Rogier Van VaerenberghMasterstudent Geschiedenis

Academiejaar: 2018-2019

Belgium in Bretton Woods, 1944-1971 (a study of literature)

Word Count: 85653 (annexes included)

Vrije Universiteit BrusselDepartement GeschiedenisMasterproef voorgedragen voor de graad Master in de GeschiedenisTaal: Engels

Promotor: Prof Dr Benoit HenrietCommissaris:Commissaris:

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Ik verklaar plechtig dat ik de masterproef, (titel), zelf heb geschreven.Ik ben op de hoogte van de regels i.v.m. plagiaaten heb erop toegezien om deze toe te passen in deze masterproef.Datum: Naam + handtekeningRogier Van Vaerenbergh

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Dankwoord:

Een verhandeling schrijven in de opleiding geschiedenis, hoe begin ja daaraan? Door veel te lezen, zo wordt gezegd. En dat leeswerk wordt beloond door het opschrijven in eigen bewoordingen van al de literatuur. Daarna volgt het rijpingsproces: een eerste draft wordt nagelezen op woordkeuze, grammatica en spelling. Tijdens dat proces wordt er ook hier en daar geschrapt of bijgeschreven. Ik zou dan ook enkele mensen willen bedanken in dit proces. Ten eerste mijn ouders die mijn studies al die jaren al hebben gevolgd. Het is een vruchtbaar proces geweest met hoogten maar ook met laagten. Maar zij zijn altijd bij mij geweest ook al stonden ze niet altijd achter mijn keuzes. Ten tweede wil ik ook de archieven bedanken die mij de vrijgeleides hebben gegeven dit omvangrijk werk te onderzoeken. Het is daar dat het intellectuele proces tezamen met de literatuur onstaat. En tenslotte zou ik ook mijn promotor willen bedanken voor de constructieve feedback en voor het doorworstelen van dit werk met andere lezers.

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Abstract:

This dissertation has as subject the Bretton Woods System and the Bretton Woods Conference. The Bretton Woods Conference happened during the Second World War, whereas the Allies reached towards each other to mold the new world order. For the first time in history, the international monetary system was constructed by rules. The interwar years and the Great Depression wanted the Allies to be avoided. The international monetary system during the interwar years was defined by the gold-exchange standard. This was a reconstruction of the classical gold standard from the nineteenth century. That gold standard system was broken down by the First World War. The gold-exchange standard functioned less than the classical gold standard. This dissertation has diplomacy also as subject: the financial and monetary relations during the Second World War and during the Bretton Woods System, 1944 to 1971. In Belgium there is not much attention for financial or monetary relations. The works of the NBB wanted to fill this void as I want to do. This work fills a void in the Belgian research history. The Bretton Woods System worked well from the 1958 convertibility of the European currencies. This milestone of convertibility was an undermining of the System too. As the System developed more elements became known to be flawed: Triffin and Rueff discovered some errors. The System was further undermined by elements that wanted to fix the faults: the GAB, the SDR and the gold pool. As whereas these elements to fix the System, the Bretton Woods Order came by its end because of a new ideology that came to be known as monetarism and by the Nixon – shock. The Bretton Woods System ended when the fixed currencies came to be floated, something economists, politicians and experts wanted to avoid during the interwar years.

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Abbreviations:

BIS: Bank of International Settlements

ECOSOC: Economic and Social Council

EPU: European Payments Union

EEC: European Economic Community

GATT: General Agreement on Tariffs and Trade

IAB: Inter-American Bank

IBRD: International Bank for Reconstruction and Development

IDA: International Development Agency

IFC: International Finance Corporation

IMF: International Monetary Fund

ITO: International Trade Organization

NATO: North Atlantic Treaty Organization

NBB: Nationale Bank van België

OECD: Organization of Economic Cooperation and Development

SDR: Special Drawing Rights

UNCTAD: United Nations Conference on Trade and Development

USSR: Union of Socialist Soviet Republics

UK: United Kingdom

UNO: United Nations Organization

USA: United States of America

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‘For there are, in the present time, two opinions; not, as in former ages, the true and the false, but the outside and the inside; the opinion of the public voiced by the politicians and the newspapers, and the opinion of the politicians, the journalists, and the civil servants, upstairs and backstairs and behind-stairs, expressed in limited cirlces. Those who live in limited circles and share the inside opinion pay both too much and too little attention to the ouside opinion; too much, because, ready in words and promises to concede to it everything, they regard open opposition as absurdly futile; too little, because they believe that these words and promises are so certainly designed to change in due season, that it is pendatic, tiresome, and inappropriate to analyse their literal meaning and exact consequences. They know all this nearly as well as the critic, who wastes, in thier view, his time and his emotions in exciting himself too much over what, on his own showing, cannot possibly happen. Nevertheless, what is said before the world, is still of deeper consequence than the subterranean breathings and well-informed whisperings, knowledge of which allows inside opinion to feel superior to outside opinion, even at the moment of bowing to it.’

-John Maynard Keynes

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TABLE of AFFAIRS1. Introduction

1.1 Heuristics1.2 Status Quaestionis1.3 Research Questions

2. Financial and Monetary Diplomacy2.1 What is Diplomacy?

2.1.1 Conference Diplomacy and Summits2.1.2 Bilateralism and Multilateralism2.1.3 Monetary and Financial Diplomacy

2.2 Monetary Situation before Bretton Woods2.2.1 A Stable Monetary System: the Classical Gold Standard2.2.2 Critics on the Classical Gold Standard

2.3 Intermediary Conclusion3. Conferences during the Second World War

3.1 Anglo-American Diplomacy: the bilateral ‘two-level’ game3.1.1 The Belgians in Exile

3.2 Teheran and Moscow3.3 The Construction of the Bretton Woods Conference

3.3.1 The Quest for a Stable Monetary System3.3.2 The Anglo-Belgian Relations During the War

3.4 The Construction of a Bank and Fund3.4.1 Development Thinking from Roosevelt in Latin America to Construct the

Conference3.4.2 Development Thinking from Asia3.4.3 The Keynes Plan3.4.4 The White Plan3.4.5 Comparison White and Keynes Plan3.4.6 Other Plans

3.5 Bretton Woods3.5.1 Joint Statement and Atlantic City3.5.2 The Conference3.5.3 Other Voices from Bretton Woods

3.5.3.1 Latin America3.5.3.2 China3.5.3.3 Africa3.5.3.4 Eastern Europe3.5.3.5 India

3.5.4 The Construction of the Benelux3.5.5 The Battle for Bretton Woods in England and America 3.5.6 The Battle for Bretton Woods in Belgium

3.6 Yalta and Potsdam3.7 The Savannah Conference and the Loan to the UK3.8 Intermediary Conclusion

4. The Bretton Woods System during the Cold War, 1944-19604.1 Camille Gutt as first Director-General4.2 The Start of the Cold War and of the Marshall Aid 4.3 The British Devaluation of 1949 4.4 The European Payments Union4.5 The 1950s

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4.6 The Economics of the Bretton Woods System4.7 The Bretton Woods System

4.7.1 The IMF4.7.1.1 Belgium in the IMF

4.7.2 The World Bank4.7.2.1 Belgium in the World Bank

4.8 Intermediary Conclusion5. The Implosion of Bretton Woods, 1960-1971

5.1 The Quest towards a Stable Monetary System5.1.1 The Heyday of Bretton Woods5.1.2 The Gold Pool5.1.3 The General Agreements to Borrow5.1.4 The Decolonisation5.1.5 The Special Drawing Rights

5.2 The Dollar Glut and the World Wide Inflation5.2.1 The Eurodollarmarket in London

5.3 The Ideology Against and the Errors in the Bretton Woods System5.4 The Nixon – Shock

5.4.1 Other Reasons Why the Bretton Woods System Collapsed5.5 Intermediary Conclusion

6. General Conclusion7. Bibliography8. Annexes (Articles of Agreement)

8.1 The IMF8.2 The World Bank

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1. Introduction

During the Second World War the Allies called for some conferences to define the post-world order. The Allies looked towards the Big Three: the USA, the USSR and the UK to draw the lines of the post-war world. The Belgians and the other countries were sceptical but had also something to say in those plans. The Belgians fled during the Second World War to London but not the whole of Belgium: there was a government in London that spoke for the Belgians and there was a government in Belgium that spoke for the Belgians and that collaborated.1 There were also Belgians who fled to New York. At those conferences the post-war world order was discussed as the war itself, there were also plans for a new world economic system. In that system the crash of 1929 had to be avoided even as the ‘beggar-thy-neighbour-policies’2 between the countries whereas nationalism surged.3

This dissertation has also some worth for current affairs: the IMF rescued some European countries in the euro-crisis in 2010. The European countries suffered during the financial crash in 2007-2008. Those countries had a strong link between the financial sector and the government. The IMF helped the most wary countries, as the IMF was constructed after the Great Depression to avoid a new depression. The international monetary system and the international financial system have currencies, banks, key reserve currencies, the IMF and the IBRD as subject. Within current affairs the System has been given extra tools as the ‘Financial Stability Board’. Those tools were created to avoid a new Great Depression. Those institutions are defined as ‘global public goods’.

Those ‘global public goods’ are given for everyone but there is a free-rider problem. A hegemon has to give those public goods for everyone and has to defend them, and other countries have to be honest in their usage of those goods. The dollar too is evolved as a global public good because of the settlements of the Bretton Woods Conference and System.4 The dollar replaced gold. Because of the definition as a public good the dollar functions as an international liquidity. In that relationship there is a confidence problem: that is the free-rider problem. Because of its seigniorage5 the dollar has come to be known as the ‘exorbitant privilege’: it is the currency of the USA but everyone’s problem.6The World Bank and the IMF are also defined as public goods but the free-rider problem is less a problem for those institutions.

The World Bank and the IMF came to be, because of the Bretton Woods Conference, in New Hampshire, 1944, in the USA. There were 44 nations present at the Conference. Those nations wanted a solution for the Great Depression. And they wanted to avoid a repeat of it. They defined for the first time an international monetary system by rules: it circled round the dollar, gold, the IMF and the IBRD.7 The dollar was fixed on gold, the other currencies were fixed on the dollar. The value of

1 https://diplomatie.belgium.be/nl/Beleid/internationale_instellingen/financieel-economische_instellingen/imf2 In economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries3 https://diplomatie.belgium.be/nl/Beleid/internationale_instellingen/financieel-economische_instellingen/imf4 Stiglitz, J. Globalization and the Logic of International Collective Action, memosa5 Seigniorage is the difference between the value of money and the cost to produce and distribute it. The term can be applied in two ways: Seigniorage derived from specie (metal coins) is a tax added to the total price of a coin (metal content and production costs) that a customer of the mint had to pay, and which was sent to the sovereign of the political region. Seigniorage derived from notes is more indirect; it is the difference between interest earned on securities acquired in exchange for banknotes and the cost of producing and distributing the notes.6 Stiglitz, J. Globalization and the Logic of International Collective Action, memosa7 https://financien.belgium.be/nl/node/3573

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the dollar was set as 35$ for one ounce gold. The IMF had been created as surveillance for that system. And the IBRD was created as a sign of goodwill for the development countries.8

The Belgian Camille Gutt was the first director-general of the IMF and he functioned from 1946 to 1951.9 He came to replace Harry Dexter White, the creator of the System, because he was accused as a spy for the USSR. White was called for pension. During that period the USA was tormented by the ghost of communism and by McCarthyism. The Cold War was born.

The Articles of Agreement of the IMF was for the first time changed in 1969 by its members to fix the System: the SDR’s were created.10 The members wanted more change in the IMF: they also wanted to reform the gold tranche, the quota system and the parities.11The quota was made available by the NBB and by the Thesaurie. 12 The NBB and the Thesaurie has the mandate of the Belgian state to follow everything the Fund or the Bank setts.13 The quota system in the IMF is the most important construction of the Bretton Woods System: quota made sure that countries could lend to each other. According to this reasoning balance of payment problems of the member countries were corrected by the quota system. The quota was revised in five years because the world economy grows yearly. In the beginning of the automatic drawings of the quota conditionalities were made, i.e. countries had to set conditions in the why countries would lend to each other. This was because of the decolonization and the need of international liquidities. This was one of the achievements of Camille Gutt.14

The gold tranche had to be drawn automatically. In 1963 the USA financed its deficit with a super gold tranche: this could directly be made. 15The gold tranche became a reserve asset, readily used as the dollar. The USA came up with the idea behind the SDR. This was also launched by the French.

The SDR’s were created too in 1967. The SDR’s had as goal to replace the dollar as international key reserve currency. But that failed because of the veto of the USA in the IMF. The veto is set because of the quota in the IMF. The USA has a greater percentage of quota and thus has the possibility to obstruct decisions in the IMF. The SDR’s are defined by a basket of currencies in the IMF, and those currencies are the most used worldwide. In current affairs, the SDR is used as mathematical unit in the IMF itself.16 For Belgium, the NBB and the Treasury were participants of the Bretton Woods System. They send representatives to the Bank and to the Fund.17 All participants were obliged to give the institutions 10 billion dollar as quota. The quota system had to be calculated every five year, i.e. it meant that the funds and resources of the Fund kept growing. Also, the enlargement of the IMF and the IBRD meant that the funds of those two kept growing.18

Another pillar of the Bretton Woods System is the World Bank. It started as the IBRD and the first goal of it was to give funds and capital for the development and reconstruction of the economies after the World War. Its creation can be seen as lubricant for the development nations to be part of

8 https://financien.belgium.be/nl/node/35739 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 199910 https://www.imf.org/en/About11 Thesaurie, ARA, 196712 Thesaurie, ARA, 194913 Thesaurie, ARA, 195914 Thesaurie, ARA, Camille Gutt15 Thesaurie, ARA, 196716 https://www.imf.org/en/About17 Thesaurie, ARA, 194618 Thesaurie, ARA, 1950

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the Bretton Woods Order.19After the inception of the IBRD, the Bank was further developed with an IDA and further an IFC.20

The institutions of Bretton Woods had thus as goal: investment for long term usage (World Bank) and problems of the payments balance of countries (IMF). The Bretton Woods System was also called as the dollar system because of the centrality of the dollar. The Order was also a reflection of the order constructed by the two superpowers: the USSR and the USA.21 The USSR never ratified the Agreement, thus the IMF and the IBRD were rapidly seen as instruments for the capitalist world. It was for instance used as a lubricant for nations to choose the Western world as allies.22

The System worked well but came into being when the European currencies became convertible in 1958.23 It also reached to the development world: during the decolonisation waves the IMF and the World Bank were expanded.

After a while, there came to exist a situation for the USA that was difficult to have. Because of its creation of a social security system and because of the Vietnam War, the USA spent to much: the government and the Federal Reserve employed an expansionary policy.24 Hence, too many dollars circulated in the world. Countries accumulated dollars to pay for their imports but also to obtain reserves. Because of the high circulation of dollars, there was much inflation: the dollar’s value diminished. Reserves were seen in 1966 by Emmiger as a manner to fix the system: gold had to circulate to equilibrate the debtors and the creditors in the System. 25The USA had then the option to devalue or to go for deflation26. Under the Nixon-shock the USA opted for devaluation. The dollar was further fixed to 40 dollar for one ounce gold before is was put to a float. Other currencies followed and in 1973 the Bretton Woods System of fixed currencies collapsed.27

The Classical Gold Standard that was used before the Bretton Woods System had an automatic correction device: countries payed for a deficit on the payments balance with gold. This led to a diminishing of the internal monetary base and the deflation of prices. Because of the deflation the purchasing power and the imports diminished and the exports surged and vice versa. Because of the diminishing of the monetary base, the national income stagnated and the unemployment had risen. Also the government spending diminished because of that. The Bretton Woods System would end this automatic correction mechanism. The IMF would fill the void and would watch the members for their deficits and surpluses. Since its creation the IMF had the goal to correct destabilizing capital flows.28

The Bretton Woods System wanted to avoid the destabilizing capital flows from the interwar years.29 In that period the gold-exchange standard was buried and experts were looking for new systems.

19 https://www.imf.org/en/About20 IDA: International Development Agency; IFC: International Finance Corporation21 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-200022 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-200023 Report IMF, 195824 James, H. International Monetary Cooperation since Bretton Woods25 Thesaurie, 196626 A contraction of prices and loans27 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences28 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Oress, 200429 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order

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Under influence of Keynesianism and the New Deal – politics countries looked for more government intervention.30

The Conference of Bretton Woods even as the System were more or less an Anglo-American constellation whereby the interests of the Americans were more served.31 The pound, the reserve currency from before, had to keep its status. But the pound could not maintain its status because of less economic power of the UK. Vermeiren sees this as the hegemonic stability theory32 whereas the pound was changed by the dollar because of the economic strength of the USA and the waivering of the UK.33 The dollar became the number one and New York became a more diversified, more liquid and more deep financial market, replacing London.

From the beginning of the System there was a fault: the dollar. The dollar served as key reserve currency because the pound could not be the same international exchange currency after the Second World War. The pound seized to be a key reserve currency because it was not convertible during the War. The dollar was kept as asset and liquidity. This dollar functioned as IOUs and was accumulated by surplus countries. Because of this flaw the inflation in the world had risen and the USA had to keep a deficit on its payments balance to keep its exchange rate.34 Because of this inflationary bias the world had to keep imbalances. The discrepancy between the dollar as reserve currency and as currency for internal usage could not be held. And that was the flaw. The only solution to end this discrepancy was to devalue the dollar from the fix with gold and this meant ending the fixed parity.35 The American presidents did not want this because they thought that the international monetary system would collapse. This meant that presidents were doing a foreign economic policy of ‘benign neglect’36. It also meant that an international monetary system could not be based on floating currencies because of the experience with destabilizing capital flow in the interwar years.37

The Bretton Woods System or the ‘United Nations Monetary and Financial Conference’ was the Conference where it all began.38 The goal of it was to reach a stable international monetary system. The collapse of world trade because of the crash of 1929 was seen in terms of money. More than 500 diplomats and experts from 44 nations came to the States to reach an agreement in a Conference of 30 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-197131 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 200432 Hegemonic stability theory (HST) is a theory of international relations, rooted in research from the fields of political science, economics, and history. HST indicates that the international system is more likely to remain stable when a single nation-state is the dominant world power, or hegemon. Thus, the fall of an existing hegemon or the state of no hegemon diminishes the stability of the international system. When a hegemon exercises leadership, either through diplomacy, coercion, or persuasion, it is actually deploying its "preponderance of power." This is called hegemony, which refers to a state's ability to "single-handedly dominate the rules and arrangements ...[of] international political and economic relations." HST can help analyze the rise of great powers to the role of world leader or hegemon. Also, it can be used to understand and to calculate the future of international politics through the discussion of the symbiotic relation between the declining hegemon and its rising successor.33 Vermeiren, M.34 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 200435 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 200436 an attitude or policy of ignoring an often delicate or undesirable situation that one is held to be responsible for dealing with37 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 200438 https://diplomatie.belgium.be/nl/Beleid/internationale_instellingen/financieel-economische_instellingen/imf

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three weeks. On that conference two famous economists battled to see their plans realized. These two economists were the British John Maynard Keynes and the American Harry Dexter White.39 The Belgians were a part of the Conference too.40 During the Second World War those economists were devising their plans. The result of all those plans reached what was called as a plan definitely American but also as the White-light plan.41

The Conference was a heyday of diplomacy. It showed how the international diplomacy was played during the War and on a Conference less known.42 Experts of diplomacy or of the War knew the Conferences of Teheran, Yalta or Potsdam; or the Conferences which led to Dumbarton Oaks or San Francisco in creating the United Nations.43

The source for the Keynes and White plan came from the Nazi’s. Walter Funk and Hjalmar Schacht were devising a plan for the post-war order, the ‘New World Order’. In that plan the Nazi’s wanted to cooperate with Fascist Italy. The foundation for those relations would be bilateral with Germany central and around Germany there would be a bunch of satellites based on bilateral agreements. From this bunch of bilateral agreements the multilateral trade would be constructed. The Funk-Schacht system would seek fixed parities with the Reichsmark which would fluctuate in a bond of exchange. New World Europe would change primary sources for high technology products via ‘barter’44. The trading system with the USA would be discriminated. According to this System Germany and Berlin would be the centre of a ‘clearing system’45. Berlin would follow London as centre for finance. Trade would be dominated by the Nazis. The plan of Funk and Schacht would be copied by Keynes and White for some parts.

In contrast to Germany, Belgium is a small, open economy whereby its economic policy was different from others. Because of that, Belgium felt much for the Agreement of Bretton Woods.46 Indeed, Bretton Woods had its effects as on the Belgian economy as on the Belgian policy. The country learnt to recongize the USA and it focused less on the UK. This situation did not occur during the Second World War. The bad economy of the UK would led to such things. After the devaluation in 1949 of the pound, the dollar would be number one. The Marshall Plan would attract the Belgians towards the USA. ‘The Articles of Agreement’ of Bretton Woods would be ratified soon after the Conference in Belgium.47

This dissertation has thus money as subject even as the monetary diplomacy during and after the Second World War.48 Money ties countries and nations to each other because money is a source for exchange and an instrument for barter. The use of money is the exchange rate. The ‘exchange rates

39 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order40 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 199941 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order42 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order43 Van de Meerssche, P. Internationale Politiek. Deel I: 1815-194544 barter is a system of exchange where participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money45 In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment (for example, in the form of a cheque or electronic payment request) into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.46 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 199947 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 199948 Barston, R. Modern Diplomacy

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represent the price at which the currency of one country can be purchased with the currency of another.’49 Exchange rates have to be governed because they have stable prices and economic growth as consequence. The Bretton Woods System was constructed to govern the world economy and world trade. The System thereby was a system of fixed but adjustable exchange rates functioned. Monetary relations are the instrument thereby, whereas services and goods have a price to exchange. Thus the International Monetary System is central to this dissertation. The Cold War is the context for this stage.50 Politics and economics are two sides of the same coin and diplomacy is also central to this dissertation. After trial-and-error conference diplomacy was institutionalized with the League of Nations.51 After the Second World War the Big Three constructed a successor with the United Nations. The United Nations had as goal to forget the League of Nations and to do better. To institutionalize they did some 10 years.52

With this dissertation I would like to fill the gap in the historiography in Belgium. The primary sources are now available and the secondary sources are plenty, especially in the UK or the USA. In other countries the gap is beign filled too. The unique character of this dissertation is that it is new for the Belgian historiography. Others who are also interested in financial and monetary diplomacy can follow. The Bretton Woods System is a period very good documented in the world and in the subject of international finance.

1.1. Heuristics

As for the heuristics I began with my search on the digital archive of the IMF. The IMF opens its sources after 20 years, thus these sources are easy and free on the internet. For this dissertation I use the period 1944-1971 and the free sources focus on Belgium. The sources which I have gathered from the IMF are: the Minutes and the Staff Reports. I use the reports on the economic situation of Belgium too.53

The archives of the Belgian Foreign Affairs are also open. The primary sources can be consulted after a period of 50 years. The archives are the memory of the department and started from 1830. The archives have three departments: the historical service, the Africa archive, and the diplomatic archive. For this dissertation I use many sources from the diplomatic service and that for the period 1944-1971: the sources on the IMF and the IBRD. The sources are political and economic pieces, exchanges of letters, and documents where Belgium has played a role. They are the reports from the ECOSOC Council from the UN too.54 Those reports are at the archives of the FOD Foreign Affairs because the UN wanted to streamline the UN-family and the IMF and the IBRD are organizations under the UN-umbrella. The reports of the IMF deal with the international monetary situation in the world and the reports of the IBRD are over the development status in the world.

I also use the archives of the FOD Finance. The department of the Thesaurie is less known. The Thesaurie is the treasury of the state Belgium. It handles everything of debt and of the currency. With the introduction of the euro, the Thesaurie has lost its role in the currency but gained influence in international finance. In the Thesaurie I use the archive of the International Financial Affairs.55 The department has played a role in the IMF and that since its creation in 1946. The archives have led in

49 Myrus, R. From Bretton Woods to Brussels: A Legal Analysis of the Exchange-Rate Arrangements of the IMF and the European Community, In: Fordham Law Review, 199450 Van de Meerssche, P. Internationale Politiek. Deel II: 1945-200551 Van Dormael, A. Bretton Woods. Birth of a Monetary System52 Van de Meerssche, P. Internationale Politiek. Deel I: 1815-194553 https://www.imf.org/external/np/arc/eng/archive.htm54 https://diplomatie.belgium.be/nl/Documentatie/Archief/delen_en_collecties/diplomatiek_archief55 http://arch.arch.be/docs/surv-toe/TT-SL/fed/Thesaurie_VS_2010_DEF.pdf

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the past to friction between the FODs Finance and Foreign Affairs. The sources of the Thesaurie are based in the General Archives of Belgium.

1.2. Status Quaestionis

For the foreign policy of Belgium I make use of the classical work of Coolsaet.56 Coolsaet’s Belgian Foreign Policy gives a very good overview of the foreign policy of Belgium since 1830. It has a flaw that there is not much information of the Bretton Woods Conference and System. It focuses on foreign policy like it is defined in the school of International Relations. Coolsaet gives a view on the policy in a birds eye. It is however very useful for this dissertation because I also make use of diplomacy.

Therefore, there is also information about diplomacy in this dissertation. Barston, Melissen, McKercher and the Oxford Handbook for Modern Diplomacy give away information about modern diplomacy, while Bayne gives a more specialized account on economic diplomacy.5758 The New Economic Diplomacy bridges high and low politics.59 But it is also silent on the Bretton Woods Conference.

About diplomacy and about international relations there is enough literature, but about monetary and financial diplomacy there is a lacuna in the Belgian historiography. But worldwide there is enough literature specialized about this period. In Belgium there are the two accounts by Crombois whereby Crombois tells the story about finance and the figure of Camille Gutt in the Second World War.60 Crombois‘s account gives the account of the government in exile in London and New York. The government in exile are Spaak, Gutt, Theunis and Van Zeeland.61 And they tell their relationships with the British and the Americans. Crombois is a good historian but tells only a small account about the Belgians in Bretton Woods. His work of 2015 is an update of his doctoral dissertation and tells more about international finance.62

In Belgium there is an unknown account by the National Bank of Belgium (NBB) about international finance.63 In a work in four parts, the NBB tells the monetary policy of Belgium from the Second World War on. It is a rare account that gives more about the role the NBB played in international finance. 64But a work about the Thesaurie is less unknown. The NBB has in its fourpart dissertation taken the lead about international finance in Belgium. My dissertation follows the NBB but I use also sources from the Thesuarie and the FOD Foreign Affairs and that is what is innovative.

Belgium has a tradition in international relations storytelling. The work of Coolsaet is as such but I make use of the account by Paul Van De Meerssche too. 65His work treats the diplomacy since the

56 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-200057 Bayne, N. en Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations58 Oxford Handbook for Modern Diplomacy59Bayne, N. en Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations60 Crombois, J. Camille Gutt. Les Finances et la Guerre61 Camille Gutt was the minister of finance, Georges Theunis the minister of the interior, Paul-Henri Spaak the minister of foreign affairs and Paul Van Zeeland the primeminister62 Crombois, J. Camille Gutt and Postwar International Finance63 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods64 nbb65 Van de meerssche, p

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Congress of Vienna (1815). Luc De Vos’s work gives another picture: it tells the military story behind the international relations.66

Now, there is more attention in the history for the Bretton Woods System and Conference. Ed Conway’s ‘The Summit’ is such a thing whereas it gives a social history account. 67Benn Steil is another one: he tells the story about the battle between Americans and British by way of two economists: Keynes and White. These players both had an account for the post-war plans in financial and monetary diplomacy. 68Steil tells the story whereby the US is the rising country and the UK as the diminishing country. The Americans won in his story. The UK was bankrupt and had more problems with decolonisation. He also tells his story in the background of the Cold War.

The Belgians were there and played a role too. They played a role in the negotiations on uranium from Congo, and on the lending of their fleet to the Americans and the British for equipment under Lend-Lease.69 The story takesplace behind the scene of the Cold War. And about the Cold War there are a lot of works, for example the story by Vandenberghe, an emeritus. He starts telling his Cold War story from the Russian Revolution, and it focuses on diplomacy and international politics from 1917.70 The work by McWilliams and Piotrowski tells the picture by the consensus in the School of International Relations since 1945: the bipolarity with two superpowers, the USSR and the USA.71I also make use of the World History in the Cold War from Westad. It is new and he let his work start in 1890 because then the USA was a bigger economy than the UK. 1890 is also the start of the Second International: a communist gathering. World history is in and it analyses more than diplomatic history.72My intake focuses on diplomacy.

I also make use of two classical works in international finance: the magnus opus by Harold James, whereby the international monetary system is key and the centra iteml, together with the IMF.73 The work is a very good work about the international monetary relations and for the Bretton Woods System and Conference. The other classical work is that from the Brookings Institution and it deals on the World Bank since 1945.74 Because of my centrality towards international monetary relations I give less attention to the World Bank, however, it played a crucial role in the world economy and also in Belgium and for its colony.

The work by Helleiner handles a lesser know part in the Bretton Woods System and that is that of the development of the countries that were not part of the West as colonies.75 Another work by Helleiner tells the story of the undermining of the Bretton Woods System because of the development of the financial markets. 76The Canadian scholar recounts the story of development in the bigger picture of the New Deal – politics and because of the crash in 1929. Blue prints for an international bank were then laid, such as the more benign policy for the Latin American countries. The Inter-American Bank is the predecessor of the World Bank and following Helleiner it is the continuation of the dollar

66 De Vos, L. en Sterkendries, J. De Grote Geopolitieke Problemen na de Tweede Wereldoorlog67 Conway, E. The Summit68 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order69 Crombois, J. Camille Gutt. Les Finances et la Guerre70 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-199171 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations72 Westad, O. The Cold War. A World History, Allen Lane, 201773 James, H. International Monetary Cooperation since Bretton Woods74 Mason, E. and Asher, R. The World Bank Since Breton Woods75 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order76 Helleiner, E. States and the Reemergence of Global Finance. From Bretton Woods to the 1990s

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diplomacy in the US starting with Theodore Roosevelt. Other scholars go against that view: it is a debate in academic circles.

Next, there are classical works from contemporaries. They witnessed both the System and the Conference. Eckes, A Search for Solvency, tells the traditional story, starting from the interwar years, the plans, the conference and the collapse of the System. 77The contemporary and technician, Gardner, gives the story in ‘Sterling-Dollar Diplomacy’. In that work the multilateralism and the drive towards an open economic system is the main item within an American world order.78

Van Dormael’s Bretton Woods is also a classic and very thorough work. The author tells the British story and opposes the more dominant story from the Americans.79 He is also more critical for American accounts. Van Dormael is more for the return of the gold standard. Gavin also tells the Bretton Woods System. He starts from the European convertibility and draws his story behind the Cold War. The international finance of the Allies coalesced with the picture of being Allies in the NATO. He tells the story of the heyday of the Bretton Woods System whereby the Germans and the French did not always follow the Americans. Gavin tells the security-monetary relations of Bretton Woods.80

Cesarano, Eichengreen and Bordo have written a book that tells the story of the economy behind the Bretton Woods System. Bordo reports retroactive the debates behind the Systems of international monetary relations.81 Eichengreen follows his work chronological as the go-between of the Bretton Woods System from the gold standard towards a free floating system.82 Cesarano has also a work that accounts the economy of Bretton Woods as an intermediary between the classical gold standard and a free floating system. The commodity-standard was changed in a fiat standard.83

Leeson has also written a work that recounts the collapse of the Bretton Woods System.84 Following him the implosion came from an alternating paradigm and economic school: the monetarism from Milton Friedman and from the Chicago School while the Keynesians were in retreat, ideological too. The Keynesians could not give an answer to the rising stagflation from the 1970s, the monetarists did so. Leeson’s accounts his work with Milton Friedman who is the centre in his work.

At last, I make use of the magnus opus of the IMF-historians, De Vries and Horsefield.85 These historians made a project from their work and tell the story of the IMF in a three part account, starting in 1945-1965. The work gives the story of the evolution of the IMF and the Articles of Agreement of the IMF. At the beginning the IMF had to define itself and the employees had a lot of freedom. The Treaty was defined broadly. This kind of source I regard as a primary source.

I also make use of other dissertations: that from Vermeiren. His work is political- economical: Vermeiren analyses the International Financial Architecture through the International Political

77 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System78 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order79 Van Dormael, A. Bretton Woods. Birth of a Monetary System80 Gavin, F. The Gold Battles with in the Cold War: American Monetary Policy and the Defense of Europe, 1960-1963, In: Diplomatic History, 200281 Bordo82 Eichengreen, B. Globalizing Capital. A History of the International Monetary System83 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order84 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods85 De Vries, M en Horsefield, K. The IMF, Volume II: Analysis, IMF, 1969

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Economy. Vermeiren follows the monetary trilemma whereby the monetary policy and the exchange rate are central. He begins with the classical gold standard and ends with the free floating system.86

1.3. Research Questions

A dissertation stands or falls with a good research question. I break my research question down in several parts but my central question is the following: Why was the Bretton Woods System created and how played the Belgian therein? How did it collapsed and how played Belgians therein?

Questions: Who were the players in the Conference? Why was the Bretton Woods System created? What were the plans for the post-world order? What was the Bretton Wood System? What were the pros and contras in the System? How functioned the System during the Cold War? What was the Belgian reaction on the Conference and on the post-war world plans? How acted Belgium in the System? Why did the System collapsed? How reacted Belgium on the demise of the System?

This dissertation can be seen in four parts. After the introduction I go to a first part that tells more about diplomacy and about economic diplomacy. The second part tells the story behind the Conference of Bretton Woods and how it was constructed. In a third part the Bretton Woods System was developed as in the background of the Cold War. This was the first step to liberalise the currencies. In a fourth and last part I have written the heydays of the Bretton Woods System and its implosion through the Nixon – shock.

2. Financial and Monetary Diplomacy

This part constructs the story behind diplomacy. I will begin to define diplomacy. Then I will go towards the definition of summits and conference diplomacy. I go next to multilateralism and bilateralism. I end with the definition in monetary and financial diplomacy as a part of economic diplomacy. Conference diplomacy and summits show top negotiations between the top politicians

86 Vermeiren, M. Het Monetair Trilemma in de Internationale Financiële Architectuur, masterproef, 2007

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and experts. I show this to give more information about the Conferences during the Second World War, so the reader can follow more about diplomatic relations.

The word diplomacy comes from the Greek ‘diploma’ and it refers to a written document on two leaves folded. It shows a secret message or official message with rights. To draw the picture behind the Bretton Woods System I also give more context about the System used before the Bretton Woods System: the gold-exchange standard.87 The classical gold standard was a stable mechanism but its successor was not. The Bretton Woods System was a compromise between a paper key reserve currency and a commodity standard, gold.88

2.1. What is Diplomacy?

In current affairs, diplomacy is everywhere whereby the bridge between internal and external policy is more blurred. Specialization and the more technical character of that, has led to more diplomacy.89 Diplomacy can be defined as ‘het beheer van de relaties tussen de staten onderling enerzijds en tussen staten en andere actoren anderzijds.’90

Diplomacy is the instrument of the department of foreign affairs. Thereby diplomacy is defined as ‘het medium en de boodschap van het buitenlands beleid.’91 The instrumentarium and the message are intertwined.

Diplomatic actors are evolved over the years. It is no longer a monopoly for states because there are a lot of other players too such as NGOs and Multinationals. Indeed, these actors played a strong role in current affairs. The diplomatic actors, their function is negotiating. Other functions are: ceremony, governance of relations, information and communication, to protect the state, the normative and the legal.92

Diplomacy is: representation, export promotion, the giving of development aid, information gathering and political reportage.93 As diplomacy is the medium and negotiating is its function, then we can say that diplomacy is the communication between states and other international actors. Then diplomats are the agents of states.94

After 1945 diplomacy has exploded in posts and in actors. More national questions were getting an international view and the number of states raised. The actors did diplomacy on a bilateral and a multilateral level.95 Bilateral means two-sided and multilateral is more than two.96

From the former diplomacy ‘is het smeermiddel van de internationale samenleving’ whereby we call on the political scientist Hedley Bull.97 Hedley Bull saw the world as an international community of states. He had build his own School of IR: the English School.98

87 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy88 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy89 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek90 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek91 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek92 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy93 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek94 Bayne, N. en Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations95 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy96 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy97 McKercher, B. (ed.) Routledge Handbook of Diplomacy and Statecraft98 The English School of international relations theory (sometimes also referred to as liberal realism, the International Society school or the British institutionalists) maintains that there is a 'society of states' at the

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The diplomatic practice raised out of the practice from European history and that practice has been spread over the world by the European colonisation.99 Diplomacy has thereby its roots in the Italian Renaissance and in the Byzantine Empire. With the Byzantines diplomacy struck ‘to the management of barbarians.’100 The Venetians came with the permanent residence as an innovation. The French cardinal Richelieu made from the diplomatic practice a more permanent process instead of an ad-hoc event.101 Diplomacy became more and more a permanent institute. The reason of the state and commerce went hand in hand in that process. Commerce and security were raison d’état.102

A good diplomatic practice has to adapt with its time. Indeed, following Jönsson diplomacy ‘is the content’ of foreign affairs, and the ‘conduct’ of foreign policy.103 He speaks about diplomacy as an art with adaptations on current affairs. Watson defines diplomacy ‘as a central task (…) not the management of order, but the management of the change and the maintenance by continued persuasion of order in the midst of change.’104 He also asks a question which interests a diplomat has to follow: that of the state or that of the international community? The ideal diplomat is a bridge between the two.

Regarding the perspective of IR105 diplomacy is also defined as: for Realists, whereas only states are seen as actors in the process of international relations, they see diplomacy as ‘a means to make the power of the state bigger’.106 The English School of IR in contrast, speaks of diplomacy as an institute and practice of IR. They constructed their definition on the constructivism that diplomacy ‘constitutes and produces an international society’.107 It assures the structure of the international system.

Figure 1: Diplomacy

international level, despite the condition of anarchy (that is, the lack of a global ruler or world state). The English school stands for the conviction that ideas, rather than simply material capabilities, shape the conduct of international politics, and therefore deserve analysis and critique. In this sense it is similar to constructivism, though the English School has its roots more in world history, international law and political theory, and is more open to normative approaches than is generally the case with constructivism.99 Barston, R. Modern Diplomacy100 Barston, R. Modern Diplomacy101 McKercher, B. (ed.) Routledge Handbook of Diplomacy and Statecraft102 McKercher, B. (ed.) Routledge Handbook of Diplomacy and Statecraft103 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy104 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy105 Leer der internationale betrekkingen106 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek107 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek

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Source: http://4.bp.blogspot.com/_fYVGBB-LTK4/S99fltZsP5I/AAAAAAAAAB0/u_tMd-Q5IlM/s1600/661054_pw_diplomacy.jpg

2.1.1 Conference Diplomacy and Summits

A specific form of diplomacy is conference diplomacy and diplomacy in ‘summits’.108 I show this in my first part so I can construct more the diplomacy during the Second World War. I do this to analyse the Conferences during the War.

Those Conferences were multilateral. Bilateral talks were the first form of diplomacy but because of a bigger growing world, multilateralism was more institutionalized.109 The Congress of Vienna and the Concert of Europe after 1818 were the first steps. This Concert spoke of ‘high politics’110 and it developed international law through Conferences. The two Congresses of The Hague developed the laws of war in 1899 and in 1907. Those Congresses were heydays for diplomacy and for the first time than before there were no-Western nations at the Conference. The Holy Alliance of monarchs functioned as a predecessor for the collective security system of the League of Nations or the United Nations.111

After the Concert conference diplomacy was institutionalized in the League of Nations. The League of Nations was an idea of president Woodrow Wilson who with his 14-point plan wanted to change the balance of power through international law and international conventions. The ad-hoc diplomacy became an institute. The Americans were opposed their own child, the League of Nations.112

For the French the League of Nations was a means for their own security while for the British it was a better construction than the European Concert.113 The ambition of the League was universality but a lot of things happened outside the League too: the Conference of Locarno was outside this institute.

108 Bayne, N. en Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations109 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy110 Within the subfield of international relations, and political science as a whole, the concept high politics covers all matters that are vital to the very survival of the state: namely national and international security concerns. It is often used in opposition to "low politics".111 Papadimitriou, P and Pistikou, V. Economic Diplomacy in National Security, In: Procedia Economics and Finance, 2015112 Morse, J. en Keohane, R. Contested Multilateralism, In: Review Int Org, 2014

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With this the League had not enough power.114 Through the years the League became more and more like the Concert and the balance of power got in it. The big diplomatic players saw more and more the League of Nations as rivals. The League would fail and it would end in War. During that War people talked about founding a better institute and that was the United Nations.115

To have a conference the conference players have to see the benefits of the meeting. Those assemblies can be formal or informal. On informal summits diplomats, experts, politicians talked in the so-called backrooms.116 Once a Conference is decided, than there has to be worked towards it: those are the so-called Prep-Com or preparatory meetings. There the decision is held on negotiations. Those negotiations are: the recognition of the problem, the search for a solution and at the end an agreement for the adherents. Negotiations has as goal to take away the insecurity of the parties.117

A special form of conference diplomacy is a summit: than the government leaders or state leaders are coming together. Also, the highest representative of international organisations can participate. In the next part the Big Three came together several times during the War.118 The leaders of the Big Three came together to solve the big axiomas119 of its time. And through communiqués the followers were briefed. Communiqués from a summit are vague and are things in ambiguity because every player wants something from the table.120

Sherpa’s guide the top players through the summits.121 It can be that the sherpas negotiate and that the top politicians only have to negotiate the last deal and only have to sign the deal. Through the complexity the players of the summit reach ‘packaged deals’ most of the time whereby different cases are combined with each other.122

Summits are done about the economy, about security, about a common identity, about the near presence, about the plot, and about the historical ties. Summits underline the interdependence of states. A benefit is that leaders took part in the interdependence of things. Misunderstandings are cleared by the building of confidence between the players of the conferences and summits.123

2.1.2 Bilateralism and Multilateralism

113 The European Concert is the predecessor for the League of Natiuons but only Eruopean. It was constructed after the Vienne Congress114 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek115 Barston, R. Modern Diplomacy116 McKercher, B. (ed.) Routledge Handbook of Diplomacy and Statecraft117 McKercher, B. (ed.) Routledge Handbook of Diplomacy and Statecraft118 Melissen, J. (ed.) Diplomatie raderwerk van de internationale politiek119 Een axioma (of postulaat) is in de wiskunde en logica sinds Euclides en Aristoteles een niet bewezen, maar als grondslag aanvaarde bewering. Een axioma dient zelf als grondslag voor het bewijs van andere stellingen.120 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy121 Cooper, A., Heine, J. en Thakur, R. The Oxford Handbook of Modern Diplomacy122 Morse, J. en Keohane, R. Contested Multilateralism, In: Review Int Org, 2014123 Barston, R. Modern Diplomacy

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In this part I build on the part of conference diplomacy because conference diplomacy is most of the time multilateral. Multilateralism has come to the fore because of more globalization, while bilateralism is more or less a two – level game between states.124

Keohane and Ruggie define multilateralism in two ways: ‘as institutionalized collective action by an inclusively determined set of independent states.’125 Institutions have to be open so that every nation can accede if they truly want to be multilateral. Ruggie for instance gives: ‘multilateralism to action among three or more states ‘on the basis of generalized principles of conduct,” such as diffuse reciprocity.’126 Ruggie’s definition has an influence on the diplomacy in the 20th century. Multilateralism is a tool for foreign policy experts and from international lawyers.127

Multilateral diplomacy has grown strongly because of the developing of many international organizations. Bilateralism in contrast, is the defence of state-interests. Both define commerce and security but the organization of it is different. Both handle social, economic, political and cultural relations. Multilateralism and bilateralism have in common: defence of interests, ideology and social skills.128 Caporaso says it as: ‘firstly, the distinction between multilateral institutions and the institution of multilateralism is cognizant of two levels of related international activity. Multilateral institutions focus attention on the formal organizational elements of international life and are characterized by permanent locations and postal addresses, distinct headquarters, and ongoing staffs and secretariats. The institution of multilateralism may manifest itself in concrete organizations, but its significance cuts more deeply. The institution of multilateralism is grounded in and appeals to the less formal, less codified habits, practices, ideas, and norms of international society.’ Simply said it is a tool to look to the world and to look at the organization of the world. Political scientists have it in this regard about hegemony. Secondly, Caporaso has it also as: ‘cause-and-effect ways. Multilateral organizations may provide arenas within which actors learn to alter perceptions of interest and beliefs. The institution of multilateralism may in turn spawn, maintain, alter, and undermine specific organizations.’129

Caporaso defines ‘multilateral’. Multilateral suggests "many" actors, but it is unspecific as to what number constitutes many.130 "Many" could refer to anything from a minimum of three to a maximum of all. Multilateralism refers to a region, rather than a point, on the continuum and thus can be analyzed in terms of gradations. When conceptualized in this manner, multilateral action is compatible with theories concerning thresholds in groups of less than universal membership.’ Multilateral implies doing it together and it has a means and an end. Following Ruggie, multilateralism is: firstly, ‘indivisibility’; secondly, ‘non-discrimination’; thirdly, ‘diffuse reciprocity’.131

124 Alvare, J. Multilateralis mand its Discontents, EJIL, 2000125 Ruggie, J. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, In: International Organization, 1982126 Ruggie, J. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, In: International Organization, 1982127 Cooper, A. Heine, J en Thakus, R. Oxford Handbook of Modern Diplomacy128 Martin, L. Interests, Power, and Multilateralism, In: International Organizations, 1992129 Caporaso, J. International relations theory and multilateralism: the search for foundations, In: International Organizations, 1992130 Caporaso, J. International relations theory and multilateralism: the search for foundations, In: International Organizations, 1992131 Ruggie, J. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, In: International Organization, 1982

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The negative of multilateralism is that it can go hand – in – hand with free-rider behaviour.132 Therefore, there are rules and economists and mathematicians have constructed the game theory. In game theory experts have developed strategies to combat free-rider behaviour.133 Uncertainty has to be combatted by it and because of the game theory players have to be rational actors. Keohane therefore talks about: ‘Such cooperation is not harmonious but rather emerges from discord as a way to generate international regimes that achieve goals of states through reducing the costs of transactions and providing relevant information.’134

Bilateral diplomacy is practiced by embassies and consulates that lobby in the host countries. Experts talk about people-to-people relations. They influence the host countries and they follow their news so they can lobby these states. For that they have the necessary discretionary powers.135 Multilateralism goes further by talking about legalization. The multilateral scheme is also the best for treaty-making and for the world economy. The world economy is made better by the Bretton Woods Institutions which have constructed a more stable economic environment.136

Multilateral diplomacy is more complex than bilateral diplomacy too.137 They form a community whereby leadership defines success in the bilateral world. Multilateralism is also different from regionalism and ad-hoc diplomacy. Unilateralism is the way of power by one actor. Regionalism is better defined by regional players while multilateralism is best played by multilateral actors. Institutions that were build during the Second World War have strengthened multilateralism.138

Figure 2: Bilaterism and multilateralism (two-level game)

Source: https://upload.wikimedia.org/wikipedia/en/thumb/b/b7/Bilateral_versus_Multilateral_Control.png/400px-Bilateral_versus_Multilateral_Control.png

2.1.3 Monetary and Financial Diplomacy

Here we talk about economic diplomacy and its more specialised settings in financial and monetary diplomacy. Economic diplomacy can be a bridge towards high politics, i.e. security, from ‘low politics’, i.e. commerce.139 Indeed, economic diplomacy can be a medium to the security of the national realm, about the gaining of influence and about the defence of the interests of the state. This leads to economic diplomacy as economic statecraft. Okano-Heijmans define economic diplomacy as a tool for war and commerce. We build on it further to define economic diplomacy: one, ‘diplomacy

132 Barston, R. Modern Diplomacy133 Cooper, A. Heine, J en Thakus, R. Oxford Handbook of Modern Diplomacy134 Keohane, R. The Contigent Legitimacy of Multilateralism, Garnet Working paper, 2006135 Barston, R. Modern Diplomacy136 Cooper, A. Heine, J en Thakur, R. Oxford Handbook of Modern Diplomacy137 Barston, R. Modern Diplomacy138 McKercher, B. (eds.) Routledge Handbook of Diplomacy and Statecraft139 McKercher, B. (eds.) Routledge Handbook of Diplomacy and Statecraft

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concerned with economic policy questions’140 and two, ‘diplomacy that employs economic resources in pursuit of a particular foreign policy objective.’141

Monetary and financial diplomacy is a special branch of economic diplomacy. This form is constructed by the Bretton Woods Institutions: the IMF and the World Bank.142 Currently, they come in the news because of the demands to reconstruct both, a demand by the developing world. These reforms have to show the more justified economic relations in the world. The Bretton Woods institutions are a picture taken from the order in the Second World War.143

Odell defines economic diplomacy further and it goes as: ‘policies relating to production, movement or exchange of goods, services, investment, money, information and regulation’.144 As regular diplomacy, economic diplomacy acts through state actors and non-state actors. Because of a more economical setting, economic diplomats function in friction with other departments and institutes. The essence in economic diplomacy is more or less legalization and that happens more than regular diplomacy. Economic diplomacy in contrast with regular diplomacy is also about the power of the market. Ideas also play a role, even as ideology.145 On the one hand it is a political practice and on the other hand a strategy on commercial or economic relations. Coolsaet and Kesteleyn build on it further: ‘economische diplomatie een hefboom [was] voor de verwerving van rijkdom en dus macht van de heersende elite. Militaire politiek zorgde voor de beveiliging van deze elite en de waarborg van haar rijkdom. Samen vormen economische diplomatie en veiligheidspolitiek de DNA-structuur van de diplomatie, waarbij, afhankelijk van de vereisten van het moment, nu eens het ene, dan weer het andere de overhand heeft.’146

In the Bretton Woods Institutions where financial diplomats come together, there are 187 members. Those members give and take quota and those quota are the weight of the voting system. Those quota are also revisioned after 5 years. The quota is a representation of the economic power of a country in the Bretton Woods institutions.147 Those quota are drawn when members have problems with its balance of payment. The USA was the biggest economy during and after the Second World War and that is why they got the most quota to have a majority. With this majority they can veto every decision in the IMF and in the World Bank. In current affairs, the IMF had evolved from a watchdog for parities towards a surveillant of the world economy. With the creation of the WTO in 1994 the economic diplomacy has been given a new élan.148

In contrast to current affairs, financial and monetary relations were a bridge in between the politicians and the financial world. In the interwar years those interests were shaped by the central

140 Okano-Heijmans, M. Conceptualizing Economic Diplomacy: The Crossroads of IR, Economics, IPE and Diplomatic Studies, In: The Hague Journal of Diplomacy, 2011141 Okano-Heijmans, M. Conceptualizing Economic Diplomacy: The Crossroads of IR, Economics, IPE and Diplomatic Studies, In: The Hague Journal of Diplomacy, 2011142 McKercher, B. (eds.) Routledge Handbook of Diplomacy and Statecraft143 Cooper, A. Heine, J en Thakur, R. The Oxford Hnadbook of Modern Diplomacy144 Bordo, M. and Eichengreen, B. (eds.) A Retrospective on the Bretton Woods System, Lessons for International Monetary Reform, Chicago University Press, 1993145 Bayne, N. and Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations146 Coolsaet, R. en Kesteleyn, J. Na 100 jaar: Wederopstanding van Economische Diplomatie, In: Internationale Spectator, 2010147 Bayne, N. and Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations148 Bayne, N. and Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations

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banks. Because of the Great Depression the financial elites came in distrust. And that is in the contemporary world too.149

Figure 3: Economic Diplomacy

Source: https://image.slidesharecdn.com/economicdiplofinalproject-160108165421/95/economic-diplomacy-2-638.jpg?cb=1452273614

2.2 Monetary Situation before Bretton Woods

The twentieth century has known three different international monetary standards. After the First World War the classical gold standard was replaced by a gold-exchange standard. And the last rules-based standard was the Bretton Woods System: it is more or less an intermediary between a commodity standard and a fiat standard.150 This view is based on the work of Cesarano and on Eichengreen.

Eichengreen and Cesarano begin their work with the history of an international monetary system defined by a commodity and fixed metal, gold.151 From bimetallism in the nineteenth century a gold standard was followed by several states. The gold standard made that currencies were exchangeable between each other. The classical gold standard was a multilateral standard with gold and the pound at the centre. With the Great Depression and the Second World War it lost its multilateralism.152

To set the stage for the Bretton Woods System we have to tell something about the international monetary system itself and about its predecessor. The system we are using today is fully based on the laws of demand and supply.153 The Bretton Woods System itself was the last rules-based system in that realm. Experts also tell that only with the period of 1958-1968 the System came in to place

149 Bayne, N. and Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations150 Pilbeam, K. International Finance, Palgrave Macmillan, 2013151 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008152 Bayne, N. and Woolcock, S. (eds.) The New Economic Diplomacy. Decision – Making and Negotiation in International Economic Relations

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and after that its demise was certain. Most countries where then in fully compliance with Article VIII154 from the Articles of Agreement.155Article VIII was created in accordance with the GATT System. Article VIII was also invoked for the creation of the European Economic Community. The European Economic Community was created with the implementation of the EPU and Article VIII was in that System incorporated.

If we go deeper to define an international monetary system, we can tell that a monetary system is a system based ‘on conventions, rules, procedures and institutions that govern the conduct of financial relations between nations’.156 This is the view from Pilbeam in his work on International Finance.

2.2.1 A Stable International Monetary System: the Classical Gold Standard

The Classical Gold Standard was used until the outbreak of the First World War and came back in the interwar years but with more problems. The classical gold standard and its successor were based on the ‘price-specie flow’ from Hume whereby always an equilibrium was reached by changes in the price level.157

The ‘price-specie flow’ worked as follows: a surplus in trade led to an influx in gold whereby prices raised. Hence, imports grew and exports diminished. A new equilibrium was reached because the extra supply of money was neutralized. This was the theory behind a commodity standard. Hume tried on this way to battle mercantilism that said that no country alone could have all the fixed metal in the world. The fixed metal was always divided between several players in world trade. Cesarano argues that this system only worked in theory. White defines it otherwise as: ‘gold will flow from an area with low interest rates into an area with higher interest rates as the supply of funds seek higher returns.’158 Capital movements in this way had to create profits for the actors. The classical gold standard also meant a restriction on government investments. Bordo tells: ‘specie standard meant adherence to sound money, i.e. predictable policies that maintained stable price levels (as well as fiscal probity, i.e. balanced budgets) and avoiding the transactions costs of exchanging different currencies into each other.’159

153 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008154 Article VII is the avoidance of restrictions on current payments and of discriminatory currency transactions155 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006156 Pilbeam, K. International Finance, Palgrave Macmillan, 2013157 Pilbeam, K. International Finance, Palgrave Macmillan, 2013158 White, L. The Clash of Economic Ideas. The Great Policy Debates and Experitments of the Last Hundred Years, Cambridge University Press, 2012159 Bordo, M. Exchange Rate Regime Choice in Historical Perspective, IMF Working Paper, 2003

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Figure 4: Price-Specie-Flow (Hume)

Source: https://slideplayer.com/slide/5135263/16/images/8/Classical+Gold+Standard:+1875-1914.jpg

According to Vermeiren there were rules in the gold standard: one, the price of the currency was made sure by law; two, gold and capital were free; three, banknotes were covered by gold; four, to pay for imports money or gold in the country was made available.160 The system implicated a fixed exchange rate mechanism with free capital movement as is told by the monetary trilemma.

Cesarano argues that the gold standard worked differently than what Hume theorized: the price level was made sure by the function of the gold standard and the Bank of England stabilized the system as hegemon and by intervention on the capital market. Central Banks after the Bank of England followed to stabilize the gold standard.161 De Cecco tells in this regard: ‘the gold standard practice in the 19th century operated not on this principle but on that of a common centre with which the other countries were connected through trade and finance.’162 And this centre was London.

Following Cesarano the system was built around: the Bagehot rule, the restoration rule and the price level rule. Whenever there was a drain on the reserves of the central bank, the interest rate of the central bank was raised. The Bagehot rules worked to attract capital from abroad, the exchange rate risk was neutralized by the restoration rule and the price level rule made sure that the internal inflation did not rise.163

The fluctuation of the money supply was tempered by the Bagehot rule because the function as ‘lender-of-last-resort’ of the central banks countered the short term liquidity problem. The restoration rule made sure that a restriction on the monetary policy happened because of the

160 Vermeiren, M. Het Monetair Trilemma in de Internationale Financiële Architectuur, masterproef, 2007161 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006162 Bordo, M. and Eichengreen, B. (eds.) A Retrospective on the Bretton Woods System, Lessons for International Monetary Reform, Chicago University Press, 1993163 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006

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convertibility.164 The price level rule defined the price level on the gold market. Thus the gold standard became on this way symmetrical, stable and believable. Those three rules had to work in connection with each other and worked simultaneously. An equilibrium had to be reached in this way.165

The central banks intervened in the gold market to get the right price. The fiduciary element made sure that there was a restriction on the money supply. An economic shock was absorbed by the specie-flow mechanism in the gold standard. The classical gold standard survived the debates on bimetallism in the nineteenth century. The thing thereby was to preserve the purchasing power by a commodity anchor.166

After the First World War the system lost its credibility because the fiduciary in the system was greater and the system was weakened by the war and by inflation. This happened by the spreading of more and more fiat money.167 The classical gold standard’s ‘straightjacket’ was honoured after the War. In the debates that followed during the interwar years Keynes rejected the gold standard as a ‘barbarous relic’. The same Keynes predicted the Second World War in the Consequences of the Peace in 1919 and he wrote with the Allies on the plans that defined the post-world order.168

The prediction of Keynes was right because of Germany: Germany battled hyperinflation in the course of interwar years. The Young and Dawes plan that followed had to make sure that Germany honoured the settlements of Versailles. Both plans would led to nothing and were governed by a new institution, the BIS.169 170Germany would be back on track by the election of the Nazis and with their economic system of autarky.171

Over the interwar years countries went back on gold. And that on the parity of before the War. Those countries wanted a stable monetary order but they also wanted more government intervention in their economic affairs. The pound and gold were also governed by the League of Nations as by the Bank of England.172 Indeed, the economic and financial committee of the League wanted a return of the classical gold standard. Post-war conferences were also created by the League and organized by the League. Those conferences had to construct the internationalism of before the War.173

The Conference of Genoa of 1922 was a failure: there, some countries decided to go back on gold.174 They wanted to cooperate again but the world had changed: they followed a policy that was in contrast with the gold standard. Monetary stability had to lead to recovery. The currency of England 164 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006165 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008166 Eichengreen, B. and Sachs, J. Exchange Rates and Economic Recovery in the 1930s, In: The Journal of Economic History, 1985167 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006168 Pilbeam, K. International Finance, Palgrave Macmillan, 2013169 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008170 Bank of International Settlement171 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006172 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006173 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008174 Pilbeam, K. International Finance, Palgrave Macmillan, 2013

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was overvalued and that of France was undervalued. For the UK this meant a loss of competitivity and this meant that the unemployment had risen. For France this was an undervalued currency and the recovery of competitivity. A stimulation of the export sector was a solution to the unemployment question. The classical gold standard in contrast to the gold-exchange standard needed monetary control and that was not the case.175 Hence, capital movements became destabilized.

Gold reserves were needed to absorb economic shocks. Indeed, after the crash 1929 the USA and France made their monetary policy to hoard gold. This raised the prestige of the country. And by this move convertibility became possible and this brought more in than a devaluation. In 1936 the gold standard came to an end. The gold bloc with Belgium came to an end. The countries let their currencies float and wanted to restore their competitivity.176

With this a fiat system was born. Central banks intervened massively on the money markets to control the fluctuations of their currencies. With monetary policy politicians and central bankers followed an expansionary monetary policy to find a solution for the unemployed.177 The competitivity was regulated by the market and this strengthened the export sector in some countries. There was also a new Conference: the Conference of London was also finished by a failure because protectionism raised and cooperation tumbled. The world became more fragmented with this failure.178

In the interwar years the Belgians were in favour the return to the gold standard. That standard would be used to stabilize the Belgian franc, to restrict government intervention and to limit public expenses. The Belgians also hoped for the payments from the Germans as stipulated by the Treaty of Versailles.179 After the First World War, Belgium was changed forever: the once great industrial nation was no more. In 1926, therefore, to connect again with gold, the Belgian franc would be devalued and the country would be part of the gold bloc until its demise.180

Stipulating the hegemonic stability theory, the UK was the strongest player in international finance with London as greatest financial centre and with the pound as the key reserve currency. But as is said by Westad, the GNP of the USA had surpassed that from the UK.181 In practice the USA did not want the burden to construct its own world economy and that would change with the construction of the Bretton Woods System.

Also, in economics there changed a lot: before 1914 economists and experts did not question the gold standard but in the interwar years they did. And that was because of the fact that the gold standard did not function as well as before: only the price level rule functioned. The destabilizing capital flows and the deflationary politics were something that was not seen before. And it was explained as not done.182

175Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006176 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008177 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008178 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006179Pilbeam, K. International Finance, Palgrave Macmillan, 2013180 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006181 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008

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At the Conference of London in 1933 the stabilization of the international monetary system failed because some players as president Roosevelt did not want to stabilize the dollar as key reserve currency.183 He also made the dollar inconvertible and asked for ‘the creation of a new and cooperative system of money management’.184 The fault of the Great Depression was said to be the mismanagement of money by the central banks. The Bank of England was not capable to defend its own system anymore and the Federal Reserve did not want to. They went back to the parity of before the First World War.185

During the interwar years there were currency blocs that stood against each other: the sterling bloc, the gold bloc, the Nazi bloc and the dollar bloc.186 The cooperation needed in the system collapsed. In this Crombois sees the vacuum let by the Bank of England and he also sees the hegemonic stability theory as a failure in the interwar years. He says there was a ‘discrepancy between the capability but the unwillingness of the Americans to take leadership in the international monetary cooperation and the willingness but lack of the capability of the UK to provide leadership.’187

The government of the USA as others wanted to tackle internal problems and they felt less for the defence of the international monetary system. In 1936 the Tripartite Agreement would stabilize the system further between the big players. And the USA began to buy gold so they could stabilize the dollar’s exchange rate.188 The Tripartite Agreement was signed by the central banks and was a step to reconstruct the international economy. The Agreement was a strengthening of financial diplomacy but Keynes and Harry Dexter White wanted that the Treasuries would establish stronger ties between the big players. With the Agreement parities would be fixed and only consultations could alter that.

Figure 5: The Classical Gold Standard

182 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008183 EIchengreen, B. en Uzan, M. The 1933 World Economic Conference as an Instance of Failed International Cooperation, memosa184 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006185 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008186 Pilbeam, K. International Finance, Palgrave Macmillan, 2013187 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006188 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008

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Source: https://slideplayer.com/slide/4599632/15/images/24/The+Classical+Gold+Standard+(1870-1914).jpg

2.2.2 Critics on the Gold Standard

In the interwar years the gold – exchange system was a target for economists, politicians and experts. Indeed, Irving Fisher came with the first attack: he proposed a ‘tabular system’189 and a ‘compensated dollar’190 whereas the gold would be fixed to a monetary currency that fluctuated to keep the purchasing power.191 Fisher built on the quantity theory of money and on the ‘tabular system’: ‘By eliminating the uncertainty of the unstable monetary unit the compensated dollar would result in a more precise calculation of variables on which economic agents behaviour depends thus enhancing the stability of the economy’.192

The critics can be divided in three blocs: the normals who wanted to have a governed system with a fix to gold; a radical voice, that of Keynes; and a conservative voice from the Austrian Economic School. In the way I think, in this dissertation I follow the voice of Keynes who rejected the gold standard. The Austrian School was in contrast in favour to a return of the gold standard. The gold standard did not function anymore as the way it did before: it was hybrid and countries wanted to plan their economic policy. The Austrian School rejected that and wanted a return to the laissez-faire of the gold standard.193

Keynes on the other hand wanted monetary control by central banks. The bankers had to choose between deflation and devaluation or between price stability and exchange rate stability.194 Keynes in a ‘Tract on Monetary Reform’ wanted devaluation and price stability. And he was in favour of a fiat

189 Calculation by system or table190 “compensated” dollar or “commodity” dollar. Fisher believed the dollar should be defined not by the weight of gold but by the value of gold; this value could be determined by an index number based on the price of a given set of goods191 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008192 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006193 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006

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system because the commodity standard brought deflation with it. He wanted ‘(to separate) fiduciary money from gold.’195

The economist of the League of Nations, the Norwegian Nurske, saw problems in the interwar years happening to the gold standard. He rejected the creation of a free floating system because it discouraged international trade and it led to a misallocation of the means. After the Tripartite Agreement of 1936 a floating system was created but with destabilizing capital flows and it led to arbitrage and speculation. The free floating system was seen as chaotic whereby inflation and loans raised and it led to competitive devaluations.196

2.3 Intermediary Conclusion

In this chapter we have seen what diplomacy is. Diplomacy is the communication between different actors like states, NGO’s and enterprises. These players all have an interest in international affairs. Following the different schools in the International Relations, it can be said that diplomacy is used to strengthen the power of the state on the one hand and on the other hand to construct the international community of states.

I have also said something about economic diplomacy and of monetary and financial diplomacy. Even conference and summits diplomacy have been told. Economic diplomacy is about export promotion, about nation branding, and about getting investment. Also something has been said about multilateralism and bilateralism. The difference is the number of players in the diplomatic game.

We have also defined the international monetary system that was not able to function properly in the interwar years. Indeed, the classical gold standard did not have the same results as before the First World War. The gold-exchange standard was not good enough because it did require a hegemon and that was not available. The gold-exchange standard ended in the Tripartite Agreement and it led to currency blocs. The purpose behind Bretton Woods was to correct that..

3. Conferences during the Second World War

194 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008195 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008196 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006

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There were a lot of conferences during the Second World War. They were held by the Big Three to reconstruct the post-war order.197 The Second World War was the most destructive war in history. Indeed, about 70 million people were killed with the biggest burden in the USSR. Also, in the USSR about 70% of the industrial potential was lost and about 60% of the infrastructure. This was because of the Nazi invasion in 1941. The Second World War started in Europe in 1939 by the invasion of Poland but in Asia it commenced earlier with the invasion of Japan by China in Manchuria in 1937.198

In 1939 Germany invaded Poland and Poland was partitioned by Germany and the USSR. On the invasion of Poland, France and England did not react. The Allies were not prepared for a war. In Poland, the Nazis and the Soviets decided to destroy the Polish elite and intelligentsia. After that, the Nazis attacked the rest of Europe: France capitulated even as the Benelux. Only England was not conquered. France was partitioned in an occupied part and a free part under the Vichy Regime under leadership of Pétain. The free governments in Europe all fled to London: the government of Belgium too.199

After the battle for England, Germany tried to seek peace with the British. The English rejected this. In 1941 the Germans attacked the USSR with Operation Barbarossa.200 The Soviets were not prepared to defend, they were trained to attack. The border with Germany was spread over some 3 million soldiers.201 Also in 1941 the Lend – Lease came to being with the British and the Americans. Article VII of Lend Lesae was the most important and stipulated convertibility and safeguards.

After the invasion by Germany in the USSR, the USSR took part in Lend-Lease as well. The free governments in London did that as well. The Lend-Lease decided to give the Allies war material, food and primary resources that had to be bought in the USA. After the War it had to be paid back. The agreement stipulated: it ‘authorized the President to sell, transfer, exchange, lease, lend or otherwise dispose of any defensive article to any country whose defence he deemed vital to the defence of the US.’202

In the Mutual Aid Agreement there was disagreement with Article VII. Article VII implied the end of the British Empire: it wanted to end the preferential trading system from the Common Wealth. Therefore, Keynes negotiated under Churchill’s leadership that ‘the elimination of discrimination’ together with ‘the expansion of production, employment, and exchange and consumption of goods.’203 It talked about the post-war order: with the Mutual Aid Agreement, the UK fixed itself to the USA. The British and the Americans wanted to reconstruct the world economy under the lines of multilateralism.204

197 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005198 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011199 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-2000, Van Halewyck, 2006200 Operation Barbarossa (German: Unternehmen Barbarossa) was the code name for the Axis invasion of the Soviet Union, which started on Sunday, 22 June 1941, during World War II. The operation stemmed from Nazi Germany's ideological aims to conquer the western Soviet Union so that it could be repopulated by Germans, to use Slavs as a slave-labour force for the Axis war effort, and to seize the oil reserves of the Caucasus and the agricultural resources of Soviet territories201 De Vos, L. en Sterkendries, J. De Grote Geopolitieke Problemen na de Tweede Wereldoorlog, Davidsfonds, 2010202 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969203 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969204 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969

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Again in 1941 the Japanese attacked the USA with the strike on Pearl Harbour. With this act the USA was dragged into the Second World War, hence, the American exceptionalism and isolationism got a stab.205 The Allies acted on it and they concluded the Atlantic Charter: this Charter is one of 26 nations against the Axis powers. With this Charter the Allies declared that they did not want expansion, that they sougth the right to self-determination, that everyone had to have access to primary sources, and that they were for the freedom of the seas.206 They also opted for a better system of collective security. And they wanted, therefore, to replace the League of Nations. In the Charter they also decided that no nations have to seek peace with the Axis: they wanted them to be defeated.207

The meaning of the Charter was ‘to strive to promote mutually advantageous economic relations between them through the elimination of any discrimination in either the US or in the UK against importation of any product originating in the other country; and they will endeavour to further the enjoyment by all peoples of access on equal terms to the markets and to the raw materials which are needed for their economic prosperity.’208 The Mutual Aid Agreement and the Atlantic Charter had to reconstruct the world economy on the lines of multilateralism.

The Charter attacked the preferential system of the British. The Ottawa Constellation was ‘inconsistent with the principle of equal access to raw materials’.209 It was also decided with this Charter that the neutrality had be given up and with the Charter and the Agreement the gold supply came to lie for 80% with the USA. The Belgians had also a role to play: the gold supply and the Congo attracted the interests of the Allies even as their fleet for the Charter and for the Agreement. The Congo was one of the only countries that had uranium. Uranium was used in the Manhattan Project. The Congo had also other rare earth minerals to give.

This was the context for the Conferences that were held during the Second World War. The diplomacy then was decided by the British and the Americans. I mention the Conferences that decided the War and I give the build-up of the Bretton Woods Agreement.210

3.1 Anglo-American Diplomacy: the bilateral ‘two-level’ game

The Americans were dragged into the War. Before they held to isolationism and they did not want to be part of power politics in Europe. The Americans opted for tariffs and protectionism in the interwar years too. And they wanted also payments for the First World War but then from the Allies and not from Germany. The Allies had lent plenty from the Americans during the First World War. The Americans therefore would reconstruct the German finances with the Young and Dawes Plan.211212

205 Van de Meerssche, P. Internationale Politiek. Deel I: 1815-1945, Acco, 2006206 Van de Meerssche, P. Internationale Politiek. Deel I: 1815-1945, Acco, 2006207 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006208 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975209 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975210 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984211 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008212 The Young Plan was a program for settling Germany's World War I reparations written in August 1929 and formally adopted in 1930. It was presented by the committee headed (1929–30) by American industrialist Owen D. Young, creator and ex-first chairman of the Radio Corporation of America (RCA), who, at the time, concurrently served on the board of trustees of the Rockefeller Foundation, and also had been one of the representatives involved in a previous war-reparations restructuring arrangement—the Dawes Plan of 1924.

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The USA and the USSR were economies that were somewhat in autarky. The USA and the USSR were newcomers in the world of power politics. They are continent wide and could produce everything by themselves. Woodrow Wilson wanted a different world after the First World War and decided with the 14-point plan that something had to be changed in the world politics of the Old Continent. This call was strengthened with the demand for government Intervention after the crash of 1929: a new elite came to the fore with Roosevelt and with the New Deal.213

This American elite knew the faults from their predecessors in their failure to comply with the League and they did not want to see the economic failures.214 This new elite was against the economic nationalism from the Axis but also against their politics of isolationism. The New Dealers wanted to rebuild the multilateral trading system as it was created by the British hegemony. Therefore, the tariffs had to go away: the Americans called for non-discrimination and in monetary terms it meant the convertibility of the currencies.215 They asked for multilateralism and that would go hand in hand with the division of labour and with the specialisation of countries in factor endowments.

With this multilateralism everyone would have access to the primary resources. And by this, trade would strengthen the world production and the world competition for markets. And that also gave more rebalancing of world trade.216 With multilateralism peace would be strengthened. This was the full liberal credo of international relations whereby free trade would bolster peace. Therefore, the Americans wanted to end the preferential system of the British.217

The Constellation of Ottawa meant autarky for the British and the Dominions. The British are a trading nation but with the Great Depression they focused on internal problems and they constructed a system of tariffs. The elite with their laissez - faire was discredited. The Belgians asked several times to be part of the Ottawa Constellation. The Americans too protected their markets with for instance the Smooth-Hawley Tariffs. This led to trade wars and currency wars. The conservatives in the UK wanted to defend the preferential system. Labour too was in favour to the preferential system because they wanted to do something for the unemployed. Both the Tories and Labour in Britain wanted more state intervention with the control of the exchange rate, with bilateralism and with mercantilism.218

The Inter-Allied Reparations Commission established the German reparation sum at a theoretical total of 132 billion, but a practical total of 50 billion gold marks. After the Dawes Plan was put into operation in 1924, it became apparent that Germany would not willingly[citation needed] meet the annual payments over an indefinite period of time.[citation needed] The Young Plan reduced further payments by about 20 percent. Although the theoretical total was 112 billion Gold Marks, equivalent to US ca. $27 billion in 1929 (US$ 117 billion in 2019) over a period of 58 years,[1] which would end in 1988, few expected the plan to last for much more than a decade.[2] In addition, the Young Plan divided the annual payment, set at two billion Gold Marks, US $473 million, into two components: one unconditional part, equal to one third of the sum, and a postponable part, equal to the remaining two-thirds, which would incur interest and be financed by a consortium of American investment banks coordinated by J.P. Morgan & Co.213 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969214 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975215 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975216 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014217 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014218 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969

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3.1.1 The Belgians in Exile

The Belgians fled to the UK at the start of the War.219 Gutt was the spokesperson of them and the minister of finance. In London he would defend the interests of Belgium. He also got more export markets for the Belgians. Theunis also was in London, Van Zeeland was in New York. In New York Van Zeeland created the Belgian National Committee.220

The first gain of the Belgians with the British was a payments agreement whereby the franc would get a new parity vis-à-vis the pound. And with the Congolese franc they also reached a new parity. The Belgian franc reached parity with the pound at 123 and the Congolese franc at 176.221

The government in exile also had disputes with the collaboration in its own country. Leopold III had capitulated and had given the power to the Nazis.222 This government was fought by the Belgians in exile. Also the gold of the NBB was for the Belgians in exile through Congo. That gold had given the people in exile more leverage for their negotiations.223

3.2 Tehran and Moscow

In Teheran the Big Three came together for the first time for their ‘high politics’. For the Americans, Roosevelt participated, for the British Churchill and for the Soviets Stalin participated. Roosevelt was against the occupation of Eastern Europe but also against a world following influences. He let Stalin with the occupation of Eastern Europe and the Baltic States. Roosevelt was also against the directorate of the Big Four.224225

In contrast Churchill defended the interests of the British Empire. He was more an ally of Roosevelt than of Stalin.226 With Roosevelt and with Stalin, Churchill wanted to redo the German economy and reconstruct it as a pastoral economy. Stalin wanted a buffer zone and a defence of friendly nations to discourage an invasion in the future from the West. All three wanted to replace the League of Nations that had more powers: the UN was created. Stalin also asked for a second warzone. This led to the Operation Overlord227 in 1944. The partisans and the liberalization of Yugoslavia was recognized. With a German capitulation the Big Three would divide the country.228

On the Conference of Moskow the Big Three assembled again. There was an invasion in Italy out of Sicily and the South. Romania and Bulgaria came to be in the communistic sphere of influence. A sphere of influence of the British also came into being: Churchill feared a collapse of Greece. Hence, a Balkan deal was reached: Eastern Europe was lost to the Soviets while Greece was for the West. The Italian fascism was battled too.229

219Coolsaet, R. België en zijn Buitenlands Politiek, 1830-2000, Van Halewyck, 2006220 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999221 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999222 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-2000, Van Halewyck, 2006223 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015224 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011225 The UK, the USA, the USSR and China or France226Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006 227 Operation Overlord was the codename for the Battle of Normandy, the Allied operation that launched the successful invasion of German-occupied Western Europe during World War II. The operation was launched on 6 June 1944 with the Normandy landings (Operation Neptune, commonly known as D-Day). A 1,200-plane airborne assault preceded an amphibious assault involving more than 5,000 vessels. Nearly 160,000 troops crossed the English Channel on 6 June, and more than two million Allied troops were in France by the end of August.228 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006

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Figure 6: Conferences of Tehran and Moskow

Source: https://4.bp.blogspot.com/-pWYLedGpzXo/VMfWiQQs3XI/AAAAAAAABk4/sArasHUNY5Y/s1600/1943moscowconference.jpg

3.3 The Bretton Woods Conference

3.3.1 The Quest for a Stable International Monetary System

The creators of the Bretton Wood System were acquainted with the former international monetary systems. The classical gold standard was the one to be reached but they also wanted to construct it with more management of the world economy.230

Indeed, in the classical gold standard the currencies were fixed to gold. In this way currencies became convertible to each other to gold. The pound and the Bank of England were the stabilizers of the system. The gold standard went hand in hand with the first stage of globalization and with the laissez-faire politics on the world scene.231

Because of convertibility of the currencies world trade could grow. With the First World War a phase of deglobalization came through. Indeed, nationalism surged and after the crash of 1929 countries sought to protect themselves from foreign influence.232 The strength of the UK waivered while the strength of the USA gained. The financial centre of the world became New York instead of London and the dollar followed suit but than gradually.233 The USA was the largest creditor while the UK was the greatest debtor. The dollar loans of the Allies during the First World War had to be payed.234 Therefore, the UK devalued the pound after the War. In 1921 the UK went back on gold and in 1922 after the Conference of Genoa several countries went to gold. The gold-exchange standard was restored. The Price-Specie flow of Hume functioned less. And that came to be seen in the interwar years.

The UK had an overvalued parity and opted for deflation and austerity. The French in contrast went back on gold with an undervalued parity.235 The key reserve status of the pound was lost with the financial markets. The financial markets followed the current of their days but the USA did not want 229 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005230 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978231 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978232 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013233 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013234 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014

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to stabilize the dollar as the hegemon of the system. In full dollar diplomacy the USA gave loans to the world. To reach more cooperation and to stabilize Germany they constructed the Bank of International Settlements (BIS) as the central bank of central banks.236

The crash of 1929 was the last stab to the gold standard. After that countries wanted to protect themselves. With the Tripartite Agreement the gold standard came to an end. The Tripartite Agreement got governed by the League of Nations. Belgium exited gold and devalued the franc in 1936. The adherents of the Tripartite Agreement tried floating currencies with intervention in the money markets.237 The Agreement sought a stable exchange rate mechanism. But without the rigidity of the gold standard. The Young and Dawes plan were also constructs to stabilize the world economy. The creator of it was Fed foreman Benjamin Strong and the minister of Finance Henry Morgenthau. They loaned to Germany and they wanted to stabilize the mark. The hyperinflation in Germany ended with the creation of the Reichsmark and this was a construct of the USA. Deglobalization happened too: the world got divided in currency and trade blocs. The Commonwealth, the dollar zone, the Nazi-zone were created. Everyone got on bilateralism. The creation of Bretton Woods had to replace bilateralism and had to rebuild the international monetary system on a rules-based way round multilateralism.238

3.3.2 The Belgian Relations During the War

The Belgians had some leverage in London. They had their fleet which they lent out to the Allies in the Lend-Lease System. The Belgian fleet could connect goods towards the British and the Americans. And the country had gold and rare earth metals through Congo. 10 million Belgian francs were given to the UK as payment for the war. Also, a motorised army unit of 1000-2000 people was created for Belgium.239

Some goals were cleared too: the Belgians wanted access to British Commonwealth or wanted to be part of the preferential trading system.240 The protectionism of the Commonwealth had to be diminished. Gutt’s demands were: the restoration of the Belgian sovereignty, a seat in the peace negotiations, compensation for war damage and support for the reconstruction after the war. Furthermore, he wanted Leopold III gone. The neutrality had not withheld the country to be part of the Second World War. Therefore, the Belgians sought after allies: the British and the Americans.241

Gutt got two decisions accepted: Congo got access to the preferential system on the one hand and had its gold supply given to the British on the other hand.242 The Americans distrusted the Belgians in New York and confiscated their goods. After that the Belgians participated in the Mutual Aid Agreement as it happened with the British. The only thing that the Americans wanted more from the Belgians was uranium from Congo. The African Metals Corporation supplied them and took part in

235 Kirshner, O. (eds.) The Bretton Woods-GATT System. Retrospect and Prospect After 50 Years, M.E.Sharpe, 1996236 Kirshner, O. (eds.) The Bretton Woods-GATT System. Retrospect and Prospect After 50 Years, M.E.Sharpe, 1996237 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969238 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969239 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999240 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015241 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015242 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999

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the Manhattan Project. Van Zeeland knew this but failed to give the news to Belgium. He constructed in the USA something that was the forebode of the UN Refugees Agency243

Theunis, in the USA was busy with a campaign for the reconstruction and the relieve of destroyed nations. Theunis had also the function to protect the Belgian interests in the USA. Spaak on the other hand had a vision for a collective security system under the leadership of the UK.244 Churchill did not follow: the UK recognized their minor partnership with the USA. The idea of Spaak was based on alliances and ententes without the USSR. Spaak recognized the failure of the neutrality policy of Belgium. The neutrality policy was the cornerstone of the foreign policy for ages and it had functioned well.245

3.4 The Construction of a Bank and of a Fund

For contemporaries the development of a Bank and a Fund were not a given. Today we would order those ideas to stabilize the world economy as ‘embedded liberalism’: a construction of the world economy by international law. ‘Embedded liberalism’ was an idea from the political scientist Ruggie to talk about the Bretton Woods System. It told that economic intervention has to be constructed on the lines of economic multilateral bilateralism. Bretton Woods began from ‘stable exchange rates and current account convertibility while the economy is cushioned by multilateral rules allowing adjustment of exchange rates and capital controls as well as IMF’s provision of short-term balance of payment support.’246 It is actually a sort of global social security to combat worldwide unemployment. ‘Embedded liberalism’ is a ‘Labour Standard’ defended by the pax America and established by Bretton Woods.247The ‘Labour Standard’ refers to the compromise between capital and labour defended by the democrats.

According to Helleiner ‘embedded liberalism’ is a policy whereby ‘economic practices are required to defend the political autonomy of new interventions in the creation of the welfare state’.248 Following Ikenberry ‘embedded liberalism’ ‘allowed it the operation of a relatively open system of trade and payments as well as arrangements to support domestic full employment and a social welfare provision.’249 Therefore, capital controls were established to combine national economic motives with economic liberalism. The experience of destabilizing capital during the interwar years led to capital controls in the Bretton Woods System.

According to the literature the Conference and the diplomacy behind the Bretton Woods System was an Anglo-American thing. Indeed, Steil and Gardner construct their stories as a battle between economic ideas from the British and from the Americans: the Briton John Maynard Keynes and the American Harry Dexter White.250 Keynes is a very well known figure, White is not. The reason

243 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999244 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-2000, Van Halewyck, 2006245 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-2000, Van Halewyck, 2006246 Ruggie, J. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, In: International Organization, 1982247 Ruggie, J. International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, In: International Organization, 1982248 Helleiner, E. The International Development of Bretton Woods. North-South Dialogue in the Making of the Postwar Order, memosa249 Bordo, M. and Eichengreen, B. (eds.) A Retrospective on the Bretton Woods System, Lessons for International Monetary Reform, Chicago University Press, 1993250 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014

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therefore is that White has been accused as being a Soviet spy during the Second World War. That is why, tells Steil, that he could not lead its own creation the IMF or the IBRD.251

Helleiner follows the same reasoning but gives another picture whereas he deals with the development picture behind Bretton Woods. The development thinking behind Bretton Woods has led that the Global South complied to the IBRD and to the IMF.252 Helleiner tells his story and begins with the ‘Good Neighbour’ – policy from Roosevelt. This follows the big stick policy and the dollar diplomacy from its predecessors Herbert Hoover and Theodore Roosevelt. These policies aimed at intervention in the Western Hemisphere. It aimed at fostering cooperation and friendship.253

These policies are according to Cronon a continuation of American imperialism.254 The Americans intervened in Cuba with the ‘Platt Amendment’ which gave the tools to protect American interests. Roosevelt would not follow this Amendment. Roosevelt would leave the imperialistic ambitions of the Americans in Latin America. McPherson tells thereby that the ‘good neighbour-policy’ started with Hoover who condemned the occupation of Haïti and of the Dominican Republic. As president Hoover strove for trade relations and cultural relations between North and South America and to strengthen them.255

These relations where trend-setting for the creation of a Bank and for the development mandate. Then there came a division between the North and the South: after the crash of 1929 the North wanted a system of social security while the South wanted more government intervention. Thus both parts of the world wanted more cooperation and more intervention. The Export-Import Bank had to give loans to the Latin Americans and acted as an institute for financial diplomacy towards the South.256

The New Dealers from Roosevelt wanted peace through development and they combatted poverty.257 By placing development and poverty at the forefront, Roosevelt wanted social justice. There were also economic motives: they sought export markets and investments for American businesses. These ideas: economical and political, pleaded the neoliberal credo from labour division following the adagio of Ohlin and Heckscher. Factor endowments had to be strengthened in the world. Those factor endowments are labour, capital and land.258

In the construction of the Bretton Woods System those ideas were hailed and they were spread over the world. The Americans wanted this kind of structure on neoliberal lines. Development had also some other origins in the bigger South.259 Indeed, the Chinese Sun Yat-Sen was a statesman and

251 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014252 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016253 Cronon, D. Interpreting the New Good Neighbor Policy: The Cuban Crisis of 1933, In: HAHR,254 Sadlier, D. Conferencia-Americans All: Good Neighbor Diplomacy in World War II, In: Boletín del Posgrado en Historia, 2016255 McPherson, A. Herbert Hoover, Occupation Withdrawal, and the Good Neighbor Policy, In: Presidential Studies Quarterly, 2014256 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016257 Spellacy, A. Mapping the Metaphor of the Good Neighbor: Geography, Globalism, and Pan-Americanism durning the 1940s, In: American Studies, 2006258 Bordo, M. and Eichengreen, B. (eds.) A Retrospective on the Bretton Woods System, Lessons for International Monetary Reform, Chicago University Press, 1993259 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016

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philosopher developing the tradition of development economics. He constructed his ideas in the 1930s.260

3.4.1 The Development Thinking from Roosevelt about Latin America to Construct the Conference

A coalition was made before the Bretton Woods Conference. The Americans built on the Monroe doctrine, the Roosevelt Corollary, and the dollar diplomacy to foster cooperation and trust in the world. The New Dealers built on it further to get their world structure.261 The ‘Good Neighbour’ – policy was the carrot in the western hemisphere: it fostered the cultural, the geopolitical and the socio-economic ties between the continents.262

The development nations bled under the Great Depression. They were exporters of primary resources and they were not diverse economically speaking. By the crash of 1929 the capital from the USA fell away. Because of that people asked more aid and funds from their governments. Indeed, many people in Latin America wanted that the politicians intervened in the economy. The development loans went to projects in agriculture and in industry.263

The ideas for more state intervention came from the Prussian Friedrich List. His idea of the ‘infant industry’ was very popular. He was also for more state control in the economy. He developed his thinking for more economic nationalism.264

The Latin American countries underwent also the influence from nationalism and fascism. Roosevelt wanted to counter that by aiding the Hispanics. The politicians from the left in Latin America wanted the Soviet economy as example.265

Against the New Dealers there came opposition from the financial elite. This elite was dogmatic for the free market and argued for a bigger public sector and if the government did loans that would be against their business. They got support from the isolationists too.266

The Latin Americans were delighted with the aid but did not trust each other as trusting the yankees. Geopolitics played a role: Argentina regarded the aid to Brasil as distrustful, but they also got aid. The aid were short term loans for the current account and to stabilize the currency. They did also long term projects for development.267

During the interwar years the Americans also defended dictators because they wanted stable regimes thus they could protect American interests. In contrast to that the yankee policy also strived towards democracy. Roorda tells in this way that the Americans were not against the massacres from the Trujilo regime in the Dominican Republic.268 The Trujilo regime was more or less like a fascist 260 Rimmer, D. Some Origins of Development Economics, memosa261 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016262 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016263 Rimmer, D. Some Origins of Development Economics, memosa264 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016265 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016266 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016267 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016268 Roorda, E. Genocide Next Door: The Good Neighbor Policy, the Trujillo Regime, and the Haitian Massacre of 1937, memosa

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regime. Roosevelt tried to negotiate between the Trujilo regime and its opposition but failed. They also supported the regimes in Latin America.269

The support reached its heyday with the Inter-American Bank (IAB). This bank was a predecessor for the World Bank but the IAB was never constructed. The purpose of the IAB was to foster regional cooperation and to supply loans to countries in crisis. The Export-Import Bank overshadowed this project and gave loans to Latin America.270

The IAB was proposed in Panama on a conference between the North and the South Americans: there it was the proposal of Mexico on the Rio Conference.271 That proposal was a ‘clearing house’, where central bankers had to stabilize their currencies and the delegate of Mexico wanted silver as international standard too. Parts of ideas of this Conference were taken over by Harry Dexter White.272

The IAB had 9 goals: investment, stabilizing the currency, acting as a clearing house, more free trade, promoting development, foster cooperation, facilitate research, get some advice and exchange information.273 The purpose of this bank was also to be controlled by the states and not by the financial elite. Because of the Second World War, the IAB never came into being because it was never ratified by the American Congress.274

3.4.2 Development Thinking from Asia

China was one of the players from Asia on the Conference together with the Philippines. China would not be part of the system when it was created by the Conference. Indeed, China was destroyed by a civil war where the communists won in 1949.275

The Chinese Sun Yat-Sen276 was the father of the economic development theory.277 In his work he asked for the upgrading of the living standards by means of free foreign capital, by technology and the exchange of expertise. Sun Yat - Sen had offered China the ‘Economic Ocean’, capable of absorbing all the surplus capital as quickly as the Industrial Nations can possibly produce’, this is told in the history of development thinking.278 With this consideration they went to Bretton Woods. Sun also proposed an organization: the International Development Organization. This institute was one of

269 Roorda, E. Genocide Next Door: The Good Neighbor Policy, the Trujillo Regime, and the Haitian Massacre of 1937, memosa270 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016271 Piffaretti, N. Reshaping the international Monetary Architecture. Lessons from the Keynes’ Plan, World Bank Paper, 2009272 Piffaretti, N. Reshaping the international Monetary Architecture. Lessons from the Keynes’ Plan, World Bank Paper, 2009273 Shinkawa, K. The Role of the Export-Import Bank in US Economic Diplomacy towards Latin America, memosa274 Shinkawa, K. The Role of the Export-Import Bank in US Economic Diplomacy towards Latin America, memosa275 Rimmer, D. Some Origins of Development Economics, memosa276 Sun Yat-sen (/ˈsʌn ˈjætˈsɛn/; 12 November 1866 – 12 March 1925)[1][2] was the founding father of the Republic of China. The provisional first president of the Republic of China, Sun was a Chinese medical doctor, writer, philosopher, Georgist,[3][4] calligrapher,[5] and revolutionary. As the foremost pioneer and first leader of a Republican China, Sun is referred to as the "Father of the Nation" in the Republic of China (ROC) and the "forerunner of democratic revolution" in the People's Republic of China (PRC).277 Wu, Y. Sun Yat-Sen Thought, Centennial of the ROC and Development Models in Taiwan and Mainland China: A Macro Analytical Framework, Conference Paper, 2011278 Wu, Y. Sun Yat-Sen Thought, Centennial of the ROC and Development Models in Taiwan and Mainland China: A Macro Analytical Framework, Conference Paper, 2011

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the blue prints for the World Bank. More initiatives were launched in that period of time and the organization that came into being would be related to the League of Nations or its successor.279

Figure 7: Sun Yat-Sen

Source: https://3.bp.blogspot.com/-2B9MrvZglIM/VYZ-_hzL8gI/AAAAAAAAQSI/aoAnwA-1mxI/s1600/Sun-Yat-Sen.jpg

In the interwar years China was a toy of the big powers and a state in full development. In that state, the British had many interests. The mission of Leith – Ross would gave a loan to the Chinese and this would construct the Chinese towards the British model.280 This mission led to combatting behaviour between the Japanese and the USA in defending their interests in China. They defended their loans. Those loans had to go towards the infrastructure in the railways and to the roads construction. Sun Yat-Sen was the father of the Chinese miracle. It led to the development of the ‘capitalist development state’. It is because of this that capitalism could adapt to the Chinese culture. Wu asks for that if this Chinese capitalistic system is also totalitarian. It is not totalitarian but it is autocratic with goes hand in hand with Chinese culture. Indeed, the communist state of Mao will show autocratic tendencies.281

3.4.3 The Keynes Plan

We have seen the constructions of the ideology towards a Development Bank. Now I will go in to deep in constructing the Fund and the Bank by its actors that began in the Second World War. Indeed, the British started with plans to rebuild the post-war order. The Axis had also plans to construct their ‘New World Order’.282

The British were aware of the situation that they would play a more smaller role in world affairs. The most endeavouring idea on the plan of Keynes was the International Clearing Union (ICU). Everyone who participated in the construction of Bretton Woods found this the best idea. The Americans did not. The ICU would make the global imbalances a thing from the past whereas deficit and surplus

279 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016280 Endicot, S. British Financial Diplomacy in China: the Leith – Ross Mission, 1935-1937, In: Historical Papers/Cummunications Historiques, 1973281 Wu, Y. Sun Yat-Sen Thought, Centennial of the ROC and Development Models in Taiwan and Mainland China: A Macro Analytical Framework, Conference Paper, 2011282 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978

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countries would equilibrate.283 The Americans were against because the Congress would oppose such a thing. They were the biggest creditor and that was why they opposed such an idea.

The ICU would work as a national banking system and the other things in the plans were focused on Europe. Keynes did not pay attention to development. The ICU would find a complement in the International Trade Union (ITO).284 In its construction they would allow import restrictions, there would be exchange controls or there would be a chance for bilateral payments agreements. The ITO would not be constructed, instead they went for a less powerful institution, the GATT or General Agreement on Tariffs and Trade.285Keyens previsioned 25 billion dollar for his system.

Keynes saw two alternatives: one, reconstruction and development aid after the War. New Dealers would influence policy and diminished tariffs like that of the American agriculture. Second, a system of payments and clearing would be multilateral with the selling and buying of British products and it would circulate around the central banks.286 When a country would have a deficit and it had to go for a devaluation, or it would have to be paid with gold to the ICU, or it had to implement capital controls, or it would have to retreat from the system. A credit in the system would lead to an appreciation, it would also lead if allowed to a loan to a country with a debit. Credits would also be changed in a reserve fund for later. To equilibrate deficit and surplus countries ICU countries would get an interest rate. Deficit and surplus countries would see it in their economy: a contraction would be compensated by an expansion in another country.287

The ICU from Keynes strived towards multilateralization of the monetary system and held trade as a monetary problem. Fantacci gives an example: ‘for example, an export from country A to country B financed by the Clearing Union would give rise to the simultaneous registration of two entries of equal amount: a credit to the account of A and a debit to the account of B. Thanks to the centralization of all accounts at the Clearing Union, however, the credit and debit would not be bilateral, but multilateral positions, of each country vis à vis all the other members as a whole. In ‐ ‐other terms, the surplus country A could spend its credit in bancor not only with B, but with any other member country; and B could reduce its debit by exporting towards any other country. In this way, the Clearing Union would be able, in principle, to finance international trade and its expansion, without the need of any given amount of money.’288 It equilibrates the world but there is also a bias towards more money creation and thus inflation.

The ICU created an international accountancy value, the bancor, that had to clear the current accounts of the participating countries. Bancor would be created after the economic potential of the members in world trade. The deficits and surpluses would be nominated in bancor. Keynes wanted to create 26 billion dollars as bancor and he gave also a place for gold but he always told that gold was a barbarous relic.289 The Keynes plan would stabilize the capital flows from the interwar years. With the

283 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984284 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013285 Kirshner, O. (eds.) The Bretton Woods-GATT System. Retrospect and Prospect After 50 Years, M.E.Sharpe, 1996286 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975287 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975288 Fantacci, L. Why Not Bancor? Keynes’s Currency Plan as a Solution to Global Imbalances, memosa289 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014

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ICU and the bancor, Keynes wanted to do something against unemployment, hence, his plan. The two strongest players, the UK and the USA had to govern the ICU.290

The whole idea was that because of the ICU, surplus and deficit countries would be pressured to come to equilibrium. The interest rate on it would function as a tax. The ICU implied a multilateral financial and monetary system. But no such thing played for an international trading system.291

The Belgians were against the creation of the ICU.292 Gutt wanted the plan of Schacht to be created. The Schacht-Funk plan foresaw fixed currencies and free trade with a clearing system between deficit and surplus countries. Gutt saw some elements of that plan In the Keynes plan. Gutt himself wanted the return of the classical gold standard and the Keynes plan was for him too theoretical.293After the creation of the Bretton Woods System, the whole world realized they missed a chance.294 Soon after the ending of the Second World War, some experts still wanted to create the Keynes Plan and this is thus to today. Global imbalances would not be prevented in the world economic system.

Figure 8: John Maynard Keynes

Source: https://i2.wp.com/richtopia.com/wp-content/uploads/2015/01/John-Maynard-Keynes-Image1.jpg?fit=650%2C433&ssl=1

3.4.4 The White Plan

290 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969291 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969292 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999293 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999294 Thesaurie, ARA, 1947

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The Americans came with blue prints for a post-war order too. The Rio Conference of 1941 led to the proposal of the IAB in the new New Deal-style. The New Deal politics came from the rising Keynesianism. A demand-shock would give a new spark to an economic slump. And government investment would help too.295

We recapitulate a bit: we have seen the construction of the Atlantic Charter and of the Lend-Lease agreement between the Americans and the British. After the invasion of the USSR by the Germans the USSR participated in the Lend – Lease: Article VII was the most important because it strived to an open world economy and it was against discrimination of international trade. In this way the Americans wanted access to the British Imperial System.296

The essence of the White proposal was a better gold standard whereby capital flows would restore the global imbalances. In the plan we see: ‘to enact a sort of 'nationalised Gold Standard' in which nations went through the paces of the classical mechanism without being prompted, or assisted by international short term capital flows.’297White previsioned 5 billion dollar for his system. After a while and because of reading the Keynes plan he altered its currency to 10 billion dollar.

The creation of a Fund was the most important item of the plans from White. It was more complex than the construction of a Bank. Some parts like debt reconstruction for the development world were controversial. The Bank in its inception had to do long term investments in countries that had less capital.298

The Fund was an institute for central bankers and for the people of the Treasuries.299 To become a member to the Fund: the exchange rate would get an agreement from the Monetary Fund, the members would not have foreign exchange controls and they would do bilateral ‘clearing’, the gold would be spoken for by the Treasuries and by the central banks. To become a member of the Fund, tariffs had to come down and members may not declare default on their debts.300

White was also a Keynesian and he was for ‘deficit spending’. The Fund he created had as purpose: ‘emergency reserves or aid’(…) to be put at the disposal of (…) ‘members with balance of payments deficits’.301 The Fund also had to govern exchange rates of their members. Those exchange rates are fixed but flexible in a band of 1% round a value. The stable exchange rate had to stabilize trade and had to facilitate it. The exchange rate could change only with the executive board’s consent and after that the exchange rate could fluctuate more than 10%.302

The members of the Fund had to give 5 billion dollar as quota, whereof 25% of the quota would be in cash (50% of it In gold) and 25% in stocks or things like gold and stocks. The goal was to create a buffer with quota to cushion incoming recessions. The quota was and is the voting system in the IMF

295 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996296 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984297 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975298 Conway, E. The Summit, Little Brown, 2014299 Conway, E. The Summit, Little Brown, 2014300 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996301 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975302 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975

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and World Bank.303 The USA as largest economy had the most votes and could place a veto of 25% of the votes. The Fund also got the role as surveillant for the world economy.304

The quota were calculated with a formula of the USA: ‘90 per cent of 2 per cent of national income, 1940, plus 5 per cent of gold and dollar balances on July 1, 1943, plus 10 per cent of maximum variation of exports, 1934-38, plus 10 per cent of average imports, 1934-38, increased for each country in the same ratio as average exports, 1934-38, bore to national income.’305 Everyone of the members got 250 votes with this formula for extra voting power. The quota is also the working capital for the Fund.

The White plan had as goal to create a central bank of central banks. This would become the World Bank. Here too quota would play a role as capital and as voting system. The starting capital was 10 billion dollar whereof 2% came from its members. Because the USA was the largest economy, here too they could play a veto. From the 10 billion dollar half of it must be paid into gold. The Fund had another mandate: short term loans. The IBRD had to do long term loans. In its plans, White thought about reconstruction of war torn economies. The development goals would come from talks with the Latin Americans. Therefore, the construction of the Bank would raise the productivity and would bolster the living standard. The IBRD could finance itself with the creation of bonds and stocks and the Bank had to stabilize the prices of primary resources.306

With the Fund and the Bank the interdependence in the world economy would grow. With shared interests peace would be more attractive. Both institutions had a contra-cyclical mandate. The American ’Exchange Stabilization Fund’ was the predecessor for the ideas of White even as the good neighbour policy and the New Deal politicians.307

Gutt was also not interested in the Fund. Gutt’s attention went to the proposal by the French. The French had also a plan based on the ‘International Clearing Office’ whereby global imbalances would end with the transfer of gold.308 Gutt wanted exchange rate stability and therefore he wanted the gold standard back. Gutt also wanted an institute for the building up of international investments. With this Gutt was a forerunner to developments of the IBRD with IDA and IFC.309

Figure 9: Harry Dexter White

303 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984304 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978305 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014306 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978307 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996308 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999309 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999

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Source: http://www.japanfocus.org/data/41094.jpg

3.4.5 Comparison Keynes – White Plan

Table 1

Stabilisation Fund – Unitas (White) Clearing Union – Bancor (Keynes)Quota through capital Quota = creditQuota’s for deposits Quota = ‘overdraw of international account’To exchange money on the current account Transactions are central in the ICU with national

controlsControl on capital movements Capital controlsSanction switch the weaker party The strongest party had to be correctedSharing of foreign resources expansionisticBlocked balances had to be mobilised under the war

Attention for smaller and poorer countries

Towards convertibility Quota= export and import from the last three years

Quota= gold and GNP Multilateral clearingSource: Itoh, M. Pre-History of the IMF

In 1943 both plans were opened up for the world. The financial press summarized it as: the British protected their trading power, the Americans protected their gold power. 310The Keynes Plan stood for more flexible, simpler finance and less attachments to gold. The White Plan was getting the critics to want a return to the gold standard. The Fund held a multilateral clearing system. With this in mind the currency became an international unit of account. This unit could be a liquidity and could be changed into a third currency.311One of the similarities in both Systems was the quota idea.

After the publications of their plans the protagonists wanted to reach a compromise. To get the consent of the Parliaments in England and in the USA: the capital subscription would be held instead of the banker’s principal of the ICU.312 They also asked for a ceiling on the payment that would be given as a credit. The dollar-gold fix had to come before Congress, in order to change it. The exchange rate of the dollar-sterling rate came on ¼. The plans had something in common: capital flows were destabilizing whereby Keynes and White went for capital controls. 313

310 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order311 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971312 Mikesell, R. Some Issues in the Bretton Woods Debates

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The British wanted that the unitas became more than an international unit of account.314 The British and the Americans wanted that the members would still control the exchange rate and they wanted to protect their sovereignty.315 The British wanted to build on bilateralism while the Americans wanted to build on multilateralism. What the plans had in common was that ‘un système de taux de change fixes en vue de stimuler le commerce mondiale’316 and it had assured ‘une création d’une institute internationale chargée de coordoner, de régler et de faciliter les paiement internationales’317; in both plans they foresaw a fixed currency even as an institute to discipline and to control investments. Both were a ‘par value’ system constructed against discrimination and against international liquidity. The par value was decided by prices, loans and the living conditions. 318

The Americans did not want that the dollar was too much used by other countries because that implied that the USA had to have a deficit on the current and payments balance. The Americans wanted that the members of the Bretton Woods System had the right economic motives and policy and they made references to the gold standard.319

The British wanted with this to reform their economy because they became a debtor while the Americans wanted an open world economy with free trade. For that the Americans wanted a stable monetary system. The Americans proposed that the Bretton Woods System would start directly after the war. The British in contrast wanted a transition period. The Anglo-American ties were strong. Ikenberry tells: ‘The “new thinking” embraced by the Anglo-American planners, with its synthesis of interventionist and liberal goals, has a political resonance within wider and more contentious British and American political circles. The Bretton Woods ideas played a politically integrating role-they allowed political leaders and social groups across the political spectrum to envisage a post-war economic order where multiple (and previously competing) objectives could be met simultaneously. Outside the narrow transatlantic community of government economists, politicians were looking for options that could steer a middle course. In the end, the ability of policy experts to articulate ideas that spoke to the needs of practical British and American politicians was the most consequential aspect of their work.’320 In other words: it was the time for a state-led compromise and for the end of laissez-faire. The compromise was a blessing for internationalists, for interventionists, for free-traders.

Figure 10: White and Keynes

313 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order314 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971315 De Cecco, M. Origins of the Post-War Payments System, In: Journal of Economics, 1979316 Cassiers, I. et Ledent, P. Politique Monétaire et Croissance économique en Belgique à l’ère de Bretton Woods, 1944-1971, NBB, 2005317 Cassiers, I. et Ledent, P. Politique Monétaire et Croissance économique en Belgique à l’ère de Bretton Woods, 1944-1971, NBB, 2005318 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969319 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975320 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969

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Source: http://www2.biglobe.ne.jp/~remnant/WhiteandKeynes.jpg

3.5.5 Other Plans

Other than the Keynes and White plan there were also new plans from other persons and authorities. They were also for more welfare, for more efficiency and for peace. The plan by Williams from the New York Fed had to be regarded in this way. Williams came with the ‘key-currency approach’.321 He started therein with the Tripartite Agreement from 1936. He told that the biggest economies had to construct the world economy and that their currencies had to be the key reserve currency. Thereby those economies had to go for stable internal economic policies whereas this also would lead to a stable external environment. His thinking was for a ‘reserve-currency system’: ‘Under such an arrangement the reserve-currency country holds no international monetary assets; it simply creates international money (increases its liquid liabilities) to finance external transactions. Balance-of-payments deficits of the reserve-currency country would then be the source of international monetary reserves in the system, and its balance-of-payments surpluses would contract international reserves.’322

Canada had some other plans too: they came with an ‘International Exchange Union’.323 This was comparable with White’s Fund but the intake as reserves was higher: 8 billion dollar. The Canadians wanted also a band of 5% around a currency and a more flexible fluctuation had to have a consent of the Union. The Canadian proposal was a compromise further from the White and Keynes Plan. They also wanted several key reserve currencies and a free membership for the Union. With a global imbalance surplus and deficit countries would both get penalties.324

As a first step towards a compromise, the British Treasury came with a proposal. In that proposal international cooperation and common responsibility stood central. Also in this plan they talked

321 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013322 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015323 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984324 Kirshner, O. (eds.) The Bretton Woods-GATT System. Retrospect and Prospect After 50 Years, M.E.Sharpe, 1996

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about quota and reserves as capital for the Fund and as votes. The Fund would also not compete with private investors.325

The plan from Aldrich, a banker from the Chase National Bank, wanted the removal of tariffs and he wanted a stable relationship between the pound and the dollar. Both had to be a key reserve currency. He also placed the Import-Export Bank with extra responsibilities and as the predecessor of the IBRD and the IMF.326 The relationship between the currencies would function as an anchor for all the currencies of the world.

The French had a plan too: a change of exchange rates and investment trusts were central to that plan.327 They began from the Tripartite Agreement from 1936. ‘National equalization accounts’ stood central ‘with agreed limits on an amount of exchange that could be acquired, and the protection against the currency losses through guarantees and the deposits of collateral, i.e. gold’. 328The French proposal also created an institute: ‘the Monetary Stabilization Office’ which would establish a clearing system, which would create a deposit for collateral and which the members would use for international negotiations.

3.6 Bretton Woods

The Conference of Bretton Woods was held in 1944 in New Hampshire when the Allies were busy with the landing in Normandy and when the USSR was busy with its march from the East. Bretton Woods would define the world economy and would create two institutions: the IBRD and the IMF.329

As said the IBRD had a predecessor in the IAB. The IBRD and the IMF had to protect the world from a new Great Depression. Indeed, a new Great Depression was evaded by the IBRD and by the IMF in 2007. As most of the time in diplomacy, the Bretton Woods Conference was a compromise wherein the British and the Americans battled for the institutionalizing of their plan.330

The Fed came with a reserve of 15 billion whereby 2 billion would came each from the UK and the USA. Surplus countries would gain in quota and votes while the deficits countries would get a diminuation of their quota and votes. Capital controls and a devaluation would reset all this.331 The Fed also proposed to use only gold in the Fund and the American Treasury came with a quota of 8 billion whereas 50% would come as an intake in gold. The parity would fluctuate in a band of 10% before the course would be reset by a devaluation. There was also the proposal that the votes of the USA would be lessened.332

The British gain in the compromise was that the Fund would be reciprocal. The band of 10% would not make it in the British Parliament and in the American Congress. American Congress would defend its veto. The ICU was rejected by the Americans even as the bancor and the unitas. The American

325 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975326 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014327 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015328 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015329 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978330 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006331 Conway, E. The Summit, Little Brown, 2014332 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975

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Congress did not want an automatic overdraft of financial liabilities that would be unlimited in the ICU.333

The Belgians were for the proposals at Bretton Woods. They thought it would rebuild the world economy with freedom and multilateralism.334 Free trade was the one that had to be defended with fixed exchange rates. The exchange rate had to be free thus they wanted convertibility.

3.6.1 The Joint Statement and Atlantic City

The Conference of Bretton Woods was preceded by a Conference in Atlantic City in 1944. The Joint Statement reached, was a compromise between the British and the Americans. Keynes and White were the head negotiators of the British and the Americans. Keynes wanted flexible exchange rates and automatic drawings in the Fund. Drawings are the buying of currencies in the IMF while repurchases are also drawings on the IMF. The drawings are not the debt on the Fund. In 1967 the members of the IMF proposed to alter the drawing system: they had to occur automatically.335 Therefore, Article III had to be changed to get automatic drawings.

Keynes was also against the clause defended by the Americans, namely ‘the deterrent charges’, those are interests on the credits drown on the IMF. A compromise from Keynes would be proposed: capital controls may, an exchange rate of 10% fluctuation may also, and a reserve to the IMF must be in gold. The reserves of the Fund were set on 8 billion. The ‘Scarce currency clause’ had remained to combat the ‘dollar shortage’. The reasoning behind this clause: ‘the basic rationale of the scarce-currency provisions was, simply, that no country should be obligated to permit its nationals freely to import the goods of any country whose policies severely restricted the availability of financing for such purchases, that is, resulted in an external "scarcity of its currency.’ A formal declaration by the Fund that a currency was scarce would authorize members of the Fund to discriminate against the exports of such a country.’336

The ‘Scarce Currency Clause’ would become automatic by a change in the Articles whenever a currency would became under the 75% border even as the quota, i.e. whenever the quota would become under 75%, the ‘Scarce Currency Clause’ would be set in.337

The changing of Article VI made sure that the quota and the Scarce Currency Clause could also be drawn in gold or that currencies could be get in the Fund of third countries. The repurchase facility was created because of the creditor countries, especially for quota under 75%.338

The British were aware that the adjustment burden would be full on them instead on the Americans. The Americans were the biggest creditor thus they could determine the course. American bankers did not want the Bretton Woods System because it would interfere with the private initiative and they thought that loans would be crowded - out by the government investing. They did not want to create the Fund too but in contrast they wanted the Bank and the Fund as one institution with shared abilities.339

333 Conway, E. The Summit, Little Brown, 2014334 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999335 Thesaurie, 1967336 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969337 Thesaurie, ARA, 1949338 Thesaurie, ARA, 1949339 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984

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For the Bank a compromise was reached. For the USA each member would give ‘20% capital was to be paid in and could rise over time’ while the UK would decide that 20% of it had not to be more than 1/5 in gold (while 80% reserves would be callable only to meet losses’).340 Development countries were the most interested in the functions of the Bank. Europe and the USSR were more interested in the rebuilding of their economies after the war. The Bank was defended as a guarantee for international investments. The buying and selling in, the Bank could also be achieved by gold.341

The compromise reached in Atlantic City was this: one, exchange rate stability, two adjustable exchange rates with a consent for more than 10%, third multilateral payments on the current account, fourth, a correction in the short term imbalances, fifth, a par value vis-à-vis gold, sixth, the scarce currency clause, seventh, the payment of 10 billion dollar as working capital, eight the waivering of IMF membership, and nineth, the decisions by majority voting.342 All those measures had to facilitate world trade and they had to strive towards full employment.

In the ‘Joint Statement’ it had to foster international cooperation through two new institutions. The Fund had to stabilize the currencies, it functioned as a multilateral forum for payments instead of the bilateral payment agreements.343

The quota system was also revised: China wanted to be the fourth largest player and France asked the same. India wanted the same quota as China. The problem was Russia: Russia did not want to give the necessary gold for the institutions, however, it was one of the largest producers of gold. The rouble was also not freely exchangeable. And that hampered their trade and it also hampered the agreements with the IMF and the IBRD.344 The executive board was given to nine countries and members with the 5 largest economies. Those five biggest countries decided on the course of the IMF.

The flexibility of the exchange rate and the access to the reserves of the Fund was discussed. A veto of more than 25% of the votes was attacked by the British and by the Belgians. Mexico wanted a role for silver but that was rejected. More and more countries pressured the creditors.345 The Compromise of Bretton Woods summarized was: ‘First, there was a common belief in the desirability of currency stability and the convertibility of currencies. Convertibility would be ensured by the abolition of exchange controls and restrictions. Disagreement could be found on the role of gold and other mechanisms for establishing stability in exchange relations, but currency exchange adjustments, when necessary to correct payments imbalances, were to be subject to international agreement. (…) Second, the American and British experts agreed that some form of international reserves would need to be available as short-term assistance so as to allow expansionary solutions to balance of payments deficits. (…) Third, and most generally, the Anglo-American specialists, agreed that new techniques of international economic management should be devised that could reconcile the movement of capital and trade with policies that promote stable and full employment economies.’346

340 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975341 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978342 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014343 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969344 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996345 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969

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3.6.2 The Bretton Woods Conference

The Conference was a compromise between the biggest voice for the USA and the UK. It was negotiated and differences were cleared. Following Eckes: ‘‘An enduring program of future economic cooperation and peaceful progress.’347 Three Commissions were called for: Commission I for the IMF chaired by Keynes, Commission II for the IBRD headed by White and Commission III for all the rest, chaired by a Mexican.348

There were 44 nations presented with more than 700 people at the Bretton Woods hotel. The delegates were economists, monetary specialists, technicians and lawyers. For Belgium Gutt, Theunis, de Grüben, Boël, Boris-Serge, Chlepner and Nisot were presented with de Selliers as secretary. Gutt became the vice-president of Commission I, Theunis became the vice-president of Commission II. The Belgians were sceptical for a worldwide agreement, a regional agreement was more successful to reach. 349

The Americans defended their claim: the exchange rate flexibility was rejected, like the conditions for the call on funds in the IMF. The USA also wanted to maximalize their influence. The British in contrast feared the status of the pound and they feared the integrity of their Empire. The French delegate Pierre Mendes-France was furious: the Benelux would get more quota, as it was proposed.350

The Americans were not convinced about the USSR: as is said the rouble was not convertible and the USSR was an economy of state-capitalism instead of a full capitalistic system. The British and Henry Morgenthau wanted that the Russians participated as the Big Three from the War Conferences.351

To get the participation of the Russians, it was proposed that their quota would reach just under the quota of the UK with 1.2 billion dollar.352 To satisfy the Russians the quota could also be set on 900 million with a reduction of their gold contribution. Stepanov and Molotov reached an agreement on a quota of 1.2 billion and a reduction of gold. With the reasoning of a total quota of 8.8 billion for the USSR, the rest had to be recalculated again.353

Another point that the British questioned was that the headquarters had to be in the USA. The Americans countered this proposal and demanded that the headquarters would be on American soil. This they did because they were the largest economy.354 A discussion was held again over the

346 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969347 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975348 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013349 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969350 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014351 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014352 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969353 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975354 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969

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exchange rate fluctuation: a parity was reached on 1% and for more than that the consent of the IMF was needed. That parity implied an intervention on the capital markets by the central bankers.

How do we define the IMF counter on a global imbalance? De Vries tells: ‘that steps necessary to protect a member from unemployment of a chronic or persistent character, arising from pressure on its balance of payments, were indeed among the measures necessary to correct a fundamental disequilibrium. The Board further decided that, in each instance in which a member proposed a change in the par value of its currency to correct a fundamental disequilibrium, the Fund would be required to determine, in the light of all relevant circumstances, whether in its opinion the proposed change was necessary to correct the fundamental disequilibrium.’355

The Fund got the task to limit the funds from the members ‘when it was of opinion that the member was using those resources in a manner contrary to the purpose of the Fund.’ 356The Fund also got a surveillance role. So the IMF got an active role in the world.

The Articles of Agreement decided the role for the IMF. The Articles of Agreement are also in this dissertation. Article I asked for a ‘rules-based’ organization whereby the economic objectives and the welfare were central. The par value system was dependent in the first Article. The System of adjustable exchange rates was dependent on the view on the Articles. The IMF had three functions: the fostering international cooperation, the regulation of the exchange rate, and the resources were given as accessible for the members.357

Article VIII and I are the most influential: Art I (ii) is: ‘IMF facilitates expansion and balanced growth of the international trade and to contribute thereby to promote and to the maintenance of high levels of employment and real income and to the development of productive resources of all members as primary objectives of economic policy.’358 The IMF thereby strives towards universal membership, they also strived towards neutrality and towards discretion. The ambiguity of the Articles was set for the price fluctuation, how to suspend a member and how to liquidate a fund. The interpretation of the Articles was to be decided by the governors. Belgium and the Netherlands decided that their governor was to be the representative of the Benelux.359 The ‘Scarce Currency Clause’ was set to regulate the drawings of the most popular currencies.

The British had interests in the Bank only since the Atlantic City Conference. The Bank had to govern private investments. Capital was to be held in the institute by its members and that had to guarantee it as sort of a warrant. The mandate of the IBRD was given as reconstruction and as development.360

The Belgians wanted to stabilize the exchange rates and they wanted to go for free trade. Belgium is an open, small economy and the country is thus sensible for the fluctuations of the world economy. Bretton Woods had thus a big gain for Belgium. The Belgians were a go-between between many players.361

The Articles of Agreement were just limitedly changed. From the capital of the 10 billion dollar, 20% would be accessible. Of that 20%, 2% would be in gold and 85% in the local currency. The other 80%

355 IMF 1945-1965, Volume II: Analysis356 IMF 1945-1965, Volume II: Analysis357 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969358 IMF 1945-1965, Volume II: Analysis359 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999360 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969361 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015

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was based on the fund and quota. The Articles of the IMF and the IBRD ‘were to promote international monetary cooperation, facilitate the growth of international trade and the attainment of high employment levels, encourage exchange-rate stability, establish a multilateral system of payments for current account transactions, create confidence in member countries by making available the IMF's resources, and minimize disequilibrium in its members' balances of payments.’362

The Americans reached the summum of their diplomacy by getting the dollar as good as gold. The dollar became the only currency changeable into gold. And all the other currencies were fixed to the dollar. In the Articles the Agreement the clause was changed in ‘gold-convertible and gold’. With this alteration the Americans adhered to the ‘key-currency clause’ of Williams.363 The international monetary system would alter towards a dollar-system.

Figure 11: Bretton Woods Conference

Source: https://i.pinimg.com/736x/0e/94/37/0e9437db10e3d61f42ca2476a99dcf53--stability.jpg

To summarize in short the Bretton Woods Articles of Agreement:

‘Mettre en place un mécanisme de consultation et de collaboration dans le domaine des problèmesmonétaires internationaux et faciliter l’expansion du commerce international.’

‘Promouvoir la stabilité des changes, et empëcher les depreciations compétitives’ ‘Eliminer les restrictions de change sur les transactions internationals courantes et contribuer

à l’établissement d’un système de paiements multilatéral’ ‘Fournir des credits à court terme aux pays memebres qui connaissent des problems de

balance des paiements temporaires et éviter ainsi que ces pays n’ainent recours à des pratiques restrictives.’364

3.6.3 Other Voices on Bretton Woods

Bretton Woods was a Conference and a heyday of the post-war diplomacy. In this chapter I write about the other voices in the world during the Bretton Woods Conference. Helleiner, in a rare account, gives the development countries a voice.365

362 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975363 Steil, B. The Battle of Bretton Woods. John Maynard Keynes, Harry Dexter White and the Making of a New World Order, Princeton University Press, 2014364 Thesaurie, ARA, 1946-1951 Camille Gutt365 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016

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3.6.3.1 Latin America

Latin America saw the Conference as a means to get international aid. To this means they were pro the IMF and the IBRD: the IMF and the IBRD had to give development aid and they helped countries with the current account problems.366 They choose for the White Plan and not for the Keynes Plan because the Keynes Plan was too unclear or to ambitious. The White Plan was more incremental.

3.6.3.2 China

The Chinese also gave some proposals. The father of the Chinese Sun Yat-Sen constructed the Chinese development state. On the Conference they were pro: development by capital, more monetary stability and for the institutions, the IMF and the IBRD.367 The Chinese wanted to create another institute: the International Reconstruction Financial Corporation. This Corporation had to do investments in underdeveloped areas. The currency had to be fixed to gold too. The parities had to be adjustable but for big alterations they had to get the consent of the Fund. They wanted to get capital flows by way of stable currencies. And they proposed a tax for surplus and deficit countries. They had big interests in the World Bank: the development agency.368

3.6.3.3 Africa

Africa was not fully present because it was colonized. Ethiopia, Egypt, Liberia and South Africa were present. Only Egypt was interested, South Africa was indifferent. Egypt wanted attention for industrialization. Ethiopia had a conflict with the UK because of frozen pound sterling balances. The balances were colonized by the London government. The African countries wanted the sterling balances cleared. After the Second World War the African countries wanted revenge for the pound.369

3.6.3.4 Eastern Europe

Some Eastern countries were present at the Conference. They were proponents of Friedrich List and for state-led development. They would have no role of importance because they became satellites of the USSR. Only the governments in exile were for the Bretton Woods Agreement. Those governments wanted to be independent from Russia and Germany. They wanted the ICU and were against the Fund from White. And they were for the IBRD.370

3.6.3.5 India

India was present at the Conference as an UK Dominion. India had the same problem with the sterling-balances. The Indians were for the Plan of Keynes and for the ICU. India was a creditor nation and wanted to do investments through the sterling balances. The Indians were the biggest supplier during the war for British primary resources, food and war material. The sterling - balances became a problem because ‘countries held large balances of sterling accumulated during the war in payment for goods, and convertibility would mean they would switch into dollars to buy American goods. So

366 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016367 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016368 Helleiner, E. The International Development of Bretton Woods. North-South Dialogue in the Making of the Postwar Order, memosa369 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016370 Helleiner, E. The International Development of Bretton Woods. North-South Dialogue in the Making of the Postwar Order, memosa

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long as sterling remained inconvertible, these countries were more or less obliged to buy British goods; convertibility would threaten British exports to these ‘soft’ markets as well as creating a run on the pound. Further, a decision to devalue the pound would have a serious impact on these colonies and countries in the sterling area which would find that their holdings were worth less.’371

India was the only voice that wanted to put the development in the agenda because it was underdeveloped. In the Articles the word ‘‘equitable attention’ was placed at development and at reconstruction. India wanted state-led development and the country wanted capital from the rich countries.372

3.6.3.6 The Construction of the Benelux

Belgium was also at the Conference: Gutt and Theunis were busy to create an international institute namely the Benelux. The Benelux was a construct that built on the BLEU. The Benelux was something like Bretton Woods but than for the Belgians and the Dutch.373In the IMF the countries would act as a union: the Benelux stayed together but before that the agreements were settled by the BLEU, and this was an union between Luxemburg and Belgium. This union was reached in the interbellum and was an economic and political union. The BLEU exchange would settle the Bretton Woods Agreement even as the European Payments Union.374

The Benelux became a customs – union and was ratified in 1947. Spaak was keen on the construction of the Benelux.375 A loan was given to the Dutch in 1949 by the Benelux which was used to liberalize its own currency. The Benelux would be one of the motors of the European integration. In 1955 the Benelux would liberalize capital flows and trade flows without the European Payments Union.

3.6.3.7 The Battle in America and in the UK for Bretton Woods

After the Conference of Bretton Woods, the Agreement had to be defended in the American Congress and in the British Parliament. Everyone looked at the Americans if they voted for or against their own child. In America a partisan battle began between the politicians: isolationists and internationalists were spread over all the parties.376

The lobbyists from the bankers community wanted ‘the key currency’ story and they wanted a return of gold. The bankers and Washington had the same interests: ‘they sought an orderly monetary regime that would contribute to efficient use of world resources, global prosperity and international harmony’.377 The American Banker’s Association were for the IBRD but against the Fund. The IBRD had to have some parts of the Fund in its construction. The Import-Export Bank had to be strengthened by the Banker’s Association.378

371 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016372 Helleiner, E. Forgotten Foundations of Bretton Woods. International Development and the Making of the Postwar Order, Cornell University Press, 2016373 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999374 Thesaurie, ARA, 1957-1960375 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999376 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969377 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969378 Daunton, M. Britain and Globalisation since 1850: Creating the World of Bretton Woods, 1939-1958, In Transactions fot he Royal Historical Society, 2007

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The British were divided in the left and the right: the left wanted full employment after the war and they did not want foreign limitations on the British economy. The left wanted itself to be protected by the Commonwealth and the preferential system. The right side wanted to protect the City of London and they wanted to protect the pound and were against the New York city interests but also the Bank of England had to held its reputation: they were seen as the protector of the gold standard and of the City of London as financial centre.379 With this they wanted to hold the pound as the reserve currency in the world. With Bretton Woods the dollar would become the number one instead of the pound. The Bank of England feared the disintegration of the British Empire. With that they followed the right side of England.380

Keynes defended the Bretton Woods System and the ‘scarce currency clause’ to adjust to the ‘dollar gap’.381 It gave the responsibility to the Americans. The adjustment burden was given to the debtor countries. The ‘dollar gap’ had a contractionary regime for the dollar zone.

The Americans were divided too: some Congress men were against the international organisation. With this international organization a bit of the economic power of the USA would falter. Isolationists like senator Taft were against the ‘scarce currency clause’ because it infringed on its sovereignty of the USA. Over the years the dollar-gold system changed to a dollar system. The Harvard economist Williams predicted the dollar shortage at the beginning of the System.382 A defeat in Congress would be a stab to the American leadership in the world, thus Morgenthau and Roosevelt defended the agreement with force. The Americans defended the agreement as it was said that the Bretton Woods Agreement was a return to the classical gold standard while the British convinced their representatives that it was anything but a return to the classical gold standard. The isolation had not helped the Americans to stay out of another world war, thus they wanted to change. With the Bretton Woods Agreements the Agreement round the UN was also decided. The Bretton Woods System was first voted in the Monetary Commission in the Congress where 18 Republicans voted against. The Bretton Woods Act was ratified by the Congress: the Act constructed a multilateral system in trade and finance. Morgenthau wanted the leadership role of the Americans so he defended the Act with force. Morgenthau too was convinced that the collapse of the world economy after the crash in 1929 was a monetary phenomenon. The reconstruction of world trade is seen as a build up towards global peace in the world.383

‘Peace and prosperity’ were according to Morgenthau two sides of the same coin. There were lobbyists who wanted a role for silver too. Bimetallism has already been used and it was discredited and it was evolved in a gold standard, a monometallistic standard. A return towards silver was rejected. But in the Agreements of Bretton Woods silver was incalculated as the ‘coconut clause’ and every commodity was since then seen as ‘collateral’. 384

As next step the UK and the USSR had to decide for the Agreement too. The British had a massive debt pile and a deficit. The Attlee government gained a ‘Financial Dunkirk’ and a ‘surrender of just rights (…) to the American dollar’.385 With the end of the war, Lend – Lease came to an end: the British asked therefore for another loan at the Americans. The Americans decided that the British 379 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975380 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013381 Van Dormael, A. Bretton Woods. Birth of a Monetary System, Macmillan Press, 1978382 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996383 Helleiner, E. Rauchway, E. en Schuler, K. What Have We Learned About Bretton Woods From Recent Research?, Bretton Woods the Founders and the Future, Center for Financial Stability, 2014384 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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could get a loan if the pound was made convertible directly after the war. With the loan of the Americans, the British voted for the Agreement. At the same time the Americans and the British wanted the ITO to be created but that failed. The GATT was its successor.386

The USSR failed to comply to the Agreement of Bretton Woods because the Lend – Lease was stopped. After the war relations in diplomacy between the Russians and the Americans changed: Truman did not trust the USSR while Stalin was convinced of an encirclement by the West.387 The USSR therefore wanted to play ‘cavalier seul’. They also saw the IMF and the IBRD as ‘interference in their internal affairs’.388

3.6.4 The Battle for Bretton Woods in Belgium

The debate in Belgium for Bretton Woods was quickly concluded. Indeed, the representative August De Schryver was one of the most active parlementarian in the Belgian Chambre. The ratio behind this conclusion was that Belgium wanted to be in the Bretton Woods construct as one of the first members. 389

The US, the UK and France were before the Belgian to ratify. The ratification of the Bretton Woods Agreement in Belgium was quickly concluded. Indeed, the debates in the Chambre en in the Senat were ended at the end of 1945.390

The mandate to follow the IBRD and the IMF was given to the NBB, to the Treasury and to Foreign Affairs. 225 millon dollars was given as quotum in dollars whereas 25% was given as gold and 75% as Belgian francs. The Agreement is also for Belgian Congo. The Belgian government since then follows 2 currencies: the dollar and the pound.391

3.7 Yalta and Postdam

At the Conference of Yalta the Big Three has decided to open a second front against the Germans. The battle of Kursk and the battle in Stalingrad turned the chances in the Second World War. The ‘Von Rundstedt offensive’ was the death struggle of the Germans in the West.392

The declaration of a ‘Liberated Europe’ was adopted at the Conference: with this act they recognized that the Europeans could decide on their own government after the liberalization. This declaration was continued in the UN Charter that was concluded at the beginning of the War. The Big Three decided at the Conference to have another conference at Dumbarton Oaks to create a successor for the League of Nations: the UN was created.393 The UN had two bodies: the General Council for every nation-state and the Security Council with the permanent 5: the USA, the UK, France, China and the

385 Helleiner, E. Rauchway, E. en Schuler, K. What Have We Learned About Bretton Woods From Recent Research?, Bretton Woods the Founders and the Future, Center for Financial Stability, 2014386 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996387 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005388 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969389 Chambre of Belgian Representatives, 1945390 Chambre of Belgian Representatives, 1945391 Chambre of Belgian Representatives, 1945392 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975393 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006

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USSR. After 1949 the seat of China was discussed: communist China had won the civil war, nationalistic China retreated to Taiwan.394

The USSR declared war to the Japanese and remade the war of 1905 with the occupation of the Northern Kourills and with the occupation of Manchuria. Nobody would seek peace with the Axis separately. The Big Three strived towards full capitulation. There was also decided for monetary settlements after the war: the defeated powers had to pay.395

Poland was a difficult case: two governments wanted to be recognized, that from Lublin which was supported by the Soviets and one from London that was in exile and which was supported by the British and the Americans.396 A compromise was reached: 2/5 of the government would come from the London exiles and 3/5 came from the men from Lublin. The border of Poland was constructed out of the Curzon – line and the border of the Oder-Neisse. Out of the War the prestige of the USSR was strengthened and for the capitalistic elite this was a blow.397

At the Conference of Yalta the USSR wanted to create spheres of influence and a zone of friendly nations.398 The Russians saw the world as a traditional power with an universalistic ideology. The Americans thought that the Soviets strived towards world domination. Also at Yalta it was decided that the French could get a zone of occupation in Germany.399

At the Conference of Potsdam the decision to divide Germany was made by the Allies. Only Stalin was the same at the Conference, the other were: Attlee for the British and Truman for the Americans. Truman forced the end of the war by dropping two nuclear bombs on Hiroshima and on Nagasaki. Truman hoped for the surprise effect of the nuclear bombs to the USSR. The Japanese capitulated by it.400

After the Second World War East and West were in a confrontation mood: the USA and the USSR fought with each other through their competing ideologies. Europe hailed the liberalization after the German occupation.401 The Americans feared a move from the communists in Europe to construct their governments. The Americans reacted with the Bretton Woods System and with the Marshall Plan. This is a paradox: the Marshall Plan provided aid to the European countries and set the IMF out of work, thus the Marshall Aid was a stab against the Bretton Woods Order. The Cold War would come in between the relations of East and West. And that division came to be institutionalized by the Greek civil war where the communists were defeated with the aid of the Americans, the British and the Truman Doctrine.402

Figure 12: Conferences of Yalta and Potsdam

394 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006395 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011396 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006397 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005398 Westad, O. The Cold War. A World History, Allen Lane, 2017399 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005400 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011401 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006402 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006

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Source: https://c8.alamy.com/comp/D2F74B/potsdam-conference-july-august-1945-from-left-clement-attlee-harry-D2F74B.jpg

3.8 The Conference of Savannah and the loan to the UK

After the War another Conference was held: the Savannah Conference where the last phase for the Bretton Woods System was created. The British sent Keynes to the US for aid and for the return of Lend-Lease. Lend- Lease was ended but a loan with interest was given to the British.403 The loan would be repaid in a time of around 50 years.

The loan had to: lower the tariffs for the British towards the Americans, it had to rebuild world trade, and it was needed to ratify the Bretton Woods Agreement. This meant for the British the return of the convertibility of the pound. The dollar-pool had to be given up. The dollar-pool was a reserve in the British Empire that was constructed to trade in the preferential trading system with its Dominions in dollars. The pound and the dollar came to be freely used.404

Keynes did not want the ambiguity of the deal but he defended it. He died in 1946 after the effects of an bacterial infection. Nowadays, it would be cured by antibiotics.405 The inauguration of the IBRD and of the IMF came at the Conference of Savannah.

At Savannah in 1946 the diplomats came together to propose a governor for the IMF and the IBRD. It was concluded that the headquarters were placed on American soil and that the governorship would be a fulltime business. The successor of the Secretary of the Treasury of Morgenthau, Vinson, had less feeling with internationalism and protected the American interests. The Americans wanted to control both institutes and that is why they came on American soil while the British wanted them to be full autonomous institutions.406 The IMF developed itself as an active player with discretionary powers to watch the world economy and to have a control on the exchange rates of the members.

The Savannah Conference made sure that the sources of the IMF and that: ‘The Executive Directors of the International Monetary Fund interpret the Articles of Agreement to mean that authority to use resources of the Fund is limited to use in accordance with its purposes to give temporary assistance in financing balance of payments deficits on current account for monetary stabilization operations.’407

403 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969404 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975405 Conway, E. The Summit, Little Brown, 2014406 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975407Cassiers, I. et Ledent, P. Politique Monétaire et Croissance économique en Belgique à l’ère de Bretton Woods, 1944-1971, NBB, 2005

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There was also a new dispute: White saw the directors to make the decisions by themselves while Keynes saw the directors as arbiters.408 The NBB was critical: they told that the quota that was given to the members of the Bretton Woods System was not always a reflection of the their economic power of them. For Belgium there was a quota of 493.180.822 Belgian franc. The Belgian gold parity was held on 20.2768 miligram gold, or 44 BEF for one dollar. The gold parity was changed since 1936 and that for the first time since the end of the classical gold standard.409 The Belgians in exile were satisfied: the first director-general was a Belgian, Camille Gutt.410

3.9 Intermediary Conclusion

In this part we have constructed the Conference of Bretton Woods and its preparation. The plans circulated after and during the Second World War. Keynes and White came with their plans that were based for a part on the plans of the Nazis. The plan of Keynes was to theoretical and the plan of White was to conservative. The Americans were the biggest players thus a plan White-Light was accepted. A Fund and a Bank were constructed and the dollar fluctuated around gold. The other currencies fluctuated around the dollar.

During the War, voices rose to do something against underdevelopment. This we have to see in the light of the New Deal politics of Roosevelt where Roosevelt connected the ‘good neighbour policy’ of Latin Americans to foster cooperation in the world to development. The development mandate that was given to the Bank was a change and currency given to the world. The Bank would have to reconstruct the war torn countries and it would do something against the global imbalances. The Fund in contrast had to do something against balance of payment disequilibrium. However, the Fund and the Bank did not correct global imbalances

The Joint Statement and the Conference of Atlantic City were predecessors of the Bretton Woods System: Atlantic City was a general repetition to it. The Belgians were sceptical and critical for a global deal they saw more gain in a European and regional deal. Belgium wanted to be part of the Commonwealth System and they did not yet know the USA.

The Bretton Woods Conference was a heyday for diplomacy and it would construct a system that would led to the golden sixties and fifties. The IMF got the mandate to govern its parities and the world economy. The Big Three came together in several Conferences: Teheran, Moskow, Yalta and Potsdam. There the problems of the War were discussed. The USA and USSR won the War and a new setting was born with the Cold War. A difference led to the bipolar world. The first Conference after the War was in Savannah. There the differences of the Bretton Woods Conference were solved. In Savannah the Directors were chosen for the IMF and the IBRD: Camille Gutt would lead the IMF and the American Eugene Meyer would lead the IBRD.

The solution behind the Bretton Woods System was to create a stable international monetary system and to withheld the destabilization of the gold-exchange standard. A fix with gold remained: Keynes was against. The System was a system of fixed but adjustable parities. This would create in the literature the ‘Labour Standard’.

408Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969 409 Thesaurie, ARA, 1946410 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005

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4. The Mechanism behind the Bretton Woods System during the Cold War, 1944-1960

After the Second World War Harry Truman came to power and he changed the American policy: he was against state-led development and he was for private initiative. He was also for free trade. Development would get some place in his policy after 1949 too.411

After the War the world would be dominated by bipolarity: the USA and the USSR would be against each other because of their ideology. Communism and capitalism were ideologies that are the contrary of each other: the former is for the masses and the latter is for the individual. The superpowers would develop a run on arms and they would build their army. The ‘Long Telegram’ of Kennan would set the beginnings of the Cold War. In that Telegram the diplomat would say that the Soviets were for world domination and that the socialists and communists were the third bloc into Europe. He also said that the Americans had to develop the Cold War for internal policy. This led to McCarthyism. In the Long Telegram we see: ‘collaboration with the Soviet Union should stop short not only of compromise of principle but also of expansion of Russian influence in Europe and in the Far East.’412And further: ‘the United States must be able to prevent, by force if necessary, Russian domination of either Europe or Asia to the extent that the resources of either continent could be mobilized against the United States.’413

411 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005412 Leffler, M. The American Conception of National Security and the Beginnings of the Cold War, 1945-1948, In: The American Historical Review, 1984413 Leffler, M. The American Conception of National Security and the Beginnings of the Cold War, 1945-1948, In: The American Historical Review, 1984

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The philosophy behind it was to stop the communists and their expansion. According to this the people were busy reaching a compromise between capital and labour. The social- democrats were in the governments in Europe to construct the social welfare state.414 After the War in Belgium too the social pact was signed and that was the beginning of the social security system in Belgium.415 The division of Germany was reached in two states: the Bundes Republic Deutschland and the Democratic Republic Deutschland. 416

This is the conventional view of the Cold War. Westad in contrast would give in his world history of the Cold War that the Cold War had began with the rise of the USA and by the construction of the Second International in 1890. 417The First World War and the rise of communist parties in the world are signs of the ideological conflict: capitalism and its critics. In this dissertation I follow the conventional view but I mention also some information from world history. Stalin would revolutionize communism in one state and the world revolution would be a given for the world since the collapse of the Classical Russian state. Other sources tell that the Cold War started with the Great Depression whereby the USA lost much of its economic power.418

The Soviets by the figure of Stalin were convinced that the West was surrounding the USSR and that the Americans were going for world domination.419 According to Marxism they thought that the Americans were developing imperialism as the highest grade of capitalism. Stalin feared an invasion and therefore he wanted a zone of influence in Eastern Europe. After the War the CIA was up to control the USSR and they knew that the USSR was modernizing its army. The USSR trained new men and they built new planes and new army machines. The USSR felt itself threathened by the USA and that was because of the use of the atomic bombs on Japan.420 Leffler’s research showed that the CIA knew that the USSR did not have the power to invade the European countries. And they knew that they were no match for the USA.421

The Soviets would use the Second World War to regain lost territory: this territory was lost because of the revolution and because of the First World War. The Soviets were hailed as liberators in the occupied countries by Germany. Indeed, this happened in Bulgaria, Rumania and Yugoslavia. In Poland and Hungaria they were seen as conquerors. During the Second World War the Soviets still cooperated with the Americans and with the British.422

The Korean War would develop a new threathening phase by which the West would get a psychosis of the fear of the ‘Reds’. After the War, the USA said: ‘the greatest danger to the security of the United States (…) is the possibility of economic collapse in Western Europe and the consequent accession to power of Communist elements’.423 With this statement they referred to the power of the communists in Europe. They also feared the rise of communism in the Global South.

414 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005415 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011416 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006417 Westad, O. The Cold War. A World History, Allen Lane, 2017418 Westad, O. The Cold War. A World History, Allen Lane, 2017419 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005420 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005421 Leffler, M. The American Conception of National Security and the Beginnings of the Cold War, 1945-1948, In: The American Historical Review, 1984422 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011423 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006

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The Second World War had finished the European area. The European area made place for an American area and for the bipolarity. The nuclear threat was then seen as a permanent danger. The Belgians wanted at the end of the Second World War an alliance between the Western European countries.424 This had to avoid a strong Germany which had begun the two World Wars. The Belgians also wanted that war torn countries would be aided for their construction.425

Spaak also wanted that Germany had to be small. The Belgians followed the line of the French: they hoped that the German state had to be divided by the Allies. They also agreed to the new system of collective security but Spaak wanted that the UK had to lead and not the USA. The USA was not known by the Belgian elite.426

Further in monetary relations after the War. The IMF is the institute for the control of the international monetary system and was designed during the War. The mandate of the IMF was ‘rules about adjustment in international monetary relations as well as to provide temporary resources to deal with balance of payment problems’.427 The Bretton Woods System was created to be a better gold standard. They did not want to be off gold completely. The gold-exchange standard was responsible for the Great Depression. And the BIS had to govern the international monetary system during the interwar years. They also had to govern the Dawes and Young Plan: Plans to help the Germans back on their feet. The IMF and the IBRD were a continuation of that process.428Former in my dissertation I recall the ratio behind ‘embedded liberalism’ constructed by Ruggie. It is because of the Second World War the Labour Standard as the Bretton Woods System was designed. It was the compromise between capital and labour because of experience in the interwar years.

Both institutions were created to end ‘the beggar-thy-neighbour’-policies of the 1930s.429 The Conference of Bretton Woods had to end destabilizing capital flows, had to end deflation, had to end tariffs and had to end repayments for reconstruction. Eichengreen developed the view that the dollar was not ready to be a reserve currency and that the French wanted a return to the gold standard. Following him about the interwar years the only thing that was reached was the lowering of the Smooth-Hawley Tariff.430

In 1947-48 Belgium drew for the first time on the funds of the IMF: 33 million dollar. This was 75% of its quota.431 The Belgians also wanted to have a new parity in the IMF and they would get that in 1949: 1 BEF was set on 44 for one dollar. After the War the Belgians were presented as the ‘Belgian miracle’: the little country had a less destroyed infrastructure than its neighbours. Belgium reached its productivity of 1938 very soon even as its output. 432After the War, the USA would get more influence in Belgium in contrast to the UK.

From here on, I use primary sources. The former chapters could be seen as a study of literature. From this part I make use of the archival sources of the IMF, from the FOD Foreign Affairs and from the FOD Finance. The time of the archival sources is set on the period 1944-1971.424 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005425 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005426 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005427 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996428 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996429 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996430 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008431 IMF Staff Report432 IMF Staff Report

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4.1 Camille Gutt as the first director-general

The Belgian Camille Gutt was the first director-general of the IMF and he stood for economic orthodoxy. The IMF under him would fought against world inflation. Inflation was undermined by stable exchange rates and by convertibility. Camille Gutt was accepted at the Conference of Savannah by the Americans, by the Canadians, by the Dutch and by the French. He was seen as a candidate of the compromise between the Americans and the British.433

Gutt was an active and important director. He gave much confidence to its members and he started with the giving of funds and of drawings on the IMF. And he was the person who defined the IMF as a more practical institute.434The drawings were revised by Article II and Article IV to be automatic: with this move capital would equilibrate between creditors and debtors. Also, with the revision: drawing funds would become available for other means.435The first task Camille Gutt did was the compliance by the members of the IMF of Article VIII, the convertibility of currencies.436

Camille Gutt was the first director and had as duty to organize the IMF. The powers of the IMF were divided in the Fund, the governors, the administration and the staff. The real power lied and still lies with the governors and this are member states. The Fund began operations in 1947 after the ratiofication of 28 nations. 437Questions were made for the reasoning behind the voting system even as the powers of the staff.

The Administration of the IMF governs the organisation and meetings are called for by the Administration. Gutt is a person of the economic orthodoxy: it is called that he fills in the Fund to combat inflation. Gutt as director decided the course of the Fund and he decided the meetings sett by the Administration and by the governors.438

After the inauguration of the Fund, Gutt propoed some changes: the Adminsitration had to operate folliwng geographical regions. He also set the institution towards the needs of today: ‘une mission technique, (…) des consultations dans le payes, (…) et des rapport et recommandations’.439

Figure 13: Camille Gutt

433 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999434 Crombois, J. Camille Gutt. Les Finances et la Guerre, Quorum-Ceges, 1999435 Thesuarie, ARA, 1949436 Thesaurie, ARA, 1946437 Thesaurie, ARA, Camille Gutt438 Thesaurie, ARA, Camille Gutt439 Thesaurie, ARA, Camille Gutt

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4.2 The Beginnings of the Cold War and of the Marshall Aid

The first topic on the agenda in 1945-1947 was the question of the convertibility of the pound: the British had given their consent to make their currency free for a loan by the Americans. A loan was also given by the Americans to the French, to the Danish, to the Dutch and to the Luxemburgish. The ratio behind this loan was to combat the communists. The Belgian miracle led to a hausse on the primary resources market which the country would pay with gold or imported dollars.440

Gardner says that the Cold War began with the end of the Bretton Woods Conference.441 He also sees a continuation with the Marshall Plan and the Truman Doctrine and the reconstruction of multilateralism. The Bretton Woods Agreement was not ratified by the Soviets because of the Cold War between East and West. The end of the Bretton Woods Conference was also decided with the loan given to the UK by the Americans. The blocked sterling balances were massively drawn by UK’s Dominions. The dollar-pool was getting depleted in the Bank of England: the pounds were changed into dollars.442

After the War the sterling zone would break up. Moreover a ‘dollar shortage’ was a given whereby imports of the dollar zone were matched by its exports. For the British ‘multilateralisme met nationaal economisch beleid ging echt niet samen.’443 The retreat of the key reserve currency status of the pound and the recession of the British economy was a prelude to the devaluation 1949.

Bretton Woods stood for universitality, for equality and for the progressive liberal structure of the world. With the Bretton Woods System a dollar standard was created with a dollar – exchange in gold.444 The pound had some problems. The pound had led the Belgian state to the creation of a trading bloc. The Belgians had discovered the Americans and they helped construct an Atlantic Europe with the USA because of security reasons. The Atlantic Europe was in contrast with the

440 IMF Staff Report441 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969442 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969443 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005444 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013

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federalism of Caudenhove-Kalergi.445 The Belgians were divided between an Atlantic Europe and a federal Europe.446

In 1948 Belgium reached an agreement with the French whereby the Belgian bonds and the Belgian franc was introduced on the Paris market.447 On that moment France had a deficit with Belgium and they wanted to reach a bilateral payments agreements between the two states. With that agreement the Belgian franc was used by the French as an international currency. And this was the first step towards convertibility. At the same time there were agreements signed between the Netherlands and Belgium. With those payment agreements the Belgian franc was one of the most demanded currencies after the Suisse franc and after the dollar.448

The Europeans regained their strength by the Marshall Plan, or by the European Recovery Act. With that Plan the USA gave funds to the Europeans on the condition that the Europeans would become one bloc, one unity. The dollars used in Europe were recycled because of American imports: capital goods and primary sources. To streamline the Aid, the OECD449 was constructed. The Marshall Aid was Keynesianism at its best: ‘the debt relief element was embodied in provisions allowing debtors to repay in local currency valued at the original exchange rate.’450 With the Marshall AId the claim towards universality and towards liberalising of the currencies in the Bretton Woods System was replaced by regionalism and by gradualism. The IMF and the IBRD were set out of action by the Marshall Aid.

The Marshall Plan was one of the sides of the Truman Doctrine: the Marshall Aid to reconstruct the war torn countries of Europe, while containment of the communist East was the other side. The Eastern European countries were given access too but the Russians decided they may not because of the struggle between East and West. Gutt gave his consent to the Aid but was sad that the IMF was placed outside the construction of the Marshall Plan.

445 Richard Nikolaus Eijiro, Count of Coudenhove-Kalergi[1] (16 November 1894 – 27 July 1972) was an Austrian-Japanese politician, philosopher and Count of Coudenhove-Kalergi. The pioneer of European integration, he served as the founding president of the Paneuropean Union for 49 years. His parents were Heinrich von Coudenhove-Kalergi, an Austro-Hungarian diplomat and Mitsuko Aoyama, the daughter of an oil merchant, antiques-dealer, and major landowner in Tokyo.[2] His childhood name in Japan was Aoyama Eijiro. He became a Czechoslovak citizen in 1919 and then took French nationality from 1939 until his death.His first book, Pan-Europa, was published in 1923 and contained a membership form for the Pan-Europa movement, which held its first Congress in 1926 in Vienna. In 1927, Aristide Briand was elected honorary president of the Pan-Europa movement. Public figures who attended Pan-Europa congresses included Albert Einstein, Thomas Mann and Sigmund Freud.[3]Coudenhove-Kalergi was the first recipient of the Charlemagne Prize in 1950. The 1972–1973 academic year at the College of Europe was named in his honour. Coudenhove-Kalergi proposed Beethoven's "Ode to Joy" as the music for the European Anthem. He also proposed a Europe Day, European postage stamp[4] and many artefacts for the movement (e.g. badges and pennants)446 Coolsaet, R. België en zijn Buitenlands Politiek, 1830-2000, Van Halewyck, 2006447 IMF Staff Report448 IMF Staff Report449 The Organisation for Economic Co-operation and Development (OECD; French: Organisation de coopération et de développement économiques, OCDE) is an intergovernmental economic organisation with 36 member countries,[1] founded in 1961 to stimulate economic progress and world trade. It is a forum of countries describing themselves as committed to democracy and the market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices and coordinate domestic and international policies of its members. Most OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries. As of 2017, the OECD member states collectively comprised 62.2% of global nominal GDP (US$49.6 trillion)[3] and 42.8% of global GDP (Int$54.2 trillion) at purchasing power parity.[4] OECD is an official United Nations observer.[5]450 Thesaurie, ARA, 1950s

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As reaction to the Marshall Plan and to the Truman Doctrine, the Soviets had the Zjdanov doctrine.451 This doctrine divided the world between imperialists and democrats. The Soviets were the democrats while the West were the imperialists. The Comecon was constructed as something as the same as the Marshall Aid. The Comecon made sure that Eastern Europe became satellites of the USSR. The Comecon was a rules-based system based on unequal treaties.452The Eastern bloc became part of the USSR but was not monolithic.

The Cold War was based on: firstly because of the promise of the Soviets to hold free elections in Eastern Europe that was not held. In those elections fraud was played by the communists. And this was indicted by the Americans. Secondly, the Russians thought that they were let to bleed in the Second World War by not opening a second front before 1944. The Russians also accused that American capitalism was inherently leading to expansion and imperialism. Thirdly, the nuclear bombs threathened the USSR. The left side view shows a dollar empire in the West whereas the Soviets were evil for the needs of capitalism. This would lead, as is said, to McCarthyism.453

The ‘dollar shortage’ would bring a gap in devises for import: the sterling balances were still frozen. With the Marshall Aid the dollar shortage became a dollar glut. In the 1950s the pound was still the most used interantional key reserve currency. This explained the gap between liquidities in the USA and the rest of the world. International network inertia explains part of this.454 International liquidities in the form of the dollar were flooding the world starting at the end of the fifties with Marshall Aid but the IMF was set out of play in the whole reconstruction process455

Belgium after the war needed gold and currencies. And ‘Operation Gutt’ was announced. ‘Operation Gutt’ would drain the bad currencies from the Belgian Markets. The Operation would evade hyperinflation, would reform the Belgian franc, would stabilize the Belgian franc and would combat deflation. 456

The Belgians reached bilateral payments agreements: with Argentina, with Denmark, with the USA, with France, with Portugal and with the UK.457 This had as objective to rebuild intra-European trade because with the payment agreements trade agreements were reached too. The NBB also got swap agreements with other central banks.458 Bilateralism was the way to reconstruct the trading system and the financial system. Currency convertibility was a step towards multilateralism.

The Belgians after the War also had a conflict with the IMF: it happened to be about the installation of the free gold market in Belgium.459 The Belgian gold market was opened because of the gold from the Congo. The conflict with the IMF was about the black market for gold. Gold from the Congo was not offered on the official Belgian market but on the black market and this was because of the War. The gold of the Congo would be legalized as the only players on the Belgian market. With this move

451 De Vos, L. en Sterkendries, J. De Grote Geopolitieke Problemen na de Tweede Wereldoorlog, Davidsfonds, 2010452 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006453 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011454 James, H. International Monetary Cooperation sicne Bretton Woods, IMF, 1996455 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005456 IMF Staff Report457 IMF Staff Report458 Cassiers, I. et Ledent, P. Politique Monétaire et Croissance économique en Belgique à l’ère de Bretton Woods, 1944-1971, NBB, 2005459 IMF Report Staff

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the Belgian government would prohibit the black market. In this way ,the IMF reached a,n agreement with the Belgians controlling the Belgian gold market.460

Figure 14: Marshall Aid or the European Recovery Act

Source: https://bournehistorians.files.wordpress.com/2015/10/marshall-aid-71.jpg

4.3 The British Devaluation of 1949

Berlin became a heyday of the Cold War tensions: West-Berlin was part of federal Germany while the East was part of the East German State. The Russians wanted the Americans, the British and the French out of the East. Therefore, the Russians closed all access to Berlin. As a reaction to that, the Allies came with an air bridge to supply the city of West-Berlin.461

This was the context to the British devaluation in 1949: the British had to devalue because of the convertibility of the pound was not reached. With that the UK lost gold and reserves. The meaning of this move towards convertibility was a step towards multilateralism.462 The first victim of the IMF and the Bretton Woods System was France: before all the commotion behind the British move, the France franc was devalued vis-à-vis the dollar.463 Gutt as director-general gave his consent for the alteration of the parities.464 De Vries tells that the IMF was noticed in this affair.465 She says that the governors of the IMF found it hard with the decision of the UK. They also said that the UK had to decide for itself but that other countries would follow too. The devaluations led to stabilization of the loans and of the prices further in the world.

The devaluation of the British pound was a move to restore competitivity of the UK because the pound was overvalued: the pound was devalued with 30% towards a parity of 2.80 per dollar.466 After the British many countries followed with an devaluation, thus also the Belgians. The Belgians

460 IMF Report Staff461 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006462 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969463 Thesaurie, ARA, Camille Gutt464 Crombois, J. Camille Gutt and Postwar International Finance, Routledge 2015465 IMF 1945-1965, Volume II: Analysis466 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975

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devalued with 12.30%. 467WIth the devaluation the run on the pound ended: exports raised, imports faltered.

For the USA the year 1948-1949 was a year in recession. For the Europeans it meant a harsh winter. And this led to a ‘dollar shortage’. The frozen sterling balances were still an issue. Those sterling balances had to be liberalized if the pound had to reach reserve currency status. With the devaluation the role of the British Empire was questioned. With the new parities reached in the IMF, investors fled out of Europe while exports became cheaper and the balance op payments was restored.468

After ‘Operation Gutt’, the Belgians followed a policy of ‘le franc fort’.469 Because of the Belgian miracle the Belgian franc became to be seen as the European dollar: the Belgian economy fluctuated good and Belgium became a creditor. Currencies of creditors were used to clear the balances. After the devaluations of other Western countries the Belgium competitivity became not what was supposed to be. The status as creditor meant that Belgium had a surplus on the payments and trade balance. And this it had with the Netherlands and with France. The loans of Belgium were repayed in 1949.470

After ‘Operation Gutt’, the Belgian miralce was criticized by the IMF: it was a conflict over the Articles of Agreement about floating currencies. The IMF gave in: a ‘fluctuating exchange rate’ was permitted.471 The NBB let the franc floating towards a currency of 50 BEF vis-à-vis the dollar. After this the IMF would still defend the parities.472The Belgian authorities had remorse: they wanted the return of the pre-war parity, this was asked by the Treasury at the end of the year. The IBRD and the IMF rejected this call and as response the Belgian Treasury revalued the currency: revalued because the Belgian franc was less devalued than other currencies. The ratio of the devaluation was 14%473

After the war it was the intention that international trade became multilateral after 5 years. 474But it did not happen. ‘The goal was also that the pound reached its reserve currency status. Because the convertibility of the pound was not reached countries sought bilateral agreements with the UK. Bilateralism was seen as: the safest way to manage European trade in this environment. Bilateral agreements allowed governments to tightly control the amount of hard currency they expanded through trade within Europe. By balancing trade on a bilateral basis, imports from a given trading partner could be paid for with exports to the same partner and no hard currency would need to change hands. Bilateral agreements also enabled European governments to shut off imports from a given country if the bilateral balance became unfavorable and threatened to impose hard-currency obligations.’475 The hard currency here was the dollar.

467 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005468 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969469 Cassiers, I. et Ledent, P. Politique Monétaire et Croissance économique en Belgique à l’ère de Bretton Woods, 1944-1971, NBB, 2005470 IMF Staff Report471 IMF Staff Report472 IMF Staff Report473 Thesaurie, ARA, 1949474 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969475 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969

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After 1949 the ‘exchange-rate adjustments among the major currencies became less-frequent’ and this with several reasons: firstly, the reputation for a diminished prestige, secondly, speculation whereby change of parity would lead to capital flows, thirdly, retaliation in the way of competitive devaluations, fourthly, trade effects whereby tariffs would be set, fifthly, a diminishing of the costs and the rise of inflation.476

4.4 The European Payments Union (EPU, 1949)

The first Conference after the War to discuss the economy was the Conference of Paris in 1948 where the EPU was constructed. The idea was put forward by the governor of the NBB, who wanted an institute where exports and imports came together in a multilateral organization where international trade became multilateral as finance.477 European currencies had to be interchangeable to each other. On the one hand Europeans could reach to gold, to pounds and on the other hand to dollars. The goal was to continue the construction of bilateralism towards multilateralism. The British were against a further liberalising of the pound.478 The IMF was for: it realized that the EPU would construct the European Community further in the basis of the Marshall Plan or European Recovery Program. Gutt followed the movement towards the EPU and proposed the revaluation of the parities of the European countries.479

The idea of Ansiaux was strengthened by the idea of Richard Bissell in 1949. In 1950 he wanted to construct a ‘‘système Européenne de transferibilité totale’.480 This would be ‘un mécanisme d’apurement automatique de soldes des balanse de paiement intra-Européenne lorsque ces soldes dépasseraient certaines montants convenu’.481 The ideas were taken in by the OECD. The OECD had to divide the funds.482 Rojas shows that Triffin also came up with the EPU: bilateralism and a European clearing union to construct a multilateral system under the auspices of the IMF and the dollar.483

The plan towards EPU was born by Ansiaux, Bissell and Triffin in the same way as the Marshall Aid. The logical outcome of the Marshall Plan was the EPU: it made the Europeans to cooperate on monetary affairs. 484The proposal was: ‘the initial proposal was that each country would make a monthly return of its net balances; instead of each pair of countries settling their balances, offsetting claims would be cancelled and each country would be left with a single payment to the EPU as a whole. Payment was not needed up to a certain amount, but when the credit of the member was exhausted, payment would be required – partly in gold – and the management board could force corrective measures. These measures would impose discipline in bringing the balance of payments of deficit countries back into equilibrium.’485

476 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975477 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005478 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969479 Thesaurie, ARA, Camile Gutt480 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005481 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005482 Thesaurie, ARA, Camille Gutt483 Bordo, M. and Eichengreen, B. (eds.) A Retrospective on the Bretton Woods System, Lessons for International Monetary Reform, Chicago University Press, 1993484 James, H. International Monetary Cooperation since Bretton Woods, IMF, 1996

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Already in 1955 the NBB was researching convertibility: ‘conditions nécessaires aux rétablissements d’une convertibilité réelle du BEF, fondée sur des taux de change fixes et impliquant la liberalisation et partant, le développement des échanges internationaux.’486 The liberalising of dollar imports is the means towards multlateralism and free trade. In 1953 Belgium was reaching already towards a multilateral ratio for its currency: one in the official rate and one for the EPU.487

How was the EPU constructed? The EPU had to equilibrate on the short term the capital movements between creditors and debtors.488 On the long term global or European imbalances came before the IMF. The EPU was a step towards European integration and this outside the IMF. ‘The EPU Agreement helped to stimulate trade between European countries, to deter them from discriminate their trade partners and tend to reduce trade and exchange transactions between participating countries.’489 The EPU led towards convertibility of currencies and towards intra-European trade. With the Cold War the Americans led the Europeans to construct their mini Bretton Woods. The role of gold, of the dollar and of the pound remained even as the quota. Because of its European character the EPU was built in the BIS. Gutt denounced the move towards the EPU without the IMF.490

WIth the construction of the EPU, the Bretton Woods System got its first stab: EPU allowed exchange controls and trade practices that led to discrimination. With EPU in Europe, the Bretton Woods Order would be created. In 1952 Germany was allowed to the EPU and to the IMF. Japan was also allowed to the IMF in 1952. Western Germany became one of the largest creditors in the EPU and in the Bretton Woods System.491

The EPU made an end to the ‘dollar shortage’ in Europe. The Agreement recycled some parts of Keynes’s ICU into the EPU, whereby liquidity problems where seen as the liberalising of trade. To clear the European trade the European Organization of Coals and Steel had to construct another institute.492 This was done in 1949.

The governance of EPU came to a committee that gathered for the first time in 1952 to talk about Germany.493 The status of Belgium was strengthened because of the EPU and because of its creditor status.494 The EPU discriminated against the British because the pound had not yet reached its reserve status.

Because of the Korean War, exports surged in Belgium for the rebuilding of the European armies. The demand of Belgian coal and steel surged in Europe. The countries of the European Community all 485 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005486 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005487 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006488 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005489 IMF Staff Report490 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975491 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975492 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005493 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996494 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005

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took a loan from Belgium: 60% in gold, 40% in credits. Without the Korean War, NATO was not the strongest player in defence as it is today. With the Korean War the enemies of the West led to a paranoia: the USSR was building its world supremacy and this managed to the construction of the domino-theory.495 In this context, the Korean War led to the failure of the European Political Community and of the European Defence Community. The NBB proposed to go for more integration in Europe but on economical basis.496

In 1958 the Arcticle VIII of the IMF in the EPU was reached.497 European currencies became interchangeable in Europe because of the EPU. Because of Article VIII the EPU came to an end: the EPU -countries had to build up their reserves on the current account. This development meant that the European countries were full market economies, thus the war economy status of the EU members came to an end. Through convertibility, the USA invested massively into Europe.498In 1961 Belgium reached also agreements with Article XIV499: this was for their colonies. Article XIV was for the transitional period between an independent nation and a colony. Ruanda and Burundi became independent and this was foreseen because of the UN status of trusteeship.500

What did this mean for Europe? De Vries tells that ‘in 1958, fourteen Western European countries-Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, and the United Kingdom-made their currencies externally convertible for current transactions ; that is, nonresidents would now be freely permitted to exchange their earnings of these currencies from current transactions into any other currency at rates within the official margins.’501 Convertibility would lead to the growth of the world economy and of world trade. After the success of the EPU the IMF held since 1961 Article VIII consultations. Convertibilty has two pros: one, an international currency for persons and for companies and two, for international transactions.502

Figure 15: European Payments Union

495James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996 496 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011497 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996498 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996499 The transition was for after World War II but included colonies tooLend500 Thesaurie, ARA, 1961501 IMF 1945-1965, Volume II: Analysis502 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975

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Source: https://www.cvce.eu/content/publication/2006/4/19/a5425745-95dc-4b82-9259-e2488caaa978/publishable.jpg

4.5 The 1950s

The first event of the 1950s after the War, was the Korean War. Korea was divided after the Second World War in a South and a North whereas the North and the South could go for their own governance: a capitalistic South and a communist North. The North was led by the communist Kim Il Sung and the South by dictator Syngman Rhee.503

In 1950 the North invaded the South. The Americans had to intervene and this they did by the mandate of the UN Security Council.504 The Security Council was then boycotted by the Russians who wanted that the place of nationalistic China was replaced by communist China. The War would end in 1953 and under the American leadership of MacArthur the Americans would defend the South. In 1953 a truce was held and the 38th lattitude became the border between the North and the South.505 With this the North and the South held their own ideology and governance and with this the Cold War became institutionalized.

In the UN the ‘Uniting for Peace’resolution was adopted thanks to the Korean War. With that resolution the General Council could adopt measures on war and peace. The resolution also made way for the UN ‘peacekeepers’, a military arm of the UN.506 The General Council was stengthened with this resolution. With the ‘victory’ of the Americans in Korea the USSR was enclosed by a system of alliances and entities. The NATO was strengthened because of this. The Soviets reacted with the Warsaw Pact. Fautua tells that the USA had to bolster its strength because of the Korean War.507 The American army had to be prepared for its role in the world. Means for defence were raised. Because of the Korean War, the domino-theory508 in the USA was replaced with the deterrence theory509. Deterrence had to lead to peace between East and West.

503 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005504 De Vos, L. en Sterkendries, J. De Grote Geopolitieke Problemen na de Tweede Wereldoorlog, Davidsfonds, 2010505 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006506 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011507 Fautua, D. The ‘Long Pull’ Army: NSC 68, the Korean War, and the Creation of the Cold War US Army, In: The Journal of Military History, 1997508 A theory that held that when one capitalist state fell for communism others would follow509 Deterrence theory held taht with the build-up of the army other would not invade but would build their armies too

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The gap between the Russians and the Americans had declined: in 1949 the Russians had used a first atomic bomb.510 With the victory of the Chinese communists in their civil war a anxiety psychosis exploded in the West. The Chinese communists had sent a letter to Belgium so they would recognize the country. They wanted the same place in the international organization as Taiwan.511

The effect of the Korean War led to more cooperation in the EPU and between the EPU and the IMF. The War led to an investment boom in the world. Those investments were made in the industrial-military complex. The Belgian government acted in the EPU as the banker of the Europeans. Belgium had a surplus with the EPU but a deficit with the dollar zone.512

The EPU was dependent on credits from the surplus countries. This led towards the liberalization of the Belgian franc.513 With this move the Belgian franc could be changed into the dollar. The Belgian economy did not follow the European growth: European growth was brougth to 4.2% while Belgian growth was only on 2.5%. The growth of the European countries happened because of a catching-up with Marshall Aid.514Belgium did not have much Marshall Aid because of the Belgian miracle. The fifties in Belgium were the beginnings of the golden future and the development of Belgian Social State.

The fifties also had the Suez crises. There was a conflict between Western imperialism and with the Nasser regime in Egypt. A run on the British reserves unfolded. Because of the run the UK drew on the funds of the IMF and the UK also asked for a loan from the Americans. The UK held on and used its gold tranche in the IMF. A stand-by agreement with the IMF was agreed with the British at an account of 561.5 million dollar.515 The UK had to retreat from Egypt in order to get the loan. The UK promised to not go for quantitative restrictions or for protectionism. The Fund intervened in the UK a gave resources to help the UK.516

With the Suez crises demands for Belgian products faltered. Therefore, the Belgian balance of payment deteriorated.517 Belgium asked for a stand-by agreement in the IMF, worth 30 million dollar. The IMF gave its consent. Stand-by agreements are bilateral payment agreements or loans that have to be repayed to the members of the IMF over time and not directly. Stand -by agreements had no legal base in the Articles of Agreement. ‘The essential characteristic of a stand-by arrangement is that a member is given the assurance that it will be able to use the Fund's resources without any further review of its position and policies’,518 this is the difference with drawings in the IMF. There is also no conditionality to a stand-by agreement. The pound became again a target for speculators: as defence the French franc devalued and the German mark revalued.

With the Suez crises the French and the British focused on the stability as precondition for the Bretton Woods System.519 Because of Suez the French and the British decided to make their

510 Fautua, D. The ‘Long Pull’ Army: NSC 68, the Korean War, and the Creation of the Cold War US Army, In: The Journal of Military History, 1997511 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011512 IMF Staff Report513 IMF Staff Report514 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005515 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996516 Thesaurie, ARA, 1956517 IMF Staff Report518 IMF 1945-1965, Volume II: Analysis519 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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currencies free. In this way the pound became a reserve currency and the dollar became scarce on European soil. The Germans also had a surplus on the current account.520

Also in the 1950s there was the uprising in Hungary. The West did not react. Because of that the USSR came with a proposal: a pact between NATO and the Warsaw pact and the destruction of nuclear arms. The prestige of the Chrustjov regime went up: in 1957 the USSR began with space exploration too.521 Sputnik became a success.

With the Community of Coals and Steel in Europe, Belgium had to close several mines in the Ardennes and in Flanders.522 The community had to streamline the European business on coal and steel. The Belgian government reacted with the production of high-technology products.

In the fifties the capital in shares was updated in the IMF by its members.523 In 1955 a European Monetary Agreement was reached between the British and the EPU.524 This strengthened the position of the British pound as reserve currency. In the EPU a band of 5% was constructed between the European currencies and a band of 1.5% vis-à-vis the dollar. The Monetary Agreement was ‘un système multilaterale de réglements qui conservait certains des avantages de l’EBU: ‘compensation multilaterale et réglements mensuels en dollar des soldes bilaterales déclarés par les pays membres à des taux de change fixé d’avance.’525 The Monetary Agreement settled the score for the financial markets in Europe: currencies in Europe were made convertible for al, a free market was created. 526After the Agreement the Belgians did not use discriminatory practices again: trade was liberalised as finance was. 1958-1959 is seen as the beginning of the Bretton Woods System.527 And so the ‘dollar gap’ changed in a ‘dollar glut’.

As the Belgian franc the French franc was defended by their government under ‘le franc fort’.528 The French rejected the proposal to make their currency free and they rejected the devaluation of it. The French starting with de Gaulle would do everything to destroy the American System. They complained of the System as ‘le privilege exorbitant’.529 Finally, the French currency became free but not because of the EPU but because of swap agreements with central banks. They had problems too in Algeria and they asked a stand-by agreement from the IMF worth 200 million dollar. Swap agreements were constructed with the Fed of New York who was playing the lead violin. The Bank of England played a lesser role, even as the Bank of China and the Bank of France. 530Those swap agreements were a strengthening of the lending facilities in the Bretton Woods System.

The Germans became part of the EPU and wanted to integrate the European economy. They wanted to liberalise in a European setting. The capital flows they wanted, were to diminish even as inflation: this pressurized the German mark. They did not want to revaluate. The Germans accumulated dollar

520 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996521 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005522 IMF Staff Report523 Thesaurie, ARA, 1958524 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996525 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005526 Thesuarie, ARA, 1955527 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996528 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005529James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996530 Thesaurie, 1947

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reserves.531 This was another stab to the Bretton Woods System. The Germans drew also on their quota because of to much imports. Because of balance of payment problems the quota was depleted in the IMF. The Germans reacted with exchange controls and they acted with a tax on imports. 532The two German states were defended by the Russians and by the Americans. Chrutsjov proposed a neutral and united Germany to end the conflict: a destalinising was reached together with a détente.

4.6 The Economics of the Bretton Woods System

We have seen that the former international monetary system had difficulties after 1914. Indeed, the gold-exchange standard was broken and it would not survive. In 1936 with the Tripartite Agreement every nation was from gold. Bretton Woods constructed a gold-dollar fix.533 We recapitulate a bit on the gold standard.

The gold standard came to its end after the First World War and in the interwar years it lost all its credibility. Indeed, the Great Depression was caused by the gold standard.534 After the collapse of the gold-exchange standard currencies were going towards a ‘managed float’. The monetary authorities intervened massively on the gold and money markets. After the Second World War the politicians wanted a return to the fixed but adjustable exchange rates. The credibility of the central banks was lost because of the Great Depression.535

Vermeiren says that the interwar years worked less because there was no hegemon to defend the system.536 He defends the hegemonic stability thesis where a hegemon had to pay for the costs of the system. The UK was not able anymore to defend the system in the interwar years and the USA did not want to.

The Bretton Woods System constructed a stable and fixed exchange rate that was adjustable. The heydays of the System went together with the golden sixties whereby investments and consumption was rising.537 The adjustments may lead towards capital controls and to prevent deficits. The creators of Bretton Woods acknowledged that ‘capital flights are bad for the countries that experience them and these countries ought to control them if they want to use the Fund's resources.’538 Capital flows were seen as destabilizing during the interwar years. The IMF had to prevent that. The IMF had also to do research on the world economy. Following the Articles members of the IMF would make their currencies freely exchangeable. Indeed, free capital would make the markets stronger in contrast to the Bretton Woods System.539

I recapitulate why the Bretton Woods System was constructed: ’capital flights are bad for the countries that experience them and these countries ought to control them if they want to use the Fund's resources.’540 ‘Uiteindelijk werd geopteerd voor een systeem van aanpasbare pariteiten

531 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996532 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996533 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975534 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975535 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996536 Vermeiren, M. Het Monetair Trilemma in de Internationale Financiële Architectuur, masterproef, 2007537 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013538 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013539 IMF 1945-1965, Volume II: Analysis540 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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(“adjustable peg”), waarbij de monetaire overheden via een discretionaire bevoegdheid konden overgaan tot een aanpassing van de pariteit.’541 The Americans defended it as a better gold standard while the British did not want the return of the gold standard: it was everything to prevent. Nationalism was the ideology that prevented the smood functionings of the gold – exchange standard. The Bretton Woods System was ‘according to Triffin, (…) not prepared to trade on dollar-convertibility, bilateralism and trade and exchange restrictions were commonplace in the immediate postwar years.’542The System strove towards free trade and free capital. Following the monetary trilemma this is not possible. Only two of the combinations are possible.

Figure 1: the monetary trilemma

Source: wikipedia

4.6.1 The Death Rattle of the Gold Standard

The crash of 1929 was the final stab to the gold standard. Politicians instead followed a policy of full employment and of stable income for the people. Indeed, the Great Depression made this happen. The world during the interwar years became mercantile.543544

The classical economic ideology was in doubt: Hayek and Keynes were the foremost critics. They were against the equilibrium thinking of the classical economic knowledge: contraction was made because of a lowering of loans and prices. Trade unions and protectionism made clear that loans became ‘sticky’.545

Keynes in ‘A Tract on Monetary Reform’ was critical for the gold standard: central bankers had to go away from gold. They intervened on the money markets to stabilize their currencies and they prevented inflation or deflation. The classical gold standard became a gold-exchange standard. And it functioned differently than the gold-exchange standard. Reserves led to an absorbing function and the bad functioning of the adjustment role.546 In the ‘Tract’ of Keynes we see: ‘Here he observed that 541 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005542 Birnbaum, E. Gold and the International Monetary System: An Orderly Reform, Essays in International Finance, 1968543 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008544 Mercantilism = protectionism545 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006546 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006

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while inflation was indeed an evil inasmuch as it robbed creditors of their profits, deflation was a greater evil because widespread expectation of falling prices could bring an entire economy. Because expectations played such an important role, monetary authorities could dampen the business cycle by preventing “confident expectation” of either inflation or deflation. He argued that nations should do so by establishing fixed, but adjustable, values of their currencies and cooperating through international arrangements to assure that no one nation could dominate the global economy.’547

Because of the monetary trilemma the system of the gold standard functioned badly. This would lead to the Friedman dissertation with a floating system. In the interwar years Harvard economist Williams wanted a floating system too. But the people were leaning towards Keynes. Keynes came with the idea of a central bank of central banks in the ICU.548 The ICU would manage the role of gold and would regulate the national economic policy. In a state of disequilibrium the parity of the gold standard would change. With this Keynes rejected the restoration rule of the gold standard and replaced it with an independent monetary policy.549 And that policy was seen as a solution for the Great Depression. Keynes found that a demand shock in a global disequilibrium would lead to more economic growth and the restoration of the world economy.

Figure 16: Bretton Woods

Source: https://image.slidesharecdn.com/thegoldstandard-150712182548-lva1-app6891/95/the-gold-standard-9-638.jpg?cb=1436725588

4.6.2 The Bretton Woods System

The Bretton Woods System was seen as the golden time for capitalism. The period 1958-1968 was seen as the heyday of the Bretton Woods System. Growth was high and a return to the free markets was born. The System was completely new: it was an independent and closed system based on rules and based on the IMF and the IBRD.550 The Bretton Woods System had its origins in the New Order of Schacht and Funk.

Out of that plan Keynes followed the rejection of the gold standards and he mixed it with elements of the Tripartite Agreement. The accent of the Bretton Woods was on full employment. The Bretton Woods System had to be an intermediary for an independent monetary policy and for an adjustable 547 McKinnon, R. The Unloved Dollar Standard. From Bretton Woods to the Rise of China, Oxford University Press, 2013548 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006549 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008550 Kirshner, O. (eds.) The Bretton Woods-GATT System. Retrospect and Prospect After 50 Years, M.E.Sharpe, 1996

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but fixed parity.551 Keynesianism was the ideology for the Bretton Woods System. And ’shielded by capital controls, policymakers could stabilize employment and the price level, using exchange reserves, the Fund’s resources to tackle short-term payment difficulties, while the exchange rate adjustment were expressly envisaged in the case of structural disequilibrium’.552 The Bretton Woods System led to ‘sécurité sociale, conventions collectives, l’indexation et croissance des salaires’553 in Belgium. In Belgium the Social Pact was born and that was defended by this System.

The flaw in the System was that global adjustments between deficits and surplus countries did not happen automatically. Creditors could accumulate reserves without that any country would counter that. The ‘Scarce Currency Clause’ was an empty seat in the System. The IMF, hence, could not do anything against ‘currency misalignments’. And the dollar was an international and national currency that the USA had to give the world.554

Figure 17: Bretton Woods

Source: https://www.iaspaper.net/wp-content/uploads/2016/05/lec02_5.jpg

4.6.3 The IMF

The IMF was the core of the Bretton Woods System and stood for stable monetary relations. The IMF had to stabilize exchange rates and had to prevent competitive devaluations. In the fifties Triffin made the remark that the IMF had to change in a central bank of central banks. A central bank of central banks had to go for global equilibrium between creditors and debtors.555 The IMF and the World Bank were global public goods: this means that their members could freely become a member of both institutions and that those institutions were giving free public goods but that a hegemon had to defend them. Quota in the system led to liquidities and to loans. The power of the IMF was with the Board.556 The members in the Board grew because of decolonisation. The interests of the IMF depended on the states which are represented in the Board. Both institutions made use of

551 Hazlitt, H. From Bretton Woods to World Inflation. A Study of Causes and Consequences, Regnery Gateway, 1984552 Brion, R. et Moreau, J. La Politique Monétaire Belge dans une Europe en Reconstruction, 1944-1958, NBB, 2005553 Cassiers, I. et Ledent, P. Politique Monétaire et Croissance économique en Belgique à l’ère de Bretton Woods, 1944-1971, NBB, 2005554 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996555 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996556 IMF 1945-1965, Volume II: Analysis

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conditionals and this meant that members had to undergo the necessary adjustments and for that they gave a loan. Those conditionals are liberal.557

On the one hand the IMF had to do studies about the world economy and of the other hand they governed gold and national currencies. At the Suez crises stand-by agreements were reached. Stand-by agreements were new. To relaunch the IMF it became possible for drawings and for the gold tranche to be automatic. According to that the Articles of the IMF, it had to be adjusted. This led to a debate in the IMF in 1967. 558 The gold tranche was 25% of the pool in the IMF and this tranche had to be repayed in 3-5 years.559 The gold tranch: ‘The gold tranche policy thus began as an attempt to encourage a limited use of the Fund's resources, but from this modest origin it has developed into yet another original contribution to international monetary law and financial arrangements. Once the Fund had formulated its full tranche policies and had become an active financial institution, the gold tranche policy ceased to be an experimental first step in the use of the Fund's resources. The Fund and many of its members began to see in the gold tranche a facility that could be treated as a reserve asset under central bank statutes or at least in the public presentation of a member's reserves.’560The IMF, made use of the ‘staff papers’ to consult the world economy.561

The IMF and the World Bank became complementary: the Bank got a stabilizing function and the IMF got a mandate for development. The governorship with the Bank implied a governorship in the IMF. The Articles of Agreements were connected to each other as they are by the UN System.562

4.6.3.1 Belgium in the IMF

In the fifties Belgium had a public debate to leave the IBRD and the IMF. The Belgian representatives were in discord with the other members over their drawing capacity. The Belgian franc was quickly made convertible but not other countries563. The balances in the IMF for the Belgians were frozen and other countries, especially development countries, wanted that their currencies were convertible in Belgian francs. This is explained a little further with the decolonization period. The world was changed by the Bandoung Movement in 1955. The world witnessed with the decolonization that Bretton Woods favoured the developed nations. The underdeveloped nations wanted a new economic order and freedom to act. This led to the New Economic Order564 in the 1970s.

The other question in the Belgian public debate was the question of sovereignty. The Bretton Woods System diminished the sovereignty of states: the American influence reached out even as the IMF and the IBRD made the strength of the state weaker. Especially the economic orthodoxy made states weaker and boosted the American ideology in the IMF and in the Bank. The real reason to leave the IMF was the indecision in the multilateral organization.565 The movement was global: the Belgians

557 IMF 1945-1965, Volume II: Analysis558 Thesaurie, 1967559 IMF 1945-1965, Volume II: Analysis560 IMF 1945-1965, Volume II: Analysis561 IMF Staff Report562 IMF 1945-1965, Volume II: Analysis563 Thesaurie, 1950564 The New International Economic Order (NIEO) was a set of proposals put forward during the 1970's by some developing countries through the United Nations Conference on Trade and Development to promote their interests by improving their terms of trade, increasing development assistance, developed-country tariff reductions, and other means. It was meant to be a revision of the international economic system in favour of Third World countries, replacing the Bretton Woods system, which had benefited the leading states that had created it – especially the United States. This order was demanded by the Non-Aligned Movement.565 Thesaurie, 1950

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also wanted to leave the UN and other international organizations. Solidarity was a two way street. This happened foremost by the ‘dollar gap’: the Marshall Plan had to build up the currency and reserves potential of the member states. Big countries as the UK or France were against the limitations of the quota system: they wanted to reform the IMF.566 But this fell on a veto of the USA. The European countries did not support the American System anymore: the quota system was a torn in their eye. The Belgian quotas were for the Benelux, thus they represent the Dutch as the Luxembourgois. That quota had to be reduced and that was the reason why the Belgians wanted to go out the Bretton Woods System. A second reason was that the Bretton Woods System constrainted the maneuverability of the Benelux.567

In the fifties legislation of the IMF was inscripted in the Belgian state, especially of the quota revision. The central bank of Belgium, the NBB, was made more free on the order of the IMF. And this because of swap agreements with other central banks.568 The question to leave the IMF came back in the sixties: the quota system was not favorable for Belgium, thus they wanted to leave the IMF. The IMF countered that to ask for a five yearly recounting of the quota.569Why? Because the world economy grows yearly.

4.6.4 The World Bank

The World Bank or its predecessor the International Bank for Reconstruction and Development was one of the creations of the Bretton Woods Order. The Bank had to grant private loans for public investments into development projects.570 Or they did loans for reconstruction projects. The World Bank was defined by its Articles of Agreement: ‘To assist in the reconstruction and development of the territories of its members by facilitating investment of capital for productive purposes including the encouragement of the development of productive facilities and rescources in the Least Developped Countries’.571 This follows on Article I of the IMF.

The Bank financed itself with bonds and that started in 1947. The first market to construct the financing of the Bank was New York. In the beginning the Bank was a dollar bank. The construction was built in Conference II of the Bretton Woods System. Some items in the Charter stayed in their ambiguity: the governors did not know that they had authority in the Bank, that they had means, that they had experience and that they had prestige for their mandate. This led to short time projects and this led to crowding out of investments. The first loans was for France, for the Netherlands, for Luxembourg and for the Danes, worth 497 million dollar.572

With the decolonisation the membership of the Fund and the Bank had risen to 106 in 1962. Both the American Banking Association as the New York Fed were against the IBRD and the IMF in their current form: they wanted that the Bank had some functions of the IMF. They also kept on that the Fund and the Bank broke the free markets.This was a returning issue for the New York bankers.573

The first development mandate was for Chile. And because of the Marshall Aid the development mandate was in doubt. Indeed, the Europeans wanted that the IBRD supplied loans to reconstruct their economies. Later the World Bank grew further: in the fifties and the sixties the International

566 Thesuarie, ARA, 1950s567 Thesaurie, ARA, 1950s568 Thesaurie, ARA, 1958-1959569 Thesaurie, ARA, 1960570 Mason, E. and Asher, R. The World Bank Since Bretton Woods, Brookings Institution, 1973571 Mason, E. and Asher, R. The World Bank Since Bretton Woods, Brookings Institution, 1973572 IBRD Report573 Mason, E. and Asher, R. The World Bank Since Bretton Woods, Brookings Institution, 1973

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Development Agency and the International Financial Corporation was created. 574The Articles were changed in 1966 even as did the cooperation with the IMF. From the sixties and the seventies projects led to more human development.

4.6.4.1 Belgium in the World Bank

In the World Bank, Belgium asked for loans. The first project came in 1949 when the Belgian governor asked a loan for the industry in Liège Seraing. Belgium asked also for 2 loans to modernise the production capacity. The modernising reached the agricultural sector, the electrification and the development of semi-finished products.575

In the fifties and the sixties Belgium was seen as the Belgian miracle because of a less destroyed infrastructure after the Second World War. Investments stalled in Belgium and the competitivity detiorated. Growth in Belgium faltered and was less high than the European mean.576The European did catch-up.

Belgium also asked some loan projects for the Congo: a ten year loan was given. With this loan the Congo had to go into the modern era, worth 40 million dollar.577 It also had to build the infrastructure of the Tanganika Lake. Because of the decolonisation of Congo the loan would stop. 3000 kilometers roads were built with a loan from the World Bank. There were also investments in the Congo for public infrastructure, for transport, for agriculture, and for aid. Another loan went to Ruanda-Urundi, also a colony of Belgium: towards the harbour at the Tanganika Lake, worth 4.8 million dollar.578

In the fifties Belgium also asked for a loan for itself: for the Walloons to construct a channel between Charleroi and Craybeck in Brussels. This shows how Belgium modernized and kept working on its infrastructure.579 The Belgian Parliament had to negotiate and had to accept the IDA and the IFC. At the beginning of the fifties the IBRD could use some extra cash: the launched bonds on the European capital markets. According to this move the IBRD’s income was diversified and Belgium was one of the first that established a market for the bonds of the IBRD.580In 1956 Belgium asked a loan for port and waterways from the Bank.581

The NBB had in the fifties a plan for a tax on the income of the IBRD. Indeed, they proposed a tax of three procent on the revenu of the IBRD. The NBB is and was one of the foremost players in the Bretton Woods System. They wanted also a tax on the quota’s in the IBRD.582

4.7 Intermediary Conclusion

We have seen that the Bretton Woods System was created with incremental steps. Context thereby was the Cold War between East and West. Belgium was a motivated and good member. We also have seen that the EPU made currencies exchangeable to each other. Bilateralism made way for multilateralism. Belgium also reached bilateral agreements with its partners. Bretton Woods made way to a multilateral clearing in the world.

574 IBRD Report575 IBRD Report576 IBRD Report577 IBRD Report578 IBRD Report579 IBRD Report580 Thesaurie, ARA, 1949581 Thesaurie, ARA, 1956582 Thesaurie, ARA, 1950s

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With EPU the Bretton Woods Regime would be set to work: a regional agreement would led to the heydays of the Bretton Woods System. A loan had also made the pound free but the British failed because of speculation against the pound. The Americans were not happy. The British defended a strong parity of the pound. Parities of the currencies were too high after the War and this had to be corrected. Therefore, the Belgian franc devalued.

From the IMF and from the World Bank Belgium got loans and funds to reconstruct its economies and to build their colonies. Marshall Aid would set the IBRD out of action in Europe. The IBRD would give some loans to the development of projects in the Congo and in Ruanda-Urundi: for infrastructure.

The Bretton Woods System would be an intermediary between the commodity standard of the gold standard to a fiat system. The classical gold standard was a shadow of its former self. New Dealers wanted to intervene in the economy: economic planning was strengthened by the Keynesians.

5 The Implosion of Bretton Woods, 1960-1971

The Cold War reached a climax in the sixties over Cuba. Cuba was in the past part of the American Empire. At the end of the fifties the dictator Batista was driven away.583 Batista was an American aid. Rebels under the leadership of the Castro regime came to power and they wanted aid from the Americans to modernize their economy. The Americans rejected that and it is why the Cubans knocked at the door of the USSR. The Cubans could supply the USSR therefore with sugar and an alliance was made.584

The USA did not want a communist state in their backdoor. Therefore the CIA planned to overthrow the communist regime of Cuba. This led to the incident of the Pigs Bay where the coup failed.585 The following was a masterpiece in the chess game that is diplomacy. Chrutsjov did not want the American rockets in Turkey. Therefore, he placed rockets in Cuba. The Cold War reached a boiling

583 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005584 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005585 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006

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point: the Americans wanted to do a preventive attack but they did not want a Third World War. President Kennedy reached out to the Soviets with a masterpiece in diplomacy: Cuba did their rockets away as a compromise with the rockets in Turkey.586 They were also placed out of Turkey.

After the death of Stalin a détente was set in. Destalinization began and there came some flexibilitiy in the communistic bloc. The communist bloc was not seen anymore as monolithic.587 This led to a break away from the Chinese from the USSR. The Chinese therefore reached out to the Americans. The Americans recognized at the end of the sixties the communistic regime of the Chinese instead of nationalistic China or Taiwan.588 The communists got the seat of Taiwan in the UN.

The boiling point over Cuba would be held with a strengthening of the armies in the East and the West. After Cuba a period of détente happened.589 The West was like the East not a monolithic bloc: tensions would rise between the Americans and the Europeans as in security, as in financial and monetary affairs.590

Also in the sixties there was the problem of Indochina. Indochina was a colony of France. With the Geneva agreement after the Second World War, Vietnam was split in a Northern state and a Southern. The North became communistic and the South capitalistic. With the battle of Bien Diem Phuh in 1954 the French were defeated forever in Indochina.591 The South became a dictatorship under Thieu. After the French the Americans intervened in Vietnam. The Americans opted for containment and the roll-back theory. The setting became a guerilla war between the Americans and between the Viet Mihn. The international financial relations would reach tensions between the Americans and between the Europeans over the Vietnam state.592

5.1 The Quest to a Stable Monetary System

5.1.1 The Heydays of Bretton Woods

The international financial system had as goal to foster economic growth. In that system states accumulate reserves or surplusses on the capital account. Reserves made states to cushion against an economic shock. States would act because of the monetary trilemma for an independent monetary policy and for free capital movements.593 This would lead to another stab against the System. Indeed, capital markets would develop in this way away from the Bretton Woods.

In the 1960s the European countries were in agreement of the Article VIII of the Treaty of the IMF.594 In 1960 the Dutch guilder was revalued together with the German mark. Their competitivity was restored. The Belgian one not: the deficit of the Netherlands with Belgium stayed. After the five years in the IMF, quota had risen to new currency because of the growth of the world economy and because of conditional lending. In the sixties the 14 European countries were in agreement with the

586 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006587 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011588 Vanden Berghe, Y. De Koude Oorlog. Een Nieuwe Geschiedenis, 1917-1991, Acco, 2011589 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006590 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004591 McWilliams, W. and Piotrowski, H. The World since 1945. A History of International Relations, Lynne Rienner Publishers, 2005592 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004593 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008594 IMF 1945-1965, Volume II: Analysis

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Articles of Bretton Woods and currencies were exchangeable to each other.595 In Belgium the Eyskens unity law led to strikes of the trade unions. The government of Eyskens wanted to modernise the Belgian economy with a five-year plan. This plan had to lead towards more productivity and towards more output. And this would foster more economic growth.596

In the sixties the Bretton Woods System was more based on the function of the dollar. The dollar would lead to more economic power of the USA. The US dollar gave more liquidities in the international monetary system. And this led to more criticism of the system. The two reserve currencies, the pound and the dollar had to change from course.597 The deficit of the USA was financed by the dollar status. The USA did not go for an adjustment on the balance of payments because of the status of the dollar. Because of the ‘privilege exorbitant’, the world could foster IOUs on the USA. So the dollar liabilities were given to all the countries in the world. And those liabilities could not be covered by the American gold supply. This is the Trffin dilemma: the dollar shortage led to the dollar glut. Also because of the dollar the USA became the banker of the world: it lent short but gave long. To adjust global imbalances the USA had to devalue too.598In the sixties the quota had to be revised: a new calculation had to be ordered that the IMF would use. The Belgian state would follow this debate.

In the sixties there was a debate in Belgium about the growth of reserves and quota in the Bretton Woods System. The Belgians wanted that the reserves raised with 2% and that the quotas had risen with 25%.. The sixties meant also the beginning of the debate of the SDRs but for that to be implemented the Articles of Agreement had to be revised599. This meant that the members had to change their legislation before they could act or change the Articles. The revision of the quotas happened every five years. At the beginning of the sixties the question raised what to do with the quota of the Western German state and with Japan: those countries were again accepted in the world system.600Their quota has risen since they were accepted in the IMF and the IBRD.

The sixties were for Belgium a period of high growth: the country got more investments from the world and the Americans saw the Belgians as bridge head for American investments. In Belgium inflation has rose and unemployment lowered because of the Bretton Woods System.601 Belgium became a consensus model for the world in social pacification. The NBB defended the Belgian franc on the money markets.602

Also, in the sixties the Berlin Wall was constructed. The Berlin Wall had to prevent the depopulation of Eastern Berlin. Chrutsjov tried to reach a compromise with the West in order to get a neutral Germany but in one state. The liberalising of the USSR led to more chaos in the communistic bloc even as the destalinization.603 The Prague Spring was thereof the consequence. The USSR reacted with an invasion of the Warsaw Pact. The Breznjev doctrine was born. In the sixties Kennedy, Adenauer and de Gaulle wanted to reorganize the Bretton Woods System. The G10 therefore reacted with the construction of the gold pool, the General Arrangements to Borrow, and the Special

595 IMF 1945-1965, Volume II: Analysis596 IMF Staff Report597 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006598 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006599 Thesaurie, ARA, 1960s600 Thesaurie, ARA, 1959601 IMF Staff Report602 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005603 Van de Meerssche, P. Internationale Politiek, Deel II: 1945-2005, Acco, 2006

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Drawing Rights.604 The G10 are Belgium, Canada, France, Germany, Italy, the Netherlands, Japan, Sweden, the UK and the USA. The USA made the G10 ‘more a mouse than elephant’.605 The USA prevented the strenght of the G10 to emerge. The G10 prevented the rise of the gold – dollar parity and this is in contrast with there proposals of the System. They called it crude, arbitrary and even dangerous to devalue the gold -dollar standard.606

5.1.2 The Gold Pool

The first line defence of the dollar was the pound and was gold. This led to the creation of the gold pool. The gold pool was an idea of Roosa607 and the G10.608 609Because of the volatility on the markets the dollar-gold fix was in danger. The central banks intervened massively to hold the 35 dollar fix on an ounce gold. They had to defend the dollar against speculators who wanted to destroy the dollar-gold fix because the dollar ratio was undervalued. The IMF in this was set out of action. The Belgians had liberalized the gold market already in the fifties. 610

In London the ratio reached 40 dollar for one ounce. That the ratio was high on that account was because of the differences in interest ratios between the USA on the other hand and the UK and West Germany on the other hand.611 To hold the dollar – gold fix at 35 dollar for one ounce central bankers intervened massively. The central banks reached a swap agreement therefore and securities and bonds were set on the markets by the member states.612

In 1962 the gold pool was worth 900 million dollar.613 At the end of the decade it reached 30 billion dollar. The gold pool was a quick fix of the Bretton Woods Settlement. Friedman as advisor of Nixon wanted to undermine the dollar – gold fix. In the Nixon-Kennedy debate Nixon struck against the Bretton Woods System. Differences were made in the official ratio and on the private markets. According to Gavin the gold pool came to be: ‘(..) the Gold Pool led generally to official gold sales by permitting an internal drain on gold and terminated in the speculative run on gold in 1968. As a temporary fix, the private market for gold was separated from the official market with the establishment of a floating private market price and a restriction that official holders of gold would transact only with each other. Finally, foreign central banks, spurred on by selling attacks on their currencies, participated in a final attack on gold, forcing an end of access to the U.S. gold window and generating a round of revaluations against the dollar.’614

Arthur Burns of the New York Fed opposed the closing of the gold window. Instead he wished to have a tax on imports and he wished to fight internal inflation by the use of the exchange rate. President Nixon had another reasoning: he wanted to fight the dollar in the international monetary

604 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004605 James, H. International Monetary Cooperation since Bretton Woods, IMF, 1996606 Thesaurie, ARA, considerations607 Secretary of the treasury in the USA608 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996609 Thesaurie, 1967610 IMF Staff Report611 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004612 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996613 Gavin, F. The Gold Battles within the Cold War: American Monetary Policy and the Defense of Europe, 1960-1963, memosa614 Gavin, F. The Gold Battles within the Cold War: American Monetary Policy and the Defense of Europe, 1960-1963, memosa

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system. Fed chairman Paul Volcker was for the idea of Burns. 615The run on the dollar meant the end of the gold pool and meant the end of the gold-dollar standard. Another stab to the gold pool was the hoarding of gold by private citizens and businesses.616

In 1968 Belgium would retreat from the gold market even as France. Belgium devalued the franc after the devaluation of the pound in 1967. The guilder and the mark were revalued afterwards.617 The function of the gold pool was: not to provide the gold needed, but the confidence needed. By supply of gold at the monetary fixed price, other countries would not see the needs to exchange dollars into gold since this trade could always be done whenever it was needed. Besides, holding dollar would also gain interest while holding gold would cost a maintenance fee.’ Lyndon Johnson tried to save the gold pool by an American border tax for American imports. He feared for retaliation and gold flowed outside the gold pool.618 The gold was revalued on the official and free market. With Nixon as president the link between gold and the dollar was broken. With that move the gold commodity was no longer seen as an international liquidity.619

5.1.3 The General Agreements to Borrow (GAB)

In 1962 the IMF constructed something new, the debate began in 1961 in the IMF620. Extra lending facilities were built in the IMF, because of protectionism in the world: the General Agreements to Borrow (GAB). Because of the GAB the members of the IMF could protect themselves against a monetary shock. Belgium would get 150 million from GAB and in 1968 there would still be 32.5 million for the Belgians. After that a repayment with France was agreed. Belgium or the Benelux and France act as a dealmaker in the IMF. 621The GAB was created as tool for the G10 as defense for the dollar against speculation. Following Birnbaum the GAB created a tool for the change of the international monetary system: power would be diffused from the USA to the EEC. The GAB was a quick fix of the faults of the Bretton Woods System.622

In 1968 the G10 drew funds to stabilize the dollar: the USA took 735 million of funds to defend the dollar against speculators and of the funds the Belgian franc was taken too. As the pound is the second line defence of the dollar, the UK took a stand-by agreement of 2700 million in gold and 400 million was immediately drawn.623 With the beginning of the GAB the Belgian franc was revalued in 1962. The GAB remade the Articles of Agreement of the IMF: the debate about it started in 1961.624

The GAB had to fix some issues in the Bretton Woods: the liquidity issue, the confidence issue and the adjustment issue. Liquidity as reserves were needed for the convertibility of currencies in parities. Confidence augmented the reserves through borrowing and adjustment was fixed ion countries to equilibrate between debtors and creditors. 625This is in short the Bretton Woods System and the international Monetary System explained.

615 James, H. International Monetary Cooperation since Bretton Woods, IMF, 1996616 Thesaurie, Considerations617 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996618 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996619 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004620 Thesuarie, ARA, 1961621 Thesaurie, ARA, 1967622 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996623 Thesaurie, 1968624 Thesaurie, ARA, 1960s625 James, H. International Monetary Cooperation since Bretton Woods, IMF, 1996

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The implication of this move was to liberalise and to make the currencies freely convertible in the System. The GAB was in origin a Western defense mechanism. The G10 was a constellation that divided the world for the first time by economic strength. The GAB was busied by the central bankers in the world. As with the SDR’s and as with stand-by agreements the GAB are drawings in the system.626The quota system had to be incorporated by the GAB, and that was the proposal of Belgium and of France.627The GAB System was made when the quota’s reached less than 30 billion dollars. Because of the GAB the IMF wanted to recalculate the quota’s.628The quota had to be recalculated according to the monetary reserves of the country. Gold as reserves were also incalculated. The GAB reached also something for the indebtedness of countries: indebtedness of countries was countered byh the lending to each other.

The UNCTAD in contrast was an economic bloc of the developing nations. In this way the GAB connected with development financing. The UNCTAD wanted to change the Bretton Woods Order from within. The UNCTAD was a reaction to the G10. In the UNCTAD they placed fair trade central. UNCTAD stabilized mainly the primary resources.629

5.1.4 The Decolonization

In het sixties the IMF would be strengthened by decolonization: the members in the IMF would rise from 68 to 101.630 The underdeveloped countries did not have to be in accord with the Articles of Agreement of the IMF to liberalise. They would also become member of the IBRD and that would help them with their development programs. A new parity and a new quota was devised.

Following the IMF and the IBRD the underveloped nations were doing a wrong economic policy. Firstly, they neglected the agricultural sector to develop industry. Industry developed by import-substitution.631 By way of government policy they manipulated prices and loans. Secondly, the elite came from the big cities. And they neglected the underdeveloped regions. Thirdly, there was the role of the international system. The global economic system made those countries producers of primary resources: price distortions were made out of the world market.632After the end of the Bretton Woods System, the development countries became more important even as the IMF and the IBRD.633

Because of developments and because of a new ideology in 1960s import-substitution was seen as an expression of sovereignty and of political independence. The consensus of the IMF was needed to get funds for the developing countries: the underdeveloped nations wanted to protect their economies from foreign influence. Inflation was imported by the world system into the prices and loans of those countries.634 Fiscal discipline and a good independent monetary policy were not done by the underdeveloped nations. That was something for the western world.

The IMF created the adjusments programs for underdeveloped nations. They would give more long term advantages: they would lead to more economic growth and to more redistribution of income. Adjustment Programs were stabilization programs to get the house in order. The wrong policy

626 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996627 Thesaurie, ARA, 1967628 Thesuarie, ARA, 1965629 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996630 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006631 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006632 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996633 Thesaurie, ARA, 1976634 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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brought wrong effects on the balance of payments and on the current account. IMF thought in contrast that the wrong economic policies would bring more inflation. This hyperinflation would led to crowding out effects635 and to an upwards surge of the exchange rate. The governments had to control the exchange rate and the inflation.

Import-substitution would lead to more industry in the developing nations. This industry would lead to higher loans and to a more destabilized nation. The revalued currency would lead to more skew rearrangement of the nations richness. Peasants would make the journey towards the city for a higher loan.636

Asia, Africa and the Latin American countries could follow a catching up by the right economic policies. This economic catching up led to more economic power and to more economic growth for those countries.637 Belgium would let loose their colonies: Congo, Ruanda and Burundi.638 Those economies were developing the agricultural sector. According to the decolonization of the world the IMF got a new mandate for development.

With decolonization the Global South saw the IMF and the IBRD as instruments of imperialism.639 The Gobal South became more critical of the IMF. The IMF declared: ‘The Fund recognized, for example, that the search for broader solutions to their trade and payments problems had to include action by the industrial countries : ‘industrial nations had to maintain a high level of economic activity and to reduce their own trade barriers, both tariff and nontariff restraints, against imports from developing countries, as well as export capital to the developing nations’.640 The IMF saw underdevelopment as a problem of the currency and of trade. The UN declared the sixties as the developing era.641

Because of the decolonization the IBRD got more powers in the world. The IBRD did more conditional lending to states and in paricular to the Global South. The IBRD supported the construction of capital markets. The IBRD developed further towards the IDA and into the IFC. Those two institutions led to more private investment and to more stability in the World.642

5.1.6 The Special Drawing Rights (SDR)

The Special Drawing Rights were created to fulfil the international liquidity problem. The plan for the construction of the SDRs was in its origin a French plan to equilibrate the international monetary system.643 In the sixties Lyndon Johnson wanted to create a supranational currency. The president proclaimed capital controls further.644

The dollar was a weak and strong currency at the same time, i.e. a national and international currency. The G10 wanted a quick fix in the international monetary system a supranational currency as proposed by Keynes or White: the unitas or bancor.645The SDR was created to come to this need in

635 Crowding out: replacing private investments with government investments636 Eckes, A. A Search for Solvency. Bretton Woods and the International Monetary System, 1941-1971, University of Texas Press, 1975637 IMF Staff Report638 IMF Staff Report639 IMF Staff Report640 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996641 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006642 Mason, E. and Asher, R. The World Bank Since Bretton Woods, Brookings Institution, 1973643 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996644 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996645 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004

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1969 and the Articles of Agreement were changed in this way. The SDR had to replace the dollar as international currency. The SDR became a paper currency, only used in the IMF itself. The value of the SDR was calculated by a basket of currencies and an interest rate was calculated on the SDR for conditional lending. Belgium would replace currency for SDR worth, 225 million.646 Next to the SDR, the IMF made Roosa-bonds too.647 Following France SDR’s were a matter to better finance the American deficits and that of the Europeans. The USA would get support from the Germans and from Belgium. The USA came with this plan to protect the gold supply and to prevent austerity in the USA. Germany wanted by the SDR the strengthening of the alliance between the Western countries.648 The Americans wanted that the SDR would replace the role of the dollar and that of gold. Because of the SDR creditors and debtors came together in the IMF.

Figure 18: SDR

646 IMF Staff Report647 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996648 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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5.2 The dollar glut and the world wide inflation

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As the years followed, the dollar became the centre of the international monetary system. Americans did not want that and they came with a Conference to discuss the adjustment burden in the world economic system.649

The deficits of the fifties were changed in a surplus in the sixties, the dollar glut. The dollar glut made the USA the banker of the world. Firstly, the deficits of the USA payed for the import by the international liquidity what the dollar is. The dollar constructed a dichotomy between on the one hand economic policy and on the other hand the status of the dollar.650Economic policy is national while the dollar is an international key reserve currency. Since 1965 the French changed their dollar reserves into gold. The French questioned ‘le privilège exorbitant’ of the USA.

In the sixties, the international monetary system became to be flawed. Keynesianism managed the attention to the building of the social security system with focus on the combatting of unemployment and on economic growth.651 Belgium became better because of the Bretton Woods System.652 Its small economy lives by the export and by the import of international trade, hence, its focus on competitivity and therefore a stable social climate is necessary. Social consensus was reached in loans and in prices since then, hence, the Social Pact in Belgium.653

Because of the dollar glut capital markets were less controlable. The Euromarket came into existence for dollars and for dollar products. This led to the accumulation of dollars and so the USA exported more dollars. In 1963 dollar denominated products were made available for the Eurodollar market.654 This market developed further in the sixties with central bankers in control and with the IMF as regulator. Because of the Euromarket the international monetary system became less harder to manage and the defence of the parities for central banks became harder too.655

5.3 The Euro-dollar market

The Euro-dollar market was an offshore market. The euro-dollar was “een deposito in Amerikaanse dollars bij een bank buiten de VS, met inbegrip van buitenlandse filialen van Amerikaanse banken.”656 The dollar market was a banking system where credits were channeled as liquidity. Therein came problems with publicity “toen de massa dollars de liquiditeiten die men nodig had om de handel en investeringen te financieren ver overtrof.”657 The dollars in circulation remade the system: it became a dollar glut. Roosa Bonds658 were launched too in 1962: this were securities in the global capital markets.

With the Euro-dollar market , the London market was strengthened. The Americans and the British broke the Bretton Woods System with this move towards a rebuilding of the capital structure.659 Because of the Euro-market the pound regained its status as reserve currency. The USA in contrast

649 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003650 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996651 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003652 IMF Staff Report653 IMF Staff Report654 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003655 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996656 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005657 Pluym, W. en Boehme O. Van de Golden Sixties tot de Val van Bretton Woods, NBB, 2005658 After Secretary of Monetary Affairs659 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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wanted the dollar on several markets. Helleiner sees this development as an undermining of the System. The first line defense of the dollar was the pound even as the liquidation of the sterling balances.660 In 1965 the UK got a stand-by agreement of the IMF to defend the pound. A run on their reserves occured: the G10 came with rescue aid.

In 1967 the War in the Middle East came between the Arabs and the Jews. Because of this the UK the imports in the UK surged and became larger than their exports, hence, the UK had to devalue the pound with 14.3%.661 The UK knocked again on the door of the IMF for a loan of 2 billion. The devaluation led to a surge in exports. British bonds were bought too in line of the defense of the pound. The Germans accumulated massively dollar – IOUs. Those dollar – IOUs could be seen as protection against American protectionism.662 The Japanese also ran on the dollar to accumulate reserves.

The French devalued the franc after a run on it in the year 1968. The French asked together with the Americans that the German mark was revalued. Germans made their currency float as a reaction on this: the German mark revalued with 9.3%.663 The extra liquidities heightened the pressure on the currencies and this led to inflation. Surplusses in Germany and in Japan undermined the system because of their higher savings quote whereby savings were used in the catching -up in their own country within the Bretton Woods System. Belgium was also a player on the London market: it loaned on the capital markets and launched bonds.664

Helleiner and Skidelsky: the optimism in the market deepened the London market and made that market bigger and more liquid.665666 The ‘embedded liberalism’ made place for a new ideology constructed by Milton Friedman.667Friedman in contrast to keynesians constructed a thesis of supply- side economics instead to the demand shock proposed by their adversaries. Friedman proposed his thesis to combat still rising inflation, a construct of the Bretton Woods System.

5.4 The Ideology against and the Flaws in the Bretton Woods System

In the sixties the flaws in the System were recognized. The Frenchman Jacques Rueff saw in the system a building up of inflation. To counter that, Rueff wanted a heigthening of the gold-dollar price. He even proposed the return of the classical gold standard. In 1967 this led to a debate in the IMF.668 Rueff wanted also a financial superstructure to avoid global imbalances. Rueff with this got the bias out of the System: the bias was inflation that always grew with the monetary policy of the USA. Rueff also proposed that countries had to build-up their reserves in dollar-IOUs and he wanted to revaluate the dollar vis-à-vis gold: 100 dollar per ounce. Rueff wanted the return of gold because it is more possible that gold functions as debt than a fiat standard.669

660 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996661 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996662 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004663 Gavin, F. Gold, Dollars, and Power. The Politics of International Monetary Relations, 1958-1971, The University of North Carolina Press, 2004664 IMF Staff Report665 Helleiner, E. Rauchway, E. en Schuler, K. What Have We Learned About Bretton Woods From Recent Research?, Bretton Woods the Founders and the Future, Center for Financial Stability, 2014666 Skidelsky, R. Keynes, Globalisation, and Bretton Woods Institutions in the Light of the Changing Ideas about Markets, In: World Economics, 2005667 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003668 Thesaurie, 1967669 Thesaurie, 1967

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Charles De Gaulle followed this line of reasoning for his nationalistic policy. He wanted a return of the classical gold standard for a more equitable international monetary system. He proposed a better gold standard whereas countries could build a cushion of reserves in either dollars or sterling. Those reserves are IOUs on the USA or the UK. Debt is necessary, he thought, for a more stable international monetary system. 670Rueff wanted as De Gaulle that the USA would follow a more stable and orthodox economic policy.671 A devaluation of the dollar or a lowering of the interest rate were solutions for de Gaulle.

The Belgian Triffin saw faults in the system too. He proposed an extra liquidity system and attacked the thesis of Williams. Reserves had to be heigthened and had to be stimulated.672 This would lead to the formulation of the Triffin dilemma: there are global imbalances on the one hand and there is a dichotomy between the fixed metal and the fiat currency on the other hand. The accumulation of dollar reserves world wide are IOUs on the USA. Those assets could be changed into gold and proposed ounces and states did that.673 Triffin proposed because of that dichotomy a new monetary standard. The changing of the IOUs in dollars would diminish the confidence in the system. And this would lead to its end.

Triffin proposed further that prices had to be stable, that they had to follow a conservative policy and they had to go for a creditor position whereby foreign markets and capital markets had to stay open for governments and for private investors.674 Triffin propposed a system of certificates to finance the IMF as the World Bank’s bonds too. The USA did not follow this policy: they followed in the sixties an expansionary policy and they had to battle in Vietnam. They also had to build a social security system. The expansionary policy led to the overheating of the American economy. Taxes were diminished in the USA too in 1964 and this led to inflation.675

Bretton Woods would also get a stab from ideology: Friedman would attack the System from within by its monetarism.676 Friedman’s ideology was defended by the Chicago Boys. The Bankers too were against the System. They repeated their request to reconstruct the IMF and the World Bank into one.

Friendman attacked the System on the base of the monetary trilemma free trade, a fixed exchange rate and the combat against unemployment had to change the System. Friedman refered to the System as ‘the Labour Standard’. Friedman proposed a floating regime: ‘floating has the advantage of monetary independence, insulation from real shocks and a less disruptive adjustment mechanism in the face of nominal rigidities than is the case with pegged exchange rates.’677

Friedman also defended the free market. He wanted to liberalize the international trading system and he combatted protectionism. Friedman came with a new orthodox ideology: he changed the

670 Thesaurie, Comity Monetary671 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003672 Birnbaum, E. Gold and the International Monetary System: An Orderly Reform, Essays in International Finance, 1968673 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003674 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003675 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003676 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003677 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003

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Fisher equation. In the equation he doubted the constancy of the velocity of circulation. The velocity of circulation was not fixed but a variable. And the velocity would grow yearly.678

Also, with Friedman the demand for a multilateral policy came back, especially for free trade. Governments had to invest massively in the economy. The best possible way to reach this was a floating system. The Americans had because of the dollar-gold fix no liberty for an expansionary policy without the criticism of the foreign nations679. Monetarism defended the liberty of the USA and the free floating system. With monetarism the Phillips-curve was born. The Phillips -curve was a trade -off between unemployment and inflation. Monetarism followed suit: from Chicago to other universities. Policy makers followed too even as the Treasury as the IMF and the Federal Reserve.680

As research question monetarism had money whereby the money supply was in proportion to the inflation rate. Monetarism defended the central banks and this would lead to the independency of the central bankers. Monetarism rejected ‘embedded liberalism’ too. Instead of a demand shock monetarism strengthened the supply -side of the economy: this is monetarism for policy makers.681

Nixon, influenced by monetarism, rejected ‘embedded liberalism’.682 Nixon wanted an open world economy because capitalism divides the scarce resources in the world. This would lead to the Nixon – shock: a floating regime would make the system more free.

Another flaw was the adjustment burden: the USA rejected this too. The deficit the USA had, had to change especially the current account and the trading account. The international monetary system had to be defended by the Americans but they did not.683

Figure 19: Jacques Rueff and Robert Triffin

678 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006679 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003680 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003681 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003682 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006683 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996

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5.5 The Nixon-shock

Nobody would have the burden of adjustment in the international monetary system. In 1971-1973 the Bretton Woods came to an end. Vietnam and Johnson’s ‘Great Society’ led to expansionary policy. Johnson’s Great Society constructed full employment, economic growth and stable loans and prices. Because of the expansionary policy the dollar came under fire.684

The pound as first line of defence also came under fire when the dollar was attacked. Secretary for Monetary Affairs called the pound the ‘outer perimeter of defense’.685 The National Plan of the Labour government would undermine the pound on the financial markets.686 The Six Day War in the Middle East played a role too whereby exports of the UK would falter and imports would rise. The financial markets attacked the pound further because of its mismanagement. The Bank of England drew another swap agreement with the IMF and the Fed. Finally, the pound would be devalued in 1967 from 2.80 dollar to 2.40 dollar, a devaluation with 14%.687

The pound – sterling was the weakest part in the System. With the devaluation the competitivity of the UK was restored and this meant a weakening of the System. The pound could not maintain its status as reserve currency.688 Former Dominions would negotiate their status in the pound-sterling zone. Another attack on the pound meant a weakening of the System too. The sterling-zone would be buried together with the dollar system. All Dominions would step out of the sterling zone except Ireland.689Because of the devaluation of the pound, the UK asked for a stand-by arrangement from the members of the IMF. Belgium was for.

The global imbalances destroyed the System: the USA kept having deficits. Because of the Triffin dilemma the USA exported liquidities in the System massively. They were accumulated as reserves. The Nixon administration defended the American intererests in the System. He followed a policy of ‘benign neglect’.690 Their phrase became: ‘the dollar is our currency but your problem’.691 The Nixon administration wanted to tame inflation and wanted to limit its deficit. He counted on the goodwill of their allies.

684 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003685 James, H. International Monetary Cooperation sicne Bretton Woods, IMF, 1996686 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996687 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996688 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996689 Kirshner, O. (eds.) The Bretton Woods-GATT System. Retrospect and Prospect After 50 Years, M.E.Sharpe, 1996690 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003691 Bordo, M. and Eichengreen, B. (eds.) A Retrospective on the Bretton Woods System, Lessons for International Monetary Reform, Chicago University Press, 1993

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From the 70s on the voice to reconstruct the System became louder. The demand to revalue the dollar led to problems: ‘the devaluation of a major reserve currency could create a serious international monetary disturbance if for no other reason than that international liquidity would be extinguished’.692 .(….) the result would almost certainly be to provoke corresponding devaluations by other countries, with the effect that the devaluation of the dollar, in terms of other currencies, would not stick’.693 The gold exchange was stopped even as the gold sales.

Because of the finished gold exchange capital flew to the USA. Capitals flew into Germany too. The central banks intervened to limit the appreciation of the German mark and of the American dollar. The German Bundesbank intervened massively and demanded the USA to explain their policy. The German mark became a floating one. After that the IMF asked to revalue the dollar. The EEC wanted after the float that the European currencies would became floating vis-à-vis the dollar.694 The Belgian franc appreciated with capital inflows. And that is why Belgium proclaimed exchange controls. The revaluation of the German mark and of the Dutch guilder withheld the speculation of the BEF.

In the ‘70s the USA was in a recession. Because of that the Fed lowered its interest rate and capital was pulled towards the USA. The IMF pressurized the USA to devalue the dollar. The USA rejected that claim.695 Indeed, those countries had to have the adjustment burden. The capital flows led to a revaluation of the currencies and to an upsurge of inflation. With the expansionary monetary policy this led to stagflation.696

After the attack on the pound, speculators attacked the dollar. Speculators dumped massively dollar – IOUs. This was worth 1 billion dollar.697 The FED decided to defend the dollar. To combat the pressure on the dollar and to combat the recession, the Nixon administration reacted with a program of adjustments and with a freezing of loans and prices. The swap agreements between the Fed and other central banks was stopped. The Nixon administration also proclaimed a tax on imports. The gold window was closed as well. The rest of the world reacted with floating exchange against the dollar. The French proclaimed capital controls and they opted for a devaluation of the franc. The EEC pressurized the USA further to devalue the dollar.698 The dollar lowered on the gold market towards 37.50 dollar. Fed chairman Volcker let the dollar course loose. The dollar became a float and the markets became to decide the course of the dollar. Policy makers and politicians even as economists defended the float. The float would lead to a more equitible trading and financial system with automatic adjsustments.

The G10 came together to discuss the float. The course of the dollar was set on 38 dollar an ounce. After that the course was set on 40 dollar an ounce. After that the course was set free. Belgium would also loosen its parity. The Belgian gold market closed too. The Smithsonian agreement would seek a solution: the yen, the mark, the franc, the lira, the pound all revalued but ‘the realignments

692 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003693 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003694 James, H. International Monetary Cooperation since Bretton Woods, Oxford University Press, 1996695 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003696 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006697 Eichengreen, B. Globalizing Capital. A History of the International Monetary System, Princeton University Press, 2008698 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003

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under the Smithsonian Agreements did not end the selling attacks-the massive acquisitions of official dollar claims did not cease until generalized floating began in March 1973.’699

The governor of the Fed, Paul Volcker, wanted a float of 4.5% round the dollar so the Americans could do their thing and follow policy. Because of the expansionary policy the USA trade deficit became bigger. The recession, the oil shock and the stagflation made an end to the Bretton Woods System.700 The IMF rejected capital controls to adjust the global imbalances and monetarism became the new ideology. The IMF saw capital controls as a constraint to international trade and for capital movements. After the battle in the Smithsonian, the IMF got a new function and that was to watch the world economy. And that became the sole function of the IMF.701

The EEC reacted with a float and regionalism: the snake in the tunnel. In this System the fluctuation of currencies was 4.5% vis-à-vis each other. The plan Barré and the plan Werner led to the creation of the European Monetary Union.702

Figure 20: Milton Friedman and Richard Nixon

Source: https://img.wennermedia.com/920-width/rs-138304-20121207-nixon-306x306-1354901279.jpg

5.6 Other Reasons for the Ending of the System

The Triffin dilemma made sure that the System was destroyed even as the development of the capital markets.703 The Law of Gresham played too: the price of gold became higher because it was the good currency. The liquidity problem led to destabilizing capital flows. The capital flows were lifted in the sixties. Speculators attacked the dollar too.704

The adjustment problem led to a devaluation of the dollar against gold. The USA had a deficit: a revaluation and devaluation of the dollar were demanded. There was also the seigniorage problem: the dollar is besides the national currency also an international liquidity. That international liquidty was accumulated too as reserve. With the ‘exorbitant privilege’ the Americans consumed more than they produced. They became the ‘consumer – of – last resort’. According to Gardner the USA became the banker of the world: ‘the United States’ his great advantage as a central bank and that did not force any corrective measures when foreigners acquired its liquid liabilities or gold’. (…) And ‘the

699 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003700 Cesarano, F. Monetary Theory and Bretton Woods. The Construction of an International Monetary Order, Cambridge University Press, 2006701 Leeson, R. Ideology and the International Economy. The Decline and Fall of Bretton Woods, Palgrave Macmillan, 2003702 IMF Staff Report703 Oatley, T. Multilateral Trade and Payements in Postwar Europe, In: International Organization, 2001704 Vermeiren, M. Het Monetair Trilemma in de Internationale Financiële Architectuur, masterproef, 2007

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United States contended that it had a balance-ofpayments deficit because foreigners demanded liquid dollar claims rather than because of mismanaged macroeconomic policy or some fundamental disequilibrium in exchange rates. If the United States took steps to eliminate the deficit, it would generate deflation.’705 The System failed because it misused its privilegies. Gold was a tool to promote the dollar system. The dissertation of Williams got it right. This meant that the world was moving towards currency blocs and trading blocs. The ‘One World’ thesis stumbled. Other experts called the end of the fixed system the beginning of the ‘nonsystem’: floating had less political advantages as the fixed but adjustable system. After the Smithsonian Agreement and the closing of the gold window currencies began to float. Some currencies, especially currencies from the developing world remained their fix vis-à-vis the dollar. The USA would not act as a monetary savior: they said ‘Santa Claus is dead’.706As reaction to the demise of the Bretton Woods System, the Europeans reacted with a fixed system, the ‘snake in the tunnel’.

5.7 Intermediary Conclusion

In the sixties the Bretton Woods Order came under pressure. Experts saw that there were flaws in the system. Indeed, Rueff and Triffin came with reports about the System and discovered some faults. Rueff even proposed the return of the classical gold standard. Triffin came with its analyzed Triffin dilemma. And he believed that the System had to be reformed.

The System was reformed and that twice: firstly, with the GAB whereby extra liquidities were created. Secondly, with the SDR, also to created extra liquidities. The Articles of Agreement were changed too. The SDR became a unit of account in the IMF. The purpose of the IMF was to change the dollar as reserve currency. The USA prevented that: they did not want to lose their ‘exorbitant privilege’.

In the heydays of the System, the System was undermined by the construction of capital markets. Indeed, the Euromarket and other capital markets made free, destroyed the System. The bonds and securities in the Euromarket came to pressure the System. The system of fixed parities was changed too because of that. In the ‘70s Keynesianism and the New Dealers were altered by a new ideology: monetarism.

Monetarism was critical for government intervention and for central banks. Friedman was the proponent of monetarism. He defended the free floating system and he was critical for the government intervention. Nixon was a proponent of monetarism: he followed first a policy of ‘benign neglect’ in the international monetary system. Vietnam and the ‘great society’ of Johnson made the surplus of the Americans into a deficit. The Americans did not want the adjustment burden thus they asked the countries to appreciate their currencies: they demanded to revalue the yen and the mark. Finally, the currencies would begin to float.

As a next step Nixon created a tax on imports and on capital. Dollars and IOUs on the dollar would flee out of the USA. The countries demanded that the dollar was revalued. Nixon avoided that but closed the gold window too. Nixon did that to prohibit the gold outflow from the USA. The gold dollar parity was set on 40 dollar per ounce but gold kept flowing out of the USA. With the closing of the gold window the fix between gold and the dollar was severed. The currencies all became a float and this had no precedent in history. For the first time in history there was no supporting structure to the fixed metal too. Nixon let the dollar float. Williams of Harvard was proved right. The Bretton Woods

705 Gardner, R. Sterling-Dollar Diplomacy in Current Perspective. The Origins and the Prospects of Our International Economic Order, McGraw-Hill, 1969706 James, H. International Monetary Cooperation since Bretton Woods, IMF, 1996

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System became a key reserve system circling round the dollar. After its demise the dollar stood as a central pillar in the international monetary system.

6. Conclusion

As conclusion I repeat my research questions and I summarize my dissertation in accordance with my research questions.

Who were the protagonists in the Conference?

The Conference was held in Bretton Woods by 44 nations. The protagonists and the creators of the System were John Maynard Keynes and Harry Dexter White. Belgium was represented by Theunis, by Gutt and by Van Zeeland.

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Why was the Bretton Woods System created?

The Bretton Woods System was created to combat the destabilizing capital flows of the interwar years. Indeed, the interwar years and the destabilizing capital flows hampered international trade. The gold standard in the international monetary system during the interwar years functioned less as before. The Bretton Woods System was thus created with fixed but adjustable parities and with capital controls. The System was called the ‘Labour Standard’ because they wanted full employment in the war, the ill of the interwar years. That unemployment was seen as destabilizing here as Keynes and White had to come with a solution. After the Second World War Keynesisianism was the leading ideology. This led to state intervention and to a demand shock.

What were the plans of the post-war international monetary system?

The plans for the post-war economy were created by White and by Keynes. Those plans wanted a fixed but adjustable parity system and they created the IMF and the IBRD. Keynes proposed the ICU as central bank of central banks. The ICU was an international banking system with a unit of account: the bancor. The plan of White wanted to create a Fund and a Bank where the interests of the Americans were served. The Fund came as an institution light, the Bank was created for reconstruction and for development. Quota were given as votes and as power.

How was the Bretton Woods System?

The Bretton Woods System was a fixed but adjustable currency system round the dollar and gold. The IMF and the IBRD had to defend the System. The dollar would get hegemonial status. The key reserve currency system was constructed by the economist Williams of Harvard. The System came on speed in 1958 when the European currencies were made free. The System would end in 1971 because of flaws in the System. The pound was devalued and fuctioned as reserve currency.

What were the pros and cons of the System?

The pros of the System were fixed parities but adjustable. This hampered destabilizing capital flows. The Bretton Woods System functioned as a gold standard light. The flaws were recognized by experts like Rueff and Triffin. To fix the System the GAB, the SDR and the gold pool were created. The flaws in the System were not altered because of that. The dollar standard was a logical evolution. This led to an accumulation of dollar reserves and a run on gold of the USA.

How functioned the System during the Cold War?

Because of the Cold War East and West were fighting each other. That is why the Bretton Woods System was a Western private group. The security relations between the EEC and the USA were made more important than the international monetary relations between the USA and between the EEC. The NATO was more important that the international monetary flaws.

What was the Belgian reaction?

Theunis, Gutt and Van Zeeland were present on the Bretton Woods Conference. They all were sceptical for the Bretton Woods System. Gutt would construct the Benelux because of the Bretton Woods idea, the Benelux is Bretton Woods for those countries. Gutt as minister of finance wanted a return to the classical gold standard. Camille Gutt would became the first director-general of the IMF. It was the reward for his conviction after Dexter White was accused as spy for the Soviets.

How did Belgium treat the System in 1944-1971?

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Belgium defended the franc in the Bretton Woods System on the international capital markets by the NBB. The Belgian economy could profit from the catching up of its neighbours. Indeed, people were talking of the ‘Belgian Miracle’. The fifties led to a boom in the Belgian industry because of the Cold War and because of the Korean War. The demand for Belgian steel and coal surged. Marshall Aid was proclaimed and because of that the IMF and the IBRD were set out of business for the reconstruction of Europe. The devaluations of the UK were followed by the countries on the Continent. Indeed, the Belgian state followed suit. The Belgian currency became convertible in 1958 as other European countries did. The ‘dollar gap’ of immediately after the War was changed in the sixties into a dollar glut.

How acted Belgium in the IMF and in the World Bank?

Belgium was in the IMF and the IBRD as voice of the Benelux. The first director-general was Camille Gutt who would set the line of the IMF. In the IBRD Belgium would ask loans to modernise the country and to modernise the Congo and other colonies. A 10 year loan was given to the Congo to build on its infrastructure.

Why did the System fail?

The Bretton Woods System was analyzed by Triffin and by Rueff: they discovered the flaws in the System. The System was undermined by free capital markets and by the Eurodollar market. The gold pool wanted to do something on the parity between gold and between the dollar. The reigning Keynesianism could not find a solution on ailments in the System. Nixon would follow a policy of ‘benign neglect’. Nixon followed the ideology of the Chicago Boys, led by Friedman. He would not defend the dollar – gold fix. Speculation against the pound would undermine the dollar system. The gold pool was stopped and several currencies like the yen, the mark and the guilder were kept floating. The Smithsonian agreement closed the gold window, hence, the dollar-gold parity was severed.

How did the Belgium react to the failure of the System?

Belgium was only a small player in the System and Belgium was influential on the international scene. After the devaluation of 1949 Belgium set the stakes on the ‘franc fort’ policy. In the EPU the country would become a big player. Belgium in EPU would strengthen the EEC and regionalism. Belgium changed from a contra-cyclical policy to a pro-cyclical policy in the fifties and the sixties. Belgium also stopped with the gold pool and with the defending of the dollar. The Belgian gold market would become an example for the IMF: two rates would be set in Belgium for gold, one official rate and one on the free market. On those markets the central banks would kept intervening.

7 Bibliografie

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8 AnnexenA. Artikelen van het IMF

Adopted at the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire,July 22, 1944. Entered into force December 27, 1945. Amended effective July 28, 1969, by themodifications approved by the Board of Governors in Resolution No. 23–5, adopted May 31, 1968;amended effective April 1, 1978, by the modifications approved by the Board of Governors in Resolution No. 31–4, adopted April 30, 1976; amended effective November 11, 1992, by the modifications approved by the Board of Governors in Resolution No. 45–3, adopted June 28, 1990; amended effective August 10, 2009, by the modifications approved by the Board of Governors in

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Resolution No. 52–4, adopted September 23, 1997; amended effective February 18, 2011, by the modifications approved by the Board of Governors in Resolution No. 63–3, adopted May 5, 2008; amended effective March 3, 2011, by the modifications approved by the Board of Governors in Resolution No. 63–2, adopted April 28, 2008; amended effective January 26,2016 by the modifications approved by the Board of Governors in Resolution No. 66-2, adopted December 15, 2010.

INTERNATIONAL MONETARY FUNDWASHINGTON, D.C.Articles of Agreement of the International Monetary Fund

The Governments on whose behalf the present Agreement is signedagree as follows:Introductory Article(i) The International Monetary Fund is established and shall operate in accordance with the provisions of this Agreement as originally adopted and subsequently amended.(ii) To enable the Fund to conduct its operations and transactions, the Fund shall maintain a General Department and a Special Drawing Rights Department. Membership in the Fund shall give the right to participation in the Special Drawing Rights Department.(iii) Operations and transactions authorized by this Agreement shall be conducted through the General Department, consisting in accordance with the provisions of this Agreement of the General Resources Account, the Special Disbursement Account, and the Investment Account; except that operations and transactions involving special drawing rights shall be conducted through the Special Drawing Rights Department.

Article IPurposesThe purposes of the International Monetary Fund are:(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.(v) To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive ofnational or international prosperity.(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.Art. II. Purposes

Article IIMembershipSection 1. Original members

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The original members of the Fund shall be those of the countries represented at the United Nations Monetary and Financial Conference whose governments accept membership before December 31, 1945.Section 2. Other membersMembership shall be open to other countries at such times and in accordance with such terms as may be prescribed by the Board of Governors. These terms, including the terms for subscriptions, shall be based on principles consistent with those applied to other countries that are already members.Article IIIQuotas and SubscriptionsSection 1. Quotas and payment of subscriptionsEach member shall be assigned a quota expressed in special drawing rights. The quotas of the members represented at the United Nations Monetary and Financial Conference which accept membership before December 31, 1945 shall be those set forth in Schedule A. The quotas of other members shall be determined by the Board of Governors. The subscription of each member shall be equal to its quota and shall be paid in full to the Fund at the appropriate depository.Section 2. Adjustment of quotas(a) The Board of Governors shall at intervals of not more than five years conduct a general review, and if it deems it appropriate propose an adjustment, of the quotas of the members. It may also, if it thinks fit, consider at any other time the adjustment of any particular quota at the request of the member concerned.(b) The Fund may at any time propose an increase in the quotas of those members of the Fund that were members on August 31, 1975 in proportion to their quotas on that date in a cumulative amount not Art. II, Sec. 1–2Art. III, Sec. 1–2II. Membership; III. Quotas and Subscriptions

in excess of amounts transferred under Article V, Section 12(f)(i) and(j) from the Special Disbursement Account to the General Resources Account.(c) An eighty-five percent majority of the total voting power shall be required for any change in quotas.(d) The quota of a member shall not be changed until the member has consented and until payment has been made unless payment is deemed to have been made in accordance with Section 3(b) of thisArticle.Section 3. Payments when quotas are changed(a) Each member which consents to an increase in its quota under Section 2(a) of this Article shall, within a period determined by the Fund, pay to the Fund twenty-five percent of the increase in special drawing rights, but the Board of Governors may prescribe that this payment may be made, on the same basis for all members, in whole or in part in the currencies of other members specified, with their concurrence, by the Fund, or in the member’s own currency. A non-participantshall pay in the currencies of other members specified by the Fund, with their concurrence, a proportion of the increase corresponding to the proportion to be paid in special drawing rights by participants. The balance of the increase shall be paid by the member in its own currency.The Fund’s holdings of a member’s currency shall not be increased above the level at which they would be subject to charges under Article V, Section 8(b)(ii), as a result of payments by other members under this provision.(b) Each member which consents to an increase in its quota under Section 2(b) of this Article shall be deemed to have paid to the Fund an amount of subscription equal to such increase.(c) If a member consents to a reduction in its quota, the Fund shall, within sixty days, pay to the member an amount equal to the reduction. The payment shall be made in the member’s currency and in such amount of special drawing rights or the currencies of other members specified, with their concurrence, by the Fund as is necessary to prevent the reduction of the Fund’s holdings of the

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currency below the new quota, provided that in exceptional circumstances the Fund may reduce its holdings of the currency below the new quota by payment to the member in its own currency.Art. III, Sec. 3III. Quotas and Subscriptions(d) A seventy percent majority of the total voting power shall be required for any decision under (a) above, except for the determination of a period and the specification of currencies under that provision.Section 4. Substitution of securities for currencyThe Fund shall accept from any member, in place of any part of the member’s currency in the General Resources Account which in the judgment of the Fund is not needed for its operations and transactions, notes or similar obligations issued by the member or the depository designated by the member under Article XIII, Section 2, which shall be non-negotiable, non-interest bearing and payable at their face value on demand by crediting the account of the Fund in the designated depository. This Section shall apply not only to currency subscribed by members but also to any currency otherwise due to, or acquired by, the Fund and to be placed in the General Resources Account.Article IVObligations Regarding Exchange ArrangementsSection 1. General obligations of membersRecognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, eachmember shall:(i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;Art. III, Sec. 4Art. IV, Sec. 1IV. Obligations Regarding Exchange Arrangements(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and(iv) follow exchange policies compatible with the undertakingsunder this Section.Section 2. General exchange arrangements(a) Each member shall notify the Fund, within thirty days after the date of the second amendment of this Agreement, of the exchange arrangements it intends to apply in fulfillment of its obligations under Section 1 of this Article, and shall notify the Fund promptly of any changes in its exchange arrangements.(b) Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by themember, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice.(c) To accord with the development of the international monetary system, the Fund, by an eighty-five percent majority of the total voting power, may make provision for general exchange arrangements

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without limiting the right of members to have exchange arrangements of their choice consistent with the purposes of the Fund and the obligations under Section 1 of this Article.Section 3. Surveillance over exchange arrangements(a) The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.(b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested byArt. IV, Sec. 2–3IV. Obligations Regarding Exchange Arrangementsthe Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.Section 4. Par valuesThe Fund may determine, by an eighty-five percent majority of the total voting power, that international economic conditions permit the introduction of a widespread system of exchange arrangements based on stable but adjustable par values. The Fund shall make the determination on the basis of the underlying stability of the world economy, and for this purpose shall take into account price movements and rates of expansion in the economies of members. The determination shall be made in light of the evolution of the international monetary system, with particular reference to sources of liquidity, and, in order to ensure the effective operation of a system of par values, to arrangements under which both members in surplus and members in deficit in their balances of payments take prompt, effective, and symmetrical action to achieve adjustment, as well as to arrangements for intervention and the treatment of imbalances. Upon making such determination, the Fund shall notify members that the provisions of Schedule C apply.Section 5. Separate currencies within a member’s territories(a) Action by a member with respect to its currency under this Article shall be deemed to apply to the separate currencies of all territories in respect of which the member has accepted this Agreement under Article XXXI, Section 2(g) unless the member declares that its action relates either to the metropolitan currency alone, or only to one or more specified separate currencies, or to the metropolitan currency and one or more specified separate currencies.(b) Action by the Fund under this Article shall be deemed to relate to all currencies of a member referred to in (a) above unless the Fund declares otherwise.Art. IV, Sec. 4–5IV. Obligations Regarding Exchange ArrangementsArticle VOperations and Transactions of the FundSection 1. Agencies dealing with the FundEach member shall deal with the Fund only through its Treasury, central bank, stabilization fund, or other similar fiscal agency, and the Fund shall deal only with or through the same agencies.Section 2. Limitation on the Fund’s operations and transactions(a) Except as otherwise provided in this Agreement, transactions on the account of the Fund shall be limited to transactions for the purpose of supplying a member, on the initiative of such member, with special drawing rights or the currencies of other members from the general resources of the Fund, which shall be held in the General Resources Account, in exchange for the currency of the member desiring to make the purchase.

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(b) If requested, the Fund may decide to perform financial and technical services, including the administration of resources contributed by members, that are consistent with the purposes of the Fund. Operations involved in the performance of such financial services shall not be on the account of the Fund. Services under this subsection shall not impose any obligation on a member without its consent.Section 3. Conditions governing use of the Fund’s general resources(a) The Fund shall adopt policies on the use of its general resources, including policies on stand-by or similar arrangements, and may adopt special policies for special balance of payments problems, that will assist members to solve their balance of payments problems in a man- ner consistent with the provisions of this Agreement and that will establish adequate safeguards for the temporary use of the general resources of the Fund.(b) A member shall be entitled to purchase the currencies of other members from the Fund in exchange for an equivalent amount of its own currency subject to the following conditions:(i) the member’s use of the general resources of the Fund would be in accordance with the provisions of this Agreement and the policies adopted under them;Art. V, Sec. 1–3V. Operations and Transactions of the Fund(ii) the member represents that it has a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves;(iii) the proposed purchase would be a reserve tranche purchase, or would not cause the Fund’s holdings of the purchasing member’s currency to exceed two hundred percent of its quota;(iv) the Fund has not previously declared under Section 5 of this Article, Article VI, Section 1, or Article XXVI, Section2(a) that the member desiring to purchase is ineligible to use the general resources of the Fund.(c) The Fund shall examine a request for a purchase to determine whether the proposed purchase would be consistent with the provisions of this Agreement and the policies adopted under them, provided that requests for reserve tranche purchases shall not be subject to challenge.(d) The Fund shall adopt policies and procedures on the selection of currencies to be sold that take into account, in consultation with members, the balance of payments and reserve position of members and developments in the exchange markets, as well as the desirability of promoting over time balanced positions in the Fund, provided that if a member represents that it is proposing to purchase the currency of another member because the purchasing member wishes to obtain an equivalent amount of its own currency offered by the other member, it shall be entitled to purchase the currency of the other member unless the Fund has given notice under Article VII, Section 3 that its holdings of the currency have become scarce.(e) (i) Each member shall ensure that balances of its currency purchased from the Fund are balances of a freely usable currency or can be exchanged at the time of purchase for a freely usable currency of its choice at an exchange rate between the two currencies equivalent to the exchange ratebetween them on the basis of Article XIX, Section 7(a).(ii) Each member whose currency is purchased from the Fund or is obtained in exchange for currency purchased from the Fund shall collaborate with the Fund and other members to enable such balances of its currency to be exchanged, at the time of purchase, for the freely usable currencies of other members.Art. V, Sec. 3V. Operations and Transactions of the Fund(iii) An exchange under (i) above of a currency that is not freely usable shall be made by the member whose currency is purchased unless that member and the purchasing member agree on another procedure.(iv) A member purchasing from the Fund the freely usable currency of another member and wishing to exchange it at the time of purchase for another freely usable currency shall make the exchange with the other member if requested by that member. The exchange shall be made for a freelyusable currency selected by the other member at the rate of exchange referred to in (i) above.

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(f) Under policies and procedures which it shall adopt, the Fund may agree to provide a participant making a purchase in accordance with this Section with special drawing rights instead of the currencies of other members.Section 4. Waiver of conditionsThe Fund may in its discretion, and on terms which safeguard its interests, waive any of the conditions prescribed in Section 3(b)(iii) and (iv) of this Article, especially in the case of members with a record of avoiding large or continuous use of the Fund’s general resources. In making a waiver it shall take into consideration periodic or exceptional requirements of the member requesting the waiver. The Fund shall also take into consideration a member’s willingness to pledge as collateral security acceptable assets having a value sufficient in the opinion of the Fund to protect its interests and may require as a condition of waiver the pledge of such collateral security.Section 5. Ineligibility to use the Fund’s general resourcesWhenever the Fund is of the opinion that any member is using the general resources of the Fund in a manner contrary to the purposes of the Fund, it shall present to the member a report setting forth the views of the Fund and prescribing a suitable time for reply. After presenting such a report to a member, the Fund may limit the use of its general resources by the member. If no reply to the report is received from the member within the prescribed time, or if the reply received is unsatisfactory, the Fund may continue to limit the member’s use of the general resources of the Fund or may, after giving reasonableArt. V, Sec. 4–5V. Operations and Transactions of the Fundnotice to the member, declare it ineligible to use the general resources of the Fund.Section 6. Other purchases and sales of special drawing rights by the Fund(a) The Fund may accept special drawing rights offered by a participant in exchange for an equivalent amount of the currencies of other members.(b) The Fund may provide a participant, at its request, with special drawing rights for an equivalent amount of the currencies of other members. The Fund’s holdings of a member’s currency shall not beincreased as a result of these transactions above the level at which the holdings would be subject to charges under Section 8(b)(ii) of this Article.(c) The currencies provided or accepted by the Fund under this Section shall be selected in accordance with policies that take into account the principles of Section 3(d) or 7(i) of this Article. The Fund may enter into transactions under this Section only if a member whose currency is provided or accepted by the Fund concurs in that use of its currency.Section 7. Repurchase by a member of its currency held by the Fund(a) A member shall be entitled to repurchase at any time the Fund’s holdings of its currency that are subject to charges under Section 8(b) of this Article.(b) A member that has made a purchase under Section 3 of this Article will be expected normally, as its balance of payments and reserve position improves, to repurchase the Fund’s holdings of its currency that result from the purchase and are subject to charges under Section8(b) of this Article. A member shall repurchase these holdings if, in accordance with policies on repurchase that the Fund shall adopt and after consultation with the member, the Fund represents to the member that it should repurchase because of an improvement in its balance of payments and reserve position.(c) A member that has made a purchase under Section 3 of this Article shall repurchase the Fund’s holdings of its currency that result from the purchase and are subject to charges under Section 8(b) of this Article not later than five years after the date on which the purchaseArt. V, Sec. 6–7V. Operations and Transactions of the Fundwas made. The Fund may prescribe that repurchase shall be made by a member in installments during the period beginning three years and ending five years after the date of a purchase. The Fund, by an eightyfive percent majority of the total voting power, may change the periods for repurchase under this subsection, and any period so adopted shall apply to all members.

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(d) The Fund, by an eighty-five percent majority of the total voting power, may adopt periods other than those that apply in accordance with (c) above, which shall be the same for all members, for the repurchase of holdings of currency acquired by the Fund pursuant to a special policy on the use of its general resources.(e) A member shall repurchase, in accordance with policies that the Fund shall adopt by a seventy percent majority of the total voting power, the Fund’s holdings of its currency that are not acquired as a result of purchases and are subject to charges under Section 8(b)(ii) of this Article.(f) A decision prescribing that under a policy on the use of the general resources of the Fund the period for repurchase under (c) or (d) above shall be shorter than the one in effect under the policy shall apply only to holdings acquired by the Fund subsequent to the effective date of the decision.(g) The Fund, on the request of a member, may postpone the date of discharge of a repurchase obligation, but not beyond the maximum period under (c) or (d) above or under policies adopted by the Fund under (e) above, unless the Fund determines, by a seventy percent majority of the total voting power, that a longer period for repurchase which is consistent with the temporary use of the general resources of the Fund is justified because discharge on the due date would result in exceptional hardship for the member.(h) The Fund’s policies under Section 3(d) of this Article may be supplemented by policies under which the Fund may decide after consultation with a member to sell under Section 3(b) of this Article its holdings of the member’s currency that have not been repurchased in accordance with this Section 7, without prejudice to any action that the Fund may be authorized to take under any other provision of this Agreement.(i) All repurchases under this Section shall be made with special drawing rights or with the currencies of other members specified by Art. V, Sec. 7V. Operations and Transactions of the Fundthe Fund. The Fund shall adopt policies and procedures with regard to the currencies to be used by members in making repurchases that take into account the principles in Section 3(d) of this Article. The Fund’s holdings of a member’s currency that is used in repurchase shall not be increased by the repurchase above the level at which they would be subject to charges under Section 8(b)(ii) of this Article.(j) (i) If a member’s currency specified by the Fund under (i) above is not a freely usable currency, the member shall ensure that the repurchasing member can obtain it at the time of the repurchase in exchange for a freely usable currency selected by the member whose currency has been specified. An exchange of currency under this provision shall take place at an exchange rate between the two currencies equivalent to the exchange rate between them on the basis of Article XIX, Section 7(a).(ii) Each member whose currency is specified by the Fund for repurchase shall collaborate with the Fund and other members to enable repurchasing members, at the time of the repurchase, to obtain the specified currency in exchange for the freely usable currencies of other members.(iii) An exchange under (j)(i) above shall be made with the member whose currency is specified unless that member and the repurchasing member agree on another procedure.(iv) If a repurchasing member wishes to obtain, at the time of the repurchase, the freely usable currency of another member specified by the Fund under (i) above, it shall, if requested by the other member, obtain the currency from the other member in exchange for a freely usable currency at the rate of exchange referred to in (j)(i) above. The Fundmay adopt regulations on the freely usable currency to be provided in an exchange.Section 8. Charges(a) (i) The Fund shall levy a service charge on the purchase by a member of special drawing rights or the currency of another member held in the General Resources Account in exchange for its own currency, provided that the Fund may levy a lower service charge on reserve trancheArt. V, Sec. 8V. Operations and Transactions of the Fundpurchases than on other purchases. The service charge on reserve tranche purchases shall not exceed one-half of one percent.

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(ii) The Fund may levy a charge for stand-by or similar arrangements. The Fund may decide that the charge for an arrangement shall be offset against the service charge levied under (i) above on purchases under the arrangement. (b) The Fund shall levy charges on its average daily balances of amember’s currency held in the General Resources Account to the extent that they (i) have been acquired under a policy that has been the subject of an exclusion under Article XXX(c), or(ii) exceed the amount of the member’s quota after excluding any balances referred to in (i) above.The rates of charge normally shall rise at intervals during the period in which the balances are held.(c) If a member fails to make a repurchase required under Section 7 of this Article, the Fund, after consultation with the member on the reduction of the Fund’s holdings of its currency, may impose such charges as the Fund deems appropriate on its holdings of the member’s currency that should have been repurchased.(d) A seventy percent majority of the total voting power shall be required for the determination of the rates of charge under (a) and (b) above, which shall be uniform for all members, and under (c) above.(e) A member shall pay all charges in special drawing rights, provided that in exceptional circumstances the Fund may permit a member to pay charges in the currencies of other members specified by the Fund, after consultation with them, or in its own currency. The Fund’s holdings of a member’s currency shall not be increased as a result of payments by other members under this provision above the level at which they would be subject to charges under (b)(ii) above.Section 9. Remuneration(a) The Fund shall pay remuneration on the amount by which the percentage of quota prescribed under (b) or (c) below exceeds theArt. V, Sec. 8V. Operations and Transactions of the FundFund’s average daily balances of a member’s currency held in the General Resources Account other than balances acquired under a policy that has been the subject of an exclusion under Article XXX(c). The rate of remuneration, which shall be determined by the Fund by a seventy percent majority of the total voting power, shall be the same for all members and shall be not more than, nor less than four-fifths of, the rate of interest under Article XX, Section 3. In establishing the rate of remuneration, the Fund shall take into account the rates of charge underArticle V, Section 8(b).(b) The percentage of quota applying for the purposes of (a) above shall be:(i) for each member that became a member before the second amendment of this Agreement, a percentage of quota corresponding to seventy-five percent of its quota on the date of the second amendment of this Agreement, and for each member that became a member after the date of thesecond amendment of this Agreement, a percentage of quota calculated by dividing the total of the amounts corresponding to the percentages of quota that apply to the other members on the date on which the member became a member by the total of the quotas of the other members on the same date; plus(ii) the amounts it has paid to the Fund in currency or special drawing rights under Article III, Section 3(a) since the date applicable under (b)(i) above; and minus(iii) the amounts it has received from the Fund in currency or special drawing rights under Article III, Section 3(c) since the date applicable under (b)(i) above.(c) The Fund, by a seventy percent majority of the total voting power, may raise the latest percentage of quota applying for the purposes of (a) above to each member to:(i) a percentage, not in excess of one hundred percent, that shall be determined for each member on the basis of the same criteria for all members, or(ii) one hundred percent for all members.Art. V, Sec. 9V. Operations and Transactions of the Fund(d) Remuneration shall be paid in special drawing rights, provided that either the Fund or the member may decide that the payment to the member shall be made in its own currency.

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Section 10. Computations(a) The value of the Fund’s assets held in the accounts of the General Department shall be expressed in terms of the special drawing right.(b) All computations relating to currencies of members for the purpose of applying the provisions of this Agreement, except Article IV and Schedule C, shall be at the rates at which the Fund accounts for these currencies in accordance with Section 11 of this Article.(c) Computations for the determination of amounts of currency in relation to quota for the purpose of applying the provisions of this Agreement shall not include currency held in the Special DisbursementAccount or in the Investment Account.Section 11. Maintenance of value(a) The value of the currencies of members held in the General Resources Account shall be maintained in terms of the special drawing right in accordance with exchange rates under Article XIX,Section 7(a).(b) An adjustment in the Fund’s holdings of a member’s currency pursuant to this Section shall be made on the occasion of the use of that currency in an operation or transaction between the Fund and another member and at such other times as the Fund may decide or the member may request. Payments to or by the Fund in respect of an adjustment shall be made within a reasonable time, as determined by the Fund, after the date of adjustment, and at any other time requested by the member.Section 12. Other operations and transactions(a) The Fund shall be guided in all its policies and decisions under this Section by the objectives set forth in Article VIII, Section 7 and by the objective of avoiding the management of the price, or the establishment of a fixed price, in the gold market.Art. V, Sec. 10–12V. Operations and Transactions of the Fund(b) Decisions of the Fund to engage in operations or transactions under (c), (d), and (e) below shall be made by an eighty-five percent majority of the total voting power.(c) The Fund may sell gold for the currency of any member after consulting the member for whose currency the gold is sold, provided that the Fund’s holdings of a member’s currency held in the General Resources Account shall not be increased by the sale above the level at which they would be subject to charges under Section 8(b)(ii) of this Article without the concurrence of the member, and provided that, at the request of the member, the Fund at the time of sale shall exchange for the currency of another member such part of the currency received as would prevent such an increase. The exchange of a currency for the currency of another member shall be made after consultation with that member, and shall not increase the Fund’s holdings of that member’s currency above the level at which they would be subject to charges under Section 8(b)(ii) of this Article. The Fund shall adopt policies and procedures with regard to exchanges that take into account the principles applied under Section 7(i) of this Article. Sales under this provision to a member shall be at a price agreed for each transaction on the basis of prices in the market.(d) The Fund may accept payments from a member in gold instead of special drawing rights or currency in any operations or transactions under this Agreement. Payments to the Fund under this provision shall be at a price agreed for each operation or transaction on the basis of prices in the market.(e) The Fund may sell gold held by it on the date of the second amendment of this Agreement to those members that were members on August 31, 1975 and that agree to buy it, in proportion to their quotas on that date. If the Fund intends to sell gold under (c) above for the purpose of (f)(ii) below, it may sell to each developing member that agrees to buy it that portion of the gold which, if sold under (c) above, would have produced the excess that could have been distributed to itunder (f)(iii) below. The gold that would be sold under this provision to a member that has been declared ineligible to use the general resources of the Fund under Section 5 of this Article shall be sold to it when the ineligibility ceases, unless the Fund decides to make the sale sooner. The sale of

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gold to a member under this subsection (e) shall be made in exchange for its currency and at a price equivalent at the time of sale to one special drawing right per 0.888 671 gram of fine gold.Art. V, Sec. 12V. Operations and Transactions of the Fund(f) Whenever under (c) above the Fund sells gold held by it on the date of the second amendment of this Agreement, an amount of the proceeds equivalent at the time of sale to one special drawing right per 0.888 671 gram of fine gold shall be placed in the General Resources Account and, except as the Fund may decide otherwise under (g) below, any excess shall be held in the Special Disbursement Account. The assets held in the Special Disbursement Account shall be held separately from the other accounts of the General Department, and may beused at any time:(i) to make transfers to the General Resources Account for immediate use in operations and transactions authorized by provisions of this Agreement other than this Section;(ii) for operations and transactions that are not authorized by other provisions of this Agreement but are consistent with the purposes of the Fund. Under this subsection (f)(ii) balance of payments assistance may be made available on special terms to developing members in difficult circumstances, and for this purpose the Fund shall take into account the level of per capita income;(iii) for distribution to those developing members that were members on August 31, 1975, in proportion to their quotas on that date, of such part of the assets that the Fund decides to use for the purposes of (ii) above as corresponds to the proportion of the quotas of these members on the date of distribution to the total of the quotas of all members on the same date, provided that the distribution under this provision to a member that has been declared ineligible to usethe general resources of the Fund under Section 5 of this Article shall be made when the ineligibility ceases, unless the Fund decides to make the distribution sooner.Decisions to use assets pursuant to (i) above shall be taken by a seventy percent majority of the total voting power, and decisions pursuant to (ii) and (iii) above shall be taken by an eighty-five percent majority of the total voting power.(g) The Fund may decide, by an eighty-five percent majority of the total voting power, to transfer a part of the excess referred to in (f) above to the Investment Account for use pursuant to the provisions of Article XII, Section 6(f).Art. V, Sec. 12V. Operations and Transactions of the Fund(h) Pending uses specified under (f) above, the Fund may use a member’s currency held in the Special Disbursement Account for investment as it may determine, in accordance with rules and regulationsadopted by the Fund by a seventy percent majority of the total voting power. The income of investment and interest received under (f)(ii) above shall be placed in the Special Disbursement Account.(i) The General Resources Account shall be reimbursed from time to time in respect of the expenses of administration of the Special Disbursement Account paid from the General Resources Account bytransfers from the Special Disbursement Account on the basis of a reasonable estimate of such expenses.(j) The Special Disbursement Account shall be terminated in the event of the liquidation of the Fund and may be terminated prior to liquidation of the Fund by a seventy percent majority of the total voting power. Upon termination of the account because of the liquidation of the Fund, any assets in this account shall be distributed in accordance with the provisions of Schedule K. Upon termination prior to liquidation of the Fund, any assets in this account shall be transferred to the General Resources Account for immediate use in operations and transactions.The Fund, by a seventy percent majority of the total voting power, shall adopt rules and regulations for the administration of the Special Disbursement Account.(k) Whenever under (c) above the Fund sells gold acquired by it after the date of the second amendment of this Agreement, an amount of the proceeds equivalent to the acquisition price of the

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gold shall be placed in the General Resources Account, and any excess shall be placed in the Investment Account for use pursuant to the provisions of Article XII, Section 6(f). If any gold acquired by the Fund after the date of the second amendment of this Agreement is sold after April 7, 2008 but prior to the date of entry into force of this provision, then, upon the entry into force of this provision, and notwithstanding the limit set forth in Article XII, Section 6(f)(ii), the Fund shall transfer to the Investment Account from the General Resources Account an amount equal to theproceeds of such sale less (i) the acquisition price of the gold sold, and (ii) any amount of such proceeds in excess of the acquisition price that may have already been transferred to the Investment Account prior to the date of entry into force of this provision.Art. V, Sec. 12V. Operations and Transactions of the Fund

Article VICapital TransfersSection 1. Use of the Fund’s general resources for capital transfers(a) A member may not use the Fund’s general resources to meet a large or sustained outflow of capital except as provided in Section 2 of this Article, and the Fund may request a member to exercise controls to prevent such use of the general resources of the Fund. If, after receiving such a request, a member fails to exercise appropriate controls, the Fund may declare the member ineligible to use the general resources of the Fund.(b) Nothing in this Section shall be deemed:(i) to prevent the use of the general resources of the Fund for capital transactions of reasonable amount required for the expansion of exports or in the ordinary course of trade, banking, or other business; or(ii) to affect capital movements which are met out of a member’s own resources, but members undertake that such capital movements will be in accordance with the purposes of the Fund.Section 2. Special provisions for capital transfersA member shall be entitled to make reserve tranche purchases to meet capital transfers.Section 3. Controls of capital transfersMembers may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments, except as provided in Article VII, Section 3(b) and inArticle XIV, Section 2.Art. VI, Sec. 1–3VI. Capital Transfers

Article VIIReplenishment and Scarce CurrenciesSection 1. Measures to replenish the Fund’s holdings of currenciesThe Fund may, if it deems such action appropriate to replenish its holdings of any member’s currency in the General Resources Account needed in connection with its transactions, take either or both of the following steps:(i) propose to the member that, on terms and conditions agreed between the Fund and the member, the latter lend its currency to the Fund or that, with the concurrence of the member, the Fund borrow such currency from some other source either within or outside the territories of the member, but no member shall be under any obligation to make such loans to the Fund or to concur in the borrowing of its currency by the Fund from any other source;(ii) require the member, if it is a participant, to sell its currency to the Fund for special drawing rights held in the General Resources Account, subject to Article XIX, Section4. In replenishing with special drawing rights, the Fund shall pay due regard to the principles of designation under Article XIX, Section 5.

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Section 2. General scarcity of currencyIf the Fund finds that a general scarcity of a particular currency is developing, the Fund may so inform members and may issue a report setting forth the causes of the scarcity and containing recommendations designed to bring it to an end. A representative of the member whose currency is involved shall participate in the preparation of the report.Section 3. Scarcity of the Fund’s holdings(a) If it becomes evident to the Fund that the demand for a member’s currency seriously threatens the Fund’s ability to supply that currency, the Fund, whether or not it has issued a report under Section 2 of this Article, shall formally declare such currency scarce and shallArt. VII, Sec. 1–3VII. Replenishment and Scarce Currenciesthenceforth apportion its existing and accruing supply of the scarce currency with due regard to the relative needs of members, the general international economic situation, and any other pertinent considerations. The Fund shall also issue a report concerning its action.(b) A formal declaration under (a) above shall operate as an authorization to any member, after consultation with the Fund, temporarily to impose limitations on the freedom of exchange operations in the scarce currency. Subject to the provisions of Article IV and Schedule C, the member shall have complete jurisdiction in determining the nature of such limitations, but they shall be no more restrictive than is necessary to limit the demand for the scarce currency to the supply held by,or accruing to, the member in question, and they shall be relaxed and removed as rapidly as conditions permit.(c) The authorization under (b) above shall expire whenever the Fund formally declares the currency in question to be no longer scarce.Section 4. Administration of restrictionsAny member imposing restrictions in respect of the currency of any other member pursuant to the provisions of Section 3(b) of this Article shall give sympathetic consideration to any representations by the other member regarding the administration of such restrictions.Section 5. Effect of other international agreements on restrictionsMembers agree not to invoke the obligations of any engagements entered into with other members prior to this Agreement in such manner as will prevent the operation of the provisions of this Article.Article VIIIGeneral Obligations of MembersSection 1. IntroductionIn addition to the obligations assumed under other articles of this Agreement, each member undertakes the obligations set out in this Article.Art. VII, Sec. 4–5Art. VIII, Sec. 1VIII. General Obligations of Members

Section 2. Avoidance of restrictions on current payments(a) Subject to the provisions of Article VII, Section 3(b) and Article XIV, Section 2, no member shall, without the approval of the Fund, impose restrictions on the making of payments and transfers for current international transactions.(b) Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member. In addition, members may, by mutual accord, cooperate in measures for the purpose of making the exchange control regulations of either member more effective, provided that such measures and regulations are consistent with this Agreement.Section 3. Avoidance of discriminatory currency practices

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No member shall engage in, or permit any of its fiscal agencies referred to in Article V, Section 1 to engage in, any discriminatory currency arrangements or multiple currency practices, whether within or outside margins under Article IV or prescribed by or under Schedule C, except as authorized under this Agreement or approved by the Fund. If such arrangements and practices are engaged in at the date when this Agreement enters into force, the member concerned shall consult with the Fund as to their progressive removal unless they are maintained or imposed under Article XIV, Section 2, in which case the provisions of Section 3 of that Article shall apply.Section 4. Convertibility of foreign-held balances(a) Each member shall buy balances of its currency held by another member if the latter, in requesting the purchase, represents:(i) that the balances to be bought have been recently acquired as a result of current transactions; or(ii) that their conversion is needed for making payments for current transactions.Art. VIII, Sec. 2–4VIII. General Obligations of MembersThe buying member shall have the option to pay either in special drawing rights, subject to Article XIX, Section 4, or in the currency of the member making the request.(b) The obligation in (a) above shall not apply when:(i) the convertibility of the balances has been restrictedconsistently with Section 2 of this Article or Article VI,Section 3;(ii) the balances have accumulated as a result of transactions effected before the removal by a member of restrictions maintained or imposed under Article XIV, Section 2;(iii) the balances have been acquired contrary to the exchange regulations of the member which is asked to buy them;(iv) the currency of the member requesting the purchase has been declared scarce under Article VII, Section 3(a); or(v) the member requested to make the purchase is for any reason not entitled to buy currencies of other members from the Fund for its own currency.Section 5. Furnishing of information(a) The Fund may require members to furnish it with such information as it deems necessary for its activities, including, as the minimum necessary for the effective discharge of the Fund’s duties, national data on the following matters:(i) official holdings at home and abroad of (1) gold, (2) foreign exchange;(ii) holdings at home and abroad by banking and financial agencies, other than official agencies, of (1) gold, (2) foreign exchange;(iii) production of gold;(iv) gold exports and imports according to countries of destination and origin;(v) total exports and imports of merchandise, in terms of local currency values, according to countries of destination and origin;Art. VIII, Sec. 5VIII. General Obligations of Members

(vi) international balance of payments, including (1) trade in goods and services, (2) gold transactions, (3) known capital transactions, and (4) other items;(vii) international investment position, i.e., investments within the territories of the member owned abroad and investments abroad owned by persons in its territories so far as it is possible to furnish this information;(viii) national income;(ix) price indices, i.e., indices of commodity prices in wholesale and retail markets and of export and import prices;(x) buying and selling rates for foreign currencies;

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(xi) exchange controls, i.e., a comprehensive statement of exchange controls in effect at the time of assuming membership in the Fund and details of subsequent changes as they occur; and(xii) where official clearing arrangements exist, details of amounts awaiting clearance in respect of commercial and financial transactions, and of the length of time during which such arrears have been outstanding.(b) In requesting information the Fund shall take into consideration the varying ability of members to furnish the data requested. Members shall be under no obligation to furnish information in such detail that the affairs of individuals or corporations are disclosed. Members undertake, however, to furnish the desired information in as detailed and accurate a manner as is practicable and, so far as possible, to avoid mere estimates.(c) The Fund may arrange to obtain further information by agreement with members. It shall act as a centre for the collection and exchange of information on monetary and financial problems, thus facilitating the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.Art. VIII, Sec. 5VIII. General Obligations of MembersSection 6. Consultation between members regarding existing international agreementsWhere under this Agreement a member is authorized in the special or temporary circumstances specified in the Agreement to maintain or establish restrictions on exchange transactions, and there are other engagements between members entered into prior to this Agreement which conflict with the application of such restrictions, the parties to such engagements shall consult with one another with a view to making such mutually acceptable adjustments as may be necessary. The provisions of this Article shall be without prejudice to the operation of Article VII, Section 5.Section 7. Obligation to collaborate regarding policies on reserve assetsEach member undertakes to collaborate with the Fund and with other members in order to ensure that the policies of the member with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.Article IXStatus, Immunities, and PrivilegesSection 1. Purposes of ArticleTo enable the Fund to fulfill the functions with which it is entrusted, the status, immunities, and privileges set forth in this Article shall be accorded to the Fund in the territories of each member.Section 2. Status of the FundThe Fund shall possess full juridical personality, and in particular, the capacity:(i) to contract;(ii) to acquire and dispose of immovable and movable property; and(iii) to institute legal proceedings.Art. VIII, Sec. 6–7Art. IX, Sec. 1–2

IX. Status, Immunities, and PrivilegesSection 3. Immunity from judicial processThe Fund, its property and its assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that it expressly waives its immunity for the purpose of any proceedings or by the terms of any contract.Section 4. Immunity from other actionProperty and assets of the Fund, wherever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation, or any other form of seizure by executive or legislative action.Section 5. Immunity of archives

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The archives of the Fund shall be inviolable.Section 6. Freedom of assets from restrictionsTo the extent necessary to carry out the activities provided for in this Agreement, all property and assets of the Fund shall be free from restrictions, regulations, controls, and moratoria of any nature.Section 7. Privilege for communicationsThe official communications of the Fund shall be accorded by members the same treatment as the official communications of other members.Section 8. Immunities and privileges of officers and employeesAll Governors, Executive Directors, Alternates, members of committees, representatives appointed under Article XII, Section 3(j), advisors of any of the foregoing persons, officers, and employees of the Fund:(i) shall be immune from legal process with respect to acts performed by them in their official capacity except when the Fund waives this immunity;(ii) not being local nationals, shall be granted the same immunities from immigration restrictions, alien registration requirements, and national service obligations and the same facilities as regards exchange restrictions as areArt. IX, Sec. 3–8IX. Status, Immunities, and Privilegesaccorded by members to the representatives, officials, and employees of comparable rank of other members; and(iii) shall be granted the same treatment in respect of traveling facilities as is accorded by members to representatives, officials, and employees of comparable rank of other members.Section 9. Immunities from taxation(a) The Fund, its assets, property, income, and its operations and transactions authorized by this Agreement shall be immune from all taxation and from all customs duties. The Fund shall also be immune from liability for the collection or payment of any tax or duty.(b) No tax shall be levied on or in respect of salaries and emoluments paid by the Fund to Executive Directors, Alternates, officers, or employees of the Fund who are not local citizens, local subjects, or other local nationals.(c) No taxation of any kind shall be levied on any obligation or security issued by the Fund, including any dividend or interest thereon, by whomsoever held:(i) which discriminates against such obligation or security solely because of its origin; or(ii) if the sole jurisdictional basis for such taxation is the place or currency in which it is issued, made payable or paid, or the location of any office or place of business maintained by the Fund.Section 10. Application of ArticleEach member shall take such action as is necessary in its own territories for the purpose of making effective in terms of its own law the principles set forth in this Article and shall inform the Fund of the detailed action which it has taken.Art. IX, Sec. 9–10X. Relations with Other International OrganizationsArticle XRelations with Other International OrganizationsThe Fund shall cooperate within the terms of this Agreement with any general international organization and with public international organizations having specialized responsibilities in related fields. Any arrangements for such cooperation which would involve a modificationof any provision of this Agreement may be effected only after amendment to this Agreement under Article XXVIII.Article XIRelations with Non-Member CountriesSection 1. Undertakings regarding relations with non-member countriesEach member undertakes:

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(i) not to engage in, nor to permit any of its fiscal agencies referred to in Article V, Section 1 to engage in, any transactions with a non-member or with persons in a nonmember’s territories which would be contrary to the provisions of this Agreement or the purposes of the Fund;(ii) not to cooperate with a non-member or with persons in a non-member’s territories in practices which would be contrary to the provisions of this Agreement or the purposesof the Fund; and(iii) to cooperate with the Fund with a view to the application in its territories of appropriate measures to prevent trans- actions with non-members or with persons in their territories which would be contrary to the provisions of this Agreement or the purposes of the Fund.Section 2. Restrictions on transactions with non-member countriesNothing in this Agreement shall affect the right of any member to impose restrictions on exchange transactions with non-members or with persons in their territories unless the Fund finds that such restrictions prejudice the interests of members and are contrary to the purposes of the Fund.Art. XArt. XI, Sec. 1–2XI. Relations with Non-Member Countries; XII. Organization and ManagementArticle XIIOrganization and ManagementSection 1. Structure of the FundThe Fund shall have a Board of Governors, an Executive Board, a Managing Director, and a staff, and a Council if the Board of Governors decides, by an eighty-five percent majority of the total votingpower, that the provisions of Schedule D shall be applied.Section 2. Board of Governors(a) All powers under this Agreement not conferred directly on the Board of Governors, the Executive Board, or the Managing Director shall be vested in the Board of Governors. The Board of Governors shall consist of one Governor and one Alternate appointed by each member in such manner as it may determine. Each Governor and each Alternate shall serve until a new appointment is made. No Alternate may vote except in the absence of his principal. The Board of Governors shall select one of the Governors as Chairman.(b) The Board of Governors may delegate to the Executive Board authority to exercise any powers of the Board of Governors, except the powers conferred directly by this Agreement on the Board ofGovernors.(c) The Board of Governors shall hold such meetings as may be provided for by the Board of Governors or called by the Executive Board. Meetings of the Board of Governors shall be called whenever requested by fifteen members or by members having one-quarter of the total voting power.(d) A quorum for any meeting of the Board of Governors shall be a majority of the Governors having not less than twothirds of the total voting power.(e) Each Governor shall be entitled to cast the number of votes allotted under Section 5 of this Article to the member appointing him.(f) The Board of Governors may by regulation establish a procedure whereby the Executive Board, when it deems such action to be in the best interests of the Fund, may obtain a vote of the Governors on a specific question without calling a meeting of the Board of Governors.Art. XII, Sec. 1–2XII. Organization and Management

(g) The Board of Governors, and the Executive Board to the extent authorized, may adopt such rules and regulations as may be necessary or appropriate to conduct the business of the Fund.(h) Governors and Alternates shall serve as such without compensation from the Fund, but the Fund may pay them reasonable expenses incurred in attending meetings.(i) The Board of Governors shall determine the remuneration to be paid to the Executive Directors and their Alternates and the salary and terms of the contract of service of the Managing Director.

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(j) The Board of Governors and the Executive Board may appoint such committees as they deem advisable. Membership of committees need not be limited to Governors or Executive Directors or their Alternates.Section 3. Executive Board(a) The Executive Board shall be responsible for conducting the business of the Fund, and for this purpose shall exercise all the powers delegated to it by the Board of Governors.(b) Subject to (c) below, the Executive Board shall consist of twenty Executive Directors elected by the members, with the Managing Director as chairman.(c) For the purpose of each regular election of Executive Directors, the Board of Governors, by an eighty-five percent majority of the total voting power, may increase or decrease the number of Executive Directors specified in (b) above.(d) Elections of Executive Directors shall be conducted at intervals of two years in accordance with regulations which shall be adopted by the Board of Governors. Such regulations shall include a limit on the total number of votes that more than one member may cast for the same candidate.(e) Each Executive Director shall appoint an Alternate with full power to act for him when he is not present, provided that the Board of Governors may adopt rules enabling an Executive Director elected by more than a specified number of members to appoint two Alternates.Such rules, if adopted, may only be modified in the context of the regular election of Executive Directors and shall require an ExecutiveArt. XII, Sec. 3XII. Organization and ManagementDirector appointing two Alternates to designate: (i) the Alternate who shall act for the Executive Director when he is not present and both Alternates are present and (ii) the Alternate who shall exercise the powers of the Executive Director under (f) below. When the Executive Directors appointing them are present, Alternates may participate in meetings but may not vote.(f) Executive Directors shall continue in office until their successors are elected. If the office of an Executive Director becomes vacant more than ninety days before the end of his term, another Executive Director shall be elected for the remainder of the term by the members that elected the former Executive Director. A majority of the votes cast shall be required for election. While the office remains vacant, the Alternate of the former Executive Director shall exercise his powers, except thatof appointing an Alternate.(g) The Executive Board shall function in continuous session at the principal office of the Fund and shall meet as often as the business of the Fund may require.(h) A quorum for any meeting of the Executive Board shall be a majority of the Executive Directors having not less than one-half of the total voting power.(i) Each Executive Director shall be entitled to cast the number of votes which counted towards his election.(ii) When the provisions of Section 5(b) of this Article are applicable, the votes which an Executive Director would otherwise be entitled to cast shall be increased or decreased correspondingly. All the votes which an Executive Director is entitled to cast shall be cast as a unit.(iii) When the suspension of the voting rights of a member is terminated under Article XXVI, Section 2(b), the member may agree with all the members that have elected an Executive Director that the number of votes allotted to that member shall be cast by such Executive Director,provided that, if no regular election of Executive Directors has been conducted during the period of the suspension, the Executive Director in whose election the member had participated prior to the suspension, or his successor elected in accordance with paragraph 3(c)(i) of Schedule L or with (f) above, shall be entitled to cast the numberArt. XII, Sec. 3XII. Organization and Managementof votes allotted to the member. The member shall be deemed to have participated in the election of the Executive Director entitled to cast the number of votes allotted to the member.

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(j) The Board of Governors shall adopt regulations under which a member may send a representative to attend any meeting of the Executive Board when a request made by, or a matter particularly affecting, that member is under consideration.Section 4. Managing Director and staff(a) The Executive Board shall select a Managing Director who shall not be a Governor or an Executive Director. The Managing Director shall be chairman of the Executive Board, but shall have no vote except a deciding vote in case of an equal division. He may participate in meetings of the Board of Governors, but shall not vote at such meetings.The Managing Director shall cease to hold office when the Executive Board so decides.(b) The Managing Director shall be chief of the operating staff of the Fund and shall conduct, under the direction of the Executive Board, the ordinary business of the Fund. Subject to the general control of the Executive Board, he shall be responsible for the organization, appointment, and dismissal of the staff of the Fund.(c) The Managing Director and the staff of the Fund, in the discharge of their functions, shall owe their duty entirely to the Fund and to no other authority. Each member of the Fund shall respect the international character of this duty and shall refrain from all attempts to influence any of the staff in the discharge of these functions.(d) In appointing the staff the Managing Director shall, subject to the paramount importance of securing the highest standards of efficiency and of technical competence, pay due regard to the importance of recruiting personnel on as wide a geographical basis as possible.Section 5. Voting(a) The total votes of each member shall be equal to the sum of its basic votes and its quota-based votes.(i) The basic votes of each member shall be the number of votes that results from the equal distribution among allArt. XII, Sec. 4–5XII. Organization and Management

the members of 5.502 percent of the aggregate sum of the total voting power of all the members, provided that there shall be no fractional basic votes.(ii) The quota-based votes of each member shall be the number of votes that results from the allocation of one vote for each part of its quota equivalent to one hundred thousand special drawing rights.(b) Whenever voting is required under Article V, Section 4 or 5, each member shall have the number of votes to which it is entitled under (a) above adjusted(i) by the addition of one vote for the equivalent of each four hundred thousand special drawing rights of net sales of its currency from the general resources of the Fund up to the date when the vote is taken, or(ii) by the subtraction of one vote for the equivalent of each four hundred thousand special drawing rights of its net purchases under Article V, Section 3(b) and (f) up to thedate when the vote is taken, provided that neither net purchases nor net sales shall be deemed at any time to exceed an amount equal to the quota of the member involved.(c) Except as otherwise specifically provided, all decisions of the Fund shall be made by a majority of the votes cast.Section 6. Reserves, distribution of net income, and investment(a) The Fund shall determine annually what part of its net income shall be placed to general reserve or special reserve, and what part, if any, shall be distributed.(b) The Fund may use the special reserve for any purpose for which it may use the general reserve, except distribution.(c) If any distribution is made of the net income of any year, it shall be made to all members in proportion to their quotas.

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(d) The Fund, by a seventy percent majority of the total voting power, may decide at any time to distribute any part of the general reserve. Any such distribution shall be made to all members in proportion to their quotas.Art. XII, Sec. 6XII. Organization and Management(e) Payments under (c) and (d) above shall be made in special drawing rights, provided that either the Fund or the member may decide that the payment to the member shall be made in its own currency.(f) (i) The Fund may establish an Investment Account for the purposes of this subsection (f). The assets of the Investment Account shall be held separately from the other accounts of the General Department.(ii) The Fund may decide to transfer to the Investment Account a part of the proceeds of the sale of gold in accordance with Article V, Section 12(g) and, by a seventy percent majority of the total voting power, may decide to transfer to the Investment Account, for immediate investment,currencies held in the General Resources Account. The amount of these transfers shall not exceed the total amount of the general reserve and the special reserve at the time ofthe decision.(iii) The Fund may use a member’s currency held in the Investment Account for investment as it may determine, in accordance with rules and regulations adopted by the Fund by a seventy percent majority of the total voting power. The rules and regulations adopted pursuant to thisprovision shall be consistent with (vii), (viii), and (ix) below.(iv) The income of investment may be invested in accordance with the provisions of this subsection (f). Income not invested shall be held in the Investment Account or maybe used for meeting the expenses of conducting the business of the Fund.(v) The Fund may use a member’s currency held in the Investment Account to obtain the currencies needed to meet the expenses of conducting the business of the Fund.(vi) The Investment Account shall be terminated in the event of liquidation of the Fund and may be terminated, or the amount of the investment may be reduced, prior to liquidation of the Fund by a seventy percent majority of the total voting power.(vii) Upon termination of the Investment Account because of liquidation of the Fund, any assets in this account shall beArt. XII, Sec. 6XII. Organization and Managementdistributed in accordance with the provisions of Schedule K, provided that a portion of these assets corresponding to the proportion of the assets transferred to this account under Article V, Section 12(g) to the total of the assets transferred to this account shall be deemed to be assets held inthe Special Disbursement Account and shall be distributed in accordance with Schedule K, paragraph 2(a)(ii).(viii) Upon termination of the Investment Account prior to liquidation of the Fund, a portion of the assets held in this account corresponding to the proportion of the assets transferred to this account under Article V, Section 12(g) to the total of the assets transferred to the account shall betransferred to the Special Disbursement Account if it has not been terminated, and the balance of the assets held in the Investment Account shall be transferred to the GeneralResources Account for immediate use in operations and transactions.(ix) On a reduction of the amount of the investment by the Fund, a portion of the reduction corresponding to the proportion of the assets transferred to the Investment Accountunder Article V, Section 12(g) to the total of the assets transferred to this account shall be transferred to the Special Disbursement Account if it has not been terminated, and the balance of the reduction shall be transferred to the General Resources Account for immediate use in operationsand transactions.Section 7. Publication of reports

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(a) The Fund shall publish an annual report containing an audited statement of its accounts, and shall issue, at intervals of three months or less, a summary statement of its operations and transactions and its holdings of special drawing rights, gold, and currencies of members.(b) The Fund may publish such other reports as it deems desirable for carrying out its purposes.Section 8. Communication of views to membersThe Fund shall at all times have the right to communicate its views informally to any member on any matter arising under this Agreement.Art. XII, Sec. 7XII. Organization and ManagementThe Fund may, by a seventy percent majority of the total voting power, decide to publish a report made to a member regarding its monetary or economic conditions and developments which directly tend to produce a serious disequilibrium in the international balance of payments of members. The relevant member shall be entitled to representation in accordance with Section 3(j) of this Article. The Fund shall not publish a report involving changes in the fundamental structure of the economic organization of members.Article XIIIOffices and DepositoriesSection 1. Location of officesThe principal office of the Fund shall be located in the territory of the member having the largest quota, and agencies or branch offices may be established in the territories of other members.Section 2. Depositories(a) Each member shall designate its central bank as a depository for all the Fund’s holdings of its currency, or if it has no central bank it shall designate such other institution as may be acceptable to the Fund.(b) The Fund may hold other assets, including gold, in the depositories designated by the five members having the largest quotas and in such other designated depositories as the Fund may select. Initially, at least one-half of the holdings of the Fund shall be held in the depository designated by the member in whose territories the Fund has its principal office and at least forty percent shall be held in the depositories designated by the remaining four members referred to above. However, all transfers of gold by the Fund shall be made with due regard to the costs of transport and anticipated requirements of the Fund. In an emergency the Executive Board may transfer all or any part of the Fund’s gold holdings to any place where they can be adequately protected.Section 3. Guarantee of the Fund’s assetsEach member guarantees all assets of the Fund against loss resulting from failure or default on the part of the depository designated by it.Art. XII, Sec. 8Art. XIII, Sec. 1–2XIII. Offices and Depositories

Article XIVTransitional ArrangementsSection 1. Notification to the FundEach member shall notify the Fund whether it intends to avail itself of the transitional arrangements in Section 2 of this Article, or whether it is prepared to accept the obligations of Article VIII, Sections 2, 3, and 4. A member availing itself of the transitional arrangements shall notify the Fund as soon thereafter as it is prepared to accept these obligations.Section 2. Exchange restrictionsA member that has notified the Fund that it intends to avail itself of transitional arrangements under this provision may, notwithstanding the provisions of any other articles of this Agreement, maintain

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and adapt to changing circumstances the restrictions on payments and transfers for current international transactions that were in effect on the date on which it became a member. Members shall, however, have continuous regard in their foreign exchange policies to the purposes ofthe Fund, and, as soon as conditions permit, they shall take all possible measures to develop such commercial and financial arrangements with other members as will facilitate international payments and the promotion of a stable system of exchange rates. In particular, members shall withdraw restrictions maintained under this Section as soon as they are satisfied that they will be able, in the absence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the general resources of the Fund.Section 3. Action of the Fund relating to restrictionsThe Fund shall make annual reports on the restrictions in force under Section 2 of this Article. Any member retaining any restrictions inconsistent with Article VIII, Sections 2, 3, or 4 shall consult the Fund annually as to their further retention. The Fund may, if it deems such action necessary in exceptional circumstances, make representations to any member that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions, inconsistent with the provisions of any other articles of this Agreement.The member shall be given a suitable time to reply to such representations.If the Fund finds that the member persists in maintainingArt. XIII, Sec. 3Art. XIV, Sec. 1–3XIV. Transitional Arrangementsrestrictions which are inconsistent with the purposes of the Fund, the member shall be subject to Article XXVI, Section 2(a).Article XVSpecial Drawing RightsSection 1. Authority to allocate special drawing rights (a) To meet the need, as and when it arises, for a supplement to existing reserve assets, the Fund is authorized to allocate special drawing rights in accordance with the provisions of Article XVIII to members that are participants in the Special Drawing Rights Department.(b) In addition, the Fund shall allocate special drawing rights to members that are participants in the Special Drawing Rights Department in accordance with the provisions of Schedule M.Section 2. Valuation of the special drawing rightThe method of valuation of the special drawing right shall be determined by the Fund by a seventy percent majority of the total voting power, provided, however, that an eighty-five percent majority of the total voting power shall be required for a change in the principle of valuation or a fundamental change in the application of the principle in effect.Article XVIGeneral Department and Special Drawing Rights DepartmentSection 1. Separation of operations and transactionsAll operations and transactions involving special drawing rights shall be conducted through the Special Drawing Rights Department. All other operations and transactions on the account of the Fund authorized by or under this Agreement shall be conducted through the General Department. Operations and transactions pursuant to Article XVII, Section 2 shall be conducted through the General Department as well as the Special Drawing Rights Department.Art. XV, Sec. 1–2Art. XVI, Sec. 1XV. Special Drawing Rights

Section 2. Separation of assets and propertyAll assets and property of the Fund, except resources administered under Article V, Section 2(b), shall be held in the General Department, provided that assets and property acquired under Article XX, Section 2 and Articles XXIV and XXV and Schedules H and I shall be held in the Special Drawing Rights

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Department. Any assets or property held in one Department shall not be available to discharge or meet the liabilities, obligations, or losses of the Fund incurred in the conduct of the operations and transactions of the other Department, except that the expenses of conducting the business of the Special Drawing Rights Department shall be paid by the Fund from the General Department which shall be reimbursed in special drawing rights from time to time by assessments under Article XX, Section 4 made on the basis of a reasonable estimate of such expenses.Section 3. Recording and informationAll changes in holdings of special drawing rights shall take effect only when recorded by the Fund in the Special Drawing Rights Department.Participants shall notify the Fund of the provisions of this Agreement under which special drawing rights are used. The Fund may require participants to furnish it with such other information as it deems necessary for its functions.Article XVIIParticipants and Other Holders of Special Drawing RightsSection 1. ParticipantsEach member of the Fund that deposits with the Fund an instrument setting forth that it undertakes all the obligations of a participant in the Special Drawing Rights Department in accordance with its law and that it has taken all steps necessary to enable it to carry out all of these obligations shall become a participant in the Special Drawing Rights Department as of the date the instrument is deposited, except that no member shall become a participant before the provisions of this Agreement pertaining exclusively to the Special Drawing Rights Department have entered into force and instruments have been deposited under thisArt. XVI, Sec. 2–3Art. XVII, Sec. 1XVI. General Department and Special Drawing Rights DepartmentSection by members that have at least seventy-five percent of the total of quotas.Section 2. Fund as a holderThe Fund may hold special drawing rights in the General Resources Account and may accept and use them in operations and transactions conducted through the General Resources Account with participants in accordance with the provisions of this Agreement or with prescribed holders in accordance with the terms and conditions prescribed under Section 3 of this Article.Section 3. Other holdersThe Fund may prescribe:(i) as holders, non-members, members that are non-participants, institutions that perform functions of a central bank for more than one member, and other official entities;(ii) the terms and conditions on which prescribed holders may be permitted to hold special drawing rights and may accept and use them in operations and transactions with participants and other prescribed holders; and(iii) the terms and conditions on which participants and the Fund through the General Resources Account may enter into operations and transactions in special drawing rights with prescribed holders.An eighty-five percent majority of the total voting power shall be required for prescriptions under (i) above. The terms and conditions prescribed by the Fund shall be consistent with the provisions of this Agreement and the effective functioning of the Special Drawing Rights Department.Art. XVII, Sec. 2–3XVII. Participants and Other Holders of Special Drawing RightsArticle XVIIIAllocation and Cancellation of Special Drawing RightsSection 1. Principles and considerations governing allocation and cancellation(a) In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing

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reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.(b) The first decision to allocate special drawing rights shall take into account, as special considerations, a collective judgment that there is a global need to supplement reserves, and the attainment of a better balance of payments equilibrium, as well as the likelihood of a betterworking of the adjustment process in the future.Section 2. Allocation and cancellation(a) Decisions of the Fund to allocate or cancel special drawing rights shall be made for basic periods which shall run consecutively and shall be five years in duration. The first basic period shall begin on the date of the first decision to allocate special drawing rights or such later dateas may be specified in that decision. Any allocations or cancellations shall take place at yearly intervals.(b) The rates at which allocations are to be made shall be expressed as percentages of quotas on the date of each decision to allocate. The rates at which special drawing rights are to be cancelled shall be expressed as percentages of net cumulative allocations of special drawing rights on the date of each decision to cancel. The percentages shall be the same for all participants.(c) In its decision for any basic period the Fund may provide, notwithstanding (a) and (b) above, that:(i) the duration of the basic period shall be other than five years; or(ii) the allocations or cancellations shall take place at other than yearly intervals; orArt. XVIII, Sec. 1–2XVIII. Allocation and Cancellation of Special Drawing Rights(iii) the basis for allocations or cancellations shall be the quotas or net cumulative allocations on dates other than the dates of decisions to allocate or cancel.(d) A member that becomes a participant after a basic period starts shall receive allocations beginning with the next basic period in which allocations are made after it becomes a participant unless the Fund decides that the new participant shall start to receive allocations beginning with the next allocation after it becomes a participant. If the Fund decides that a member that becomes a participant during a basic period shall receive allocations during the remainder of that basic period and the participant was not a member on the dates established under (b) or (c) above, the Fund shall determine the basis on which these allocations to the participant shall be made.(e) A participant shall receive allocations of special drawing rights made pursuant to any decision to allocate unless:(i) the Governor for the participant did not vote in favor of the decision; and(ii) the participant has notified the Fund in writing prior to the first allocation of special drawing rights under that decision that it does not wish special drawing rights to be allocated to it under the decision. On the request of a participant, the Fund may decide to terminate the effect of thenotice with respect to allocations of special drawing rights subsequent to the termination.(f) If on the effective date of any cancellation the amount of special drawing rights held by a participant is less than its share of the special drawing rights that are to be cancelled, the participant shall eliminate its negative balance as promptly as its gross reserve position permits and shall remain in consultation with the Fund for this purpose. Special drawing rights acquired by the participant after the effective date of the cancellation shall be applied against its negative balance and cancelled.Section 3. Unexpected major developmentsThe Fund may change the rates or intervals of allocation or cancellation during the rest of a basic period or change the length of a basic period or start a new basic period, if at any time the Fund finds it desirable to do so because of unexpected major developments.Art. XVIII, Sec. 3XVIII. Allocation and Cancellation of Special Drawing Rights

Section 4. Decisions on allocations and cancellations(a) Decisions under Section 2(a), (b), and (c) or Section 3 of this Article shall be made by the Board of Governors on the basis of proposals of the Managing Director concurred in by the Executive Board.

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(b) Before making any proposal, the Managing Director, after having satisfied himself that it will be consistent with the provisions of Section 1(a) of this Article, shall conduct such consultations as willenable him to ascertain that there is broad support among participants for the proposal. In addition, before making a proposal for the first allocation, the Managing Director shall satisfy himself that the provisions of Section 1(b) of this Article have been met and that there is broad support among participants to begin allocations; he shall make a proposal for the first allocation as soon after the establishment of the Special Drawing Rights Department as he is so satisfied.(c) The Managing Director shall make proposals:(i) not later than six months before the end of each basic period;(ii) if no decision has been taken with respect to allocation or cancellation for a basic period, whenever he is satisfied that the provisions of (b) above have been met;(iii) when, in accordance with Section 3 of this Article, he considers that it would be desirable to change the rate or intervals of allocation or cancellation or change the length of abasic period or start a new basic period; or(iv) within six months of a request by the Board of Governors or the Executive Board; provided that, if under (i), (iii), or (iv) above the Managing Director ascertains that there is no proposal which he considers to be consistent with the provisions of Section 1 of this Article that has broad support among participants in accordance with (b) above, he shall report to the Board of Governors and to the Executive Board.(d) An eighty-five percent majority of the total voting power shall be required for decisions under Section 2(a), (b), and (c) or Section 3 of this Article except for decisions under Section 3 with respect to a decrease in the rates of allocation.Art. XVIII, Sec. 4XVIII. Allocation and Cancellation of Special Drawing Rights

Article XIXOperations and Transactions in Special Drawing RightsSection 1. Use of special drawing rightsSpecial drawing rights may be used in the operations and transactions authorized by or under this Agreement.Section 2. Operations and transactions between participants(a) A participant shall be entitled to use its special drawing rights to obtain an equivalent amount of currency from a participant designatedunder Section 5 of this Article.(b) A participant, in agreement with another participant, may use its special drawing rights to obtain an equivalent amount of currency from the other participant.(c) The Fund, by a seventy percent majority of the total voting power, may prescribe operations in which a participant is authorized to engage in agreement with another participant on such terms and conditions as the Fund deems appropriate. The terms and conditions shall be consistent with the effective functioning of the Special Drawing Rights Department and the proper use of special drawing rights in accordance with this Agreement.(d) The Fund may make representations to a participant that enters into any operation or transaction under (b) or (c) above that in the judgment of the Fund may be prejudicial to the process of designation according to the principles of Section 5 of this Article or is otherwise inconsistent with Article XXII. A participant that persists in entering into such operations or transactions shall be subject to Article XXIII,Section 2(b).Section 3. Requirement of need(a) In transactions under Section 2(a) of this Article, except as otherwise provided in (c) below, a participant will be expected to use its special drawing rights only if it has a need because of its balance of payments or its reserve position or developments in its reserves, and not for the sole purpose of changing the composition of its reserves.

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Art. XIX, Sec. 1–3XIX. Operations and Transactions in Special Drawing Rights(b) The use of special drawing rights shall not be subject to challenge on the basis of the expectation in (a) above, but the Fund may make representations to a participant that fails to fulfill this expectation. A participant that persists in failing to fulfill this expectation shall be subject to Article XXIII, Section 2(b).(c) The Fund may waive the expectation in (a) above in any transactions in which a participant uses special drawing rights to obtain an equivalent amount of currency from a participant designated underSection 5 of this Article that would promote reconstitution by the other participant under Section 6(a) of this Article; prevent or reduce a negative balance of the other participant; or offset the effect of a failure by the other participant to fulfill the expectation in (a) above.Section 4. Obligation to provide currency(a) A participant designated by the Fund under Section 5 of this Article shall provide on demand a freely usable currency to a participant using special drawing rights under Section 2(a) of this Article. Aparticipant’s obligation to provide currency shall not extend beyond the point at which its holdings of special drawing rights in excess of its net cumulative allocation are equal to twice its net cumulative allocation or such higher limit as may be agreed between a participant and the Fund.(b) A participant may provide currency in excess of the obligatory limit or any agreed higher limit.Section 5. Designation of participants to provide currency(a) The Fund shall ensure that a participant will be able to use its special drawing rights by designating participants to provide currency for specified amounts of special drawing rights for the purposes of Sections 2(a) and 4 of this Article. Designations shall be made in accordancewith the following general principles supplemented by such other principles as the Fund may adopt from time to time:(i) A participant shall be subject to designation if its balance of payments and gross reserve position is sufficiently strong, but this will not preclude the possibility that a participant with a strong reserve position will be designated even though it has a moderate balance of payments deficit.Participants shall be designated in such manner as willArt. XIX, Sec. 4–5XIX. Operations and Transactions in Special Drawing Rightspromote over time a balanced distribution of holdings of special drawing rights among them.(ii) Participants shall be subject to designation in order to promote reconstitution under Section 6(a) of this Article, to reduce negative balances in holdings of special drawing rights, or to offset the effect of failures to fulfill the expectation in Section 3(a) of this Article.(iii) In designating participants, the Fund normally shall give priority to those that need to acquire special drawing rights to meet the objectives of designation under (ii) above.(b) In order to promote over time a balanced distribution of holdings of special drawing rights under (a)(i) above, the Fund shall apply the rules for designation in Schedule F or such rules as may be adopted under (c) below.(c) The rules for designation may be reviewed at any time and new rules shall be adopted if necessary. Unless new rules are adopted, the rules in force at the time of the review shall continue to apply.Section 6. Reconstitution(a) Participants that use their special drawing rights shall reconstitute their holdings of them in accordance with the rules for reconstitution in Schedule G or such rules as may be adopted under (b) below.(b) The rules for reconstitution may be reviewed at any time and new rules shall be adopted if necessary. Unless new rules are adopted or a decision is made to abrogate rules for reconstitution, the rules in force at the time of review shall continue to apply. A seventy percentmajority of the total voting power shall be required for decisions to adopt, modify, or abrogate the rules for reconstitution.

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Section 7. Exchange rates(a) Except as otherwise provided in (b) below, the exchange rates for transactions between participants under Section 2(a) and (b) of this Article shall be such that participants using special drawing rights shall receive the same value whatever currencies might be provided andwhichever participants provide those currencies, and the Fund shall adopt regulations to give effect to this principle.Art. XIX, Sec. 6–7XIX. Operations and Transactions in Special Drawing Rights(b) The Fund, by an eighty-five percent majority of the total voting power, may adopt policies under which in exceptional circumstances the Fund, by a seventy percent majority of the total voting power, may authorize participants entering into transactions under Section 2(b) of this Article to agree on exchange rates other than those applicable under (a) above.(c) The Fund shall consult a participant on the procedure for determining rates of exchange for its currency.(d) For the purpose of this provision the term participant includes a terminating participant.Article XXSpecial Drawing Rights Department Interest and ChargesSection 1. InterestInterest at the same rate for all holders shall be paid by the Fund to each holder on the amount of its holdings of special drawing rights. The Fund shall pay the amount due to each holder whether or not sufficient charges are received to meet the payment of interest.Section 2. ChargesCharges at the same rate for all participants shall be paid to the Fund by each participant on the amount of its net cumulative allocation of special drawing rights plus any negative balance of the participant or unpaid charges.Section 3. Rate of interest and chargesThe Fund shall determine the rate of interest by a seventy percent majority of the total voting power. The rate of charges shall be equal to the rate of interest.Section 4. AssessmentsWhen it is decided under Article XVI, Section 2 that reimbursement shall be made, the Fund shall levy assessments for this purpose at the same rate for all participants on their net cumulative allocations.Art. XX, Sec. 1–4XX. Special Drawing Rights Department Interest and ChargesSection 5. Payment of interest, charges, and assessments Interest, charges, and assessments shall be paid in special drawing rights. A participant that needs special drawing rights to pay any charge or assessment shall be obligated and entitled to obtain them, for currency acceptable to the Fund, in a transaction with the Fund conducted through the General Resources Account. If sufficient special drawing rights cannot be obtained in this way, the participant shall be obligated and entitled to obtain them with a freely usable currency from a participant which the Fund shall specify. Special drawing rights acquired by a participant after the date for payment shall be applied against its unpaid charges and cancelled.Article XXIAdministration of the General Department and theSpecial Drawing Rights Department(a) The General Department and the Special Drawing Rights Department shall be administered in accordance with the provisions of Article XII, subject to the following provisions:(i) For meetings of or decisions by the Board of Governors on matters pertaining exclusively to the Special Drawing Rights Department only requests by, or the presence and the votes of, Governors appointed by members that are participants shall be counted for the purpose of callingmeetings and determining whether a quorum exists or whether a decision is made by the required majority.

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(ii) For decisions by the Executive Board on matters pertaining exclusively to the Special Drawing Rights Department only Executive Directors elected by at least one member that is a participant shall be entitled to vote. Each of these Executive Directors shall be entitled to cast the number of votes allotted to the members that are participants whose votes counted towards his election. Only thepresence of Executive Directors elected by members that are participants and the votes allotted to members that are participants shall be counted for the purpose of determining whether a quorum exists or whether a decision is made by the required majority.Art. XX, Sec. 5Art. XXIXXI. Administration of the General Department and the SDR Department

(iii) Questions of the general administration of the Fund, including reimbursement under Article XVI, Section 2, and any question whether a matter pertains to both Departments or exclusively to the Special Drawing Rights Department shall be decided as if they pertained exclusively to the General Department. Decisions with respect to the method of valuation of the special drawing right,the acceptance and holding of special drawing rights in the General Resources Account of the General Department and the use of them, and other decisions affecting the operations and transactions conducted through both the General Resources Account of the General Departmentand the Special Drawing Rights Department shall be made by the majorities required for decisions on matters pertaining exclusively to each Department. A decision on a matter pertaining to the Special Drawing Rights Department shall so indicate.(b) In addition to the privileges and immunities that are accorded under Article IX of this Agreement, no tax of any kind shall be levied on special drawing rights or on operations or transactions in specialdrawing rights.(c) A question of interpretation of the provisions of this Agreement on matters pertaining exclusively to the Special Drawing Rights Department shall be submitted to the Executive Board pursuant toArticle XXIX(a) only on the request of a participant. In any case where the Executive Board has given a decision on a question of interpretation pertaining exclusively to the Special Drawing Rights Department only a participant may require that the question be referred to the Board ofGovernors under Article XXIX(b). The Board of Governors shall decide whether a Governor appointed by a member that is not a participant shall be entitled to vote in the Committee on Interpretation on questions pertaining exclusively to the Special Drawing Rights Department.(d) Whenever a disagreement arises between the Fund and a participant that has terminated its participation in the Special Drawing Rights Department or between the Fund and any participant during the liquidation of the Special Drawing Rights Department with respect to any matter arising exclusively from participation in the Special Drawing Rights Department, the disagreement shall be submitted to arbitration in accordance with the procedures in Article XXIX(c).Art. XXIXXI. Administration of the General Department and the SDR DepartmentArticle XXIIGeneral Obligations of ParticipantsIn addition to the obligations assumed with respect to special drawing rights under other articles of this Agreement, each participant undertakes to collaborate with the Fund and with other participants in order to facilitate the effective functioning of the Special Drawing Rights Department and the proper use of special drawing rights in accordance with this Agreement and with the objective of making the special drawing right the principal reserve asset in the international monetary system.Article XXIIISuspension of Operations and Transactions in Special Drawing RightsSection 1. Emergency provisionsIn the event of an emergency or the development of unforeseen circumstances threatening the activities of the Fund with respect to the Special Drawing Rights Department, the Executive Board, by an eighty-five percent majority of the total voting power, may suspend for a period of not more than

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one year the operation of any of the provisions relating to operations and transactions in special drawing rights, and the provisions of Article XXVII, Section l(b), (c), and (d) shall then apply.Section 2. Failure to fulfill obligations(a) If the Fund finds that a participant has failed to fulfill its obligations under Article XIX, Section 4, the right of the participant to use its special drawing rights shall be suspended unless the Fund otherwise decides.(b) If the Fund finds that a participant has failed to fulfill any other obligation with respect to special drawing rights, the Fund may suspendArt. XXIIArt. XXIII, Sec. 1–2XXII. General Obligations of Participantsthe right of the participant to use special drawing rights it acquires after the suspension.(c) Regulations shall be adopted to ensure that before action is taken against any participant under (a) or (b) above, the participant shall be informed immediately of the complaint against it and givenan adequate opportunity for stating its case, both orally and in writing. Whenever the participant is thus informed of a complaint relating to (a) above, it shall not use special drawing rights pending the disposition of the complaint.(d) Suspension under (a) or (b) above or limitation under (c) above shall not affect a participant’s obligation to provide currency in accordance with Article XIX, Section 4.(e) The Fund may at any time terminate a suspension under (a) or (b) above, provided that a suspension imposed on a participant under (b) above for failure to fulfill the obligations under Article XIX, Section 6(a) shall not be terminated until one hundred eighty days after the end of the first calendar quarter during which the participant complies with the rules for reconstitution.(f) The right of a participant to use its special drawing rights shall not be suspended because it has become ineligible to use the Fund’s general resources under Article V, Section 5, Article VI, Section 1, or Article XXVI, Section 2(a). Article XXVI, Section 2 shall not apply because a participant has failed to fulfill any obligations with respect to special drawing rights.Article XXIVTermination of ParticipationSection 1. Right to terminate participation(a) Any participant may terminate its participation in the Special Drawing Rights Department at any time by transmitting a notice in writing to the Fund at its principal office. Termination shall become effective on the date the notice is received.(b) A participant that withdraws from membership in the Fund shall be deemed to have simultaneously terminated its participation in the Special Drawing Rights Department.Art. XXIV, Sec. 1XXIII. Suspension of Operations and Transactions in Special Drawing RightsSection 2. Settlement on termination(a) When a participant terminates its participation in the Special Drawing Rights Department, all operations and transactions by the terminating participant in special drawing rights shall cease except as otherwise permitted under an agreement made pursuant to (c) below in order to facilitate a settlement or as provided in Sections 3, 5, and 6 of this Article or in Schedule H. Interest and charges that accrued to the date of termination and assessments levied before that date but not paidshall be paid in special drawing rights.(b) The Fund shall be obligated to redeem all special drawing rights held by the terminating participant, and the terminating participant shall be obligated to pay to the Fund an amount equal to its net cumulative allocation and any other amounts that may be due and payable because of its participation in the Special Drawing Rights Department. These obligations shall be set off against each other and the amount of special drawing rights held by the terminating participant that is usedin the setoff to extinguish its obligation to the Fund shall be cancelled.

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(c) A settlement shall be made with reasonable despatch by agreement between the terminating participant and the Fund with respect to any obligation of the terminating participant or the Fund after the setoff in (b) above. If agreement on a settlement is not reached promptly theprovisions of Schedule H shall apply.Section 3. Interest and chargesAfter the date of termination the Fund shall pay interest on any outstanding balance of special drawing rights held by a terminating participant and the terminating participant shall pay charges on any outstanding obligation owed to the Fund at the times and rates prescribed under Article XX. Payment shall be made in special drawing rights.A terminating participant shall be entitled to obtain special drawing rights with a freely usable currency to pay charges or assessments in a transaction with a participant specified by the Fund or by agreement from any other holder, or to dispose of special drawing rights received as interest in a transaction with any participant designated under ArticleXIX, Section 5 or by agreement with any other holder.Art. XXIV, Sec. 2–3XXIV. Termination of ParticipationSection 4. Settlement of obligation to the FundCurrency received by the Fund from a terminating participant shall be used by the Fund to redeem special drawing rights held by participants in proportion to the amount by which each participant’s holdings of special drawing rights exceed its net cumulative allocation at the time the currency is received by the Fund. Special drawing rights so redeemed and special drawing rights obtained by a terminating participant under the provisions of this Agreement to meet any installmentdue under an agreement on settlement or under Schedule H and set off against that installment shall be cancelled.Section 5. Settlement of obligation to a terminating participantWhenever the Fund is required to redeem special drawing rights held by a terminating participant, redemption shall be made with currency provided by participants specified by the Fund. These participants shall be specified in accordance with the principles in Article XIX, Section 5.Each specified participant shall provide at its option the currency of the terminating participant or a freely usable currency to the Fund and shall receive an equivalent amount of special drawing rights. However, a terminating participant may use its special drawing rights to obtain its own currency, a freely usable currency, or any other asset from any holder, if the Fund so permits.Section 6. General Resources Account transactionsIn order to facilitate settlement with a terminating participant, the Fund may decide that a terminating participant shall:(i) use any special drawing rights held by it after the setoff in Section 2(b) of this Article, when they are to be redeemed, in a transaction with the Fund conducted through the General Resources Account to obtain its own currency or a freely usable currency at the option of the Fund; or(ii) obtain special drawing rights in a transaction with the Fund conducted through the General Resources Account for a currency acceptable to the Fund to meet any charges or installment due under an agreement or the provisions of Schedule H.Art. XXIV, Sec. 4–6XXIV. Termination of ParticipationArticle XXVLiquidation of the Special Drawing Rights Department(a) The Special Drawing Rights Department may not be liquidated except by decision of the Board of Governors. In an emergency, if the Executive Board decides that liquidation of the Special Drawing Rights Department may be necessary, it may temporarily suspend allocations or cancellations and all operations and transactions in special drawing rights pending decision by the Board of Governors. A decision by the Board of Governors to liquidate the Fund shall be a decision to liquidate both the General Department and the Special Drawing Rights Department.

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(b) If the Board of Governors decides to liquidate the Special Drawing Rights Department, all allocations or cancellations and all operations and transactions in special drawing rights and the activities of the Fund with respect to the Special Drawing Rights Department shallcease except those incidental to the orderly discharge of the obligations of participants and of the Fund with respect to special drawing rights, and all obligations of the Fund and of participants under this Agreement with respect to special drawing rights shall cease except those set out in this Article, Article XX, Article XXI(d), Article XXIV, Article XXIX(c), and Schedule H, or any agreement reached under Article XXIV subject to paragraph 4 of Schedule H, and Schedule I.(c) Upon liquidation of the Special Drawing Rights Department, interest and charges that accrued to the date of liquidation and assessments levied before that date but not paid shall be paid in special drawing rights. The Fund shall be obligated to redeem all special drawing rights held by holders, and each participant shall be obligated to pay the Fund an amount equal to its net cumulative allocation of special drawing rights and such other amounts as may be due and payable because of its participation in the Special Drawing Rights Department.(d) Liquidation of the Special Drawing Rights Department shall be administered in accordance with the provisions of Schedule I.Art. XXVXXV. Liquidation of the Special Drawing Rights DepartmentArticle XXVIWithdrawal from MembershipSection 1. Right of members to withdrawAny member may withdraw from the Fund at any time by transmitting a notice in writing to the Fund at its principal office. Withdrawal shall become effective on the date such notice is received.Section 2. Compulsory withdrawal(a) If a member fails to fulfill any of its obligations under this Agreement, the Fund may declare the member ineligible to use the general resources of the Fund. Nothing in this Section shall be deemed to limit the provisions of Article V, Section 5 or Article VI, Section 1.(b) If, after the expiration of a reasonable period following a declaration of ineligibility under (a) above, the member persists in its failure to fulfill any of its obligations under this Agreement, the Fund may, by a seventy percent majority of the total voting power, suspend the votingrights of the member. During the period of the suspension, the provisions of Schedule L shall apply. The Fund may, by a seventy percent majority of the total voting power, terminate the suspension at any time.(c) If, after the expiration of a reasonable period following a decision of suspension under (b) above, the member persists in its failure to fulfill any of its obligations under this Agreement, that member may be required to withdraw from membership in the Fund by a decision of the Board of Governors carried by a majority of the Governors having eighty-five percent of the total voting power.(d) Regulations shall be adopted to ensure that before action is taken against any member under (a), (b), or (c) above, the member shall be informed in reasonable time of the complaint against it and given an adequate opportunity for stating its case, both orally and in writing.Section 3. Settlement of accounts with members withdrawingWhen a member withdraws from the Fund, normal operations and transactions of the Fund in its currency shall cease and settlement of all accounts between it and the Fund shall be made with reasonable despatch by agreement between it and the Fund. If agreement is notArt. XXVI, Sec. 1–3XXVI. Withdrawal from Membershipreached promptly, the provisions of Schedule J shall apply to the settlementof accounts.Article XXVIIEmergency ProvisionsSection 1. Temporary suspension

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(a) In the event of an emergency or the development of unforeseen circumstances threatening the activities of the Fund, the Executive Board, by an eighty-five percent majority of the total voting power, may suspend for a period of not more than one year the operation ofany of the following provisions:(i) Article V, Sections 2, 3, 7, 8(a)(i) and (e);(ii) Article VI, Section 2;(iii) Article XI, Section 1;(iv) Schedule C, paragraph 5.(b) A suspension of the operation of a provision under (a) above may not be extended beyond one year except by the Board of Governors which, by an eighty-five percent majority of the total votingpower, may extend a suspension for an additional period of not more than two years if it finds that the emergency or unforeseen circumstances referred to in (a) above continue to exist.(c) The Executive Board may, by a majority of the total voting power, terminate such suspension at any time.(d) The Fund may adopt rules with respect to the subject matter of a provision during the period in which its operation is suspended.Section 2. Liquidation of the Fund(a) The Fund may not be liquidated except by decision of the Board of Governors. In an emergency, if the Executive Board decides that liquidation of the Fund may be necessary, it may temporarily suspend all operations and transactions, pending decision by the Board of Governors.Art. XXVII, Sec. 1–2XXVII. Emergency Provisions(b) If the Board of Governors decides to liquidate the Fund, the Fund shall forthwith cease to engage in any activities except those incidental to the orderly collection and liquidation of its assets and the settlement of its liabilities, and all obligations of members under this Agreement shall cease except those set out in this Article, in Article XXIX(c), inSchedule J, paragraph 7, and in Schedule K.(c) Liquidation shall be administered in accordance with the provisions of Schedule K.Article XXVIIIAmendments(a) Any proposal to introduce modifications in this Agreement, whether emanating from a member, a Governor, or the Executive Board, shall be communicated to the chairman of the Board of Governorswho shall bring the proposal before the Board of Governors. If the proposed amendment is approved by the Board of Governors, the Fund shall, by circular letter or telegram, ask all members whether they accept the proposed amendment. When three-fifths of the members, having eighty-five percent of the total voting power, have accepted the proposed amendment, the Fund shall certify the fact by a formal communication addressed to all members.(b) Notwithstanding (a) above, acceptance by all members is required in the case of any amendment modifying:(i) the right to withdraw from the Fund (Article XXVI, Section1);(ii) the provision that no change in a member’s quota shall be made without its consent (Article III, Section 2(d)); and(iii) the provision that no change may be made in the par value of a member’s currency except on the proposal of that member (Schedule C, paragraph 6).(c) Amendments shall enter into force for all members three months after the date of the formal communication unless a shorter period is specified in the circular letter or telegram.Art. XXVIIIXXVIII. AmendmentsArticle XXIXInterpretation(a) Any question of interpretation of the provisions of this Agreement arising between any member and the Fund or between any members of the Fund shall be submitted to the Executive Board for its

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decision. If the question particularly affects any member, it shall be entitled to representation in accordance with Article XII, Section 3(j).(b) In any case where the Executive Board has given a decision under (a) above, any member may require, within three months from the date of the decision, that the question be referred to the Board of Governors, whose decision shall be final. Any question referred to the Board of Governors shall be considered by a Committee on Interpretation of the Board of Governors. Each Committee member shall have one vote. The Board of Governors shall establish the membership, procedures, and voting majorities of the Committee. A decision of the Committee shall be the decision of the Board of Governors unless the Board of Governors, by an eighty-five percent majority of the total voting power, decides otherwise. Pending the result of the reference to the Board of Governors the Fund may, so far as it deems necessary, act on the basis of the decision of the Executive Board.(c) Whenever a disagreement arises between the Fund and a member which has withdrawn, or between the Fund and any member during liquidation of the Fund, such disagreement shall be submitted to arbitration by a tribunal of three arbitrators, one appointed by the Fund,another by the member or withdrawing member, and an umpire who, unless the parties otherwise agree, shall be appointed by the President of the International Court of Justice or such other authority as may have been prescribed by regulation adopted by the Fund. The umpire shallhave full power to settle all questions of procedure in any case where the parties are in disagreement with respect thereto.Article XXXExplanation of Terms In interpreting the provisions of this Agreement the Fund and its members shall be guided by the following provisions:Art. XXIXArt. XXXXXIX. Interpretation(a) The Fund’s holdings of a member’s currency in the General Resources Account shall include any securities accepted by the Fund under Article III, Section 4.(b) Stand-by arrangement means a decision of the Fund by which a member is assured that it will be able to make purchases from the General Resources Account in accordance with the terms of the decision during a specified period and up to a specified amount.(c) Reserve tranche purchase means a purchase by a member of special drawing rights or the currency of another member in exchange for its own currency which does not cause the Fund’s holdings of the member’s currency in the General Resources Account to exceed its quota, provided that for the purposes of this definition the Fund may exclude purchases and holdings under:(i) policies on the use of its general resources for compensatory financing of export fluctuations;(ii) policies on the use of its general resources in connection with the financing of contributions to international buffer stocks of primary products; and(iii) other policies on the use of its general resources in respect of which the Fund decides, by an eighty-five percent majority of the total voting power, that an exclusion shallbe made.(d) Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:(1) all payments due in connection with foreign trade, other current business, including services, and normal shortterm banking and credit facilities;(2) payments due as interest on loans and as net income from other investments;(3) payments of moderate amount for amortization of loans or for depreciation of direct investments; and(4) moderate remittances for family living expenses.The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions.Art. XXXXXX. Explanation of Terms

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(e) Net cumulative allocation of special drawing rights means the total amount of special drawing rights allocated to a participant less its share of special drawing rights that have been cancelled under ArticleXVIII, Section 2(a).(f) A freely usable currency means a member’s currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.(g) Members that were members on August 31, 1975 shall be deemed to include a member that accepted membership after that date pursuant to a resolution of the Board of Governors adopted before that date.(h) Transactions of the Fund means exchanges of monetary assets by the Fund for other monetary assets. Operations of the Fund means other uses or receipts of monetary assets by the Fund.(i) Transactions in special drawing rights means exchanges of special drawing rights for other monetary assets. Operations in special drawing rights means other uses of special drawing rights.Article XXXIFinal ProvisionsSection 1. Entry into forceThis Agreement shall enter into force when it has been signed on behalf of governments having sixty-five percent of the total of the quotas set forth in Schedule A and when the instruments referred to in Section 2(a) of this Article have been deposited on their behalf, but in no event shall this Agreement enter into force before May 1, 1945.Section 2. Signature(a) Each government on whose behalf this Agreement is signed shall deposit with the Government of the United States of America an instrument setting forth that it has accepted this Agreement in accordance with its law and has taken all steps necessary to enable it to carry out all of its obligations under this Agreement.Art. XXXI, Sec. 1–2XXX. Explanation of Terms(b) Each country shall become a member of the Fund as from the date of the deposit on its behalf of the instrument referred to in (a) above, except that no country shall become a member before thisAgreement enters into force under Section 1 of this Article.(c) The Government of the United States of America shall inform the governments of all countries whose names are set forth in Schedule A, and the governments of all countries whose membership is approved in accordance with Article II, Section 2, of all signatures of this Agreement and of the deposit of all instruments referred to in (a) above.(d) At the time this Agreement is signed on its behalf, each government shall transmit to the Government of the United States of America one one-hundredth of one percent of its total subscription in gold or United States dollars for the purpose of meeting administrative expenses of the Fund. The Government of the United States of America shall hold such funds in a special deposit account and shall transmit them to the Board of Governors of the Fund when the initial meetinghas been called. If this Agreement has not come into force by December 31, 1945, the Government of the United States of America shall return such funds to the governments that transmitted them.(e) This Agreement shall remain open for signature at Washington on behalf of the governments of the countries whose names are set forth in Schedule A until December 31, 1945.(f) After December 31, 1945, this Agreement shall be open for signature on behalf of the government of any country whose membership has been approved in accordance with Article II, Section 2.(g) By their signature of this Agreement, all governments accept it both on their own behalf and in respect of all their colonies, overseas territories, all territories under their protection, suzerainty, or authority, and all territories in respect of which they exercise a mandate.(h) Subsection (d) above shall come into force with regard to each signatory government as from the date of its signature.

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[The signature and depositary clause reproduced below followed the text of Article XX in the original Articles of Agreement]Art. XXXIXXXI. Final Provisions

Done at Washington, in a single copy which shall remain depositedin the archives of the Government of the United States of America,which shall transmit certified copies to all governments whose namesare set forth in Schedule A and to all governments whose membershipis approved in accordance with Article II, Section 2.Art. XXXIXXXI. Final Provisions

Australia . . . . . . . . . . . . . . . 200Belgium . . . . . . . . . . . . . . . 225Bolivia . . . . . . . . . . . . . . . . . 10Brazil . . . . . . . . . . . . . . . . . 150Canada . . . . . . . . . . . . . . . . 300Chile . . . . . . . . . . . . . . . . . . . 50China . . . . . . . . . . . . . . . . . 550Colombia . . . . . . . . . . . . . . . 50Costa Rica . . . . . . . . . . . . . . . 5Cuba . . . . . . . . . . . . . . . . . . . 50Czechoslovakia . . . . . . . . . 125Denmark* . . . . . . . . . . . . . . . . *Dominican Republic . . . . . . . 5Ecuador . . . . . . . . . . . . . . . . . 5Egypt . . . . . . . . . . . . . . . . . . 45El Salvador . . . . . . . . . . . . . 2.5Ethiopia . . . . . . . . . . . . . . . . . 6France . . . . . . . . . . . . . . . . . 450Greece . . . . . . . . . . . . . . . . . 40Guatemala . . . . . . . . . . . . . . . 5Haiti . . . . . . . . . . . . . . . . . . . . 5Honduras . . . . . . . . . . . . . . 2.5Iceland . . . . . . . . . . . . . . . . . . 1India . . . . . . . . . . . . . . . . . . 400Iran . . . . . . . . . . . . . . . . . . . . 25Iraq . . . . . . . . . . . . . . . . . . . . . 8Liberia . . . . . . . . . . . . . . . . . .5Luxembourg . . . . . . . . . . . . . 10Mexico . . . . . . . . . . . . . . . . . 90Netherlands . . . . . . . . . . . . 275New Zealand . . . . . . . . . . . . 50Nicaragua . . . . . . . . . . . . . . . . 2Norway . . . . . . . . . . . . . . . . . 50Panama . . . . . . . . . . . . . . . . . .5Paraguay . . . . . . . . . . . . . . . . . 2Peru . . . . . . . . . . . . . . . . . . . 25Philippine Commonwealth. . . . 15Poland . . . . . . . . . . . . . . . . 125Union of South Africa. . . . . 100

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Union of Soviet SocialistRepublics . . . . . . . . . . . 1200United Kingdom . . . . . . . . 1300United States . . . . . . . . . . 2750Uruguay . . . . . . . . . . . . . . . . 15Venezuela . . . . . . . . . . . . . . . 15Yugoslavia . . . . . . . . . . . . . . 60

B. Artikelen van de IBRD

a par value of $100,000 each, which shall be available for subscription only by members. (b) The capital stock may be increased when the Bank deems it advisable by a three-fourths majority of the total voting power. SECTION 3. Subscription of Shares(a) Each member shall subscribe shares of the capital stock of the Bank. The minimum number of shares to be subscribed by the original members shall be those set forth in Schedule A. The minimum number of shares to be subscribed by other members shall be determined by the Bank, which shall reserve a sufficient portion of its capital stock for subscription by such members. (b) The Bank shall prescribe rules laying down the conditions under which members may subscribe shares of the authorized capital stock of the Bank in addition to their minimum subscriptions. 1. As of April 27, 1988, the authorized capital stock of the Bank had been increased to 1,420,500 shares. (c) If the authorized capital stock of the Bank is increased, each member shall have a reasonable opportunity to subscribe, under such conditions as the Bank shall decide, a proportion of the increase of stock equivalent to the proportion which its stock theretofore subscribed bears to the total capital stock of the Bank, but no member shall be obligated to subscribe any part of the increased capital. SECTION 4. Issue Price of SharesShares included in the minimum subscriptions of original members shall be issued at par. Other shares shall be issued at par unless the Bank by a majority of the total voting power decides in special circumstances to issue them on other terms. SECTION 5. Division and Calls of Subscribed CapitalThe subscription of each member shall be divided into two parts as follows: (i) twenty percent shall be paid or subject to call under Section 7 (i) of this Article as needed by the Bank for its operations; (ii) the remaining eighty percent shall be subject to call by the Bank only when required to meet obligations of the Bank created under Article IV, Sections 1 (a) (ii) and (iii). Calls on unpaid subscriptions shall be uniform on all shares. SECTION 6. Limitation on LiabilityLiability on shares shall be limited to the unpaid portion of the issue price of the shares. SECTION 7. Method of Payment of Subscriptions for SharesPayment of subscriptions for shares shall be made in gold or United States dollars and in the currencies of the members as follows: (i) under Section 5 (i) of this Article, two percent of the price of each share shall be payable in gold or United States dollars, and, when calls are made, the remaining eighteen percent shall be paid in the currency of the member; (ii) when a call is made under Section 5 (ii) of this Article, payment may be made at the option of the member either in gold, in United States dollars or in the currency required to discharge the obligations of the Bank for the purpose for which the call is made; (iii) when a member makes payments in any currency under (i) and (ii) above, such payments shall be made in amounts equal in value to the member's liability under the call. This liability shall

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be a proportionate part of the subscribed capital stock of the Bank as authorized and defined in Section 2 of this Article. SECTION 8. Time of Payment of Subscriptions(a) The two percent payable on each share in gold or United States dollars under Section 7 (i) of this Article, shall be paid within sixty days of the date on which the Bank begins operations, provided that (i) any original member of the Bank whose metropolitan territory has suffered from enemy occupation or hostilities during the present war shall be granted the right to postpone payment of one-half percent until five years after that date; (ii) an original member who cannot make such a payment because it has not recovered possession of its gold reserves which are still seized or immobilized as a result of the war may postpone an payment until such date as the Bank shall decide. (b) The remainder of the price of each share payable under Section 7 (i) of this Article shall be paid as and when called by the Bank, provided that (i) the Bank shall, within one year of its beginning operations, call not less than eight percent of the price of the share in addition to the payment of two percent referred to in (a) above; (ii) not more than five percent of the price of the share shall be called in any period of three months. SECTION 9. Maintenance of Value of Certain Currency Holdings of the Bank(a) Whenever (i) the par value of a member's currency is reduced, or (ii) the foreign exchange value of a member's currency has, in the opinion of the Bank, depreciated to a significant extent within that member's territories, the member shall pay to the Bank within a reasonable time an additional amount of its own currency sufficient to maintain the value, as of the time of initial subscription, of the amount of the currency of such member which is held by the Bank and derived from currency originally paid in to the Bank by the member under Article II, Section 7 (i), from currency referred to in Article IV, Section 2 (b), or from any additional currency furnished under the provisions of the present paragraph, and which has not been repurchased by the member for gold or for the currency of any member which is acceptable to the Bank. (b) Whenever the par value of a member’s currency is increased, the Bank shall return to such member within a reasonable time an amount of that member's currency equal to the increase in the value of the amount of such currency described in (a) above. (c) The provisions of the preceding paragraphs may be waived by the Bank when a uniform proportionate change in the par values of the currencies of all its members is made by the International Monetary Fund. SECTION 10. Restriction on Disposal of SharesShares shall not be pledged or encumbered in any manner whatever and they shall be transferable only to the Bank. IBRD Articles of Agreement III General Provisions Relating to Loans and GuaranteesSECTION 1. Use of Resources(a) The resources and the facilities of the Bank shall be used exclusively for the benefit of members with equitable consideration to projects for development and projects for reconstruction alike. (b) For the purpose of facilitating the restoration and reconstruction of the economy of members whose metropolitan territories have suffered great devastation from enemy occupation or hostilities, the Bank, in determining the conditions and terms of loans made to such members, shall pay special regard to lightening the financial burden and expediting the completion of such restoration and reconstruction. SECTION 2. Dealings between Members and the BankEach member shall deal with the Bank only through its Treasury, central bank, stabilization fund or other similar fiscal agency, and the Bank shall deal with members only by or through the same agencies. SECTION 3. Limitations on Guarantees and Borrowings of the Bank

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The total amount outstanding of guarantees, participations in loans and direct loans made by the Bank shall not be increased at any time, if by such increase the total would exceed one hundred percent of the unimpaired subscribed capital, reserves and surplus of the Bank. SECTION 4. Conditions on which the Bank may Guarantee or Make LoansThe Bank may guarantee, participate in, or make loans to any member or any political sub-division thereof and any business, industrial, and agricultural enterprise in the territories of a member, subject to the following conditions: (i) When the member in whose territories the project is located is not itself the borrower, the member or the central bank or some comparable agency of the member which is acceptable to the Bank, fully guarantees the repayment of the principal and the payment of interest and other charges on the loan. (ii) The Bank is satisfied that in the prevailing market conditions the borrower would be unable otherwise to obtain the loan under conditions which in the opinion of the Bank are reasonable for the borrower. (iii) A competent committee, as provided for in Article V, Section 7, has submitted a written report recommending the project after a careful study of the merits of the proposal. (iv) In the opinion of the Bank the rate of interest and other charges are reasonable and such rate, charges and the schedule for repayment of principal are appropriate to the project. (v) In making or guaranteeing a loan, the Bank shall pay due regard to the prospects that the borrower, and, if the borrower is not a member, that the guarantor, will be in position to meet its obligations under the loan; and the Bank shall act prudently in the interests both of the particular member in whose territories the project is located and of the members as a whole. (vi) In guaranteeing a loan made by other investors, the Bank receives suitable compensation for its risk. (vii) Loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development. SECTION 5. Use of Loans Guaranteed, Participated in or Made by the Bank(a) The Bank shall impose no conditions that the proceeds of a loan shall be spent in the territories of any particular member or members. (b) The Bank shall make arrangements to ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency and without regard to political or other non-economic influences or considerations. (c) In the case of loans made by the Bank, it shall open an account in the name of the borrower and the amount of the loan shall be credited to this account in the currency or currencies in which the loan is made. The borrower shall be permitted by the Bank to draw on this account only to meet expenses in connection with the project as they are actually incurred. SECTION 6. Loans to the International Finance Corporation(1)(a) The Bank may make, participate in, or guarantee loans to the International Finance Corporation, an affiliate of the Bank, for use in its lending operations. The total amount outstanding of such loans, participations and guarantees shall not be increased if, at the time or as a result thereof, the aggregate amount of debt (including the guarantee of any debt) incurred by the said Corporation from any source and then outstanding shall exceed an amount equal to four times its unimpaired subscribed capital and surplus. (b) The provisions of Article III, Sections 4 and 5 (c) and of Article IV, Section 3 shall not apply to loans, participations and guarantees authorized by this Section. IBRD Article IVOperationsSECTION 1. Methods of Making or Facilitating Loans(a) The Bank may make or facilitate loans which satisfy the general conditions of Article III in any of the following ways:

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(i) By making or participating in direct loans out of its own funds corresponding to its unimpaired paid-up capital and surplus and, subject to Section 6 of this Article, to its reserves. 2. Section added by amendment effective December 17, 1965. (ii) By making or participating in direct loans out of funds raised in the market of a member, or otherwise borrowed by the Bank. (iii) By guaranteeing in whole or in part loans made by private investors through the usual investment channels. (b) The Bank may borrow funds under (a) (ii) above or guarantee loans under (a) (iii) above only with the approval of the member in whose markets the funds are raised and the member in whose currency the loan is denominated, and only if those members agree that the proceeds may be exchanged for the currency of any other member without restriction. SECTION 2. Availability and Transferability of Currencies(a) Currencies paid into the Bank under Article II, Section 7 (i), shall be loaned only with the approval in each case of the member whose currency is involved; provided, however, that if necessary, after the Bank’s subscribed capital has been entirely called, such currencies shall, without restriction by the members whose currencies are offered, be used or exchanged for the currencies required to meet contractual payments of interest, other charges or amortization on the Bank's own borrowings, or to meet the Bank's liabilities with respect to such contractual payments on loans guaranteed by the Bank. (b) Currencies received by the Bank from borrowers or guarantors in payment on account of principal of direct loans made with currencies referred to in (a) above shall be exchanged for the currencies of other members or reloaned only with the approval in each case of the members whose currencies are involved; provided, however, that if necessary, after the Bank's subscribed capital has been entirely called, such currencies shall, without restriction by the members whose currencies are offered, be used or exchanged for the currencies required to meet contractual payments of interest, other charges or amortization on the Bank's own borrowings, or to meet the Bank’s liabilities with respect to such contractual payments on loans guaranteed by the Bank. (c) Currencies received by the Bank from borrowers or guarantors in payment on account of principal of direct loans made by the Bank under Section 1 (a) (ii) of this Article, shall be held and used, without restriction by the members, to make amortization payments, or to anticipate payment of or repurchase part or all of the Bank's own obligations. (d) All other currencies available to the Bank, including those raised in the market or otherwise borrowed under Section 1 (a) (ii) of this Article, those obtained by the sale of gold, those received as payments of interest and other charges for direct loans made under Sections 1 (a) (i) and (ii), and those received as payments of commissions and other charges under Section 1 (a) (iii), shall be used or exchanged for other currencies or gold required in the operations of the Bank without restriction by the members whose currencies are offered. (e) Currencies raised in the markets of members by borrowers on loans guaranteed by the Bank under Section1 (a) (iii) of this Article, shall also be used or exchanged for other currencies without restriction by such members. SECTION 3. Provision of Currencies for Direct LoansThe following provisions shall apply to direct loans under Sections I (a) (i) and (ii) of this Article: (a) The Bank shall furnish the borrower with such currencies of members, other than the member in whose territories the project is located, as are needed by the borrower for expenditures to be made in the territories of such other members to carry out the purposes of the loan. (b) The Bank may, in exceptional circumstances when local currency required for the purposes of the loan cannot be raised by the borrower on reasonable terms, provide the borrower as part of the loan with an appropriate amount of that currency. (c) The Bank, if the project gives rise indirectly to an increased need for foreign exchange by the member in whose territories the project is located, may in exceptional circumstances provide the

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borrower as part of the loan with an appropriate amount of gold or foreign exchange not in excess of the borrower's local expenditure in connection with the purposes of the loan. (d) The Bank may, in exceptional circumstances, at the request of a member in whose territories a portion of the loan is spent, repurchase with gold or foreign exchange a part of that member's currency thus spent but in no case shall the part so repurchased exceed the amount by which the expenditure of the loan in those territories gives rise to an increased need for foreign exchange. SECTION 4. Payment Provisions for Direct LoansLoan contracts under Section 1 (a) (i) or (ii) of this Article shall be made in accordance with the following payment provisions: (a) The terms and conditions of interest and amortization payments, maturity and dates of payment of each loan shall be determined by the Bank. The Bank shall also determine the rate and any other terms and conditions of commission to be charged in connection with such loan. In the case of loans made under Section 1 (a) (ii) of this Article during the first ten years of the Bank's operations, this rate of commission shall be not less than one percent per annum and not greater than one and one-half percent per annum, and shall be charged on the outstanding portion of any such loan. At the end of this period of ten years, the rate of commission may be reduced by the Bank with respect both to the outstanding portions of loans already made and to future loans, if the reserves accumulated by the Bank under Section 6 of this Article and out of other earnings are considered by it sufficient to justify a reduction. In the case of future loans the Bank shall also have discretion to increase the rate of commission beyond the above limit, if experience indicates that an increase is advisable. (b) All loan contracts shall stipulate the currency or currencies in which payments under the contract shall be made to the Bank. At the option of the borrowers however, such payments may be made in gold, or subject to the agreement of the Bank, in the currency of a member other than that prescribed in the contract. (i) In the case of loans made under Section 1 (a) (i) of this Article, the loan contracts shall provide that payments to the Bank of interest, other charges and amortization shall be made in the currency loaned, unless the member whose currency is loaned agrees that such payments shall be made in some other specified currency or currencies. These payments, subject to the provisions of Article II, Section 9 (c), shall be equivalent to the value of such contractual payments at the time the loans were made, in terms of a currency specified for the purpose by the Bank by a three-fourths majority of the total voting power. (ii) In the case of loans made under Section 1 (a) (ii) of this Article, the total amount outstanding and payable to the Bank in any one currency shall at no time exceed the total amount of the outstanding borrowings made by the Bank under Section 1 (a) (ii) and payable in the same currency. (c) If a member suffers from an acute exchange stringency, so that the service of any loan contracted by that member or guaranteed by it or by one of its agencies cannot be provided in the stipulated manner, the member concerned may apply to the Bank for a relaxation of the conditions of payment. if the Bank is satisfied that some relaxation is in the interests of the particular member and of the operations of the Bank and of its members as a whole, it may take action under either, or both, of the following paragraphs with respect to the whole, or part, of the annual service: (i) The Bank may, in its discretion, make arrangements with the member concerned to accept service payments on the loan in the member's currency for periods not to exceed three years upon appropriate terms regarding the use of such currency and the maintenance of its foreign exchange value; and for the repurchase of such currency on appropriate terms. (ii) The Bank may modify the terms of amortization or extend the life of the loan, or both. SECTION 5. Guarantees(a) In guaranteeing a loan placed through the usual investment channels, the Bank shall charge a guarantee commission payable periodically on the amount of the loan outstanding at a rate determined by the Bank. During the first ten years of the Bank's operations, this rate shall be not less than one percent per annum and not greater than one and one-half percent per annum. At the end

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of this period of ten years, the rate of commission may be reduced by the Bank with respect both to the outstanding portions of loans already guaranteed and to future loans if the reserves accumulated by the Bank under Section 6 of this Article and out of other earnings are considered by it sufficient to justify a reduction. In the case of future loans the Bank shall also have discretion to increase the rate of commission beyond the above limit, if experience indicates that an increase is advisable. (b) Guarantee commissions shall be paid directly to the Bank by the borrower. (c) Guarantees by the Bank shall provide that the Bank may terminate its liability with respect to interest if, upon default by the borrower and by the guarantor, if any, the Bank offers to purchase, at par and interest accrued to a date designated in the offer, the bonds or other obligations guaranteed- (d) The Bank shall have power to determine any other terms and conditions of the guarantee. SECTION 6. Special ReserveThe amount of commissions received by the Bank under Sections 4 and 5 of this Article shall be set aside as a special reserve, which shall be kept available for meeting liabilities of the Bank in accordance with Section 7 of this Article. The special reserve shall be held in such liquid form, permitted under this Agreement, as the Executive Directors may decide. SECTION 7. Methods of Meeting Liabilities of the Bank in Case of DefaultsIn cases of default on loans made, participated in, or guaranteed by the Bank: (a) The Bank shall make such arrangements as may be feasible to adjust the obligations under the loans, including arrangements under or analogous to those provided in Section 4 (c) of this Article. (b) The payments in discharge of the Bank’s liabilities on borrowings or guarantees under Section 1 (a) (ii) and (iii) of this Article shall be charged: (i) first, against the special reserve provided in Section 6 of this Article; (ii) then, to the extent necessary and at the discretion of the Bank, against the other reserves, surplus and capital available to the Bank. (c) Whenever necessary to meet contractual payments of interest, other charges or amortization on the Bank's own borrowings, or to meet the Bank’s liabilities with respect to similar payments on loans guaranteed by it, the Bank may call an appropriate amount of the unpaid subscriptions of members in accordance with Article II, Sections 5 and 7. Moreover, if it believes that a default may be of long duration, the Bank may call an additional amount of such unpaid subscriptions not to exceed in any one year one percent of the total subscriptions of the members for the following purposes: (i) To redeem prior to maturity, or otherwise discharge its liability on, all or part of the outstanding principal of any loan guaranteed by it in respect of which the debtor is in default. (ii) To repurchase, or otherwise discharge its liability on, all or part of its own outstanding borrowings. SECTION 8. Miscellaneous OperationsIn addition to the operations specified elsewhere in this Agreement, the Bank shall have the power: (i) To buy and sell securities it has issued and to buy and sell securities which it has guaranteed or in which it has invested, provided that the Bank shall obtain the approval of the member in whose territories the securities are to be bought or sold. (ii) To guarantee securities in which it has invested for the purpose of facilitating their sale. (iii) To borrow the currency of any member with the approval of that member. (iv) To buy and sell such other securities as the Directors by a three-fourths majority of the total voting power may deem proper for the investment-of all or part of the special reserve under Section 6 of this Article. In exercising the powers conferred by this Section, the Bank may deal with any person, partnership, association, corporation or other legal entity in the territories of any member. SECTION 9. Warning to be Placed on SecuritiesEvery security guaranteed or issued by the Bank shall bear on its face a conspicuous statement to the effect that it is not an obligation of any government unless expressly stated on the security.

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SECTION 10. Political Activity ProhibitedThe Bank and its officers shall not interfere in the political affairs of any member; nor shall they be influenced in their decisions by the political character of the member or members concerned. Only economic considerations shall be relevant to their decisions, and these considerations shall be weighed impartially inorder to achieve the purposes stated in Article I. IBRD Article V Organization and ManagementSECTION 1. Structure of the BankThe Bank shall have a Board of Governors, Executive Directors, a President and such other officers and staff to perform such duties as the Bank may determine. SECTION 2. Board of Governors(a) All the powers of the Bank shall be vested in the Board of Governors consisting of one governor and one alternate appointed by each member in such manner as it may determine. Each governor and each alternate shall serve for five years, subject to the pleasure of the member appointing him, and may be reappointed. No alternate may vote except in the absence of his principal. The Board shall select one of the Governor-s as chairman. (b) The Board of Governors may delegate to the Executive Directors authority to exercise any powers of the Board, except the power to: (i) Admit new members and determine the conditions of their admission; (ii) Increase or decrease the capital stock; (iii) Suspend a member; (iv) Decide appeals from interpretations of this agreement given by the Executive Directors; (v) Make arrangements to cooperate with other international organizations (other than informal arrangements of a temporary and administrative character); (vi) Decide to suspend permanently the operations of the Bank and to distribute its assets;(vii) Determine the distribution of the net income of the Bank. (c) The Board of Governors shall hold an annual meeting and such other meetings as may be provided for by the Board or called by the Executive Directors. Meetings of the Board shall be called by the Directors whenever requested by five members or by members having one quarter of the total voting power. (d) A quorum for any meeting of the Board of Governors shall be a majority of the Governors, exercising not less than two-thirds of the total voting power. (e) The Board of Governors may by regulation establish a procedure whereby the Executive Directors, when they deem such action to be in the best interests of the Bank, may obtain a vote of the Governors on a specific question without calling a meeting of the Board. (f) The Board of Governors, and the Executive Directors to the extent authorized, may adopt such rules and regulations as may be necessary or appropriate to conduct the business of the Bank. (g) Governors and alternates shall serve as such without compensation from the Bank, but the Bank shall pay them reasonable expenses incurred in attending meetings. (h) The Board of Governors shall determine the remuneration to be paid to the Executive Directors and the salary and terms of the contract of service of the President(e) The Executive Directors shall function in continuous session at the principal office of the Bank and shall meet as often as the business ofthe Bank may require. (f) A quorum for any meeting of the Executive Directors shall be a majority of the Directors, exercising not less than one-half of the total voting power. (g) Each appointed director shall be entitled to cast the number of votes allotted under Section 3 of this Article to the member appointing him. Each elected director shall be entitled to cast the number of votes which counted toward his election. All the votes which a director is entitled to cast shall be cast as a unit. (h) The Board of Governors shall adopt regulations under which a member not entitled to appoint a director under (b) above may send a representative to attend any meeting of the Executive Directors when a request made by, or a matter particularly affecting, that member is under consideration.

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(i) The Executive Directors may appoint such committees as they deem advisable. Membership of such committees need not be limited to governors or directors or their alternates. SECTION 5. President and Staff(a) The Executive Directors shall select a President who shall not be a governor or an executive director or an alternate for either. The President shall be Chairman of the Executive Directors, but shall have no vote except a deciding vote in case of an equal division. He may participate in meetings of the Board of Governors, but shall not vote at such meetings. The President shall cease to hold office when the Executive Directors so decide. (b) The President shall be chief of the operating staff of the Bank and shall conduct, under the direction of the Executive Directors, the ordinary business of the Bank. Subject to the general control of the Executive Directors, he shall be responsible for the organization, appointment and dismissal of the officers and staff. (c) The President, officers and staff of the Bank, in the discharge of their offices, owe their duty entirely to the Bank and to no other authority. Each member of the Bank shall respect the international character of this duty and shall refrain from all attempts to influence any of them in the discharge of their duties. (d) In appointing the officers and staff the President shall, subject to the paramount importance of securing the highest standards of efficiency and of technical competence, pay due regard to the importance of recruiting personnel on as wide a geographical basis as possible. SECTION 6. Advisory Council(a) There shall be an Advisory Council of not less than seven persons selected by the Board of Governors including representatives of banking, commercial, industrial, labor, and agricultural interests, and with as wide a national representation as possible. In those fields where specialized international organizations exist, the members of the Council representative of those fields shall be selected in agreement with such organizations. The Council shall advise the Bank on matters of general policy. The Council shall meet annually and on such other occasions as the Bank may request. (b) Councillors shall serve for two years and may be reappointed. They shall be paid their reasonable expenses incurred on behalf of the Bank. SECTION 7. Loan CommitteesThe committees required to report on loans under Article III, Section 4, shall be appointed by the Bank. Each such committee shall include an expert selected by the governor representing the member in whose territories the project is located and one or more members of the technical staff of the Bank. SECTION 8. Relationship to Other International Organizations(a) The Bank, within the terms of this Agreement, shall cooperate with any general international organization and with public international organizations having specialized responsibilities in related fields. Any arrangements for such cooperation which would involve a modification of any provision of this Agreement may be effected only after amendment to this Agreement under Article VIII. (b) In making decisions on applications for loans or guarantees relating to matters directly within the competence of any international organization of the types specified in the preceding paragraph and participated in primarily by members of the Bank, the Bank shall give consideration to the views and recommendations of such organization. SECTION 9. Location of Offices(a) The principal office of the Bank shall be located in the territory of the member holding the greatest number of shares. (b) The Bank may establish agencies or branch offices in the territories of any member of the Bank. SECTION 10. Regional Offices and Councils(a) The Bank may establish regional offices and determine the location of, and the areas to be covered by, each regional office. (b) Each regional office shall be advised by a regional council representative of the entire area and selected in such manner as the Bank may decide. SECTION 11. Depositories

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(a) Each member shall designate its central bank as a depository for all the Bank’s holdings of its currency or, if it has no central bank, it shall designate such other institution as may be acceptable to the Bank. (b) The Bank may hold other assets, including gold, in depositories designated by the five members having the largest number of shares and in such other designated depositories as the Bank may select. Initially, at least one-half of the gold holdings of the Bank shall be held in the depository designated by the member in whose territory the Bank has its principal office, and at least forty percent shall be held in the depositories designated by the remaining four members referred to above, each of such depositories to hold, initially, not less than the amount of gold paid on the shares of the member designating it. However, all transfers of gold by the Bank shall be made with due regard to the costs of transport and anticipated requirements of the Bank. In an emergency the Executive Directors may transfer all or any part of the Bank's gold holdings to any place where they can be adequately protected. SECTION 12. Form of Holdings of CurrencyThe Bank shall accept from any member, in place of any part of the member's currency, paid in to the Bank under Article 11, Section 7 (i), or to meet amortization payments on loans made with such currency, and not needed by the Bank in its operations, notes or similar obligations issued by the Government of the member or the depository designated by such member, which shall be non-negotiable, non-interest-bearing and payable at their par value on demand by credit to the account of the Bank in the designated depository. SECTION 13. Publication of Reports and Provision of Information(a) The Bank shall publish an annual report containing an audited statement of its accounts and shall circulate to members at intervals of three months or less a summary statement of its financial position and a profit and loss statement showing the results of its operations. (b) The Bank may publish such other reports as it deems desirable to carry out its purposes. (c) Copies of all reports, statements and publications made under this section shall be distributed to members. SECTION 14. Allocation of Net Income(a) The Board of Governors shall determine annually what part of the Bank's net income, after making provision for reserves, shall be allocated to surplus and what part, if any, shall be distributed. (b) If any part is distributed, up to two percent non-cumulative shall be paid, as a first charge against the distribution for any year, to each member on the basis of the average amount of the loans outstanding during the year made under Article IV, Section 1 (a) (i), out of currency corresponding to its subscription. If two percent is paid as a first charge, any balance remaining to be distributed shall be paid to all members in proportion to their shares. Payments to each member shall be made in its own currency, or if that currency is not available in other currency acceptable to the member. if such payments are made in currencies other than the member's own currency, the transfer of the currency and its use by the receiving member after payment shall be without restriction by the members. IBRD Article VIWithdrawal and Suspension of Membership: Suspension of Operations SECTION 1. Right of Members to WithdrawAny member may withdraw from the Bank at any time by transmitting a notice in writing to the Bank at its principal office. Withdrawal shall become effective on the date such notice is received. SECTION 2. Suspension of MembershipIf a member fails to fulfill any of its obligations to the Bank, the Bank may suspend its membership by decision of a majority of the Governors, exercising a majority of the total voting power. The member so suspended shall automatically cease to be a member one year from the date of its suspension unless a decision is taken by the same majority to restore the member to good standing. While under suspension, a member shall not be entitled to exercise any rights under this Agreement, except the right of withdrawal, but shall remain subject to all obligations. SECTION 3. Cessation of Membership in International Monetary Fund

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Any member which ceases to be a member of the International Monetary Fund shall automatically cease after three months to be a member of the Bank unless the Bank by three-fourths of the total voting power has agreed to allow it to remain a member. Section 4. Settlement of Accounts with Governments Ceasing to be Members(a) When a government ceases to be a member, it shall remain liable for its direct obligations to the Bank and for its contingent liabilities to the Bank so long as any part of the loans or guarantees contracted before it ceased to be a member are outstanding; but it shall cease to incur liabilities with respect to loans and guarantees entered into thereafter by the Bank and to share either in the income or the expenses of the Bank. (b) At the time a government ceases to be a member, the Bank shall arrange for the repurchase of its shares as a part of the settlement of accounts with such government in accordance with the provisions of (c) and (d) below. For this purpose the repurchase price of the shares shall be the value shown by the books of the Bank on the day the government ceases to be a member. (c) The payment for shares repurchased by the Bank under this section shall be governed by the following conditions: (i) Any amount due to the government for its shares shall be withheld so long as the government, its central bank or any of its agencies remains liable, as borrower or guarantor, to the Bank and such amount may, at the option of the Bank, be applied on any such liability as it matures. No amount shall be withheld on account of the liability of the government resulting from its subscription for shares under Article H, Section 5 (ii). In any event, no amount due to a member for its shares shall be paid until six months after the date upon which the government ceases to be a member. (ii) Payments for shares may be made from time to time, upon their surrender by the government, to the extent by which the amount due as the repurchase price in (b) above exceeds the aggregate of liabilities on loans and guarantees in (c) (i) above until the former member has received the full repurchase price. (iii) Payments shall be made in the currency of the country receiving payment or at the option of the Bank in gold. (iv) If losses are sustained by the Bank on any guarantees, participations in loans, or loans which were outstanding on the date when the government ceased to be a member, and the amount of such losses exceeds the amount of the reserve provided against losses on the date when the government ceased to be a member, such government shall be obligated to repay upon demand the amount by which the repurchase price of its shares would have been reduced, if the losses had been taken into account when the repurchase price was determined. In addition, the former member government shall remain liable on any call for unpaid subscriptions under Article IL Section 5 (ii), to the extent that it would have been required to respond if the impairment of capital had occurred and the call had been made at the time the repurchase price of its shares was determined. (d) if the Bank suspends permanently its operations under Section 5 (b) of this Article, within six months of the date upon which any government ceases to be a member, all rights of such government shall be determined by the provisions of Section 5 of this Article. SECTION 5. Suspension of Operations and Settlement of Obligations(a) In an emergency the Executive Directors may suspend temporarily operations in respect of new loans and guarantees pending an opportunity for further consideration and action by the Board of Governors. (b) The Bank may suspend permanently its operations in respect of new loans and guarantees by a vote of a majority of the Governors, exercising a majority of the total voting power. After such suspension of operations the Bank shall forthwith cease all activities, except those incident to the orderly realization, conservation, and preservation of its assets and settlement of its obligations.

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(c) The liability of all members for uncalled subscriptions to the capital stock of the Bank and in respect of the depreciation of their own currencies shall continue until all claims of creditors, including all contingent claims, shall have been discharged. (d) All creditors holding direct shall be paid out of the assets of the Bank, and then out of payments to the Bank on calls on unpaid subscriptions. Before making any payments to creditors holding direct claims, the Executive Directors shall make such arrangements as are necessary, in their judgment, to insure a distribution to holders of contingent claims ratably with creditors holding direct claims. (e) No distribution shall be made to members on account of their subscriptions to the capital stock of the Bank until (i) all liabilities to creditors have been discharged or provided for, and (ii) a majority of the Governors, exercising a majority of the total voting power, have decided to make a distribution. (f) After a decision to make a distribution has been taken under (e) above, the Executive Directors may by a two-thirds majority vote make successive distributions of the assets of the Bank to members until all of the assets have been distributed. This distribution shall be subject to the prior settlement of all outstanding claims of the Bank agamst each member (g) Before any distribution of assets is made, the Executive Directors shall fix the proportionate share of each member according to the ratio of its shareholding to the total outstanding shares of the Bank. (h) The Executive Directors shall value the assets to be distributed as at the date of distribution and then proceed to distribute in the following manner: (i) There shall be paid to each member in its own obligations or those of its official agencies or legal entities within its territories, insofar as they are available for distribution, an amount equivalent in value to its proportionate share of the total amount to be distributed. (ii) Any balance due to a member after payment has been made under (i) above shall be paid, in its own currency, insofar as it is held by the Bank, up to an amount equivalent in value to such balance. (iii) Any balance due to a member after payment has been made under (i) and (ii) above shall be paid in gold or currency acceptable to the member, insofar as they are held by the Bank, up to an amount equivalent in value to such balance. (iv) Amy remaining assets held by the Bank after payments have been made to members under (i), (ii), and (iii) above shall be distributed pro rata among the members. (i) Any member receiving assets distributed by the Bank in accordance with (h) above, shall enjoy the same rights with respect to such assets as the Bank enjoyed prior to their distribution. IBRD Article VIIStatus, Immunities and Privileges SECTION 1. Purposes of the ArticleTo enable the Bank to fulfill the functions with which it is entrusted, the status, immunities and privileges set forth in this Article shall be accorded to the Bank in the territories of each member. SECTION 2. Status of the BankThe Bank shall possess full juridical personality, and, in particular, the capacity: (i) to contract; (ii) to acquire and dispose of immovable and movable property; (iii) to institute legal proceedings. SECTION 3. Position of the Bank with Regard to judicial ProcessActions may be brought against the Bank only in a court of competent jurisdiction in the territories of a member in which the Bank has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities. No actions shall, however, be brought by members or persons acting for or deriving claims from members. The property and assets of the Bank shall, wheresoever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

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SECTION 4. Immunity of Assets from SeizureProperty and assets of the Bank, wherever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation or any other form of seizure by executive or legislative action. SECTION 5. Immunity of ArchivesThe archives of the Bank shall be inviolable. SECTION 6. Freedom of Assets from RestrictionsTo the extent necessary to carry out the operations provided for in this Agreement and subject to the provisions of this Agreement, all property and assets of the Bank shall be free from restrictions, regulations, controls and moratoria of any nature. SECTION 7. Privilege for CommunicationsThe official communications of the Bank shall be accorded by each member the same treatment that it accords to the official communications of other members. SECTION 8. Immunities and Privileges of Officers and EmployeesAll governors, executive directors, alternates, officers and employees of the Bank (i) shall be immune from legal process with respect to acts performed by them in their official capacity except when the Bank waives this immunity; (ii) not being local nationals, shall be accorded the same immunities from immigration restrictions, alien registration requirements and national service obligations and the same facilities as regards exchange restrictions as are accorded by members to the representatives, officials, and employees of comparable rank of other members; (iii) shall be granted the same treatment in respect of travelling facilities as is accorded by members to representatives, officials and employees of comparable rank of other members. SECTION 9. Immunities from Taxation(a) The Bank, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Bank shall also be immune from liability for the collection or payment of any tax or duty. (b) No tax shall be levied on or in respect of salaries and emoluments paid by the Bank to executive directors, alternates, officials or employees of the Bank who are not local citizens, local subjects, or other local nationals. (c) No taxation of any kind shall be levied on any obligation or security issued by the Bank (including any dividend or interest thereon) by whomsoever held: (i) which discriminates against such obligation or security solely because it is issued by the Bank; or (ii) if the sole jurisdictional basis for such taxation is the place or currency in which it is issued, made payable or paid, or the location of any office or place of business maintained by the Bank. (d) No taxation of any kind shall be levied on any obligation or security guaranteed by the Bank (including any dividend or interest thereon) by whomsoever held: (i) which discriminates against such obligation or security solely because it is guaranteed by the Bank; or (ii) if the sole jurisdictional basis for such taxation is the location of any office or place of business maintained by the Bank. SECTION 10. Application of ArticleEach member shall take such action as is necessary in its own territories for the purpose of making effective in terms of its own law the principles set forth in this Article and shall inform the Bank of the detailed action which it has taken. IBRD Article VIIIAmendments (a) Any proposal to introduce modifications in this Agreement, whether emanating from a member, a governor or the Executive Directors, shall be communicated to the Chairman of the Board of Governors who shall bring the proposal before the Board. If the proposed amendment is approved by the Board the Bank shall, by circular letter or telegram, ask all members whether they accept the proposed amendment. When three-fifths of the members, having eighty-five

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percent (1) of the total voting power, have accepted the proposed amendments, the Bank shall certify the fact by formal communication addressed to an members. (b) Notwithstanding (a) above, acceptance by an members is required in the case of any amendment modifying: (i) the right to withdraw from the Bank provided in Article VI, Section 1; (ii) the right secured by Article U, Section 3 (c); (iii) the limitation on liability provided in Article II, Section 6. (c) Amendments shall enter into force for all members three months after the date of the formal communication unless a shorter period is specified in the circular letter or telegram. IBRD Article IX Interpretation (a) Any question of interpretation of the provisions of this Agreement arising between any member and the Bank or between any members of the Bank shall be submitted to the Executive Directors for their decision. If the question particularly affects any member not entitled to appoint an Executive Director, it shall be entitled to representation in accordance with Article V, Section 4 (h). (b) In any case where the Executive Directors have given a decision under (a) above, any member may require that the question be referred to the Board of Governors, whose decision shall be final. Pending the result of the reference to the Board, the Bank may, so far as it deems necessary, act on the basis of the decision of the Executive Directors. 3. 'Eighty-five percent' was substituted to "four-fifths' by amendment effective February 16, 1989. (c) Whenever a disagreement arises between the Bank and a country which has ceased to be a member, or between the Bank and any member during the permanent suspension of the Bank, such disagreement shall be submitted to arbitration by a tribunal of three arbitrators, one appointed by the Bank, another by the country involved and an umpire who, unless the parties otherwise agree, shall be appointed by the President of the Permanent Court of International justice or such other authority as may have been prescribed by regulation adopted by the Bank. The umpire shall have full power to settle an questions of procedure in any case where the parties are in disagreement with respect thereto. IBRD Article XApproval Deemed Given Whenever the approval of any member is required before any act may be done by the Bank, except in Article VIII, approval shall be deemed to have been given unless the member presents an objection within such reasonable period as the Bank may fix in notifying the member of the proposed act. IBRD Article XIFinal Provisions SECTION 1. Entry into ForceThis Agreement shall enter into force when it has been signed on behalf of governments whose minimum subscriptions comprise not less than sixty-five percent of the total subscriptions set forth in Schedule A and when the instruments referred to in Section 2 (a) of this Article have been deposited on their behalf, but in no event shall this Agreement enter into force before May 1, 1945. SECTION 2. Signature(a) Each government on whose behalf this Agreement is signed shall deposit with the Government of the United States of America an instrument setting forth that it has accepted this Agreement in accordance with its law and has taken all steps necessary to enable it to carry out all of its obligations under this Agreement. (b) Each government shall become a member of the Bank as from the date of the deposit on its behalf of the instrument referred to in (a) above, except that no government shall become a member before this Agreement enters into force under Section 1 of this Article.

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(c) The Government of the United States of America shall inform the governments of all countries whose names are set forth in Schedule A, and all governments whose membership is approved in accordance with Article II, Section 1 (b), of all signatures of this Agreement and of the deposit of all instruments referred to in (a) above. (d) At the time this Agreement is signed on its behalf, each government shall transmit to the Government of the United States of America one one-hundredth of one percent of the price of each share in gold or United States dollars for the purpose of meeting administrative expenses of the Bank. This payment shall be credited on account of the payment to be made in accordance with Article II Section 8 (a). The Government of the United States of America shall hold such funds in a special deposit account and shall transmit them to the Board of Governors of the Bank when the initial meeting has been called under Section 3 of this Article.If this Agreement has not come into force by December 31, 1945, the Government of the United States of America shall return such funds to the governments that transmitted them. (e) This Agreement shall remain open for signature at Washington on behalf of the governments of the countries whose names are set forth in Schedule A until December 31, 1945. (f) After December 31, 1945, this Agreement shall be open for signature on behalf of the government of any country whose membership has been approved in accordance with Article II, Section 1 (b). (g) By their signature of this Agreement, all governments accept it both on their own behalf and in respect of all their colonies, overseas territories, all territories under their protection, suzerainty, or authority and all territories in respect of which they exercise a mandate. (h) In the case of governments whose metropolitan territories have been under enemy occupation, the deposit of the instrument referred to in (a) above may be delayed until one hundred and eighty days after the date on which these territories have been liberated. If, however, it is not deposited by any such government before the expiration of this period, the signature affixed on behalf of that government shall become void and the portion of its subscription paid under (d) above shall be returned to it. (i) Paragraphs (d) and (h) shall come into force with regard to each signatory government as from the date of its signature. SECTION 3. Inauguration of the Bank(a) As soon as this Agreement enters into force under Section 1 of this Article, each member shall appoint a governor and the member to whom the largest number of shares is allocated in Schedule A shall call the first meeting of the Board of Governors. (b) At the first meeting of the Board of Governors, arrangements shall be made for the selection of provisional executive directors. The governments of the five countries, to which the largest number of shares are allocated in Schedule A, shall appoint provisional executive directors. If one or more of such governments have not become members, the executive directorships which they would be entitled to fill shall remain vacant until they become members, or until January 1, 1946, whichever is the earlier. Seven provisional executive directors shall be elected in accordance with the provisions of Schedule B and shall remain in office until the date of the first regular election of executive directors which shall be held as soon as practicable after January 1, 1946. (c) The Board of Governors may delegate to the provisional executive directors any powers except those which may not be delegated to the Executive Directors. (d) The Bank shall notify members when it is ready to commence operations. DONE at Washington, in a single copy which shall remain deposited in the archives of the Government of the United States of America, which shall transmit certified copies to all governments whose names are set forth in Schedule A and to all governments whose membership is approved in accordance with Article II, Section I (b). IBRD Schedule 1SCHEDULE A

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Subscriptions(millions of dollars)Australia 200.0 Iran 24.0 Belgium 225.0 Iraq 6.0 Bolivia 7.0 Liberia 0.5 Brazil 105.0 Luxembourg 10.0 Canada 325.0. Mexico 65.0 Chile 35.0 Netherlands 275.0 China 600.0 New Zealand 50.0 Colombia 35.0 Nicaragua 0.8 Costa Rica 2.0 Norway 50.0 Cuba 35.0 Panama 0.2 Czechoslovakia 125.0 Paraguay 0.8 Denmark (a)Peru 17.5 Dominican Republic 2.0 Philippine Commonwealth 15.0 Ecuador 3.2 Poland 125.0 Egypt 40.0 Union of South Africa 100.0 El Salvador 1.0 Union of Soviet Socialist Ethiopia 3.0 Republics 1,200.0 France 450.0 United Kingdom 1,300.0 Greece 25.0 United States 3,175.0 Guatemala 2.0 Uruguay 10.5 Haiti 2.0 Venezuela 10.5 Honduras 1.0 Yugoslavia 40.0 Iceland 1.0 India 400.0

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Total9,100.0a. The quota of Denmark shall be determined by the Bank after Denmark accepts membership in accordance with these Articles of Agreement.IBRD Schedule BElection of Executive Directors 1. The election of the elective executive directors shall be by ballot of the Governors eligible to vote under Article V, Section 4 (b). 2. In balloting for the elective executive directors, each governor eligible to vote shall cast for one person all of the votes to which the member appointing him is entitled under Section 3 of Article V. The seven persons receiving the greatest number of votes shall be executive directors, except that no person who receives less than fourteen percent of the total of the votes which can be cast (eligible votes) shall be considered elected. 3. When seven persons are not elected on the first ballot, a second ballot shall be held in which the person who received the lowest number of votes shall be ineligible for election and in which there shall vote only (a) those governors who voted in the first ballot for a person not elected and (b) those governors whose votes for a person elected are deemed under 4 below to have raised the votes cast for that person above fifteen percent of the eligible votes. 4. In determining whether the votes cast by a governor are to be deemed to have raised the total of any person above fifteen percent of the eligible votes, the fifteen percent shall be deemed to include, first, the votes of the governor casting the largest number of votes for such person, then the votes of the governor casting the next largest number, and so on until fifteen percent is reached. 5. Any governor, part of whose votes must be counted in order to raise the total of any person above fourteen percent shall be considered as casting all of his votes for such person even if the total votes for such person thereby exceed fifteen percent. 6. If, after the second ballot, seven persons have not been elected, further ballots shall be held on the same principles until seven persons have been elected, provided that after six persons are elected, the seventh may be elected by a simple majority of the remaining votes and shall be deemed to have been elected by all such votes.

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