Foreign Relations of the United States: Diplomatic Papers, 1942, General; the British Commonwealth; the Far East, Volume I

800.515/581

The British Treasury Representative in the United States (Phillips) to the Assistant Secretary of State (Berle)

Washington, November 25, 1942.

Dear Mr. Berle: A revised copy of the Proposals for an International Clearing Union is attached. The principal changes have been made in paragraph 6, paragraph 7 and the new Part III (paras. 8–10), while paragraph 36 has been cleared up. You will notice, of course, that many of the alterations relate to points raised in your list of questions.

A copy of answers to these questions is also enclosed which we shall be very glad to supplement by oral discussion.

Yours sincerely,

F. Phillips

[Enclosure 1]

Proposals for an International Clearing Union, Revised November 9, 1942

I. Preface

[Paragraphs 1 to 5 here omitted are substantially the same as paragraphs 1 to 5 of the proposals for an International Clearing Union transmitted to the Department by the Counselor of the British Embassy on August 28, 1942, printed on pages 203–206.]

6. It is proposed that a draft plan of the Clearing Union shall be prepared by the United States and the United Kingdom, after such discussions with other parties as may be thought expedient, and submitted for approval or amendment by the United Nations, who shall be invited to join them as founder States. Other members would then be brought in—some from the outset, some as soon as they had established an internal organisation capable of sustaining the obligations of membership. This approach would have the great advantage that the charter and the main details of the new body could be drafted without being subjected to the delays and confused counsels of an international conference, though this need not stand in the way of informal consultation with those concerned. Moreover, membership would thus be established as a privilege only open to those who conformed to such principles and standards of international economic conduct as are essential to the operation of this scheme.

II.—The Provisions of the Plan

7. The provisions proposed (the particular proportions and other details suggested being tentative as a basis of discussion) are the following:—

(1) The Governing Board of the Clearing Union will be appointed by the Governments of the several member States; the daily business with the Union and the technical arrangements being carried out through their Central Banks or other appropriate authorities.

(2) The founder States will agree between themselves the initial values of their own currencies in terms of bancor and also the value of bancor in terms of gold; and the initial values of the currencies of other members will be agreed with them on their joining the system. A member State may not subsequently alter the value of its currency in terms of bancor without the permission of the Governing Board except under the conditions stated below; but during the first five years after the inception of the system the Governing Board shall give special consideration to appeals for an adjustment in the exchange value of a national currency unit on the ground of unforeseen circumstances.

(3) The amount of the maximum debit balance allowed to any member State shall be designated its quota. The initial quotas might be fixed by reference to the sum of each country’s exports and imports on the average of (say) the three pre-war years, and might be (say) 75 per cent, of this amount, a special assessment being substituted in cases (of which there might be several) where this formula would be, for any reason, inappropriate. Subsequently, after the elapse of the transitional period, the quotas should be revised annually in accordance with the running average of each country’s actual volume of trade in the three preceding years, rising to a five-year average when figures for five post-war years are available. The determination of a country’s quota primarily by reference to the value of its foreign trade seems to offer the criterion most relevant to a plan which is chiefly concerned with the regulation of the foreign exchanges and of a country’s international trade balance. It is, however, a matter for discussion whether the formula for fixing quotas should also take account of other factors.

(4) The Clearing Union may, at its discretion, charge a small commission or transfer fee in respect of transactions in its books for the purpose of meeting its current expenses or any other outgoings, approved by the Governing Board.

(5) A charge of 1 per cent, per annum shall be payable to the Reserve Fund of the Clearing Union on the amount of the excess of the average balance of a member State, whether it is a credit or a debit balance, above a quarter of its quota; and a further charge of 1 per cent, on the excess of the average balance, whether credit or debit, above a half of its quota. Thus, only a country which keeps as nearly as possible in a state of international balance on the average of the year will escape this contribution. These charges are not absolutely essential to the scheme. But if they are found acceptable, they would be valuable and important inducements towards keeping a level balance, and a significant indication that the system looks on excessive credit balances with as critical an eye as on excessive debit balances, each being, indeed, the inevitable concomitant of the other. Any member State in debit may, after consultation with the Governing Board, borrow from the balances of any member State in credit on such terms as may be mutually agreed, by which means each would avoid these contributions. The Governing Board may, at its discretion, remit the charges on credit balances, and increase correspondingly those on debit balances, if in its opinion unduly expansionist conditions are impending in the world economy.

(6) —(a) A member State may not increase its debit balance by more than a quarter of its quota within a year without the permission of the Governing Board. If its debit balance has exceeded a quarter of its quota on the average of at least two years, it shall be entitled to reduce the value of its currency in terms of bancor provided that the reduction shall not exceed 5 per cent, without the consent of the Governing Board; but it shall not be entitled to repeat this procedure unless the Board is satisfied that this procedure is appropriate.

(b) The Governing Board may require from a member State having a debit balance equal to a half of its quota the deposit of suitable collateral against its debit balance. Such collateral shall, at the discretion of the Governing Board, take the form of gold, foreign or domestic currency or Government bonds, within the capacity of the member State. As a condition of allowing a member State to increase its debit balance to a figure in excess of a half of its quota, the Governing Board may require all or any of the following measures:—

(i) a stated reduction in the value of the member’s currency, if it deems that to be the suitable remedy;

(ii) the control of outward capital transactions if not already in force; and

(iii) the outright surrender of a suitable proportion of any separate gold or other liquid reserve in reduction of its debit balance.

Furthermore, the Governing Board may recommend to the Government of the member State any internal measures affecting its domestic economy which may appear to be appropriate to restore the equilibrium of its international balance.

(c) If a member State’s debit balance has exceeded three-quarters of its quota on the average of at least a year, or is excessive in the opinion of the Governing Board in relation to the total debit balances outstanding on the books of the Clearing Union, or is increasing at an excessive rate, it may, in addition, be asked by the Governing Board to take measures to improve its position, and, in the event of its failing to reduce its debit balance accordingly within two years, the Governing Board may declare that it is in default and no longer entitled to draw against its account except with the permission of the Governing Board. Each member State, on joining the system, shall agree to pay to the Clearing Union any payments due from it to a country in default towards the discharge of the latter’s debit balance and to accept this arrangement in the event of falling into default itself. A member State which resigns from the Clearing Union without making approved arrangements for the discharge of any debit balance shall also be treated as in default.

(7) A member State whose credit balance has exceeded a half of its quota on the average of at least a year shall discuss with the Governing Board (but shall retain the ultimate decision in its own hands) what measures would be appropriate to restore the equilibrium of its international balances, including—

(a) Measures for the expansion of domestic credit and domestic demand.

(b) The appreciation of its local currency in terms of bancor, or, alternatively, the encouragement of an increase in money rates of earnings;

(c) The reduction of tariffs and other discouragements against imports.

(d) International development loans.

(8) A member State shall be entitled to obtain a credit in terms of bancor by paying in gold to the Clearing Union for the credit of its clearing account. But no one is entitled to demand gold from the Union against a balance of bancor, since such balance is available only for transfer to another clearing account. The Governing Board of the Union should, however, have the discretion to distribute any gold in the possession of the Union between the members possessing credit balances, proportionately to such balances, in reduction of their amount.

(9) The monetary reserves of a member State, viz., the Central Bank or other bank or Treasury deposits in excess of a working balance, shall not be held in another country except with the approval of the monetary authorities of that country.

(10) The Governing Board shall be appointed by the Governments of the member States, those with the larger quotas being entitled to appoint a member individually, and those with smaller quotas appointing in convenient political or geographical groups, so that the members would not exceed (say) 12 or 15 in number. Each representative on the Governing Board shall have a vote in proportion to the quotas of the State (or States) appointing him, except that on a proposal to increase a particular quota, a representative’s voting power shall be measured by the quotas of the member States appointing him, increased by their credit balance or decreased by their debit balance, averaged in each case over the past two years.

(11) The Governing Board shall be entitled to reduce the quotas of members, all in the same specified proportion, if it seems necessary to correct in this manner an excess of world purchasing power. In that event, the provisions of paragraph 7 (6) shall be held to apply to the quotas as so reduced, provided that no member shall be required to reduce his actual overdraft at the date of the change, or be entitled by reason of this reduction to alter the value of his currency under 7 (6) (9), except after the expiry of two years. If the Governing Board subsequently desires to correct a potential deficiency of world purchasing power, it shall be entitled to restore the general level of quotas towards the original level.

(12) The Governing Board shall be entitled to ask and receive from each member State any relevant statistical or other information, including a full disclosure of gold, external credit and debit balances and other external assets and liabilities, both public and private. So far as circumstances permit, it will be desirable that the member, States shall consult with the Governing Board on important matters of policy likely to affect substantially their bancor balances or their financial relations with other members.

(13) The executive offices of the Union should be situated in London and New York, with the Governing Board meeting alternately in London and Washington.

(14) Members would be entitled to withdraw from the Union on a year’s notice, subject to their making satisfactory arrangements to discharge any debit balance. They would not, of course, be able to employ any credit balance except by making transfers from it, either before or after their withdrawal, to the Clearing Accounts of other Central Banks. Similarly, it should be within the power of the Governing Board to require the withdrawal of a member, subject to the same notice, if the latter is in breach of agreements relating to the Clearing Union.

(15) The Central Banks of non-member States would be allowed to keep credit clearing accounts with the Union; and, indeed, it would be advisable for them to do so for the conduct of their trade with member States. But they would have no right to overdrafts and no say in the management.

(16) The Governing Board shall make an annual Report and shall convene an annual Assembly at which every member State shall be entitled to be represented individually and to move proposals. The principles and governing rules of the Union shall be the subject of reconsideration after five years’ experience, if a majority of the Assembly desire it.

III.—What Liabilities Ought the Plan To Place on Creditor Countries?

8. It is not contemplated that either the debit or the credit balance of an individual country ought to exceed a certain maximum—let us say, its quota. In the case of debit balances this maximum has been made a rigid one, and, indeed, counter-measures are called for long before the maximum is reached. In the case of credit balances no rigid maximum has been proposed. For the appropriate provision might be to require the eventual cancellation or compulsory investment of persistent bancor credit balances accumulating in excess of a member’s quota; and, however desirable this may be in principle, it might be felt to impose on creditor countries a heavier burden than they can be asked to accept before having had experience of the benefit to them of the working of the plan as a whole. If, on the other hand, the limitation were to take the form of the creditor country not being required to accept bancor in excess of a prescribed figure, this might impair the general acceptability of bancor, whilst at the same time conferring no real benefit on the creditor country itself. For, if it chose to avail itself of the limitation, it must either restrict its exports or be driven back on some form of bilateral payments agreements outside the Clearing Union, thus substituting a less acceptable asset for bancor balances which are based on the collective credit of all the member States and are available for payments to any of them, or attempt the probably temporary expedient of refusing to trade except on a gold basis.

9. The absence of a rigid maximum to credit balances does not impose on any member State, as might be supposed at first sight, an unlimited liability outside its own control. The liability of an individual member is determined, not by the quotas of the other members, but by its own policy in controlling its favourable balance of payments. The existence of the Clearing Union does not deprive a member State of any of the facilities which it now possesses for receiving payment for its exports. In the absence of the Clearing Union a creditor country can employ the proceeds of its exports to buy goods or to buy investments, or to make temporary advances and to hold temporary overseas balances, or to buy gold in the market. All these facilities will remain at its disposal. The difference is that in the absence of the Clearing Union, more or less automatic factors come into play to restrict the volume of its exports after the above means of receiving payment for them have been exhausted. Certain countries become unable to buy and, in addition to this, there is an automatic tendency towards a general slump in international trade and, as a result, a reduction in the exports of the creditor country. Thus, the effect of the Clearing Union is to give the creditor country a choice between voluntarily curtailing its exports to the same extent that they would have been involuntarily curtailed in the absence of the Clearing Union, or, alternatively, of allowing its exports to continue and accumulating the excess receipts in the form of bancor balances for the time being. Unless the removal of a factor causing the involuntary reduction of exports is reckoned a disadvantage, a creditor country incurs no burden but is, on the contrary, relieved, by being offered the additional option of receiving payment for its exports through the accumulation of a bancor balance.

10. If, therefore, a member State asks what governs the maximum liability which it incurs by entering the system, the answer is that this lies entirely within its own control. No more is asked of it than that it should hold in bancor such surplus of its favourable balance of payments as it does not itself choose to employ in any other way, and only for so long as it does not so choose.

[Paragraphs 11 to 51 here omitted are substantially the same as paragraphs 8 to 48 of the proposals transmitted to the Department on August 28, printed on pages 209–222.]

[Enclosure 2]

Answers to the United States Questions on the Clearing Union

Questions 1 and 2. It is certainly intended that member Governments should be required to take active steps to keep quoted rates of exchange within gold points or their equivalent. It is, however, necessary to distinguish between the exchange rates charged by the Central Banks of members of the Union to their own nationals, and the exchange rates for transactions between members of the Union on the Union’s books. The plan leaves banks free to establish a difference between their buying and selling rates by mutual agreement as hitherto. It is proposed on the other hand that transfers on the books of the Union from the account of one member to that of another should be made at par. This would not preclude the Union from charging, if it seemed desirable, a small commission on turnover in order to meet its current expenses or other outgoings.

Question 3. It is not contemplated that transfers of bancor should take place except by direct transfer between central banks or treasuries, including among the latter such international bodies as the Relief Council. The answer to the question at 3 (a) is “by entries on the Books of the Union”, and documents authorizing such entries would not be negotiable.

The question in paragraph 3 (b) does not therefore arise.

In regard to the question in paragraph 3 (c), non-member states holding a balance in bancor could use it only for payment to central banks or treasuries of member states.

Question 4. No question could arise of exchange rates between nonmembers and the Clearing Union itself. Non-members could only obtain bancor from a member, and the rate at which the member State accepted the currency of the non-member State would be for determination between the member and non-member direct. It would probably be convenient and might be made obligatory for members to agree amongst themselves to establish exchange rates with nonmembers which would be uniform in the sense that they left their own cross rates at their proper parities.

There will be nothing to prevent transactions at their proper parity between members and non-members in gold or any other currency which might be acceptable, but it would probably be in the interest of the non-members to accept payment in bancor since this would be available to it to make payments to any other member of the Union; the advantage to them being that bancor could be used indifferently for payment to any members, thus obviating the need for holding balances at a number of central banks.

Question 5. It is assumed that in framing this question the U. S. representatives are thinking of the more distant future and have not got in mind the prospect of an immediate post-war boom. In this connection it should be made clear that there is no suggestion that free bancor advances should be allowed to member states in the immediate post-war period without regard to the assistance which those states may simultaneously be drawing in the form of relief. There is also no suggestion that the Clearing Union Plan should be the sole instrument in dealing with the disturbances attendant upon the transition from war to a peace economy. The danger of inflation inherent in these disturbances would have to be avoided by exercising care in reducing the wartime controls.

What the plan provides for is the probability or near certainty of a contractionist movement of world-wide, or nearly world-wide scope, following at some uncertain interval the termination of the war. In order to judge whether the measures taken by the Union should still have an expansionist trend such criteria as the state of employment in the main industrial countries and the conditions of prosperity or adversity in the main primary producing countries would be considered.

Nevertheless it may be the case that the scheme should be amended so as to provide the Governing Board with powers to check an undesired inflationary tendency in effective world demand.

Some amendments with this end in view have been adopted in the revised draft attached⁵⁰ (see particularly paragraphs 7 (5) and 7 (11)). It would be helpful if we could have any proposals which the United States may wish to suggest in this connection.

It may be pointed out that if the fluctuating requirements of Commodity Controls were to be provided by the Clearing Union as tentatively suggested in 41 (3),⁵¹ this would have a powerful automatic tendency in the direction of damping down the trade cycle in both directions. For in periods of slump the Commodity Controls will be increasing their overdrafts with the Clearing Union, thus increasing the free purchasing power of the members, whilst in boom conditions when the buffer stocks were being drawn upon, the Commodity Controls would be automatically withdrawing a corresponding sum from general circulation by reducing their overdraft with the Union at the expense of the bancor position of the members of the Union. The need, therefore, for additional anti-inflation provisions partly depends on whether it proves practicable to make use of the Clearing Union in connection with the finance of buffer stocks of primary products.

Question 6. The proposals in paragraph 30⁵² (strengthened by the new paragraph 9) are intended to deal with this. If these proposals are adopted, a country with a weak currency could not acquire balances in a country with a strong currency, except with the latter’s approval. Apart from this the power of a country with weak currency to exchange its quota for strong currencies would in fact be very limited. As indicated in paragraph 7 sub-paragraph 6 (a), a state cannot increase its debit balance by more than a quarter of its quota within a year without the permission of the Governing Board, and if it increases its debit balance to a figure in excess of one half its quota the Governing Board may require the control of outward capital transactions if not already in force and the surrender of a suitable proportion of any separate gold or other liquid reserve in reduction of the debit balance. These provisions could of course be tightened up if it is thought desirable as for example by the use of sub-paragraph 6 (c), which provides that if a member state’s debit balance is excessive as measured by some formula laid down by the Governing Board in relation to the total debit balances outstanding on the books of the Clearing Union, it may be called on to take measures to improve its position, with the alternative of being declared in default.

Question 7. These questions are dealt with in the new paragraph 7 (3) and the new Section III (paragraphs 8 to 10).

Question 8. No country has a right to demand payment in gold in respect of a bancor balance, and this is fundamental to the whole plan. The disposable assets of the Union will consist in any gold or foreign exchange which it may have acquired and in the debts due to it from countries with debit balances. A country leaving the Union on a year’s notice would be able to employ any credit balance by transferring it either before or after its withdrawal to the clearing accounts of other central banks (see paragraph 7 (14)). If the Union enables comparative stability to be maintained throughout the world, deflation to be avoided and international commerce to be expanded instead, as would otherwise be likely, of suffering violent contraction, every country would gain enormously by the increase of its national production and national income. The risk of ultimate loss is reduced by the provisions of paragraph 7 (6) (c).

If more precise provisions for collateral are thought advisable, debit countries might be required at the discretion of the Governing Board to furnish it in the form of gold, currency or Government Bonds. In any case, it might be well to insert some provision for such assets to be available to discharge the debit balance in the event of dissolution of the Union, or of the country’s withdrawal. Such assets to be available for distribution between the creditor countries. (See paragraph 7 (6) (b).)

Question 9. The Dominions and India would be treated as distinct countries. In fact no other arrangement is really practicable since the Canadian dollar, the Australian pound, the New Zealand pound, the South African pound and the rupee are each distinct from the pound sterling and their values in terms of the pound sterling may and on previous occasions have varied. Trade between the United Kingdom, the Dominions and India would be counted for the purpose of determining the quotas.

It would probably be convenient to treat the United Kingdom and the Crown Colonies as a unit with a single quota, omitting trade between the group from the calculations.

Question 10. It is quite impossible to forecast which countries are likely to develop creditor accounts. In certain circumstances it may be that most of the members would develop creditor accounts (offsetting for example a debit balance represented by the holding of stocks of primary commodities under some international scheme).

It is not thought that special voting rights should be given to creditor states except when it is a question of increasing quotas for one or more member states. On such a proposal the voting rights of creditor states might be increased by the amount of their creditor balances and those of states in debit might be reduced by the amount of their debit balance. (See the new paragraph 7 (10)).

Question 11. See now the amended first sentence of paragraph 6. Since all the United Nations would be invited to join as founder States it is not thought that difficulty should arise.

Up to the stage however when the plan is submitted for approval or amendment to the United Nations as a body, it is thought that the decision as to what countries or what other authorities should be consulted should remain with the United States and the United Kingdom. This is to avoid the difficulties which experience has shown constantly arise in attempting to secure unanimity over too wide a circle during the stage of drafting.

50. Enclosure 1, p. 231.
51. The same as paragraph 38 (3) in the proposals transmitted to the Department by the Counselor of the British Embassy, August 28, p. 218.
52. The same as paragraph 27 of the proposals transmitted on August 28, p. 214.