Foreign Relations of the United States: Diplomatic Papers, 1943, General, Volume I

800.515/865c

Meeting With British Experts on Proposal for a United Nations Bank for Reconstruction and Development, at the Treasury, October 11, 1943

October 11, 1943

Present

Mr. Bitterman	Mr. A. S. J. Baster
Miss Alice Bourneuf	Lord J. M. Keynes
Mr. E. M. Bernstein	Mr. Liesching
Mr. Casaday	Mr. Lionel Robbins
Mr. W. L. Clayton	Mr. D. H. Robertson
Mr. Benjamin Cohen	Mr. Thompson-McCausland
Mr. Emilio G. Collado	Sir David Waley
Mr. Walter Gardner
Mr. Frederick Livesey
Mr. Loucheim
Mr. A. F. Luxford
Mr. Leo Pasvolsky
Mr. Warren Pierson
Miss Richardson
Mr. Harry White
Mr. John P. Young

Mr. White presented the plan for the Bank and commented that it was not to be considered a final draft.

Lord Keynes raised a question as to the formula according to which capital quotas should be determined, and the amount of gold a country would be called upon to provide. He went on to express doubt as to whether the Bank would contribute much toward equilibrium in the balance of payments. He said, “if the United States, for example, had an export surplus of one billion dollars, how would the Bank help to adjust this situation”? The British contribution to the Bank would, he added, worsen their balance of payments. The plan, he said, did not give enough consideration to the debtor-creditor position of countries.

Mr. White replied that the Bank was not a device to bring equilibrium into the balance of payments, but in so far as it stimulated private capital, would assist in a substantial way. He said that the Stabilization Fund was intended to promote adjustment in the balance of payments. Lord Keynes did not seem to agree with this reference to the purpose of the Fund.

Lord Keynes asked the extent to which proceeds from loans would be freely available to be spent anywhere the borrower chose. He wondered specifically whether money borrowed by the Bank from the market would when reloaned be restricted in regard to its utilization.

Mr. White replied that for political reasons the capital contribution of the Bank would doubtless need to be restricted in regard to the place of its expenditure. He thought it possible that there might be more freedom regarding money borrowed from the market, and particularly regarding the proceeds from guaranteed loans. He pointed out that in any event the Bank would have a considerable amount of money which would be freely available, consisting of gold plus free exchange. This, he said, would provide considerable latitude. Furthermore, the amount would increase so that after five or ten years extensive multilateral operations would be possible. He said the proposed provisions gave considerable flexibility and that the Bank was relatively free to do whatever it desired.

Lord Keynes replied that the main lines of the plan make it appear very restrictive of the use of funds, but that on closer analysis it seems this feature is mitigated by several jokers. The rigid structure, however, would not facilitate the task of explaining the Bank and dealing with criticisms of it at home.

Mr. White said that there were no jokers in the plan.

Mr. White asked Mr. Clayton whether he felt it would be politically feasible to ask Congress for funds which were to be spent in other countries.

Mr. Clayton was inclined to agree with Mr. White that Congress would be less receptive if loans were to be so used.

Mr. White said that this was classic understatement.

Mr. Clayton said further that Section IV, 1–c, seemed to cover the situation as to statutory freedom regarding the utilization of proceeds of loans. This provides as follows:

[“]c. The Bank shall impose no condition upon a loan as to the particular member country in which the proceeds of the loan must be spent; provided, however, that the proceeds of a loan may not be spent in any country which is not a member country without the approval of the Bank.”

Lord Keynes replied that it was this paragraph that bothered him. Mr. White suggested that it be worded to read, “The Bank shall permit freedom, etc.” Lord Keynes said that the difficulty was more than this, that the plan implied a tying of loans to trade. He said that the plan ties up the sources of supply of funds more tightly than ever before. The borrower does not get funds but instead gets his bills paid.

Mr. Robbins said that he thought it was impossible to make a distinction between proceeds spent in one country and proceeds spent in another country; that in the last analysis the process was interwoven. For example, in most projects the bulk of the expenditures are for local labor and supplies; yet the project may stimulate imports and expenditures in various countries.

In response to a question by Mr. White as to England’s role after the war in the field of foreign investment, Lord Keynes replied that England’s first task was to repay its debts; that it would wish to pay for the cost of the war and get its accounts in order.

Lord Keynes remarked that the Bank plan was characterized by three features:

(1) rigidity as to the use of the proceeds of loans;

(2) the Bank could invest only through bonds, and not through equities, which was too restrictive, and

(3) that the Bank would only make loans that had clear prospects of repayment; it therefore would not make many loans.

Mr. White thought it elementary that the Bank endeavor to make loans which would be repaid.

Lord Keynes said that other loans are of considerable interest and value to world progress. Many “bad” loans are disguised through the extension of new loans. England over the years has done little more, he said, than reloan interest received on foreign investments. The money accumulated abroad, and was supplemented by new loans. Many old loans would not be repaid, if payment were demanded, because balance of payments conditions were not so adjusted. However, new loans were made which paid off the creditors on maturing loans, as well as provided current interest.

According to the Bank plan, he said, there would be no free funds for this purpose since the proceeds from loans would be available only for audited expenses. There would be no outlet for these other operations.

Mr. White asked if Lord Keynes meant that England had received no benefit from her foreign investments except the accumulation of book assets.

Lord Keynes said that the foreign investments had helped to finance both wars, and had been exceedingly important to Great Britain in this respect. He said that since debtors did not repay loans, it was an error to feel that the extension of loans should depend upon ability of the borrower to build up a favorable balance of payments. He was opposed to the linking of loans directly or indirectly with exports. He said that loans to China, for example, would raise the standard of living in China, but would not necessarily cause China to produce goods which would build up an export balance; that repayment from an export balance should not be expected.

Mr. White said that the gain to the lending country from foreign loans, on this basis, would be, aside from perhaps cheaper imports as a result of an improvement in productive conditions abroad, the satisfaction that accompanies what we call WPA expenditures. Lord Keynes interjected that there would be a third gain, namely the accumulation of funds for an emergency; that such accumulation at compound interest would provide a country with a valuable asset.

Mr. White referred to the provision that a competent committee was to consider whether a loan would raise the productivity of the borrower, and whether the balance of payments prospects of the borrowing country were favorable to the servicing of the loan.

Lord Keynes remarked that an incompetent committee might come to more useful conclusions.

Mr. White said that Lord Keynes assumed that a country could not adjust its balance of payments so as to repay loans. Mr. White disagreed with this position.

Mr. Clayton remarked that he felt the plan as it now stood had too many conditions, and was too tight in certain respects. He suggested that the American group endeavor to prepare a draft which would be less rigid, and see if we could not meet some of the criticism of Lord Keynes.

Mr. Robbins referred to limitations on loans for projects that used largely local materials and labor, and said that he felt there would be times when the Bank could properly loan foreign exchange for such projects. He said that construction might cause a division of labor which would cause a need for foreign exchange.

Mr. Bernstein agreed and said, for example, railway construction in Brazil might attract coffee growers and affect Brazil’s exports of coffee. He said that the plan provides for this, and cited provisions.

Lord Keynes, referring to the plan as a whole, said that he would like to see the provisions stated as loosely as possible.

Mr. White said that he did not see how the provisions could be made much looser, unless it were provided that the Bank make equity investments; the Bank could now do almost anything.

Mr. Robbins raised a question as to whether it would not be desirable to provide machinery whereby the Bank was to seek out desirable opportunities for placing its money, and that it not assume an entirely passive role.

Mr. White said he did not believe that this would be necessary; that the Bank, he felt, would be the recipient of many requests for loans.

Mr. Collado thought that countries would request loans in excess of their ability to use the money effectively.

Mr. Robbins said that in periods of depression it might be useful for the Bank to consider how it might expand its operations.

Mr. White suggested that since the British and American groups had now compared views on the Bank and discussed its major features, it would be well if both groups consider the matter, and after a month or two discuss it further.

The meeting was adjourned.