NAC Files, Lot 60D137, NAC Minutes
Minutes of the Eighty-Third Meeting of the National Advisory Council on International Monetary and Financial Problems, Washington, January 22, 1948, 3 p. m.
- Secretary John W. Snyder (Chairman), Treasury Department
- Mr. Norman T. Ness, State Department
- Secretary W. Averrell Harriman, Commerce Department
- Mr. Thomas C. Blaisdell, Jr., Commerce Department
- Mr. Marriner S. Eccles, Board of Governors, Federal Reserve System
- Mr. J. Burke Knapp, Board of Governors, Federal Reserve System
- Mr. William McC Martin, Jr., Export-Import Bank
- Mr. Walter Sauer, Export-Import Bank
- Mr. Andrew N. Overby, International Monetary Fund
- Mr. George F. Luthringer, International Monetary Fund
- Mr. Frank A. Southard, Jr., Treasury Department
- Mr. Thomas J. Lynch, Treasury Department
- Mr. Andrew M. Kamarck (Acting Secretary)
1. French Proposed Foreign Exchange System
Mr. Overby said at the last Executive Board meeting Mr. Gutt had summarized the situation as follows:
- The Fund approved the French devaluation.
- The Fund appreciated the desirability of a free-market for invisibles in France.
- The Fund had difficulty in accepting a freely-fluctuating rate on trade items.
We, therefore, requested that the French reconsider and bring forward a new plan which would eliminate this third point. The U.S. Executive Director supported the suggestions of Mr. Gutt and earnestly urged this compromise. The United Kingdom supported the compromise. All the rest of the Fund supported the compromise of the Board, 20 percent (including Italy, Belgium, Mexico and Brazil) would in a show-down support the French on the last point, if necessary, while the rest of the Executive Board would be against the French. After the meeting the U.S. Executive Director spoke to the French along the same lines. Mendès-France said that there would be considerable difficulties in France in reversing the French proposal. One of the main difficulties was that the Sultan of Morocco had been upset because he had not been consulted on the last devaluation. He had now been consulted on this devaluation and was adamant that this free rate on trade be allowed.
The situation, therefore, as of the moment is that the French may [Page 609] come forward and re-insist on the original proposition but propose a commitment to extend the free system to all countries and to try to maintain the cross rates. This is tantamount, however, to the original proposal since it would depend on the other countries’ making the necessary concessions in their financial and payments agreements with France. Another possibility which the staff of the Fund feel might be acceptable would be for the French to adopt a free market with the other currencies floating up and down with the dollar. The French would agree to do this by buying and selling all other currencies at the appropriate cross rate to the current rate of the dollar. The French would handle this by concurrent negotiation with other countries or by export and import controls. The Fund staff feel that this would eliminate most of the discrimination, would not be a competitive devaluation and would avoid commodity arbitrage. The disadvantages of this proposal are that it is more complicated of administration and is a departure from a stable rate system.
Mendès-France believes that in the final analysis the United States will not oppose the French proposal. Mr. Overby summed up by saying that there were three possibilities:
- As long as the French hope for U.S. consent they will not give up this third element of their proposal; therefore, the first question is: Can the U.S. Executive Director oppose the third element of the original French proposal?
- Can the U.S. recede further from the compromise?
- Can the U.S. accept the new Fund staff compromise if the Board discussion with the other European countries should indicate this would be more acceptable than the other?
Mr. Eccles summed up the progress in the discussions in the Council as follows:
There appears to be general agreement that the French proposals represent a serious departure from the Fund’s basic principles and philosophy, and that action along these lines by the French would probably precipitate further departures by other member countries. The United States Government is committed to support the principles of the International Monetary Fund to the maximum possible extent, and the National Advisory Council was established by the Congress to carry out this policy. On the other hand, in the extraordinary circumstances of the world today, the Fund’s principles cannot be fully adhered to; the French proposals have been ingeniously designed to serve certain French interests; and it has been said that the French Government, having committed itself to these proposals, cannot afford to retreat from them because of the political consequences at home.
Most members of the Council are not convinced that a retreat by the French Government to some more moderate compromise position [Page 610] would have such serious political consequences in France as have been alleged. The British, who have at least as much stake in the stability of the present French Government as we have, appear to have arrived at a very different judgment on this matter.
A major objective of the French plan is to force French importers from the “hard currency” areas (except for importers of certain essentials) to bear the cost of the exchange premiums considered necessary to induce French holders of dollars derived from tourist expenditures, etc., and from assets hoarded abroad, to convert such dollars into francs. But (a) there is serious doubt as to whether this scheme will work as well as the French hope, and (b) even if it will work, there are other schemes giving identical results which would not involve the establishment of discriminatory exchange rates.
With respect to (a), there are doubts as to the extent to which French holders of dollars abroad will bring them home, even at the exchange rate of 300–350 which is expected to prevail in the open market, until further evidence appears that France is on the road to monetary stability; and it seems quite likely that the “tourist dollars”, instead of being sold on the open market, will continue to be sold at even higher rates to people who cannot obtain a license to purchase exchange on the open market (e.g., for purposes of capital flight).
With respect to (b), identical results would be achieved if the open market was made applicable only to invisible transactions and capital inflow, with the desired premium being created in the market through government support financed by the proceeds of a tax on imports from the “hard currency” countries. We have agreed to accept a compromise along these lines. It is true that the French Government may be loath to participate so openly in the payment of a bonus to the hoarders of dollar assets; their proposed open market system would be politically more palatable. But why should we resign ourselves to a major departure from the Fund’s principle simply to enable a member country to practice a deception upon its public?
There remains the French argument that since most other European currencies are over-valued in relation to the dollar, it is necessary to devalue the French franc more sharply for trade transactions with the dollar area than for those with other European countries. But widespread resort to discriminatory devaluation, especially through open market rates subject to official manipulation for the accomplishment of other purposes, would very seriously compromise the attempts by the Fund to secure an orderly and consistent readjustment of the pattern of exchange rates. It would seem far preferable for the French [Page 611] to accept for the time being the technical disadvantages inherent in a flat devaluation to any given level, and to join with the United States in pursuing a vigorous policy through the Fund aimed at hastening the readjustment of other over-valued currencies.
Mr. Ness reported that the French Ambassador had informed Mr. Lovett that if the proposal is rejected everything will fall apart in France (almost going as far as to say that the cows will stop giving milk), and that it would cause a fall of the Schuman Government. Mr. Lovett and the Ambassador think that this latter statement might be true. However, Mr. Lovett felt that the U.S. Government should consider itself free to reject the French proposal on technical grounds. His position was that we should approve all the aspects of the French proposal we can but vote “no” on the one element we cannot accept.
Action. The Council unanimously agreed to take the following action:
The National Advisory Council advises the U.S. Executive Director on the International Monetary Fund that he should accept all the other elements of the French proposal but vote to reject the proposal that the French have a free market for 50 percent of the export proceeds to convertible currency areas.
Fund Staff Proposal. Mr. Overby, Mr. Southard, Mr. Ness and Mr. Knapp agreed that the suggested new compromise of the Fund staff appeared on preliminary examination to be impossible to accept. The National Advisory Council unanimously agreed that the Fund staff proposal of all currencies floating up and down with the dollar, and attached to it by fixed cross rates, should not be accepted.
Mr. Southard said that if France does go ahead with its original proposal, it should commit itself to prohibit commodity arbitrage arising out of this new system. Mr. Valensi agrees to this. Secondly, that France should be in touch with its competitors in Europe in case it should develop that the system developed into a devaluation which gave France an unfair competitive advantage in the United States. Mr. Overby suggested that the French should agree also that their system would be initially proposed for only six months. The Chairman summed up the position that the U.S. Executive Director should follow the instructions just given by the Council; if the French go ahead anyway, he was authorized to vote for the Fund’s issuing a statement disapproving the French action. Finally, if any proposal came up which appeared to be substantially in line with the position of the Council as brought out in the discussion, the U.S. Executive Director was authorized to accent it.