NAC Files, Lot 60 D 137

Memorandum by Mr. Frank A. Southard, United States Executive Director of the International Monetary Fund, to the Secretary of the National Advisory Council ( Glendinning )1


NAC Doc. No. 1128

Subject: Use of the Fund’s Resources

1. In a memorandum addressed to you on November 9, 1950,* I summarized a proposal by Mr. Gutt as follows:2 In the light of the improved payments situation, the Fund can sensibly approach various members “to discuss with them what their plans are in respect of stabilizing their currencies, relaxing or removing their exchange restrictions, simplifying or unifying their multiple rates.” If the Fund finds that a country is ready to take serious steps toward the implementation of the Fund’s policy, but hesitates because of the risks entailed, the Fund “should tell them that we are quite ready to help them to overcome those risks, by letting them rely on the resources of the Fund.” He emphasized that mere “steps in the right direction” would not be enough; the steps must be serious and effective.

2. In that memorandum I also stated that Mr. Hooker and I believed that the Gutt proposal may be acceptable, provided it is carried out with caution and rigor. We would insist that the right of last-minute challenge be fully maintained, but might agree that in practice this right need only be exercised in cases where we felt there was good reason for opposing the drawing. We were inclined to believe that the Fund would have to review at frequent intervals the developing situations of those members whose stabilization programs had been approved by the Fund. This might help to avoid those difficult situations in which, because of a country’s situation “turning sour”, we might feel obliged to vote no on a subsequent request for a drawing.

3. At a meeting on December 5, 1950, I presented the Gutt proposal to the National Advisory Council. It appeared to be the sense of that meeting that the time might not be opportune for the Fund to proceed along the lines Mr. Gutt had suggested.

4. In my opinion, the U.S. Executive Director should support the Gutt proposal, for the following reasons:

It is a logical proposal, since it goes no further than holding out the prospect for use of the Fund’s resources in connection with an [Page 1614] acceptable program of stabilization. The right of the Fund Board to review requests for drawings at the time they are made would continue. Moreover, repurchase arrangements could be insisted upon where reserves are held in sterling or other inconvertible currencies, or where convertible reserves are smaller than the country’s quota in the Fund.
Actual drawings under the Gutt proposal should be small under present conditions. Most members will be unlikely to resort to Fund drawings. In addition, the Fund Board (and the U.S.) could give overriding importance to defense considerations in evaluating all proposed adjustments in exchange rates and exchange systems. Finally, as long as the ERP continues, the so-called ERP decision in the Fund could be held unchanged, which would make very unlikely any European efforts to draw.
Possible drawings of $50 million to $100 million per year might seem unwelcome, taken by themselves, since they might assist countries to maintain imports at a time of scarcity. Hence, at first thought it might appear attractive to turn down the Gutt proposal for fear it might, even though in very small degree, stimulate use of the resources of the Fund. However, the Gutt proposal is offered on a kind of “trial” basis; that is, the Fund (and the National Advisory Council) would have an ample opportunity to review any programs (whether involving exchange rate unification or general stabilization) before any opportunity would be given to draw on the Fund. If the U.S. is going to continue financial support of the EPU, of certain balance of payments deficits, and of economic development programs, there would probably be resentment if we endeavored to argue that the small and occasional drawings on the Fund envisaged by the Gutt proposal would be undesirable.
The question of use of the Fund’s resources is certain to be raised again at the next meeting of the Board of Governors. If it can be alleged that U.S. opposition has been responsible for lack of progress in reformulation of Fund policy, the U.S. Governor and his delegation may be confronted with sharp criticism. Modest as the procedure proposed by Mr. Gutt may appear, it can properly be offered by us and others at the Annual Meeting as evidence of a satisfactory modus operandi.

5. The Executive Board of the Fund is likely within the next two or three weeks to take this question up again. I should appreciate having the advice of the National Advisory Council before that time.3

  1. This memorandum was actually dated April 17; it received the April 19 date when it became an NAC document.
  2. NAC Staff Document No. 473. [Footnote in the source text. NAC Staff Doc. 473 is not printed, but see Foreign Relations, 1950, vol. i, p. 824, minutes of Meeting No. 167 of the National Advisory Council, December 5, 1950, at which this document was discussed.]
  3. Camille Gutt was Managing Director, International Monetary Fund.
  4. No record has been found in the NAC files of any National Advisory Council consideration of this matter in April or May. However, in May 1951 the International Monetary Fund in effect adopted the Gutt proposal.