NAC Files, Lot 60 D 137
Document Prepared by the NAC Staff
NAC Staff Doc. No. 565 (Part B)
Memorandum on the International Monetary Fund
Congressman J. K. Javits, in letters dated October 17, 1951, and January 18, 1952,1 has asked for a report on the possibilities for a broader utilization of the resources of the International Monetary Fund, in connection with the current hearings on the Mutual Security Program. Mr. Javits cited the report of the Committee on Foreign Affairs of the House on H.R. 5113 (House Report 872 of August 17, 1951) as the basis for his request.
Various reports of the National Advisory Council on International Monetary and Financial Problems to the Congress, and particularly the second special biennial report submitted in May, 1950 (House Document No. 611, 81st Cong., 2nd Session), indicate the efforts of the U.S. Government to work toward an effective policy for the use of the resources of the International Monetary Fund.
The Council has always emphasized that the use of the resources of the Fund should be linked with the broad foreign exchange policy which is embodied in the Articles of Agreement of the Fund. This means, in brief, that the members of the Fund should be permitted to draw on the resources of the Fund only as a means of assisting them in maintaining the stability of their currencies, or in making progress toward convertibility through the elimination of exchange [Page 1638] restrictions or other appropriate measures. The Congress, in enacting the Bretton Woods Agreements Act which provided for the participation of the United States in the International Monetary Fund (Public Law 171, 79th Congress),2 required the U.S. Governor and Executive Director to obtain promptly an official interpretation by the Fund which, in effect, would limit the use of the Fund’s resources to current monetary stabilization operations to afford temporary assistance to members (see Section 13). The International Monetary Fund subsequently did approve an official interpretation of the Articles of Agreement to this effect. At the end of 1951 the Executive Board of the Fund gave further emphasis to the short-term nature of the use of the Fund’s resources by revising the scale of interest charges so as to cut in half the length of time a drawing can be outstanding before a member is required to consult with the Fund respecting repurchase. It has been the view of the National Advisory Council that drawings on the Fund should not be outstanding longer than five years, and current policy in the Fund is in line with this attitude.
Early in 1952 the United States supported a program recommended by the new Managing Director Mr. Ivar Rooth, former head of the National Bank of Sweden, which looks toward a greater use of the resources of the Fund within the context of policies which the United States has supported in the Fund since its inception. The Managing Director’s proposal recognizes that drawings on the Fund are intended only for giving assistance to member countries in financing temporary balance of payments difficulties and that there must be a clear understanding at the time of drawing that the currency drawn from the Fund be repaid within three to five years as the outside limit.
Bearing in mind the policy outlined above, it is not surprising that the Fund’s resources have been used less actively in the last few years than may have been anticipated at the time the Fund was established. Many countries have struggled with balance of payments difficulties of a character which have not made short-term borrowing an appropriate means of dealing with them. The best evidence of this situation has been the European Recovery Program itself, which was a recognition by the U.S. Government and the U.S. Congress of the need for special assistance, largely by grants rather than by loans. Another relatively large group of countries, including, for example, most of the countries of the Western Hemisphere, and some in the Eastern Hemisphere, have had favorable export markets in the postwar years. Nevertheless, several countries in those parts of the world have had access to Fund resources to meet temporary payments difficulties, and some of them have already been in a position to repurchase their currencies from the Fund as their balance of payments position improved and their reserves increased.[Page 1639]
This does not mean that the resources of the Fund are unimportant and could be dispensed with. The members of the Fund are not merely members of a short-term bank. In joining the Fund, they have subscribed to a policy embodied in the Articles of Agreement. This policy, as has been suggested above, sets up as the ideal for each member a convertible currency free of exchange controls except as may be necessary to deal with capital movements. The United States for many years has favored this foreign exchange policy and it is well known that the United States not only was the prime mover in the drafting of the Articles of Agreement of the Fund but is a principal factor of influence in the continuance in force of the Articles of Agreement of the Fund. When the countries originally joined the Fund and signed the Articles of Agreement and when new members have joined the Fund, the prospect of having access to the resources of the Fund has been and is an indispensable element in their decision to accept the obligations embodied in the Articles of Agreement. Many members know from experience that they can use the resources of the Fund when they have balance of payments difficulties which are genuinely temporary in character. The most recent example is the drawing by Brazil of $37½ million to meet a special short-run problem arising out of the failure of the Argentine wheat crop and of the necessity of making increased purchases of dollar wheat. As additional countries surmount their most basic balance of payments difficulties and can be added to the list of countries whose balance of payments problems are of a more temporary character, the number of members relying on access to the Fund’s resources in time of temporary difficulty will increase.
The U.S. quota in the Fund is $2,750 million. Of this amount the U.S. paid into the Fund $687.5 million in gold, the remainder, or $2,062.5 million, is subject to call as needed by the Fund and, in accordance with the Articles of Agreement, the U.S. gave the Fund non-interest bearing demand notes for this amount instead of paying dollars into the Fund. As member countries draw dollars from the Fund the U.S. Treasury makes the dollars available to the Fund, an equivalent amount of non-interest bearing demand notes being cancelled. As these drawings are paid back to the Fund, the Fund returns the dollars to the Treasury in return for new non-interest bearing demand notes. At the end of January 1952, net drawings on the Fund in dollars have resulted in cashing of $740 million of these demand notes.
It has been suggested that a portion of the gold and dollar resources of the Fund might be made available to some other international lending or investing institution. The Fund itself does not have the power to make advances to such institutions. The United States could recapture part of its gold subscription by obtaining a reduction of its quota in the Fund, and make the proceeds available to some other [Page 1640] international institution. But the reduction would have to be very large. To obtain $500 million of gold in this way the U.S. quota would have to be reduced from $2,750 to $750 million or by $2,000 million. Such a reduction could have only one possible result, the liquidation of the Fund. Insofar as the demand notes of the United States Treasury held by the Fund are concerned, the conversion of the notes into effective dollar resources would place upon the Treasury the same burden as would the provision of dollars out of the current tax revenues or proceeds of loans. In short, although the resources of the Fund are not being utilized on a very large scale at present, only so far as the idle resources consist of gold is there any “tying up” of funds subscribed either by the United States or by any other member; and if the Fund is to continue in existence, its gold resources are essential.
The International Monetary Fund has its place in the set of international institutions on which the United States relies as important elements in the implementation of desirable international economic and financial policies. This memorandum has emphasized that the Articles of Agreement of the Fund comprise a valuable international accord in the field of international financial policy. The Articles also constitute the Fund as a forum for consideration of par values and official exchange rates and the policies and practices of member countries directed toward achieving and maintaining currency stability and convertibility. The Fund’s resources were subscribed by the member countries as a means of dealing with short-term balance of payments difficulties. It would be a mistake to take steps to divert the resources of the Fund to other purposes, if by so doing the Fund itself was endangered.