Chapter

II. PAR VALUES AND EXCHANGE RATES

Author(s):
International Monetary Fund
Published Date:
September 1951
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The general structure of par values established in September 1949 has been maintained through an initial testing period of nine months, followed by more than a year of drastic changes in trade resulting from accelerated rearmament. The realignment of exchange rates to a large extent eliminated the marked disparities between price levels which had developed after World War II. With war damage largely repaired and the producing capacity of the non-dollar world restored, the conditions were favorable for the emergence of a more satisfactory international structure of relative prices and costs, in which greater reliance could be placed on the price mechanism in international trade and less reliance on controls.

During the year 1950-51 there were a few further rate adjustments, and new par values were established for two countries that had already agreed par values with the Fund. A detailed description of these changes may be appropriately prefaced by a more general examination of exchange rate policy in the present world situation.

Currency Appreciation

Current exchange rates have recently received renewed attention in relation to the existing world-wide inflationary tendencies and the consequent shifts in terms of trade. While these tendencies have their origin in increases in demand in many countries, they may appear to each individual country as coming from abroad in the form of higher export prices and higher import prices. Faced with the upward pressures which these higher prices tend to exercise on a country’s general level of domestic prices and wages, it may appear as a solution to this problem to sever the existing link between that country’s currency and the foreign currencies in which these high prices are quoted, and either to raise gradually the value of its currency, or to peg it at once at a substantially higher value. The former policy raises special questions, which are dealt with in the next section of this chapter; this section is devoted to a discussion of the revaluation or appreciation of currencies as an anti-inflationary measure. While it appears useful to discuss this problem in general terms and to indicate some of the most relevant considerations, this should not be allowed to divert attention from the fact that decisions about an appropriate rate of exchange must always be taken in relation to a particular country, in which all aspects of the country’s economy must be given due consideration.

In considering whether currency appreciation is a suitable means of dealing with the problems arising out of the current world-wide inflation, countries must weigh a number of important factors. Firstly, no country, except one whose share in world trade is insignificant, can regard prices in world markets as fixed data, and hence can assume that by changing the value of its currency the prices of international commodities in its own currency will be changed to a corresponding extent. Each country, through its demand for imports and its supply of exports, forms part of the world market and through its own action is therefore in part responsible for the price level in these markets. The prospect of touching off a chain reaction must be kept in mind, because it is unlikely that any given country could act alone in revaluing its currency under present conditions, and it could certainly be expected that, if any large group of countries revalued their currencies, world market prices in terms of dollars would receive a strong upward impetus.

The great majority of countries do not have strong and persistently favorable balances of payments, maintained without the help of restrictions. Currency revaluation may weaken further their balances of payments. On the import side, it may involve either a greater outlay for imports or the intensification of restrictions. On the export side, too, the effects of revaluation would require careful consideration. It would be a mistake, in this connection, to assume that the inflationary pressures of the last year have so weakened competitive forces in international markets that exporters in general can again count on a sellers’ market in which price is of little importance. Moreover, the possibility of an anticipation by the public that any substantial revaluation might have to be reversed in the not too distant future might invite the kind of speculation against currencies which was a major trouble before the 1949 devaluations.

Any transitory benefits to be expected from appreciation in an environment where shortages of exportable manufactures are expected may easily be exaggerated. The pressure of inflation is great both in Western Europe and in North America, where large defense programs are being undertaken. The inflationary pressures resulting therefrom demand firm fiscal and credit policies keeping in check all types of unnecessary domestic expenditure. On the international payments side, every effort is still necessary to avoid continued dependence on external aid and to relax reliance on restrictions and discriminations. One of the most important factors that would contribute to continued improvement in the payments position of Western Europe is competitive export prices. The present exchange rates for Western European currencies and the currencies of the countries associated with them give their exports a strong competitive position, which appreciation would weaken and perhaps undermine.

In facing the issue of a possible substantial revaluation of currencies over a wide area, account must be taken of the general conditions of the world at present, and the need for cooperative, rather than competitive, monetary and exchange rate policies which this situation requires. In the present world situation member countries’ anti-inflationary policies should primarily rely on measures which will combat the inflationary pressures within their own economies, rather than on attempts to transfer these pressures elsewhere by changes in exchange rates. The creation of the International Monetary Fund was due in no small measure to the realization that the world had been ill served by the exchange policies of the thirties, whose effect was to unload on other countries the curse of deflation. The pressing world problem today is inflation. Widespread appreciation would be as ineffective for solving this problem as widespread depreciation was for solving the problem of deflation in the thirties.

Fluctuating Rates

In previous Annual Reports the Fund has discussed the par value system that was agreed at Bretton Woods, noting particularly that the system is one of stability of rates rather than rigidity. The governments that negotiated the Fund Agreement concluded that the exchange rate system best calculated to promote the Fund’s purposes is a system of fixed par values agreed with the Fund and subject to occasional adjustment—in accordance with orderly procedures—for the purpose of correcting any fundamental disequilibrium that may develop in the economic relationships of the member countries.

From time to time, in the public press and in both technical and non-technical discussions of foreign exchange policy, this par value system has come under critical review. There has been some advocacy not only of fluctuating exchange rates to suit particular circumstances facing a given country but even of a large number of rates fluctuating at the same time. One important argument offered in favor of this system is the idea that exchange rates should be left to find their own level, in the belief that market forces can best determine appropriate valuations for currencies. A fluctuating rate is sometimes advocated as a procedure better designed than changes in par values to facilitate frequent changes in the rate of exchange when such changes are made necessary by unstable foreign or domestic conditions. Those who favor a “fluctuating rate system” also argue that each rate of exchange should move so as to protect the domestic economy from pressures arising abroad, and, under other circumstances, that the exchange rate should protect the balance of payments against pressures arising out of domestic economic policies.

The continuing interest in alternative foreign exchange arrangements calls for a brief review of the par value system and of the objectives that it serves. The system is not a wise one merely because it was written into the Articles of Agreement. But it is correct to state that it was written into the Articles of Agreement because it emerged from the experience of the world over a period of many years. No one would deny that the maintenance of a given exchange rate is sometimes made very difficult either by a set of internal policies or by the external economic forces with which countries must deal. In the main, these difficulties arise from the fact that changing economic forces operate with unequal effects on various countries. Nevertheless, it is a striking fact that the maintenance of stable rates of exchange is virtually the invariable objective of all countries at all times; even those countries that have embarked on a policy of fluctuating rates have in practice generally stabilized their rates within narrow limits over long periods of time.

Those who advocate allowing rates to find their “natural” level, permitting market forces to determine a rate of exchange that will be stabilized, seek to provide a simple solution for a very complex problem. There is no such thing as a “natural” level for the rate of exchange of a currency. The proper rate will, in each case, depend upon the economic, financial and monetary policies followed by the country concerned and by other countries with whom it has important economic relationships. If the economy of a country is to adapt itself to a given exchange rate, there must be time for the producers, sellers and buyers of goods and services to respond to the new set of price and cost relationships to which the rate gives rise. This means that in the short run changes in the exchange rate are either no test or a very poor test of basic economic inter-relationships. It also means that whether a given exchange rate is at the “correct” level can be determined only after there has been time to observe the course of the balance of payments in response to that rate. Moreover, past experience with fluctuating rates of exchange has proved that movements in the rate are significantly affected by large speculative transfers of capital. Consequently countries prefer to make adjustments in their rates of exchange in a manner that will minimize distortions through speculation. Parenthetically it may be mentioned that generally implicit in the arguments for fluctuating rates is the assumption that some major currency will remain stable as a point against which to operate the fluctuating rates.

When a rate of exchange becomes inappropriate because of fundamental changes in a country’s balance of payments, arising from forces either external or internal, it should be adjusted to the new situation. The Fund Articles are sufficiently broad to permit any necessary and justifiable changes in par values, and if changes are made by the orderly procedure provided by the Articles, sufficient weight will be given to the interests of all members of the international community. In the present circumstances it is essential that the cooperative endeavor represented by the Fund be extended and improved, rather than undermined. By establishing the Fund, its members recognized that each had a responsibility toward all the others; that the action of each had effects on all the others; and that only by working together could they mitigate the evils of economic nationalism and secure the benefits of expanded trade. The course of events since the meeting at Bretton Woods has shown that their judgment was sound.

For these reasons a system of fluctuating exchange rates is not a satisfactory alternative to the par value system. But there may be occasional and exceptional cases where a country concludes that it cannot maintain any par value for a limited period of time, or where it is exceedingly reluctant to take the risks of a decision respecting a par value, particularly when important uncertainties are considered to exist. Even under such circumstances, however, members of the Fund must recognize that should any one of them be moved by these considerations to allow its rate of exchange to fluctuate, other members of the Fund will be affected. For a country whose position in international trade is comparatively unimportant, this consideration may not be as significant as the benefit it expects to derive for its own economy. But there is always the danger of the psychological impact of such action on expectations in other countries that might force these countries to follow the same course. When such a situation is examined with respect to a country with an important position in international trade, particularly if its currency is one of the major trading currencies, the implications for other countries are far more important than the results that it might seek to achieve for its own economy. Moreover, if a substantial number of exchange rates were allowed to fluctuate, complex problems would be created for all countries and a chaotic situation might easily develop.

What should be the Fund’s attitude toward these exceptional cases which, from time to time, have been presented to the Fund and may be again presented in the future? A member of the Fund cannot, within the terms of the Articles of Agreement, abandon a par value that has been agreed with the Fund except by concurrently proposing to the Fund the establishment of a new par value. What a country can do under the circumstances described above is to inform the Fund that it finds itself unable to maintain rates of exchange within the margins of its par value prescribed by the Fund Agreement, and, accordingly, that it is temporarily unable to carry out its obligations under Sections 3 and 4 (b) of Article IV.

The circumstances that have led the member to conclude that it is unable both to maintain the par value and immediately select a new one can be examined; and if the Fund finds that the arguments of the member are persuasive it may say so, although it cannot give its approval to the action. The Fund would have to emphasize that the withdrawal of support from the par value, or the delay in the proposal of a new par value that could be supported, would have to be temporary, and that it would be essential for the member to remain in close consultation with the Fund respecting exchange arrangements during the interim period and looking toward the early establishment of a par value agreed with the Fund. No other steps would be required so long as the Fund considered the member’s case to be persuasive, but at any time that the Fund concluded that the justification for the action of the member was no longer sustainable, it would be the duty of the Fund so to state and to decide whether any action under the Fund Agreement would be necessary or desirable.

The essence of this whole analysis may be very simply expressed. The par value system is based on lessons learned from experience. There is ample evidence that it continues to be supported by the members of the Fund. Exceptions to it can be justified only under special circumstances and for temporary periods. The economic and financial judgment of the Fund in such cases must be tempered by recognition of its responsibilities in the wider field of international relations.

Par Values in 1950-51

During the fiscal year 1950-51, adjustments in established par values were agreed with two members of the Fund and an initial par value was agreed for a third member.1

The change in the par value of Ecuador from 13.50 sucres to 15 sucres per dollar, in which the Fund concurred on December 2, 1950, involved a simplification of the country’s multiple rate structure, and was a significant step toward a definite adjustment of the rate pattern and exchange system on a more realistic basis. Ecuador had been dealing with its postwar balance of payments difficulties largely through an emergency system involving multiple exchange rates and exchange taxes. When a serious deficit developed in 1949, largely as a result of a recession in the prices of Ecuadorian exports, the country was not yet ready to take a definite step and hence did not join in the formal devaluations undertaken by many other countries at that time. Instead it resorted to the further temporary measures referred to in last year’s Annual Report, mainly in order to gain time to consider a thorough overhaul of the exchange structure. In 1950 the improvement in international markets eased the position of Ecuador and made possible the disposal of some accumulated export surpluses. Reserves were accumulated at a substantial rate during the year. The money supply increased considerably, though not in proportion to the increase in reserves, since internal factors had a net contractionary effect, due mainly to the repayment of crop advances made in the preceding year and the limited size of expenditures on development projects.

The Korean crisis led to a sustained favorable demand for some of Ecuador’s major exports. At the end of November 1950, when the emergency legislation expired, it was believed that a devaluation of about 10 per cent would be sufficient to assure for the foreseeable future an adequate flow of exports, with the exception of some minor products for which a compensation system was to be retained for a limited period. On the import side, the new parity rate is applied to the essential imports that constitute the greater part of total imports. For the two categories of less essential imports, the rather complex exchange taxes and surcharges have been replaced for the time being by a flat tax, applied at different rates for the two groups, with the least essential continuing to obtain exchange in the free market. The anticipation of shortages had induced in Ecuador, as in other countries, an increased demand for imports, and more experience of domestic policies and the development of the world situation will be required before the effectiveness of the present system can be properly assessed.

During the year under review, Paraguay effected a change in par value and made other modifications in its exchange system to supersede the temporary revisions of late 1949. Under that temporary system and with the application of rather severe import restrictions, Paraguay succeeded during 1950 in increasing its reserves. At the same time the guaraní loss that resulted from the Bank of Paraguay’s exchange transactions became an important element activating inflation in the latter part of 1950. A fundamental adjustment of the system was needed to ease the pressures resulting from continued inflation and the inadequate rate structure. Paraguay has benefited only to a relatively minor extent from the rise in world raw material prices after mid-1950.

After a period of close consultation, a change in the par value of the guaraní, effective March 5, 1951, from 3.09 to 6.00 guaraníes per dollar, was agreed with the Fund, and at the same time a significant simplification of Paraguay’s complex exchange system was effected. Under the new system there are only two fixed rates: the parity rate, which applies to the bulk of exports, a limited number of essential imports, and some government transactions; and a rate of 9 guaraníes per dollar for the bulk of imports and certain minor exports. A legal free market was also established for certain nontrade transactions, and the importation of certain luxury goods was temporarily suspended. Among other modifications, it is worth noting that the graduated tax on sales of exchange, which during the preceding months had been applied in addition to the rate spreads, was eliminated. Although the results of the new system cannot yet be accurately appraised, its effectiveness will depend to a considerable extent upon the success of anti-inflationary measures and upon the improvement of the exchange control machinery. In connection with the latter, the Fund has been giving Paraguay technical assistance.

The dollar exchange rate of the Pakistan rupee had not been changed at the time when other sterling area currencies were devalued. The Government of Pakistan—which became a member of the Fund and communicated a par value based on its then prevailing rate of exchange in July 1950—believed that the balance of payments of Pakistan did not require devaluation; that the supply conditions of her major exports, jute and cotton, ; made it unlikely that devaluation would increase Pakistan’s export earnings, including those of hard currencies; that higher import prices would constitute a serious inflationary danger; and that industrialization in Pakistan would be impeded by the higher costs of imported capital goods that would result from devaluation. In the light of the devaluations by other countries, many of them having close trade relations with Pakistan, Pakistan’s position gave rise to doubts in some quarters.

During the 18 months since September 1949, Pakistan’s balance of payments showed improvement. Pakistan succeeded in marketing its exportable production, although this was due to some extent to the fact that the 1949-50 jute crop was smaller than normal. The continuing upward movement of world prices and demand for Pakistan’s exports strengthened the case for maintaining the original exchange rate of the Pakistan rupee. On March 19, 1951, an initial par value for the Pakistan rupee of PRs 3.30852 per U.S. dollar, which was identical with the exchange rate prior to the devaluations of September 1949, was accepted by the Fund. In the Fund’s judgment, this par value appeared appropriate in the light of the balance of payments prospects of Pakistan and current world market trends.

On September 30, 1950, the Government of Canada suspended its fixed rate of exchange and announced that the rate would be permitted to fluctuate in response to market forces. This action was taken in order to check an undesired capital inflow, mainly from the United States, which was adding to the money supply and tending to depress interest rates, thus augmenting internal inflationary pressures and, at the same time, increasing Canada’s gross foreign debt and annual service charges. The objective of the Canadian action thus differed from that of previous exchange rate adjustments of most other countries, which were intended to rectify an unfavorable balance of trade and to check an outflow of capital.

The heavy inflow of capital into Canada in 1950 of about Can$l billion was accompanied by a deterioration in Canada’s over-all balance on goods and services, although the current account with the United States showed substantial improvement. Speculative opinion in the United States had formed the view that the trend of the balance of payments with the United States would continue increasingly favorable to Canada, and might lead to an upward revaluation of the Canadian dollar. More than two thirds of the total inflow of capital for the year was concentrated in the third quarter, when there was a considerable movement via the security markets under the influence of this speculative opinion. In view of the speculative nature of much of the capital inflow, the Canadian Government felt unable to foresee the end of the movement so long as a fixed exchange rate was maintained. As, in the view of the Government, it was impossible to determine in advance with any reasonable assurance what new level would be appropriate, it announced that the rate of exchange should be left to be determined by market forces.

The Fund recognized the exigencies of the situation that led Canada to the proposed plan and took note of the intention of the Canadian Government to remain in consultation with the Fund and to re-establish an effective par value as soon as circumstances warranted. After the suspension of the fixed rate of exchange which became effective October 1, 1950, the exchange value of the Canadian dollar rose from 90.9 U.S. cents to nearly 97 cents, and the inflow of capital subsided to nominal proportions. The market rate on April 30, 1951, was 93.6 cents.

The action of Canada has increased to three—the other two being France and Peru—the number of Fund members that have decided temporarily not to maintain exchange rates within I narrow margins of the par values agreed with the Fund. The position is similar in Italy and Thailand, where, however, no par values have ever been agreed with the Fund.

In France and in Italy the Governments have succeeded, during the whole of the period under review, in keeping the exchange rate between their respective currencies and the dollar at the level prevailing at the beginning of this period. In Greece, too, the effective dollar and sterling exchange rates of the drachma have remained stable since the devaluation of 1949.

During the past year, Peru has maintained the exchange system established in November 1949, involving two exchange markets in which the rate was subject to fluctuations. The sol has, however, been effectively stabilized in relation to the dollar; discriminatory import prohibitions on dollar goods have been removed, and the spread between the certificate and draft rates has been reduced to a fraction of one per cent. The level of international reserves has also risen. These developments should facilitate the unification and formal stabilization of the exchange rate.

After the exchange reform of November 1949, the sol appreciated against the dollar in both the certificate and the draft markets. The certificate rate, which had been about 15.20 soles to the dollar in November 1949, reached its highest level, 14.30 soles, in February 1950. Thereafter it depreciated, fluctuating around 15 soles to the dollar until September 1950; it then strengthened with government intervention in the market and was effectively stabilized in October at 14.95.

The relative firmness of the sol against the dollar following the reform of November 1949 was partly a result of the exchange reform itself, which increased the supply of dollars in the certificate market more than it added to the demand. Moreover, the anti-inflationary policy that the monetary authorities pursued with marked success in the months following the reform prevented any significant rise in the money supply until May (the money supply actually declined through January 1950). Following the outbreak of the Korean conflict the demand for imports rose sharply. At the same time expanding exports together with internal pressures (despite budget equilibrium) expanded the money supply, which at the end of December 1950 was more than 15 per cent higher than at the end of 1949. These factors largely explain the depreciation of the sol during that period. As the export boom gathered momentum a tendency in the opposite direction began to appear. However, appreciation was arrested by further Central Bank purchases in the dollar certificate market and by the reduction and eventual abolition of the prohibitions on dollar imports. As a result of the Central Bank’s intervention, Peru’s international reserves increased substantially in the latter part of 1950 and in early 1951. Inflationary pressures appear to have continued in 1951. The authorities took steps in May 1951 to check the expansion of the money supply, while continuing the accumulation of reserves.

The sterling rate has at times followed a somewhat different course. For a time sterling commanded a premium over the dollar, largely because the intensified import demand was unhampered by import prohibitions in the sterling market. With the subsequent removal of prohibitions on dollar imports, a discount on sterling tended to reappear. To some extent these movements in the sterling rate were also influenced by the seasonal character of Peruvian trade with the sterling area.

In Thailand during the past twelve months the free market rates for the baht have appreciated in terms of both sterling and dollars. The rate of appreciation increased in the last quarter of 1950, and the first quarter of 1951, partly on account of rapidly rising prices for rubber and tin and an increased volume of rice exports. The average free selling rate for the dollar fell from 22.14 baht in April 1950 to 21 in April 1951, and for sterling from 57.53 baht to 54.11 baht. The baht has therefore appreciated by 5.4 per cent in terms of the dollar and 6.3 per cent in terms of sterling.

The area within which broken cross rates threaten to distort the normal flow of trade is now much narrower than it was two or three years ago. The cross rates of greatest significance are the sterling-dollar rates, and the increased relative strength of sterling has been the basic reason for the improvement. There are, however, still a number of countries, including Hong Kong, Peru, Syria, Lebanon, and Thailand, where cross rates have not been brought under control, and countries confronted with special exchange problems are still sometimes disposed to look for an easy solution to practices that involve broken cross rates.

Other Exchange Policy Developments

In Austria the inflationary pressures that in earlier years had been a continuous threat to financial stability were eased in 1950 by a considerable ordinary budget surplus, achieved through improved tax assessment and collection procedures, the restrictive credit policy of the Central Bank, and substantial increases in industrial and agricultural production. This enabled the Government to decrease the distortion of the domestic price structure and price-cost relations, and thus made possible a further adjustment in the exchange rate structure of the schilling. On October 5, 1950, following a price-wage agreement that partially eliminated the existing distortions in domestic relative prices, and, after consultation with the Fund, the exchange system that had been established in November 1949 was considerably simplified. The existing three rates applied to different import categories were replaced by a single rate hitherto used for one category of imports and all exports. A single rate of 21.36 schillings to the U.S. dollar (equal to the so-called effective export rate) has thus been established for all trade transactions. The premium rate of 26 schillings to the U.S. dollar has been maintained for certain invisibles, mainly tourist expenditures. The “basic rate” of 14.40 schillings to the U.S. dollar, previously applied to imports that were given a heavy weight in the cost of living index, was abolished, the subsidies that this rate implied being partly abolished and partly transferred to the budget. Private barter and/or compensation arrangements and other “irregular trading” devices have been abolished in principle.

The decline in the prices of Chile’s major export commodities that had been partly responsible for its difficulties last year was arrested and subsequently reversed during the 1950-51 fiscal year. Inflationary pressures, however, still continued to aggravate the balance of payments difficulties, though during the early part of the period a serious effort was made to curb persistent inflationary trends, chiefly through a somewhat less liberal credit policy, and some encouraging success was achieved. After the Korean conflict began, however, the impact of developments abroad became an increasingly important inflationary factor and disturbing trends again made themselves felt.

In an attempt to adapt its exchange structure to the continuously changing economic situation at home and abroad, Chile has made a number of revisions in its complex exchange rate system. It was not possible to move as far toward the objective of a unified exchange system as had been hoped when the measures reported in last year’s Annual Report were taken early in 1950, but there was some progress in that direction. After a series of intermediate adjustments, a major reform was carried out toward the end of 1950 which resulted in a further depreciation of the average level of exchange rates and permitted some relaxation of direct restrictions. After the legalization of the free market, which is now used for the majority of nontrade transactions and for certain trade transactions, the free market rate tended for a time to appreciate, apparently in response to internal policies and to international economic developments. About one fourth of imports are free from control, another fourth is freely importable by specified importers, while the remainder is still subject to quantitative restrictions. The largest group of imports is subject to a rate of 60 pesos per dollar, another significant portion obtains exchange in the free market, and for a few of the most essential imports exchange is provided at the preferential rates of 50 or 31 pesos. On the export side, the rate of 19.37 pesos per dollar has been retained for the local currency requirements of the large foreign-owned companies, particularly copper mining companies, while other exports are effected at the rate of 50 pesos or the free rate. Consultations between Chile and the Fund are continuing.

To ease the growing pressure on its import controls, Colombia in March 1951 undertook an extensive reform of its exchange system that involved depreciation on both the buying and the selling side and diminished the reliance previously placed on direct controls. An accelerated monetary expansion during most of 1950 had brought about a rising demand for imports, which was intensified by the anticipation of shortages after June 1950. The pressures became so strong that the authorities found it necessary to relax the application of import restrictions about the middle of the year. As a result, there was a moderate decline of reserves, and substantial payments arrears accumulated during the year, notwithstanding record exchange earnings resulting from the continuing rise in the price of coffee, Colombia’s main export. Furthermore, the very large volume of import licenses outstanding at the end of the year had yet to be translated into payments obligations.

In addition to these immediate and prospective balance of payments difficulties, and growing dissatisfaction with the cumbersome control and exchange rate system, economic development and policies consciously oriented to that objective had been receiving increasing attention in Colombia. It was felt that foreign investments should be encouraged, and for that purpose some rate adjustment and relaxation of restrictions were deemed to be desirable incentives. In view of all these considerations, Colombia proposed major modifications in its exchange system, which the Fund approved as concrete steps in simplifying the exchange rate structure and relaxing restrictions, and toward the ultimate establishment of a new par value.

The new system, which went into effect on March 20, 1951, established a new buying rate of 2.50 pesos per U.S. dollar, which applies to all exchange receipts except those from coffee exports. For the time being this rate is also applied to 25 per cent of coffee export exchange proceeds, the remainder being sold at the old rate of 1.95 pesos. Previously, major export (including coffee) proceeds, the earnings of Colombian capital abroad, and exchange derived from registered foreign capital had received the 1.95 peso rate, while all other exchange proceeds were liquidated at a premium certificate rate, which fluctuated around 3.00 pesos per U.S. dollar. The exchange certificate market has now been abolished.

The selling rate of exchange has, on the average, depreciated by more than the buying rate. The basic selling rate, formerly 1.95 pesos per U.S. dollar, is now 2.51 pesos. An exchange tax of 3 per cent is applied to all private import payments, and taxes ranging from 2 to 9 per cent to specified nontrade payments. The number of effective selling rates has thus been reduced to 5, against as many as 21 in July 1950. Direct restrictions on permitted imports have been substantially removed, but a list of prohibited imports has been established which covers about 8 per cent of the value of 1950 imports.

Colombia’s exchange earnings this year are likely to exceed substantially even last year’s record level. It is, therefore, expected that, with appropriate supporting policies, the new exchange rate structure should equilibrate Colombia’s international accounts, at least after the payments arrears carried over from last year have been settled and the effects of last year’s relaxation of import restrictions at lower rates of exchange have been absorbed.

In November 1950, as part of a general fiscal program, Denmark levied a tax of 20 per cent on sales of foreign exchange for travel purposes. While the Fund regretted the introduction of a new multiple currency practice and did not approve the tax as a long-term policy, nevertheless, in view of the fact that this tax did not constitute a major modification of Denmark’s foreign exchange system, and as it was understood that the tax would lapse in March 1952, the Fund did not object to its temporary continuance until March 1952.

Late in February 1951, after consultation with the Fund, a system was introduced in Iceland whereby operators of small fishing vessels were granted import licenses for certain specified goods, in an amount denominated in Icelandic currency equal to one half the foreign exchange proceeds derived from export products from these vessels except herring products and cod liver oil. This system was established in order to provide a temporary subsidy to this part of the fishing industry; it will remain in force for one year and Iceland will consult with the Fund regularly on its operation.

After the devaluations of September 1949, Iran stabilized the certificate rate, applied to the majority of trade transactions (other than oil), which had gradually appreciated during the preceding year, at the level of 40 rials per U.S. dollar. This situation was maintained until July 1950, when the exchange system was substantially revised. Under this revision there were three different official rates of exchange. The rate of 32.50 rials per U.S. dollar continued to apply to the exchange sales of the Anglo-Iranian Oil Company, to governmental nontrade transactions, and to certain essential personal remittances. Payments for a specific list of essential imports were subject to a second fixed rate of 40 rials per U.S. dollar. A third fluctuating rate was also introduced, mainly as an incentive to exports and a discouragement to nonessential imports. Exporters were permitted to dispose of their foreign exchange proceeds in the free market to importers of nonessential goods which were not on the list of prohibited imports.

This free market, however, met with considerable criticism in business circles, largely because of the added element of risk and uncertainty it introduced into their dealings. The Central Bank found that it curtailed its control over exchange availabilities and operations. Moreover, the free rate for the rial showed a pronounced tendency to appreciate.

These considerations induced the authorities in November 1950 to replace the fluctuating rate with a fixed rate of 48.75 rials. The scope of transactions to which the three different rates applied remained unchanged. At the same time, the period within which foreign exchange receipts must be surrendered was reduced from 16 to 12 months. The Fund has been in close consultation with Iran concerning its exchange system and related problems.

The stop-gap modifications in the exchange system of Nicaragua, introduced late in 1949, proved inadequate to overcome the country’s balance of payments difficulties that had been growing during the postwar period. Notwithstanding record export receipts in 1950, there was by the end of the year an accumulated backlog of commercial arrears of about $5 million. A more thoroughgoing reform of the exchange rate structure and system was found to be necessary and with the agreement of the Fund this was enacted in November to take effect January 1, 1951. The reform established a more realistic rate pattern and eliminated the compensation and certificate practices. It established a single effective buying rate of 6.60 cordobas to the dollar and a basic selling rate for private transactions of 7 cordobas to the dollar.

These basic rates are subject for the time being to certain qualifications. Exchange for governmental requirements, and for the settlement of outstanding commercial obligations for imports previously incurred at the official rate of 5 cordobas, will be provided at that rate. The amount made available for these purposes is not, however, to exceed 20 per cent of total exchange receipts. Surcharges on imports have been introduced to replace direct controls that had led to unsatisfactory allocations. While exchange is allocated for essential imports without surcharge at the rate of 7 cordobas, surcharges are imposed on semi-essential and nonessential imports at the rates of one cordoba and three cordobas per dollar, respectively. The receipts from these surcharges are to be sterilized, and, as a further anti-inflationary measure, advance deposits are required on import payments. The new system has simplified Nicaragua’s multiple rate structure and, given proper enforcement of the principles on which it is based, should be adequate to restore balance to Nicaragua’s payments position.

The Philippine Republic has in the past year been faced with the necessity of taking further measures to overcome the grave difficulties that may still be considered a direct legacy of the devastation of the war. Production had fallen to a low level after the war and both production and exports are still significantly below the prewar level. On the other hand, the annual value of imports from 1946 to 1949 was about double that of exports. During the postwar years large U.S. disbursements and aid tended to conceal the urgency of the need for other measures to improve the country’s international position and lessen its dependence on foreign aid. As these disbursements declined, a continued high level of imports sustained by high money incomes, and the failure of exports to expand caused a severe drain on foreign exchange reserves. As reported in last year’s Annual Report, it was found necessary toward the end of 1949 to introduce exchange and import controls to prevent complete exhaustion of the reserves and to arrest capital flight.

Reliance on direct controls as the predominant instrument of policy could not, however, be an adequate remedy in the long run. The serious economic straits in which the Republic found itself prompted the government in 1950 to request the President of the United States to appoint an economic survey mission to consider the economic and financial problems of the country and to make appropriate recommendations. This mission, in a report submitted in October 1950, recommended various economic reforms. Among a number of alternative measures, which it proposed in order to facilitate the reduction of imports through cost measures, was the imposition of an exchange tax of 25 per cent. However, as a result of the combination of stringent exchange and import restrictions and rising export prices, the external position of the Republic showed substantial improvement in 1950, and the exchange tax adopted by the Philippine Congress was somewhat lower than had been recommended in the mission’s report. Effective March 28, 1951, a special tax of 17 per cent, to be maintained for two years, was imposed on the value in pesos of foreign exchange sales. Sales of foreign exchange for certain essential purposes, including specified imports and certain invisible items, are exempt from the tax. This action was taken after consultation with the Fund, The Fund, taking into consideration that related measures were also being taken to increase production and achieve internal financial stability, approved the use of such an exchange tax as a temporary measure.

There have also been significant developments in exchange policy in two countries, Argentina and Poland, which are not members of the Fund. The measures taken by Argentina to adjust its complex exchange system to the currency realignment of 1949, and their effects on certain neighboring member countries were referred to in last year’s Annual Report. These measures did not prove adequate to provide in 1950 the desired stimulus to production of basic agricultural exports, to discourage excessive imports, and to maintain a sound basis for a balanced agricultural-industrial economy. This was particularly true with respect to the basic rate of 3.3582 pesos to the U.S. dollar, which had been maintained unchanged in the 1949 adjustments and which applied to Argentina’s major agricultural exports, such as cereals and meat. Domestic inflationary developments continued to raise the cost of production. Domestic minimum prices for basic agricultural products had to be increased and, although the international prices of these products also rose after the outbreak of hostilities in Korea, a devaluation of the basic rate was deemed necessary as a further stimulus to production and in order to restore the profit margins of the state trading corporation. Devaluation of the basic rate from 3.3582 pesos to 5 pesos per U.S. dollar, effective August 28, 1950, was accompanied by a simplification of the exchange system. Three rates replaced the ten rates previously in force. In addition to the 5 peso rate, which applies to basic exports and preferred imports, there is a preferential export and basic import rate of 7.5 pesos per U.S. dollar. A free exchange market was established for capital transactions, other invisibles, minor exports, and nonessential and luxury imports. The rate in the free market has been fluctuating around 14 pesos to the dollar. Argentina was able subsequently to increase the export prices of its major products with a view to maximizing foreign exchange earnings, and the competitive position of those Argentine exports that compete with similar products from Uruguay and Paraguay appears to have remained virtually unchanged.

A revaluation of the zloty, which gave an exchange rate of 4 zlotys to the U.S. dollar, identical with that of the Soviet ruble, instead of the old effective rate of 400 zlotys, was announced in Poland on October 28, 1950. This change was part of a general monetary reform, which at the same time involved a reduction of prices to three hundredths of their former level. If the old effective rate accurately represented the real purchasing power of the old zloty, the new rate therefore substantially overvalued the zloty against the U.S. dollar and other Western European currencies. A new zloty has been put into circulation, the cash of private persons and enterprises being converted at the rate of 100 old zlotys to one new zloty, and of cooperative and state enterprises and institutions and the savings deposits of the working population at the rate of 100 to 3. A fundamental objective of the reform, which reduced the real value of cash balances of private persons and entrepreneurs by two thirds, was stated to be “the completion of the process of shifting part of the capital held by capitalists to the masses of workers and peasants.”

In contrast with the far-reaching changes of the previous year, the structure of par values in 1950-51 has shown a satisfactory degree of stability. In the present circumstances the broad pattern of agreed exchange rates may be accepted as adequately performing the proper economic function of exchange rates. There should, however, be no complacency about these results. It is the duty of the Fund and its members to keep exchange rates continuously under review; especially at the present time it must be emphasized that the soundness of a country’s rate of exchange is dependent upon its ability to maintain monetary stability, and that the soundness of the rate structure as a whole is dependent especially upon monetary stability in the larger economies.

The establishment of an initial par value of 230 markkas = US$1 for the Finnish markka was also announced by the Fund on June 28, 1951.

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