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 )

secret

NAC Doc. No. 1208

Subject: Use of the Fund’s Resources

1. The question of the appropriateness of using the resources of the Fund under current conditions is again being actively reviewed both within and outside of the Fund.1

2. Under current policy and procedures, drawing on the Fund is limited to members who can meet relatively severe tests designed to assure that the use of the Fund’s resources would be temporary. In the application of these tests I believe there is still a relatively wide gap between our “criteria” and “creditworthiness” as defined by the British. In any event, at present two groups of countries may be able to draw on the Fund:

(a)
One of these comprises the “blue chip” countries (such as Canada, Mexico, and Cuba) which can readily meet even our criteria but which are unlikely to need to draw on the Fund in the near future.
(b)
The other includes countries which may qualify under the so-called Gutt procedure approved last May,2 which would place the resources of the Fund at the disposal of a country engaged in a stabilization program approved by the Fund. This is an attractive and sound idea, but under present conditions it is unlikely that many countries will be able to qualify.

3. So far as Europe is concerned, any general increase in use of the Fund’s resources in the next year seems to me quite problematical. Of the eight leading European members of the Fund, i.e., U.K., France, Italy, Netherlands, Norway, Denmark, Belgium, and Sweden, only the last two appear to qualify. The other six are faced with internal and external financial situations which would appear to preclude use of the Fund’s resources. Some major non-European countries, such as India, Pakistan, and Japan, raise similar questions.

4. The above considerations point to the likelihood that present policies respecting use of the Fund’s resources will continue to result in almost no drawings on the Fund.

[Page 1627]

5. The balance of this memorandum is concerned with two proposals by Mr. Rooth which might somewhat increase the use of the Fund’s resources with little or no risk that such use would be abused—that is, would result in large drawings with little or no prospect of reasonably prompt repayment.

6. The first proposal is to permit automatic drawing rights for a member up to the point at which the Fund’s holdings of its currency reached 100 percent of its quota. If a member has paid 25 percent of its quota in gold and dollars, the automatic drawing right would amount to 25 percent of the quota. Countries having paid in less gold and dollars would have proportionately smaller automatic drawing rights.

(a)
The rationale of this proposal is this: To the extent that a member has contributed gold and dollars to the Fund, it may be entitled to somewhat easier treatment. The Fund’s experience with the automatic repurchase mechanism in the last 18 months has been quite good; a number of countries have made large repayments to the Fund in gold and dollars. As long as a country’s drawings on the Fund are limited to the total amount of its contributions of gold and dollars, there is a reasonable presumption that normal fluctuations in its reserves will provide automatic repayment to the Fund. Moreover, the very fact that a member has paid gold or dollars to the Fund in an amount approaching a fourth of its quota indicates some likelihood that its gold and dollar reserves ordinarily will stand at a level high enough to bring the automatic repurchase mechanism into play. It should be kept in mind that most of the more important countries with respect to which this generalization is not applicable have already drawn more than the amount of their gold and dollar in-payments, as the attached table will show.
(b)
This small amount of automaticity would be quite useful. It would encourage countries to place some reliance on the Fund. It would make the automatic repurchase mechanism entirely palatable, whereas at present countries resent having to repay the Fund in gold with no assurance whatever that they can again draw. I feel it would enable us to hold the line beyond the point at which the Fund’s holdings of a member’s currency exceed 100 percent, much more easily than we now do and with much more understanding from members. Finally, there are inevitably some cases of countries which have paid one-fourth of their quota in gold but which present relatively poor risks for (large) drawings. I think of countries like Paraguay. If these countries could from time to time draw small amounts, not exceeding their gold in-payments, they would have a friendlier understanding of the Fund’s policies.
(c)
I do not believe this procedure would result in large drawings, as long as countries trusted the Fund to hold to this policy once it was announced. As the attached table shows, the total amount of such drawings would be $350 million if all countries fully utilized their right. Of this total, $306.24 million can be accounted for by 10 countries (Belgium, Canada, Colombia, Cuba, Egypt, Germany, Japan, Mexico, Sweden, and South Africa). These countries have the kinds of fluctuations in their reserve positions which tend to result in automatic [Page 1628] repurchase. Belgium, Egypt, Mexico, and South Africa have already repurchased their whole drawing from the Fund, which demonstrates that the system does work. Finally, the assurance of being able to draw within the limits set forth above would give Governor Frere what he needs before he would feel able to permit drawings in Belgian francs.

7. The second recommendation is that the Fund should make clearer to members that 6 to 12-month credits can be obtained to meet seasonal or other very temporary situations.

(a)
These very short-term drawings would be accompanied by special repurchase undertakings by the member countries. Hence a member would be granted this kind of accommodation even though its basic situation was such as to make it ineligible for an ordinary drawing.
(b)
Mr. Rooth is much interested in this kind of operation because it fits into the concept of short-term operations with which he is familiar as a central banker. I believe countries would find this accommodation quite useful from time to time.

8. I should appreciate receiving the views of the National Advisory Council respecting these two proposals.

[Page 1629]

Attachment

Members’ Quotas

(All values in millions of U.S. dollars)

[Page 1630][Page 1631]
Member Quota Fund holdings of member currencies Per cent of member’s quota Paid in gold Outstanding drawings Unused portion of gold payment
Australia 200 211. 57 106 8. 40 20. 0 0
Austria 50
Belgium 225 168. 75 75 56. 25 56. 25
Bolivia 10
Brazil 150 150. 00 119 37. 50 65. 5 0
Canada 300 224. 99 75 75. 00 75. 00
Ceylon 15 . 75 . 75
Chile 50 46. 55 93 8. 82 5. 37 3. 45
China 550 . 06
Colombia 50 37. 50 75 12. 50 12. 50
Costa Rica 5 3. 75 75 1. 25 0 1. 25
Cuba 50 37. 49 75 12. 50 12. 50
Czechoslovakia 125 128. 63 103 2. 37 6. 00 0
Denmark 68 72. 26 106 5. 94 10. 20 0
Dominican Republic 5 3. 75 75 1. 25 1. 25
Ecuador 5 3. 75 75 1. 25 1. 25
Egypt 60 45. 00 75 9. 49 9. 49
El Salvador 2. 5 1. 87 75 . 63 . 63
Ethiopia 6 5. 94 109 . 06 . 06
Finland 38 37. 24 98 . 76 . 76
France 525 541. 77 103 108. 11 125. 00 0
Germany* 330 290. 00 88 40. 00 40. 00
Greece 40
Guatemala 5 3. 75 75 1. 25 1. 25
Honduras 0. 5 . 37 75 . 13 . 13
Iceland 1 . 75 75 . 25 . 25
India 400 472. 42 118 27. 53 99. 98 0
Iran 35 26. 23 75 8. 77 8. 75
Iraq 8 8. 00 100
Italy 180 . 02
Japan* 250 214. 00 85 36. 00 36. 00
Lebanon 4. 5 4. 23 94 . 27 . 27
Luxembourg 10 9. 52 95 . 48 . 48
Mexico 90 67. 50 75 22. 50 22. 50
Netherlands 275 281. 63 102 68. 75 73. 39 0
Nicaragua 2 1. 50 75 . 50 . 50
Norway 50 47. 06 94 12. 50 9. 56 2. 94
Panama 0. 5 . 37 75 . 13 . 13
Paraguay 3. 5 2. 62 75 . 88 . 88
Peru 25 21. 85 87 3. 15 3. 15
Philippines 15 11. 25 75 3. 75 3. 75
Sweden 100 83. 00 83 17. 00 17. 00
Syria 6. 5 6. 33 97 . 17 . 17
Thailand 12. 5 75 3. 13 3. 13
Turkey 43 37. 25 87 10. 75 5. 00 5. 75
Union of South Africa 100 75. 00 75 25. 00 25. 00
United Kingdom 1,300 1,331. 60 102 236. 27 265. 96 0
Uruguay 15
Venezuela 15 11. 25 75 3. 75 3. 75
Yugoslavia 60 61. 16 102 7. 88 9. 00 0
5,866. 5 4,789. 45 873. 70 694. 96 350. 92
  1. For an earlier phase in 1950, see Foreign Relations, 1950, vol. i, pp. 810 ff. The phase under consideration here coincided with the advent of a new Managing Director of the International Monetary Fund, Mr. Ivar Rooth, who assumed his responsibilities on August 3, 1951. For an account of this matter by the IMF official historian, see J. Keith Horsefield, The International Monetary Fund, 1945–1965, Twenty Years of International Monetary Cooperation, volume I: Chronicle, pp. 321 ff. (Mr. Horsefield was also editor in charge of the entire 3-volume series that makes up the official IMF history for the years 1945–1965, under the same general title as cited above.)
  2. See NAC Doc. 1128, April 19, p. 1613.
  3. Or dollars, in the case of repurchases. [Footnote in the source text.]
  4. Based on probable quota and gold payment. [Footnote in the source text.]
  5. Based on probable quota and gold payment. [Footnote in the source text.]