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

NAC Files, Lot 60D137

Minutes of Meeting (No. 125) of the National Advisory Council, Washington, May 18, 1949

Washington, May 18, 1949

confidential

[Here follow list of persons present (26) and discussion of a prior agenda item.]

2. Policy with Regard to Drawings on the International Monetary Fund

Mr. Glendinning¹ pointed out that a year had elapsed since the Council had reviewed overall policy with respect to drawings on the International Monetary Fund. To date some $700 million of drawings had occurred and a number of countries had drawn up to 25 percent of their quotas. It was anticipated that a number of the latter countries were likely to request further drawings and it was felt advisable by the United States Executive Director and the Staff for the Council to review the statement of policy. The proposed action was unanimously agreed to by the Staff and was presented in the form of an amendment to last year’s action (NAC Document No. 827²).

Mr. Southard³ observed that this action would not be welcome in the Fund. One or two directors might support it wholeheartedly and a few more might give it lukewarm support but the rest, including the British, would oppose it. The second point he wished to make was that the action was not self-enforcing. The action involved a set of criteria which the United States Executive Director could insist upon and endeavor to have the Fund Staff apply in order to avoid being pushed step by step in the next twelve months into a series of drawings on the Fund, each one seeming to be justified on general terms, much as had happened during the last twelve months. He inquired whether there would be any objection to his making known the Council, action in whole or in part to the Fund.

The Chairman⁴ thought it was essential to make it known in whole to the Fund. If the United States did not take a firm stand now, it was likely to be in an embarrassing position in a few years when the International Monetary Fund’s dollar funds would be exhausted. Positive action was necessary in order to prevent the Fund’s resources being entirely dissipated. Mr. Szymczak⁵ added that there would be an advantage in having the United States Executive Director make known the overall standards we would like to have incorporated in Fund policy, so that it would permit the United States Executive Director to cast a negative vote when appropriate. Mr. Knapp suggested that paragraph 4 of the action, concerning the desirability in appropriate instances of obtaining undertakings to repay drawings from the Fund within a specified period of time, should not be included in the material made available to the Fund. Mr. Southard agreed and said that this provision would be used for bargaining purposes and that he was concerned with making known the first three paragraphs of the action concerning the general criteria governing drawings on the Fund. The fifth paragraph relating to ERP countries had already been accepted by the Fund and would create no problem so long as ECA is in existence. He added that some cases were coming up which would make it highly desirable to get some discussion of this matter in the Fund without reference to any particular country.

Mr. Thorp requested that the Council be informed by the Executive Director when the matter was considered in the Fund since Council agencies would be discussing financial problems with these countries and should know when it became an expressed policy. Mr. Southard said that he would circulate promptly a minute with respect to any meetings on this subject.

The recommended action was approved unanimously without further discussion.

Action: The following action was taken (Action No. 327):

The National Advisory Council amends Action No. 249 of May 5, 1948 to read as follows:

The National Advisory Council advises the United States Executive Director on the Fund that he should be guided by the principles set forth below in acting on applications of members for the purchase of currency from the Fund or in determination of the Fund policy with respect to the use of its resources by the members.

1. The U.S. Executive Director should call to the attention of the Board the interpretation of the Fund concerning the use of its resources made at the request of the U.S. Governor, and those portions of Fund Executive Board Memorandum No. 75, which stress the temporary nature of Fund drawings and the need for assurances of repayment. Consistent with this interpretation and with a view to conserving the resources of the Fund, the use of these resources by any member should be subject to close scrutiny to assure that any purchases conform strictly to the general spirit and purposes of the Fund, as well as to the specific provisions of the Articles of Agreement. Any doubts should be resolved in favor of the Fund rather than in favor of the member, especially in the case of members drawing in excess of 25 percent of their quotas.

2. It is the view of the United States that, quite aside from the obligations under the repurchase provisions of Article 5, Section 7, countries drawing currencies from the Fund have an obligation to repay the Fund within a short period of time. This general obligation, which is particularly significant in the case of countries with planned balances of payments, is implied in the provisions of the Articles of Agreement with respect to the purposes for which the Fund’s resources are to be used. Accordingly, the purchasing member should demonstrate its ability to repurchase its currency within a relatively short period of time.

3. The United States Executive Director should take the view that a country which finds it necessary to ration its dollar resources through the application of exchange restrictions on current transactions or quantitative import controls should be considered prima facie to be suffering from a fundamental disequilibrium. Therefore, the United States Executive Director would not support dollar drawings by members of the Fund exercising such controls except under the following conditions:

(a) A specific determination by the Fund that the par value of the member is appropriate.

(b) A specific determination by the Fund that the circumstances which give rise to the proposed drawing are in fact due to a temporary rather than to a fundamental disequilibrium.

(c) A specific determination by the Fund that the proposed drawing cannot primarily be attributed directly or indirectly to requirements engendered by programs of rehabilitation or development.

(d) A specific determination by the Fund that the member is undertaking all steps essential to assume as soon as possible its full obligations under the Articles of Agreement of the Fund, in particular, maintenance of convertibility, avoidance of restrictions on current payments, and avoidance of discriminatory currency arrangements and multiple currency practices.

4. The United States Executive Director should consider the desirability, in appropriate instances, of the Fund’s obtaining from members determined to be otherwise eligible to draw, undertakings to repay their drawings from the Fund within a specified period of time.

5. In any event, countries participating in the European Recovery Program should not be permitted to purchase dollars from the Fund except under special circumstances.⁶

[Here follows discussion of another subject.]

1. C. Dillon Glendinning, Acting Secretary of the NAC.
2. Supra.
3. Frank A. Southard, Jr. became U.S. Executive Director of the Fund on March 1, 1949 (A. N. Overby resigned effective February 8, 1949). His alternates were Henry J. Tasca and John S. Hooker.
4. The Secretary of the Treasury, John W. Snyder.
5. M. S. Szymczak, Board of Governors, Federal Reserve System.
6. At the meeting of the National Advisory Council on May 26, 1949, the U.S. Executive Director of the Fund (Southard) reported: “… that the action taken by the Council at its preceding meeting (Action No. 327) had been made available in modified form to the Fund Board and to the senior staff of the Fund through the Managing Director. Although the United States Executive Director had not asked that the item be put on the agenda, several other Executive Directors had so requested. Mr. Southard added that it was clear that this was an unpopular document and that the Executive Directors were trying to ascertain the background for its issuance.” (NAC Minutes of Meetings (No. 126), May 26, 1949, Lot 60D137)