International monetary fund and monetary stability

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Authors Pai, Bantval Padmanabha, 1935-

Publisher The University of Arizona.

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INt.SRHAJJONAL,.' M ONETARY FUND A lp ) ' M ONETARY STABILITY : .

A T h e s is Subm itted to the F acu lty of the .

DEPARTMENT" O F BUSINESS ADMINISTRATION

In P a r t ia l F u lfillm en t of th e R eq u irem en ts •

F or the D eg ree o f

V ; ;- M A STER O F SO IE N C S •

In the G raduate C o lleg e

I

STATEM ENT BY AUTHOR

T his th e s is has b een SuSm ittetl in p a r tia l fu lf illm en t -of req u ir e - m ents for an-advanced d eg ree at the U n iv ers ity of A rizon a and is d ep osited in the U n iv ersity U ib rary to he m ade a v a ila b le to bor row ers under ru le s of the L ib ra ry .

B r ie f quotations from th is th e s is a re a llow able w ithout sp e c ia l p e r m lss lp n , p f oyide'd that a ccu ra te acknow ledgraent o f so u r c e i s m ade.. R eq u ests fo r p e r m is s io n for extended quotation fro m Or rep rod uction of th is m a n u scr ip t in w hole or in part m a y be. granted by the head of the m ajor d ep artm en t or the D ean of th e Graduate C o lleg e w hen in th e ir judgm ent the p ro p o sed u se of the m a te r ia l is in the ̂ in terests o f sch olarsh ip :. In a l l dfher in s ta n c e s , h o w ev er , p e r m is s io n m u st be obtained from the author. ; . 1 ' •

A PPR O V AL BY T HE SIS DIREC TOR - ’ •

T h is th e s is h as'b een , approysd' ph the date shown below :

W illiam H / FinkA sso c ia te P r o fe s s o r o f F co n o m ics;a n d B u sin ess

A d m in istra tion

i i

A G K SC M JuE D M E lfT S

T'Ke-peiriod.. 1;9S6; 'fe^oii^t'.te/-feld;'reiief/'tEe:/forex^ "exchange d ifficu lt ie s ex p er ien ced by the d eve lop in g Indian econ om y.In that' context P r o fe sso r . R, M„ H oward, H ead of the D ep artm ent of A ccounting, su g g ested Wnt I w r ite m y th e s is on the In tern ation al M ohe- ta ry Fund., I w e lco m ed the su g g estio n , as at that tim e th ere w as a grow ing d is sa t is fa c t io n in fin a n c ia l c ir c le s in India that it w as not getting enough b en efits from the Fund though India w as the fifth la r g e s t con tr ib u tor to th e Fund. But in v iew of the d earth of m a te r ia ls on th is su bject of India’s r e la tio n sh ip w ith the Fund, i t w as b e lie v e d that a c o m p reh en siv e su r v ey could not he c a rr ie d on. So I ch ose to w r ite on the Fund and its a c t iv it ie s in broud ou tlin e . ,

, . T h is w ould not have been p o s s ib le but for the p a tien ce , c a r e ful d irec tio n , and eru d ition of D r. W illiam . H. Fink,' D epartm en t Of E co n o m ics . F or th ese and th e long hours he expended, read in g the ' d raft, 1 o ffer h im m y to th a n k si i / . a . ' '

T A B L E OF CONT ENTS

'Ch Ap t e n ’;v /'"'v;.-'' ' .: - - ’ v : :

INTRODXJCTION« e ® » »_».« •. • @ • »■ »*. * * , •• •> « ® «•» « « , » «, • «« • 1

: ' , ' , : .THE H lST O R toA L DELJNEATlON

• ' I GOLD STANDARD MECHANISM AND.ITS C O LLAPSE 4

. I! \ ’ INTERNATIONAL M ONETARY LESSONS O F TH E :, ' I I IÎ .̂*Î IjilS o a - • • a a a a a a a a a a a a a a a a a a a a a a a a a a a a. a a a a a a II

' III ■ ■ T H E PRO BLEM S O F M ONETARY STABILIZATION. . 15To ■ c-■ PLA N S FO R,INTERNATIO NAL M ONET ARY COOP- '

- z , -e r a t i o n . . . ; . : ^ a

IV ’ THE ROAD TO BRETTON WOODS, • * . . . . . . . . . . . , . 21

; . V : ' A SYNTHESIS: . T H E INTERNATIONAL. MONET ARY■ ’ : T'lTISfEa. a a, a , a, a a "a a a a > a a 'a ,a a a a a a a a a a a a a a a a a a a a a a a ;a . a a .28

,■ @ a a a a a a a .a a a a a a a a a a a a a. a a a a a a a a a a a a a a 'a a a 2 8a a a a a a a a a a a a a a a a a a a a 3 0

P A R T III . . .

■ , ... PROGRESS O F TH E FUND

VI T H E E A R L Y : Y E A R S O F C R IS IS , a a a a . a . . . . . .'a .> a . . ; 33

' In tern ation al E con om ic Situationa . . . . . . . . . . . . . . . 34.A ss is ta n c e from thfe Fuad. , a a a a a a a , a a a a a a a a a a a a 40

'3’A B t e p r ; .Q Q N T W W (cont'd)

CHAPTER:

H I

f i l l

XnitiS-T P ar' T 'alass and E xchange S tab ility „ ,» . . . 42E xchange R e s lr ic t iq h s aiid M n ltip ie C u rren cy

- jr'racticea. „ * v @ « o q o »« «,_*»□ o a * * @ * * * * * *«@ « «,« . » » 4^(2ori"ye rtii^rlrty^@ @« » ®. « » * » ® « * < * i ® .*■ ® ». ® ̂ ® ® ® ® ® * * . ^̂ 8..

'.E rah ce IgnoTes :the Fund's D e c is io n . „ _ 50. > S e r ie s e f P ev a lu a tio n s . ® - . . . . > ■. 54

E xchange R e str ic t io n s a fter th e 'T r a n s itio n 'l „ „ „> 58VEuxihp'eau;P aym eE t;©''',̂ ^'0^1>'i 4« >4* > * A . 60

IS 'THE. TRANSITION O fE R ? 4 4 > * , . . ... . . . . . . . . . . » . ■ 61

a: ';:;V"'a :a : p a r t i v ; ' ; a /

THE. RO RE :OF THE FUND IN STRENGTHENING ' 4 '

SUMMART: AND C O NCEUSIQ NS.. . . . . . . . . - 74

at .International M onetary C o o p e r a tio n .. 74The E con om ic and F in a n c ia l C onditions D uring V.the’ E a r ly T ea rs-o f-th e . Putid..., ■.. . . . . . . . . ‘. . . 7 6

P r o g r e s s of the Fund; E xchange S ta b ility . . . . . . . . 76E xchange R e s tr ic t io n s . . « . . . . . . . . . 78

. C o n y er tib ility . . . * . . . . ©... . . & @ . . . . . ».» "... ■.. 8.0T he Fund's E xchange O p e r a t io n s .. . ;> . . . . . . . . . . 81C ase for In c re a sed R e s o u r c e s . . . . . . . . . . . . . . . . . 85

, E lem exxt. . . .« . . . . . . . . . . . . . . . *» »»© . «. ■» ®. © ©« .88

BIBLIOGRAPHT. . . » . . > . . . » . 8 f

" v

IN TR O D trC tlO N

; The p rob lem w ith w hich this, stu d y cQncerns. i t s e l f is . an a s s e s s -

m ent and a n a ly s is of m o n eta ry .stab ility and th e . S u b sid ia ry . agen cy of the :

United N ation s-.-T H E INTERNET lO NAE MONETARY FUND (IM F )--a

d ev ice of the p o s t-w a r w orld d es ig n ed to a c h ie v e thrs. T h is in stitu tion ,

w as b orn along w ith its tw in in stitu tio n , the International Bank for R edon- ■ '

St ruction and D evelop m en t (IBRD), as a r e su lt o f th e B retton W oods C on- ,

fe r e n c e w hich w as attended by 44 nation s at. B retton W oods, N ew H am p-

"sh ire, Ju ly , 1944- y : . :‘,':y ;

T ke.IM F ep itom id os the sp ir it o f our a g e - -b e c a u s e a new age

req u ired the form u lation o f a new p h ilo so p h y and a new in stitu tion a l,

fram ew ork s In an age of in tern atip n a lism ., the e x e r c is e o f n ational

S o v ere ig n ty is - fraught w ith great dangers.. W hether in th e p o lit ic a l or ■.

econ om ic Sphere, we are fa ced w ith n a tio n a l p o lic ie s d ictated ;w ith r e f e r

ence to th e ir s e l f - in t e r e s t s co n flic tin g w ith the n eed s and req u irem en ts

of our t im e . In th is con text, it is. .a p latitude to rep ea t that we m u st •

e ith er p lan Or p e r ish . ' ' 'R ’ " , "/ v / .

. O bviously , th e r e fo r e , the e co n o m ies of the w o r ld a re to be su b - ■

, j e c t e d to S o m e e x t e r n a l d i s c i p l i n e s o f h a t t h e o b j e c t i v e s o f t h e w e l l - b e i n g

1

2

and continuous, p r o sp e r ity o f a ll nations can be a ch iev ed . The fie ld s o f

fo re ig n exch ange and in tern a tio n a l p aym en ts have h ith erto been looked

upon by th e so v e r e ig n n a t io n -s ta te s as th e ir un questioned p r o v in c e s» and

p o lic ie s a ffec tin g th ese have been m ou lded by the govern m en ts so le ly

w ith referep .ce to n a rrow ly co n ce iv ed national in te r e s t s . N ev er th e less^

the! d evasta tion and d estru ctio n brought about by the w o r ld w ars and the

co n seq u en ces o f the w o r ld -w id e d e p r e ss ip n o f the th ir t ie s have fo rced

th e r e a lisa t io n oh the nations of the w o r ld that th e w e ll-b e in g of a ll ’

co u n tr ies depends on the p o lic ie s that each p u rsu es in m a tter s a ffectin g

the w orld econ om y t As a result^ the n eed for an in ter n ation a l o r g a n iz a

tion to a s s i s t in: the d eterm in a tio n and m aih ten an ce of eq u ilib riu m r a te s

o f exchange and to s e t t le th e in tern a tio n a l paym en ts w as reco g n ized .

V arious in stitu tio n s were^ th e r e fo r e , co n ce iv ed and s e t up a fter the w ar l /

to a ch iev e m o n eta ry S tab ility , o rd er ly econ om ic grow th, and s tea d y

p r o g r e s s . Ay/: - -

To the n ations m ap ping p e a c e - t im e r ec o n str u c tio n at the end of

W orld War 11, the in tern a tio n a l m o n eta ry d isru p tion and co n flic t o f the

1930!s and 194bVs w ere b itter m e m o r ie s . T h ere w as l i t t le sen tim en t for

r e s to r in g th e old g o ld -stan d ard m ech a n ism w hich R. G. Hawtr ey c a lls a

sta te o f nanarchy in w o r ld cred it co n tro l. n But th ere was w id esp rea d

̂ R. G. H aw trey , T ra d e b e p r e s s io n and the Way Out (Bondon, ' L on gm an s, G reen and G o .', 1931),ppo 1 5 -1 8 .

a g reem en t on the n e c ess ity , for r e s to r in g rea so n a b le exch ange s ta b ility

; and for le s s e n in g the .r e s tr ic t iv e , d isc r im in a to r y exchange con tro ls ; ;

p rev a len t b efore and: during th e w a r s . (The IM F w as e s ta b lish e d in the -

hope o f a ch iey in g what w as thnS w id e ly a g r ee d on. ) In th is th e s is 3 it i s ,

s e t in the h is to r ic a l p e r s p e c t iv e . , The la tte r day eco n o m ic and m o n eta ry

d evelop m en ts are a lso tr a c e d to:Show the s u c c e s s a ch iev ed by the Fund.

T he so u r ce s and m ate r ia ls u se d for this, s u r v e y a re the o ff ic ia l v

docum ents o f the IM F and oth er G overn m en ts, o p era tio n a l r ep o rts , .

a r t ic le s from the in flu en tia l econ om ic jo u rn a ls , book s, and, reports, by

ex p er ts in th is f ie ld . ; f , : - ' . '

CH A PTER I

GOLD STANDARD MECHANISM AND ITS COLLAPSE

An e x cu rs io n into the p r e - 1914 p er io d anti a reca p itu la tio n and

evalu ation of the m ech a n ism o f the gold 'standard, the p r e d e c e s s o r of the

In ternation al M onetary Fund, is perh ap s the b e s t p re lu d e to the .Study of

the la tte r in stitu tio n . : The (gold standard m ech a n ism , w as a n a tu ra l evo lu

.tion: and w a s fa ir ly S h eceS sfu l in eq u ilib ratin g-th e 'ever changeab le '

d evelop m en ts o f the in tern a tio n a l ba lan ce o f p aym en ts. T his m ech a n ism

a sem ia u to m a tic s y s te m , was. the w o r ld 's n e a r e s t app roach to a •system

o f in tern a tio n a l m o n eta ry eq u ilib r iu m . Its e s s e n c e w as the co r resp o n d -

ence of d o m estic m o n ey supp ly changes to in tern a tio n a l gold flo w s. . In

th e w o r ld o f the la s t th ird o f the 19th and the f ir s t th ird o f th e 20th c e n

tu r y , w h ere each independent n ation fa n cied that so v er e ig n ty w as its

m o st p r iz ed p o ss e s s io n , it f la ttered th e ir n ation al ego not to have to pay

.h om age• to a m a n -m a d e in stitu tio n , though i t w as not r e a lis e d by them

that to O bserve the ru le s of the gold staindard gam e w as in r e a li ty to

su rren d er p a r t of th e ir so v er e ig n ty to the dom inant n ation , L e . » E ngland

; An un derstan d in g of the natUre, o p era tion , and c o lla p se o f th is

. sy s te m w ould fu rther exp la in and c o n f ir m the foreg o in g .

• The gold stand ard :gam e p r e su p p o se s that the m e m -' ■ tier c o u n tr ie s .a r e 'on gold. . . . . . The national m o n eta ry

■ u n its are defined, in term s' of w eigh t units; o f gold-, arid ’ : .. through the m ediu m of gold the exchange ra te s a re fix ed . f -

' Tinder th es e e onditipus gold is the wo r id ' s c om m on unit ̂ .o f v a lu e , an in tern a tio n a l m ea n s' o f paym ent,, and a m on ey ' . '

. r e s e r v e o f in tern a tio n a l liq u id ity . *

v ■ :' y 'The fe g a l ' r a ^ ls i t e s , fo r a go ld .stan d ard are th at the C entral . T; ' T

Banks or tr e a s n r ie s of m ein he f co u n tr ie s m u st tie w illin g to buy and s e l l

u n lim ited am ounts o f gold at fixed p r ic e s ; th e se p r ic e s m uSt tie p r a c t i

c a lly the sa m e for p u rch a ses and S a le sf m o r e o v e r , fr e e im p o rt and . f

export of gold bu llion or ppins m u st tie p erm itted . In p r in c ip le , the

!'c la s s ic a l" w ay in w hich the gold standard w orked in its h ey -d a y b efore '

T 9 l4 , as d escr itied by the C unliffe C o m m ittee , is d e lig h tfu lly s im p le .

If a country d eve lop s , an ap p rec ia b le balan ce ,of paym en ts d e fic it , it i s

se ttle d by a flow of gold out of the coun try . S im ila r ly , a su rp lu s cou n try

w ill r e c e ly e a gpld in flow . . ' 1 • ■

; > , . At th is point co m es the e s s e n t ia l lin k in the chains the banking

m e c h a n ism s of co h n tr ie s d p era tin g th e stand ard a cco rd in g to the c l a s s i

c a l ru les should be su ch that a gpld in flow lea d s to an exp an sion in the

to ta l m o n eta ry c ircu la tip n , w h ile a gold outflow lea.ds to a con traction . ■ - V •

The change in the m o n eta ry c ircu la tio n o ccu rs at tw o p o in ts : th e change

; in the quantity, of le g a l ten d er m on ey , and the change in the am ount of .

G eorge H.' H alm , In ternational M onetary C oop eration (Chapel H ill, .The U n iv ersity of N orth C arolina P r e s s , 1945), p . 11. .

■deposits at the c o m m e r c ia l banks.A T his can be se e n i f we c o n s id e r ,

sa y , the country w ith a balance o f p aym en ts d e fic it , w hich is lo s in g gold .

Im p orters pay for the im p ort su rp lu s by buying, fo re ig n exchange from

th e ir banks 5 th e ir banks get the fo re ig n exch ange by buying gold from the

, c en tr a l bank add exp ortin g it.: The p u b lic !s d ep o sits at the c o m m e r c ia l /

banks and c o m m e r c ia l ban k s1 ca sh r e s e r v e s a t the c en tr a l bank fa l l by

e'dual am ounts b rin g in g down the r e s e r v e ra tio o f the fo r m e r . In the

' id e a l gold standard s y s te m , e x c e s s r e s e r y e s o f th e ' c o m m e r c ia l banks

are at a m in im u m 5 th e r e fo r e , in the new equilibrium , th ey m u st m ak e

m u ltip le •cuts In 'th e ir in v estm en t s and advan ces , and S o in th e ir d ep osit s .

dim ilarlyV th ere w il l be. a m tiltip le ex p a n sio n in the quantity of m o n ey in

a cou n try w hich is r e c e iv in g gold i f its c o m m e r c ia l banks are m a in ta in in g

constan t r e s e r v e r a tio s , • . ..

; The c o n tra c tio n is t p o lic ie s w hich depend at le a s t p a rtly tin, a

c o h sc io u s e ffort on the part o f the cen tra l bank w ill r a is e the ra tes o f

in te r e s t in the g o ld - lo s in g or d e fic it cou n try , w h ile , on th e other hand,

the ra tes o f in te r e s t in the. g o ld -r e c e iy in g country w il l fa ll . The d if fe r

ent in te r e s t le v e ls w ill th er e fo re ca u se a flow o f sh o r t-term .fu n d s from

the g o ld -r e c e iv in g to the g o ld - lo s in g cou n try . '

̂ A. G. 1U. D ay, The O utline o f M onetary E conom ic.s (Oxford, G larendon P r e s s , : 1^57), p . ■ 4$8. , , ' '' ,...

T h is; flow o f Sho rt - 1e rm. c ap ita l w ill /supply fo:rei gm b a la n ces fo r , ahd e a se the d e n a t io a is t Straiii iii, the :d s f ie it eotintry". Such an adjusting m ovem en t i s , . i :e x tr e m e iy im p ortan t for th e sm ooth w ork ing o f the gold stand ard m e c h a n ism . 1 .

But i f the p r ic e le v e ls o f countries, are out o f lin e w ith each o th er ,

;■ th e ' 'h a s ic .a n ti.ic r a g .-r u n :.adjihStitidnt i s t o b e a t t a in e d f r o m t h e c h a n g e s : in .

th e r e s p e c t i v e p r i c e l e v e l s w h ic h t h e r e c i p r o c a l p o l i c i e s o f c r e d i t c o n - .

t r a c t i o n a n d c r e d i t e x p a n s io n a r e to b r in g a b o u t 1

The gold loS m g country w ill'r e d u c e its p r i c e - c o s t . ■ ’str u c tu r e , w ill export m o r e and im p ort l e s s , and, w ith

. ' op p osite ad justm en ts in the .gold r e c e iv in g co u n tr ie s ,: >; : : in tern ation a l paym ent eq u ilib riu m is b a s ic a lly r e s to r e d - - / ; .. :

t not s im p ly patched: up. ̂ n y i; JV 1 ' ’ - \

The guarantee of .stable exch ange r a te s w hich ind uced and p r o - : ,

m oted in ter n a tio n a l,tra d e .and in v estm en t, w h ile d isco u ra g in g d is e q u ili

brating s p e cu la tiy e m o v em en t s o f sh o rt - te r m ca p ita l, w a s the outstanding .

Virtue df th is m e c h a n ism . ' " : ■ : J r . 'y- :

. y T he: g o ld s t a n d a r d m e c h a n i s m u s e s s m a l l a n d e a r l y - : , . ' - ' •a p p l i e d d o s e S o f in f l a t i o n a n d d e f la t io n in h o p e s o f a v p id - 1i n g d e f la t io n s a n d I n f la t io n s o f t h e m o r e v i o l e n t a n d Selfr- p r o p e l l i n g t y p e . » , „ „ .R e s e r y e S o f in t e r n a t i o n a l l i q u id i t y Ig o ld r ese r v e s ) a r p p r d y id e d a s S h o c k a h p d r b e r s . ^ . • . p

In the econ om ic and p o lit ic a l en viron m en t o f the d ecad es p r e c e d - :

ing the outhreak of the f i f s t wo rid w ar, w here there was a large degree

8

o f e c o n o m ic i n t e r n a t i o n a l i s m , t h e g o ld s t a n d a r d w o r k e d r a t h e r s m o o t h l y

a n d s u c c e s s f u l l y . T h is l a r g e d e g r e e o f e c o n o m ic i n t e r n a t i o n a l i s m h a d

p r e v a i l e d t h e n b e c a u s e o f f r e e t r a d e o v e r v a s t a r e a s , r e l a t i v e l y S ta b le

• t a r i f f s t e m p e r e d b y th e a p p l i c a t io n o f t h e " m o s t f a v o r e d n a t io n c l a u s e " ,

a n a l m o s t c o m p l e t e f r e e d o m o f i n t e r n a t i o n a l c a p i t a l m o v e m e n t s , th e r

e l a s t i c w o r ld d e m a n d f o r e x p o r t s , f l e x i b i l i t y o f th e p r i c e - c o s t S t r u c t u r e

o f ̂ the r a e m b e r c o u n t r i e s , b o th u p w a r d s a n d d o w n w a r d s , a n d , s e n s i t i v i t y .

o f t h e .n a t io n a l m o h e t a r y c i r c u l a t i o h s , t o g o ld f l o w s . B u t i t i s a " fa ir t '

w e a t h e r c r a f t , o f d o u b t fu l s e a w o r t h i n e s s in s t o r m y w a t e r s . "

' ■ In a w o r ld t o r n a p a r t b y h o s t i l i t i e s , w ith e c o n o m ic c o n t r o l s t a k in g

th e p l a c e o f th e p e a c e - t i m e f r e e d o m o f e c o n o m ic t r a n s a c t i o n s , a n d a n

in t e r r u p t io n o f ;a l l t h e n o r m a l c o m m e r c i a l a n d f i n a n c i a l o p e r a t io n s , a n ■: ;

i n t e r n a t io n a l m o n e t a r y s y s t e m . c o u ld n o t s u r v i v e ; a n d h a d n e c e S S a r i l y t o

b r e a k d o w n . .The d i s l o c a t i o n s c a u s e d b y t h e w a r , t h e s t r u g g l e th r o u g h o u t

th e w o r l d t o 1 a c h i e v e e c o n o m ic s t a b i l i t y , th e S t r e n g t h e n in g o f th e S p ir i t •

o f n a t i o n a l i s m , t h e f a i l u r e to a t t a in e f f e c t i v e i n t e r n a t i o n a l c o o p e r a t io n ,

a n d f i n a l l y , th e C a ta s t r o p h e o f w o r ld w id e d e p r e s s i o n c o m h in e d to f o r m ,

a p o l i t i c a l , S o c i a l , a n d e c o n o m ic e n v ir o n m e n t i n s h a r p c o n t r a s t to th a t

o f t h e p r e w a r p e r i o d . p \ .

̂ T oe, , c it .

The m a in rea so n s for the fa ilu re to reb u iid th is s y s te m after the

/:.o

; 1- T he reco n stru c tio n w as starte.d. too. la te .and-wasc a r r ie d out in too fra g m en ta ry a fash ion ; . ..

, 2 . The change of eco n o m ic condition and o th er fa c -, to r s sto o d .in the w ay o f the re -a d o p tio n of the gold

i standard in its p rew ar form , w h ile no c o n s is te n t new ■ :. sy s te m w as eh v isa g ed ; \

3 . The reco n stru c tio n w as im p ed ed v e ry s e r io u s ly • hy the p rev a len t -fear o f the s c a r c ity o f gold; and

4, The growth of econ om ic n a tio n a lism p rev en ted- the c re a tio n o f an. econ om ic en v iron m eh t in w h ich 1 V

m o n eta ry s ta h llity could he m ain ta in ed . 1 ■ .

The yea r 1919 and the p er io d im m ed ia te ly th er e a fte r w itn esse d

exch ange in s ta b ility in m an y ctiuntrieS due to the d istu rb ed in tern atip na l

econ om ic and p o lit ic a l con d itions and to th e un even p r o g r e s s o f in fla tion

in the y a f io u s countries^ In su ch a con tex t, the f ir s t in tern ation a l fin an

c ia l and m o n eta ry co n feren ce that m et in B r u sse ls in 1920, and the -

.second in Genba . in 1922, w e re .w e lco m e tb a m o n e ta r ily ch aotic w orld ,

. ' ..But as 'th ese

d ea lt a' y e fy a ey ere b lew to tKts. B es id e s 3 the m e a g r e r e s o u r c e s at the

d isp o sa l of the bank ren d ered it in cap ab le of p lay in g a s ig n ifica n t ro le in

: ' The im pending s c a r c ity o f gold led th e in d iv idu al co u n tries to y

adopt d ifferen t var ia n ts o f the gold s ta n d a r d .. The p r ic e l e v e l of na-oSt

co u n tries w as su b sta n tia lly h igh er in the m id d le -tw e n tie s in te r m s of the

d o llar Or s te r lin g than it had b een in l9 1 4 j yet fh® p r ic e of gold in te r m s

o f d o lla r and S ter lin g rem ain ed on the p rew ar le v e l , or w as brought back,

to it . The new: gold s ta n d a rd w as a c o lle c t io n o f ad h oc d e v ic e s . It is .

tra g ic that no in tern ation a l a g reem en t w as reach ed at any tim e in the

tw e n tie s , b eca u se the de facto c o r r e la t io n o f eco n o m ic , fin a n c ia l, and •

m o n eta ry p o lic ie s w h ich preivailed p r io r to W orld W ar I m ad e it a ll th e :

m d re n ec® S sa fy for a-doneerted . a ttem p t to reach a g reem en t on an in s tr u

m ent o f in tern ation a l m o n eta ry co o p era tio n . .

c h a p t e r . :ii

INTERNATIONAL MONETARY LESSONS OF THE, THIRTIES ' ; '

The chaos and con fu sion of the e a r ly 1930',s w as fo llow ed by a „

: p er iod of su b sta n tia l changes and exp erim en ta tion . The c o lla p se of the

. r e s to r e d gold standard cam e in two s ta g e s : Its abandonm ent by B rita in

in I 9 3 I , and hy the United S tates in 1933. The D e p r e ss io n w h ich began

in , 1929 had y e r y fa r -r e a c h in g r e p e r c u ss io n s on the eco n o m ies of the

w orld . ■ T h ose co u n tries w hich depended for th e ir econom iC and fin a n c ia l

s ta b ility and so lid a r ity on an in fln x of fo re ig n ca p ita l found it la ck in g as

the c re d ito r .natiohs' stopped th e ir ca p ita l exports and added in su lt to th e

in jury by' w ithdraw ing even S h o rt-term cap ita l funds w hich in itia ted the

w ave, o f cu rren cy depreciati'ons, d eva lu a tion s, - and exch ange con tro ls; Thus

England in 1931 w as fo rced o ff the gold standard a fter su sta in in g great

l o s s e s o f gold. In 1905 G reat B rita in , a long w ith o th er m a jo r trad in g

n a tion s, had r e tu r n e d to the g o ld -stan d ard at the p rew ar p a r ity on the

b a s is of what P r o fe s s o r R obbins d e scr ib e # as h it - d r -m is s m e th o d s1

L io n e l R ob b ins, The G reat D e p r ess io n (London, M acm illan C om pany, 1 9 3 5 ), p>. 9v- - ;; " ' - /; y - , ' /' ,' , ; f' V-.

12

that to ta lly d isreg a rd ed the p u rch asin g pow er p a r ity th eo ry . T his,

p a r ity put E ngland's export indies tr ie s at an a r t if ic ia l d isadvan tage at a

tim e/w h en h er export trad e w as in a m o s t d ifficu lt p o s it io n , owing, to the

d isru p tion o f .her fo re ig n m a rk ets and oth er s tr u c tu r a l ch an ges as a

, r e s u l t o f th e w a r , ̂ . ..

: ; T he attem pt tow ards d efla tion fa iled , and it w as r e a liz e d that

p r e s s u r e can; he brought to bear on the u s e r s of c re d it by a r e s tr ic t io n o f c r e d it or the r a is in g o f

i ' bank ra te , but that p r e s s u r e cannot be d ir e c t ly -brought to b ear upon the c o s t s o f p r o d u c t i o n . 2

W age c o s ts in. p a r ticu la r w ere r ig id , at le a s t in a downward d irectio n ,

‘The r e su lta n t export d if f ic u lt ie s r e s tr ic te d the lo n g - te r m ca p ita l exp orts ,

w h ile the con stan t gold outflow and h igh in te r e s t ra te s a ttra c ted s h o r t

te r m funhs , bringing about.in the w ords o f Robbins "a la ck o f balance

b etw een lo n g -te r m and s ho rt - 1erm in v e s tm e n t w hich w as i t s e l f cpnduclye

to d is - eq u ilib r iu m and la ten t w ith dan ger of e x ten s iy e ca ta stro p h e .

T h ie ern b a rra ss in g ^ n h h cia l p red ica m en t of England brought about h er ' ; ;

d iv o rce from the gold standard and a lso the devaluation o f the pound in

S ep tem b er, 1931, w hich in turn brought about m o d est r e c o v e r y .

The T h eory Saye that th e exch ange ra tes sh ou ld be in' co n fo rm ity With the d o m estic p r ic e levels;. ; ' ‘ i V

̂ C om m ittee on F in an ce and Industry R eport (M acm illan) (London, H*. M w Statitiaery Ciffice^ ;19d lh . 32. ; ' : ' t ; y y ■ ' ". . . • .

3 L ion el R ob b in s, op. c it . , p . 9. .

, : ' , ' , . V ' ' ■ '■ ■ " ■ X - ; ; .■ ' ' 13

' . ' T he co u n tries of .the B r itish C om m onw ealth of Nations,;, the ' , t'.'ii'''';

Scandinavian co u n tries ,. And o th ers found the s ta b ility of th e ir c u r r e n c ie s

in te r m s of s te r lin g ra th er than gold and th er e fo re fo llow ed su it, w hich . •

brought into being the s te r lin g b lo c . The w orld sp lit into the s te r lin g

a rea , the gold a r e a , and the h e tero g en eo u s group o f co u n tr ie s p ra c tic in g v-

v a r iou s ty p es o f exchange c o n tr o ls . E ach ex p er ien ced a d eg ree of d e p r e

c ia tio n . The S o v ie t Union w ith its 'sa te llite s form ed the, o th er area . In ■

1933, devaluation of the d ollar d ea lt a death blow to the gold stan d ard . ■

' R eek ie s s 1 ending and borrO w ing,; c ouple d w ith incbhSis teiit p p l ic ie s i .

c h a r a c ter iz ed the th ir t ie s . "That the m a in cred ito r cO untties tr ie d to

exclu d e the co m m o d itie s of the debtor co u n tr ies through p r o te c tio n is t

d e v ic es i s one of the m o s t g larin g in c o n s is te n c ie s of the in ter w ar p er io d . "

The cred ito r co u n tr ie s , by n e ith er p u rch a sin g ad d ition a l im p orts n o r ,u s in g

.th e ir r ec e ip ts to m ake lo n g -te rm lo a n s , e i t h e r o f w hich th ey w e r e d u ty-:,

bound to do, fo rced the debtor co u n tr ie s into d efla tion ,, devaluation , and .

exchange c o n tr o ls . 1 ■ . f" -' , , .■ . .... a;::

A fter d eva luation , Englahd e s ta b lish e d in A p ril, 1932 , the B r it ish

E xchange E q u a lisa tio n A ccount to , o ffse t sp e cu la tiv e m o v em en ts in s te r l in g

exch ange ra tes . S im ila r exch ange S ta b iliza tion funds , w h ich tr ied to

cou n teract abn orm al changes in dem and on the fo re ig n exch ange m a rk e ts

by m an agin g the su p p ly , w ere e sta b lish e d in other co u n tr ie s . A ty p ica l

G eorge N. Halm ,' In ternational M onetary C ooperation (Chapel H ill, The U n iv ers ity o f N orth C arolin a P r e s s , 1945), p. 32.

exchange s ta b iliza tio n fund c o n s is t s of fo re ig n b a lan ces or gold and o f

d o m estic m on ey , and it s e r y e s as a. buffer "which m itig a te s the ..impact

of r e p e r c u ss io n s r e sp it in g from p o lic ie s of d ifferen t c o u n tr ie s . The

c o n n e c t io n betw een the fo re ig n exch an ge m a rk e ts and d o m estic .m o n ey

m a r k e ts is m ad e su b ject to a co n tro llin g d ev ice w h ich r e p la c e s the

golden brake of the c red it m ach in e by the gear sh ift o f the s ta b iliza tio n

fund. A ccord in g to M alm, th e se funds "as a p o o l for c o n cer ted action ,

point to the v e r y c o re of the new p lan s for in tern ation a l m o n eta ry co o p -

The T r ip a r tite .A greem ent o f 1936, betw een the U nited States., th e '

U nited K ingdom , and F r a n ce , and a lso jo in ed by S w itzer la n d , B elg ium ,

M olland, and in d ir ec tly by the w hole " ster lin g b loc" , e lim in a te d c o m p e ti-

t iv e d ep rec ia tio n o f c u r r e n c ie s and r e su lte d in a c e r ta in am ount o f c o lla b

oration betw een the .s ta b iliza tio n funds of s e v e r a l c o u n tr ie s .

CH A PTER III

. THE P R 0B H E M S :a F ;M O H E T M T STABILIEATIOH.. ' W: J

H aving fo llow ed the h is to r y o f the gold stand ard through its h e y

day to: i t s :c

16

• T t e s , w itii exchange ra tes a c cu ra te ly r e f le c t iiig the interna,! ‘ :

p u rch asin g p ow er of the c u r r e n c ie s co n cern ed , Frank .Graham poin ts to

four possible s e ts of rela tion sh ip s: in r e sp e c t to Stability o f any given

:c u r r e n c y ; .T h e s e are.: Vf':

1. S tab le in tern a l p u rch a sin g pow er and sta b le exchange ra te s a ll cu rren c ies: a re sta b ilized ; 2„ Stable" in ter n a i :

- p u rch asin g pow er and u n stab le exchange r a t e s - - t h e m ea s - ,u r in g c u r r e n c ie s a re u n stab le; 3 , U nstable in tern a l p u r- ^ chasdng pow er and s ta b le excharige r a te s - - th e rn ea su rin g . , .c u r r e n c ie s a re u n sta b le , but flu ctu ation s o ccu r in u n ison ’W i t h th o se o f tb e m e a su r e d cu rren cy ; and 4. U nstable :in tern a l p u rch a sin g pow er and u n stab le exch ange r a te s . .The m e a su r in g c u r r e n c ie s m a y be e ith er sta b le o r un stab le

• antf exchange rates, w ill th e r e fo r e ten d to flu ctu ate in the one c a se p ro p o rtio n a te ly and in the o ther d isp ro p o rtio n -a t e l y w i t h t h e c h a n g e s in t h e in t e r n a l 'p u r G h a S in g p o w e r o f ,th e m e a su r ed u n it. 1 : :: ' ' , , : ,

T h ere baS , h o w ev er , b een no c u r r e n c y With u n yaryin g p u rch a sin g

p o w er . T he th ird p o s s ib il i ty has been r e a lis e d w h en eyer a giyeh rn o h e- .

ta r y m a te r ia l h as b eco m e W idely e s t a b l is h e d .' - T h e .p ro b lem -o f m o n eta ry

.Stability in the n a r r o w er sen se , a r is e s w ith r e sp e c t to. one or m o r e cu r

r e n c ie s o f the type in d ica ted In the fou rth ca teg b ry . T h is prob lem le d

to the resu m p tip h o f the. gold standard as a m eah s o f s e c u r in g som e d eg ree

of s ta b ility in th e p u rch a sin g p ow er, w ith ab so lu te s ta b ility in exchange ,

ra tes o f go ld-standard c o u n tr ie s ,. . ■

• Frank C. G raham , "M onetary S ta b iliza tio n ," E n cyclop aed ia of S o c ia l S c ie n c e s , V ol. 9 (New Y ork, M acm illan Co. , MCMXLVIII, 1933), pp. 5 9 1 -5 9 5 . h :

In in co n v er tib le ■ pap er m o n eta ry s y s te m s , a tho rough- go in g cu r - ■

■ ren cy d is in teg ra tio n m a y happen. The f ir s t paper pound from 1797-1821

' w as an excep tion to -th is . T h ere a re p h y s ic a l l im it s to th e pos s ib ility o f

cu rren cy exp an sion under m e ta liic m o n eta ry s y s t e m s , w h erea s under

in co n v er tib le p ap er s e lf - r e s tr a in t is th e pnly lim it . T h is is an inadequate

sa feg u a rd . , , ^

. A fter W orld W ar I the ex trem e m o n eta ry d iso rg a n iza tio n that

b eca m e the ord er of'the day on th e E uropean continent ren d ered cu r re n c y

.s tab iliza tion an ur gent n e c e s s ity for m an y c o u n tr ie s . And. out of th e

v a r ied e x p e r ie n c e s o f th e se co u n tr ie s , .som ething lik e a standard body

of d octr ih e has em erg ed . V . e " ̂ ■

F rank G raham o b se r v e s that th ree p r in c ip a l ty p es of w artim e .

in fla tion and d ep rec ia tio n m ay be d istin g u ish ed . In G reat B rita in , H ollan d ,

S w itzer lan d , and Scandinavian co u n tr ies in fla tion and d ep rec ia tio n w ere

not so great as to m a k e im p ra c tica b le the re s to r a tio n o f the p rew ar m o n e

ta r y un it. The r e s to r a tio n and m a in ten a n ce of a fu ll or m o d ified gold

standard in v o lv es th e equation o f in fla ted pap er w ith w o r ld gold p r ic e

le v e ls . T h is m ay be a c h ie v ed e ith er by su ch an a ltera tio n o f th e pap er ■

p r ic e s tru c tu re ais w il l b r in g it Into co rresp o n d en ce w ith g o ld :p r ices at

a p r e d e te rm in e d gold value; o f the c u r re n c y un it, or by su ch an a ltera tio n :

o f the O riginal gold, w e ig h t o f th e c u rren cy unit as w ill su sta in the cu rren t

p r ic e le v e l on .a gold b a s is . S ta b iliza tio n o f a d ep rec ia ted cu rren cy at the

" ' : . : 7 . : ' : IS "■■■'

e r ig iiia l gx3M y a tee o f th e iinonetairy; im it i s , s i t i e . on ly a p r o - ‘

c e s s of deflation- and a p ostp on em en t of fin a l action un til p r ic e s can 'be -

nedttCed to a r e q u is ite leye!* ■ - •. :

Wlxere d ep rec ia tio n lia s been so great as .to m ake. th e continuance

o f the d id value of the cu rren cy unit im p r a c tic a b le 3 b eca u se i t w ould ■'

in v o lv e an in te r e s t burden on the public debt (approxim ating or ex ceed in g

the p r o sp e c t iv e n ation al in co m e), devaluation b eco m es c le a r ly in ev ita b le .

The' r e s to r a tio n of. the o r ig in a l, va lue o f the d ep rec ia ted c u rren cy m ean s . ,

a p ro lon gation o f in s ta b ility , ft a lso b rin gs about that m o s t d evasta tin g •

form o f p r ic e ch an ge, that is to s.ay, a p ro lon ged fa ll w ith .an a ccom p an y

ing s tra in on b u sin es s and fin a n c ia l in stitu tio n s and w id e sp r ea d u n em p loy -

m en t. : : ; . f: . : : V:' 1 - - ' ; ' 1 v :

On th e corhbfhed grounds o f e^ u ity-an d .exped iehcy^ fhe: c h o ic e -o f l l-l '

the sta b le ra te o f exch ange should be som ew h at, but not g rea tly , below .

the e x is t in g value o f the cu rren cy un it. T h ere are tw o m e a su r e s of th is

yalue., the p r ic e le v e l and the exchange r a te . U su a lly , the lo w er of the

tw o p r ic e s is taken w ith the excep tion that i f the exch an ge value of the •

c u r fe n c y is e x tr e m e ly d e p r e sse d r e la t iv e ly to its va lu e as in d ica ted by

the p r ic e le v e l , i t may' be w orthw hile to attem pt s ta b iliza tio n at a h igh er ■ •

figu r e than the e x is t in g exchange ra te w o u ld se e m to War rant. f ; V ■ ;

The ir r e sp o n s ib le is s u e o f pap er c u rren cy , w ith i t s e v il c e n s e - ,

q u en ces o f advance, in in tern a l p r ic e le v e l , r is in g c o s t of gold exch an ge.

and unbalanced p rodu ction , e tc . , can be annulled by a la r g e r e s e r v e of

gold or fo r e ig n exchange acq u ired in advance through a fo r e ig n loan or

o th e r w ise , w hich iv i l l 'cushion any ex cess, of cu rren t .demand oy er sup p ly

,for ^exchange. at the ch o sen r a te . To John M aynard K eyn es, the problem .

of m o n eta ry s ta b iliza tio n resoTyeS into th ree p a r t s :

1. D e v a lu a t io n y s . d e f la t io n . , \ ' V

V r W • • 2. S ta b ility o f p r i c e s v s . s t a b i l i t y o f e x c h a n g e . '" .v ■

3 . R e s t o r a t i o n of. a g o ld - S t a n d a r d . ' .

. D efla tio n , w hich is a p o licy of red u c in g the r a tio betw een the

volum e o f a cou n try 's cu rren cy and its req u irem en ts o f p u rch asin g p ow er

in the form o f m on ey so as to in c r e a s e the value o f the c u r r e n c y in te r m s

o f gold dr c o m m o d itie s , is u n d esira b le a s it red istrib u tes: w ea lth in a

m an n er in ju riou s to b u s in ess and to s o c ia l s ta b ility . It b rin gs about a

tr a n s fe r e n c e of w ea lth fr o m the r e s t of th e com m u nity to the ren tier

.c la s s and to a ll h o ld er s of t i t le s to m o n ey ju st as in fla tio n in v o lv es th e

;,o p p o s& e .y ^

: , Speaking about the s ta b ility o f p r ic e s vs.' s fa b ili ty of exch an ge, ^

K eynes favors the s ta b il i ty o f int ern a l p r ic e le v e ls . The fau lt o f the.

p o s t-w a r reg im e is. that p r ic e lev e ls , depend on in tern a l in flu en ces and

the ra te s o f exchange have to .adjust th er e to . T hus, w hen th ere a re v io len t

Shocks to the- p r e -e x is t in g eq u ilibriu m between the in te r n a l and ex tern a l

2 6

p r ic e le v e l s , the p rew ar m eth od is l ik e ly to break down in p r a c tic e On,ly

b eca u se it cannot bring about read ju stm en t o f in tern a l p r ic e le v e ls quick

enough. . " '. 1 u

The K eyn esian co n c lu s io n is that . ' ,

a . . . w hen s ta b ility o f the, in tern a l p r ic e le v e l and, s ta b ility , ■of the ex tern a l exch an ges are in com p atib le , the fo r m e r is

vfV'ivy •- g en era lly p r e fe r a b le . If a ll other co u n tr ies r e s to r e the gold standard , the r e s to r a tio n of it w ould give us not the s ta b ility o f in tern a l p r ic e le v e l , but ex tern a l e x ch a n g e s .

• The conditions of the future a re not th o se o f the p a s t . Ther e s t o r a t i o n o f t h e g o ld S ta n d a r d i n t h e p r e s e n t c o n d i t i o n s ;is .'ju st n o t p o s s i b l e . We a r e n o w i n t e r e s t e d in t h e s t a b i l i t y '

. of b u s in e s s , p r ic e s , and .em p lo y m en t..

T his c h a p t e r , i t i s h d p e d , w i l l s e r v e to . h e lp u n d e r S ta n d th e p r ob'-

le m s w ith w h ich the IM F h as had to w r e s t le and around w h ich its

a c t iv it ie s c e n te r .

* John M.. K eyn es, Es sa y s in .P e r su a s io n (New Y ork, H arcou rt, B ra ce and. C o . , 1932), pp. 1 9 9 -2 0 0 . '

P. A R T : II,.

[ON AT, A ilM E T ART CO O PER AT ION

■/ ■ ' ': " ‘ :• : : - . ' ■■ - ' '

' --T B B R G A D '$Q SR E T T O N 'W G 0D 8 ::: -; : . ; ‘'V- y: G;--

M any ex p ert and k een brains w ere h e a v ily e x e r c is e d on the

, p rob lem of m o n eta ry in stab ility^ and two p lan s for s ta b iliza tio n w ere /

S u ggested : one by H arry D. W hite, the able m on eta ry a d v ise r to. the 1

' U nited S ta tes T re a sn r y , and another by L ord K eynes o f E ngland, Tbe ,

two p lans form tbe k eyston e' o f .the arch o f in tern ation a l m o n eta ry co o p - .

; ■nrati.Qn'?of';th e ppst'-wariwprid^;; \^ h e 'Snbjddt'-ihntten'':bf thirs ch ap ter ;

. th er e fo re is a co m p a r iso n in broad Ontiines of th e se two p la n s , out of " ;

w hich em erg ed the International: M on etary Fund, . , "

> • The fie ld in w h ich the w o r ld /a f t e r W orld War II, n e e d e d u rg en tly ,

rem aking; through reth in k in g , w a s : th e f ie ld ;o f M tern ational EcGnomic 1 ..

R e la tio n s , In that fie ld , the p a ttern o f ih tern a tio n a l m o n eta ry in stitu tio n s ■

is Of ca rd in a l s ig n if ic a n c e . M onetary s ta b ility h in g e s , as w e sa w in the • ;

p reced in g ch a p ter , bn th e prdb iem o f flu ctu atin g exch ange ra tes wS, fix ed

exchange r a te s . R eco g n is in g th is as o f u n iv e r sa l co n cern and a lso s e e in g ■

th e n eed to keep the fo r e ig n b a la n ces a r is in g out o f norm al- trad e tr a n s - i; .

a c tio n s a s liq u id and un frdzen as d o m estic bank h a la n c e s , the two draft

’ ' ‘ \ -' : ;, ; ml w ; 2 l 1 -i : ' ■ : ■ ; . ■; ■■ ■ ■ , Wi ;. v

22

plans of L ord K eynes and W hite w e r e c ir c u la te d w id e ly w ith o ff ic ia l

Support. :"G aSt!n an eS sa y fo rm the K eynes draft is a m a s te r p ie c e of

p u rsu a s iy e exp osition ," ^ 'w hile the A m erica n plan is in th e form o f a

draft MI L, . / - \ /' \ "

B road ly S peak ing, the In ternation a l S ta b ilisa tio n Fund of W hite

and the International C lea rin g Union of K eynes have in com m on the four

fo llow in g o b j e c t iv e s : . ,

' l i C ontrol by an in tern ation a i a g en cy Over thea le v e ls of exchange ra tes o f national c u r r e n c ie s ; ,-- / v ;;/':

■ 2. P r o v is io n by th is agen cy of an e ffe c t iv e sy s te mof m u lt ila te r a l c le a r in g s > ■ . ,

3. R egu la tory or ad m on itory pow er of th is ag en cy. . , . w ith r e sp e c t to m o n eta ry and other p r o c ed u r es , >,

fo llow ed by p a rticu la r co u n tr ie s w hich a re such as to d istu rb or th rea ten in tern ation a l econ om ic • =

■ e q u i l i b r i u m | . . . ■ .

. 4 . ;Augm ehtatioh o f and a b e tter d istr ib u tio n of the■ ; . ' w orld -’ s supply o f liqu id m ea n s of in tern a tio n a l ' ,

‘ : paym ent. 2 :fv .. : . : : .. y::''' y r

The m o st S ign ifican t d iffe re n c e s b etw een the p la n s a re in the

extent of th e grant o f pow er and fin a n c ia l m ean s and in th e ty p es o f p r o

ced u res fo r p rom otin g th e s e obj e c t iv e s w h ich th ey p r o p o s e . ■ A s th e n a m es

su g g e s t , exch ange s ta b iliza tio n in W hite's P la n and c le a r in g fu n ction in / '"

* Jacob V in er , "Two;Plans for in tern a tio n a l M onetary S ta b iliza tio n ;’’ Talg. R ev iew , A utum n 1 9 4 3 , pp. 8 3 -8 4 ,

- U oc, c it .

23

K e y n e s1 P la n r e c e iv e em p h a sis . Both p lan s give the govern in g board

p ow ers to c a ll for re lev a n t in form ation from the p a rtic ip a tin g go v ern

m e n ts , arid to rnake the recom m en d ation s and im p o se p e n a lt ie s for e x c e s s

debit b a la n ce s , though K eynes h a s a n o v e l fea tu re of im p o sin g p en a ltie s

on even the e x c e s s c re d ito r b a la n c e s«, C r it ic ism s from an in ferriation al

ag en cy 'o f su ch repute and good stand ing , h ow ever, m igh t p rove to be

m o r e e ffe c t iv e than fin a n c ia l p e n a lt ie s h r rew ard s in in d ucin g m em bers:

to avoid p r a c tic e s that a re in im ic a l to the m ain ten an ce o f ^ herriational

m o n eta ry eequilibrium . Both en v isa g e th is agen cy tb h ave as its p r im a r y

op eratin g function the banking function p ro p er , that i s , th e tr a n s fe r o f .,

m on eta ry a s s e t s on a loan b a s is from thoSe who. a re in liq u id p o s itio n to

■those who. are.in . n eed o f b in d s, e yv'V; X- :: :;i ' ■ v '-;v yvl'

Though W hite r e q u ir e s the m e m b er s to m ake an in it ia l ca p ita l

cohtribu tion in lo c a l cu r re n c y , gold arid govern m ent S e c u r it ie s , K eyn es

does not m ak e any p r o v is io n .'for th is b eca u se what, he co n tem p la tes is a

m u tual c re d it p oo l. Under, both p lan s

. . . . the p u rp ose of Such banking op era tion s w ou ld "be • , ; t o p ro v id e su ita b le c red it fa c i l i t ie s for co u n tr ie s

te m p o ra r ily sh o rt of m ea n s o f m e e tin g ex tern a l l ia b il it ie s on cu rren t accou nt so a s to m ak e it p o ss ib le •

'a • ; -'f^q/ffor th em to m ak e the n e c e s s a r y paym en ts w ithout y ,p r e s s u r e on the exchange v a lu es of th e ir c u r r e n c ie s and w ithout .r e so r t to d efla tio n a ry internal, m e a s u r e s ,.

\ to r e s tr ic t io n s on im p o rts or to. the ap p lica tion o f Vf ;e t c c o m m e r c ia l tr a n s a c t io n s , ' ' i

I b id ., pp. 8 5 -8 6 . ' . ; : /v ' . ‘ ' ' '*.'1'■•■.■■'■■'.

2:4

If the world, is to: m o v e as en v isa g ed by W hite and K eynes to an ;

. in tern a tio n a l cu rren cy d iv o rced from gold, and co n stitu tin g the so le , *

m o n eta ry unit g en era lly u sa b le in m ak ing in tern ation a l paym en ts,, the :

. K eyneS plan w ill have gone fa r th er in the d irectio n o f s e tt in g up fo rm a l r

re la tio n sh ip s ap p rop ria te to th# hew cu rren cy 'an d a b o lish in g fo r m a lit ie s '

of e x is t in g p ro ced u re in in tern a tio n a l m o n eta ry tr a n s a c t io n s „ The r e a l

contribu tion of th e se p lans is hot the m a c h in er y p rov id ed by them to o ff- . '

.set debits and c r e d it s . It is the techn iq ue o f p rom otin g exchange S tab ility

and th e ex p ecta tio n s o f i t s in d efih ite contin uance that th ey c reated by wa:y

0:f req u ir in g the co u n tr ie s to abandon b ila te r a l c le a r in g s .

T h ere a re a g rea t m an y o th er d e ta ils in both p lan s about the w ays .

. in w h ic h in tern a tio n a l m o n eta ry eq u ilib r iu m has to be a tta ined , F rom

the point of v ie w of w o r ld econ om y, tw o q u estion s a re of 'param ount

im p o rta n ce , co n cern in g w hich th ere e x is t w ide d if fe r e n c e s o f opinion

betw een m o n eta ry n a tio n a lis ts and in te r n a t io n a lis ts . T h ese q u estion s a re

the fo llow ing: • '

’ 1, Stable p arities , v s , flu ctu atin g exchange ra te s or flex ib le

t i y . p a r it ie s j and - ' ,

• : 2, F r e e fo r e ig n exchange m a r k e ts yS, exch an ge co n tro l.

. T he W hite p lan s e e m s to look tow ards a b so lu te ly fix ed exch ange r a te s a s

■the h o fm a l s itu a tio n , w h ile the K eynes p lan , on the o th er hand, s e e m s to

look tow ard s in tern a tio n a lly reg u la ted f le x ib il ity of exch ange r a te s . But

in the ab sen ce of lo g -r o llin g , m a jo r ity co n sen t as p r e sc r ib e d by K eynes

to the d ep rec ia tio n o f a m ajor cu rren cy w ould s c a r c e ly e v er be obtainable ,

' from an in tern a tio n a l body and th er e fo re th e K eynes p lan , excep t fo r i t s ' :

’ sa n c tio n of an, in it ia l d ep rec ia tio n of fiv e p er cen t, w ould in p ra c tice

im p o se as m uch r ig id ity of exchange ra te s as w ould the app arently l e s s

e la s t ic W hite p la n . On the seco n d q u estion , both adm itted a c e r ta in

am ount o f exchange co n tro l, e sp e c ia lly w ith r e sp e c t to ca p ita l tr a n s fe r s .

By c re a tin g an add ition al an d f le x ib le supp ly of . / 'a Ail d 't in tern a tio n a lly liq u id m ea n s o f p aym en ts, both p lan s ' . '

w ould prb y id e n eed ed sa feg u a rd s aga in st e ith e r World •or Id ea l d efla tion s o r ig ih a tin g in n ation a l b a lan ce of paym en t d if f ic u lt ie s . In doing so , h ow ever, both plans

V , w ould fttrnish a d d ition a l tin d er for w d rld -w id e in f la - ■ . t i o n . l

A broad com parison: of th es e two p lans w ill g iye us an in s ig h t into the .

p r e se n t day in tern a tio n a l m o n eta ry institution.a n d it i s th is Sam e a p p re-

hens ion o f inducing a pos s ib le in fla tion by the s e. p lans that the Fund fac e s

today. ,:■■■ V . : ' ■■ ; . . ■' ; ̂ ';n: '''i': ' ■V' i

W hile a grea t m an y fin a n e ia l w ie a id s and e co n o m is ts raliied. to

th ese p la n s. P r o f . J. H. W illia m s of H arvard U n iy ers ity d ep reca ted i. •

the ten d en cy at o y e r - a l l o rgan iza tion , and su g g e s te d w hat is known as

the "Key c o u n tr ie s approach" to the p ro b lem o f m o n eta ry reco n stru c tio n . ^

' • , * Ibid. , p. lo -l. : v, '•

2 John H. W illia m s , "C urrency S tab iliza tion ; th e K eynes and ' W hite P la n s , " F o re ig n A ffa irs ,. July 1943, "C urrency S ta b ilisa tio n ; [A m er-' :

ica n and B r itish Attitudes',', F o re ig n A ffa ir s , Jan u ary 1944.

He poin ted out the n eed for b a sic d o lla r - s te r lin g s ta b iliza tio n and u rged

a gradual and p r o g r e s s iv e d evelop m en t from that point on. ...

\ T h e/p u b lic and o ff ic ia l d ebates on th ese p lan s .paved the w ay to .

B retton W oods„ On A p ril 21 , 1944, a jo in t S tatem en t by ex p erts on th e

. E sta b lish m en t of an IM F w as p u b lish ed . Subsequently^ the U nited N ation s

at B retton W oods, w ith the Joint S ta tem en t as ground w ork , a g reed to

s e t up an Ih tern ation al M onetary Fund, and a lsb the In tern ation al Bank ;

for R ecb n stru ctio n and D evelop m en t.

. By m ain ta in in g the fo r m :of W h ite1 s p lan , it a lso 'in co rp o ra ted the

Sonn.der e lem en ts of g rea ter f le x ib ility in m p n e ta r y p a r it ie s , a g rea ter

em p h a sis on the r e s p o n s ib il it ie s of th o se co u n tr ies w ith ch ron ic su rp lu s

in th e ir b alan ce o f p a y m en ts , and a g r ea ter exchange co n tro l during th e

tr a n s it io n p er io d fo liow ln g the w a r . T he plan fo r IM F, as it f in a lly

em erg ed , is th er e fo re c lo s e r to W hite!s p lan than K e y n e s ’. .

A w ord about IBRD* The sh a ttered econ om y o f the p o s t-w a r p ■

w orld n eed ed ca p ita l on a la r g e s c a le for econ om ic d eve lop m en t for .

u n d erd eveloped eco n o m ies o f . A sia and A fr ica and for reh a b ilita tio n o f

E urope. The IBRD function of len d in g -or .in v estin g ca p ita l on a lo n g -

te r m b a s is fo r p u rp o ses o f econ om ic d evelop m en t is. th e r e fo r e d ifferen t

from that of the IM F, w hich tr a n s fe r s funds to c o r r e c t the tem p o ra ry

m a la d ju stm en ts sh o r t - l iy e d d isequ ili.br ia . A n a r r o w in terp re ta tio n .

o f th is te r m 1 vtem p o ra ry m alad ju stm en t" has been r e s p o n s ib le , as w e

/:: : 2 7sh a ll s e e la te r , fo r the inadequate a c tiv ity of the Fund, Not until 1952

did the Fund, fa c in g a v o lle y of cr it ic ism s: fro m m e m b e r s , l ib e r a liz e its

len d in g p o lic ie s by in trod u cin g the n o v e l sta n d -b y c r e d it a rra n g em en ts„

A SYNTHESIS f : TH E INTERNATIONAL M ONETARY FUND

an;

and.the tw enty y e a r s of m o n eta ry tro u b les hetw eeh the tw o w a rs s u g g e s t

th e n e e d for a n in tern ation a l m o n eta ry sy s te m that w ould p rovid e for

u n r e s tr ic te d w orld tra d e . The r e s t of th is th e s is w ill co v er what the

Fund w as intended to a cco m p lish , and r ev ie w its operations, s in c e its

: A r t ic le 1 Of th e IM F en u m era tes the m ain p u rp o ses o f the Fund.

T W a r e : ‘ V , . -

1. To p rom ote in tern a tio n a l m o n eta ry co o p era tio n through a

on

2 . T o fa c ilita te the exp an sion and balanced grow th o f in te r

n ation al tra d e , aud io con tribu te th ereb y to the prom otion

: and m ain ten an ce o f h igh l e v e l s of em p loym en t and r ea l

: ■■■'' -/ - " ' ; M

; • in c o m e and to the d eve lop m en t of the p ro d u ctiv e r e so u r c e s

; o f .all m e m b er s a s p r im a ry o b jec tiv e s o f eco n o m ic p o licy ,

3» To p rom ote exchange s ta b ility , to m a in ta in o r d e r ly exchange

V: : a rran gem en ts am ong m e m b ers and to avoid co m p etitiv e

exchange d ep rec ia tio n . - ,

: 4„- To a s s i s t in the e sta b lish m en t of a m u lt ila te r a ! sy ste m of

paym en ts in r e sp e c t o f cu rren t tr a n sa c tio n s betw een m e m

b ers and in the e lim in a tio n of fo re ig n exch ange r e s tr ic t io n s

w hich h am p er the grow th of w orld trade,, '

5» To give con fid en ce to m e m b ers by m ak ing the Fund's r e s o u r c e s

a'yailable to th em under adequate Safegu ard s, thus p rov id in g »

, m e m b e r s w ith opportuhity to c o r r e c t m a la d ju stm en ts iii

m e m b e r s ' balan ce of paym en ts w ithout r e so r tin g to m e a su r e s

- ' d e s tr u c tiv e o f n ation a l or in tern ation a l p r o sp e r ity .

6. In a cco rd a n ce w ith the aboye, .to sh o r te n .th e duration and

le s s e n the d eg ree o f d iseq u ilib r iu m in the in tern ation a l b a l-

v ;;'',v ’ ; ,a n ces o f p aym en ts o f ;th e:m em bers, ; ; v ;■. : ■■ % g.'-

As a ll the d e c is io n s Of the: Fund; a r e to be guided by A r tic le I

(above quoted)-, w e m a y s e e how the Fund has ta ck led the • s e v e r a l c r is e s

' it en coun tered so fa r . : . • : ’ ' -n .

O b jectives one and two c a ll fo r a w e ll - Ordered m o n eta ry se t-u p

to; fa c ilita te trad e and contribu te to the grow th o f p r o sp e r ity . The th ird

p u rp ose is the m o s t im p ortan t a im o f the Fund as'’ind eed of any form o f

in tern ation a l m o n eta ry orgahi% atioh. P o in t four su p p lem en ts th is by

em p h a siz in g the need for c rea tin g a tru ly in tern ation a l s y s te m of p aym en ts

and abandoning the y a r io u s ty p es of r e s tr ic t io n s w hich grew: up during

the th ir t ie s . P o in t fiy e is an e lab ora tion on the su b ject o f point th r e e .

The e lem en t of con fid en ce is v e r y im p ortant. C r ise s of con fid en ce lea d

' to p an icky flig h ts of c a p ita l, a s th ey did in 1949 in E ngland, arid thus e ith er

to cu rren cy 'b reak d ow n s oh to h igb ly r e s tr ic t iv e m e a s u r e s o f co n tro l. ; An

adequate a c c e s s to, liq u id .m ean s of p aym en t is one of the b e s t Safe guards

a g a in st p an ic . It sh ou l d h o w ev er be noted h ere that a c c e s s to its liqu id

r e s o u r c e s is provided;iri o rd er to fa c ilita te the adoption of c o r r e c t iv e f

; mehSure:S :tq':cure fh e 'illS ^ a W /n o t,ns..a p erm anent so lu tio n . f:

O rgan ization and S tru c tu r e : ■ . i

The .m iem bership o f the IM F, at p r e se n t 66.,^ em b ra ces p r a c t ic a lly ■

a ll of the co u n tr ies of the w orld excep t th o se of the co m m u n ist b loc . As

of A p ril 30, 1:958, U. S. $9 ,088 m illio n in gold and natiorial c u r r e n c ie s bad .

been paid to- the Fund by its m e m b er s t o ‘p rov id e r e s b u r c e s to be u sed to

c a r r y out its o b je c tiv e s . The p aym en ts have ranged from $2 ,750 m ill io n

by the United S ta te s .to $500 ,000 by P an am a. : .

y.:;. : : I : 1 W ith the m e r g e r ;.pf/E gypt. ;arid: S y r ia IntAh: s in g le ::State,.th e,-; - United A rab R epublic becam e- a S in g le m e m b er of th e . Fund w ith a -single ::

All; the p ow ers o f the Fund a re vested , in a B oard o f G overnors

c o n s is t in g o f one govern or and one a ltern a te appointed by each m em b er

country,- M any co u n tr ie s haye nam ed th e ir M in is te rs o f F inance o r the

G overnors' of their' C en tra l Banks to the B oard of G o v ern o rs , The B oard

o f G overn ors m e e ts ann ually and th is m e e tin g co n stitu te s an o cca s ib n

not only for conducting the b u sin ess o f the Fund, but a lso fo r in fo rm a l :

d isc u ss io n s am ong m e m b er s o n p tk e f m atters> ; ̂ : "

: The B oard of G overn ors has; d e leg a ted its p ow ers to the E x ecu

tiv e D ir e c to r s , ex cep t in re la tio n to c er ta in m a tter s r eS ery ed to the

B oard of G overnors under the A r t ic le s of A g reem en t, The E xecu tive V,

Board, c o n s is t s at p r e se n t o f 17 E x ecu tiv e D ir e c to r s , E ach of the f iv e

co u n tr ies w ith the la r g e s t q u o t a s (U nited S ta te s , U nited K ingdom , C hina,

F ra n ce , and India) appoints one E x ecu tiv e D ir ec to r , The other E x ecu

tiv e D ir e c to r s of the Fund a re e le c te d by m em b ers for' a tw o -y e a r te r m ,

each D ir e c to r ■representing a m em b er country , o r group o f c o u n tr ie s ,

E ach E x ecu tiv e D ir ec to r appoints an A ltern ate from h is own country, V

or from , one o f the oth er co u n tr ie s that he r e p r e se n ts . T hus, the m e m

b ersh ip o f the E x ecu tive B oard a s s u r e s an adequate v o ic e to; a ll reg io n s

and s tr engthens the p redom in ant ten d en cy to give fu ll w eigh t to in ter - .

n ation al c o n s id e r a t io n s , . \ i ; v

The E x ecu tive B oard has pow er to give approyal in a ll m a tter s

req u ir in g Fund C tinsent,' e x c e p t fo r the p ow ers r e s e r v e d to the B oard of

G overno rs „ T h u s, it m a y coucur w ith or ob ject to ch an ges prop os e d b y

m em bers: in the p ar v a lu es o f th e ir c u r r e n c ie s . It m a y approve the v

im p o sitio n by m e m b er s o f r e s tr ic t io n s p n paym en ts 'and tr a n s fe r s for

cu rren t in tern a tio n a l tr a n sa c t io n s , d isc r im in a to ry cu rren cy arrangem ents.

; on m ultiple, cu rren cy p r a c t ic e s , w hich are not o th erw ise au th orised u n d er

the Fund A g reem en t, The tra n sa c tio n s by w hich th e r e s o u r c e s of th e

Fund are m a d e a v a ila b le to it s m e m b er s a r e under th e ju r isd ic t io n o f

i the S x e c u tiv e Board, The B oard fu n ction s in continuous s e s s ion , so that

the b u s in e s s of the Fund can be c a r r ie d on w ith ou t■ interruption,, T h e

v iew s of the Fund are cO nyeyed to m e m b e r s or o th er in tern ation a l a g e u c ie

a fter d is c u s s io n and approved by the E x ecu tiv e B oard headed by the

M anaging D ir e c to r , who d ir e c ts th e d a y -to -d a y w o rk a ls o , ‘ ;

P A R T I I I

PROGRESS O F .THE; FUHD.

Y ,. v ' '

. ' . ' ;' ' ' .: ■;■• THE EARLY^ySARS OF,CRISIS

TiioTagh ''estaM ished. in h a ste" , as R. G» H aw trey s a y s »- the IM F

in its e a r ly y ea rs had to w r e s t le w ith trem en d ou s iDurdens and ravages

Iby- ^aa;*; • In 1 946> inRavannah., the B oard of G overn ors had to

d ec id e the b a s ic c h a r a c te r of th is in stitu tio n - - w hether it w a s to : be p o l i t

ic a l ox te c h n ic a l. The dan ger of p o lit ic a l in tru sion is p r e se n t with, the

Fund w h ose co n cern is p r im a r ily w ith m onetary' p o lic y , a je a lo u s ly

guarded p r e se r v e o f n ational so v er e ig n ty . They d ec id ed that the object

of econ om ic s ta b ility and p e a c e cou ld .be a ch iev ed by m ak in g the Fund: a

tech n ica l in stitu tio n w hich w ould n ev er qu estion d o m estic p o l ic ie s .

T he s y s te m em b od ied in the B retton W oods a g reem en t o f 1944

see k s to a ch iev e in tern ation a l econ om ic and fin a n c ia l eq u ilib riu m by ,

in te r n a ip r ic e and in co m e adjustm ent (as under the gold standard) c u sh

io n ed som ew h at by the ju d ic io u s u s e Of in tern a tio h a l c r e d it , hi addition^

p r o v is io n is m ad e for-ad justm en t of exch an ge ra tio s in c a s e s o f "funda-.

m en ta l d iseq u ilib r iu m , b The k ey c h a r a c te r is t ic o f any s y s te m o f .

1 R. G» H aw trey, B retton W oods for B etter Or W o rse , (lionddh, - ,Eongmans:,,'.Green A.,Goltbil^46).: p. ' 1, r.':

in tern ation a l p aym en ts is the r e la t iv e w eigh t th at it g iv es to adjustm ent

and, credito / . .■* ' " ■

Tde y ea rs o f d e p r e ss io n and the inam ert'Se,influence of K eynes

m ade B rita in d eterm in ed to avoid the re s to r a tio n of a s tra ig h t jack et of

the gold .-standard type that w ould expos e the d b m estic econ om y to the

.contam ination o f a w orld slum p . On th e ir s id e , the A m er ica n n eg o tia to rs

c ited the y e a rs of co m p etit iv e devaluation; and e x ch a n g e : co n tro l that f o l

low ed the' b reak -u p o f the gold standard as a w arning of the danger of

abandoning a ll ex tern a l d is c ip lin e . The ag reem en t a ffirm ed the p r in c ip le

of exchange, s ta b ility , but it a lso m ad e s p e c if ic p r o v is io n for p er io d ic

exchange ad ju stm en ts to C orrect a ''fundam ental d is e q u ilib r iu m .l' .

''\:.Ihthe follow ing;,pages an a ttem p t,is m ade to s e e how .su c ce ssfu l

the Fund has been in r ec o n c ilin g independent domestic p o lic ie s and s ta b le

exchange r a te s . To w hat extent it h a s p rom oted exchange s ta b ility by

m itig a tin g the b a lan ce o f p a y m en ts d if f ic u lt ie s o f the d iff er ent nations , -

and the d eg ree to w hich v a r iou s r e s tr ic t iv e d e v ic e s have been red uced

or e lim in a ted w ill a lso be c o n s id e re d , : ‘ ‘ V, -

In tern ation al E con om ic S itu a tion ; ■ ■ ‘ >

T he ap p rop ria te Stapling: poin t fo r a m o r e d e ta iled exam in ation

of its p r o g r e s s s in c e its e sta b lish m en t m ay be a b r ie f review^ o f th e ; in te r

national econ om ic situ a tion ih t h e beginn ing y e a r s , of th e Fund,

35

By tlie en

36

The aim o f E.uropea.n c o u n tr ie s3 h o w ev er , w as not only to r e s to r e ,

p rew ar le v e ls o f produ ction , but to continue to in c r e a se output fu rther

and to in c r e a se i t at a fa s te r rate than in the in ter w ar p er io d . . A ll

g o y em m en ts in E urope, in the e a st through cen tra l eco n o m ic planning,

in the w e st through n a tio n a liza tio n o f the h a s ic ih d u str ie s or through

g r e a te f Control Of the public econ om y, a im ed at in c r e a s in g in d u str ia l

and a g r icu ltu ra l output, . T h is ‘was: thou n e c e s s a r y to r e s to r e ex tern a l ;

ba lan ce , to a ch iey e h ig h er standar.ds: o f liv lh g or sim.p.ly to. k eep in s tep

‘w ith oth er countries-. The: r e su lt w as a h eayy dem and for in v estm en t ' 1

g o o d s. U n less h eld back by r e s tr ic t iv e p o l ic ie s , th e se d em an ds w e r e '

bound to c a ll for fu rth er ahd su b sta h tla l r i s e s in Output.-

A p ro p er ly function ing p e a c e tim e econ om y in E urope could be

r es to r ed only by r e -e s ta b lish in g the trad in g re la tio n sh ip s both w ithin

Europe and w ith .th e ou tsid e w orld on w hich the n e c e s s a r y flow of.irnports

:4epehde!h;,vi'::'Btit;sinde' the w ar th ere w e r e S om e ra d ica l and ir r e y e r s ib le

s'tructural changes in E urope, l ik e the. d iy is ion of. E urope into E a st and

West^ . E a ster n E urope by its con cen tra tion of the fo re ig n trad e in State _

‘■iri_ohop;blie'S..>h ad m o re d irec t m ean s of en fo rc in g a b a la n ce in the fo re ig n

tr a n sa c tio n s„ E or E a stern E urope a b a lan ce of paym en ts prob lem lik e _

the ''dollar prob lem " of W estern E urope cOuld S c a r c e ly e x is t . T his m ad e

i t d ifficu lt to r ec o n str u c t a fr e e and m u ltila te r a l p a ttern of w orld trade

and paym ent's. H ow ever, in fla tio n a ry con d ition s in E uropean •countries

: . V " ; / , : Vv : ■' ■ . a .? / - . /.

as e lse w h e r e iB. the e a r ly p o s t-w a r p er io d undoubtedly in flu en ced a d v e r se ly

the le v e l o f th e ir im p o rts and;exports- and tend ed to d is to r t the pattern o f ,

th e ir ex tern a l trad e as w e ll as th e ir d o m estic production and in v estm en t, ' >v

So d esp ite a ll the p h y sica l upheaval of the Second W orld W ar, the :

ta sk of rev iy in g 'p r oduction and trad e a fter the w ar proved, to he in fin ite ly

e a s ie r than that of resto r in g ' a y iah le In tern ation al h a lan ce . ’ In' Southeast

•Asia the r e c o v e r y p er io d w as ra th er p ro lon ged , p a r tly b eea u se o f the r e la

t iv e ly s lo w r e v iv a l pf a g r icu ltu re arid p a r tly h ecattse o f th e great com p lex

o f p ro h iem s w h ich accom p an ied the tr a n s it io n to ind ep endence in m any Of

the c o u n tr ie s in th e a rea ,. The B retton W oods in s titu tio n s , d esp ite the .

c a re fu l forethought that w ent into th em , did not reco g n ize the fu ll s ig n if i

cance or the scop e o f the p rob lem o f IhternatioH al im h a la n ce . t . ̂ '

T h u s, th e p a ttern of in tern a tio n a l trad e and paym en ts e m erg in g in •:

the cp u rse o f The e a r ly p o s t-w a r y ea rs rep re sen ted a re spons e to tr e m e n -

dodS 'sh ifts in the w orld d istr ib u tion o f in co m e , p rod u ctive cap acity , and , ,

■ -''em iharige a s s e t s r e su lt in g d ir e c t ly o r In d irec tly from the w ain ; ; " . . •

. M ore than a. y ea r a fter 'th e 'e s ta b lish m en t o f the Fund,th e w orld i s -confronted w ith s er io u s ly unbalanped-1 rade > v ;

■. " i w ith an u rgen t p rob lem of fin an cin g in ternatiP n al p a y m en ts , a■ r and w ith s e v e r e sh o rta g es o f goods for reco n stru c tio n and , ,

d '' ;■■■/: eyen fo r m a in ta in in g m in im u m consnm ption, stan d ard s fn ■ 'a, m any c o u n tr ie s . 2 . a-a. ";a ■ . • ; \ - a - : : : 1

'V 1 U nited N a tio n s , W orld E co n o m ic - S u rv ey , 1956, D ept. :,of E cpnd- ;■ m ic s .a n d S o c ia l A ffa irs (New York, 1959), p. 17.

̂ In tern ation al M onetary Fund, Annual R ep o rt, 1947, (W ashington,' ' D . 1947), p. '■Zi ' ^;a: a d F d 'p a v /v " X a a J n " 'V

38

R ecogn iz in g the m agnitude of the ta sk b efore th em , the E x ecu tive d i r e c

to r s o f the Fund in th e ir f ir s t Annual R ep ort, in stea d of S tre ss in g its

im p o rta n ce , go on to com m en t th a t :

„ o . o the Fund cannot so lv e th e se p r o b le m s , but the .; . ro le w hich the Fund w ill be ab le to p lay in the

future m u st inevitab ly , be d eterm in ed in la r ge m e a s u re by the w ay in w hich th e se p ro b lem s a re so lv ed . 1

L arge p a r ts of th.e w orld w ere s t i l l in tu rm o il. C onsum ption w a s

h eld co n sid era h ly below the p rew ar le v e l . T h ere w as a la ck of p ro d u c

t iv e r e so u r c e s for m an y urgent ta sk s and a S c a r c ity o f la b o r in E urope.

Added to th is w as th e loss: o f G erm any as a source- of su p p ly . B efore th e

w ar, 70 p er cen t o f G erm an y’s exp orts c o n s is t in g o f co a l and f e r t i l iz e r s ,

m a ch in ery and equipm ent (so e s s e n t ia l for recoh S tru ction ), w ent to

E urope. Ad S. r e s u lt , the ta sk of r eco n etru ctio n b ecam e v e r y d ifficu lt .

K or w as th e .in tern ation a l p o lit ic a l en viron m en t cond u cive to econ om ic

s ta b ility and p r o g r e s s , , ‘ ■

A lthough the to ta l vo lum e o f w orld exp orts in 1946 w as only about

15 p er cen t below th e 1938 le v e l , the p attern of w orld trad e w a s r a d ic a lly

changed. B efd re the w ar , the c o u n tr ie s Of Eurbpe and th e F ar EaSt

accou nted for th e la r g e r p art of w o r ld trad e and S erv iee tr a n sa c tio n s .

B efo re the w a r , G erm any and Japan, who to g e th er accou n ted for 13. 5

pei” cen t of the w o r ld 's ex p o r ts , su p p lied in 1946 on ly one p er cent of the

ib i d . , pp. 2 -3 .

to ta l. The E uropean co u n tr ie s engaged, in the w ar, exclu d in g the United

Kingdom and G erm any,, accounted, for 23 p er cen t o f th e to ta l o f w orld

exp orts b efore the w ar . In 1.946 the.se sa m e countries, accou n ted for on ly

11 p e y h a n t, o f w orld exp opt a. .■ The ex p orts o f th ese co u n tr ie s as a group

w e r e 'about 60 p e r cen t b elow the 1938 v o lu m e. ■

The United Kingdom had a p ro b lem .in in tern a tio n a l paym en ts in'

m any r e sp e c ts un ique. The la r g e d ec lin e in h er o y er s e a s ih com e from

s e r v ic e ite m s and the b ig in c r e a se in govern m ent paym en ts o v e r se a s had

red u ced sh a rp ly h er a b ility to pay fo r im p o r ts . A lthough exp orts fro m

th e U nited Kingdom in 1946 w e r e - v ap p rox im ate ly the 19,38. vo lu m e, the

l e v e l Of im p o rts waS 31 p er cen t b e low p rew a r . .

T he d ec lin e in ex p o rts ,w a s m o re s ig n ifica n t in the c a se of the

co u n tr ies of the F a r E a st , it b eing 30 p er cen t below the p rew ar v o lu m e. '

The r e lie v in g fea tu re of a l l th is is that the U nited S ta tes and Canada, who

W ere not d ir e c t ly a ffec te d by d ev a sta fio n , in c r e a se d th e ir exp orts by 90 .

and 45 p er cen t, r e s p e c t iv e ly , above the p rew ar v o lu m e. T he im p orts o f

both w ere 40 p er cen t la r g e r than b e fo re the w ar. The volum e of w orld

trad e in 1947 w as above the p rew a r le v e l , though the p a ttern of trad e

r a d ic a lly d iffered . ' \

. T h ese :changes in the vo lu m e of trad e w ith the r e la t iv e r i s e in -

p r ic e s of goods and s e r v ic e s in flu en ced s ig n ifica n tly th e in tern ation a l

p aym en ts p o s itio n in 1946. The ed ific e o f iiitern a tio n a l paym en ts has

been a ffec ted fay the lo s s of fo re ig n in v e s tm e n ts , w hich for co u n tr ie s

lik e the United Kingdom., F ra n ce , and the N eth erlan d s w as a great so u r c e

o f ea rn in g s . . The r is e o f the fo re ig n exp en d itu res of so m e govern m en ts

lik e the U nited Kingdom and the U nited S ta tes is a new fa c to r in in te r -

national p a y m en ts. In the c a se o f th e U nited K ingdom , the n e c e s s ity of

continuing la r g e govern m ent exp en d itu res abroad accou n ted for th r e e - ,

fourths of the 1946. balan ce of paym en ts d e fic it o f $1 ,600 m illio n , ^

■ . T h is / d isfo rtio h ; in In ternation al p aym en ts by c a u s in g , a ser io u s ■ 1

balance o f paym en ts p rob lem had .ren d ered the ta sk o f r e s to r in g co n v er ti - ‘

b ility m o r e d ifficu lt. D esp ite the gra n ts , c r e d it s , and fo r e ig n aid p ro

v id ed fo r rec o n str u c tio n , the a v a ila b ility o f fo re ig n exch an ge r e c e ip ts

and m o n eta ry reS eryeS a ffec ted the sh a re o f im p orts going to d ifferen t

^parts-of:tho '':wOrld.s, i ■’

A s s is ta n e e from the Fund: . '- ' ; A ' ■ . ; e '

. T h is unbalance in w orld trad e r e f le c te d the ca p a c ity of the W estern

H em isp h ere to produ ce and export and the u rgen t n eed of E urope and th e

E a r .E a st for im p o rts for reco n stru c tio n . The c o n s id e re d opinion of th e

B oard of E x ecu tiv e D ir e c to r s of. the Fund w a s that it w as a m ista k e to

fo rce a n e a r ly sh ift in the d ir e c t io n of w o r ld tra d e . The p ro b lem w as •

: A ll th e se fig u res w ith thos e in the r e s t of the t h e s is are takenfr o m • the s t a t is t ic a l d ocu m en ts of the In tern ation a l. M onetary Fund and a lso : fro m the S ta t is t ic a l O ffice Of th e U nited N ations.

rath er to fin ance the flow of goods to th o se a r e a s to enable th em to .

rea td re production and exp orts and .gradually to •shift the d irectio n of • '

trad e to the pattern su ita b le to the p er io d a fter tr a n s it io n . ?

T his waS d on e, as is . ev ident from the grants by goyernrnentS

through. UiTRRA of about $7 . 7 b illio n f rom the end o f th e w ar to the. m id d le

of 1947. In the sa m e p e r io d ,a g g r eg a te c r e d its am ounted to ap p rox im ate ly

$13 b il l io n -- th e U nited S ta tes being a m a jo r contribu tor in both •cases.

The m o n eta ry re s e r y e s o f the r e s t o f the w orld w e r e in su ffic ie n t to m e e t

a su s ta in e d balan ce of paym en ts d e fic it w ith the U nited S ta te s , (In the

f ir s t h a lf o f 1947, th ese , co u n tries u sed $ 2 .3 b illio n o f gold and sh ort -

te r m d o llar a s s e t s to fin an ce im p o r ts fr o m the U nited S ta te s . ) In the

eirC um Stances i t w as through S e lf-h e lp arid in c r e a s in g th e ir prdduction

that the co u n tr ies of E urope and F ar E a st could in t im e p ro v id e the

exports to balan ce th e ir in terriational paym en ts . A h igh le v e l o f trad e

a lso had to be m a in ta in ed . • • : ' ; ■ / .

: V iew ed in th is p ersp e .c tiv e , the rec.om m endation o f the Fund to

i t s m e m b er s to check, in f la tio n , w as t im e ly . It a lso u rg ed th em to r e s to r e

and m ain ta in con fid en ce in th e ir c u r r e n c ie s . As the r e s o u r c e s o f the

Fund and IBRD a re lim ite d and a s the fo r m e r is not in ten d ed to give help

in re co n st ruction , the b e s t it cou ld do: w as to prb vid e tem p o ra ry exch ange

Intern ation al M on etary F u nd ,.op . • e f t . , p-. • 10.

as&istaiiice to its m e m b ers during the tr a n s it io n p e r io d ,1 The ad v ice and ■

a s s is ta n c e o f the Fund in its f ir s t yea r o f op eration w as a co n sid era b le

h elp W \ • " ." .v ; ; ••; . ■ . .:v;. , ;

• As of June 3 0 / 1947, the tota l, am ount of su b scr ip tio n s paid w as

the eQ uiyalent o f $6^535 m illio n , of w hich $1 ,344 m illio n wad paid, in gold

and the e^h ivaleht e f $5 ,190 nnillion w as paid by m e m b ers in th eir own .

c u r r e n c ie s and the rem ain in g $1 m ill io n w as paid in U nited S ta tes d o lla rs

' b y a l l m e m b ers to d efray a d m in istra tiv e c o s t s . ,

The d eterm in ation of a s a t is fa c to r y p attern of exchange ra tes is

a d if f ic u lt p rob lem at any tim e and m o r e so in a d iso rg a n ized and d evas -

ta ted w orld econtim y. H ow ever,, th is w a s a m a jo r ta sk o f the Fund in its

f ir s t y e a r . The e sta b lish m en t of in it ia l p ar v a lu es by th e Fund on D e c e m

ber 1.8, 1946 s e t at r e s t the fe a r s of m an y m em b ers of co m p etit iv e (e x

change) devaluation . . H en ce, the Fund A greem en t la y s down

■ . . . . that par v a lu e s of the c u r r e n c ie s of the m em b ersa re to be e s ta b lish e d in th e f i r s t in s ta n ce by a g r e e - . ■ m en t w ith the Fund.: T h e r e a fte r , th ey m a y b e -changed .on ly a fter co n su lta tion w ith the Fund and in accord an ce

' • , w ith the Fund A g reem en t. 1 '

A lbng w ith th e added stren gth of the national e co n o m ies and th e grow th ■ f

o f w orld tra d e , th is step forw ard of the Fund m igh t help fu lf ill to a co n -

. s id e r a b le extent th e o b jec tiv e s o f th is in stitu tio n . . .

1 Ib id , , p . 26 . '■ .. ■ v y ;' : ; . v

4 3 :

■ As o f June 30, 1947, the Fund a ccep ted p a r it ie s p rop oseti fo r 36

c u r r e n c ie s . "No c r it ic is m s or seco n d thoughts su g g e st th e m se lv e s e ■,

reg a rd in g ftie dirigiiial d e c ls io n to a ccep t the p a r it ie s n o tified by m e m - . ■ ■

.her'si b efore the Fund s ta r ted to: op.era-te. But th e in fla tio n a ry f is c a l • v

■ and c red it p o lic ie s adopted by the m e m b er s th rea ten ed to im p a ir and

• un derm ine the p a r it ie s o f th e c u r r e n c ie s o f th es e c o u n tr ie s . In th is ;

con text, by c a llin g the atten tion o f th e s e m e m b ers to the n eed for ta ck lin g

th is p ro b lem e ffe c t iv e ly , the Fund did a brave and t im e ly a ct.

The Fund a lso req u ested the m e m b er s to co o p era te w ith it b y *. :

e lim in a tin g ex tern a l gold tra n sa c tio n s at p rem iu m p r ic e s w hich g e n e ra lly

in v o lv e a lo s s o f gold from m o n eta ry r e s e r v e s and w hich w ould m ake

fu tile the a ttem p ts to. e s ta b lish exch auge s ta b ility .

E xchange R e str ic t io n s and M ultip le G urren cy P r a c t ic e s :

The Fund's reco rd is . . . . vu ln erab le on theis s u e o f m u ltip le c u r r e n c y p ifactiqeb vdth d ifferen

: t ia l r a te s o f ex ch a n g e ,. . . . . . . . M ultiple c u r r e n c yp r a c t ic e s not on ly c a ll into qu estion the o ff ic ia l p a r it ie s r eco g n ized by th e Fund; th ey a re a ls o lea d in g to an in c r e a s in g -d is to r tio n o f the ch a n n els of w orld tra d e , a d istortion : w hich m a in ly h a rm s

, the co u n tr ie s w hich continue to shun th ese p r a c - ' t ic e s . 2 . .

"The Bretton W oods T w ins," The E co n o m ist, Sept. 25, 1948,p. bob. ; . ' - - . Vy y ;

; 2 B oc. c it . '

H ow ever, in a p er io d of tr a n s it io n , a la ck o f d o c tr in a ire approach

‘ is ,;

cu rren t tra n sa c tio n s in .any a rea w ithout d isc r im in a tio n . The w id er u se

of s te r lin g w hich th is d evelop m en t m ad e p o s s ib le m ean t in p r a c tic e th at

a v e r y , la r ge part of the trad e ° f the world, w as conducted in te r m s of .

tr a n sfe ra b le c u r r e n c ie s , p a r tic u la r ly the U nited S ta tes d o lla r and sterlingV

E x p ressin g , sa tis fa c tio n s;fh e-R ep o rt •says ' ,

The ohjectiw e o f r e s to r in g a S y s te m o f m u lt i- la te r a l p a y m en ts , under-w hich th e p r o ceed s o f

;■ exp orts to any country can be u se d to pay fo r im -- . p o rts from any oth er coun try , is thus n e a r er

- ‘ : ; a ch iey em en t. 1 ’ - ■ ; p vV';. v'- z- y :

No le s s im p ortan t w as the d ev e lo p m en t o f the p ro p o sed In ter

n ation a l T rad e O rganization . to p rov id e sa feg u a rd s a g a in st d ir e c t trad e

c o n tr o ls . The ch a rter o f TTO p ro v id es fo r c lo s e co n su lta tio n betw een the

Fund and i t s e l f on a ll balance o f p aym ents and m o n eta ry r e s e r v e p rob

le m s , R ep eated ly the R eport sa y s that th e r e s tr ic t io n is t p o lic ie s adopted

during the tr a n s it io n p er io d are to be ended fo llow in g the term in a tio n of

th is p e r io d . The Fund a is o h a s p ro v id ed •m achinery for coord ination and

coop era tion am ong n ation s which, is in d isp en sa b le fo r p r o g r e s s . .

To exp atia te a t Snch length on th e d eta ils p f o p era tio n s during the

f ir s t y ea r haS been found n e c e s s a r y b eca u se o f the m agn itud e of the ta sk

in v o lv ed and th e headw ay m ad e by the ■Fund through th is chaotic s itn a tio n

it en cou ntered . H e re a fter , h o w ev er , the p a r ticu la r is s u e s that the Fund

so lv ed or has been in stru m en ta l in so lv in g w il l be d is c u s se d .

One o f the b a sic p u rp o ses of the -Fund is "to prom ote exchange

sta b ility , n But th is im p lie s that w hen ad ju stm ents in. exch ange ra tes a re

n e c e s s a r y th ey should be m ad e though, m ad e in an o r d e r ly m a n n er. T h u s ,

the R eport of the Fund fp r the yea r 1.948 draws: a co n tra st betw een s ta b i l- :

ity and r ig id ity . On the .question o f the v a lid ity of the exchange r a te s ,

the Fund r e ite r a te d the how fa m ilia r point of v ie w that so lo n g as an

exchange ra te did not ham p er a co u n try 's exp orts th er e w a s l it t le to be •

" sa id in d istu rb ed w orld con d ition s for a lte r in g it:.; Thd R eport■addi, h o w

e v er , "that in so m e co u n tr ie s the exch ange rate is b eco m in g a re s tr a in in g

factor, on exp orts and'that it is adding to the d ifficu lty o f earn in g con v er -

f i l i e c h r f e n c ie s , "^ H ow ever, ah exch an ge ra te •adjustm ent inulerda&eh

by a country su ffer in g from in fla tion m igh t tem p o ra r ily c o r r e c t a p r ic e

re la tion sh ip w hich had begun to h am per e x p o r ts . • But w ithout e ffe c t iv e

a n ti-in fla tio n a ry m e a s u r e s , the b en efits o f the ad ju stm ent w ould soon

evap orate . A lthough the Fund is n o te n t it le d to p ro p o se a change in the •