Under the systems of pegged and managed spot exchange rates, short-term capital flows have frequently been disruptive. To relieve pressure on international reserves and the money stock, a policy of supporting both the spot and forward exchange rates has been undertaken occasionally. Experience suggests, however, that such a policy may be costly, as shown by the loss made by the Bank of England after the devaluation of sterling in 1967, and ineffective, as illustrated by the “merry-go-round” effect induced by the policy of the Deutsche Bundesbank.1 Owing to the experiences of the Bank of England and the Bundesbank, countries have become reluctant to give large-scale support to the forward market. Exchange controls and greater exchange rate flexibility have become the preferred means of combating disruptive capital flows.
International Monetary Fund. External Relations Dept.
This paper discusses actions taken by members themselves, particularly for the establishment of internal financial stability, are of primary importance for the elimination of restrictions. The IMF has sought to give its support to countries faced with the practical difficulty of establishing such policies, pointing out the importance of appropriate exchange rate policies in achieving a sound international financial position and the importance of internal stability for exchange rate policy. Many member countries have now reached a point where they are re-examining more carefully not only their need for the current level of restrictions, but also the more fundamental question of reliance upon restrictions to cope with balance of payments difficulties. In the first year of IMF consultations, although some countries were applying policies designed to produce favorable conditions for the removal of restrictions, most countries were so preoccupied with their immediate problems that any substantial withdrawal of restrictions was impracticable.
Each 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.
Recognizing 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, each member shall: