Foreign Relations of the United States: Diplomatic Papers, 1944, General: Economic and Social Matters, Volume II

800.516/88a

The Counselor of the British Embassy (Opie) to Mr. Harry Dexter White, Special Assistant to the Secretary of the Treasury (Morgenthau)

Washington, April 20, 1944.

Dear Harry: I enclose a note which gives the British Treasury views at the official level on the preliminary draft plan for the Bank for reconstruction and development. You will see that the notes are based on the November draft²⁵ and that they were written before people in London had seen your draft statement of principles. The note was despatched by urgent bag on April 13th, but it only arrived this morning.

I have read the note through and I hope that you will agree with me that it is helpful in bringing out the fundamental issues. I am sure that this was intended to be its purpose and it is very much on the lines that I expected. To save time I am sending you this rough copy because I know that you will in any case wish to have other copies made.

Perhaps we can discuss on Monday as you suggested on the telephone.

Yours sincerely,

Redvers Opie

[Enclosure]

Views of British Treasury on Preliminary Draft Plan for a Bank for Reconstruction and Development

1. U.K. officials have carefully studied the U.S. Treasury’s preliminary draft outline of a proposal for a Bank for Reconstruction and Development and have had the advantage of discussions on the matter with the technical representatives of India and the Dominions whose general reactions to the problem were very much on the same lines as our own. As a result of this, it is now possible to indicate the following preliminary comments. It is noted that the scheme is a tentative proposal, which has not yet received the official approval either of the U.S. Treasury or of the U.S. Government; and, in the same way, the following comments are those of technical experts, which in no way commit the Government of the United Kingdom.

2. The criticisms made are not to be regarded as in any way non-cooperative or obstructive. It is very fully recognized that loans from creditor countries to debtor countries in the early post-war period are essential to avoid widespread economic chaos and much needless human suffering; that without them no international monetary plan can have a fair start; and that the reduction of barriers to trade will be frustrated by acute difficulties in balancing international payments. U.K. officials are, therefore, highly appreciative (and this view was strongly shared by all the Dominions experts) of the initiative which the U.S. Treasury have taken and of the generosity of approach which obviously underlies many of the provisions of the scheme, so far as concerns the part to be played by the United States.

3. Nevertheless, there are two fundamental matters, about which it seems vital that agreement should be reached before proceeding into all the consequential details. It is thought, therefore, that much the best way to make satisfactory progress will be to begin with a discussion of certain fundamental considerations, without in the early stages commenting in detail upon all the provisions of the plan tentatively put forward by the U.S. Treasury. Until this stage has been reached, it is felt that not much useful purpose would be served by attempting to discuss in detail all the provisions of the plan tentatively put forward by the U.S. Treasury. This does not mean that many of these details could not be worked into a final draft, embodying the general principles which the U.K. officials favour. But at this stage it seems more profitable to get clear on certain fundamentals than to spend time on the precise technique by which, after they are agreed, they will have to be worked out in practice.

4. Primary importance is attached by the U.K. officials to two fundamental conditions:—

(1) In the U.S. Treasury outline for the Reconstruction Bank (references are to the text of November 24th 1943) IV.7 provides that “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.” U.K. officials agree in thinking that the principle lying behind this should be fundamental in its application to any loans sponsored by an international institution. No doubt, in the future as in the past, there will be room for valuable and important loans, where the provision of the finance and the employment of it in the purchase of goods and [are?] closely tied together. (The U.K. Export Credits Guarantee Department and the U.S. Export-Import Bank are examples. Other similar applications are likely to be appropriate from time to time.) But, wherever the link between the source of the finance and the place of the expenditure is appropriate, the loan in question should be financed domestically by the country directly concerned. On the other hand, the proceeds of any loan raised or guaranteed or sponsored by an international institution should be, without qualification, free exchange available to the borrower to expend in any market at his choice for any requirements arising out of the project to be financed.

The difficulty felt by U.K. officials is, however, that, whilst the above principle is accepted in the constitution of the proposed bank, the provisions in detail appear in fact to have the result of tying the source of finance to the place of its expenditure with particular strictness. The provision that, subject to certain exceptions, it is the country in which the loan is expended which has to find the money seems to undo the practical effect of the principle which has been put forward in the clause of the constitution quoted above. It is appreciated that the reason which lies behind this is the anxiety to bring all countries in on a symmetrical basis. It is extremely difficult, indeed impossible, for a country, which has no investible surplus, to contribute funds for actual investment unless it be on the tied principle. The U.S. Treasury Plan, therefore, tries to temper the wind to the position of those countries which are not likely to have an investible surplus. Nevertheless, U.K. officials feel it to be essential that some other way must be found round this particular difficulty. They are, therefore, led on to a second fundamental principle, closely associated with that just enunciated, namely, as follows:—

(2) No country should be obligated to subscribe, directly or indirectly, to the loans sponsored or guaranteed by the international bank, unless its monetary authority has approved such subscription as being within the capacity of a country’s balance of payments at the time when it has to be made. Without this provision the maintenance of monetary equilibrium, which is one of the main purposes of the monetary and investment schemes taken as a whole, would be gravely endangered, and the schemes might indeed prove self-defeating. It is suggested, therefore, that the actual subscription by the government or in the market of the lending country of each individual loan approved by the international bank must be subject to the prior approval of the monetary authority, which approval must be given in the light of the first condition, that the proceeds of the loan, once subscribed, should be free exchange available to the borrower for expenditure in any market.

5. These conditions still leave the international institution free to provide a vital function, in the provision of which all member countries would be expected to come in on the same footing relatively to their resources.

6. For whilst the actual provision of funds can obviously only be supplied by those countries in which the monetary authority sees its way to an investible surplus, there is no reason why the risks of the resulting transaction should also be concentrated, as has been the case hitherto, in the absence of an international institution, on the country which is in a position to find the money. It is accordingly suggested that the following should be the fundamental functions of the new institution.

7. The facilitation of suitable loans from creditor countries to countries in need of reconstruction and development is so much in the general interests of world economy and of equilibrium in the international balances of payment that countries which fall into neither of these two categories, as well as those which do, can reasonably be asked to contribute by accepting a contingent liability under guarantees within the limits of their reasonable capacity. This is, indeed, a function of the bank which the draft already contemplates. This is felt to be the promising line of development. Here there is real scope for joint international action on an equal footing, whereas, in the matter of the actual provision of funds, it is quite clear that joint and equal participation is, from the nature of the underlying facts, out of the question. This leads to the conception that only quite a small part of the Bank’s capital would be called up to start with and that for the rest loans sponsored by the Bank would be guaranteed as an international obligation to which all the countries concerned would subscribe. Such loans could be offered in the first instance in the market on precisely the lines contemplated in the draft. Failing this and if the loan, even with the guarantee, could not be raised on the market at an appropriately low rate of interest, then it might be that the government of the country, by which the loan is to be made, should itself make the loan and obtain the benefit of the guarantee.

8. This seems an appropriate division of functions, which will appeal to the world as just and right. Only those countries with an investible surplus can put up the money; but that is no reason why they should also run all the financial risks, perhaps quite substantial, of reconstructing the devastation of war and developing the more backward countries. The great increase of trade arising from the granting of the loans would benefit all alike, and it is just and right that the resulting risk should be shared all around. This should be within the capacity, divided, of course, in appropriate proportions, of all participating countries. It embodies both the justice and the common-sense of the underlying situation.

9. In view of the need to ensure that no country should be suddenly called upon under its guarantee to subscribe more than should be within the capacity of its balance of payments, it is important to provide, so far as possible, that any calls on the guarantees shall be spread over as long a period as possible. For this reason it is suggested that the service of the loans should take the form of terminable annuities, covering both interest and repayment of principal, so that, in the event of default, no large capital sum falls due for repayment, but only the continuance of the annuities.

10. A further suggestion, to which importance is attached, is that the institution should charge a substantial commission at a flat rate of (say) 1 per cent per annum on all loans guaranteed by it. For example, if the standard rate of interest at which it seemed proper for the bank to issue a loan at a given date were (say) 3 per cent and the cumulative sinking fund were taken at 1 per cent (though a higher rate of sinking fund would be appropriate for projects requiring more rapid repayment), then the total cost to the borrowing country, including commission, would be at the rate of 5 per cent per annum, to cover both interest and capital. This would, in all the circumstances, be far from burdensome. If there were particular cases where it seemed right that help should be given on quite special terms, then some other appropriate source would have to be found for that part of the annual charge of which it was desired to relieve the borrowing country. The commissions thus collected would not be divided between the participants in the bank, except in the event of liquidation. But both the accumulations and the current commissions would be available to the institution to meet any defaults before calling on guarantees, and it should be provided that they would be so used.

11. There is a second function to be performed by the bank, to which high importance is attached. The provision of cash to implement a loan, though a very essential part of the proceedings, is only one side of the picture. The right selection of projects is scarcely less important to permanent success. The expert examination of projects for international loans, for which a guarantee by the United Nations Bank has been or may appropriately be sought, should, therefore, be a primary function of the institution. This expert examination should have particular regard to the degree of priority which should be accorded to each of such projects, to the reliability and technical capacity of those who would handle the spending of the loan, and to the prospects of the recipient country being in a position to service it in free exchange. Here again, there is a function of special suitability for an international institution.

12. Finally it should be made clear, what is, no doubt, in fact the intention, that the institution would be concerned with loans for postwar reconstruction as well as for new development. For it is only in this event that it will serve to bridge the gap which now exists between the purposes of UNRRA²⁶ and the purposes of the International Monetary Fund.

13. U.K. officials would welcome an opportunity of discussing with the U.S. Treasury the principles here outlined, in the hope that agreement could thus be reached, which would serve as a basis for wider discussion between the experts of the United Nations as a whole. U.K. officials are very conscious of the great importance of this question and of the service rendered by the U.S. Treasury to the United Nations as a whole by having put forward concrete suggestions on the matter with a view to bringing the matter to a head and to a conclusion.

25. For text, see Federal Reserve Bulletin, January 1944, p. 37.
26. United Nations Relief and Rehabilitation Administration.