International Institutions in Trade and Finance

A. I. MacBean, P. N. Snowden

• Publisher: Routledge
• Year: 2021
• Print ISBN: 9781032129570
• eBook ISBN: 9781000478143
• Edition: 1
• Topic: Economia
• Subtopic: Teoria economica

Originally published in 1981, this book provided an up-to-date and critical review of the recent history and current status of the main economic institutions affecting international trade and relations at the time. The authors emphasise the economic effectiveness or otherwise of such bodies as GATT, IMF, EEC, UNCTAD and the World Bank, but take account of the political factors present in both the initial 'design' and in the way that the institutions have developed. In particular, the book analyses the changed degree of dominance which the USA had been able to exert on the international community.

Chapter 1 Introduction: The Main Institutions

Attitudes to the development of new institutions in the field of international trade in the aftermath of the Second World War were characterised by anxiety to avoid the chaos of the interwar period and by the need to reconstruct Europe. These were reflected in the negotiations at Bretton Woods to set up: (1) an institution to provide short-term finance to relieve countries of the necessity to deflate or restrict imports unduly when faced by temporary balance of payments deficits; (2) an organisation to promote freer trade and to help regulate trade policies, and (3) a bank to provide long-term capital assistance to support policies of recovery and growth.

The outcome of the negotiations differed somewhat from the intentions of the more ambitious reformers in this field. The International Monetary Fund (IMF), to some extent the brainchild of Keynes, fell far short of his ideal. The negotiations for the creation of an International Trade Organisation (ITO) never reached fruition, though the interim General Agreement on Tariffs and Trade (GATT) in fact survived and partially fulfilled some of the objectives of the planned ITO. The International Bank for Reconstruction and Development (IBRD) (World Bank), the third institution negotiated at Bretton Woods, gave relatively little assistance to reconstruction, and seemed to many to be too conservative in its early years to do much for the less developed countries. Since then it has grown in stature and with its associate body the International Development Association has become a major factor in the field of international aid to the developing countries.

The Creation of the IMF

Thinking on the subject of reform of the international monetary system began quite early in the Second World War. By 1943 two fully fledged drafts of plans for the setting up of an international monetary institution had been devised. These were the proposals for an International Clearing Union, a British Government Official Paper which was mainly the work of Keynes, and a United States draft for an International Stabilisation Fund, usually known as the ‘White Plan’ after its main author Harry Dexter White, then Assistant Secretary of the US Treasury. The declared objectives of both these plans were liberal and progressive. Their basic philosophies were similar. Both believed in the advantages of free trade in promoting efficiency but were at least as concerned with the need to maintain high levels of demand and employment within national economies. They aimed at the creation of a system of generally stable exchange rates with adjustment from disequilibrium in the balance of payments smoothed and facilitated by the provision of credit and avoidance of recourse to foreign exchange restrictions, discrimination in trade or deflation and domestic unemployment.

Trade in the interwar era had been bedevilled by the adoption of just such restrictive measures. Between 1931 and 1936 a series of competitive currency devaluations disrupted trade and stimulated wild flights of hot money which in turn forced still further fluctuations in exchange rates. The principal trading nations of the world abandoned free trade. Australia, the USA, Britain and Nazi Germany, one after another adopted tariffs and discrimination in trade as economic policy. While each initiating country or trading bloc could temporarily improve its balance of payments or domestic employment by such measures it could do so only at the expense of the exports and employment of other countries. Such policies were self-defeating in the long run. It was to combat the risks of the recurrence of similar international anarchy in the economic relationships of nations in the aftermath of the Second World War that these two sets of draft proposals were put forward. They formed the basis of discussions which took place at Bretton Woods in New Hampshire in 1943. Both stressed a multilateral approach to the solution of international monetary problems. Yet for a long time, according to Sir Roy Harrod, Keynes wavered between this and a belief that Britain and the other European countries would only be able to pursue policies of full employment and reconstruct their war-torn economies if they could maintain strict controls on trade and capital flows. This was a view shared by many British Treasury officials and members of the government.¹

Britain’s more acute concern with employment and reconstruction difficulties accounts for the differences in emphasis in the British and American proposals. The Americans laid more stress on the need for multilateralism and non-discrimination and rather less on safeguarding the freedom of action of national governments to maintain domestic employment in the face of balance of payments deficits. As a large creditor nation the Americans were inclined to stress the obligations of debtor countries to adjust their economies so as to eliminate deficits while the British proposals laid equal emphasis on the need for creditors to take action to reduce their balance of payments surpluses.

These differences in attitudes were reflected in the two sets of proposals, in the Bretton Woods discussions, in the subsequent debates in the legislatures, and in the different interpretations which the two nations placed on the terms of the agreement.

The Proposals for an International Clearing Union

The full text of these proposals is available in the British government publication, Proposals for an International Clearing Union (HMG, 1943) and has been reprinted in full in chapter 2 of International Monetary Reform (Grubel, 1963). Summaries are available in works by Gardner and Harrod which are listed in the Bibliography.

The Objects of the Plan

The Plan itself gives lucid expression to its objectives summarised in the list of requirements below²:

1. We need an instrument of international currency having general acceptability between nations, so that blocked balances and bilateral clearings are unnecessary...
2. We need an orderly and agreed method of determining the relative exchange values of national currency units, so that unilateral action and competitive exchange depreciations are prevented.
3. We need a ‘quantum’ of international currency, which is neither determined in an unpredictable and irrelevant manner as, for example, by the technical progress of the gold industry, nor subject to large variations depending on the gold reserve policies of individual countries; but is governed by the actual current requirements of world commerce, and is also capable of deliberate expansion and contraction to offset deflationary and inflationary tendencies in effective world demand.
4. We need a system possessed of an internal stabilising mechanism, by which pressure is exercised on any country whose balance of payments with the rest of the world is departing from equilibrium in either direction, so as to prevent movements which must create for its neighbours an equal but opposite want of balance.
5. We need an agreed plan for starting off every country after the war with a stock of reserves appropriate to its importance in world commerce, so that without undue anxiety it can set its house in order during the transitional period to full peace-time conditions.
6. We need a central institution, of a purely technical and non-political character, to aid and support other international institutions concerned with the planning and regulation of the world’s economic life.
7. More generally, we need a means of reassurance to a troubled world, by which any country whose own affairs are conducted with due prudence is relieved of anxiety for causes which are not of its own making, concerning its ability to meet its international liabilities; and which will, therefore, make unnecessary those methods of restriction and discrimination which countries have adopted hitherto, not on their merits, but as measures of self-protection from disruptive outside forces.

To achieve these objectives Keynes proposed an International Clearing Union which would operate with a new currency for which he suggested the name ‘bancor’. This would be pegged to gold (though not at an irrevocable rate) and accepted as equivalent to gold by all members for the purpose of settling international debts. Each member would be allocated an initial quota, whose value might be, say, 75 per cent of the sum of its exports and imports on the average of the three prewar years with provision for annual revision after the elapse of the transitional period. National central banks would hold accounts with the Clearing Union. Countries which had balance of payments surpluses would run up credits with the Union, those with deficits would go into debt. If all payments were made in ‘bancor’ the debits and credits would be exactly equal and the total of bancor would remain the same. Of course restraints would have to be placed on countries’ use of bancor to prevent their exploiting the fund to support higher consumption and investment at the expense of creditor countries.

These checks were³:

1. A member state shall pay to the Reserve Fund of the Clearing Union a charge of 1 per cent per annum on the amount of its average balance in bancor, whether it is a credit or debit balance, in excess of a quarter of its quota, and a further charge of 1 per cent on its average balance, whether credit or debit, in excess of half its quota.
   This was a slight inducement to maintain a level balance.
2. Any member was also required to obtain the permission of the Governing Board before increasing a debit balance by more than a quarter of its quota in a given year. If a debit were to be allowed to reach half the quota the Governing Board could permit or require certain actions from the member country, e.g. devaluation of the currency, deposit of suitable collateral (gold, foreign or domestic currency, or government bonds), controls on capital movements, surrender of gold or other liquid reserves, appropriate internal measures to restore equilibrium in its international balance. If a member’s debit balance exceeded three quarters of its quota on the average of at least a year it could be asked by the Board to take measures to improve its position and if it failed to improve its position in two years the Board could declare that member in default. The member could then no longer draw on its account except with the permission of the Board.

The novel feature in all this was, of course, not the checks on the debtor but the interest penalty imposed on the creditor member. It was an attempt to induce nations with balance-of-payments surpluses to take action to restore equilibrium. Under the traditional gold standard system when countries followed ‘the rules of the game’ the burden of adjustment was shared. Surplus countries were forced to inflate at the same time as deficit countries had to deflate their economies. The British proposal aimed to restore this responsibility of surplus countries to assist the restoration of international equilibrium. Clause (9) of the Proposals took this even further⁴:

A member state whose credit balance has exceeded a half of its quota on the average of at least a year shall discuss with the governing board (but shall retain the ultimate decision in its own hands) what measures would be appropriate to restore the equilibrium of its international balances, including -

1. Measures for the expansion of domestic credit and domestic demand.
2. The appreciation of its local currency in terms of bancor, or, alternatively, the encouragement of an increase in money rates of earnings.
3. The reduction of tariffs and other discouragements against imports.
4. International development loans.

It is also clear that the British thought that the Clearing Union should have sufficient resources to assist the adjustment of the European economies from their war effort back to the operation of normal peacetime economies. The facilities offered will be of particular importance in the transitional period after the war, as soon as the initial shortages of supply have been overcome’ (para. 15).

The scheme was also intended to enable expansion or contraction of international liquidity so as to control the aggregate of world purchasing power should there be worldwide deflationary or inflationary pressure. This could be effected through empowering the governing board to expand or reduce the quotas of all members. Moreover as trade expanded it was envisaged that quotas would be revised upwards fairly automatically. Other ideas mentioned, but not developed, were for accounts to be established in the Union on behalf of relief agencies and for a Commodity Control Authority which was to assist stabilisation policies.

The American Proposals

The scheme put forward by the Americans was much less radical than the Keynes Plan. Their International Stabilisation Fund was to be composed of gold and currencies to be deposited by members in amounts fixed according to the size of their quotas. Members who ran into deficit on their balance of payments would draw upon their quotas with the Fund within prescribed limits. The quotas were to be fixed on a mixture of criteria including the size of the member’s foreign trade, gold reserves and national income. One effect of this was to give America a much larger quota than Britain whereas the Keynes Plan criterion would have meant approximately equal quotas for Britain and the USA.

On the basis of the American plan the financial resources of the Fund would have been $5 billion. The British proposal of a Clearing Union would have given a total credit creating capacity of about $25 billion. The American plan was designed to give merely ‘an iron ration to tide over temporary emergencies of one kind or another’.⁵ While it was Keynes’ hope that the Bri...

Table of contents

• Cover
• Half-Title Page
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Dedication Page
• Table of Contents
• Preface
• List of Abbreviations
• 1 Introduction: The Main Institutions
• 2 Criteria for Evaluation of International Institutions in World Trade
• 3 The International Monetary Fund (IMF)
• 4 The General Agreement on Tariffs and Trade (GATT)
• 5 The United Nations Conference on Trade Aid and Development (UNCTAD)
• 6 International Commodity Agreements
• 7 The Organisation for Economic Co-operation and Development (OECD)
• 8 The European Economic Community (EEC)
• 9 Economic Integration in Less Developed Countries
• 10 The Council for Mutual Economic Assistance (CMEA [COMECON])
• 11 The World Bank (IBRD), International Development Association (IDA) and the International Finance Corporation (IFC)
• 12 Changing Needs and New Roles
• Bibliography
• Index