4 Decline of Exchange Restrictions, 1945–69

Margaret De Vries
Published Date:
June 1986
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Exchange controls commenced in the 1930s, especially in Germany, and in the rest of Central and Eastern Europe, in Japan, and in Latin America. With the outbreak of World War II, they spread quickly, especially throughout Western Europe and the countries of the British Commonwealth. By the end of the war, they had become major instruments of national economic policy.

It was in the midst of these restricted international economic relations that the Fund opened its doors in May 1946. One of its main purposes was to assist in the establishment of a multilateral system of payments and to eliminate exchange restrictions. To help achieve this, the Fund varied its policies a great deal from 1945 to 1969 with the ever-changing panorama of world economic conditions. During that time there were five distinct periods, each of approximately five years.


One of the legacies of World War II was the imposition of additional problems on the already burdened flow of international commerce. For countries in Europe and for Japan, the war had left difficulties arising from destruction, the loss of overseas resources, and the rupture of long-established trade and finance connections. Not only did most of these countries have sizable trade and payments deficits, but the whole pattern of world trade was seriously unbalanced. This imbalance reflected the sharp contrast between the capacity of countries in the Western Hemisphere to produce goods for export and the output capacities of other areas, where productive facilities right after World War II were inadequate to meet the greatly increased demands of their populations for goods and services.

In these circumstances, most of the Fund members in Europe and in the Middle East and Asia felt compelled to ration available supplies of domestically produced goods and to continue and even to extend their stringent wartime restrictions on imports. Moreover, in 1947, the payments problem which was soon to be generally known as the “chronic world dollar shortage” had forced many countries to change the character of their trade and exchange restrictions. Formerly, restrictions had been placed on imports of certain goods, such as luxury and nonessential items, rather than on imports from specific currency areas; during 1947 the restrictions of most members were altered so as to reduce their deficits in U.S. dollars and to save their gold and dollar reserves. In short, most restrictions became “discriminatory” against the dollar area—that is, against imports from the United States, Canada, and parts of Latin America.

In addition, by August 21, 1947, the attempt to render convertible all pounds sterling accruing from current transactions, under the terms of the Anglo-American Financial Agreement of 1945, had failed. European currencies, including the pound sterling, were “inconvertible”—that is, earnings in these currencies by exporters from other countries could not be freely transferred into gold or U.S. dollars. Restrictions also prevailed elsewhere. In many Latin American countries, the demand for imports—swollen partly because of deferred wartime demand and partly because of postwar inflation—necessitated the intensification of restrictions, even though foreign exchange receipts were large. In several Eastern European countries, exchange restrictions, although severe, were themselves subordinated to even more direct and comprehensive state intervention through state trading and barter arrangements; the Eastern European economies became progressively more isolated from the rest of the world.

During this period, the Fund, not intended as an emergency agency, could do little. Meanwhile, it stressed to its members the importance of those measures—such as exchange depreciation and domestic monetary policies—that would be likely to improve their balance of payments positions in the longer run. Improved payments positions would lay the basis for an eventual reduction of restrictions. The preconditions for improved payments and freer trade and payments were not easily achieved: they included, in many members, the restoration of productive capacity; a well-balanced flow of international trade; appropriate relations between the price-cost structures of the main trading countries; freedom from undue inflationary or deflationary pressures; an active international capital market; and the buildup in the non-dollar world of adequate monetary reserves. Fund officials were also mindful that, while international agencies could make an important contribution to the achievement of these preconditions, it was basically national policies that would determine the kind of world economy that would ultimately emerge.


The first signs of improving world economic conditions appeared by 1950. The financial aid provided to Western European countries by the United States through the Marshall Plan had immensely facilitated the reconstruction of the economies of these countries. Production throughout Western Europe had greatly increased, exportable goods from the deficit countries had become more plentiful, and the abnormal need for imports for reconstruction had become much smaller. Inflationary pressures in most countries had also moderated. Last, the devaluations of Western European currencies in 1949 had corrected many distortions in relative prices.

This second period of Fund policy on exchange restrictions saw a large spurt in the Fund’s dealings with its members with regard to their restrictions. Article XIV of the original Articles of Agreement called for annual reports on restrictions; the First Annual Report on Exchange Restrictions appeared in March 1950. To produce this Report, the Fund for the first time surveyed in detail the restrictions in force in all members. Article XIV also provided for a postwar transitional period during which members could maintain their exchange restrictions and adapt them to changing circumstances. This Article further provided that, five years after the Fund commenced operations, it would hold regular consultations with its members on the continuing need for restrictions. These consultations began in March 1952 and within a few years were being hailed as successful.

The Fund’s dealings with members in regard to their exchange restrictions were influenced by two general considerations. One, relaxation of restrictions and the establishment of convertibility had to be a progressive action over time; members could undertake gradual programs of decontrol without incurring unnecessary risks. Two, the actions of members were interdependent: the ability of one member to eliminate restrictions was often a function of the policies and actions of other members. Some members, for example, could remove their restrictions only when the main currencies which they earned had become convertible. Hence, there was a need for a coordinated program so that the policies and practices of every member would, to the maximum extent, assist rather than frustrate the efforts of others. Here the Fund had a proper and useful role.

While recognizing that the Fund could not press members too hard, Fund officials, despite the Korean war of 1950–52, argued that greater progress in decontrol was feasible and should be made. Some progress was made. In Western Europe, after the European Payments Union had been established, liberalization of both intra-European trade and invisible transactions started to move forward; several countries in the sterling area and in the Western Hemisphere took action to admit more imports. Some of this easing of restrictions took the form of formal removal or relaxation of restrictions. Much, however, was done by administrative action within the existing control mechanisms: more licenses for imports were granted, for example, and some goods were freed from licensing requirements.


By 1955 most of the abnormal difficulties following World War II had faded into the past and with them had gone the acute balance of payments problems that had given rise to tight restrictions. World industrial production was expanding rapidly, and world trade even more. Large gains had been made in productivity and in internal financial stability. The previously difficult U.S. market had been penetrated by the exports of other industrial countries, and exporters from Western Europe and Japan were competing successfully in third markets with exporters from the United States. Gold and dollar holdings of countries other than the United States had been rising and, by the end of 1954, were almost double what they had been at the end of 1948. Testimony to the strength of the balance of payments of the non-dollar world was that a recession in the United States in 1953–54, unlike those of 1945–46 and 1948–49, did not lead to a recrudescence of balance of payments difficulties in the non-dollar world.

Restrictions began to be relaxed considerably. Western European nations removed them from agreed proportions of their mutual trade, a liberalization which was frequently extended to imports from other non-dollar sources. Extensive relaxation of restrictions also occurred outside Europe. There was a tendency as well to reduce the degree of discrimination between imports from different countries or paid for in different currencies. Many countries, especially in Europe, began to give up bilateral payments agreements in favor of wider payments arrangements. By mid-1956 the Fund was able to report that “foreign exchange restrictions impose a less serious obstacle to international commerce today than at any time since the outbreak of World War II.”1

Against this background, the Fund could push more vigorously toward a systematic freeing of trade and payments. Eager that members not reintensify restrictions even if their balance of payments situations worsened, the Fund modified its policies on financial assistance. Members were encouraged to draw on the Fund rather than tighten restrictions. In two exceptional years ended April 30, 1958, the Fund, pursuing this policy, lent $1,765 million, including large amounts to the United Kingdom, France, India, Japan, the Netherlands, and Argentina.

The year 1958 witnessed the most signal achievement since World War II in the field of exchange restrictions: fourteen Western European members agreed to establish “external convertibility” for their currencies.2 This meant that nonresidents of these 14 members could convert current earnings of the currencies of any of these members into gold or dollars; exporters were free to use the proceeds from their exports anywhere in the world. Fifteen members, mainly in the British Commonwealth, took corresponding steps and ten, including the United States and Canada, already had convertibility. The road was thereby opened to the elimination of discriminatory restrictions and to the further liberalization of all restrictions, including those still applying to the residents of member countries whose currencies had become “externally convertible.” In other words, the road to “internal convertibility” was cleared.

Accordingly, the Fund, in October 1959, took a general decision against discriminatory restrictions imposed for balance of payments reasons and in June 1960 set out guidance for members contemplating giving up the transitional arrangements of Article XIV and accepting the obligations of Article VIII. Article VIII required members to obtain the Fund’s approval for restrictions on the making of current payments and transfers, that is, on what were sometimes called “exchange restrictions.” Although the Fund under this Article could approve any exchange restrictions, in practice a member’s acceptance of the obligations of Article VIII was a substantive move: members that opted for this Article usually had few remaining restrictions on current payments and transfers. In early 1961, most Western European members moved from Article XIV to Article VIII. They now had fully convertible currencies, in the Fund’s meaning of that term.

A NEW ERA, 1961–65

As a result of these developments, restrictions on trade and payments for the world as a whole were less by the early 1960s than they had been for some decades. The European members that had established external convertibility—and defended it against something of a crisis in 1960–61—were soon joined by others. Important obstacles to international trade remained, but there were relatively few to impede conducting that trade on the basis of a multilateral payments system.

The successful achievement and maintenance of widespread convertibility also continued to provide the basis and incentive for still further reductions of exchange restrictions, especially those still prevailing on imports or on exchange for foreign travel or for sending remittances abroad by residents of the members concerned. Such restrictions were also made less discriminatory. A wide range of members reduced their restrictions considerably, for example, Australia, Austria, Belgium, Denmark, France, the Federal Republic of Germany, Greece, Iceland, Ireland, Italy, Japan, Jordan, Luxembourg, Malaysia, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Thailand, Turkey, the United Kingdom, and Yugoslavia.

In the next few years, many members went even further in reducing their restrictions on payments than they were obliged to do under the Articles: although the Fund’s Articles permitted controls on capital movements, liberalization was gradually extended even to these. A view that had been dominant before 1930 began to gain ground, namely, that freedom of capital movements was highly desirable in itself, and, also, that the movement of short-term funds might be an equilibrating factor in international payments, diminishing the need for reserves.

Moreover, the industrial members began to concentrate on the liberalization of trade as well as of payments. In particular, in 1962–63, they initiated efforts to reduce tariffs which eventually culminated in the Kennedy Round of tariff cuts, effected through the Contracting Parties to the General Agreement on Tariffs and Trade (GATT) in 1967.

Nonetheless, problems relating to restrictions were not at an end. The dismantling of restrictions that occurred, in fact, laid bare one problem and brought forth another one, both of which were to require new and wider solutions in the future. The first problem came about because it was mainly the industrial members that dismantled restrictions. Thus, it revealed that the trade and exchange restrictions that persisted were by members in the throes of economic development, a considerable number of which at this time had only just gained their independence and become members of the Fund. While the industrial members were able to maintain their external economic relations with few limitations on acquisition or use of foreign exchange, many developing members continued to rely on restrictions. Several of them even tightened their restrictions, both to deal with balance of payments deficits and to protect domestic industries. The range of their practices also widened; they increased their use of surcharges and taxes and other devices to stem imports and of export bonuses and subsidies to encourage exports. Many of these devices supplemented other restrictions already in force. Possibly worst of all, in some developing members, restrictions seemed to have become more or less permanent.

The second problem of the early 1960s concerned the massive revival of capital movements among industrial members, once restrictions on these movements had been eased. Transfers of short-term capital, in particular, became large and frequent. Because such capital movements were often speculative and disequilibrating rather than equilibrating they presented the financial authorities, especially in industrial members, with new problems. The pound sterling, for example, was subject in the 1960s to severe strains in the world’s exchange markets, at least partly because of rather sharp outflows of short-term capital. The unexpected magnitude of capital flows from the United States was also responsible in part for the emergence and persistence of a sizable deficit in the balance of payments of that country.

These disturbing occurrences often necessitated official intervention—sometimes on a large scale—to enable members to maintain their exchange rates within the margins specified in the Articles of Agreement. To avoid impairing the freedom already allowed for the making of foreign payments, members experiencing capital outflows lost large amounts of reserves. There was heavy resort to the Fund, especially by the United Kingdom. New forms of cooperation arose among the monetary authorities of the industrial members, including mutual assistance to support each other’s currencies, and the setting up in the Fund of the General Arrangements to Borrow (GAB), by which the Fund could obtain additional funds from its ten largest industrial members.

Despite these arrangements, devaluation and rumors of devaluation of important European currencies were recurrent. The principal industrial members also had to take special measures to curb capital outflows. In 1964, the United States enacted a tax to be applied to U.S. purchasers of foreign stocks and bonds; this tax was extended in February 1965, at which time the United States also introduced a voluntary program to discourage capital exports by banks and other financial institutions. As part of several steps to correct its balance of payments in 1964–65, the United Kingdom also made changes in its exchange control regulations affecting capital movements.

These developments were bringing to the forefront basic questions concerning the mechanism of balance of payments adjustment and the possible need for additional liquidity in the international monetary system. Not only did the main industrial members avoid the use of restrictions to cope with their balance of payments disequilibria but they also tended not to alter their exchange rates. Furthermore, without the insulation of a wall of restrictions, and with great mobility of capital, the scope for independent domestically oriented monetary policy also became increasingly narrow. Monetary authorities often found themselves frustrated in using traditional monetary weapons to cope with balance of payments deficits or domestic inflationary pressures. These problems raised vital questions affecting the entire international monetary system. Should additional liquidity be introduced into the system? If so, how? Was there a need for revamping the system as set up at Bretton Woods?


In the late 1960s, new and wider solutions were being sought for the problem of trade in relation to the economic development of developing members and the problem of providing adequate international liquidity. The mechanism for adjustment of balance of payments disequilibria was also being re-examined.

As regards the restrictive practices of developing members, the Fund had, over time, come to use various policy guidelines, which it stressed in its consultations with individual members and in its technical assistance. The Fund was against temporary expedients, such as price controls, import restrictions, multiple rates, and protectionist devices. It had been the Fund’s experience that all these expedients created serious distortions in the allocation of resources of developing members. Instead, it favored exchange rate adjustment, internal stabilization programs, freer trade and payments, and patterns of resource allocation that would expand and diversify exports. Moreover, it was encouraging its developing members to draw on its financial resources so as to help them avoid intensification of restrictions when they encountered balance of payments difficulties.

At the same time the Fund increasingly recognized that the financial problems in which it was necessarily most directly interested accounted for only part of the difficulties of developing members. The search for broader solutions had to include the policies of industrial members, including further reduction of their trade barriers against imports from developing members; many industrial members still had some hard-core restrictions, especially those protecting their agricultural production. Other international avenues were also being explored. The United Nations Conference on Trade and Development (UNCTAD) had been set up permanently. The GATT was working on the reduction of remaining nontariff barriers on trade by industrial countries. In 1967 the Fund and the World Bank started to examine jointly proposals to deal with the instability of commodity prices in world markets. The developing countries themselves had set up a considerable number of regional arrangements—the Latin American Free Trade Association, the Central American Common Market, the Caribbean Free Trade Association, the East African Community, the Central African Customs and Economic Union, the Association of South East Asian Nations, and several others.

With regard to the international liquidity problem, intensive negotiations had gone on. Proposed modifications to the Fund’s Articles of Agreement were, in 1968, submitted to the Board of Governors. In July 1969 they were approved by the necessary number of members. This First Amendment added an important new dimension to the Fund’s activities and in effect gave the Fund another purpose. It provided for a new facility of special drawing rights (SDRs) and gave the Fund the function of managing international liquidity. Financial officials, including those in the Fund, hoped that this new facility, providing a supplement to existing gold and foreign currency reserves, would help ensure an appropriate level of international reserves.

Meanwhile, the problem of capital movements was gradually becoming more acute. On January 1, 1968, the United States introduced mandatory controls on direct investment abroad and voluntary programs were tightened. The United Kingdom continued to maintain mandatory controls over outflows of capital. At the end of 1968, the French franc began to experience periodic crises, due in part to capital movements. In these circumstances, in 1969, the Fund undertook, quietly and with as little fanfare as possible, to re-examine the exchange rate mechanism.

Thus, as of the middle of 1969, there were new and difficult problems in the international monetary system. In some quarters there were even apprehensions that the international monetary system might disintegrate. Nations might return to individualistic policies, such as exchange devaluation and the use of restrictions on payments and transfers and would no longer engage in the international monetary cooperation that had existed since the end of World War II. Yet among most public officials, expressions of continuing confidence in the system’s adaptability were common. There was concrete support for their confidence. The major industrial members, while resorting to controls on capital movements, had avoided recourse to restrictions on current payments and transfers. Moreover, as problems in the international monetary system heightened, cooperation among the central banks and treasuries of the leading countries, through swap and similar arrangements, was becoming more intensive and close, rather than the reverse.

Note: This article was published earlier in a slightly different form in Finance & Development (Washington), Vol. 6 (September 1969), pp. 40–44.

Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1956 (Washington: International Monetary Fund, 1956), p. 89. (Hereinafter cited as Annual Report,—.)

That is, agreed to convertibility of currencies when held by foreigners. Austria, Belgium, Denmark, Finland, France, the Federal Republic of Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, and the United Kingdom; Greece did so in May 1959.

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