There are four formal complaints outstanding against Czechoslovakia in the IMF as follows:

(a) that in raising the gold content of the Czech crown by nearly 700 per cent in connection with the monetary reform of June 1953 she made an unauthorized change in the par value of her currency without consultation with the Fund

(b) that she is in partial default on interest payments due the Fund

(c) that she has failed to provide the Fund with the Minimum information necessary for the effective discharge of the Fund's duties

(d) that she has failed to consult with the Fund regarding the maintenance of her exchange restrictions.

The complaints at (c) and (d) above have been formulated only in the past two weeks, and relate to the obligations of members under Article VIII, Section 5 of the Agreement and Article XIV, Section 4, respectively. The most substantial complaint is the first, and the second is related thereto, since the Czechs have paid in a sufficient number of Czech crowns to discharge their obligations on the basis of the revised gold content of the crown. Officials of the Czech Embassy in Washington have appeared before the Board of the Fund, and have attempted to deal with the first of the above complaints. They have argued that the change in the par value of the Czech crown is justified under Article IV, Section 5 (e) of the Fund Agreement which reads: "A member may change the par value of its currency without the concurrence of the Fund if the change does not affect the international transactions of the members of the Fund."

The validity of this defence is extremely questionable since it is virtually impossible to conceive of circumstances in which a change in an exchange rate would not have some effect on international transactions.

A Czech Delegation is coming from Prague to meet with the Executive Board on November 4 to discuss the complaints against Czechoslovakia. The United States Director is taking the lead in pressing for a declaration by the Fund that under Article XV, Section 2, of the Agreement, Czechoslovakia has failed to fulfill certain of its obligations, and is therefore ineligible to use the resources of the Fund. His ultimate objective appears to be the expulsion of Czechoslovakia, a result which could flow from action under this Article. We understand that the US Director may be supported by his Latin American colleagues, as well as the Japanese, Australian and Chinese Directors. The Indian Director is likely to oppose action leading towards expulsion, and the United Kingdom is understood to be sympathetic to this view, but anxious to avoid an open split with the United States on the issue.

While fully conscious of the undesirability of condoning breaches of obligations by member countries, more particularly in international financial organizations, such as the Fund, and the Bank, we must also take into account the political implications involved in action at this time to expel Czechoslovakia from the Fund. Theoretically, at least, opportunities exist to influence Czeeh economic and perhaps political policies while she is a member of the Fund, which would disappear if she were expelled. At a time when there are at least some indications of a more forthcoming attitude on the part of Soviet satellite states, it seems to us undesirable to seek to bring about Czechoslovakia's expulsion, if a reasonable alternative is available. One such alternative would be to declare that the Czech case did not fall under Article IV, Section 5 (e), and that the Fund objected to the change in par value and the failure to consult. In these circumstances, under the provisions of Article IV, Section 6, Czechoslovakia would automatically become ineligible to use the Fund's resources unless otherwise determined, but this would not necessarily be the first step towards expulsion. The Fund could also, of course, formally declare that Czechoslovakia was in default on her obligation to provide information, and consult on the retention of exchange restrictions.

As the meeting with the Czech Delegation is scheduled for November 4, I shall be grateful if you would discuss this question urgently with the Foreign Office, and ascertain the extent to which they think it might be inadvisable for political reasons to support action against Czechoslovakia under Article XV, Section 2.