convertible exchange as of January 1, 1944;
(c) 10 percent of average annual imports, 1934–1938, inclusive;
(d) 10 percent of maximum variation in annual exports 1934–1938, inclusive.
It is further proposed that the total so determined be increased for each country by the percentage ratio of its average annual exports (1934–1938) to its national income. In this way, special consideration is given to those countries whose national income is particularly affected by international trade.
After testing this formula for a number of countries, we have come to the conclusion that on the whole the results are as satisfactory as can be obtained through the use of any formula. We recognize that under this formula some countries may, for various reasons, be given entirely inadequate quotas. With any formula, provision must be made for adjustment of inequitable quotas. We have proposed that before determining individual quotas 10 percent of aggregate quotas be reserved as a special allotment for the equitable adjustment of quotas. For example, if the aggregate quotas for all member countries should be equivalent to $8 billion, the formula would be used to apportion 90 per cent ($7.2 billion) of the authorized aggregate quotas among the member countries. The remaining 10 percent ($800 million) could be used to increase the quotas of any countries whose quotas, as determined by application of the formula, seem inadequate. The adjustment of the quota need not always be based upon a country’s need for access to the Fund. Since no formula can take account of the intangible factors, the special allotment will also be needed to assure to each country a share in the responsibility for management of the Fund commensurate with its potential position in international economic affairs.
It is provided in the Joint Statement that quotas may be revised from time to time by changes which require a four-fifths vote and no member’s quota may be changed without its consent. It is the view of the technical experts of the United States that provision should be made for the adjustment of quotas on the basis of the most recent data three years after the establishment of the Fund and at intervals of five years thereafter, in accordance with an agreed upon formula. At the time of revision of quotas, the special allotment mentioned above may be used to increase the quota of a country if the quota as determined by the formula is still termed inequitable. This special allotment may also be used in the periods between recurrent adjustments, if developments indicate that a country is entitled to a larger quota.
If quotas are to be based in part on holdings of gold and gold-convertible exchange would not this give most facilities to those members needing them least and vice versa?
As indicated in the answer to the previous question gold and gold-convertible exchange holdings would be only one of several factors in the determination of the quotas of member countries.
The quotas assigned to member countries in the International Monetary Fund proposal have a three-fold purpose: to provide a measure of the appropriate subscription to the Fund by member countries; to provide a measure of the appropriate utilization of resources of the Fund by member countries; and to provide a basis for responsibility in the management of the Fund. It is not regarded as feasible to set up one formula for subscription to the Fund, a separate formula for the utilization of resources of the Fund, and still another formula for voting power in the Fund. For each country the use of the resources of the Fund must be related to its subscription although in practice countries will necessarily use varying proportions of their quotas. Finally, the voting power in the Fund must be related to each country’s subscription to the Fund, although it need not be in precise proportion to subscriptions.
Holdings of gold and gold-convertible exchange are regarded as one of the appropriate factors in the determination of quotas because they indicate the capacity of a country to provide an important type of asset that will be required in the operations of the Fund. It has not been given preponderant importance in the formula for quotas that has been suggested for consideration. The proportion of aggregate quotas arising from the use of this factor is something over 16 percent of the whole. All of the other elements used—national income, variability of exports, average imports, and relation of exports to national income—measure characteristics of the national economy which reflect past or potential need for the use of foreign exchange resources to meet adverse balances on current account and to maintain stability of the exchanges. Finally, when the formula does not give a country a quota properly reflecting its prospective need for use of the resources of the Fund, the quota can be adjusted from the special allotment.
It should be added that a number of provisions are included in the draft proposal intended to give consideration to the position of countries with relatively small holdings of gold and gold-convertible exchange. The subscription in the form of gold is smaller in proportion to the quota for such countries than for countries with relatively large holdings. Countries with gold and gold-convertible exchange holdings which are less than their quotas need not use any part of their gold holdings in purchasing foreign exchange from the Fund. And countries with official holdings which are less than their quotas need not offer to sell to the Fund any part of the increment of gold they acquire so long as their official holdings are below this level.
Does the Fund proposal provide for a quasi-automatic increase in quotas to facilitate the financing of an increasing volume of international trade?
The characteristic feature of the Fund proposal as outlined in the Joint Statement on the Fund is its flexibility. In general, the Fund proposal does not depend on quasi-automatic provisions for its effectiveness. Instead, the Board of Directors is commonly given authority to adjust the policies of the Fund to the conditions prevailing in particular cases, acting within broad provisions intended to safeguard the resources of the Fund and the interests of member countries.
As was stated in the reply to Question 8, it is the recommendation of the technical experts of the United States that the quotas of member countries should be adjusted on the basis of the most recent data three years after the establishment of the Fund and at intervals of five years thereafter, in accordance with an agreed formula. The quota formula itself could only be changed with the approval of a four-fifths vote of the Board of Directors. However, it would not be necessary to wait for the termination of the initial three-year period, or subsequent five-year periods, to adjust quotas. It would be within the power of the Board to increase the quota of a member country at any time out of a special allotment reserved for the equitable adjustment of quotas. To safeguard any country from being compelled to subscribe additional resources to the Fund, it is provided that an increase in the quota of a country can be made only with its consent.
Under the provisions outlined above there will be an expansion of quotas periodically as national incomes rise, as the stock of monetary gold increases, and as the volume of international trade grows. With the expansion of quotas the resources of the Fund and the ability of member countries to purchase foreign exchange will be increased correspondingly. More important, however, is the fact that neither the resources of the Fund nor the ability of member countries to purchase foreign exchange from the Fund are rigidly determined by the quotas. There are flexible provisions for increasing the resources of the Fund as needed. No limitations are placed on the Fund’s ability to obtain resources through borrowing scarce currencies from member countries on terms agreed between the countries and the Fund. Likewise member countries may secure foreign exchange for their needs when they have exceeded the ordinary limits provided under the quota limitations under provisions that safeguard the interests of the Fund.
It would be a mistake to put too much stress on quasi-automatic changes in quotas. For example, if quotas were adjusted automatically to short-run changes in the volume of trade there would be an expansion of quotas in boom years and a contraction in years of slump. While the expansion of quotas in boom periods may not be disturbing of itself because the excessive use of quotas can be controlled, there can be no doubt that a contraction of quotas in depression periods would tend to have a depressing influence.
The fact is that the need for use of the resources of the Fund is not a simple function of the volume of trade. When international trade expands gradually, the growth may well be balanced, and there may be little need for help from the Fund. The need is likely to be greatest at the very time when the total volume of trade has fallen, for it is at such times that the greatest distortion in the normal balance of payments takes place. It is for this reason that the Fund proposal places great stress on fluctuations in the balance of payments on current account as a factor in the determination of quotas.
Automatic devices are unreliable guides to policy in troubled times. What is needed is not a new series of automatic signals to replace the discarded ones of the past. On monetary problems, there can be no automatic substitute for a rational policy implemented with flexible powers. While the American technical experts favor a provision for periodic adjustment of quotas, this feature is regarded as less significant than the provisions that give the Fund flexibility in acquiring resources and in permitting member countries to use resources.
In what form will member countries meet supplementary subscriptions if their quotas are increased?
No specific provision is made for the form in which member countries may meet supplementary subscriptions if their quotas are increased. Unless specific provision is regarded as necessary by some member countries, it would be desirable to give the Board of Directors complete authority to require member countries to meet supplementary subscriptions in the form which seems most appropriate to the Board at the time the supplementary subscriptions are made.
It would not be possible to specify in advance in what form it would be most desirable to have supplementary subscriptions to the resources of the Fund. If the Fund has experienced a period of successful operation, with its resources appropriately distributed among different member currencies and with adequate holdings of gold, there could be no objection to having supplementary subscriptions paid largely in member currencies. On the other hand, if the Fund has experienced some difficulty in meeting the demands for some currencies, it would be preferable to strengthen the Fund by having some part of the supplementary subscriptions paid in gold.
There may be some member countries that would wish to assure themselves against a requirement that they meet supplementary subscriptions with an excessive payment in gold. While a country could withhold its consent to an increase in its quota if too large a part of the supplementary subscription is called for in gold, this may not be regarded as an adequate safeguard. Such countries might prefer a provision that supplementary subscriptions should be made in the same proportions as the original subscriptions and on the basis of the relation of gold and gold-convertible exchange holdings to the revised quota at the time supplementary subscriptions would be made.
An alternative provision could provide the necessary safeguard to member countries while retaining for the Fund considerable flexibility in determining the form in which supplementary subscriptions should be made. The Fund could be given authority to call for subscriptions in whatever form it deems in the general interest, but limiting the subscription to be paid in gold to not more than the proportion specified for the original subscriptions. Of course, any schedule for payments in gold in connection with supplementary subscriptions should be applied uniformly to all member countries.
PART THREE: GOLD AND THE OPERATIONS OF THE FUND
What is the purpose of requiring that a portion of the subscribed quota be paid in gold?
Because of the unquestioned acceptability of gold as an international exchange medium the power of the Fund to serve its members will depend in part upon the size of its gold holdings. With gold the Fund can buy the currency of any member country. If the assets of the Fund consisted solely of currencies of member countries, there would be a danger that relatively small disturbances in the balance of payments positions of member countries would leave the Fund short of certain currencies.
So long as the Fund holds gold it can acquire additional amounts of any member currency. The lack of such generally acceptable resources as gold could in time compel the Fund to take measures to restrict its sales of foreign exchange to the currencies that are available. It is of utmost importance, therefore, that the Fund hold resources that can be used, as needed, to acquire any currency that becomes temporarily scarce.
In many respects, an ideal Fund would be one consisting predominately of gold. It is recognized that such an ideal Fund cannot be immediately established. There is every reason, however, to provide the Fund with as much of such general exchange resources as is within the power of member countries to furnish through their quota subscriptions. For this reason, part of the quota subscription is to be made in gold, graduated for each member country according to its capacity to meet part of its quota in this form. While large gold holdings would strengthen the Fund, such holdings will have to be accumulated gradually in order to avoid pressure on the reserves now held by member countries. Gold subscriptions of 25 percent of the quota or 10 percent of the official gold and gold-convertible exchange holdings of a member country, whichever is the smaller, would appear to meet the immediate needs of the Fund and to be within the present capacity of member countries.
Apart from the original contributions in gold, there are provisions for strengthening the Fund by gradually increasing its holdings of gold. Provision is made for sale of gold to the Fund by member countries desiring to obtain other member currencies. Part of the payment for foreign exchange purchased from the Fund must be made in gold if the member country’s official gold and gold-convertible exchange holdings exceed its quota. And member countries are required to use part of the increase in their official gold and gold-convertible exchange holdings, if they exceed their quotas, to repurchase their local currencies from the Fund. These provisions will in time add to the gold holdings of the Fund without putting pressure on the gold reserves of member countries.
It should be noted that a member country will not necessarily in fact find its foreign exchange position impaired by making part of its quota subscription in the form of gold, or by substituting gold for its local currency in the Fund, since the right of a member country to purchase foreign exchange from the Fund is directly related to the Fund’s holdings of its local currency. The greater the original subscription in gold and the later replacement of local currency holdings with gold, the more foreign exchange a member country has the right to purchase from the Fund. The net foreign exchange position of a member country (its own holdings of gold and foreign exchange, plus its unused right to purchase foreign exchange from the Fund) is unaffected by its use of gold in payment of part of its subscription and by its sale of gold to the Fund. On the other hand, the liquidity of the Fund’s assets, and hence its usefulness to member countries, is increased when local currency is in part replaced with gold.
There is, of course, the possibility that a member country will find that although the unused portion of its right to purchase foreign exchange from the Fund is large, the one currency it requires is scarce and can be acquired from the Fund only in limited amounts. It is true for such a country that its gold subscription to the Fund is not fully equivalent to holding gold for itself. Such a difficulty can be overcome only by strengthening the Fund and by avoiding in this and in other ways the development of a situation in which a currency must be declared scarce.
Would the Fund contribute in any way to the maintenance of a market for gold?
Because gold has a world-wide market, it is superfluous to speak of the Fund as contributing to the maintenance of a market for gold. With or without the Fund, gold will continue to be held as monetary reserves and to be used throughout the world in the settlement of international balances. The provisions of the Fund in no way change the established position of gold. They are designed to utilize the recognized status of gold as the accepted medium of international payments in order to facilitate the settlement of international balances and the maintenance of stable exchanges.
The Fund utilizes the accepted position of gold in a number of ways. In the first place, the Fund itself is expected to hold gold, entirely for the purpose of assuring to member countries an adequate supply of any member currency that may be demanded. As has been indicated in the reply to Question 5, the Fund must hold an adequate amount of general resources such as gold.
The Fund is authorized to buy and sell gold and provision is made for strengthening the Fund by adding to its holdings of gold to enable it to more effectively meet the needs of member countries. Part of the quota subscription is required in gold and member countries are required to pay for part of their foreign exchange purchases from the Fund in gold unless their own gold and exchange holdings are inadequate. Member countries holding a stated minimum of gold must repurchase the Fund’s holdings of their local currencies with part of the gold they acquire in excess of their holdings at the time of becoming members of the Fund. Member countries that wish to sell gold for member currencies are expected to offer the gold for sale to the Fund if this is equally advantageous to them.
The Fund also utilizes the accepted position of gold to facilitate the maintenance of exchange stability. It is generally recognized that when a currency is defined in terms of gold and the monetary authorities are prepared to buy and sell gold (or currencies equivalent to gold) at approximately fixed prices in terms of local currency, the exchange rates can be maintained stable within an appropriate range. Various provisions of the Fund proposal make use of these customary devices.
The assets of the Fund are guaranteed against depreciation with respect to gold. Member countries may not induce a de facto depreciation of their currencies by purchasing gold, directly or indirectly, at a price in local currency in excess of a stated maximum above the gold parity; nor may member countries induce a de facto appreciation of their currencies by selling gold, directly or indirectly, at a price in local currency below a stated minimum under this parity.
The Fund itself is expected to buy and sell local currencies for gold when this becomes necessary for avoiding a fluctuation in exchange rates beyond the range established by the Fund. Member countries, in turn, are expected to take appropriate action to maintain exchange rates within the prescribed range. By established custom, such appropriate action includes the use of gold and foreign exchange resources to prevent depreciation and the acquisition of gold to prevent appreciation of the exchanges.
While the Fund utilizes the recognized status of gold to facilitate its operations, the Fund does not impose any specific obligations on member countries to hold or use gold for any purposes other than to help maintain stability of the exchanges. While member countries must buy back their own currencies acquired by other member countries from current transactions either with the currency of the other member country or with gold, there is no general obligation on the part of any member country to redeem its local currency in gold. Nor is it expected that the Fund will regard appropriate action to maintain exchange rates as requiring a member country to exhaust all of its reserves of gold and foreign exchange.
Are all countries that are members of the International Monetary Fund under obligation to buy all gold offered to them at a fixed price?
The Fund proposal provides no explicit obligation on the part of member countries to buy all gold offered to them at a fixed price. Provision IX-1 of the Joint Statement on the Fund Proposal is intended to prevent member countries from depreciating or appreciating their currencies through an increase in the price at which gold is bought or a decrease in the price at which gold is sold. While this provision does place limitations on the prices at which gold transactions may be undertaken, it does not itself require a member country either to buy or sell gold at all.
Despite the fact that there is no explicit provision requiring member countries to buy all gold offered to them, it is our view that provision IX-2 implicitly requires member countries to buy gold offered to them by member countries when this becomes necessary to prevent an appreciation of the exchange beyond the range established by the Fund. Appropriate action to prevent exchange transactions in its market in currencies of other members at rates outside the prescribed range involves the acquisition of gold offered by other member countries or by the Fund.
Obviously, a member country can take steps to limit the demand for its currency by the nationals of other countries and in this way it can minimize the import of gold. It may, with the approval of the Fund, restrict capital movements when the influx of foreign funds is regarded as undesirable. It may even adopt measures that will reduce the demand for its exports in other countries, although certain forms of such measures can be adopted only with the approval of the Fund. But in any case, so long as there is a demand for its currency to settle international transactions on current account, a member country is implicitly obligated to provide its currency for gold.
Also, it is clearly expected that the Fund can replenish its supply of the currency of any member country through the sale of gold when this is necessary to provide exchange for the purposes for which the Fund is authorized to sell exchange. Because the Fund’s gold holdings are regarded as a liquid asset equivalent to any member currency, provision is made for the gradual replacement of local currency by gold. It would be contrary to the purposes of these provisions if gold were not purchased freely by member countries when this becomes necessary to prevent an appreciation of the exchanges.
Would the Fund be able to create credit in the course of its operations?
The Fund proposal as outlined by the Joint Statement makes no provision for transferable currency or deposits in terms of a new or special monetary unit. The operations of the Fund are exclusively in currencies of member countries and in gold. The Fund does not have any means of creating, holding or transferring currencies or deposits which do not originate with the member countries themselves.
In fact, the Fund proposal does not anywhere provide for the creation by the Fund of transferable credits whether denominated in gold or in the currencies of the member countries or in some special unit. The resources of the Fund in currencies and gold plus what resources the Fund can borrow, represent the facilities the Fund can put at the disposal of member countries. The resources of the Fund are not indefinitely expandable in the sense that international credits are created by the process of a country’s getting into debt to the Fund. The creation of credit remains exclusively a function of the monetary authorities of member countries.
We believe that this arrangement is more desirable for the following reasons:
First, with this restriction the management of the Fund is likely to be more vigilant in taking steps which will correct a persistent disequilibrium in the balance of payments position of member countries than if there were no definite limit to the total volume of credit balances which could be created by means of loans or overdrafts.
Second, a system under which a member country assumes a known and limited obligation to subscribe resources for the Fund gives needed protection to all countries, and Governments will be more willing to enter into such an arrangement with a definite and specified limit to their obligations.
Third, the financial strength and stability will be greater in the case of a Fund which possesses a substantial amount of tangible resources for carrying on its operations than in the case of an international institution which has no resources other than an agreement on the part of member countries to accept the credits created by that institution in exchange for real goods and services.
Fourth, if the operations of the Fund reveal a need for additional resources for its successful functioning, such resources can be secured through the borrowing power of the Fund, without the indirect compulsion inherent in the creation of credit.
PART FOUR: EXCHANGE RATES
What will be the procedure for establishing initial rates of exchange?
Initial rates of exchange are to be established for the currencies of all member countries by defining the parity of each currency in terms of gold. Once established, the initial parity of a member country’s currency can be changed only after consultation with or approval by the Fund. All transactions between the Fund and member countries, and all transactions in member currencies, will be at rates of exchange within an agreed percentage of parity.
The Joint Statement on the Fund proposal provides that initial par values of the currencies of the member countries shall be fixed by agreement between the member countries and the Fund. Before the Fund can be established it will be necessary for the member countries to agree with the Fund as to the exchange rates which these countries will fix upon entering the Fund. At the initial meeting of the members of the Fund, the Fund will accept or reject the initial rates proposed by each of the member countries. An agreement must be reached with the Fund on the par values of their currencies by the members at the initial meeting of the Fund before the Fund can begin operations.
The task of considering and determining the initial rates of exchange for all countries that will become members of the Fund would seem at first glance to be overwhelming. If the process of determining initial exchange rates by extended negotiation can be avoided it would simplify the problem of the organization of the Fund. What is wanted is a criterion for the initial fixing of rates of exchange which can be applied generally without prolonged and difficult negotiations with each member country.
It is believed that for most countries that will be invited to become members of the Fund the prevailing rates of exchange will prove entirely satisfactory. In the case of such countries there is clearly no need for the negotiation of a new rate of exchange. For this reason it is the recommendation of the technical experts of the United States that for any country which becomes a member prior to the date on which the Fund’s operation began, the rates initially used by the Fund shall be based on the value of the currency in terms of U.S. dollars which prevailed on July 1, 1943. In the event that either the member country or the Fund regards the rate prevailing on July 1, 1943 as clearly inappropriate, it will be necessary for the initial rate to be determined by consultation between the member country and the Fund.
In countries occupied by the enemy there were no dollar rates on July 1, 1943. Moreover, because of the drastic economic changes that have taken place in occupied countries it would not be feasible to apply a general rule, such as a pre-war rate, as a guide for determining the initial rates of exchange for these currencies. In such cases the Fund will use the exchange rate fixed by the government of the liberated country in consultation with the Fund, provided this rate is not considered by the Fund to be inappropriate. No operations in the currency of the member country may be undertaken by the Fund until an acceptable rate has been determined.
Because of the great uncertainty of their postwar situation, some occupied countries may be justly reluctant to fix a definitive rate of exchange immediately after their liberation. Adequate provision has been made in the Joint Statement for changing rates of exchange which prove to be unsatisfactory to the member country. These provisions will be discussed in the reply to Question 17. It would naturally be in the interest of the Fund to correct any maladjustment which was the outgrowth of the fixing of an improper rate at the time a country joined the Fund.
Although under the present provisions of the Joint Statement member countries must establish definitive par values for their currencies before they can purchase foreign exchange from the Fund, it may be desirable to provide that countries which have been occupied in whole or in part during the present war may with the approval of the Fund establish provisional rates. The Fund might be permitted to undertake limited operations in such currencies under adequate safeguards for the resources of the Fund.
What facilities are provided by the Fund for correcting an initial rate of exchange that proves unsatisfactory?
The provisions of the Joint Statement on the Fund proposal recognize certain fundamental concepts with respect to exchange rates. First, it is not desirable to alter exchange rates unnecessarily or when there are other satisfactory means of restoring equilibrium in a country’s international balance of payments. Second, it is not possible to support indefinitely an exchange rate that does not reflect a country’s international economic position. Third, an alteration of the exchange rate affects the economic life of other countries and should, therefore, be undertaken only after consultation with other countries. Fourth, the interest of a country in its own exchange is paramount, and no change in the exchange rate for a currency should be made except with the consent of that country.
In order to avoid the unnecessary changing of exchange rates, it is provided in the Joint Statement that the par value of each member’s currency shall be fixed by agreement between the Fund and the member country. Normally this will be the rate which prevails at the time the member country joins the Fund; but where the prevailing rate is deemed to be inappropriate by either the Fund or the member country, the initial rate must be determined by consultation between the member country and the Fund.
It is recognized in the Fund proposal that alteration in exchange rates may be necessary to correct fundamental disequilibrium. Neither a member country nor the Fund can succeed in supporting indefinitely an exchange rate which does not reflect a country’s international economic position. Where other satisfactory measures cannot be taken to restore equilibrium in a country’s balance of payments position, it is necessary to adjust the rate of exchange. There is general agreement that because of the extreme uncertainties prevailing at the time, some exchange rates that are fixed during and immediately after the war may have to be altered. For this reason, it is believed that some changes in such exchange rates should be permitted with more freedom than would be justified after international economic relationships have attained a greater degree of stability. The Fund should not, of course, reject a requested change in an exchange rate that is necessary to restore equilibrium because of the domestic social or political policies of the country applying for the change.
An alteration in an established rate of exchange is a matter of interest not only to the country whose currency is changed but to other countries whose economies may be affected by the alteration of the rate of exchange. A change in exchange rates should not be made, therefore, unless it is essential to the correction of fundamental disequilibrium, and except in cooperation with other countries. The Fund proposal provides that no change in exchange rates can be made without prior consultation with the Fund, and that changes that alter the established rate by more than 10 percent can be made only with the approval of the Fund.
It is provided in the Joint Statement that a member country may, after first consulting the Fund, change the established parity of its currency provided the proposed change, inclusive of any changes made since the establishment of the Fund, does not exceed 10 percent. If a member country believes that a change in its exchange rate, not covered by the above, is necessary for the correction of a fundamental disequilibrium, it may make application to the Fund for such change. If the requested change does not exceed 10 percent the Fund is required to give its decision on such application within two days of receiving the application, if the applicant so requests. In the case of requests for changes beyond those covered by the above provisions the Fund will allow sufficient time for a thorough investigation of the need for the change in the exchange rate requested by the member country before giving its decision. It should be noted that in all cases of requests for changes in exchange rates member countries agree not to propose a change in the parity of their currency unless they consider it appropriate to the correction of a fundamental disequilibrium.
Although there are times when an alteration of exchange rates is in the general interest, the significance of the rate of exchange is of such paramount importance in the economic life of a country, that a change in the exchange rate for a currency should not be imposed on a country. The Fund proposal recognizes the special interest of a country in its own exchange rate and provides that a change in the exchange rate for a currency can be made only at the request of the country concerned.
Where the Fund’s approval for a change in the par value of a member currency is required, the decision is by majority of the votes of the member countries.
While the Fund cannot compel a country to accept an exchange rate it does not regard as desirable or to change an exchange rate it wishes to keep, the Fund need not make its resources available to support an exchange rate it regards as inappropriate. The Fund cannot undertake operations in a currency until an initial rate is fixed which has its approval. Further, the Fund may give appropriate notice that it will not continue to sell foreign exchange to a country that is using the resources of the Fund in a manner contrary to the purposes and policies of the Fund. Obviously, under this provision the Fund would not provide an exchange rate which prevents the restoration of equilibrium.
What will be the position of countries, members of the International Monetary Fund, whose currencies are customarily tied to the dollar or sterling?
The practice followed by many countries of maintaining close relationships between their currencies and either the dollar or sterling has undoubtedly been very useful to them. To a considerable extent, such relationships have been helpful in maintaining a greater degree of exchange stability than would otherwise be possible. There is nothing in this practice that is necessarily contrary to the purposes of the Fund, and there is much in this practice that can facilitate the operations of the Fund.
Countries whose currencies have been tied to the dollar or to sterling can continue their customary relationship. They may by law define their currencies in terms of the dollar or sterling; they may hold their monetary reserves in the form of dollar or sterling balances; they may make their currencies redeemable in dollars or sterling. In general, there will be for such countries no need to terminate or to alter the prevailing relationship between their currencies and the dollar or sterling.
Such countries will be particularly interested in the stability of the exchange rates for their currencies in terms of dollars or sterling. When the initial gold parities of their currencies are determined, it is expected that in most instances the Fund will use parities based on the exchange rates prevailing at the time the Fund is established. Unless such rates are clearly inappropriate, and they do not appear to be for most currencies which were tied to the dollar or to sterling, there will be no reason to disturb the existing rates between such currencies and the dollar or sterling.
Once established, the gold parity for a currency continues in effect so long as a member country is satisfied, for the Fund cannot on its own initiative compel a country to alter the parity of its currency. There is no reason for assuming, therefore, that the Fund would in the future require a country to discontinue the special relationship of its currency to the dollar or sterling.
The only occasion when a country could experience any difficulty, as a member of the Fund, in retaining the customary relationship of its currency to the dollar or to sterling would be if the parity for either the dollar or sterling were altered. Even so, there is reason for believing that the difficulty is more apparent than red. A change in the gold parity of a currency can be made only after consultation with the Fund and, with one exception, only with the approval of the Fund. Assuming that the gold parity for either the dollar or sterling were changed, would countries whose currencies are linked to the dollar or sterling be able to alter the parities for their currencies correspondingly?
Aside from the exception previously referred to, a country desiring to alter the parity for its currency in order to maintain its previous relationship to the dollar or sterling would have to secure the prior approval of the Fund. Such approval would be granted if it were shown that a change in the parity is necessary to correct a fundamental disequilibrium. In most instances in which a currency is tied to the dollar or sterling, the special relationship has been established because of the close ties of the two countries in international commerce or finance. If this is so, a change in the dollar or sterling parity is likely to lead to a change for such a country in the demand for exports to or imports from the United States or England. Obviously if such a change in the dollar or sterling parity would have the effect of bringing about a disequilibrium in a country’s international payments position, the Fund would undoubtedly permit a country to make the corresponding change for its own currency.
It should be noted that there is no provision in the Fund proposal for pooling or transferring the permissible quotas of member countries. Undoubtedly, to some small extent it is possible for member countries to use their quotas to support the currencies of other countries. The Fund, however, could prevent any considerable use of its resources for this purpose.
How will the range of permissible fluctuation in exchange rates, as fixed by the Fund, compare with the old spread between gold points?
There would appear to be three sets of limits on exchange rates to be considered in connection with this question: (1) the gold import and gold export points; (2) the highest and lowest points within which exchange rates established by the Fund may be permitted to fluctuate; and (3) the Fund’s buying and selling rates for foreign exchange in terms of local currency.
In the opinion of the technical experts of the United States it is on the whole desirable to have the range established by the Fund somewhat broader than the range of the gold points. It is a moot question whether the Fund’s buying and selling rates should be the same as the lower and upper limits of the range established by the Fund. There are, however, some disadvantages in having the Fund’s buying and selling rates lie within the range of fluctuations permitted by the Fund, and some advantages in having the Fund’s buying and selling rates lie outside this range.
In general, it is our view that the range that the Fund would establish would be somewhat greater than the traditional gold points that prevailed in the 1920’s. A broader range within which exchange rates could fluctuate might have some effect in inducing member countries to use their independent resources of gold and foreign exchange before resorting to the Fund. It would be in the general interest if member countries would undertake to meet normal and moderate needs for additional exchange by their nationals out of their holdings of gold and foreign exchange, while the resources of the Fund would be reserved for occasions when member countries experience a real need for supplementary resources to be used while working out the basic adjustments in their international position. The inducement to a country to use its resources of gold and foreign exchange is further increased if the Fund’s buying and selling rates for exchange lie outside the range of permitted fluctuations, as this would directly penalize the monetary authorities of a member country for using the resources of the Fund.
It is too much to hope that even a relatively broad range, say 2 percent, within which member currencies might be permitted to fluctuate would provide sufficient flexibility for adjusting a country’s international balance of payments through a movement in exchange rates. There will, nevertheless, be seasonal or even small cyclical pressures that can be considerably offset by a movement of exchange rates within such a broad range prescribed by the Fund.
There is to this extent something to be said even on the economic side for broadening the range of exchange rates prescribed by the Fund as compared with the old spread between gold points. On the other hand, the permissible variations must not introduce a risk of exchange fluctuations so considerable as to deter short-term financing of international trade or long-term lending for investment. Neither should the permissible fluctuation encourage speculation of a character that would tend to weaken the established structure of exchange rates, or too easily introduce a disrupting influence in the money and exchange markets.
The range prescribed by the Fund should for administrative reasons be greater than the spread between the gold points. In the post-war period, it is almost certain that under any circumstances the spread between the gold points will be considerably greater than it was in the 1920’s. While lower interest rates, the higher monetary value of gold, and perhaps improved transport facilities will tend to narrow the gold points, other factors, particularly the difference between the buying and selling prices for gold in various countries, will tend to broaden the gold points.
In the 1920’s there was in fact no difference between the buying and selling prices for gold in the United States and a difference of less than 1/6 of 1 percent in the United Kingdom. Differences between the buying and selling prices of gold were an insignificant factor in determining the dollar-sterling gold points in the 1920’s. Now, under the Gold Reserve Act of 1934 there is a charge of 1/4 percent for buying or selling gold. If this difference of 1/2 percent were to be adopted by the United Kingdom, there would be a spread of approximately 1 percent between the exchange rate equivalents for gold in New York and London. Probably another 3/5 of 1 percent should be allowed for actual costs of moving gold in both directions. Under these conditions, the spread between the gold points would be 1.6 percent.
It would seem, therefore, that if the range of fluctuations in exchange rates permitted by the Fund is to be somewhat greater than the spread between the gold points, the Fund’s range will have to be very close to 2 percent. This would seem to be sufficient inducement to a country to utilize its own gold and exchange resources rather than to draw upon the resources of the Fund to meet normal and moderate needs for foreign exchange. As already stated, a further penalty would be placed upon a country using the Fund’s resources if the Fund’s buying and selling rates for exchange were outside the range of permitted fluctuations.
In this connection, it should be noted that the range of exchange rates permitted by the Fund has been compared with the normal gold points that might be expected in the post-war period. Some countries may have so large a difference between the official buying and selling prices for gold that their gold points might in fact lie outside any broad but reasonable range the Fund might be expected to establish. In such cases the Fund might recommend that the member country narrow the spread between its buying and selling prices for gold.
There is another point of some interest that may be mentioned. In general, the spread between the gold points is a function of the distance between the two exchange markets under consideration. In the 1920’s, the spread between the gold points was much narrower between New York and Montreal than between New York and Bombay. It may be desirable to standardize the range established by the Fund in order to give all member countries whatever advantage there may be in a broad range within which exchange rates may be permitted to fluctuate.
Because of the importance of these unsettled questions and the difference of opinion on the technical merits of alternative policies, it was considered best not to include in our tentative proposal any specific provisions on such technical matters until agreement has been reached on these questions. There is no doubt that decisions on such technical questions can be worked out to the satisfaction of member countries.
Would differential rates of exchange for different classes of imports and exports (visible and invisible) be permitted by the Fund?
Differential rates of exchange would come under the provision of the Joint Statement which deals with multiple currency practices. This provision, IX-3, is based on a view that the use of such methods should not be encouraged because they may so easily become the means for discrimination in trade relationships and because they usually involve control of the exchanges so complete as to offer a strong temptation to restrict transactions on current account.
According to provision IX-3 member countries agree not to engage in multiple currency practices without the approval of the Fund. Undoubtedly such approval would not be given in the case of multiple currency practices which in the judgment of the Fund do retard international trade and the flow of productive capital.
Where a country has centralized the exchange dealings of its nationals for purposes of supervision, differential rates on imports may provide a convenient substitute for customs duties. At the time the exchange authorities make foreign exchange available to importers it is very simple for them to collect what are in effect import duties. Insofar as various classes of imports are distinguished and different exchange rates are assigned to them, the same result is produced as by an ad valorem tariff with different rates of duty on the various classes of merchandise. Differential rates that are not the same for all currencies are obviously discriminatory. Of course, if the exchange rates for some classes of imports are extremely low (say, lower than the exchange rates for some classes of exports) there may in fact be a subsidy for some imports. Obviously, differential exchange rates for imports may easily lead to restriction of international trade.
Differential rates of exchange for exports act as a subsidy for some exports and an export duty on others. This may create important although disguised discrimination among the importing countries, especially where the differentials are not the same for all currencies. On the whole, the case for differential rates of exchange for exports is even weaker than for differential rates for imports.
While differential rates have some administrative advantages in a country which has centralized its foreign exchange dealings and which secures substantial revenues from them, there are serious disadvantages and dangers inherent in their use. Comparability of international values becomes much more tenuous where there are multiple exchange rates. Also, differential rates can hardly be prevented from channelizing trade in a fashion that results in intentional or unintentional discrimination among countries. Differential exchange rates can become an instrument for the worst form of unfair competition in international trade. There is also the risk that multiple currencies may again be used, as Germany used them, to produce division and domination of weaker countries for political purposes. On the whole, differential exchange rates open the way to dangerous abuses, while offering few offsetting advantages that cannot be equally well achieved in other ways.
For these reasons, it is provided that member countries may not engage in multiple currency practices which in the judgment of the Fund restrict international transactions. In countries where differential rates of exchange for different classes of imports and exports are used, their continuances would require the approval of the Fund. It is conceivable that the Fund would in some instances decide that multiple currencies are being used by a member country in such a way that they do not conflict with the purposes of the Fund. In other cases the Fund may permit adequate time for the abandonment of the practice, in order to give member countries ample opportunity to arrange for collection of revenue by other methods based on the foreign transactions of their nationals.
There is, nevertheless, one category of invisible exports where a differential exchange rate would seem to be within the purposes of the Fund. For social and political reasons it may be desirable to attract tourists and students from other countries. A differential rate of exchange for these purposes could very well be regarded by the Fund as an appropriate means of encouraging friendly relations between countries, and in some instances may be found to be an effective device for helping to correct disequilibrium in a country’s balance of payments. It would seem undesirable, therefore, not to allow some flexibility in this matter. The Fund, of course, would have to give its approval before such differential exchange rates were established.
If a country has exhausted its rights of recourse to the Fund, does its undertaking to maintain a stable rate of exchange lapse?
The obligations of a country to other member countries and to the Fund are not terminated when it has exhausted its permissible quota or for any other reason has no further access to the resources of the Fund.
Specifically, a member country is obligated to prevent exchange transactions in its market in currencies of other members at rates outside the range prescribed by the Fund by taking whatever appropriate measures are necessary for this purpose. Such measures cannot, of course, include the practices opposed to the purposes of the Fund and prescribed in Section IX of the Joint Statement. Obviously, one appropriate measure is the use of the gold and foreign exchange resources of a country to support its currency.
A country cannot succeed indefinitely in maintaining a stable exchange rate by the use of its own resources of gold and foreign exchange if the established rate does not reflect approximately its international economic position. Where the disequilibrium in a country’s balance of payments is of a fundamental character, measures will ultimately have to be taken to restore equilibrium either through an approved change in the exchange rate or through other appropriate means.
When a country has reached the stage where its rights of recourse to the resources of the Fund are exhausted the Fund may at its discretion waive the limitation on the Fund’s holdings of that currency provided in III-2(c) under conditions which safeguard the interest of the Fund. The conditions which the Fund will normally impose on a country which has exhausted its normal rights of recourse to the Fund will be the adoption of measures by the member country which in the view of the Fund will restore the necessary balance in the country’s position. Such measures might include alteration of the exchange rate, control of capital movements, or in extreme cases direct measures to limit the volume of imports.
It would be unfortunate if any member country should adopt the attitude that its obligations to the Fund could be disregarded when it has exhausted its right to further use of the Fund. The provision of resources to facilitate the maintenance of exchange stability is only one aspect of the Fund’s functions. The Fund must be regarded as an agency with general responsibilities for international monetary cooperation. The duty to take all possible measures to avoid unilateral exchange depreciation is not a qualified duty.
Alteration of exchange rates can only be undertaken with the approval of the Fund, except that a member country may change the established rate for its currency by not more than 10 percent, provided the Fund is notified and consulted on the advisability of the action. Both a member country and the Fund have a duty to cooperate in taking measures to prevent an authorized depreciation in exchange rates.
When a country’s currency becomes scarce, does that country’s obligation to keep constant by “appropriate action” its rate of exchange on the currencies of all other countries remain unaffected?
As indicated in the answer to the previous question, it is the view of the technical experts of the United States that the obligation of a member country to prevent its exchange rate from fluctuating beyond the range specified by the Fund cannot be terminated without the consent of the Fund. The fact that a currency has become scarce within the meaning of provision VI-1 is indicative of a demand for the currency which, if not met or restricted, will tend to appreciate that currency. It is clearly the intention of provision VI-1, if no additional supply is forthcoming, to restrict the demand for the currency in some equitable manner, in order to prevent an appreciation of the exchange rate.
As one of its obligations as a member of the Fund, each member country agrees not to allow exchange rates in its market to fluctuate outside a prescribed range based on the agreed parities of the currencies. This implies that a member country must undertake by appropriate action to maintain exchange rates within the range established by the Fund. For a country with a favorable balance of payments, the obligation to maintain exchange rates by appropriate action includes the acquisition of gold that is offered for its currency to support the exchanges of the gold selling countries and to prevent the appreciation of the currency of the country with a favorable balance of payments.
The acquisition of unlimited amounts of the currencies of any other countries cannot reasonably be regarded as appropriate action within the meaning of the Fund proposal. It is not intended that any provision of the Fund proposal shall make it mandatory for any member country to acquire and to hold the currency of another member country. Instead, it is the Fund as a cooperative enterprise which undertakes to acquire the currencies of member countries in accordance with the provisions of the proposal.
When a country’s currency becomes scarce, the Fund itself takes steps either to increase the supply or to restrict the demand. By apportioning the available supply, the demand is directly restricted. In general, such action by the Fund would prevent an appreciation of a scarce currency. Member countries are, after consultation with the Fund, authorized to restrict freedom of exchange operations in currencies which have been declared by the Fund to be scarce. In the countries where a scarce currency must be rationed, the controls should be effective in restricting imports. It follows that the exporters of the country whose currency is scarce will not, in fact, have foreign exchange to offer for sale, and there will be no need for placing limitations on the sale of foreign currencies by exporters. However, a member country could apply such direct limitations with the approval of the Fund and in cooperation with other member countries.
For further discussion of the problem related to a scarce currency, see the answers to questions 30 and 31.
PART FOUR [BIS]: OPERATIONS OF THE FUND
Will the International Monetary Fund sell foreign exchange to a member country to support its rate of exchange if that rate is not in accord with the country’s international economic position?
While it is a major purpose of the Fund to help stabilize exchange rates, the Fund cannot and should not undertake to provide foreign exchange to prolong a basically unbalanced position. Numerous provisions of the Fund proposal are intended to provide safeguards against the use of the Fund’s resources to support an exchange rate not in accord with a member country’s international economic position.
When initial rates of exchange are determined, the rate established for a currency must, in the judgment of the Fund, be appropriate. Until the Fund has given its approval to an initial rate of exchange, no operations may be undertaken by the Fund in such a currency. Even after the initial rate of exchange has been fixed with its approval, the Fund is not required to sell exchange to a member country if that country is using the resources of the Fund in a manner contrary to the purposes and policies of the Fund. One of the fundamental purposes of the Fund as stated in provision I-3 is to enable members to correct maladjustments in their balances of payments by making the Fund’s resources available to them with adequate safeguards. The Fund is not required therefore to sell exchange to a member country to support an unbalanced position.
When a member country is using the resources of the Fund in a manner that clearly has the effect of preventing or unduly delaying the establishment of a sound balance in its international accounts, the Fund, after notice, may suspend the member country from making further use of the Fund’s resources on the grounds that it is using them in a manner contrary to the purposes and policies of the Fund. The Fund is, however, required to present to such country a report setting forth the reasons for that country’s being suspended from the privilege of purchasing foreign exchange from the Fund and the Fund must allow a suitable time for reply before notice of actual suspension is given. The Fund in its report to the member country will undoubtedly stipulate certain conditions whereby the member country can avoid suspension of the right to draw on the resources of the Fund. If in its reply to the Fund, the member country agrees to the conditions stipulated by the Fund, notice of suspension of the privilege of purchasing foreign exchange from the Fund would not be given.
The Fund is also expected to limit its sales of foreign exchange to member countries that use the resources of the Fund at an unwarranted rate. In general, the presumption is that a country that purchases foreign exchange for local currency at an annual rate in excess of 25 percent of its quota is making unwarranted use of the Fund and except under special circumstances members will not be permitted to purchase foreign exchange from the Fund at an annual rate in excess of 25 percent of their quotas provided the Fund’s total holdings of their currency are not below 75 percent of their quota. Such use of the Fund is an indication of an unbalanced position that should be corrected.
A limitation on the Fund’s holdings of the local currency of a member country is established for each country because it is regarded as desirable to have an objective indication of a limit to the Fund’s acquisition of local currency to help a country to support its exchange rate. There is implicit in this provision the view that when the Fund’s holdings have reached 200 percent of the quota, it is generally an indication that there is a fundamental disequilibrium in a country’s international position that calls for remedial action. While the Fund may sell additional foreign exchange to such a country, the sale requires specific approval and can be made only if satisfactory measures are being or will be taken to correct the disequilibrium, or if it is believed that the disequilibrium is temporary and the excess holdings of the Fund can be disposed of within a reasonable time.
It cannot be emphasized too frequently that the Fund is not designed simply to sell foreign exchange needed by member countries to meet their adverse balances on international account. The resources of the Fund may properly be used to help a country through a period of temporary disequilibrium. The resources of the Fund are available to member countries under adequate safeguards to help them maintain stability of their currencies, while giving them time to correct maladjustments in their balance of payments without resorting to extreme measures destructive of international prosperity. A Fund operating successfully should be influential in inducing member countries to adopt policies making for an orderly return to equilibrium.
Does the Fund provide facilities for multilateral clearing to a country which has its overall international payments on current account in balance but has an adverse balance of payments on current account with some countries?
According to the present provisions of the Joint Statement on the Fund proposal there can be no doubt that in almost all circumstances a member country will be able to use freely the proceeds of its transactions in one country for the settlement of balances due on current account in another country.
Let us suppose that England has a favorable balance with France and an adverse balance of equal amount with the Netherlands. France and the Netherlands are in equilibrium with each other, and so is each of the three countries with all countries other than the three. This situation may manifest itself in an accumulation of francs by England and a need by England for guilders. It might be possible for England to offer all or part of its accumulated holdings of francs for sale in the exchange market and secure payments in guilders.
Assuming, however, that there is no franc-guilder market, it would then be necessary for England to offer the francs for sale to France. Under provision III-5, France is obligated to buy francs from England with sterling or with gold, if such francs were acquired by England from current transactions with France, and if France has access to sterling in the Fund. France might have to apply to the Fund for sterling for the purpose. If the Fund supplied sterling, the Fund’s holdings of sterling would be reduced by the amount made available for the purpose.
If the Fund’s holdings of sterling are not outside the limits specified in the proposal (which is unlikely in view of the fact that the Fund’s holdings of sterling would have been reduced by support of the franc), and if England is not making unwarranted use of the Fund’s resources (which is unlikely in view of the fact that there is no net change in the Fund’s holdings of sterling), the Fund could under the provisions of the proposal make available the necessary guilders.
Under provision III-2 of the Joint Statement on the Fund proposal the Fund is permitted to sell foreign exchange to a member country so long as the currency demanded is presently needed for making payments in that currency which are consistent with the purposes and policies of the Fund and so long as the member country is not making unwarranted use of the Fund’s resources. It is not necessary for a member country to have an over-all adverse balance of payments to obtain a particular member’s currency which that country needs to correct a temporary maladjustment in her balance of payments with another member.
Would it be possible for the Fund to provide the foreign exchange needed to maintain stability of the currency of a member country if the deficit giving rise to this need for foreign exchange is in the balance of payments with a third country?
The resources of the Fund are intended to be used to aid member countries in meeting adverse balances of payments predominantly on current account. The Fund is not intended to enter the exchange markets or to provide the means for carrying out arbitrage transactions.
Under the provisions of the Joint Statement the Fund cannot use the currency of one country to help maintain stability of the exchange of another country if the deficit giving rise to the pressure on the exchange is with a third country. Concretely, if Canada has a favorable balance of payments on current account with England, the Fund cannot use U.S. dollars for the purpose of enabling England to meet payments in Canada.
If England has an adverse balance on current account with Canada, the Fund can sell Canadian dollars to England for sterling in order to enable England to settle this balance. If the Fund’s holdings of Canadian dollars are inadequate, it may use gold to purchase Canadian dollars. The Fund is not authorized to use any member currency for the purpose of acquiring another.
No hardship is inflicted on Canada because of this regulation. Under provision III-5 of the Joint Statement, Canada can require England to purchase the sterling acquired from current transactions, payment to be made either in Canadian dollars or in gold. If England may acquire Canadian dollars from the Fund (Canadian dollars not being a scarce currency and England not being suspended from making use of the Fund’s resources), England is obligated to purchase such sterling from Canada. The reduction in the Fund’s holdings of Canadian dollars would increase correspondingly Canada’s ability to purchase foreign exchange from the Fund within the terms of the Joint Statement.
No doubt, there would be some advantages if the Fund could use any of its resources to aid any member country in meeting adverse balances on current account. If all member currencies were freely convertible into gold, such restrictions might be safely dropped. It is not feasible, however, to permit the free use of some currencies (say, U.S. dollars) for meeting an adverse balance of payments with any country, while restricting the use of another currency exclusively for meeting adverse balances with that country.
Would member countries exporting capital be permitted to purchase foreign exchange from the Fund?
If a member country is in present need of the currency of another member country for making payments in that currency in order to correct a maladjustment in its balance of payments toward which capital exports are contributing only in small part, the Fund would undoubtedly permit its resources to be utilized by the member. Provision V-1 prevents a member country from using the resources of the Fund to meet a large or sustained outflow of capital, and gives the Fund power to require a member to exercise controls to prevent such use of the resources of the Fund. This provision is not intended however to prevent the use of the Fund’s resources for capital transactions of a reasonable amount required in the ordinary course of trade, banking, or other business. Nor is it intended to prevent capital movements which are met out of a member country’s own resources of gold and foreign exchange, provided such capital movements are in accordance with the purposes of the Fund. A capital export for the purpose of expanding exports does not in fact represent a net loss of exchange resources of the amount involved, since the expansion of exports tends to provide a favorable current balance of approximately the same amount. Capital exports for this purpose are therefore permitted, even when a country is making some use of the Fund.
In general it would appear to be more desirable for the Fund to provide a member country with some resources to help maintain exchange stability than to require the imposition of a system of exchange control merely to prevent the export of a moderate amount of capital. The Fund can safely take this position so long as its holdings of the local currency in question are not excessive. But the Fund cannot allow its resources of other currencies to be seriously depleted to facilitate the speculative movement of funds; nor can it sanction the dissipation in this way of resources of the Fund which should be reserved for the maintenance of international interchange of goods and services. It is expected that as the Fund’s holdings of a member currency increase, the Fund will be less lenient with respect to the volume of capital exports which that country will be permitted to have without being deprived of the use of the resources of the Fund.
It is clear from the above provisions that it is not intended that the Fund should ever rigidly exclude the utilization of its resources when a country has an export of capital. It is recognized that there will be instances when permitting an export of capital will not involve a net drain on the resources of the Fund and will be beneficial from the point of view of the general international economic situation. Under such circumstances, the Fund will want to allow its resources to be used in moderation by a country exporting capital.
It may be of interest to consider the conditions under which the Fund might regard the export of capital as in the general interest and as not in conflict with the primary objectives of the Fund. In fact, an export of capital, even when some of the foreign exchange is provided by the Fund, may reduce the net call on the Fund’s resources and may give the Fund a more balanced distribution of its assets. For example, one member country may export capital to another member country which has an adverse balance on current account and may wish to purchase from the Fund part of the exchange needed for this purpose. Such a capital export may reduce correspondingly the need of the second country to call upon the Fund for exchange with which to meet its adverse balance on current account. The net amount of exchange sold by the Fund under such conditions would be less because it facilitated the capital export. Further, if this capital export is from a country whose currency the Fund holds in a moderate amount to a country whose currency the Fund holds in an excessive amount, the distribution of the Fund’s assets would become more balanced, and as a result of the transaction the Fund would be in a better position to serve all member countries.
Apart from such general conditions, the Fund might be more favorably disposed toward permitting certain types of capital transfer than toward permitting others. The repayment of a short-term credit is, in a sense, a capital movement. However, if the credit was acquired to finance trade, it may have served when made to obviate a corresponding use of the Fund, and the Fund would ordinarily provide exchange for the repayment of such a credit. The meeting of normal sinking fund installments on a debt is usually regarded as a capital movement. Nevertheless, if such sinking fund payments are not large relative to the Fund’s holdings of the currency of a member country, the Fund would ordinarily provide foreign exchange to facilitate a capital export by a country with a maturing obligation which cannot be fully met at once but which its balance of payments could absorb within two or three years.
In considering the probable attitude of the Fund toward the sale of foreign exchange to facilitate a transfer of capital, it should be borne in mind that the provisions of the Fund proposal are designed to give effect to the general principle that the Fund’s resources should be used primarily for settling international balances on current account. However, sufficient flexibility is provided so that the resources of the Fund can be used for meeting a capital export where it is deemed to be generally desirable. There is no reason to believe that a country making payments of a capital nature will be debarred entirely from recourse to the Fund unless and until the Fund has given sufficient notice to the member country that such payments are not in the general interest.
It is important for the Fund to build up in the course of its operations accurate statistics on international payments of all types, as it easily can do under its authority to require full reports from member countries. In the period before these records are available, however, completely accurate records of a country’s capital inflow or outflow are not essential to the proper execution of the policy outlined above. The Fund will be concerned only with large movements, not with flows that are small relative to a country’s volume of international transactions. Large non-recurring capital flows—like a large redemption operation, or defaulted loan settlement—would be known to the Fund, while recurring net outflows of significant size would be difficult to obscure. It is not necessary to know precisely the amount of net outflow; it is enough to be able to ascertain whether the net outflow is significantly large or not. It would be desirable, of course, for member countries to arrange to receive regular reports on capital movements into and out of their countries, and to make such data available to the Fund.
An extended discussion of the control of capital movements will be found in the answers to questions 33 and 34.
What provision is made to permit a country with abnormally low holdings of foreign currencies and gold to accumulate such resources while a member of the Fund?
Provision III-7-c requires each member country to offer to sell to the Fund one-half of the gold and gold-convertible exchange it acquires in excess of its official holdings at the time it became a member of the Fund so long as this does not reduce the Fund’s holdings of the member’s currency below 75 percent of its quota. However, no country need sell gold or gold-convertible exchange under this provision unless its official holdings are in excess of its quota.
The significance of this provision can best be brought out by an explanation of its purpose.
1. Some member countries may be tempted to use the resources of the Fund to build up independent holdings of gold and foreign exchange. The Fund is not devised to facilitate the accomplishment of such a purpose. On the contrary, the Fund’s resources are intended only for needs arising from an adverse balance of payments predominantly on current account.
Although the Fund would not sell foreign exchange for local currency to permit a member country to acquire additional balances of gold or foreign exchange, some provision is necessary to prevent the Fund from being used indirectly for such a purpose. Without such provision, a member country could resort to the Fund when it has a temporary adverse balance of payments, and keep any increment of gold or foreign exchange which it may acquire when it has a favorable balance of payments.
With provisions III-7-b and III-7-c, a member country cannot build up excessive gold and foreign exchange balances while at the same time drawing upon the resources of the Fund. A member country must pay with gold for one-half its net purchases of foreign exchange from the Fund, provided its gold and gold-convertible exchange holdings exceed its quota; and it must offer to sell to the Fund for its local currency one-half of the gold and gold-convertible exchange it may acquire in excess of its official holdings at the time it became a member of the Fund (provided its official holdings exceed its quota).
2. The Fund proposal does not generally specify a definite time compelling the repurchase of local currency which has been acquired by the Fund from the sale of foreign exchange to a member country. Presumably when the Fund sells foreign exchange in excess of the amounts normally permitted under provision III-2-c, there would be an understanding that the Fund’s holdings of local currency would be brought within appropriate limits in some specified period. Similarly, when the Fund sets conditions upon additional sales of foreign exchange to a country in accordance with provision III-2-d one condition could be that a reduction in the Fund’s holdings of local currency be effected in some specified period.
The great bulk of the exchange transactions of the Fund with member countries will not require specific approval, as the Fund’s holdings of the currencies of member countries will in general not exceed the prescribed limits. The Fund would not in such instances prescribe conditions for the repurchase of local currencies, although the penalty provisions will be a strong inducement to repurchase local currencies from the Fund. It is necessary, however, that some obligation should rest on member countries utilizing the resources of the Fund to repurchase their own currencies. Otherwise, the Fund’s resources would tend to become unbalanced in the form of unnecessarily large holdings of some local currencies. Provision III-7-c is in fact a method of requiring the repurchase of local currency by member countries as their balances of payments become favorable and as they acquire additional gold and gold-convertible exchange.
3. The Fund starts with resources of local currencies and gold. In general, resources of this character should be adequate for the operations of the Fund. With its local currency resources the Fund may meet any moderate calls for any currency; and with its gold holdings the Fund can supplement its local currencies and meet very large calls for any new currencies. Nevertheless, it would be desirable to strengthen the Fund by gradually converting its local currency holdings into gold. Provision III-7 makes this possible.
For the world as a whole, the balance of payments, as ordinarily defined, is always active to the extent of the annual increment in gold reserves resulting from the production and distribution of newly-mined gold (perhaps modified for changes in private hoards of gold). The normal balance of payments for a country should tend to provide for an expansion in its holdings of gold and gold-convertible exchange. There is no good reason why part of the increment in gold and gold-convertible exchange should not be used by member countries to repurchase from the Fund its holdings of their local currencies. It is in the interest of all member countries that the strength and liquidity of the Fund be increased by the gradual replacement of local currencies with gold, particularly as such replacement would not involve any reduction in the reserves of member countries.
It should be emphasized that no hardship is incurred by a member country in offering to sell to the Fund part of its increment of gold and gold-convertible exchange. The member country offering the resources for sale is under no obligation to accept any currency other than its own. To the extent that a member country reduces the Fund’s holdings of its local currency, it increases its right to acquire foreign exchange from the Fund with its local currency. In view of the general advantages that would be conferred by a strong and liquid Fund, the right to acquire foreign exchange from a Fund adequately supplied with gold is not inferior to the actual holding of gold and foreign exchange (except, of course, in the acquisition of scarce currencies).
These provisions by no means indicate a policy of discouraging the maintenance of independent monetary reserves. It is, on the contrary, the view of the technical experts of the United States that it is desirable for member countries to build up adequate holdings of gold and foreign exchange. For this reason a reduced subscription in the form of gold may be made by countries with small or moderate holdings, since the obligatory gold subscription of a member country is 25 percent of its quota or 10 percent of its holdings of gold and gold-convertible exchange whichever is smaller. To take account of the greater need of countries which have been occupied by the enemy, a further reduction in the subscription of gold might be permitted for such countries. It is the recommendation of the U.S. technical experts that the countries whose home areas have suffered substantial damage from enemy action or occupation during the present war, should be permitted to reduce their obligatory gold subscriptions to 75 percent of the amount they would otherwise pay.
In addition, a country with gold and gold-convertible exchange holdings less than its quota need not use gold in paying for exchange purchased from the Fund. In countries in which working balances, other than official balances, are at a very low level at the time of adherence to the Fund, these private working balances may be built up (but not excessively) without any obligation to offer to sell such increments of gold and gold-convertible exchange to the Fund.
The requirement to offer to sell to the Fund gold and gold-convertible exchange acquired by a member country is also subject to qualifications designed to permit a country to accumulate some holdings of gold and gold-convertible exchange. The provision applies only to gold and gold-convertible exchange acquired by a member country in excess of its official holdings at the time it became a member of the Fund, and no country need offer to sell gold or gold-convertible exchange under this provision unless its official holdings are in excess of its quota. Furthermore, only one-half of the increase in gold and gold-convertible exchange holdings must be offered to the Fund. Finally, a member country is not required to sell additional gold to the Fund after the Fund’s holdings of its local currency are below 75 percent of its quota.
When does newly-mined gold become subject to the provision that member countries must under certain conditions offer for sale to the Fund half of the increase in their official holdings of gold?
The provision that the Fund may require up to half of the increase in a member’s holdings of gold and gold-convertible exchange to be used to repurchase part of the Fund’s holdings of its currency applies only to the increase in official holdings of gold or gold-convertible exchange. Newly-mined gold held by the producers or by bullion dealers awaiting sale is not to be regarded as part of the official holdings of a country.
It is conceivable that newly-mined gold will regularly be offered for sale to the monetary authorities of a country soon after its production. It then becomes subject to the obligations of III-7-c. It should be noted that the Fund may require a member country to sell half of its increase in gold and gold-convertible exchange only at the end of the Fund’s financial year, so that a gold producing country in which newly-mined gold is sold to the monetary authorities will only need to offer for sale to the Fund one-half of the net increment in its gold holdings as represented by its holdings at the end of the Fund’s financial year.
As a matter of administrative convenience the Fund would probably provide some period during which newly-mined gold would be deemed not to have entered into the official holdings. This might be necessary in order to avoid innumerable minor adjustments. In some countries, Treasury or Mint agencies temporarily include in their holdings newly-mined gold delivered to them for assaying and refining or for safekeeping. To avoid hardship, holdings of such a character should be excluded by establishing a period during which such holdings are deemed not to have entered into the official holdings.
It may be pointed out again that a country holding newly-mined gold awaiting distribution does not suffer any hardship (the scarce currency problem aside) if half of the increment of such gold is offered to the Fund for its local currency. To the extent that the gold was held to acquire foreign exchange, the capacity of the country to acquire such exchange is not impaired by sale of half of the increment of gold to the Fund for local currency. The member country can acquire foreign exchange to the full value of the gold held for the purpose by purchasing needed foreign exchange from the Fund, payment to be made half in gold and half in local currency.
In computing the increment of gold and gold-convertible exchange that member countries must offer for sale to the Fund is any allowance made for increased foreign liabilities?
In computing the amount of gold and gold convertible exchange that must be offered for sale to the Fund under this provision, no explicit allowance is made for increased liabilities to foreigners. It should be noted, however, that it is only half the increase in official holdings that must be offered for sale to the Fund. The intention is not to restrict the acquisition of such resources when they are needed by commercial banks and other nationals as working balances for international transactions. It is desirable, however, to avoid the accumulation of excessive holdings in this form by countries utilizing the resources of the Fund. In the event that the commercial banks and nationals of a member country using the resources of the Fund are accumulating gold or gold-convertible exchange in excessive amounts the Fund might consider bringing to the attention of the monetary authorities of the country concerned, the undesirability of utilizing the resources of the Fund while excessive balances of foreign exchange are held by its nationals. Undoubtedly, in determining whether such holdings are excessive, consideration would be given to the foreign liabilities of commercial banks and other nationals.
No explicit allowance is made for offsetting the official holdings of Treasuries and central banks with their foreign liabilities. If it is regarded as desirable to make some allowance for such liabilities against official holdings of gold and foreign exchange, consideration can be given to the manner in which this may be most appropriately done. Provision for such offsets, if regarded as desirable, could be made in the operating regulations that are adopted to implement III-7.
PART FIVE: POLICIES OF THE FUND
What kind of action is it contemplated that the International Monetary Fund would recommend to a country whose currency is in scarce supply?
The Joint Statement provides that when the Fund’s holdings of the currency of a member country become excessively small in relation to prospective acquisitions and needs for that currency, the Fund is required to render a report embodying an analysis of the causes of the depletion of the Fund’s holdings and recommending measures designed to increase the Fund’s holdings of that currency (VI-1).
The specific recommendations which the Fund might make to a member country whose currency is in scarce supply would be formulated in accordance with the nature of the existing disequilibrium in the balance of payments position of that country and the forces responsible for its development. It would be desirable to have a special committee appointed to study the problem and to draft a report on the recommendations to be made. It would also be desirable for the Board member of the country whose currency is declared scarce to be a member of the Fund committee appointed to draft the report.
No limitation on the scope of such recommendations is provided in the Fund proposal. It would, however, be necessary for the Fund to give full consideration to the effects of its recommendation on the internal economy of the member country to whom the recommendations are made as well as to any constitutional or other legal limitations which might make difficult or impossible positive action on some of the recommendations under consideration.
It may be assumed that such obvious measures as the control of capital movements have already been taken to ease the strain on the exchange position of member countries and the Fund with relation to the scarce currency. In the event that the disequilibrium in the balance of the payments position of a member country was the result of an inflow of capital and not the result of persistent forces operating on current account items, the Fund would undoubtedly make recommendations which look toward a reversal of this flow. The control of capital inflow is not, however, the primary responsibility of the member country experiencing such inflows. If capital movements are responsible for a serious drain on the Fund’s supply of that currency, the member countries exporting capital to the country whose currency is in short supply could be required by the Fund to take the initiative in restricting such exports.
The Fund may propose to a member country whose currency is in scarce supply that it lend currency to the Fund. Such an additional supply would provide the member countries with the additional time needed to work out a more satisfactory balance in international payments with the country whose currency is scarce. No member country is under any obligation to make any loan to the Fund. If a loan is made, the terms and conditions of the loan would be agreed between the member country and the Fund.
This question regarding the Fund’s recommendations is not primarily concerned with these intermediate measures but with corrective measures. It is impossible at this point to state specifically what the Fund would recommend in any given situation, since each case would be a problem of its own, involving a large number of variables, and concerning which intensive study would be necessary. If, for example, the disequilibrium stems from an excess of exports over imports which is not likely to correct itself in a reasonable period of time, the Fund might recommend measures for an expansion of imports and a reduction of artificial stimulants to exports if any are operating. Specifically, appropriate recommendations for increasing imports might include a reduction of tariff rates and the encouragement of tourist travel abroad. We believe it would be contrary to the best interests of the members of the Fund to recommend a reduction of exports; but it might be quite proper to recommend that nations eliminate subsidies on exports provided such elimination would make a significant contribution to the adjustment.
When a country shows a persistently favorable balance of payments on current account, it may be that the most appropriate and the most effective means of restoring a balance in its international accounts would be an expansion in its foreign investments. If there are factors prevalent in the country discouraging the flow of private investment to foreign countries, the report might well recommend their correction. The Fund might even recommend measures designed to promote repatriation of foreign funds.
In general, there is little reason to expect that it will be necessary to recommend measures designed to encourage domestic expansion in the country whose currency is scarce. Nevertheless, if such recommendations are needed, they should be made, including recommendations on credit policy, investment policy, and other measures which have a bearing on the level of economic activity and employment within a member country. It is quite possible that the rise in production has been greater than the rise in wage rates, efficiency rates of remuneration have fallen, and that an upward adjustment should be encouraged.
In extreme cases it may also be desirable to recommend a change in exchange rates for the country whose currency is scarce. An upward change in the foreign exchange value of a currency, however, should be considered only if other measures appear to be inadequate, and only if such a step does not contribute to further deterioration in the general international economic situation. It should be emphasized that what is desired is not merely a reduction in a country’s exports, but, remedial action that will correct its balance of payments without generating deflationary forces at home and abroad.
The recommendations of the Fund will unquestionably be given careful consideration. It is in the interests of a country whose currency is scarce to avoid the need by the Fund to allot its holdings of such a currency, and to take measures to obviate the need for such action by the Fund. While the Fund itself cannot correct the situation, it provides a means for facilitating the adoption of appropriate measures by the cooperating member countries.
It should not be overlooked that a disequilibrium in the balance of payments cannot be manifested as a problem peculiar to one country. Whenever the supply of a member country’s currency is scarce, this scarcity is likely to be accompanied by excessive supplies of the currencies of other countries. In such cases the responsibility for the correction of the maladjustment is not a unilateral one. It will be the duty of the Fund to make a report not only to the country whose currency is scarce but also to the member countries who are exhausting or are using the resources of the Fund in a manner which is not consistent with the purposes of the Fund. The report should provide a comprehensive analysis of the causes of the scarcity and practical recommendations for remedying the situation.
What is the purpose of requiring the Fund to apportion a scarce currency?
As was pointed out in the answer to the previous question, the Fund will make recommendations to a member country whose currency is in scarce supply, with a view to correcting the conditions in its balance of payments relations giving rise to the scarcity of its currency. It is in the interest of such a member country to carry out the Fund’s recommendations since otherwise it will be faced with the alternative of reducing its exports and making other undesirable adjustments.
It should be noted that the scarcity of an important currency is likely to be accompanied by an excess in the Fund’s holdings of the currencies of other member countries. A disequilibrium in the balance of payments is of necessity not confined to one country; and it is well to recognize that the responsibility for the scarcity of a currency in the Fund need not be primarily that of the country whose currency becomes scarce. We may presume the Fund will study the problem in all its aspects and will make appropriate recommendations to all interested countries.
There can be no assurance that the action of the Fund under VI-1 will always be adequate to remedy the situation. The recommendations of the Fund should be given the utmost consideration in the formulation of the monetary, economic, and commercial policies of member countries. The Fund’s recommendations will have behind them the enormous force of the world’s opinion. Within each country there is certain to be developed a growing recognition of the importance of effective cooperation with other countries through the Fund and in other ways. Even though the Fund’s recommendations carry with them no element of compulsion, it will be difficult for any country cognizant of its responsibility to disregard them.
It is to be hoped that the Fund will not find it necessary to utilize provision VI-2 on the apportionment of scarce currencies. Ordinarily, the Fund will be able to borrow enough of a scarce currency to meet the needs of member countries during the period in which the recommendations made by the Fund take effect. Nevertheless, it is necessary to establish the basis for the apportionment of a scarce currency if such action should become essential for a limited time.
The fact that a currency has become scarce is evidence of a distortion in the pattern of trade balances that must be corrected through fundamental adjustments. In the meantime action may have to be taken to limit the demand for a scarce currency. The apportionment of a scarce currency by the Fund and its rationing by the monetary authorities of member countries are one means of promptly limiting the demand and even of helping to correct the disturbances in the pattern of trade balances. In time, the measures recommended by the Fund, if adopted by member countries, would probably have the effect of establishing a more balanced international payments position. Until these measures can be made effective, some direct control is necessary in extreme cases.
The apportionment of scarce currencies by the Fund is probably the most certain means of promptly directing excessive demand away from a member country with a large and persistently favorable balance of payments to other member countries with an unfavorable balance of payments. In a sense such action involves a type of direct control and of bilateralism that should be avoided. It is important, therefore, to bear in mind that apportionment of a scarce currency is regarded as a temporary measure of an emergency character. Under the direction of the Fund, this method of adjusting the demand for a scarce currency to the available supply would be free from dangers of discrimination. Ultimately, of course, it is expected that fundamental adjustments will remove the need for apportioning a currency.
May a country to whom the Fund has granted an allocation of a scarce currency restrict imports from the country whose currency has become scarce?
It is intended that when the Fund’s holdings of a currency become scarce steps will first be taken to increase the supply of the scarce currency. Under provision VI-1, the Fund is authorized to render a report to the member country embodying an analysis of the causes of the depletion of the Fund’s holdings of that currency and making recommendations designed to increase the Fund’s holdings of that currency.
The recommendations are likely to be of two types. Some of the recommendations will probably be designed to provide member countries and the Fund with additional amounts of the scarce currency, through encouragement of foreign investment in member countries and through loans or advances to the Fund. Other recommendations will probably be designed to correct the fundamental maladjustment in the balance of payments position of the member countries. It is hoped, of course, that the recommended measures will be effective.
Nevertheless, the Fund must take account of the possibility that whatever measures are taken will not immediately alleviate the scarcity of a currency. Under such circumstances, with a continuing scarcity for a currency, the Fund must adopt measures on its own account to assure the proper use of its limited holdings. Provision VI-2 provides for the apportionment of a scarce currency.
The technical experts of the United States interpret this provision as applying only to the Fund’s holdings of a scarce currency. Member countries would be free to use the scarce currency accruing to them directly to meet their own needs, with the qualification, of course, that half of the increases in their accumulated holdings of gold and gold-convertible exchange must be offered for sale to the Fund in accordance with provision III-7. Similarly, member countries could utilize their holdings of gold and foreign exchange to supplement the allocation of a scarce currency made to them by the Fund.
The apportionment of a scarce currency by the Fund would take the form of allotting to member countries an amount of scarce currency (to be paid for with local currency and gold, as provided in III-7), the Fund taking into consideration the special needs and resources of member countries requesting an allotment. The actual distribution of its allotment by any member country among its importers and other users of a scarce currency would be a matter for the member country to decide.
Obviously, with a limited allotment of a scarce currency, some member countries will find it necessary to restrict the demand of their nationals for such a currency. The decision by the Fund to apportion a scarce currency is in effect an authorization to member countries temporarily to restrict the freedom of exchange transactions in the affected currency. Thus, their action would not be inconsistent with provision IX-3 in which they undertake not to impose restrictions on current transactions except with the Fund’s consent. In determining the manner of restricting the demand, and in rationing the limited supply among its nationals, it is provided that the member country shall have complete jurisdiction.
Will the Fund require all member countries to prohibit or restrict the outflow of capital?
The purpose of the Fund is to provide, through stability of exchanges and through cooperation in the maintenance of exchanges, the conditions necessary for the restoration and balanced growth of international trade. In accordance with this purpose, it is not intended as a general policy to have the resources of the Fund used to finance substantial outflows of capital from member countries.
The decades of the 20’s and the 30’s showed that many countries could not withstand the drains on their gold resources resulting from widespread conversion of local currency and flights of capital. Out of this experience has come general recognition that the gold and foreign exchange resources of a country should be reserved primarily for the settlement of international balances on current account. In line with this view, the general policy of the Fund should be to give countries access to the resources of the Fund only when such resources are needed to meet an adverse balance of payments predominantly on current account.
It would be incorrect to assume that most capital exports are prohibited under the Fund’s provisions or that the policy of the Fund with respect to capital exports requires the maintenance of exchange controls or exchange restrictions in all or even the majority of cases. A careful examination of the Fund proposal will reveal that most capital exports can probably take place freely, and only in a minority of cases will exchange restrictions have to be imposed. The conditions under which capital exports may take place freely are described in the following paragraph:
1. Capital exports of any type can take place freely from countries with a favorable balance on current account.
It is recognized that there will be many countries in need of foreign capital for reconstruction and development after the war, and that there will be some countries whose international economic position will permit them to export capital. The provision of capital under these conditions can contribute to the balanced growth of international trade. Most of the capital exports of this type are likely to be from countries with a credit balance of payments on current account, and serve to help maintain monetary stability. It is one of the purposes of the Fund to facilitate the resumption of such international lending by restoring confidence in the greater stability of exchange rates, and in the greater freedom from injurious restrictive exchange practices.
The only limit on the free outflow of capital from a country experiencing a favorable balance on current account might be the case where a country has been previously experiencing an unfavorable balance and had sold the Fund more of its currency than the Fund found it desirable to keep. In that event, the Fund might prefer to have the country employ part of its favorable balance of payments to repurchase some of the Fund’s holdings for its currency before or pari passu with the country’s undertaking significant amounts of capital exports. In fact, provision III-7 is intended to do this.
2. Some countries experiencing an unfavorable balance of payments on current account could regard with complete equanimity an efflux of capital of any character, because their holdings of gold and foreign exchange are entirely adequate to meet all likely drains. Provision V specifically states that the limitation on capital exports is not intended to prevent capital movements which are made out of a member country’s own gold and foreign exchange resources, provided such capital movements are in accordance with the purposes of the Fund. For example, the United States could permit very substantial and continued capital exports for a long time even if its balance of payments turned unfavorable on current account. There are doubtless a number of other countries which could permit capital exports under these circumstances, either because the unfavorable balance of payments on current account is small relative to their foreign exchange resources, or the volume of capital outflow is small compared to the unfavorable balance on current account.
3. Also, a country having an unfavorable balance of payments on current account could freely permit foreign investments, or capital exports if at the same time it was itself a recipient of capital inflow. It usually happens that a country is at the same time both an importer of capital and an exporter of capital. Sometimes both inflow and outflow of capital may be long-term in character. For example, British firms may be building branch plants in South America or Africa, at the same time that Americans are investing in British securities, newly issued or held by residents of the United Kingdom. In some instances, the capital may be predominantly of short term character and the outflow predominantly long-term in character.
The significant drain of foreign exchange resources on capital account is the drain on net capital account, though it is also true that attention must be paid to the predominant character of the inflow or outflow. The movement of what may be classified as short term capital has different significance in different countries and at different periods. Nevertheless, it is not to be assumed that a country with an unfavorable balance of payments on current account could not continue to purchase foreign exchange from the Fund unless it curtailed its capital exports. A country could continue indefinitely having large gross capital flows and small net flows.
4. All countries could permit capital exports such as are reflected, even with a moderate lag, wholly or chiefly in exports of goods or services. It has been a common practice in the past, and there is no reason to expect that it will cease in the future, for some foreign loans to be tied to exports in such a way that the granting of the loan is accompanied sooner or later by a net export of goods and services almost of the same magnitude as the loan. The Joint Statement specifically provides that the Fund’s resources may be used for capital transactions of reasonable amount required for expansion of exports or in the ordinary course of trade, banking or other business (V-1).
The mechanism of adjustment of international accounts does not always, or even usually, operate smoothly or rapidly enough to translate a net export of capital to a net flow of goods and services (unless the foreign investment is “tied” to the export of goods). But it would be an error to overlook the fact that the mechanism of adjustment does operate to some extent. The rapidity of operation differs greatly with the countries affected, the period, the magnitudes involved, the make-up of the international accounts, the phase of the business cycle, and other factors.
Countries with limited foreign exchange resources making loans to other countries should be very reluctant to make loans in excess of the amount absolutely needed to finance the additional exports effectuated directly or indirectly through the loan. The borrowing countries should be equally reluctant to burden their balance of payments unnecessarily by borrowing more for a particular project than is required to pay for the imports necessary for that project, making due allowance for secondary effects of the borrowing. Countries with inadequate foreign exchange resources should rarely borrow abroad merely for the purpose of domestic financing.
5. Finally, even where a country has an unfavorable balance of payments and inadequate foreign exchange resources, the Fund would not be disturbed by capital exports from that country if the amount were small or if the Fund did not have large holdings of that country’s currency, or if the capital exports were sporadic or of brief duration. Provision V-1 prohibits a member country from using the Fund’s resources to meet a large or sustained outflow of capital. It is only when the capital exports are (a) net, (b) large, (c) sustained, and (d) are motivated chiefly by the desire for speculative profit that the Fund is likely to require a restriction of capital exports as a condition for continued use of the Fund’s resources.
The flow of capital from one country to another seeking political and economic security, or speculative profit is frequently undesirable. Such flows are particularly disturbing when they take place from countries with a debit balance of payments to countries with a credit balance of payments on current account. Such flows serve to disturb monetary stability, and it is not the purpose of the Fund to facilitate such capital movements.
Until, however, the Fund considers a continuation of capital exports of that character and under these conditions to be injurious, no restrictive action over capital exports need be taken by the country exporting capital. It is only when the Fund deems it undesirable to continue to sell foreign exchange to the country in question, unless its capital exports are curtailed, that the latter must seek ways of curtailing undesirable forms of capital exports. In some cases, the country may be able to do without the necessity of imposing exchange controls and restrictions. When it cannot do so, then the country will have to restrict the flow of capital through the exercise of carefully imposed exchange controls. The existence of the Fund should make resort to such restrictions less urgent and less frequent.
A proper evaluation of this aspect of the Fund’s powers can be made only against alternative courses. It would be quite erroneous to assume that in the absence of the Fund, countries could permit uncontrolled capital outflow of any character at all times. Restriction of capital movements is, of course, not a novel practice. One needs only to recall the history of the last 20 years to make clear that controls over capital movements were adopted in a large number of countries even though no such institution as a Fund existed.
It should be clear that under any circumstances the Fund does not of itself require that any country impose control over capital exports unless and until the member country wishes to purchase excessive amounts of foreign exchange from the Fund and then only if they are regarded as in the general interest of the Fund and its members.
In summary, it is clear that the Fund does not expect a member country to use exchange provided by the Fund exclusively for current account purposes. So long as the exchange purchased from the Fund is used to meet an adverse balance of payments predominantly on current account, the Fund would regard a member country as fulfilling its obligations. No definite proof would be required that the resources of the Fund are being used predominantly for current account. The Fund would expect to utilize reports on the balance of payments and on capital movements. Although such reports would not always be complete and accurate, they should be sufficient to reveal a substantial and continued outflow of capital. Only when the resources of the Fund are used to finance capital movements of this character would the Fund require a member country, as a condition for the sale of additional exchange, to restrict the outflow of capital.
The regulatory devices a member country might use are discussed more fully in the reply to the next question.
What provision must be made by countries that are members of the Fund to control capital movements if this should become necessary?
The Fund proposal provides for the control of capital movements by member countries in two ways.
First, member countries have the right to control capital exports when such control is regarded by them as desirable. This right is subject to the limitation that a member country may not use its control of capital movements to restrict payments for current transactions or to delay the transfer of funds in settlement of commitments (V-2).
Second, under certain conditions, discussed in the reply to the previous question, the Fund itself may require that member countries control capital exports as a condition for further use of the Fund’s resources (V-1). It may be presumed that member countries will take the necessary steps, including in some instances supervision of the exchange market, to assure their capacity to fulfill the above obligations. The manner in which member countries organize and control their exchange markets is not prescribed by the Fund. It is a matter for each country to decide. Presumably, organization and control would differ from country to country depending upon the nature of a country’s exchange market, the state of its monetary reserves, its balance of payments position, and the position of its currency in the Fund.
In some countries, particularly those not purchasing exchange from the Fund, no elaborate system of government organization and control of the exchange market will be necessary in order to assure fulfillment of their cooperative obligation to members of the Fund.
As a minimum, each country would certainly set up a system for collecting information on its balance of payments position and on capital movements. The receipt of such information would be helpful to the proper functioning of the Fund. Even though it never becomes necessary for a country to prevent a flight of capital, a country may find it helpful to cooperate with other member countries in controlling capital movements. Such cooperative measures might appropriately include a refusal to accept or permit acquisition of deposits, securities, or investments by nationals of any member country imposing restrictions on the export of capital except with the permission of the government of that country and the Fund. Member countries might also undertake to make available to the Fund or to the government of any member country information on property, deposits, securities, and investments of the nationals of that member country.
To supply this current information, most countries will have to have at all times an adequate system of reporting capital movements. This is not to be confused with exchange controls. They are quite different. The United States for many years has had a reporting system for capital movements, but not until the outbreak of the war were any restrictions imposed on the transfer of funds. The only countries that might find it necessary to adopt exchange controls are those whose foreign exchange resources do not permit a free and continued export of capital.
Apart from the arrangements for providing the Fund with data on capital movements, there are no measures that must be taken by member countries in anticipation of a possible need for controlling capital movements. It is a matter for each country to decide whether, while imposing no restrictions on current transactions, it wishes to establish or retain any administrative supervision over foreign exchange transactions. The Fund does not require member countries either to control capital movements or to supervise them, unless and until such member countries make considerable use of the resources of the Fund.
Some countries, foreseeing the need for control of capital movements, might require prior notification on international transactions in order to keep close control of their exchange position by scrutiny of international transactions. Such scrutiny of exchange transactions would not be in conflict with the obligations of the member country under provision IX-3 unless it were used in fact as a device to impose exchange restrictions on current international transactions in the guise of a control of the export of capital. Since the imposition of restrictions on current international transactions would be contrary to the obligations of a member country, it may be presumed that the Fund would make representations to member countries if such scrutiny of exchange transactions were used contrary to the purposes of the Fund (V-2).
Still other countries may find it desirable to set up a licensing system to assure an effective control over capital movements. Thus a country might require that all foreign exchange must be bought and sold through licensed dealers. No exchange need then be sold unless the purchaser showed proof that the foreign exchange was needed for the purchase of goods and services or the payment of interest and dividends or other payments of a non-capital nature; and the delivery of foreign exchange receipts would be required of exporters and other recipients of funds from abroad. Banks and other institutions licensed to engage in foreign exchange operations might not be permitted to increase their foreign exchange holdings or holdings of other foreign assets beyond an amount necessary to carry on their normal business operations. The government might require that any additional amounts of foreign exchange acquired by banks and by other licensed dealers be sold to the central bank or the exchange authority.
Presumably in some countries effective control could be assured only through an official monopoly of exchange transactions. There is no provision in the Fund proposal that would bar a country from instituting a monopoly of exchange transactions, provided that such techniques are not administered to restrict current international transactions without the consent of the Fund. It is not with administrative techniques but with policies that the Fund is primarily concerned.
It is not contemplated that control of international capital transactions or of exchange transactions generally will be exercised directly by the Fund. On the contrary, it is expected that in many countries the usual channels for buying and selling exchange will continue to be utilized. Within the provisions set forth in the proposal, the Fund will sell to member governments such foreign exchange as they may require to meet an adverse balance of payments predominantly on current account. The manner of channeling into the exchange market the foreign exchange sold by the Fund is a matter for each member country to decide. While in the ordinary course of events the Fund would not scrutinize exchange transactions, it may be expected that the Fund may require assurances in some instances that the exchange sold by the Fund is in fact intended to meet an adverse balance of payments predominantly on current account and not to meet a large or sustained outflow of capital. In the main, however, the Fund’s decision would be based on information revealed by the balance of payments of the country in question rather than by supervision over its foreign exchange transactions.
Our conclusions with respect to the control of capital movements may be summarized as follows:
1. All countries should have machinery for adequate reporting of capital movements by type and totals with geographical breakdowns.
2. A number of countries will find it necessary from time to time to maintain some form of supervision over foreign exchange transactions.
3. Some of these countries will have to impose restrictions at one time or another on the outward movement of certain types of capital.
4. The Fund itself will never exercise authority as an agency controlling exchange transactions in any member country.
What are the purposes of the provisions requiring more than a majority vote to authorize action by the Fund?
There are only two provisions in the Joint Statement requiring more than a majority to authorize action by the Fund. In these cases, the requirement is for the purpose of safeguarding the resources of the Fund or safeguarding the interests of member countries on matters affecting their national policies.
The ordinary business of the Fund would be undertaken by the management in accordance with the provisions of the Fund and the regulations prescribed by the Board of Directors. For the most important operations of the Fund, no positive action by the Board is needed at all.
In those instances where approval of the Board is needed all ordinary operations of the Fund require only a simple majority vote. The following important operations are included in this category:
To permit the sale of exchange to a member country in excess of the limitations prescribed in III-2-c and determine the conditions for such sale.
To permit and determine the conditions for the sale of additional exchange where a country is purchasing exchange at an annual rate in excess of 25 percent of its quota (III-2).
To report to a member country whose currency in the Fund is becoming scarce (VI-1).
To allocate among member countries available amounts of a scarce currency (VI-2).
To propose to a member country that it lend its currency to the Fund (III-4).
To approve of any multiple currency arrangements and similar practices engaged in by a member country (IX-3).
To suspend a country from making further use of the Fund’s resources on the ground that it is using them in a manner contrary to the purposes and policies of the Fund (III-2-d).
To approve the initial par value of a member’s currency fixed by that member (IV-1).
To grant a request by a member country for a change in the par value of its currency in accordance with provisions IV-3 and IV-4.
It would appear from the above that the Fund can unquestionably engage in all transactions necessary for the ordinary conduct of its business without prior approval or with the approval of only a majority of the member votes.
There are two matters of an extraordinary character involving the safeguarding of the resources of the Fund and of member countries and matters of the highest policy which are reserved for decision by a larger than majority vote of the Board:
1. According to the present provisions of the Joint Statement changes in the quotas require a four-fifths vote. It is the recommendation of the United States technical experts that this provision be changed to read that changes in the quota formula require a four-fifths vote (see question 8). The purpose of this requirement is to assure member countries that having joined the Fund with assurance of their relative position within the Fund, they will not be confronted with a change in the quota formula which will seriously affect their status. This is the more important because many countries will subscribe large resources to the Fund the use of which will depend in part upon the relative position of countries within the Fund.
2. A uniform change in the gold value of the member currencies can be made only by a majority including the approval of every member country having 10 percent or more of the votes. Because a uniform change in the price of gold can have far-reaching effects, it is thought essential to require the unanimous approval of the countries with the largest gold holdings and the greatest production of gold for such action.
It will be observed that the two actions of the Fund requiring more than a majority vote would only be necessary as a result of special circumstances and can in no way be considered as a part of the ordinary operations of the Fund. It is felt that on policy questions of such far-reaching importance, a safeguard against hasty and unwarranted action is needed in the form of a favorable vote larger than a majority.