CHAPTER 5 Exchange Rate Adjustment

International Monetary Fund
Published Date:
February 1996
  • ShareShare
Show Summary Details
Margaret G. de Vries

Just as the fund has had to develop policies pertaining to the establishment and maintenance of par values, so it has had to evolve policies relating to changes in those par values and in other exchange rates. The issues which have come to the fore include the reasons for devaluation, the magnitudes of the changes, and the possibility of adverse consequences for other members. The role of the Fund in a matter explicitly stated by the Articles to be reserved to the initiative of members has also had to be clarified. Furthermore, the Fund has had to decide what to do when members change exchange rates that have not been agreed as par values: adjustment of exchange rates is not always effected by the simple mechanism set up in the Articles—that is, from one unitary par value to another.

The major examples of rate adjustment between 1946 and 1965 through what, in the parlance of economists, is called “altering the pegs” were the devaluations of the major currencies in September 1949, devaluations by Mexico (1954) and Pakistan (1955), and the German and Dutch revaluations of 1961. These rate adjustments form the subject of this chapter. Exchange rates have also been altered in three other ways. The first comprises partial and selective devaluations through the alteration of multiple rates; these were very frequent until the late 1950’s. The reasons for devaluation in this manner, and the Fund’s views, are discussed in Chapter 6. Second, in a few countries devaluation has been effected by the temporary institution of a fluctuating exchange rate; only later was a new par value established. Canada, the Philippines, and Thailand afford noteworthy examples of this type of devaluation. Third, devaluation has occurred through the use of steadily depreciating fluctuating rates. Some countries which had introduced fluctuating rates subsequently undertook to support these rates. Later, they were obliged to devalue again. These last two types of devaluation are discussed in Chapter 7.


The Fund’s Articles contain two basic concepts applicable to changes in par values. The first provides a criterion by which to judge the need for a change in par value: par values are to be altered only to correct a fundamental disequilibrium. The second relates not only to the need for devaluation but also to its size: competitive depreciation is to be avoided.

In the twenty-odd years since these concepts were formulated, the Fund has never attempted to define precisely either “fundamental disequilibrium” or “competitive depreciation.” In its first years, in response to members’ requests, the Fund did make two interpretations of its Articles involving the first term. And in the early 1950’s some sizable devaluations excited in at least one Executive Director the fear of excessive, if not competitive, depreciation.

Subsequently, the need for exact definitions of these terms has not been a pressing one; therefore such definitions, which could limit the leverage of future Fund actions, have been avoided. In fact, even when the Fund has taken decisions denoting its concurrence with the proposed rate changes of individual countries, it has rarely used these terms. But the absence of definitions has not meant that the conditions described could not be recognized when they were thought to occur. Over the years member countries have proposed a number of changes in par values and, where par values did not exist, in their prevailing exchange rates, and the Fund has generally concurred. In these instances, several different reasons for devaluation can be discerned, all tending to suggest the nature of fundamental disequilibrium.

In a postwar world in which economic conditions have been in direct contrast to those of the interwar period, there has been little temptation to indulge in competitive depreciation of exchange rates. Whereas unemployment had been widespread in the 1930’s, high levels of employment have prevailed in most countries since the end of World War II. The economic dangers have stemmed from inflation rather than from deflation. Consequently, countries have been less, rather than more, inclined since the war than in the interwar period to use devaluation as an instrument of balance of payments policy. In this environment it is understandable that the Fund has not found it necessary to disapprove, certainly not formally, any proposed change in exchange rates as constituting competitive depreciation.


While the plans for a postwar international monetary organization were being drawn up, considerable interest centered on how to limit the frequency of exchange rate adjustments. To this end many economists distinguished fundamental disequilibrium—for which rate adjustments were appropriate—from cyclical or seasonal disequilibrium—for which rate adjustments were not suitable. Furthermore, a prime concern, both for Fund member countries and for economists, was how to reconcile domestic objectives, especially the attainment of full employment, with the requirements of external balance. Therefore, the question raised by the United Kingdom at the outset of the Fund’s activity in 1946 could be expected. The British Government stated its intention to maintain full employment and asked whether steps necessary to protect a member from unemployment of a chronic or persistent character, arising from pressures on its balance of payments, would be considered measures necessary to correct a fundamental disequilibrium.1 In other words, would countries threatened by unemployment due to loss of exports, now (with the advent of the Fund) have the option of devaluing their currency with the approval of an international body? Their choice had previously been restricted to deflation, as required by the gold standard, or to devaluation in circumstances likely to induce retaliatory depreciation, as during the 1930’s.

In answer to the British request for an interpretation of fundamental disequilibrium, the Executive Directors took what proved to be one of two unique decisions pertaining to that expression—that steps necessary to protect a member from unemployment of a chronic or persistent character, arising from pressure on its balance of payments, were indeed among the measures necessary to correct a fundamental disequilibrium. The Board further decided that, in each instance in which a member proposed a change in the par value of its currency to correct a fundamental disequilibrium, the Fund would be required to determine, in the light of all relevant circumstances, whether in its opinion the proposed change was necessary to correct the fundamental disequilibrium.2


Another early issue in connection with the interpretation of fundamental disequilibrium focused on the question of the exact powers of the Fund. Although the Fund Agreement specified that exchange rate changes could be proposed only by members—not by the Fund—and only where there was fundamental disequilibrium, this still left scope for wide differences in view as to how much of a role the Fund might play, and in what way. How much informal initiative could the Fund take in suggesting exchange rate changes? Who in the Fund—the Executive Board, the Managing Director, or, informally, the staff—might take such initiative, and in what ways and to what degree?

In fact, as the Fund and its members learned to work closely together, a modus operandi was evolved without any formalized arrangements having been agreed. However, at the outset of the Fund’s deliberations in the late 1940’s, countries were understandably jealous of their sovereignty in this important field. This was the first time that such a previously unilateral matter had been turned over to an international body. Moreover, there was much mistrust of the Fund, especially among Western European countries. They feared especially that changes in exchange rates or relaxation of restrictions might be forced upon them. They doubted that the Fund was adequately aware of the difficulties of postwar reconstruction. And in their fears and concerns they were mindful of the strong voting position in the Fund of the United States and of the eagerness of the U.S. authorities to have international trade and payments relations restored to normal. In these circumstances the power of the Fund even to object to a proposed par value had to be agreed upon explicitly by the Board.

An insufficient devaluation

In the course of the Executive Board’s discussion concerning the first devaluation referred to the Fund—that of the French franc early in 1948 3—Mr. de Largentaye (France) brought up an ancillary, but crucial, question. Although under its Articles the Fund could object to a change in par value if no fundamental disequilibrium existed, could the Fund also object if it considered the proposed degree of change in par value not sufficient to correct that disequilibrium? Did the Fund not have to concur in a proposed change of parity if (a) there was a fundamental disequilibrium, and (b) a change in the par value was necessary to correct the fundamental disequilibrium?

Mr. de Largentaye believed that the Fund had no power to object to an insufficient change in parity. His reasoning was that if the Fund had the right to object to a proposed change in a par value because it found the change insufficient, the Fund would, in the long run, force the member to accept an additional depreciation of its currency. The Fund, rather than the member, thereby would initiate a change in the par value. The purpose of the Fund was to oppose competitive alterations of par values. In order to prevent competitive depreciation, it was not necessary for the Fund to be able to object to an insufficient alteration; it was enough to empower it to object to an excessive alteration.

The question at stake was vital. The Board, in addition to discussing France’s devaluation, held extra sessions to consider this matter of the Fund’s authority. In the preparatory staff paper for these discussions, the General Counsel expressed the opinion that the Fund could object if the degree of proposed devaluation was insufficient. In effect, the Fund must be satisfied that not just two but three conditions existed before it was required to concur in a change in par value: first, a fundamental disequilibrium must exist; second, the fundamental disequilibrium could not be corrected without a change in par value; and third, the change would, in fact, correct the disequilibrium.

The Directors, however, did not consider the question resolved so simply. Mr. de Selliers (Belgium) concurred with Mr. de Largentaye in his belief that the Fund had no power to object to an insufficient devaluation. Article IV, he contended, was intended to avoid competitive devaluations. Its whole emphasis was on keeping changes in par values as small as possible. There was no indication that members could be made to devalue further than they wished because the Fund thought that only a greater change would correct a fundamental disequilibrium.

Mr. Martínez-Ostos (Mexico), Alternate to Mr. Gómez, agreed with Mr. de Largentaye and Mr. de Selliers on purely legal grounds. He recalled that the Fund was debarred from objecting to a change in par value amounting to less than 10 per cent of the original parity. If a member could make a change of up to 10 per cent with freedom, he doubted that the Fund could object to an even greater change on the ground that it was insufficient.

Other Directors had a broader view of the Fund’s powers. Mr. Overby (United States) thought that the Fund would be in a ridiculous position if it was forced to concur in a change in par value which it was convinced was not adequate. The acceptance of an inadequate change would jeopardize exchange stability for the member and endanger orderly exchange arrangements for all members. He emphasized that, with the establishment of the Fund, a new regime had come into being. Par values were no longer matters of unilateral decision. They were now subject to agreement with the Fund. And the term agreement necessarily meant that the parties must have the power to concur or reject. Consultation and collaboration in the true sense involved more than mere form.

Although he did not ordinarily intervene in discussions such as this, the Chairman, Mr. Gutt, believed the issue to be so significant that he wished to express his opinion. From the practical point of view, he believed that the Fund would be placed in an absurd position before the public if it was forced by interpretation to concur in inadequate changes. To protect its integrity, the Fund would have to declare that the concurrence was purely formal, and that it really opposed the new par value; such a declaration would be confusing to the public and would bring discredit on the Fund.

The concept of “reasonable doubt”

Mr. Saad (Egypt), who was away from headquarters at the time, cabled a statement of his position and successfully resolved the debate with a concept of “reasonable doubt.” He believed that the Fund, which could not legally require a member to change its par value in order to correct a fundamental disequilibrium, could not justifiably express disagreement with a proposed depreciation merely because it questioned whether the depreciation was sufficient to correct the fundamental disequilibrium. However, he thought that a different situation prevailed if it was proved beyond doubt that the proposed depreciation would not correct even partially the fundamental disequilibrium, or that the damage done to a member’s interest by such a depreciation would absorb any possible advantage that the depreciation would give to the member. In such circumstances, the Fund could rightly consider that a proposed depreciation could not be justified as correcting a fundamental disequilibrium.

In effect, Mr. Saad’s concept acknowledged the Fund’s power to object to a proposed devaluation if the inadequacy of that devaluation could be proved beyond doubt; if it could not, the Fund could not object. Moreover, in its deliberations, the Fund must give the member the benefit of any reasonable doubt.

On this basis the Board was able to take the second of two decisions on fundamental disequilibrium. On March 1, 1948, it decided that the Fund had authority under Article IV, Section 5, to object to a change in par value proposed by a member when the extent of the proposed change, in the judgment of the Fund, was insufficient to correct a fundamental disequilibrium. The Fund recognized, however, that the extent of the necessary change could not be determined with precision, and that, in reaching a decision on a member’s proposal to change its par value, whether during the transitional period or thereafter, the member should be given the benefit of any reasonable doubt. In addition, due consideration should be given to the views of the member regarding the political and social consequences of a change in par value greater than the one proposed.4

Changes in rates other than par values

Since members did not always devalue their currencies by altering an agreed par value, the Fund found it necessary to establish its authority to agree to other kinds of exchange rate changes. From 1947 to 1951, the Executive Board took a series of decisions to the effect that all alterations of exchange rates, regardless of whether par values were involved or not, were subject to review by the Fund. In December 1947 procedures and policies were outlined for reviewing changes in multiple rates, to apply to all members including those for whose currencies par values had not been established.5 In April 1951, the Board took a further decision requiring new members that had not yet agreed initial par values to consult with the Fund and obtain its agreement before changing the exchange rates which had prevailed when they accepted membership. Thus, as countries joined the Fund, they were required to consult with the Fund before changing their exchange rates, even though they might not yet have set par values.


A test for the fund

Both the staff and the Executive Directors were well aware of the arguments against devaluation being advanced by many economists in the late 1940’s. Differences of opinion as regards the need for exchange rate adjustment in Western Europe also occurred among the staff, who had been studying the need for devaluation, and among the Directors. Nevertheless, in their Annual Report for 1948 the Executive Directors distinguished between exchange stability and exchange rigidity:

The Fund Agreement makes it clear that the provisions for the regulation of exchange rates are not intended to impose upon the Fund the duty of perpetuating in the name of stability exchange rates which have lost touch with economic realities.6

By that time there were indications that in some countries the exchange rate was restraining exports and adding to the difficulty of earning convertible currencies. The Fund stressed that in the timing of an exchange rate adjustment, the function of the rate in promoting exports, which had been a major element in the determination of the initial par values, was still of great importance.7

Significantly, the Directors also said that

although the Fund is not entitled to propose a change in the par value of a currency it has an obligation to keep the exchange rate situation constantly under review, and its views may properly find expression in its informal consultations with members. When an exchange rate is no longer appropriate the Fund will, of course, give prompt and realistic consideration to a member’s request for adjustment in the par value of its currency.8

But this statement was as far as the Directors, as a whole, were prepared to go. The European Directors especially were unready, even by mid-1949, for any decision by the Fund to review countries’ exchange rates. Some did not want the Board even to discuss the problem. Jealous of members’ sovereignty in this field, they believed that a decision by the Board to study exchange rates was unnecessary and likely to be detrimental to the interests of both the Fund and members. They were especially fearful that the Fund might propose a devaluation and thereby usurp a prerogative of members.

The position of the U.S. Executive Director was exactly the opposite. In the U.S. Government the conviction had gradually grown that the establishment of a stronger economic structure in Europe required a substantial depreciation of sterling and other Western European currencies. Early in 1949 this attitude found public expression. The U.S. National Advisory Council proposed that “the exchange rate question should be reviewed with a number of European countries in the course of the next year.” 9 In discussions in the Executive Board of the position of individual members during the first eight months of 1949, Mr. Overby and Mr. Southard (who succeeded him in March 1949) found frequent opportunities to raise the question of exchange rate adjustment.

At the suggestion of Mr. Southard, an Ad Hoc Committee of the Board was established in August 1949 to consider the problems arising out of the international payments situation and the relation of exchange rates to these problems. Some Directors objected to the establishment of such a committee and took a very unfavorable view of its discussions. The last meeting of this committee was held on September 8, about a week before the devaluation of sterling. The committee’s report advocated that member countries in Western Europe review their rate structures and determine, in consultation with the Fund, to what extent adjustment should be made in each individual case where it was appropriate. Several Directors, among them Mr. Beyen (Netherlands), Mr. Bolton (United Kingdom), Mr. de Largentaye, Mr. Madan (India), Alternate to Mr. Joshi, Mr. McFarlane (Australia), and Mr. Rasminsky (Canada), opposed adoption of any formal report in which members were “invited” to change their exchange rates. Their opposition continued even after the devaluations of September. In their view the Fund should refrain from coming to formal decisions in advance on the exchange rates of its members. Eventually, the committee’s report was adopted by formal vote of the Directors.

The devaluation of sterling

What finally precipitated the devaluation of sterling was a large outflow of sterling reserves during the summer of 1949, such as had occurred in the attempt at convertibility in 1947. In the three months April-June 1949, gold and dollar reserves of the sterling area fell by 14 per cent, to $1,650 million. This level of reserves was less than half the amount of gold alone held at the beginning of 1938, and less than a quarter of that amount in terms of purchasing power, after making allowance for the increase in U.S. prices in the intervening decade. As anticipations of devaluation grew, speculative action increased. In the eleven weeks from June 30 to September 18 reserves declined by nearly 20 per cent, to $1,340 million, and the British authorities came to look upon devaluation as an unavoidable step in order to end a situation which was being made more difficult by the expectation of devaluation.

The choice of an appropriate new rate presented a most difficult problem. Obviously, the lower the new rate, the more expensive in sterling terms American imports would be, and the greater, therefore, the difficulty of controlling increases in manufacturing and living costs; in addition, the lower the rate, the greater the difficulty of servicing the dollar debts of the United Kingdom. On the other hand, the disparity in export price levels was such as to call for a drastic change. Perhaps even more important was the need to establish a rate low enough to create expectations that the British Government would be able to maintain it.

The Managing Director of the Fund was informed by the Chancellor of the Exchequer on September 15, 1949, the penultimate day of the Fund’s Fourth Annual Meeting, that the U.K. Government intended to devalue sterling by approximately 30.5 per cent. The exchange rate of £1 = $4.03 which had been accepted by the Fund as the initial par value for sterling would be replaced by a new rate of £1 = $2.80. Formal notification of the proposal to establish a new par value was submitted to the Fund on Saturday, September 17, and on the afternoon of that day the Executive Board concurred in the proposal.

The Directors considered that the causes of the devaluation of sterling were to be found both in the United Kingdom itself and in other countries of the sterling area. Among the long-term factors that had shaped the problem of the United Kingdom in 1949, the most important were the severe deterioration of its external position on capital account compared with ten years earlier, the deterioration in its terms of trade, the difficulties it had experienced in recapturing an adequate share of the dollar markets, its abnormal dependence on dollar imports, the persistence of inflationary pressures in its economy, and the existence of large sterling balances.

Subsequently the role of the Fund in the devaluation of sterling was, variously, questioned, criticized, and defended. Had not the Fund been merely a “rubber stamp”? Had not the Fund been too passive—some said “by-passed”—in this devaluation?

Clearly the magnitude of the devaluation as well as the timing had been determined by the British authorities before the Fund was notified. However, the test had been met that plans to change the rate were presented to an international body prior to action. The Fund, recognizing the need for devaluation, and that the extent ought to be large, agreed to the proposed change. The Fund could therefore be regarded as putting into operation the guidelines of the general decision taken a year and a half earlier. At that time, as noted above, it had stated that the extent of a necessary change in par value could not be determined with precision and that, as the Fund reached a decision on a member’s proposal to change its par value, the member should be given the benefit of any reasonable doubt. Also the Fund might, and did, stress the need for monetary and fiscal policies to back up the new exchange rate.

Devaluations of other currencies

The devaluation of sterling was immediately followed by devaluations of several other currencies—those of the sterling area and of all the Western European countries. This was indeed a week in which the Fund’s machinery—Board and staff—went into operation. A detailed staff study evaluating the new exchange rate was prepared for each of the several countries and was discussed by the Executive Board. Much relevant preparatory work had laid the basis for expediting the staff’s papers and the Board’s consideration of them. Nonetheless, much preparation and discussion still had to be done quickly—within the course of four days and mostly over a week-end. Furthermore, complete secrecy was mandatory. Those who were closely involved at the time recall several measures to maintain secrecy and to keep up the pace of staff preparation and Board consideration of the exchange rate changes being proposed. The staff, for example, was not permitted to leave the building for any purpose on Saturday, September 17, meals being brought in. And senior officials did not go home for three days, sleeping at a nearby hotel.

Most of the currencies involved, including not only those of other countries in the sterling area (Australia, Iceland, India, Iraq, and the Union of South Africa), but those of Egypt, Denmark, and Norway, were also devalued by 30.5 per cent. The Netherlands guilder was devalued from f. 2.65285 to f. 3.80 = $1, i.e., by 30.2 per cent.

The devaluation of the currencies of Belgium and Luxembourg from 43.8275 francs to 50.000 francs = $1 involved a depreciation of only 12.3 per cent. For a few days the Belgian Government had considered the possibility of introducing a fluctuating rate. After discussion with the Fund, however, the Government concluded that the disadvantages of a floating rate were too grave to be worthwhile, and proposed a new par value. The rate chosen was designed to adjust the export and import prices of the Belgian-Luxembourg Economic Union (BLEU) to the trend of world prices which was expected to follow the devaluations, and to improve the payments position of the BLEU vis-à-vis the dollar area. Since the end of World War II the international financial position of the BLEU had been strong; its current account deficit with the dollar area had been declining and its surplus with other countries had increased. The position of the Belgian steel industry was also relatively strong. However, the Belgian authorities believed it necessary to adjust the parity of the Belgian franc somewhat in the face of the general devaluation. These considerations led the Belgian Government to adopt a middle course between maintenance of the former parity and devaluation to the same extent as sterling.

The problem of the appropriate rate for Canada was dominated by two considerations. Had the rate been left unchanged, Canada would have been subjected to the strains arising from the improved competitive position of the devaluing countries, although still needing to alleviate the imbalance in its trade with the United States. On the other hand, a devaluation equal to that of sterling would not have helped to expand imports from the devaluing countries, which was required if such countries were to correct the serious disequilibrium in their payments position vis-à-vis Canada. In light of these considerations, the Canadian dollar was devalued by 9.1 per cent.

The Fund also agreed to changes in the exchange rates of Finland and Greece, for which no par values had been agreed, and to a change in the exchange rate for France, for which the agreed par value had been suspended. In July 1949, Finland had devalued the markka by 15 per cent, from Fmk 135 = $1 to Fmk 160 = $1. The devaluation in September 1949 was to Fmk 230 = $1. The Government of Greece, on September 22, changed the effective exchange rate for the drachma to Dr 15,000 = $1 and Dr 42,000 = £1, a depreciation of 33.3 per cent in respect of the dollar.

The French Government proposed to unify its system as well as adjust the exchange rate. Since October 1948 the free rate for the franc had applied only to nontrade transactions in certain currencies. For commercial transactions the daily average of the free rate and the previous fixed official rate of 214.392 francs per U.S. dollar had been used. Financial as well as commercial transactions in all other currencies except the Italian lira were conducted at exchange rates based on this average dollar rate. The rates for financial transactions were approximately 20 per cent more depreciated than the rates for commercial transactions. After unification in September 1949, the exchange rate applicable to transactions in U.S. dollars was allowed to rise from F 330.80 to F 350.00 = $1. This represented a depreciation vis-à-vis the dollar of 5.7 per cent for financial transactions and 21.8 per cent for commercial transactions, but it represented an appreciation vis-à-vis sterling of about 12.5 per cent.


The issue arises

The onset of the first devaluations—those of September 1949—demonstrated that differences in points of view about the need for and magnitudes of devaluation were inevitable. The Latin American Directors, exercised lest the devaluations of the outer sterling area in line with that of the pound sterling should harm the export prospects of their countries, thought that there was a need for a “definitional examination” of competitive depreciation. Both Mr. Paranaguá (Brazil) and Mr. D’Ascoli (Venezuela) doubted whether a clear case of fundamental disequilibrium could be made in support of the devaluations of the dependent territories, and felt certain that no such case could be made for a devaluation by 30 per cent.

This objection raised a related legal question. When a member proposed to the Fund a change in the par value of its metropolitan currency and corresponding changes in the par values of the separate currencies of its nonmetropolitan areas, could the Fund consider the various pieces of the proposal separately or did the Fund have to deal with the proposal as a whole? The Legal Department’s opinion in the preparatory staff paper was that the Fund was required to consider and decide on such proposals as a unit. It could object to the entire proposal if it was not satisfied that the changes proposed in the par value of the metropolitan currency or in the par value of one or more of the separate currencies were necessary to correct a fundamental disequilibrium. But it was not required to decide on the proposal as a unit if the intended changes in the par values of the separate currencies did not correspond to that in the metropolitan currency.

Several Directors did not concur. Mr. D’Ascoli thought that the conclusion that the Fund had to accept or reject the entire proposal of a country was wholly impractical. It put the Board in the situation of either (a) accepting an unjustified change in the par value of a separate currency (i.e., a colonial currency) purely for the sake of not having to reject at the same time a justified and even very necessary change in the par value of a metropolitan currency, or (b) rejecting both proposals, even if the member making the proposal was taking the very action that the Board thought it should have taken long before with respect to the metropolitan currency.

There seemed, Mr. D’Ascoli stated, to be an assumption that colonial empires possessed economic uniformity. In actuality, the differences between metropolitan and dependent territories were so great that separate currencies had been created for many dependent territories. The Fund should be entitled to decide upon the changes in those separate currencies without being influenced by considerations independent of the payments position of the territory concerned. Mr. Hooker (United States), Alternate to Mr. Southard, supported Mr. D’Ascoli’s position. But he commented that, as a practical matter, if the Fund had any doubts on a joint proposal, these doubts could be expressed to the member during the course of the Fund’s preliminary discussions with that member.

Most of the European Directors, on the other hand, agreed with the interpretation put forward by the staff. Mr. Tansley (United Kingdom) and Mr. McFarlane (Australia) argued that a member which proposed a change in the par values of its metropolitan currency and its separate currencies made a single proposal which the Fund had to accept or reject as a whole, although the Fund had the right to look at each separate currency. Mr. de Largentaye’s opinion was that the drafters of the Articles of Agreement could not have intended to give the Fund the right to object or concur in only part of a proposal. The Fund’s rejection of a part of the proposal would amount to a change in the par value of the separate currency in terms of the metropolitan currency which the member had not proposed.

Mr. Southard’s reasoning was that on economic grounds there was no necessity for a separate currency to follow the metropolitan currency. The Fund should consider each currency independently after economic analysis of each proposal. He did not believe that the Articles of Agreement denied the Fund the right to concur in part of a proposal if it had arrived at the conclusion that only a portion of a proposal was justified and other portions were not. Mr. Southard’s argument was also that the Fund was not necessarily serving the best interests of members that administered dependent territories by treating a joint proposal as a unit. It was of more help to the metropolitan members for the Fund to examine carefully the exchange rates of dependent territories. Accordingly, Mr. Southard suggested and the Board agreed that further discussion should be postponed until the Directors for these members had had an opportunity to consider the problem further.

There has not, however, been any further discussion in the Board of the question whether devaluation of nonmetropolitan currencies should be considered separately from that of the member. Another instance of devaluation of nonmetropolitan currencies occurred in December 1958. After France had devalued and proposed a new par value for the franc, it also proposed parities for the separate currencies of its nonmetropolitan territories, but the rates proposed were not uniform. The new par value established for the franc for Algeria, the French Antilles, and French Guiana was the same as that for the French franc, 0.202550 U.S. cents per franc. The par value of the CFA franc, for Cameroun, French Equatorial Africa, French West Africa, Madagascar and dependencies, Reunion, St. Pierre and Miquelon, and Togoland, was 0.405099 U.S. cent per CFA franc; the CFA franc was thus equal to 2.00 French francs. The par value agreed for the CFP franc, applying to the French possessions of Oceania, New Caledonia, and New Hebrides, was 1.11402 U.S. cents per CFP franc, equal to 5.50 French francs. But, in any event, no question was raised in the Board about these devaluations, and the decision was taken without discussion.

What is competitive depreciation?

The possibility that competitive depreciation might be involved in a member’s proposal to devalue has come up on only a few occasions. One such occasion was when Iceland, which had already devalued by 30.5 per cent in September 1949, proposed to devalue by another 42.5 per cent in February 1950. The problem posed for the Fund was made the more difficult by the fact that the second devaluation, according to the member, was not needed to sustain exports; in fact, in order to prevent excessive export price cutting, sizable export taxes were being introduced. The extra depreciation was necessary rather to curb imports: import demand was swollen and the country could not introduce import duties. Inasmuch as European markets for fish, the chief Icelandic export, had become much more competitive, concern by several European Directors over this devaluation was more pronounced than it might otherwise have been.

Several questions confronted the Fund: Should a country be permitted, because of import considerations, to cut its par value below a point adequate to move exports? Could devaluing a currency so as to balance imports with exports be regarded as competitive depreciation? If export taxes were to be applied after devaluation because otherwise the profits to exporters would be too great, could such a devaluation be considered necessary to correct a fundamental disequilibrium?

In effect, the Icelandic devaluation had raised the question of the nature of competitive depreciation. How could it be defined or identified? The staff undertook a careful examination of the subject.

Meanwhile, a decision on Iceland’s exchange rate could not wait. When the Board considered the proposal, several Directors agreed that a devaluation was necessary and saw no reason to object to the degree proposed. In their view, because of its payments deficits, Iceland needed some protection for its exports. And they were pleased at the well thought out program of fiscal measures that would accompany devaluation. However, Mr. de Largentaye believed that the devaluation should be held to the lowest possible level so as to keep down the inflationary and other undesirable effects that would follow. He also questioned whether the country was taking all possible steps to deflate the economy, which, in his view, was a better alternative than devaluation where it was possible.

Mr. van der Valk (Netherlands), Alternate to Mr. Beyen, and Mr. Santaella (Venezuela), Alternate to Mr. D’Ascoli, had similar doubts about the degree of devaluation proposed. So large a devaluation as was proposed might mean that other countries would be subjected to unjustified competition from Icelandic exports only because of Iceland’s need to curb imports.

After an assurance by Iceland that it was not intending to engage in competitive depreciation, the Fund concurred in the proposed change in the par value, noting with approval the intention to impose export taxes which would help to prevent undue pressure on highly competitive markets for particular exports. A year later, to cope with a similar set of circumstances, Iceland introduced a multiple rate system which lasted for several years.

Search for a definition

After studying the question of a definition of competitive depreciation, the consensus of the staff was that a devaluation which merely corrected the payments position of a country could not be considered competitive, even if that devaluation had adverse effects on other countries. Admittedly, devaluation might be disturbing to other countries exporting the same goods, and even to countries importing such goods if they competed with home output, but this did not make the devaluation competitive. Only an excessive devaluation—that is, one that overcorrected for a fundamental disequilibrium—could be regarded as competitive depreciation in the sense of the Fund Agreement. The question was how to determine an excessive devaluation.

The staff approach to this question was to measure an excessive devaluation in terms of its departure from a “correct” exchange rate. The “correct” level of an exchange rate was defined to be one that over a period of years tended to restore external balance and to yield a moderate increase in reserves if these were previously deficient. In this light, devaluation was competitive only when it resulted in so marked a surplus in the devaluing country that reserves grew at an excessive rate.10 This definition was, of course, influenced heavily by the circumstances of the time, when all countries except the United States were suffering from low foreign exchange reserves. But this definition also made clear that, in order to judge whether a proposed exchange adjustment is correct, the Fund must have a broad concept of (1) the appropriate distribution of reserves in the world, (2) the effects on the world pattern of exchange rates and the need for continuing direct controls that the proposed adjustment would involve, and (3) the extent to which the new exchange rate would enable the devaluing country, over a period of years, to acquire reserves.

From time to time other devaluations aroused some concern, at least for one or two Directors; these are discussed immediately below. On these occasions, although some members of the staff suggested a general discussion by the Board of competitive depreciation, one was never held. The need for a definition of competitive depreciation had waned.


In the next few years the magnitudes of some other proposed devaluations, although acceptable to nearly all the Executive Directors and defensible as far as staff analysis was concerned, were to elicit expressions of disapproval from at least one Director when the proposals were discussed by the Board.

Greece and Austria

In 1953 two countries—Greece and Austria—both of which had devalued in late 1949, again proposed sizable devaluations in moves to unify their multiple rates. When Greece proposed to unify its exchange structure at a new rate of Dr 30,000 = $1, Mr. de Largentaye (France) queried the rate. The free rate in New York was only 16,000 to 17,000 drachmas per U.S. dollar. According to staff calculations, the average effective rate for all exports under the multiple rate system was approximately 20,000 drachmas per U.S. dollar. The average effective rate for imports subject to tax was also estimated at about 20,000 drachmas per U.S. dollar. Mr. de Largentaye was of the opinion, therefore, that a devaluation to Dr 30,000 = $1 was extreme, especially for a country which was in near equilibrium. Such a sizable devaluation would, he believed, be apt to bring a considerable reflux of capital, which might well destroy the newly won internal economic stability and might ruin the deflationary efforts of the Government.

The consensus of the Board did not coincide with this view. As had the staff, the Directors reasoned that the inflation which continued in Greece after the devaluation of September 1949 had made the drachma by 1953 again considerably overvalued. Moreover, Greece had had great difficulty in moving its principal exports, even at exchange rates of 20,000 drachmas per U.S. dollar and more. Additionally, Greece was proposing to remove virtually all quantitative restrictions on imports, except for those on some luxury goods. Therefore, the new rate had to be high enough to keep in check the hitherto suppressed import demand which might otherwise emerge. But because of the point made by Mr. de Largentaye, the Board, in its decision, impressed upon the Greek authorities the importance of firm anti-inflationary measures.

In May 1953 Austria similarly proposed a unification of its multiple rates and a devaluation to S 26 = $1. Austria also proposed this rate as an initial par value. Once again Mr. de Largentaye commented that the proposed devaluation was rather severe. He was not convinced that a smaller devaluation would not have been possible: Austria’s reserves had doubled in one year, its credit in the EPU had increased, and its exports had been expanding.

The majority of Directors, however, were in favor of sizable devaluation. A new price-wage spiral which had developed after the outbreak of the Korean War had weakened the competitive position of Austria’s exports, and the country was liberalizing restrictions.11

Bolivia and Mexico

About the same time Bolivia also proposed a large devaluation of its currency. This was the second change in its par value in three years. Mr. de Largentaye again questioned the size of the devaluation. In his view, the fundamental disequilibrium involved could be corrected by a much smaller devaluation, provided wages and salaries were held at their then-current levels rather than being permitted to rise. However, the Board concurred in the Bolivian proposal on several grounds. The country’s exchange earnings had declined, both because of a drop in the price of its main export (tin) from the level reached during the Korean War, and from adjustments in connection with the nationalization of various industries. Meanwhile, import demand had remained high. Bolivia’s system of multiple rates had become most complex, and the new devaluation would enable a simplification of the exchange rate structure.

In answer to Mr. de Largentaye, some Directors commented that the devaluation could scarcely be considered excessive when quantitative restrictions were still required. Interestingly enough, at this time some Directors thought that the Fund was not required to pass judgment on the entire stabilization program, but only on the devaluation; it was later that the Fund adopted the policy of assessing the over-all stabilization programs of its members.

Another example of a unitary rate change which seemed to some Directors to be possibly unnecessary or excessive was that of Mexico in 1954. That country proposed a devaluation of 30.8 per cent from its par value, although it had devalued substantially just five years earlier. As in the Icelandic case in 1950, the evidence of a fundamental disequilibrium was not to be found in a falling off of exports. Although the demand for the country’s exports had slackened, this was attributable to a decline in world demand and prices.

As the staff pointed out, the more difficult part of Mexico’s problem was twofold. First, because of the decline in exports, business conditions had become depressed. The Government wished to neutralize the export decline through compensatory fiscal policies, but without a devaluation such fiscal policies would have tended to place additional pressure on the monetary system and the balance of payments. Second, there had been massive speculative capital outflows—the largest in Mexico’s history. The gradual reduction over three years of the country’s reserves had impaired Mexico’s ability to cope with balance of payments deficits or with recurrent sizable outflows of capital. A foreign exchange crisis had in fact emerged.

To cope with these developments, the country was proposing a devaluation which it expected would restrain imports, give a stimulus to foreign tourist receipts, and encourage an inflow of private investment. Simultaneously, the Government planned to impose a special 25 per cent ad valorem tax on all exports to absorb the windfall profits on exports and to increase government revenues.

Mr. Martínez-Ostos, a former Executive Director, attended the Board meeting as the representative of Mexico. He stressed that his Government was not resorting to this exchange rate depreciation as a competitive device to increase Mexican exports at the expense of other countries. Not only had Mexico always deprecated such practices as unfair, but it considered that competitive depreciation would be self-defeating: competitive depreciation would impair the country’s terms of trade without bringing any significant gains in the volume of exports.

The Directors reviewed the reasons why devaluation seemed the only alternative. Since Mexico had relatively small reserves, the peso was susceptible to speculative pressures. Again the point was made that the Mexican authorities wished to avoid exchange controls; they were not certain that such controls could be enforced. These characteristics of Mexico’s situation had been impressed upon the Directors in 1948–49, when Mexico had previously devalued the peso. Thus what Mr. Southard referred to as a “premature devaluation” seemed the only solution.

Mr. Southard also commented that he was prepared to accept the judgment of the Mexican authorities about the degree of devaluation required. It had to be large enough to provoke a backflow of capital and to meet the country’s needs for some years hence. However, the danger of competitive depreciation in the years ahead was increased, and he reserved the right of the United States to take appropriate action if unfair competition resulted from Mexico’s action. After expressing similar concerns, but with a recognition that no alternative was open to Mexico, the Directors took a decision noting the Fund’s concurrence with the devaluation.


Multiple rates have also given rise to fears of competitive depreciation, especially insofar as they have suggested that certain exports were being subsidized. There was grave concern about this prospect in the middle 1950’s, when several countries intensified their use of multiple rates for exports. The intention of these countries was to promote exports at a time when their particular products were encountering stiffer competition in world markets. Early in 1955, Brazil introduced a series of export bonuses and gradually added to the number of its effective exchange rates, eventually ending up with a complex system. Indonesia considerably revised its exchange system in order to assist its exports. Uruguay announced a special premium for exports of wool, including wool tops. Israel devised a system in which export premiums were applied to various commodities on the basis of net domestic value added.

The storms of the 1950’s

As world export markets in the mid-1950’s were becoming increasingly competitive for all countries, the alarm of the Executive Directors from nearly all the major countries at any exchange rates which favored exports became more vocal. Were multiple rates subsidizing the exports of certain countries? How could a subsidy within a multiple rate system, which also included penalty rates, be identified? At one time Mr. Southard, for example, announced that he reserved the right of his Government to impose countervailing duties if export subsidies were found to be involved in new export rates introduced in Brazil. Mr. Warren (Canada), Alternate to Mr. Rasminsky, drew attention to the interest of the GATT, as well as of the Fund, in export measures, because of their commercial aspects.

Requests for the Fund’s approval to shift individual commodities from one exchange rate category to another within a complex rate structure were regarded by both the Board and the staff as especially difficult to appraise. The mere fact that the rate for a given export was being devalued did not suggest competitive depreciation. Indeed the Fund, in its informal contacts with members, had been encouraging—or at least not discouraging—countries to alter their exchange rates toward more depreciated rates where exports were not moving satisfactorily and where it appeared likely that a unification of multiple rates would involve further depreciation.

The criterion by which the staff judged a change in an export rate was whether the change was in the direction of an exchange rate at which future unification might take place. If so, no subsidy was considered to be involved; shifting an export to such a rate was really equivalent to reducing an export duty. If, however, a subsidy was involved, the staff was guided by the Board’s view that the exchange system was not an appropriate instrument for providing subsidies. Straight budgetary subsidies were usually preferable, as they made clear the costs of the subsidy and avoided misuse of the exchange system.

This anxiety over multiple export rates brought about renewed attempts by the Fund to assist countries to eliminate multiple rates more quickly, and by the late 1950’s the number of multiple rates was greatly reduced and the problem of export subsidies—and of possible competitive depreciation via multiple rates—much diminished.12

New views in the 1960’s

A changed climate had emerged by the 1960’s. The gravity of the problem faced by the less developed countries in exporting primary products had become more apparent. Empirical evidence had revealed that the exports of the less developed countries had been expanding much less rapidly than those of the industrial countries. During the 1950’s, the former had increased at an annual rate of 3.6 per cent; this was only about one-half the rate at which the exports of the industrial countries had advanced. Moreover, since there had been a deterioration in the terms of trade of the less developed countries, the purchasing power of their exports had risen at an annual rate only slightly above 2 per cent.13 Trade in primary products had fallen even farther behind that of manufactured goods. In the three decades between 1928 and 1955–57, the increase in total world trade of primary commodities had been less than one-third that in manufactured goods; excluding petroleum, a special case since it is exported by only a few countries, the growth of world trade in primary products had amounted to only about one-seventh that in manufactures.14

But another factor contributed even more to a new attitude toward the exports of the less developed countries. This was the growing realization that exports were the key to successful economic development. Several studies by the United Nations, the Economic Commission for Latin America, the Economic Commission for Asia and the Far East, and the World Bank, as well as various private studies, pointed up a striking correlation between the expansion of exports of developing countries and the rates of growth of their economies. The trade and exchange policies of the less developed countries shifted markedly away from policies which emphasized restriction of imports to those which stressed stimulation of exports.15

There was a parallel change in emphasis away from the policies of individual countries to the policies of international bodies or of groups of countries acting in unison. A new general awareness emerged that, except for possible temporary and unusual circumstances, the problems of expanding the exports of the less developed countries could be tackled only as a cooperative venture. Various new exceptions to its rules for the less developed countries were worked out by the GATT. A United Nations Conference on Trade and Development (UNCTAD) was held in March 1964 to consider proposals for dealing with their special trade problems. Shortly thereafter, UNCTAD was set up on a permanent basis to give continuing attention to the trade problems of these countries. The Fund itself, in 1963, introduced a new facility known as “compensatory financing,” to provide short-term financial assistance to countries suffering from fluctuations in exchange receipts from exports of primary products (see Chapter 18).

The widespread search for new ways to promote the exports of the less developed countries caused some changes in the Fund’s policies on exchange rates, stress being placed on the close relation between realistic rates of exchange and exports. Where exchange rate flexibility was thought useful and feasible, countries were encouraged to adjust their exchange rates periodically, or even, temporarily, to institute fluctuating exchange rates. The widespread prevalence of inflation had caused Executive Directors to fear that, in the absence of exchange rate adjustments, domestic price increases would affect exports adversely and shift demand to imports. Increasingly, the Fund placed emphasis on the benefits to exports likely to accrue from exchange depreciation, and by 1965 had come to the view that possibly the most important gain from devaluation was the effect on exports of the realignment of external prices with domestic prices.16

Export promotion programs were introduced by a number of countries. In part because of the general world emphasis on the need for developing countries to increase their exports, but probably even more because many developing countries were eliminating multiple rates and devaluing to unitary rates, these export promotional devices no longer occasioned the adverse reactions among Executive Directors that similar schemes in the 1950’s had done. And some Directors recognized the usefulness of many of these arrangements: they frequently did give a pronounced fillip to exports.

Nonetheless, the Board continued to be very cognizant of the undesirable consequences of promoting exports through special export schemes or multiple currency practices favoring exports. Indeed, when such arrangements became complex and yielded exchange rates widely different from the par value, the Board urged their elimination. Moreover, export promotion schemes were still regarded as temporary palliatives. The Fund called the attention of its developing members specifically to two more enduring solutions: improving the supply and the quality of their exports by altering resource allocation patterns, and maintaining the competitiveness of their exports.17 But by the mid-1960’s all methods of enlarging the export earnings of the less developed countries were certain to receive serious discussion and consideration by both the Fund staff and the Board.


In the early 1960’s the exchange rates of two of the major currencies that had been devalued in 1949 were adjusted upward—that is, they were appreciated. On March 4, 1961, Germany proposed to the Board a change in the par value of the deutsche mark from DM 4.20 to DM 4.00 = $1, effective on March 6. Germany argued that it wished to make a useful contribution to the common task of reaching a better equilibrium in international payments. Some steps had already been taken in the monetary field. Moreover, considerable speculative capital had come to Germany. The appreciation of the deutsche mark by 5 per cent—chosen to allow some leeway for internal adjustment—was believed to be sufficient to bring down the current balance of payments surplus, and to cheapen imports so as to offset excessive inflationary tendencies.

Because the change in the value of the currency was less than 10 per cent of the initial par value, and because no previous change had been made in the initial par value, the proposal did not require a decision by the Fund. The Board, however, recorded its view that the move was a useful one because it reflected the improvement in Germany’s competitive position.

On March 6, 1961—two days later—the Netherlands Government took a similar decision, to be effective on March 7. As the guilder had already been devalued in 1949 by more than 10 per cent of its initial par value, this change required the approval of the Fund. Mr. Lieftinck (Netherlands) laid stress on the surplus in the Dutch balance of payments on current account and the increased liquidity in the domestic economy. He contended, moreover, that the labor market in particular had become excessively strained by the continuing boom. Before the revaluation of the deutsche mark there had already existed a large and growing discrepancy between the wage levels in the Netherlands and in Germany, resulting in a significant outflow of Dutch workers across the eastern frontier. The Fund accepted the Netherlands’ proposal and a new par value of f. 3.62 = $1 was set.

Table 4, at the end of this chapter, presents a chronological list of all changes in par values from 1948 through 1965.


As shown in the foregoing sections, the years 1948 through 1965 witnessed a number of changes in par values. Briefly, the industrial countries undertook relatively little devaluation of their exchange rates. Of the fourteen members of the Fund classed as industrial countries in 1965, only five altered their exchange rates between September 1949 and the end of 1965.18 The adjustments of two of these countries—Germany and the Netherlands in March 1961—were appreciations. Austria devalued by stages until 1953. France devalued twice. Canada devalued once, by a small amount, in the course of its return to parity from a fluctuating rate in 1962. (The Canadian dollar had appreciated by some 5 per cent while it was fluctuating.)

However, many less developed countries experienced a greater frequency and degree of exchange depreciation than often is realized. Countries in Africa, Asia, Latin America, and the Middle East undertook several exchange rate adjustments. Among a third group of countries, classed as primary producing but more developed,19 exchange devaluation was not uncommon. Finland and Iceland each devalued twice again between 1949 and 1965, and Turkey and Yugoslavia once.

This section presents some measurements of the extent of these devaluations. The focus is on the accumulated magnitudes over a long period of years.

Measuring the magnitudes

Percentage changes in the exchange rates for 105 countries for the seventeen years from the end of 1948 to the end of December 1965 are summarized in Table 3. The 105 countries comprise the membership of the Fund at the end of 1965 plus Cuba and Indonesia, which were Fund members during part of the period. As a starting date, the end of 1948 has been preferred to an earlier postwar date (that is, the end of 1945, or of 1946, when the Fund set initial parities for its original members) because the exchange rates of several countries were more settled by that year (or by early in 1949) than they were immediately after World War II. Moreover, data for 1948 are readily available.20

Table 3.Magnitudes of Exchange Depreciation, End 1948 to End 1965: Distribution of 105 Countries by Degree of Depreciation(Magnitudes in per cent)
Category1Magnitude of DepreciationNumber of Countries
CLess than 30.514
GMore than 9010

The countries are distributed among the categories as follows (for each category they are listed in order of increasing depreciation, or in alphabetical order where the depreciation was the same for all countries in the group):


Cuba, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Japan, Liberia, Panama, United States

Ethiopia, Canada, Italy, Belgium, Luxembourg, Ecuador, Costa Rica, Germany, Syrian Arab Republic, Saudi Arabia, Portugal, Venezuela, Netherlands, Nicaragua

Australia, Burma, Ceylon, Cyprus, Denmark, Ghana, Iraq, Ireland, Jamaica, Jordan, Kenya, Kuwait, Libya, Malawi, Malaysia, New Zealand, Nigeria, Norway, Pakistan, Sierra Leone, Somalia, South Africa, Sudan, Sweden, Tanzania, Trinidad and Tobago, Uganda, United Kingdom, Zambia

Burundi, United Arab Republic, Nepal, Afghanistan, Philippines, Rwanda, Thailand, India, Iran, France, Austria, Finland, Mexico

Turkey, China, Cameroon, Central African Republic, Chad, Dahomey, Gabon, Guinea, Ivory Coast, Malagasy Republic, Mali, Mauritania, Niger, Senegal, Togo, Upper Volta, Viet-Nam, Peru, Algeria, Tunisia, Democratic Republic of Congo, Morocco, Spain, Congo (Brazzaville), Colombia, Greece, Iceland, Laos

Israel, Yugoslavia, Uruguay, Paraguay, Argentina, Chile, Brazil, Bolivia, Indonesia, Korea

The countries are distributed among the categories as follows (for each category they are listed in order of increasing depreciation, or in alphabetical order where the depreciation was the same for all countries in the group):


Cuba, Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Japan, Liberia, Panama, United States

Ethiopia, Canada, Italy, Belgium, Luxembourg, Ecuador, Costa Rica, Germany, Syrian Arab Republic, Saudi Arabia, Portugal, Venezuela, Netherlands, Nicaragua

Australia, Burma, Ceylon, Cyprus, Denmark, Ghana, Iraq, Ireland, Jamaica, Jordan, Kenya, Kuwait, Libya, Malawi, Malaysia, New Zealand, Nigeria, Norway, Pakistan, Sierra Leone, Somalia, South Africa, Sudan, Sweden, Tanzania, Trinidad and Tobago, Uganda, United Kingdom, Zambia

Burundi, United Arab Republic, Nepal, Afghanistan, Philippines, Rwanda, Thailand, India, Iran, France, Austria, Finland, Mexico

Turkey, China, Cameroon, Central African Republic, Chad, Dahomey, Gabon, Guinea, Ivory Coast, Malagasy Republic, Mali, Mauritania, Niger, Senegal, Togo, Upper Volta, Viet-Nam, Peru, Algeria, Tunisia, Democratic Republic of Congo, Morocco, Spain, Congo (Brazzaville), Colombia, Greece, Iceland, Laos

Israel, Yugoslavia, Uruguay, Paraguay, Argentina, Chile, Brazil, Bolivia, Indonesia, Korea

Table 4.Changes in Par Values, 1948–65 1
Date 2CountryChange in Par Value
Jan. 26FranceInitial par value suspended
July 22MexicoInitial par value suspended
Dec. 17ColombiaPar value changed to 51.2825

U.S. cents per peso
June 17MexicoNew par value set at 11.5607

U.S. cents per peso
Sept. 18AustraliaPar value changed to 224.000

U.S. cents per pound
Sept. 18DenmarkPar value changed to 14.4778

U.S. cents per krone
Sept. 18NorwayPar value changed to 14.0000

U.S. cents per krone
Sept. 18South AfricaPar value changed to 280.000

U.S. cents per pound
Sept. 18EgyptPar value changed to 287.156

U.S. cents per pound
Sept. 18United KingdomPar value changed to 280.000

U.S. cents per pound
Sept. 19CanadaPar value changed to 90.9091

U.S. cents per dollar
Sept. 20IraqPar value changed to 280.000

U.S. cents per dinar
Sept. 21IcelandPar value changed to 10.7054

U.S. cents per króna
Sept. 21NetherlandsPar value changed to 26.3158

U.S. cents per guilder
Sept. 22BelgiumPar value changed to 2.00000

U.S. cents per franc
Sept. 22LuxembourgPar value changed to 2.00000

U.S. cents per franc
Sept. 22IndiaPar value changed to 21.0000

U.S. cents per rupee
Nov. 15PeruPar value suspended
Mar. 20IcelandPar value changed to 6.14036

U.S. cents per króna
Apr. 8BoliviaPar value changed to 1.66667

U.S. cents per boliviano
Sept. 30CanadaPar value suspended
Dec. 1EcuadorPar value changed to 6.66667

U.S. cents per sucre
Mar. 5ParaguayPar value changed to 16.6667

U.S. cents per guaraní
Jan. 1YugoslaviaPar value changed to 0.33333

U.S. cent per dinar
May 14BoliviaPar value changed to 0.52632

U.S. cent per boliviano
Oct. 5ChilePar value changed to 0.90909

U.S. cent per peso
Jan. 1ParaguayPar value changed to 6.66667

U.S. cents per guaraní
Apr. 19MexicoPar value changed to 8.00000

U.S. cents per peso
Aug. 18ParaguayPar value changed to 4.76190

U.S. cents per guaraní
July 1NicaraguaPar value changed to 14.2857

U.S. cents per córdoba
July 30PakistanPar value changed to 21.0000

U.S. cents per rupee
Mar. 1ParaguayPar value changed to 1.66667

U.S. cents per guaraní
May 22IranPar value changed to 1.32013

U.S. cents per rial
Sept. 15FinlandPar value changed to 0.31250

U.S. cent per markka
Dec. 29FranceNew par value set at 0.20255

U.S. cent per franc
Jan. 1FrancePar value changed to 20.2550

U.S. cents per (new) franc
Feb. 22IcelandPar value changed to 2.63158

U.S. cents per króna
Aug. 20TurkeyPar value changed to 11.1111

U.S. cents per lira
Feb. 14South AfricaPar value changed to 140.000

U.S. cents per rand
Mar. 6GermanyPar value changed to 25.0000

U.S. cents per deutsche mark
Mar. 7NetherlandsPar value changed to 27.6243

U.S. cents per guilder
July 14EcuadorPar value changed to 5.55556

U.S. cents per sucre
Aug. 4IcelandPar value changed to 2.32558

U.S. cents per króna
Sept. 3Costa RicaPar value changed to 15.0943

U.S. cents per colón
Feb. 9IsraelPar value changed to 33.3333

U.S. cents per pound
May 2CanadaNew par value set at 92.5000

U.S. cents per dollar
Jan. 1FinlandPar value changed to 31.2500

U.S. cents per (new) markka
Dec. 31EthiopiaPar value changed to 40.0000

U.S. cents per dollar
July 26YugoslaviaPar value changed to 0.080000

U.S. cent per dinar
Nov. 8PhilippinesPar value changed to 25.6410

U.S. cents per peso

Excludes nonmetropolitan territories.

Dates specified are those on which the change took effect, which is not necessarily the same date on which the change was agreed with the Fund.

Excludes nonmetropolitan territories.

Dates specified are those on which the change took effect, which is not necessarily the same date on which the change was agreed with the Fund.

Because the results depend on the particular exchange rate used, and because in some instances (e.g., for countries with multiple exchange rates) there was a choice of rates, an endeavor has been made to select exchange rates that were currently used for most transactions. For most countries par values, or at least fixed official rates, could be used for both initial and end years. For other countries, a free market rate or one of the multiple rates was used for either the initial or end year, and in some instances midpoints among multiple rates were used. Table 5, at the end of this chapter, specifies which rates were used for each country.

Table 5.Exchange Rates Used in Table 3
Country1948 11965
1. AfghanistanFreeFree
2. AlgeriaOfficialOfficial
3. ArgentinaFreeFree
4. AustraliaPar valuePar value
5. AustriaOfficialPar value
6. BelgiumPar valuePar value
7. BoliviaPar valueFree
8. BrazilFreeFree
9. BurmaPar valuePar value
10. BurundiOfficialPar value
11. CameroonOfficialOfficial
12. CanadaPar valuePar value
13. Central African RepublicOfficialOfficial
14. CeylonOfficialPar value
15. ChadOfficialOfficial
16. ChileFreeFree
17. ChinaOfficialOfficial
18. ColombiaFreeFree
19. Congo (Brazzaville)OfficialOfficial
20. Congo, Democratic RepublicPar valueOfficial
21. Costa RicaPar valuePar value
22. CubaPar valueOfficial
23. CyprusPar valuePar value
24. DahomeyOfficialOfficial
25. DenmarkPar valuePar value
26. Dominican RepublicPar valuePar value
27. EcuadorOfficial 2Official 2
28. El SalvadorPar valuePar value
29. EthiopiaPar valuePar value
30. FinlandOfficialPar value
31. FranceOfficialPar value
32. GabonOfficialOfficial
33. GermanyOfficialPar value
34. GhanaPar valuePar value
35. GreeceOfficialPar value
36. GuatemalaPar valuePar value
37. GuineaOfficialOfficial
38. HaitiOfficialPar value
39. HondurasPar valuePar value
40. IcelandPar valuePar value
41. IndiaPar valuePar value
42. IndonesiaFreeFree
43. IranPar valuePar value
44. IraqPar valuePar value
45. IrelandOfficialPar value
46. IsraelOfficialPar value
47. ItalyOfficialPar value
48. Ivory CoastOfficialOfficial
49. JamaicaPar valuePar value
50. JapanOfficial 3Par value
51. JordanOfficialPar value
52. KenyaPar valuePar value
53. KoreaOfficialOfficial
54. KuwaitOfficialPar value
55. LaosOfficialFree
56. LebanonFreeFree
57. LiberiaOfficialPar value
58. LibyaOfficialPar value
59. LuxembourgPar valuePar value
60. Malagasy RepublicOfficialOfficial
61. MalawiPar valuePar value
62. MalaysiaPar valuePar value
63. MaliOfficialOfficial
64. MauritaniaOfficialOfficial
65. MexicoPar valuePar value
66. MoroccoOfficialPar value
67. NepalOfficialPar value
68. NetherlandsPar valuePar value
69. New ZealandOfficialPar value
70. NicaraguaPar valuePar value
71. NigerOfficialOfficial
72. NigeriaPar valuePar value
73. NorwayPar valuePar value
74. PakistanOfficialPar value
75. PanamaPar valuePar value
76. ParaguayFreeFree
77. PeruPrincipalFree
78. PhilippinesPar valuePar value
79. PortugalOfficialPar value
80. RwandaOfficialPar value
81. Saudi ArabiaOfficialPar value
82. SenegalOfficialOfficial
83. Sierra LeonePar valuePar value
84. SomaliaOfficialPar value
85. South AfricaPar valuePar value
86. SpainOfficialPar value
87. SudanOfficialPar value
88. SwedenOfficialPar value
89. Syrian Arab RepublicFreeFree
90. TanzaniaPar valuePar value
91. ThailandOfficialPar value
92. TogoOfficialOfficial
93. Trinidad and TobagoPar valuePar value
94. TunisiaOfficialPar value
95. TurkeyPar valuePar value
96. UgandaPar valuePar value
97. United Arab RepublicPar valueOfficial
98. United KingdomPar valuePar value
99. United StatesPar valuePar value
100. Upper VoltaOfficialOfficial
101. UruguayFreeFree
102. VenezuelaNon-oil exportsNon-oil exports
103. Viet-NamPrincipalFree
104. YugoslaviaOfficialPar value
105. ZambiaPar valuePar value
Sources: International Financial Statistics, monthly issues and Supplement to 1966–67 issues; and Annual Report on Exchange Restrictions, various years.

For some members the par values used here were those that had been established for them while they were nonmetropolitan areas.

Selling rate.


Sources: International Financial Statistics, monthly issues and Supplement to 1966–67 issues; and Annual Report on Exchange Restrictions, various years.

For some members the par values used here were those that had been established for them while they were nonmetropolitan areas.

Selling rate.


Exchange rate changes were measured relative to gold; that is, with the initial period as the base, the percentage was calculated of the change in the exchange rate expressed in terms of grams of fine gold per local currency unit. This is the customary Fund way of measuring exchange rate changes: it produces, for example, the familiar 30.5 per cent devaluation of the pound sterling in September 1949. Measured in this way, 100 per cent is the maximum that a currency can depreciate. Inasmuch as the gold content of the U.S. dollar has remained unchanged, measurements relative to gold are, of course, identical with measurements relative to the U.S. dollar.

How much depreciation?

In Table 3 the countries covered are distributed over seven categories according to the degree of their exchange depreciation from the end of 1948 to the end of 1965. In Lebanon a slight appreciation occurred. Group B comprises 10 countries which did not devalue at all: the United States, 7 Central American countries, Liberia, and Japan.21 Group C comprises 14 countries that devalued less than 30.5 per cent—that is, less than the amount by which sterling was devalued in September 1949; in this group are several industrial nations (Belgium, Canada, Germany, Italy, Luxembourg, and the Netherlands), 4 Latin American countries (Costa Rica, Ecuador, Nicaragua, and Venezuela), and Ethiopia, Portugal, Saudi Arabia, and the Syrian Arab Republic. Germany and the Netherlands, after depreciating by approximately 30 per cent in September 1949, both appreciated their currencies by 5 per cent in 1961. Group D comprises 29 countries which devalued by 30.5 per cent in September 1949, or (Pakistan) some years later. These countries are mainly those of the sterling area, plus Denmark, Norway, and Sweden.

What is often not fully realized is that for 50 countries (groups E, F, and G), the magnitude of exchange depreciation in these years exceeded 30 per cent. Thirteen countries devalued by between 31 and 65 per cent; these included Austria, Finland, France, India, Mexico, and the Philippines. For another 28 countries devaluation ranged from 66 to 90 per cent. Among European countries in this group were Greece, Iceland, Spain, and Turkey. Other countries devaluing by these large amounts were two Latin American countries (Colombia and Peru), much of the French franc area of Africa, and Viet-Nam. Finally, there were 10 countries—6 Latin American countries plus Indonesia, Israel, Korea, and Yugoslavia—for which depreciation exceeded 90 per cent.

Developed countries, even in Europe, are distributed among all the five groups C through G. Among less developed countries two patterns of depreciation are apparent. One follows that of the major currencies. Countries in Central America conformed generally to the U.S. dollar and devalued either not at all or very little. Many others in Asia and Africa followed the lead of either sterling or the French franc. The second pattern was related to the price and balance of payments experiences of the individual country. Quite a number of countries, in all geographic regions, devalued independently of the major currencies, by from 40 to nearly 100 per cent.22


The role of the Fund in exchange rate adjustments has grown appreciably over the years. By 1965 the Board could, as it discussed a member’s economic situation, consider the exchange rate without setting off the same touchy debates among Directors about the Fund’s jurisdiction as had characterized 1948 and 1949. Individual Directors had become less desirous of defining the precise limits of the Fund’s authority in this field.

This change in attitude had come about mainly because Fund-member relations in general had grown easier. One of the primary benefits of the annual consultations, begun in 1952, was that the Fund and its members learned how to talk to each other informally and quietly about a range of topics of mutual concern (see Chapter 11). In addition, precedents had gradually been set for the inclusion in Board decisions of sentences relating to exchange rates. When the atmosphere first tended to become more relaxed—about the mid-1950’s—decisions merely reminded countries to keep their exchange policies under review. But individual Directors went so far as to note freely at Board meetings that they considered certain currencies overvalued, or at least questionable. Later, increasingly stronger sentences were incorporated into decisions. It became commonplace for decisions to contain phrases urging countries to adopt more realistic exchange rates or policies which would permit unification of multiple rates at realistic levels. In one instance in 1964 the Board went so far as to comment explicitly, in its decision, on the overvaluation of the currency of a member and its unrealistic exchange rate.

Some Directors have continued to be fearful that the Fund might overstep its bounds. A few, for instance, have questioned the propriety of inserting in a decision any exhortations to a country to correct a growing disparity between external and internal prices, or have wanted to know precisely the precedents for inclusion of the term overvaluation in decisions. As time has gone on, however, anxieties over the Fund’s jurisdiction in exchange rate matters have tended to diminish. This lessening of the sensitivities of the Executive Directors, and in effect of the members they represented, concerning the Fund’s role in deliberations of exchange rate policy, also had implications for the work of the staff. Staff discussions with authorities in member countries could increasingly include consideration of exchange rate policies. Over time the staff has undertaken informally to explore with members the need for exchange rate adjustment or the likely consequences of devaluation, and, at times, even to suggest specific exchange reforms. Nonetheless, both the staff and the Board have proceeded cautiously in these matters, mindful both of the paramount need for secrecy concerning possible exchange rate changes and of members’ prerogatives in this field.

By the 1960’s, a more serious problem for the Fund than that of immediate jurisdiction was the onset of new debates about exchange rates in general. To many economists, countries seemed to be eschewing devaluation. The experience of the Fund had revealed a variety of reasons why, since World War II, countries often avoided or at least postponed devaluation. Domestic political resistance to reductions in the external values of currencies, especially if elections were to be held in the near future, was a factor. In a world of general inflation, the danger of further price advances following devaluation was another. Authorities were often preoccupied with the effects of devaluation on the prices of imported goods, and hence on the cost of living. There was also a strong apprehension that, where the country was an important supplier to world markets, and where the demand for its exports was inelastic, devaluation would lower world market prices and yet not enhance the country’s export earnings.

The environment in which the Fund operated in the 1960’s was made even more complex by the re-examination of questions central to the operation of the international monetary system. What was the mechanism by which balance of payments adjustment took place? Could fundamental disequilibrium be corrected by a change in the exchange rate? Had it not been demonstrated that policies of several kinds—exchange rate, monetary, fiscal, and, more recently, incomes policies—worked together to alter a given balance of payments situation? What was the appropriate “policy mix” for attaining external equilibrium? What was the function of international capital flows in balance of payments adjustment? Were capital movements equilibrating, as had once been thought, or disequilibrating? Finally, new proposals were being advanced for enhancing the liquidity of the international monetary system.

In this climate, steering between the Scylla of taking upon itself the initiative that rightfully belongs to its members, and the Charybdis of ignoring exchange rate adjustment as a vital policy tool, was not easy for the Fund. Indeed, the passive role in exchange rate changes assigned to the Fund, and the continued sensitivities of several members, had the result that, in the midst of the crucial concerns of the middle 1960’s—the balance of payments deficits of major nations and the problem of international liquidity—the Board had not, by the end of 1965, discussed the general role of exchange rates in balance of payments adjustment.


Resolution IM-5, Selected Documents, p. 19.


E.B. Decision No. 71-2, September 26, 1946; below, Vol. III, p. 227.


See below, pp. 129–30.


E.B. Decision No. 278-3, March 1, 1948; below, Vol. III, p. 227.


Footnote to E.B. Decision No. 237-2, December 18, 1947; below, Vol. III, p. 264.


Annual Report, 1948, p. 21.


Ibid., p. 23.


Ibid., p. 24.


U.S. Congress, Senate, Committee on Foreign Relations, Extension of European Recovery, Hearings … on S. 833, a Bill to Amend the Economic Cooperation Act of 1948, 81st Cong., 1st sess., 1949, p. 388.


See Walter R. Gardner and S.C. Tsiang, “Competitive Depreciation,” Staff Papers, Vol. II (1951–52), pp. 399–406.


Annual Report, 1953, pp. 63–64.


See Chapter 6 above, especially pp. 143–44.


United Nations, World Economic Survey, 1961, p. 7, and 1962, p. 1.


United Nations, World Economic Survey, 1958, pp. 17–18.


For details on these trends see Margaret G. de Vries, “Trade and Exchange Policy and Economic Development,” Oxford Economic Papers, Vol. 18 (1966), pp. 19–44.


Annual Report, 1966, p. 25.


Annual Report, 1963, pp. 71–72.


The member countries specified here as industrial are those listed in the Annual Report, 1967, p. 55: Austria, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden, the United Kingdom, and the United States.


Australia, Finland, Greece, Iceland, Ireland, New Zealand, Portugal, South Africa, Spain, Turkey, and Yugoslavia.


The annual supplement to International Financial Statistics regularly presents series beginning with 1948.


Japan’s official rate was set in April 1949, and has since remained unaltered.


Further details can be found in Margaret G. de Vries, “Exchange Depreciation in Developing Countries,” Staff Papers, Vol. XV (1968), pp. 560–78.

    Other Resources Citing This Publication