IMF History Volume 3 (1945-1965) : Twenty Years of International Monetary Cooperation Volume III: Documents

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1996
• ISBN:
  9781451972511

NONE

PART I
Before Bretton Woods

The Keynes Plan

The first draft of Lord Keynes’ plan for a Clearing Union was circulated within the British Treasury on September 8, 1941. A fourth draft was given to Ministers on February 11, 1942, and this is reproduced in (A) below.

The final draft was issued by the British Government in April 1943 as a White Paper (Cmd. 6437); it is reproduced in (B) below.

(A) Proposals for an International Currency (or Clearing) Union

[February 11, 1942]

1. The proposal is to establish a Currency Union, here designated an International Clearing Union, based on international bank-money, called (let us say) bancor, fixed (but not unalterably) in terms of gold and accepted as the equivalent of gold by the British Commonwealth and the United States and all members of the Union for the purpose of settling international balances. The Central Banks of all member-States (and also of non-members) would keep accounts with the International Clearing Union through which they would be entitled to settle their exchange balances with one another at their par value as defined in terms of bancor. Countries having a favourable balance of payments with the rest of the world as a whole would find themselves in possession of a credit account with the Clearing Union, and those having an unfavourable balance would have a debit account. Measures would be necessary (see below) to prevent the piling up of credit and debit balances without limit, and the system would have failed in the long run if it did not possess sufficient capacity for self-equilibrium to prevent this.

2. The idea underlying such a Currency Union is simple, namely, to generalise the essential principle of banking, as it is exhibited within any closed system. This principle is the necessary equality of credits and debits, of assets and liabilities. If no credits can be removed outside the clearing system but only transferred within it, the Union itself can never be in difficulties. It can with safety make what advances it wishes to any of its members with the assurance that the proceeds can only be transferred to the clearing account of another member. Its problem is solely to see to it that its members keep the rules and that the advances made to each of them are prudent and advisable for the Union as a whole.

3. It is proposed that the Currency Union should be founded by the United States and the United Kingdom, which would be designated founder-States and given a special position. Their representatives, and those of other members, on the Governing Board of the Clearing Bank would be appointed by the Governments of the several member-States; the daily business and technical arrangements being carried out, as at present, by their Central Banks.

4. The plan aims at the substitution of an expansionist, in place of a contractionist, pressure on world trade.

5. It would effect this by allowing to each member-State overdraft facilities of a defined amount, proportionate to the importance of its foreign trade and subject to certain regulative provisions. That is to say, each country is allowed a certain margin of resources and a certain interval of time within which to effect a balance in its economic relations with the rest of the world. These facilities are made possible by the nature of the system itself and do not involve particular indebtedness between one member-State and another. A country is in credit or debit with the Clearing Union as a whole. This means that the overdraft facilities, whilst a relief to some, are not a real burden to others. For credit balances, just like the importation of actual gold, represent those resources which a country voluntarily chooses to leave idle. They represent a potentiality of purchasing power, which it is entitled to use at any time. Meanwhile, the fact that the creditor country is not choosing to employ this purchasing power would not necessarily mean, as it does at present, that it is withdrawn from circulation and exerting a deflationary and contractionist pressure on the whole world including the creditor country itself. No country need be in possession of a credit balance unless it deliberately prefers to sell more than it buys (or lends); no country loses its liquidity or is prevented from employing its credit balance whenever it chooses to do so; and no country suffers injury (but on the contrary) by the fact that the balance, which it does not choose to employ for the time being, is not withdrawn from circulation. In short, the analogy with a national banking system is complete. No depositor in a local bank suffers because the balances, which he leaves idle, are employed to finance the business of someone else. Just as the development of national banking systems served to offset a deflationary pressure which would have prevented otherwise the development of modern industry, so by extending the same principle into the international field we may hope to offset the contractionist pressure which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world.

6. These facilities will be of particular importance as soon as the initial shortages of supply have been overcome. Many countries, including ourselves, will find a difficulty in paying for their imports, and will need time and resources before they can establish a readjustment. The efforts of each of these debtor countries to preserve its own equilibrium, by forcing its exports and by cutting off all imports which are not strictly necessary, will aggravate the problem of all the others. On the other hand, if each feels free from undue pressure, the volume of international exchange will be increased and everyone will find it easier to re-establish equilibrium without injury to the standard of life anywhere. The creditor countries will benefit, hardly less than the debtors, by being given an interval of time in which to adjust their economies, during which they can safely move at their own pace without the result of exercising deflationary pressure on the rest of the world, and, by repercussion, on themselves.

7. Now this can only be accomplished by the countries whoever they may turn out to be, which are for the time being in the creditor position, showing themselves ready to remain so without exercising a pressure towards contraction, pending the establishment of a new equilibrium. The fact that this costs them nothing deserves emphasising. The accumulation of a bancor credit, as compared with an accumulation of gold, does not curtail in the least their capacity or their inducement either to produce or to consume. The substitution of a credit mechanism for hoarding would have repeated in the international field the same miracle already performed in the domestic field of turning a stone into bread.

8. There might be one or two other ways of effecting this temporarily or in part. For example, U.S.A. might redistribute her gold. Or there might be a number of bilateral arrangements having the effect of providing international overdrafts, as for example an agreement by the Federal Reserve Board to accumulate, if necessary, a large sterling balance at the Bank of England.

9. The objection to particular arrangements of this kind is that they are likely to be influenced by extraneous, political reasons and put individual countries into a position of particular obligation towards others; and also that the distribution of the assistance between different countries may not correspond to need and to the actual requirements as they ultimately develop. Moreover, for reasons already given, we are not likely to be specially eligible applicants for bounty of this kind. If, for example, the problem were to be met by a redistribution of America’s gold, it is unlikely that we should get any of it, partly because we should have so lately received assistance under Lend-Lease, partly because the British Commonwealth are the largest producers of gold, which output would be regarded, rightly or wrongly, as ours at one remove.

10. It should be much easier, and surely more satisfactory both for them and for us, to persuade the United States to enter into a general and collective responsibility, applying to all countries alike, that a country finding itself in a creditor position against the rest of the world as a whole should enter into an arrangement not to allow this credit balance so long as it chooses to hold it, to exercise a contractionist pressure against world economy and, by repercussion, against the economy of the creditor country itself. This would give us, and all others, the great assistance of multilateral clearing, whereby (for example) we could offset favourable balances arising out of our exports to Europe against unfavourable balances due to the United States or South America or elsewhere. How, indeed, can we hope to afford to start up trade with Europe (which will be of vast importance to us) during the relief and reconstruction period on any other terms?

11. These advantages of the proposed International Clearing Union are so great that they surely overshadow most reasons of objection on lesser grounds.

12. If, indeed, we lack the productive capacity to maintain our standard of life, then a reduction in this standard is not avoidable. If our wage and price-levels are hopelessly wrong, a change in the rate of exchange is inevitable. But if we possess the productive capacity and the difficulty is the lack of markets as a result of restrictive policies throughout the world, then the remedy lies in expanding opportunities for export by removal of restrictive pressure. There is great force in the contention that, if active employment and ample purchasing power can be sustained in the main centres of world trade, the problem of surpluses and unwanted exports will largely disappear, even though under the most prosperous conditions there may remain some disturbances of trade and unforeseen situations requiring special remedies.

13. There is no obvious means of offering a right measure of inducement to the general expansion of international trade except by a broadly based international organisation.

14. The arrangement by which the members of the Clearing Union start with substantial overdraft facilities in hand will be mainly useful, just as the possession of any kind of reserve is useful, to allow time and method for necessary adjustments and a comfortable safeguard behind which the unforeseen and the unexpected can be faced with equanimity. Obviously, it does not by itself provide any long-term solution against a continuing disequilibrium, for in due course the more improvident and the more impecunious, left to themselves, would have run through their resources. But, if the purpose of the overdraft facilities is mainly to give time for adjustments, we have to make sure, so far as possible, that they will be made. We must have, therefore, some rules and some machinery to provide that equilibrium is restored.

15. Perhaps the most difficult question to determine is how much to decide by rule and how much to leave to discretion. If rule prevails, the liabilities attaching to membership of the system are definite, whilst the responsibilities of central management are reduced to a minimum. On the other hand, liabilities which would require the surrender by legislation of too much of the discretion, normally inherent in a Government, will not be readily undertaken by ourselves or by the United States. If discretion prevails, how far can the ultimate decision be left to the individual members and how far to the central management? If the individual members are too free, indiscipline may result and unwarrantable liberties be taken. But if it is to the central management that the discretions are given, too heavy a weight of responsibility may rest on it, and it may be assuming the exercise of powers which it has not the strength to implement. If rule prevails, the scheme can be made more water-tight theoretically. But if discretion prevails, it may work better in practice. All this is the typical problem of any super-national authority. An earlier draft of this proposal was criticised for leaning too much to the side of rule. In the provisions below the bias is in the other direction. For it may be better not to attempt to settle too much beforehand and to provide that the plan shall be reconsidered after an initial experimental period of (say) five years. Only by collective wisdom and discussion can the right compromise be reached between law and licence.

16. The proposal put forward below differs in one important respect from the pre-war system because it aims at putting some part of the responsibility for adjustment on the creditor country as well as on the debtor. This is an attempt to recover the advantages which were enjoyed in the nineteenth century when a favourable balance in favour of London and Paris, which were the main creditor centres, immediately produced an expansionist pressure in those markets, but which have been lost since New York succeeded to the position of main creditor, the effect of this change being aggravated by the breakdown of international borrowing credit and by the flight of loose funds from one depository to another. The object is that the creditor should not be allowed to remain entirely passive. For if he is, an intolerably heavy task may be laid on the debtor country, which is already for that very reason in the weaker position.

17. The detailed provisions proposed (the particular proportions, &c., suggested being merely tentative as a basis of discussion) are the following:—

(1) The two founder States will agree between themselves the initial values of their own currencies in terms of bancor and the value of bancor in terms of gold; and the initial values of the currencies of other members will be fixed on their joining the system in agreement with them. A member-State may not subsequently alter the value of its currency in terms of bancor without the permission of the Governing Board except under the conditions dealt with below; but during the first five years after the inception of the system the Governing Board shall give special consideration to appeals for adjustments in the exchange-value of a national currency on the ground of unforeseen circumstances.

(2) The amount of the maximum debit balance allowed to any member-State shall be determined by reference to the amount of its foreign trade, and shall be designated its quota. There need be no limit to the amount of a credit balance.

The initial quotas might be fixed by reference to the sum of each country’s exports and imports on the average of (say) the three pre-war years, being either equal or in a determined lesser proportion to this amount, a special assessment being substituted in cases where this formula would be, for any reason, inappropriate. Subsequently, after the elapse of the transitional period, the quotas might be revised annually in accordance with the actual volume of trade in the three preceding years.

(3) A charge of 1 per cent, per annum will be payable to the Reserve Fund of the Clearing Union on the average balance of a member-State, whether credit or debit, in excess of a quarter of its quota; and a further charge of 1 per cent. on the average balance, whether credit or debit, in excess of half its quota. Thus only a country which keeps as nearly as possible in a state of international balance on the average of the year will escape this contribution. These particular charges are, clearly, not essential to the scheme. But if they are found acceptable, they would be valuable inducements towards keeping a level balance, and a significant indication that the System looks on excessive credit balances with as critical an eye as on excessive debit balances, each being, indeed, the inevitable concomitant of the other. Any member-State in debit may, however, borrow from the balances of any member-State in credit on such terms as may be mutually agreed, by which means each would avoid these contributions.

(4)—(a) A member-State may not increase its debit balance by more than a quarter of its quota within a year without the permission of the Governing Board. If its debit balance has exceeded a quarter of its quota on the average of at least a year, it shall be entitled to reduce the value of its currency in terms of bancor, provided that the reduction shall not exceed 5 per cent, within a year without the permission of the Governing Board.

(b) As a condition of allowing a member-State to increase its debit balance in excess of a half of its quota, the Governing Board may require (i) a stated reduction in the value of the member’s currency, if it deems that to be the suitable remedy, (ii) the control of outward capital transactions if not already in force, and (iii) the surrender of a suitable proportion of any separate gold reserve it may hold in reduction of its debit balance.

(c) If a member-State’s debit balance has exceeded three-quarters of its quota on the average of at least a year [or is excessive, as measured by some formula laid down by the Governing Board, in relation to the total debit balances outstanding on the books of the Clearing Union], it may be asked by the Governing Board to take measures to improve its position and, in the event of its failing to reduce its debit balance below the figure in question within two years...

Table of contents

• Cover Page
• Title Page
• Contents
• Part I: Before Bretton Woods
• Part II: Basic Documents
• Part III: Fund Pronouncements
• Part IV: After 1965
• Part V: Publications
• Footnotes