Shock Absorbers

Two institutions such as the world has never known before were completed --in plan--last week at Bretton Woods, N.H.

The United Nations Monetary and Financial Conference (see U.S. AT WAR) reached an agreement on an "International Monetary Fund" and on an "International Bank for Reconstruction and Development." The Fund is simply an $8.8 billion pot into which each member nation shoves a stack of its own chips. (Since there are not enough gold chips to go around, each player in international trade--unlike poker--has to use some of his own chips, valuable only in his own home.) The purpose of the pot is to enable any player, who temporarily needs the chips of an other, to shove in more of his own in order to borrow an equivalent value in the chips of the other.

This is the whole function of the Fund--a reserve of foreign exchange from which to borrow when normal sources of exchange run short. In order to make it work, those who are losing must be kept from shoving in more (and perhaps less valuable) chips while they borrow the good chips of the winners. The Fund pro poses to do this:

P: By requiring every nation to put in 25% of its original ante in gold, which is acceptable in all countries. But no country is required to put into the pot more than 10% of the gold and dollars it owns; if short of gold at the start, it can make up the difference by adding more currency.

P: In any one year no nation may put up its own currency to borrow other currencies to the extent of more than 25% of its original stake. And no nation may borrow more than 200% of its original stake (eight years of borrowing the yearly maximum).

P: In borrowing from the pot, each borrower must pay the Fund a 3/4% service fee. After three months it must also pay 1/2% interest, after a year 1% interest, after two years 1 1/2% interest, after 3 years 2%, etc. Furthermore, if a nation's borrowings reach more than 25% of its original stake, these interest rates jump 1/2%; on borrowings over 50% another 1/2% etc., etc. Thus large or prolonged borrowing soon becomes too expensive to continue. As a further check, if the interest gets up to 4% the Fund will talk things over with the borrower. Then, if the interest gets to 5% because the borrower has not taken the Fund's advice, the nation has to pay any charges the Fund "deems appropriate."

P: In any year when a borrowing nation's monetary reserves (gold or other nations' gold-convertible currency) increase, it must use half the increase to pay off its loans. The same holds true for any nation which has originally put up less than 25% of its stake in gold.

P: To increase the power of nations whose currency is being borrowed from the Fund, every borrower loses one vote for every $400,000 it borrows; the nation whose currency is lent gets that vote instead. Thus if South Africa borrows $100 million from the Fund, 250 of South Africa's 1,250 votes pass to the U.S. British voting power will likewise be increased if pounds are borrowed from the Fund.

P: Borrowings from the Fund can be secured only if they are made to meet current exchange transactions for normal international trade. If the Fund decides that any member is abusing these privileges, the member can be suspended.

Shock Absorber No. 1. The quotas put into the Fund by the 15 biggest members:

U.S. $2,750 millions Britain 1,300 Russia 1,200 China 550 France 450 India 400 Canada 300 The Netherlands 275 Belgium 225 Australia 200 Brazil 150 Czechoslovakia 125 Poland 125 South Africa 100 Mexico 90

The other quotas trail on down to Panama and Liberia, with a half-million dollars each.

This allocation of quotas means that Britain can borrow a maximum of $425 million a year and France $112.5 million.

Compared to the possible trade deficits of these nations, these are small amounts.

(Some estimates have placed Britain's possible annual trade deficit immediately after the war at $5,000 million. France, immediately after World War I, had a deficit of about $2,000 million a year.) Thus the Fund will not permit nations to lie back and rely on borrowings from the Fund, Each will have to put its affairs in order, must get out and hustle.

The Fund, in effect, is merely a shock absorber. It can neither make rough roads smooth nor compensate for reckless driv ing. None of the delegates at Bretton Woods believed that it would solve the problem of getting payment for U.S. goods if the U.S. tries to export goods while it blocks imports by high tariffs. But believing that the roads are certain to be rough, the delegates felt there was all the more need for shock absorbers--to save the whole world from being jarred by every thank-you-ma'am that each nation hits.

The Bank. Most of the lending needed to put the postwar world back in running order will have to be done by the U.S.

and a few other creditor nations. The Bank is merely a second pot in which the whole world puts chips to guarantee the lenders against loss. In ordinary opera tion the Bank will guarantee loans floated privately. It also has power to take part of a loan too big for private markets, and to make direct loans on a relatively small scale if they cannot be floated privately.

Each nation will subscribe stock in the Bank in the same amount that it gets a quota in the Fund (chief exceptions: the U.S., China and Canada subscribe 10% to 15% more; the Latin American re publics, 30% less). But actually only 20% of the capital will be paid in and only 2% of it will be in gold. (The U.S., with a subscription of $3,175 million, will originally put up only $63.5 million in gold and $571.5 millions in dollar deposits.) This amount may be used for direct loans and participations.

Of the Bank's total capital of $9,100 million, 80% will not be paid in but will be on call. The Bank can guarantee privately floated loans up to this 80%. But its stockholders will never be called upon to pay the unpaid balance except when necessary to pay the lenders of defaulted loans.

Each borrower will be required to pay the Bank a service fee of 1 to 1.5% a year on the unpaid balance of his borrowings in order to get the guarantee. If the loans average no better than those U.S.

investors made during the 20's, these guarantee fees are expected to pay for the defaults. But the loans made ought to be better because: CJ The Bank will lend only for specific projects which promise to increase the productivity of the borrower and his ability to pay off the loan.

P: The loans will be paid out only as work is completed (like progress payments on a mortgage), so the Bank can be assured the loans are not being misused.

P: Whoever the particular borrower (e.g., an industry), the Bank will insist on being guaranteed against loss by the government, central bank or similar agency of the country in which the loan is made.

P: Except in very unusual circumstances, loans will be granted only to pay for materials which the borrowing nation must import. Thus no country will be able to run a domestic WPA on loans from the Bank.

P: Because of the Bank's guarantee, the loans will probably be at a lower rate of interest than private investors otherwise could accept. Even after paying the guarantee to the Bank, the borrowers should not be stuck with fancy 7% and 8% loans which impose charges too heavy for the average borrower.

P: Last but not least, the Bank will keep complete tabs on all loans that every nation has outstanding--something that private bankers often cannot do--and will not allow any nation to borrow more than it can sensibly be expected to repay.

Shock Absorber No. 2. Since the U.S. will in any event have to supply most of the postwar loans made for reconstruction and development, the effect of the Bank will be to make the rest of the world foot the bill for over 65% of the losses, if any. Aside from the obvious American gain under this arrangement, the world gets a profit too. For, with the Bank's guarantee, lenders can afford to lend more than they otherwise might. Thus there will be $9.1 billion of capital available for reconstruction and development by the countries which need it badly. Compared to the amounts that may eventually be needed, this amount may also be a mere shock absorber, but it guarantees at least that much.

Management4 Bank and Fund will have similar management. Each will be run by a hired president or managing director and a board of twelve full-time directors. Each of the five biggest members (U.S., Britain, Russia, China, France) will have one director and the remaining seven will be elected by the other members under a system of proportional representation. (In the Fund, two of the seven directors' seats will be reserved for.Latin America.)

Each director will vote the number of votes of the nation or nations which he represents. Voting power is on the basis of 250 votes for every nation plus one vote for every $100,000 of that nation's subscription. Thus the U.S. will cast at least 28% of the votes in the Fund and 27% of the votes in the Bank.

The head office of the Fund and Bank will both be in the country which has the largest interest in them: i.e., the U.S. --unless the U.S. fails to join.

Both institutions will come into existence when countries having 65% of the agreed-on subscriptions have notified the U.S. that they have ratified the plan. Bank and Fund will not begin to function actively until "major hostilities" in Europe have ceased. Other nations will be admitted on terms to be agreed upon.

Any nation may withdraw at any time --resignation becoming effective on the day it is received at the head office of the Bank or Fund.

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