You may recall that last October the Executive Board of the International Monetary Fund had under consideration various complaints which had been laid against Czechoslovakia in connection with its failure to fulfil its obligations under the Fund's Articles of Agreement. At that time the United States was pressing for action to declare Czechoslovakia ineligible to use the resources of the Fund under Article XV(2) which could, in due course, lead to the expulsion of Czechoslovakia.

Our position at the time was that while expulsion of Czechoslovakia from the Fund would have the disadvantage that it might remove any opportunities to influence Czech policies through the discussions in the Fund, it would be undesirable to condone serious breaches of obligations by member countries in important international organizations, particularly financial ones. Moreover, there would be serious difficulties in adopting what might be interpreted as a "soft" policy towards a Communist State's breach of the Articles of Agreement which might bring us into open disagreement with the United States. In the circumstances, the view of the Departments concerned was that the Czechoslovaks should be given every opportunity to explain their position but if they did not give a definite indication of cooperating in a reasonable way with the Fund the Canadian representative should be prepared to support a declaration of ineligibility under Article XV. When this matter came up for discussion last November there was agreement among the majority of the members of the Executive Board that Czechoslovakia had failed to fulfil its obligations under the Articles of Agreement and therefore should be declared ineligible to use the resources of the Fund. A decision to this effect was recorded by the Board. ⁶⁶

We have just been informed through our Alternate Representative, Mr. Warren, that the United States is now proposing that the Board of Executive Directors recommend to the Board of Governors that the Government of Czechoslovakia be required to withdraw from membership in the Fund. The Government of Czechoslovakia has been notified of this proposal which will be discussed by the Executive Board on July 7th.

In the view of Mr. Rasminsky, the interpretation of the Articles of Agreement advanced by the representative of the United States may be open to question. In his opinion the relevant Articles of Agreement might be interpreted equally well to mean that the failure of Czechoslovakia to fulfil its obligations would not necessarily require any action by the Fund to expel this member. In actual practice the Fund has never resorted to expulsion of any member for failure to fulfil its obligations but instead has adopted a more moderate attitude with respect to breaches of obligations under the Articles of Agreement. Mr. Rasminsky feels that the position to be adopted by the Canadian representative should depend largely on political considerations. It seems fairly evident that the United States has primarily political motives in pressing for expulsion at this time. Mr. Warren has reported that several of the representatives of other countries have expressed their misgivings about the wisdom of the United States' proposal. A number of directors appear to be in favour of not making any recommendation to the Board of Governors but simply passing on to them a full statement of the facts for their consideration. The legal aspects of such a step by the Executive Board are now being considered by the legal authorities in the Fund.

At our request Canada House has reported that the United Kingdom Treasury and the Foreign Office do not consider it advisable for their representative on the Fund to take any firm stand on this issue until Czechoslovakia has had an opportunity to present its case, at which time the United Kingdom will consider its attitude with respect to the desirability of supporting the United States' proposal to expel Czechoslovakia from the Fund. The United Kingdom Treasury are not inclined to think that a decision to expel Czechoslovakia would be particularly embarrassing at the present time but the Foreign Office apparently are not so optimistic in this respect. The Foreign Office are somewhat concerned that Czechoslovakia might make a "kind of half-way reply" so forthcoming that it could not be rejected out of hand, yet not sufficiently satisfactory to dispose of the issue. Such a situation obviously might create some difficulties in the sense that the United Kingdom and Canada might be put into the position of having to decide whether to disagree openly with the United States if the latter should still press strongly for expulsion.

Our alternate representative to the Fund has informed us that it is likely there will not be any interval following the consideration of the Czech case by the Executive Board on July 7th during which Governments might have an opportunity to re-examine their position in the light of the arguments advanced by the Czech representatives. Mr. Warren will be sending us in the near future a report on the way the lines are being drawn along with information on the extent to which other countries are in default of their obligations under the Articles of Agreement of the Fund. In the circumstances and pending Mr. Warren's further report on the situation, we are giving serious thought to the following considerations in consultation with the Department of Finance:

(a) The political desirability, or otherwise, of supporting the United States' proposal to expel Czechoslovakia from the Fund;

(b) The value, if any, of continued Czech participation in the Fund bearing in mind the fact that expulsion may mean virtual Czech withdrawal from participation in the GATT which is likely to be working more closely with the Fund in the near future; generally speaking we are in favour of encouraging the active participation by the U.S.S.R. and the satellites in the work of the Specialized Agencies, and expulsion from the Fund at this moment might have an unfortunate effect;

(c) The distinctive features, if any, of the default of Czechoslovakia as compared with the breaches already committed by other members of the Fund, particularly Nationalist China and France;

(d) The situation surrounding the expulsion of Czechoslovakia from the International Bank (which has already taken place);

(e) Any reports which we may receive concerning the attitudes of other members of the Fund, particularly the United States and the United Kingdom;

(f) The importance which we should attach to the relationship, if any, between the expulsion of Czechoslovakia from the Fund and the understandings recently arrived at during consultations which were held in Ottawa with the delegation from Czechoslovakia on trade and financial matters.

We felt it advisable to bring this matter to your attention at this stage. After we have had an opportunity to give further thought to this problem in the light of the considerations which we have outlined above we plan to submit for your approval recommendations regarding the instructions which might be sent to the Canadian representative to the Fund. Since it is our understanding that you will be leaving Ottawa for a brief period commencing July 1st, we plan, if you agree, to forward such recommendations for your consideration on June 29th. Your colleague, Mr. Abbott is being apprised of the situation by officials in his Department. Mr. Rasminsky is away in London but we are keeping in touch with other officials in the Bank.

R.A. M[ACKAY]