62. Goldenweiser was present also. He told Eccles that agreement with the statement of principles meant a commitment to a major part of the plan.
63. This was not true of the New York bank. Sproul was opposed, and his vice president, John H. Williams, had made several public statements in opposition. The New York board of directors voted unanimously in October 1943 and June 1944 to endorse the position taken by Sproul and Williams (Minutes, New York Directors, June 19, 1944, 208–9). At Morgenthau’s request, Eccles agreed to suggest to Sproul that Williams desist from criticism.
64. Szymczak reported that White had agreed that John H. Williams could come as an assistant to Eccles if Eccles wished. Later he insisted that Williams could participate only if he accepted the Joint Statement of Experts as the basis for discussion. He was sure Williams would not agree to the statement.
The most substantive discussion came after Goldenweiser distributed copies of the plan agreed to by United States, British, and Russian experts. The opening paragraph said in part: “No government is formally committed. In practice, the governments are committed, except that Congress can refuse to ratify” (Board Minutes (June 6, 1944, 4).65 Sproul responded that “the plan as indicated is the wrong way to approach the problem” (8). He recommended that the conference concentrate on the immediate postwar problem of providing borrowing and lending arrangements for the transition from war to peace. Ransom replied that the international conference would not consider alternative proposals. It would be limited to discussion of the prepared joint statement. Sproul’s reply summarized what had happened. He was now faced with the outcome of “the procedure which had been followed of discussions at the technical level, with no commitments . . . leading inevitably to the position where, without having expressed its views or having been able to develop its point of view, the System would be committed to a program on which it was stated there was to be no variation except as to details” (9). Sproul threatened to oppose the program when it came before Congress.66
65. The proposal Goldenweiser distributed contained many of the provisions in the final agreement. The fund would have $8 billion from countries in the United Nations. Country quotas would be paid 25 percent in gold. Quota sizes had not been set. The fund was limited to financing trade; capital movements were explicitly excluded from fund lending. Exchange controls on current account were to be removed in three to five years, but capital restrictions were permitted.
66. Williams asked whether all countries agreed at the technical level. Goldenweiser replied that he knew only about England and Russia. He agreed that the fund “was wholly inadequate” for the postwar transition. It would have to be part of a program of lending and relief (Board Minutes, June 6, 1944, 11).
Those who spoke in favor of the plan did not discuss it. They spoke in favor of international cooperation and the need for monetary stability. Sproul and Williams, supported by Governor McKee, wanted to limit agreement to a transitional arrangement. Most of their arguments did not attack the plan directly; they argued that it was not appropriate at that time.
Sproul, Williams, and many bankers disliked the plan partly for the lack of attention to transitional problems. They saw, correctly, that the fund’s resources were inadequate for the task of reestablishing an international payments system. At the time of the Tripartite Agreement, they had accepted the principle that exchange rates had to be set collectively. For the longer term, they preferred a system, like the Tripartite Agreement, based on gold and fixed exchange rates. They viewed the British commitment to full employment as inconsistent with stable exchange rates. They were skeptical about Britain’s willingness to end imperial preference, and they believed that Britain’s transition to peacetime stability would take more than three years. Although Sproul and Williams did not express their distaste for an international organization, they must have seen the plan as a further weakening of New York’s influence on international economic policy.67
A central concern of the opponents was often implicit in their remarks. The agreement reversed a central principle of the classical gold standard. Countries on the gold standard had to adjust domestic policies to maintain their exchange rate. The agreement allowed international policy to adjust to domestic policy. If a country adopted a full employment policy that was incompatible with its exchange rate, it could borrow from the fund to cover its current account balance or, if the problem persisted, it could devalue. This central principle was acceptable to the British and the Americans, so much of their negotiation was concerned with how the principle would be carried out in practice. This involved the size of the fund, how much could be borrowed, what happened if a country’s surplus became large relative to the fund, and so on.
Williams addressed part of the transitional arrangement at the meeting: “This is a stabilization plan with all the stabilization measures left out” (Board Minutes, June 6, 1944, 16). The British press, he said, was exultant: “Lord Keynes is said to have said that this plan is the opposite of the gold standard. If this is so, I think that we should declare that this cannot be the opposite of the gold standard” (16). Later he added: “The essence of monetary stability is to stabilize the major currency and all else flows from that. If you do that, it is much easier to permit of exchange controls and exchange rate variations for the younger countries. That does not really affect stability” (17).
67. Williams’s proposal tried to solve the transition problem by permitting different speeds of adjustment to convertibility. At first the United States, Britain, and a few others would adopt stable exchange rates. Other countries would have more time to adjust. At the time, as much as 50 percent of all trade was denominated in pounds sterling.
Alvin Hansen replied that countries were unwilling to deflate. Without the plan, the international system would lack discipline. The issue was internal, not external, stability. Turning to the unmentioned concerns about British postwar policy, Hansen was hopeful. The plan, he said, “would exercise moral restraint against unsound policies” (ibid., 20).68
Karl Bopp (Philadelphia) pointed out that if the fund had existed in the 1930s, it would not have prevented any devaluation that took place. But he favored international cooperation. Unlike Williams, he believed that exchange rate adjustment was important because it was unlikely that countries would set postwar exchange rates correctly.
The meeting concluded without reaching agreement on the plan or discussing most of its provisions. Those present agreed only on the importance of the System’s being consulted on the choice of the United States director and having reports sent to the chairman of the Board of Governors as well as the secretary of the treasury and the secretary of state.
At the June 19 meeting, with McKee absent, the Board unanimously approved Eccles as the Board’s representative at the conference and gave him full discretion to act for the Board. In an attempt to silence Sproul and Williams, the Board agreed that “public expressions of differences of opinion within the System would tend to impair effective representation at the international conference and to destroy any influence that the System might have” (Board Minutes, June 19, 1944, 8).
The meeting at Bretton Woods lasted three weeks. At its end, forty-four countries agreed to the plans for the International Monetary Fund (IMF) and the World Bank. In contrast to the 1920s, representatives of the United States and British treasuries ran the meeting. Central bankers had a modest role.69 In contrast to the League of Nations agreement, the United States delegation included key members of Congress. White’s assistant, Edward Bernstein, described the work of the conference as modest: “Everything of importance had been discussed and settled in the two years of discussion before the Conference” (Black 1991, 47).70 This refers more to the IMF than to the World Bank. The bank agreement was much less developed before the meeting because there was less controversy about the main provisions, and no agreement about the bank would have been approved if countries had not agreed on the fund.71
68. In correspondence with
Jacob Viner, Keynes wrote that he favored price stability as a goal and was skeptical of the alleged advantages of devaluation. The main occasion for devaluation, he wrote, was when efficiency wages increased relative to wages abroad. Viner replied that the wage criterion “accepts the business agent of the powerful unions as the ultimate and unlimited sovereign over monetary policy.” See Meltzer 1988, 241.
69. Morgenthau led the American delegation. It included Fred M. Vinson, Dean Acheson of the State Department, Harry Dexter White, and four members of Congress. Eccles was the only representative of the Federal Reserve, but Edward E. Brown, president of the First National Bank of Chicago and chairman of the Federal Advisory Council, was a member. Senator Robert A. Taft was omitted because he was opposed. The British delegation, led by Keynes, also included only one representative of the Bank of England. Williams refused to accept the restriction that his comments remain within the framework established by the proposal, so he did not attend.
The Federal Reserve Board’s principal effort after the conference was to include an international financial council in the bill authorizing United States participation in the fund and the bank.72 The proposed council, with the Board represented, would supervise, approve, or reject decisions by United States representatives to the bank and the fund before any action could be taken. The Treasury agreed to an informal arrangement but would not include the council in the legislation.73
70. Bernstein served as chief technical adviser of the United States delegation and chairman of the Committee on Unsettled Questions. Later he became the IMF’s first director of research.
71. At one point Morgenthau (Blum 1967, 432) thought that a single board of directors should coordinate the work of the fund and the bank. Proposals of this kind reappeared many times.
72. Eccles and the Board also attempted to silence the proposal’s critics at the New York bank. On September 19 Eccles read a statement that he proposed to give to the presidents. The statement reviewed the discussions held the previous spring, then concluded: “The public expression of an adverse attitude, if any, on the part of any of the Federal Reserve Banks and their officers would be likely to impair the usefulness of the System in relation to the problems growing out of the conference” (Board Minutes, September 19, 1944, 6). Eccles explained that by attending the conference he had committed the Board to support the plan. Only McKee argued against the statement. He could accept a statement saying that no one could speak for or against the agreement, but not a one-sided statement. The Board approved the statement with McKee voting against. When the Board met with the Presidents Conference, the statement was the last (eleventh) item on the agenda. Eccles read the prepared statement. Sproul responded that on an issue of this importance, until it became law, “he had a duty to express his views and that if . . . such an expression [was] damaging to the System then he would have to decide whether to leave the System, but he could not agree with the view that the officers of the System from here on should be muzzled” (Board Minutes, September 22, 1944, 31). President John N. Peyton (Minneapolis) supported Sproul. Eccles retreated. He thought it would harm the System, but they were at liberty to express conflicting views.
73. The Board obtained assurance from White that he would discuss the Board’s request with Senator Wagner, chairman of the Senate Banking Committee, and other committee members. Since the proposal originated with the American Bankers Association, Morgenthau regarded it as additional evidence that the Federal Reserve represented the bankers. He had held that view for some time, so it did not take much to convince him (Blum (1967, 428). The Board’s effort was an attempt to restore some of the System’s responsibility for international monetary policy. At the same meeting, the Board voted to end the Treasury’s Exchange Stabilization Fund, scheduled to expire on June 30, 1945. The Board asked that the Stabilization Fund terminate when the subscription to the International Monetary Fund became due.
The Board’s resolution supporting ratification of the agreements included a provision asking Congress to create the council. It did not condition its support on the creation of the council, and it revised its earlier statement to remove the explicit reference to its membership on the council. The council “would not only advise the American governors and directors on the Fund and the Bank of its views with respect to the financial and monetary policies of the United States” but would also be authorized to act for the United States in matters that required approval under the agreements.74 The Board approved the resolution, with Governor McKee abstaining (Board Minutes, March 21, 1945, 1–5). To reduce bankers’ resistance, the Treasury supported the proposal.
The System remained divided on the proposal for the fund. Except for McKee, the governors supported the plan. At the New York bank, Sproul and Williams favored the bank but opposed the fund, usually stating their opposition as a matter of timing, not principle. Other presidents remained undecided or neutral. White attributed opposition or ambivalence to the influence of the American Bankers Association, which opposed both the fund and the bank.
In its haste to pass the bill, so as to show the international commitment of the United States before the San Francisco meeting to create the United Nations, the House did not ask Board members to testify. On June 21, Sproul and Williams testified at the Senate hearings.75
74. Congress gave the Treasury main responsibility for the bank and the fund. The United States executive directors are assistant secretaries of the treasury. The secretary is the United States delegate, and the chairman of the Board of Governors is his alternate.
75. Board members were enraged. On September 25 they discussed voting to censure Sproul. Their counsel advised them that they did not have a case. They knew his intention in advance and had authorized his right to appear more than a year before (in September) when the Board had tried but failed to silence the opponents. The Board then discussed statements by Chairman Beardsley Ruml, of the New York bank, and his use of this position as a platform from which to criticize the Bretton Woods Agreement. Eccles said that Ruml should not be reappointed when his term expired. Eccles also thought that the Board should dismiss John H. Williams because his “part time job [as vice president and research director] left him free to make public statements.” They agreed only to prepare a statement of policy about public statements by bank officials (Board Minutes, September 25, 1945, 7–10). The Board prepared a letter to Chairman Ruml stating that Sproul’s actions were “inappropriate and unwise.” The Board “could not countenance” that degree of independence. Nothing could be done about the past, but in the future they must function as a system. The governors could not agree, so they voted to have Eccles speak to Sproul (Board Minutes, October 16, 1945, 3–4).
In December, Eccles reported on his conversations with Sproul and Ruml. Sproul replied that the directors of the New York bank would not accept the Board’s position. Sproul made no commitment to be bound by the Board’s positions. Eccles replied by threatening not to renew his appointment as president. Sproul repeated that he would not commit to a different position (Board Minutes, December 7, 1945, 4–7). Then Eccles discussed Williams’s part-time appointment and his freedom to express his views outside the bank. Again, Sproul disagreed. He was unable to control Williams’s public statements. This did not satisfy Eccles, so he threatened not to renew Williams’s appointment.
objections to the international monetary fund The Board’s concern was out of keeping with the New York spokesmen’s testimony. Both Sproul and Williams favored the World Bank and international cooperation. They did not explicitly oppose the fund; they opposed starting it at a time when there was no hope of restoring multilateral trade.76 Their testimony went beyond their support for the fund. Williams, especially, proposed an alternative.
Their principal concern was Britain. The British still had imperial preference and were signing bilateral clearing agreements, contrary to the spirit of multilateral clearing. They could not redeem sterling balances, so these balances would overhang the fun
d. Sproul and Williams did not object to exchange controls on capital movements, but they doubted that controls on trade and payments would be removed in the foreseeable future. This violated the agreement and, of greater concern, increased the demand for dollars as the principal convertible currency. The fund would gain in-convertible currencies, lose dollars, and fail. Initially, the fund would hold only $2.75 billion, so the risk of running out of dollars was high.
Exchange rate flexibility was also a concern. The agreement permitted devaluation, so exchange rates were not really fixed. A country could follow social or economic policies leading to “fundamental disequilibrium,” then devalue its currency “if it seems to advance its interests” (Senate Committee on Banking and Currency 1945, 305). Further, the agreement was very explicit about the obligations of creditor countries, much less so about debtor countries. Since countries could devalue, they could force the adjustment on others instead of accepting it themselves. Countries would not agree on whether a devaluation was to gain competitive advantage or to respond to a “fundamental problem.”
Williams was concerned particularly about Britain’s large export sector and its precarious financial position.
A History of the Federal Reserve, Volume 1 Page 90