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

NAC Files, Lot 60D137

Memorandum by the NAC Staff Committee to the National Advisory Council

confidential

[Washington,] October 10, 1949.

NAC Doc. No. 897

Subject: Repurchase of Fund Drawings

Problem

The Fund Articles do not provide for the repurchase of drawings from the Fund within any specified period. The Articles provide for the compulsory repurchase of drawings according to a schedule based on changes in the Fund’s holdings of the member’s currency, and on changes in the member’s monetary reserves (gold and convertible currencies). Members may, however, voluntarily repurchase their currencies from the Fund with gold at any time. Under present conditions, the compulsory repurchase requirements will not, in fact, require many members to repurchase, so that drawings from the Fund result in a deterioration of the Fund’s assets without any firm assurance of restoration of the original position within a reasonable time. It has, therefore, been proposed that the Fund should make greater use of agreements to repurchase currencies as a condition to drawings.

Discussion

The compulsory repurchase provision requires the member to repurchase at the end of the fiscal year an amount of its currency equal to one-half of the increase in the Fund’s holdings of its currency within the year, plus one-half of the increase in the member country’s monetary reserves, or minus one-half of the decrease in the member’s monetary reserves in the same period. In making the repurchase, the member must use gold and convertible currencies substantially in proportion to its holdings at the end of the fiscal year. The applicability of this provision is, however, restricted by the requirement that:

“None of the adjustments described in (b) above shall be carried to a point at which

(i) the member’s monetary reserves are below its quota, or

(ii) the Fund’s holdings of its currency are below seventy-five percent of its quota, or

(iii) the Fund’s holdings of any currency required to be used are above seventy-five percent of the quota of the member concerned.”

In practice, these provisions mean (1) that a member whose monetary reserves are less than its quota has no obligation to repurchase; (2) that a country may not in a repurchase use a currency in such amount that the Fund’s holdings of that currency would be increased above 75 percent of the quota of the country whose currency is used in the repurchase; and (3) that the repurchase provisions do not apply in the case of a country whose currency has been drawn to the extent that the Fund’s holdings are below 75 percent of its quota. There is nothing, however, in the Articles to prevent a member from using gold at any time in the repurchase of its own currency from the Fund.

Under present circumstances relatively few members of the Fund would be obligated to repurchase their currencies under Article V, Sec. 7(b), since monetary reserves at the present time are, for most of the members, smaller than their quotas, while the general balance of payments situation with respect to the United States would indicate little prospect that most of the member countries which might require Fund assistance would increase their gold and dollar reserves to the extent that large repurchases would be required. There are, of course, exceptional cases where a country, such as Belgium, which has drawn from the Fund, may be required to repurchase its own currency.

Countries which exercise a firm control over their balances of payments whether as part of a controlled economy or otherwise can readily avoid becoming subject to the Fund’s compulsory repurchase requirements. Thus, they can expend all of their foreign exchange earnings so that their monetary reserves are not permitted to increase, or they may expend their reserves in part and by other devices minimize their repurchase obligations. In any case, it is possible for them in many instances to keep their total reserves below the amount of their quota so that the automatic repurchase provision would be inoperative. Under these circumstances the sale of dollars to such countries will not be followed by a repurchase within the predictable future.

In the case of the sterling area countries, monetary reserves are held in the form of sterling deposits, while the Bank of England holds the bulk of gold and convertible currency needed to meet demands upon the sterling area. These countries generally have monetary reserves, as defined by the Fund’s Agreement, below their quotas and do not have any direct incentive to increase such reserves. Consequently, the sale of dollars to sterling area countries results in an increase of Fund holdings of sterling without great prospects of repurchase of the sterling area currency.

It is, therefore, suggested that the Fund’s practice be supplemented by agreements or undertakings on the part of member countries to repurchase their currencies from the Fund according to some agreed schedule. This repurchase could take place under the voluntary repurchase provision of Article V, Sec. 7(a). The Fund’s Articles do not specifically provide for repurchase agreements although such agreements are implied under special circumstances under Article V, Sec. 4, and Article V, Sec. 8(d). If the member, as a condition to a drawing, undertakes to repurchase its currency under Article V, Sec. 7(a), there can be no question raised about violation of the Fund’s Articles.

No doubt many countries will object to specific repurchase agreements as imposing a more onerous burden upon them than contemplated by the Articles of Agreement. On the other hand, they might be willing to assume such obligations if the alternative is not to be permitted to draw from the Fund. In the few instances in which this problem has arisen previously, the legal difficulties believed to arise from a firm agreement between the Fund and the member covering the time and the amount of repurchase, have been avoided by a voluntary declaration on the part of the member to make the repurchase. It seems probable that the Fund could not impose any more serious sanctions against a member which violated a specific agreement than it could against a member which had failed to carry out its unilateral commitment. In either case, the Fund’s sanctions would be limited to a refusal to permit further drawings, or to expel the member. Accordingly, the precise legal form which the repurchase obligation should take can be determined by experimentation and negotiation within the Fund as specific cases arise. Failure to secure such commitments or agreements, however, will result under present circumstances in a steady, if gradual, deterioration of the Fund’s assets.

The willingness of a country to enter into a specific repurchase agreement or commitment should not be used as a substitute for the criteria set forth in NAC Action No. 327.¹ That is, the Fund should permit a drawing with a special repurchase agreement or commitment only when the other conditions appropriate for a drawing are satisfied. The purpose of a repurchase agreement or commitment is to supplement the automatic repurchase provisions of the Articles of Agreement at a time when the monetary reserves of many member countries are below their quotas and when conditions do not indicate that these reserves will increase quickly. It is logical to impose this additional requirement upon countries which are pursuing policies which prevent or appear likely to prevent the repurchase provisions from operating in the manner intended. The agreement or commitment is necessary to bring these members into some relation of equality with other members whose affairs are so ordered that the repurchase provisions can operate as originally contemplated. The repurchase agreement or commitment should not be interpreted as superseding such provisions of the Articles.

1. Not printed.