Foreign Relations of the United States, 1949, National Security Affairs, Foreign Economic Policy, Volume I

NAC Files, Lot 60D187

Memorandum by the NAC Staff Committee to the National Advisory Council

confidential

[Washington,] May 16, 1949.

NAC Doc. No. 827

Subject: Policy with Regard to Fund Drawings

Problem

The prospect of further requests for substantial drawings on the International Monetary Fund in the near future has raised the issue of the possible depletion of the Fund’s resources before the objectives which the United States sought to realize through the Fund had been attained. It therefore appears appropriate for the Council to review its statement of United States policy with regard to Fund drawings (NAC Action No. 249, May 5, 1948).

Discussion

1. The Fund’s Sales of Currencies

The Fund has up to date sold $708 million (exclusive of $6 million sold against gold) in addition to sterling and Belgian francs aggregating the equivalent of $17 million. At the present time the Fund’s holdings of dollar currency amount to $1,367 million and its gold to $1,424 million. The currency purchases of five countries have reached or exceeded 25 percent of their quotas, while two additional countries have purchased dollars in amounts slightly under 25 percent as shown below.

(In $ Millions)

Country	Quota	Drawings	Percent
Netherlands (dollar drawings)	275	75.3	27.4
		($62.5)	(22.7)
Mexico	90	22.5	25.0
Costa Rica	5	1.25	25.0
Nicaragua	2	.5	25.0
India	400	100	25.0
France	525	125	23.8
U. K.	1,300	300	23.1

In the past the Fund has, with a few exceptions, permitted drawings up to 25 percent of the quota in a 12 month period without serious objection. If this rate were continued, the annual drawings could amount to $1,321 million so that the Fund’s holdings of gold and dollars would be exhausted in about two years. At the present time the ERP countries may not draw dollars from the Fund except under exceptional circumstances. If this limitation is continued in effect, the annual drawings at the 25 percent rate could amount to $632 million. Under these circumstances the Fund holdings of gold and dollars would be exhausted in slightly more than four years. This calculation of the possible rate of exhaustion of the Fund should be qualified in so far as some countries do not at the present time have par values and thus are unable to draw, and also by the possibility that some relatively small amounts of dollars could be repaid by some of the members under the repurchase provisions of the Articles.

There is thus a serious danger that the Fund’s hard currency resources will be exhausted before the transitional period ends, or shortly thereafter so that the Fund will not be in a position to attain the basic objectives of the Articles.

2. Relation of the Fund Drawings to the Objectives of the Fund

Stripped of the formal language of the Articles of Agreement, the Fund’s basic objectives are to use its resources, its legal rights of approval or disapproval, and its consultative functions to:

a) Maintain the convertibility of the currencies of the members for current transactions;

b) Assure the elimination of restrictions on current transactions;

c) Assure that exchange rates will be appropriate for the maintenance of equilibrium in the international accounts of the members; and

d) Assure that the members should adopt unitary nondiscriminatory exchange rate systems.

The Fund’s resources were intended to assist members in overcoming temporary deficits in their balance of payments and were not intended to finance programs of reconstruction, rehabilitation or development, nor to provide means for the settlement of international debts previously incurred. The Fund has on two separate occasions officially stated that its resources were restricted in use to dealing with temporary disequilibria. Thus, in its interpretation of the Articles, made at the request of the United States Governor on September 26, 1946, the Fund declared that its resources were “limited to use in accordance with its purpose to give temporary assistance in financing balances of payments deficits on current account for monetary stabilization operations.” In a statement issued to all members on June 7, 1947 (Executive Board Memorandum No. 75, reproduced in NAC Document No. 441),¹ the Fund declared that its resources “must be used to meet temporary needs—they cannot, for example, be used for large and sustained capital movements, for relief, reconstruction, or to meet indebtedness arising out of the war, or to support overvalued currencies when adequate measures are not being taken to correct the disequilibrium.” The Fund also stated that in engaging in exchange transactions with members, it must consider the propects of repayment to the Fund and the means of correcting a disequilibrium either through adjustment of exchange rates or other measures. Accordingly, the members should be expected to repurchase their currency within a relatively short period of time so that the Fund’s assets will not be depleted. The appropriate repurchase period will of course vary with the particular circumstanes which are regarded as justifying the drawing. In most instances it would seem that a period of 3 to 4 years would be sufficient both to enable a country to take remedial action through adjustment of exchange rates or otherwise and to repay the Fund.

Due to the extreme scarcity of foreign exchange during the first two years of the Fund’s operations, the Fund has frequently permitted countries to withdraw the equivalent of their gold contribution. Moreover, it should be pointed out that, in the past, members have been given the benefit of the doubt in drawings up to 25 percent of their quotas, even though their gold contributions may have been of smaller amount.

The Fund’s action with regard to countries participating in the European Recovery Program recognized that they were in a state of fundamental disequilibrium. Even where the United States is not providing special assistance to foreign countries, the resources of the Fund should not be used for programs of reconstruction or development, or other purposes inconsistent with the objectives of the Fund. In such cases recourse should be had to other methods of financing.

3. Repurchase of Currencies

The Fund’s Articles provide various deterrents to excessive use of the Fund’s resources. The Fund may challenge the members’ representation that the currency requested is needed for purposes consistent with the Articles. The sliding scale of charges was to act as a further deterrent but in the light of the present international financial situation, the incentive to repurchase on this score is not great. Moreover, the Fund’s Articles provided for compulsory repurchase in accordance with a formula based on the Fund’s purchases of the members’ currency and changes in its monetary reserves. Under present conditions of inconvertibility of almost all of the members’ currencies, these repurchase provisions can not be relied upon replenish the Fund’s holdings of gold and dollars at a rate sufficient to prevent the deterioration of the quality of its resources. For these reasons it is necessary for the United States to adopt a policy in the Fund which will assure that future Fund drawings conform strictly to the requirements of the Articles and that the Fund’s assets should, for the most part, be preserved until the end of the transitional period when there is greater prospect for the realization of the objectives which the United States sought in projecting the Fund.

1. Not printed.