CHAPTER 12 Progress Toward Liberalization

International Monetary Fund
Published Date:
February 1996
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Margaret G. de Vries

The consultations process just described has become the principal instrument through which the Fund’s policies on exchange restrictions have been implemented. These policies have varied a great deal—as have the Fund’s policies in other fields—reflecting the ever-changing panorama of international economic and monetary conditions.

From 1946 to 1958, when external convertibility of European currencies was finally attained, the Fund’s policies on restrictions were directed mainly toward the liberalization of the severe restrictions which were in force when the Fund was established. This chapter recounts the developments in those policies, and depicts also the international economic situation prevailing at the time they were formulated and which therefore influenced them. Three periods, of four to five years each, may be distinguished.


The first period began in 1946, with the inception of the Fund, and lasted roughly through September 1949, when the realignment of currencies necessary to the lessening of the strict controls over international payments which prevailed after World War II took place. Apart from the working out of procedures and policies for handling multiple exchange rates, the Fund did relatively little during this period to reduce restrictions, its philosophy being that it was premature to press for any reduction.1 Instead, it stressed to its members the importance of measures—such as exchange depreciation and domestic monetary policies—that would be likely to improve their payments positions over the longer run and would lay the basis for an eventual reduction of restrictions.

In the second period, 1950 to 1954, the international economic climate became propitious for some reduction of restrictions, and there was a tremendous upsurge in the Fund’s activities. In March 1950 the First Annual Report on Exchange Restrictions appeared. Later in that year, in Torquay, England, the Fund participated in the consultations with several of the contracting parties to the GATT. The Fund’s own consultations under Article XIV were begun in 1952, and within a few years were being hailed as successful points of contact between the Fund and its members. Nevertheless, the Fund continued to postulate its policies as regards restrictions on the premise that it was preferable not to push its members too hard. Recognizing that relaxation of restrictions and establishment of convertibility could be brought about only gradually, its principal aims during this period were to ensure the maintenance of the then-current momentum in the relaxation of restrictions and to prevent their reintensification.2

By 1955 it was evident that the abnormal postwar economic difficulties of European countries had come to an end. Large gains had been made both in productivity and in the attainment of internal financial stability. Still a third phase of the Fund’s policy as regards restrictions began. Although many countries relaxed restrictions, the Fund, aware of their cautious attitudes, urged them to go further, and especially to reduce discriminatory restrictions. Western European countries undertook, under the aegis of the OEEC liberalization program, to free from restrictions most of the trade and payments which they conducted among themselves. But the Fund, anxious to hasten the convertibility of European currencies into gold and U.S. dollars, repeatedly stressed the need for an equal lessening of restrictions against imports from the dollar area. In 1955, as European countries began to take steps to widen further the transferability of their currencies, the Fund, eager to obtain greater multilateralization of world payments, also took a decision calling upon its members to reduce their use of bilateral payments agreements. By the end of 1958, external convertibility of the major European currencies had been attained.


In 1946 all the Fund’s members except El Salvador, Guatemala, Mexico, Panama, and the United States had opted for the transitional arrangements of Article XIV. Although there were wide differences in the nature and severity of the restrictions maintained, most countries applied an impressive array of restrictions to virtually all foreign exchange transactions. The underlying assumption of their exchange controls was that all payments were prohibited unless specifically authorized.

Troubled economies

These restrictions mirrored the troubled economic conditions of many countries after World War II. Supply fell very much short of demand. In the countries whose economic position had been seriously impaired by the war, the amounts of goods needed for reconstruction and to meet minimum consumption requirements were in excess of their limited productive capacity. Much of the current output was being used to repair the damage and deficiencies caused by the war. Demand, however, was high as incomes were inflated by intense economic activity, including reconstruction, which did not result immediately in a flow of consumer goods. There was also a latent inflationary pressure in most countries as a result of wartime finance, the resultant build-up of liquid funds in the hands of consumers, and the sizable pent-up demand.

In these circumstances, the countries concerned, especially in Europe but also in parts of Asia and the Middle East, felt compelled to ration available supplies of domestically produced goods. The urgency of conserving foreign exchange for the most essential imports necessitated the continuation and even the extension of heavy wartime exchange restrictions. Of the alternative methods available for limiting the demand for imports, quantitative import controls and exchange restrictions appeared to most of these countries to be preferable to exchange depreciation. The disequilibrium in their balance of payments, while large, was considered to be due more to special factors connected with the war, which would in time be overcome, than to fundamental disparities in costs and prices.

Another reason for restrictions was that the pattern of world trade that emerged was seriously unbalanced. In 1947 this imbalance, which was soon to be generally referred to as the world dollar shortage, had forced many countries to change the character of their restrictions. Whereas restrictions had in general been placed on imports of certain goods—e.g., nonessential and luxury items—rather than on imports from specific currency areas, restrictions during 1947 were in most instances imposed with the intentions of reducing an existing or prospective deficit in U.S. dollars and of safeguarding gold and dollar reserves.

In many Latin American countries the huge demand for imports also necessitated the intensification of exchange restrictions after World War II, even though foreign exchange receipts were high. Their large demand for imports was a result partly of deferred wartime demand and partly of postwar inflation. 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.

Deciding on an approach

In these early years, the Fund recognized that it was not possible to effect any considerable relaxation of restrictions. The Executive Board, in fact, discussed the general problem of reducing exchange restrictions chiefly in the course of agreeing on its Annual Reports; hence, these Reports provide an indication of the Fund’s attitudes during these years.

The Reports for 1946–49 were not on the whole optimistic about the possibilities for the early elimination, or even the reduction, of exchange restrictions. The severe shortages of goods of all kinds in most countries were believed to make exchange restrictions on current transactions unavoidable for some time, in order to ensure that limited foreign exchange reserves could finance imports to meet the most essential requirements for consumption and reconstruction. The first Report did, however, strike a note of optimism over the prospects of an early restoration of sterling convertibility for current transactions under the terms of the Anglo-American Financial Agreement of 1945, and the United Kingdom’s intention to make agreements for early settlement of accumulated sterling balances. The Report noted that these developments would help in restoring the convertibility of currencies and freedom in current transactions in accordance with the provisions of the Fund’s Agreement.3

By the terms of the Anglo-American Financial Agreement, the Government of the United Kingdom had undertaken that after July 15, 1947, unless an extension were agreed with the Government of the United States, it would impose no restrictions upon payments and transfers for current transactions and would permit the current sterling receipts of sterling area countries to be used in any currency area without discrimination.

During the months preceding that date the United Kingdom took a series of steps to extend the degree of transferability of sterling already existing and to fulfill its convertibility commitments; it announced from time to time the relaxation of certain wartime restrictions on the transferability of sterling. By July 1947 these arrangements covered the greater part of the trading world, negotiations being unfinished with only a few countries. Convertibility for current sterling did not, of course, obligate the United Kingdom to remove all trade and exchange controls. Exports and imports were still subject to license, and controls were retained on capital movements and on the large sterling balances which had accumulated during and immediately after the war.

Nonetheless, the deficit with the dollar area both of the United Kingdom and of the rest of the sterling area was growing as a result of the large rate of dollar expenditure by the sterling area as a whole. This deficit, the greater part being attributable to the deficit of the United Kingdom itself, was occasioning large use of reserves and dollar credits.4

So great was the drain on its exchange resources that on August 21, 1947 the United Kingdom, by agreement with the United States, withdrew the facility of freely transferring sterling from Transferable Accounts to American or Canadian Accounts, and at the same time eliminated Canadian Transferable Accounts. In effect, although sterling remained transferable over a wide area, the convertibility of sterling into dollars was suspended.


The Fund’s attitude toward the difficulties encountered by its members in relaxing restrictions and establishing convertibility was mixed. On the one hand, the Fund was aware that the balance of payments problems of its members were not easy of solution. But on the other, the Fund did not wish its members to abandon the objective of eventually freeing their international transactions from restrictions. It was unrealistic for the Fund to call for the abandonment of restrictions; but it was capitulation for the Fund to succumb entirely to adverse economic conditions. In these circumstances the Fund began to work out policies which stressed the need for members to lay the proper foundation for a future relaxation of restrictions. This philosophy of establishing the preconditions for relaxation of restrictions was exemplified by the remarks of the Managing Director, Mr. Gutt, to the Governors as he presented to them the Annual Report for 1947. The Report had been approved by the Executive Directors before failure of the attempt to restore convertibility of sterling; although the Directors considered modifying the Report to take account of this development, they decided that, instead of doing so, the Managing Director should make reference to it in his presentation of the Report to the Governors. In so doing, he commented on the difficult postwar economic and political problems, the Marshall Plan proposals of the U.S. Government, and the failure of sterling convertibility. His attitude toward restrictions was as follows:

I have indicated … how much, in the monetary field as in others, the disruption of the war still makes itself felt. But that is no reason for abandoning or modifying the objectives of the Fund. Rather, concerted effort must be made to establish the conditions under which these objectives can be attained. A premature attempt to force the acceptance of exchange and trade practices suited for a balanced world economy can do much harm and even endanger the attainment of these objectives.5

The Annual Report for 1947 had begun to foreshadow in greater detail the main features of what would become the Fund’s approaches to exchange restrictions for the next several years. First, the Fund’s attitude toward restrictions would not be doctrinaire; in particular, account would be taken of the differing circumstances of member countries. Second, the criteria for judging the need for restrictions were to be whether these were warranted by balance of payments considerations and whether they had harmful effects on the balances of payments of other countries. Finally, for the foreseeable future, emphasis was to be placed on the necessity of establishing the preconditions for a return to convertibility and the elimination of restrictions.6 In the 1948 Annual Report the Executive Directors reiterated that the British experience in failing to restore convertibility showed that convertibility could succeed only when the underlying conditions were favorable to a system of multilateral trade and payments.7

Characteristics of the preconditions

The preconditions on which the Fund placed emphasis were the restoration of productive capacity, the establishment of a better pattern of international payments, and elimination of inflation through proper credit and fiscal policies. What was especially required was an expansion of exports in general and in particular an enhanced flow of exports in the directions most likely to diminish dollar deficits. Preference should be given to investment which would have relatively prompt effects upon the balance of payments. An improvement in the capital accounts of many countries, while not a prerequisite for the removal of restrictions from current transactions, was also considered important for strengthening their balance of payments. Changes in international indebtedness had aggravated the payments problems of several trading countries, especially those in Western Europe. In less than forty years, the United Kingdom, for example, had passed from the position of leading international creditor to that of the largest international debtor.

It also became apparent that another essential condition for the relaxation of restrictions and the restoration of currency convertibility was some building up of the non-dollar world’s monetary reserves. Most of the members of the Fund that had taken advantage of the transitional arrangements did not, in 1947–48, have reserves adequate to enable them to meet large current deficits for even a short period, or to meet persistent deficits, even of a moderate size, for an extended period. By 1948, in their Annual Report, the Directors were also suggesting that some adjustments of exchange rates might sooner or later be necessary before adequate progress could be made.8

The Fund was also mindful that the elimination of exchange restrictions would be illusory if direct trade controls were to take their place. The mere substitution for exchange restrictions of other measures, such as direct quantitative restrictions or excessive tariffs, would not reduce the magnitude of existing restraints on international trade. Moreover, the Fund recognized that while international organizations could make an important contribution in helping to achieve these preconditions, basically it was national policies that would determine the kind of world economy which would ultimately emerge.

Dangers of prolonged restrictions

Despite the continuing consensus that early relaxation of exchange restrictions could not be expected, there was, by 1949, some change of tone in the Fund’s pronouncements on restrictions. The dangers of a prolonged period of severe restrictions and inconvertible currencies began to be perceived. In discussing the transitional period, the Annual Report for 1949, for example, drew attention to the Board’s view that if the earliest reasonable opportunity was not seized to modify restrictive policies, the difficulty of resuming trade under more normal conditions would be greatly aggravated and world trade would tend more and more to be conducted with inconvertible currencies on the basis of bilateral bargains.9

At the Annual Meeting, 1949, the Board of Governors adopted a procedure for considering selected topics, on the basis of chapters in the Annual Reports, in separate discussion groups or committees. The discussion groups at the 1949 Meeting covered two topics: (1) exchange and monetary policy, and (2) exchange restrictions and monetary reserves. The Managing Director, who chaired both discussions, noted in his report on the second discussion that the Governors generally subscribed, but with differing emphasis, to the ideas expressed by the Executive Directors in the Annual Report, that early removal of restrictions could not be expected because of difficult payments problems and low reserves, but that the improvement in the underlying economic situation over the last few years, though inadequate, provided an environment for progress toward convertibility.10


The first signs of improving world economic conditions had appeared by 1950. The financial aid provided to 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 had, in most countries, also become more moderate. Lastly, the devaluations of September 1949 had corrected many distortions in international prices. These improvements had made it possible for some countries to achieve equilibrium in their over-all balances of payments, although not in their dollar accounts. This equilibrium was, however, maintained only with the support of import and exchange restrictions and, in several countries, of extraordinary external financial aid.

Some countries made a start toward freeing their trade and payments from restrictions, but in general, even after the devaluations of 1949, countries moved slowly in removing restrictions. Economists debated whether, in view of the “chronic dollar shortage,” substantial liberalization of restrictions would ever be feasible. Some argued that the difference in productivity between European countries and the United States was deep-seated; structural changes, including modernization of industrial techniques, were required in the economies of European countries if they were to overcome their persistent dollar deficits. Others argued that European countries needed mainly to pursue orthodox monetary policies; they contended that, with the restoration—indeed the expansion—of European productive capacity, these countries need only attain internal financial stability to be able to earn sufficient dollars to cover their outgo in dollars.

First Exchange Restrictions Report

This was the situation when the Fund, in accordance with Article XIV, Section 4, issued the first of its Annual Reports on Exchange Restrictions. That Article states in part that “not later than three years after the date on which the Fund begins operations and in each year thereafter, the Fund shall report on the restrictions still in force under Section 2 of this Article,” i.e., restrictions maintained under transitional arrangements. The three-year period ended on March 1, 1950.

The first Report was drafted by the Operations Department; the Exchange Restrictions Department, which was responsible for drafting subsequent reports, was not set up until March 1950. The Report was presented in two parts. The first consisted of a general account of the forms of exchange restrictions, some historical background, and the current situation and problems; the second part was a country-by-country description of the exchange restrictions maintained by Fund members under Article XIV. The same basic structure has been followed in all subsequent reports, although in later reports the first part omitted the description of forms of exchange restrictions and historical background, and was addressed more to changes during the past year and to the current situation. The second part has also changed over the years, both in form and in countries covered, a number of nonmember countries being included in the Reports after 1951 and all Article VIII members in Reports after 1955.

The first Exchange Restrictions Report reflected the Fund’s awareness of the several factors which had, since World War II, necessitated the maintenance of restrictions, and the Fund’s realization that, though some of the postwar economic disturbances had been brought under control, others were still in evidence. By 1950, the factor with which the Fund had become most concerned was continued inflation. It was apparent that increased supplies for export would shortly be forthcoming as reconstruction was completed and productive facilities were restored. However, inflation could undermine those exports: it raised internal costs and caused products to be shifted from export markets to domestic consumption.

The Fund’s policy, as exemplified by this Report, was postulated on two general considerations. One, relaxation of restrictions and the establishment of convertibility should be a progressive action over time. Member countries could undertake gradual programs of decontrol without incurring unnecessary risks. Three ways in which restrictions could be relaxed on a step-by-step basis were specified: by categories of international transactions, by particular foreign currencies, and by types of international payments.11 Members proceeding along these lines could test their balance of payments positions by degrees and could appropriately time the next stage of their program to remove restrictions.

Two, 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. In many instances, members had joint responsibilities if exchange restrictions were to be effectively reduced. For example, some countries 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 country would, to the maximum extent, assist rather than frustrate the efforts of others.12

The Executive Directors had indeed agreed, when they considered the draft of this Report, that a proper and useful role for the Fund was to assist its members to work together in eliminating restrictions: the Fund could contribute to the progress toward relaxation of restrictions by initiating, encouraging, and coordinating appropriate concerted action among its members. Some Directors had been specific: in their view, the Fund should, as necessary, consult member countries individually as to the measures which those maintaining restrictions might take, consider with creditor countries what they might do to assist the payments position of the debtors, help to work out the proper timing of actions, and examine the possibility of making Fund resources available to cushion the shocks for countries moving toward convertibility.

Intensified Fund efforts

A few months later, when the Annual Report for 1950 appeared, the Board further clarified its specific concerns. Although the improvement in the world economic situation had been substantial, many difficulties had still to be over-come before countries could, without facing serious risks, remove restrictions and assume the obligations of convertibility. Inflationary pressures had been brought under more effective control by many countries, but it remained to be seen whether the stability achieved could be maintained. The correction of international price distortions was far from complete. While the strengthening of reserves was progressing, it was too early to judge whether the increase in reserves was due to permanent factors or was just a temporary aftermath of the devaluations of 1949.

Along with its concern about inflation, the Fund was anxious that countries should improve their ability to compete in the U.S. market and expand their exports to the dollar area. The reasoning underlying this position was as follows: Both the staff and the Directors recognized that the dollar reserves of most Fund members were low. But they believed that, even more than reserves, members needed to improve their current dollar payments position. Mindful of the large loss of reserves suffered by the United Kingdom in mid-1947 when it had attempted to make sterling convertible, both staff and Directors were cognizant of the fact that even sizable reserves might be quickly dissipated if countries relaxed restrictions before they had obtained satisfactory balance in their current dollar accounts. Indeed, concern with the need for countries to strengthen their current dollar earnings led several members of the staff and some of the Directors to fear that the maintenance of protected markets at home and abroad, such as was possible through the intra-European payments arrangements then being organized, would provide outlets in Europe for relatively high-cost output. The dollar positions of European countries would, in that event, remain relatively weak.

In addition, in the Annual Report for 1950, the Board was somewhat more definite on the possibilities of removing restrictions. While recognizing that it could not press members too hard, it argued that greater progress in decontrol was feasible and should be made.13 Regretting that the 1949 devaluations had not been followed by more freeing of trade and payments, the Board warned that waiting for convertibility until all obstacles in the path had been removed might become the most effective means of ensuring that the path would always remain blocked. The danger had to be recognized that the continuation of restrictions might create a situation in which some condition for convertibility would always be absent; thereby any effective move toward the relaxation of restrictions could always be prevented.

Pointing to the further disadvantages of continuing restrictions, the Board called attention to the way in which they supported high costs and prices in the countries using them, distorted the allocation of resources, reduced competitive ability, and discouraged private capital. Accordingly, the Fund intended to press forward with a continuing examination of the need for, and the effects of, existing exchange restrictions in order to make sure that no reasonable opportunity for their removal was lost.

Restrictions on security grounds

Meanwhile, the Korean conflict, which broke out in June 1950, complicated the picture by introducing strategic and military considerations into the field of restrictions. In December 1950 the United States, for reasons of national security and international emergency, placed a virtual embargo on exports to certain Far Eastern destinations and froze assets and restricted payments in the United States of residents of the Chinese mainland and North Korea. In July 1951 Cuba introduced controls similar to those of the United States. As a way of rationing scarce supplies, many other countries introduced export controls, and these became increasingly important determinants of the composition, volume, and direction of international trade.

The imposition of these restrictions raised the issue of the Fund’s authority over restrictions imposed not for economic or financial reasons but on security grounds. The view of the U.S. Executive Director was that the Articles of Agreement were not explicit, and that probably the Fund would not have to act; nonetheless, the United States had informed the Fund of its measures. The Board formally noted the actions of the United States and Cuba, and deferred judgment on the questions of the Fund’s authority and of how it should be exercised.

In August 1952, after extensive consideration by the staff and by the Board, the Board took a decision to the effect that Article VIII, Section 2 (a), applies to all restrictions on current payments and transfers, irrespective of their motivation and the circumstances in which they are imposed. However, recognizing that the Fund does not provide a suitable forum for discussion of restrictions imposed solely for the preservation of national or international security, certain policy guidelines were formulated for such situations. First, when a member proposed to impose restrictions on security grounds, it was to notify the Managing Director, preferably in advance but ordinarily not later than thirty days afterward; such notification was to be circulated to the Executive Directors. The member could assume that the Fund had no objection to the imposition of the restrictions, unless the Fund informed the member otherwise within thirty days. Second, the Fund would thereafter review the restrictions periodically and reserve the right to modify or revoke, at any time, its approval or the effect of this approval on any restrictions that might have been imposed under it.14 The Board applied this decision retroactively to the measures taken earlier by the United States and Cuba.

This procedure was to be followed again late in 1965 when the United Kingdom, by a series of steps, subjected to exchange control all transactions with Rhodesia. Beginning on November 11, 1965, following its unilateral declaration of independence, Rhodesia was excluded from the sterling area, all transfers of capital from the United Kingdom to Rhodesia were prohibited, a stop was placed on practically all current payments from the United Kingdom to Rhodesia, imports into the United Kingdom from Rhodesia were subjected to license and virtually prohibited, and no credit was to be allowed for U.K. exports to Rhodesia.15 In accordance with the Board’s decision in 1952, the United Kingdom informed the Fund of these measures as measures solely related to the preservation of national security.


By the end of 1950, the Fund recognized that some of the essential characteristics of the problem of exchange restrictions were being altered as the largest trading countries diverted an increased proportion of their productive efforts to rearmament. For many countries, the problem had become more one of shortage of supplies and less one of inability to finance foreign expenditures. Export controls were becoming increasingly important in determining the pattern of world trade and payments. Greater attention was being given to the obtaining of strategic commodities and raw materials. Some international agreements were being worked out to ration these commodities.

At the same time the Fund continued to press for a reduction of restrictions. It was noted that during the year 1950, before the Korean hostilities, there had been a remarkable improvement in the world payments situation, especially vis-à-vis the United States, and an accelerated increase in the gold and dollar exchange reserves of countries other than the United States. The new security considerations were regarded as essentially independent of balance of payments requirements. The Fund continued to believe that the general improvement in the balance of payments positions and prospects of most of its members, stemming at least partly from the Korean crisis, justified a relaxation of restrictions, especially of discriminatory ones. Therefore, countries limiting imports of available goods for financial or protectionist reasons might well be able to relax or remove restrictions on imports despite the need for emergency measures on exports.

Not only was it feasible for countries with improved balance of payments conditions to relax restrictions, but it was in their interest as well. Relaxation of restrictions would increase the quantity of goods available for domestic consumption, and hence restrain inflation, and would permit a more economic use of resources.

These arguments, as expressed in the Fund’s public statements, reflected the concern of the Managing Director and the Governors during the Fifth Annual Meeting, held in Paris in September 1950, just three months after the outbreak of the Korean conflict. A committee of Governors was again set up to consider the Directors’ views on exchange restrictions as expressed in the Annual Report and also in the first Exchange Restrictions Report. The Governor for the United States, Mr. Snyder, stressed the dangers of maintaining exchange restrictions indefinitely, their tendency to perpetuate themselves, and the desirability of the Fund’s persisting in its efforts to promote relaxation of restrictions or at least to prevent unnecessary tightening, even though new difficulties would arise out of rearmament. The Governor for the United Kingdom, Mr. Gaitskell, again indicated that there was little chance of the United Kingdom’s removing restrictions or dropping exchange control as a whole, but stated that the United Kingdom would remove all unnecessary restrictions. The Governor for Belgium, Mr. Frère, pointed out that the necessity for restrictions was a consequence of inadequate monetary and credit policies, and that it was idle to talk about removing restrictions if inflation was not dealt with first. The Managing Director, noting that the first Exchange Restrictions Report had been drafted before the Korean crisis, repeated in presenting the Annual Report his alarm concerning the dangers of inflation. He also expressed worry about increased restrictions as a result of the Korean hostilities. These views, except for those of the Governor for the United Kingdom, were reflected in the Report of the committee.16

Following its Fifth Annual Meeting, the Fund participated in the consultations held in connection with the Fifth (Torquay) Session of the Contracting Parties to the GATT on recent changes in the import policies of Australia, Ceylon, Chile, India, New Zealand, Pakistan, Southern Rhodesia, and the United Kingdom.17 The Fund’s reports for these consultations similarly reflected a hardening of its attitude toward prolonged restrictions. These reports had concluded that it would be feasible for several countries in the sterling area to relax their restrictions, a recommendation resisted by those countries.


For the first time there was progress toward lessened restrictions. In Europe, after the European Payments Union (EPU) had been established, liberalization of both intra-European trade and transactions in invisibles started to move forward.18 For example, in regard to the liberalization of intra-European visible trade, OEEC members agreed in 1950 to take measures for the progressive elimination of restrictions on nongovernmental imports from other members and to provide for the automatic allocation of foreign exchange to pay for such imports. This relaxation was originally (from December 15, 1949) applied to 50 per cent of imports on private account from other OEEC countries, using the year 1948 as a base. From October 4, 1950, the percentage was raised to 60 (with exceptions for certain countries); these percentages were calculated separately for each of three categories—food and feeding stuffs, raw materials, and manufactured goods. It was proposed that the 60 per cent liberalization requirement be raised, by February 1, 1951, to 75 per cent of all nongovernmental imports from participants regardless of category.

The OEEC countries varied in their ability to achieve these goals. Italy and Belgium, which had become creditors to the EPU, had, by the end of 1951, freed from restrictions commodities which in 1948 had formed over 90 per cent of their total imports on private account from other OEEC countries. But France and the United Kingdom, which had accumulated considerable deficits with the EPU, were forced during 1951–52 to reintroduce many of their import restrictions: by measures taken at the end of 1951, the United Kingdom reduced its percentage of liberalized imports to 44, and France in early 1952 again subjected all OEEC imports to quantitative restrictions.

Despite this setback, some European countries began to increase the amount of their imports not only from each other but from the dollar area as well. Some countries in the sterling area also expanded their imports, including imports from the dollar area. India, in March 1951, doubled the value of import licenses issued for the first half of 1951 and extended the validity of licenses to the end of the year. Both India and the United Kingdom placed additional raw materials under “world open general license,” allowing their unrestricted import from any country. The same trend toward attempting to increase imports and relax restrictions also occurred in the Western Hemisphere and in some countries in the Middle and Far East.19 Canada abolished its exchange control system on December 14, 1951. Some of the easing of restrictions in 1950 and 1951 took the form of formal removal or relaxation of restrictions. Much, however, was done by administrative action within existing control mechanisms: more licenses for imports were granted, for example, and some goods were freed from licensing requirements.

The Fund saw these developments as indications that the acceptance of restrictions as more or less unavoidable and well-nigh permanent features of the international economic scene was at least being challenged. Anticipating important further developments, the Fund noted that the distinction between “hard” and “soft” currencies had been greatly narrowed and suggested that this should lay the basis for a reduction of restrictions, and especially of discrimination. The Fund stressed an international approach to the relaxation of restrictions, as against uncoordinated and self-defeating national action.20

It was nonetheless apparent from the first round of the Fund’s consultations under Article XIV, beginning in March 1952, that dependence on restrictions was still widespread. Most members contended that they continued to need restrictions in order to restrain aggregate import demand. The inconvertibility of many currencies, the inadequacy of reserves, the fear of capital flight, and the persistence of dollar deficits in balances of payments were repeatedly mentioned as reasons. Moreover, many members had come to regard the diminution of inflationary pressures as a very important condition for the removal of restrictions. They recognized that external balance, and particularly balance with the dollar area, could not be achieved unless the prices for their exports were competitive and unless their domestic industries could compete with imported commodities.

Thus the Fund, while recognizing the existence of other factors which still necessitated restrictions, retained its previously expressed conviction that further action in the monetary and fiscal fields was especially important if restrictions were to be reduced. Specific reference was made to monetary and fiscal policies in about two thirds of the decisions of the Executive Board in the 1952 consultations.21


The nature of the problem

As supplies of goods increased, export markets gradually became more competitive. Countries were especially anxious to penetrate the heretofore difficult dollar market, especially in the United States. Hence, in the early 1950’s another problem suddenly emerged, which was just as suddenly to disappear by 1954–55. This was the problem of “retention quotas.” Exporters in many Western European countries were allowed to retain specified proportions of their earnings of convertible currencies, and sell them or use them to import from the dollar area commodities that could be sold profitably (usually at premium prices) in the exporter’s country, where their supply was limited by discriminatory import restrictions.

There were two kinds of retention quotas, according to purpose: to foster direct exports or to promote indirect trade. The first was relatively simple in concept and operation. An exporter was induced to sell goods to the dollar area in return for special privileges: either he could retain some of the exchange earned and sell it in a premium market or he could use such exchange to purchase imported goods which he could sell at a substantial profit. The second kind of retention quota, to boost indirect trade, had been devised to keep transit trade going in the presence of adverse conditions. Transit trade, by which traders in one country sell goods originating in another country to a third country, had tended to come to an end because of the absence of convertibility. Traders could not buy goods in a hard currency country for resale (presumably at a profit) in a soft currency country; the exchange control authorities in the trader’s country would not make hard currency available for such purchases. The opposite type of transit trade transaction (buying in a soft currency country and selling in a hard currency country) would have been attractive to the exchange control authorities, but there was no profit in it for the trader at the official exchange rate.

Retention quotas made transit trade possible in these circumstances. A trader could get a license to use hard currency for the purchase of goods to be sold in a soft currency country provided that the hard currency required had been obtained as the result of a previous transit transaction effected in the opposite direction. The earlier one (sometimes called the “first leg of a switch transaction”) might entail a loss; but the latter transaction (sometimes called the “second leg”) yielded a profit. As the combination was attractive only if the profit on the second leg more than offset any loss on the first, the dealer who completed the unprofitable first leg of the transaction was given the right to retain part of the hard currency obtained in order to use it for the second leg. This right might or might not be negotiable. The reason why the authorities of the transit trader’s country were interested in this kind of deal was that the part of the hard currency proceeds of which they demanded surrender helped to increase their hard currency holdings.

Although the Fund’s staff had been concerned about retention quotas as early as 1947, it was only later, when the practice began to spread, that they became troublesome. A survey by the staff in 1952 had indicated that retention quotas were in use at least in Austria, Denmark, Finland, France, Germany, Greece, Iceland, Indonesia, Italy, Japan, the Netherlands, Norway, Sweden, Turkey, and Yugoslavia. As the Executive Board began consultations with individual countries, early in 1952, it became apparent that retention quotas were symptoms of a wider problem and that it would be desirable for the Fund to formulate a general approach to their removal. However, some countries had already indicated to the Fund that they could not see their way clear to removing such practices unless such removal was part of a general action by several countries; the Board therefore deferred any decision regarding these practices pending an over-all study.

The analysis by the staff revealed several dangers in the use of retention quotas and similar arrangements. A retention quota for the purpose of expanding direct exports was a partial de facto devaluation, as it made possible a cut in the price of the export product. Such devaluation might set off a chain of competitive actions. Retention quotas for transit trade were even more worrisome. Hard currency earnings were channeled from the soft currency country in which the goods originated to the country whose trader effected the final sale. The commodities marketed competed advantageously in the hard currency market with the same goods sold in that market by the original producer, since the transit trader could afford to accept a loss which the direct exporter could not. Trade was diverted, by an intermediary, from its normal channel direct from the country of production to the country of consumption; and the intermediary, not the country of production, received the precious dollar earnings.

Taking action

The importance of the retention quota problem at the time prompted the Board of Governors, at its Seventh Annual Meeting in September 1952 in Mexico City, to adopt a resolution to the effect that the Fund should make a special study of dollar retention quotas and similar practices in member countries, and make recommendations. This study was to take into account the situations which give rise to these practices, their magnitude in each country, the methods used for their application, their impact on other members of the Fund, and possible alternative measures.22

In judging these practices, the staff, while taking into account the point of view of the individual countries using them, employed primarily international criteria: Did they cause undue harm to the economic interests of other members? What implications did they have for international monetary cooperation? What were the consequences of these devices for existing exchange rates? Were they likely to shorten the period of inconvertibility? Essentially the staff’s findings were that retention quotas constituted a break with the principle of unitary rates, that they did not add significant flexibility to the exchange rate system of the countries concerned, and that they did not help to achieve convertibility or a substantial relaxation of restrictions. Accordingly, it was suggested that the Fund should seek the simultaneous removal of these practices by all countries.

The Executive Board had considerable difficulty in agreeing on a course of action. The Directors from those countries that were condemning retention quotas and similar practices argued that such practices involved competitive exchange depreciation, undermined otherwise appropriate exchange rates, encouraged unfair commercial practices, and resulted in diverting dollar earnings from already dollar-scarce countries. On the other hand, the Directors from those countries that were using the practices argued that the real problem was the general dollar shortage and the fact that some countries had over-all balance of payments equilibrium while others did not. Because of the inconvertibility of currencies, the former could not use their surpluses in one currency to settle deficits in another. Meanwhile, retention quotas were useful parts of dollar export promotion programs which helped to expand dollar earnings and made the export business competitive.

This difference of view made it necessary for the Board to give intensive consideration to numerous drafts of a decision. On May 4, 1953, the following decision was taken, without dissent but with one abstention:

  • In concluding consultations on restrictions on current payments and transfers as required under Article XIV of the Fund Agreement, the Fund postponed consideration of retention quotas and similar practices through which some members have sought to improve their earnings of specific currencies. The Fund has now examined these practices more fully than was possible at the consultations referred to above. The Fund has extended this examination to cover the terms of reference of the resolution adopted on September 9, 1952, by the Board of Governors, and has come to the following conclusions:
    • 1. Members should work toward and achieve as soon as feasible the removal of these retention quotas and similar practices, particularly where they lead to abnormal shifts in trade which cause unnecessary damage to other countries. Members should endeavor to replace these practices by more appropriate measures leading to currency convertibility.
    • 2. The Fund will enter into consultation with each of the members concerned with a view to agreeing on a program for the implementation of 1 above, including appropriate attention to timing of any action which may be decided upon.
    • 3. The Fund does not object to those practices which, by their nature, can be regarded as devices designed solely to simplify the administration of official exchange allocations.23

Subsequently the Executive Board considered the retention quotas of several European countries, making suggestions where they might be reduced. During later 1953 and early 1954 the use of retention quotas declined substantially and no longer presented such an acute problem as they had a year or two earlier. They were abolished in France, Germany, the Netherlands, Sweden, and Turkey. In March 1955 Japan reduced its use of the practice.


Prospects for sterling convertibility

By the early 1950’s the establishment by the United Kingdom of convertibility for sterling had come to be regarded by many as a necessary condition for the introduction of convertibility by other countries where economic conditions were already favorable. Much attention, therefore, centered on the prospects for making the pound sterling convertible.

After the abortive attempt in 1947, no consideration was given to the problem of restoring sterling convertibility until the autumn of 1951, when the Conservative Party returned to power in the United Kingdom. A statement issued in London in January 1952 by the Conference of Commonwealth Finance Ministers following their discussions on the problems confronting the sterling area stated that “it is our definite objective to make sterling convertible and to keep it so.” But convertibility was not imminent—rather a goal to be achieved gradually. “We intend to work towards that goal by progressive steps aimed at creating the conditions under which convertibility can be reached, and maintained.” The statement noted that while the sterling area countries had the primary responsibility for creating the conditions required to reach this objective, the cooperation of other countries, especially countries in surplus, was imperative. No mention was made of the Fund or of any other international financial organization, such as the EPU.24

Discussions by the British Government and the Governments of the other Commonwealth countries about the prospects for convertibility were accelerated in 1952 and 1953. These discussions were more practical and pointed than those of the past: they were less in terms of whether convertibility ought to be established and more in terms of how and when the specific necessary conditions could be established and the forms which convertibility might take. Keen interest in the prospects for sterling convertibility was also expressed in meetings of the EPU and the OEEC.

In a communiqué issued at the end of the Commonwealth Economic Conference (attended by Prime Ministers) in December 1952, it was stated that the conference had agreed that it was important not only for the United Kingdom and the rest of the sterling area but also for the world that sterling should resume its full role as a medium of world trade and exchange. The communiqué reiterated that, while an integral part of any effective multilateral system was the restoration of the convertibility of sterling, this could only be achieved in progressive stages.

The stages were now made more explicit. Three conditions were outlined for the achievement of convertibility: (1) the continuing success of actions by the sterling Commonwealth countries themselves, (2) the adoption by trading nations of trade policies conducive to the expansion of world trade, and (3) the availability of adequate financial support through the Fund or otherwise.25 Subsequent talks were held between the British Government and the new U.S. Administration early in March 1953. It was agreed that while full multilateral trade and general convertibility of currencies were ultimate objectives, firm commitments on either side were then impossible.

Position of other European currencies

Meanwhile, the continental members of the OEEC had become somewhat disturbed at the prospect of sterling convertibility. They feared both that it might be established at the expense of the trade liberalization program of the OEEC and that it would mean the end of the EPU. Conceivably, a degree of convertibility might be established accompanied by the tightening of other restrictions. At the OEEC Ministerial Council Meeting held in Paris on March 23 and 24, 1953, the United Kingdom allayed these fears by supporting the consensus of the continental members that progress toward trade liberalization should proceed pari passu with progress toward convertibility.

During the first half of 1954, a number of official reports and statements discussed the need for, and possibilities of, establishing convertibility for several European currencies. In January the report of the U.S. Commission on Foreign Economic Policy (the Randall Commission) had stated that the general economic conditions prerequisite to currency convertibility were more nearly in prospect at that time than at any previous time since the war. The decision, the methods, the timetable, and the responsibility for introducing currency convertibility should rest with the countries concerned; the commission believed, however, that its recommendations on commercial policy and for strengthening the gold and dollar reserves of European countries, as their currencies became convertible, would assist these countries in removing restrictions.26 These recommendations were subsequently approved by the President in his Message to the Congress on foreign economic policy on March 30. Also in March 1954 the U.S. and Canadian Ministers who had been members of the Joint United States-Canadian Committee on Trade and Economic Affairs welcomed the evidence of a desire in many countries to take decisive steps toward convertibility.27

Several European central banks, in the early months of 1954, pointed to the steps being taken toward convertibility.28 On February 22, 1954, the Governor of the National Bank of Belgium, after emphasizing that convertibility required strict financial discipline, stated that the National Bank believed that Belgium had attained the necessary conditions for introducing convertibility of the Belgian franc. The Board of Governors of the Bank deutscher Länder stated that convertibility of the deutsche mark had already in large measure been established, expressed the opinion that the conditions for instituting a fully convertible system of payments in Europe had been better in 1953 than at any other time since the end of World War II, and urged that any monetary decisions being taken should aim at convertibility. The President of the Netherlands Bank said that the Netherlands was standing on the threshold of convertibility. The approach to convertibility had therefore been broadened to include not only sterling but the French franc, the deutsche mark, the Dutch guilder, the Belgian franc, the Italian lira, and possibly other currencies as well.

A Ministerial Examination Group on Convertibility was established at an OEEC Council Meeting in May 1954 to consider the problems that might arise for intra-European trade and payments if and when convertibility was introduced for one or more European currencies. At a meeting of this group in London in July 1954, the United Kingdom suggested the establishment of a European Fund, and this suggestion led in time to the European Monetary Agreement.

Deliberations in the Fund

As they began to consider the prospects for convertibility, both the United Kingdom and the OEEC Group on Convertibility made informal inquiries seeking the Fund’s views; moreover, in their Annual Report for 1954, the Executive Directors took note of the discussions going on in Europe concerning convertibility: “Formal statements made by several Fund members in recent months have indicated a widespread interest in the possibility of more rapid movement in the direction of currency convertibility and the further removal of restrictions.”29

While the Board welcomed both the general trend of opinion and the policy decisions made by individual countries and by groups of countries as regards convertibility, it was aware of the problems posed by the fact that not all European currencies were equally strong. Countries returning to convertibility might impose or intensify restrictions on imports from countries with weaker currencies that remained inconvertible for the time being; countries whose currencies remained inconvertible might intensify restrictions on imports from countries with newly convertible currencies in order to increase or create balances available for conversion into dollars. It was essential, therefore, that relaxation of restrictions and restoration of convertibility should go hand in hand, and that most if not all European countries should undertake convertibility simultaneously; on the other hand, the countries which had already attained strong payments positions could not wait indefinitely.

At the Ninth Annual Meeting, in September 1954, some of the Governors expressed the belief that conditions necessitating the postwar transitional arrangements of the Articles of Agreement were drawing to an end. The Governor for the United Kingdom warned that “there may well be danger in continuing for too long a transitional provision,” and he asked the Fund to study the question of the best means of shifting from the transitional arrangements under Article XIV to Article VIII. The Governor for the United States supported this request.30

Meanwhile, the staff had been considering how the Fund might assist in a move to convertibility, both by giving financial assistance and by formulating relevant policies and procedures. Among the questions being considered was whether the Fund should announce the end of the transitional period. Did the Fund, in fact, have the power to do so? On whose initiative—the Fund’s or the country’s—should the decision be taken to give up Article XIV and take up the obligations of Article VIII? What restrictions, if any, might the Fund approve under Article VIII? How was Article VIII stricter than Article XIV?

From the Fund’s inception, it had generally been assumed that Article XIV was somehow more permissive than Article VIII—that is, countries could presumably maintain a greater degree of restriction under Article XIV than would be permitted under Article VIII. But the precise extent to which Article VIII was stricter, and the exact nature of the restrictions that might be approved under that Article, remained uncertain. Accordingly, the policies and procedures of the Fund in these matters began to be explored.

In informal session in November 1954 the Executive Directors considered a possible shift of several member countries to Article VIII. This preliminary discussion did more to point up problems and differences among members than to resolve them. Attention tended to concentrate on two important legal issues. First, was formal notification to the Fund of acceptance of Article VIII by a member required before Article VIII could become binding on a member? Inversely expressed, could the Fund find that a member was under Article VIII by virtue of that member’s having no restrictions that were maintained for balance of payments reasons? Second, did the Fund have the legal power to end the transitional period, either for all members or with exceptions for some members still in need of transitional arrangements?

Consideration of the stage at which members would come under Article VIII was also an important part of the 1954 discussions. As the staff saw it, even with the restoration of convertibility some restrictions—possibly a great many—would remain. While countries might establish “external” convertibility, it might be only at some later time that “internal” convertibility could be undertaken as well. Until then, while nonresidents could convert their earnings of a given currency, restrictions on residents would continue. The establishment of convertibility was, therefore, envisaged as occurring in two stages.


Improved world payments situation

The sudden and extensive decline in the use of retention quotas may, in part, have been occasioned by the adverse reactions of the Fund and of several of its largest members; but the virtual abolition of these practices, and the talk about prospects for convertibility, were due even more to the vast improvement in the world payments situation that had become apparent by the mid-1950’s.

World industrial production was expanding rapidly and world trade even more quickly. As increased production of both agricultural and industrial commodities had made many countries less dependent on dollar imports, the volume of these imports had tended to fall despite a considerable decline in the degree of discrimination applied against imports requiring payment in dollars. The sterling area had achieved an aggregate surplus as well as a surplus with the dollar area; and several countries in Western Europe had attained, or had continued in, total balance of payments surplus. 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 exports from the United States. The shares in world exports of manufactured goods of Japan, Germany, Italy, Belgium, and Sweden had sharply increased, and smaller rises had been experienced by the Netherlands, Switzerland, and France; the shares of the United States, and also of the United Kingdom, had diminished.31

The improvement in the international payments situation was signalized by an expansion of gold and dollar reserves outside the United States. These reserves had been rising steadily and by the end of 1954 totaled $25 billion, as against $15 billion held at the end of 1948.32 Further testimony to the strength of the balance of payments of the non-dollar world was that the recession in the United States in 1953–54, unlike those of 1945–46 and 1948–49, did not lead to a recrudescence of payments difficulties elsewhere. In fact, the reserves of non-dollar countries in 1953 and 1954 had risen by approximately $4.8 billion.33 In contrast, the recession of 1948–49, of about the same magnitude, had helped to precipitate the currency devaluations of September 1949.

Thus, by 1955 most of the abnormal postwar difficulties had faded into the past and with them had gone the acute payments problems that had given rise to severe restrictions. In addition, the improvement in the world payments situation between 1951–52 and 1954–55—in contrast to the period after the outbreak of hostilities in Korea, when there had also been a rapid rise in the non-dollar world’s reserves—was associated with stable prices and a greater freedom from inflationary pressures than in earlier years. It had been possible for countries to pursue credit policies which were more cautious than those previously employed without unduly hampering the expansion of production or creating any serious problems of unemployment.

Debates by members of the staff and by the Executive Board with representatives of member governments on the need for, and effectiveness of, anti-inflationary policies in improving balances of payments lessened in intensity and in frequency. In its 1955 consultations, for example, the Fund found in its members a much greater readiness to take measures for the correction and prevention of monetary instability. Although the authorities of practically all members made it clear that they regarded the maintenance of satisfactory levels of productive employment as a major objective of their economic policies, there was increasing recognition of the value of flexible monetary and fiscal policies as a major means of achieving stability. Differences of opinion now centered on such questions as at what point current changes in economic activity required the institution of tighter monetary, credit, and fiscal policies, the extent to which fiscal measures should be combined with monetary measures, and to which sectors of the economy stricter monetary policies should be applied.

In order to facilitate the attempts by central banks to prevent or at least counteract any inflationary or deflationary developments of sufficient magnitude to create a threat to the long-run stability of the internal and external purchasing power of their currencies, special attention was given to the problem of how to detect inflationary or deflationary developments. As part of the proceedings of the Eleventh Annual Meeting of the Board of Governors, an Informal Session on Recent Developments in Monetary Analysis was held on September 25, 1956.34 Three papers were presented, by Dr. M. W. Holtrop, President of the Netherlands Bank, Dr. Paolo Baffi, Economic Adviser to the Bank of Italy, and Dr. Ralph A. Young, Director of the Division of Research and Statistics, Board of Governors of the Federal Reserve System of the United States.35

The easing of restrictions

In response to the more satisfactory balance of payments positions of many countries, notable steps were taken, particularly in Western Europe and the sterling area but also elsewhere, to accelerate the reduction of restrictions. Although the elimination of controls was sometimes delayed because authorities hesitated to dismantle a control apparatus which they feared they might have to re-establish in the event of a deterioration of the payments situation, controls were applied less rigorously or regulations were made less rigid and formalistic. The result was a considerable relaxing of restrictions. The trade liberalization policy of the OEEC had become a driving force in the freeing of trade between Western European countries. These countries had, by January 1954, freed from quantitative restrictions three fourths of the trade conducted with each other and in 1955 they began to relax restrictions on the granting of exchange for transactions in invisibles within the OEEC. Liberalization of trade restrictions was also frequently extended to imports from other non-dollar sources. Outside Europe, where countries’ policies on restrictions were not in general subject to joint agreement, there was also extensive relaxation of restrictions.

There was a tendency, as well, to give more equal treatment to imports from different countries or paid for in different currencies, i.e., to reduce the degree of discrimination. By 1955, ten members outside the dollar area (Belgium, Ethiopia, Greece, Indonesia, Luxembourg, the Netherlands, Pakistan, Peru, Thailand, and the Union of South Africa) made little significant distinction between their treatment of the dollar area and of other countries; and during the next year, dollar import lists were further enlarged by many countries, and the OEEC countries continued their efforts to extend dollar liberalization.

Moreover, in the summer of 1955 Western European countries began to terminate some of their bilateral payments arrangements with countries outside Europe and to broaden their payments arrangements with non-European countries. Under arrangements known as the “Hague Club,” Belgium, Germany, Luxembourg, the Netherlands, and the United Kingdom terminated their bilateral agreements with Brazil and the degree of multilateralization of trade and payments between Brazil and their monetary areas was widened. Brazil undertook to apply to exports to the monetary areas of the participants the same exchange rate treatment as exports paid for in convertible currencies; to accept payment in any of the participants’ currencies without regard to the country of destination; not to discriminate between the European currencies in respect of payments for imports; and to maintain orderly cross rates among these currencies. In addition, Brazil was permitted to transfer its earnings of these currencies to other non-dollar countries. In 1956, the arrangement was extended to include Austria, France, and Italy.

In July 1956 similar arrangements, called the “Paris Club,” were established between Argentina and a number of European countries which by 1957 had increased to eleven—Austria, Belgium, Denmark, France, Italy, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom. Under this regime, Argentina could freely transfer the currencies of the European participants from one participant to another.

Meanwhile, from 1955 to 1957, the areas of transferability were increasingly being extended for the pound sterling, the deutsche mark, the Belgian franc, the Italian lira, the Netherlands guilder, and the Swedish krona. There was thus a continued movement to ease the requirements of bilateral arrangements. There were new arrangements by which one partner country made its currency transferable, and arrangements in which the two partners agreed to conduct transactions in the transferable currency of a third country.

Many of these measures, considered in isolation, were of no great significance; but their result in the aggregate was an impressive relaxation of restrictions. By early in 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.” 36

Continued inconvertibility

On the other hand, relations between European currencies and fully convertible currencies, especially the U.S. and Canadian dollars, remained unchanged. It had become fairly well established that no general move to convertibility by European countries or to the Fund’s Article VIII could be made before sterling became convertible. The need for countries to move together to the Fund’s Article VIII had been reiterated by the Governor of the Fund for Belgium, Mr. Frère, at Mr. Rooth’s luncheon for Governors at the Tenth Annual Meeting in Istanbul in September 1955, but hopes for establishment of sterling convertibility were dimming. At the Annual Meeting in Istanbul, the Governor for the United Kingdom, Mr. Butler, noted that “in the United Kingdom a too buoyant economy has called for measures to control the surge of expansion” and that “my Government has taken no decision on the timing of the convertibility of sterling.” Referring to his remarks at the previous Meeting, the Governor for the United Kingdom went on to say that the Executive Directors had found that the difficulties of a move to Article VIII were considerable and that it would be a mistake “to reach a rushed decision.”37 When sterling area reserves declined in the second half of 1955, it became clear that there would be no early action by the U.K. authorities to extend general authorization to all nonresidents to convert their current sterling earnings into convertible currencies at the official rate of exchange. Thus were ended, for the time being, any expectations of an early move to convertibility for European currencies or of members shifting to Article VIII. It is noteworthy that a few months earlier, in July 1955, the Managing Director, Mr. Rooth, had recorded in his own notations his personal view that no decision should be taken at that time to end the transitional period.


These were not easy years for the Fund. First, the great majority of members continued to apply restrictions under Article XIV. Second, most countries still retained some discrimination against the dollar area. Third, almost two thirds of the Fund’s members had bilateral payments arrangements of some kind, though some were of little more than marginal significance. Finally, administrative machinery for applying restrictions was maintained by four fifths of the Fund’s members, even though the improvements in their economic situations suggested that many could dismantle their exchange controls.

Increasing concern about discrimination

The fact that most members, including those in Europe, still applied restrictions that discriminated against imports from the dollar area had, by the mid-1950’s become of increasing concern, especially to the Directors for the United States and Canada. Part of the problem was that the way in which EPU settlements were arranged tended to encourage tighter restrictions against the dollar area. The participating countries extended credits to each other for part of the net payments due to them; consequently, they did not receive in gold or convertible currencies the full value of whatever balance of payments surplus they acquired inside the Union. They were, therefore, not able to apply the full value of surpluses within the Union to meet deficits with other areas. This settlement arrangement was of particular importance in relation to the dollar area, and, indeed, was one of the reasons given to the Fund for the retention of restrictions which discriminated against imports of dollar goods.

The U.S. and Canadian Directors were especially disturbed by discrimination against dollar imports when the country under discussion had already attained equilibrium in its aggregate balance of payments, or had achieved a surplus in its accounts with the dollar area whether or not it had reached total equilibrium. At least two of the OEEC countries which in the mid-1950’s had deficits in their accounts with EPU countries were in surplus with the dollar area, and were using the resulting dollar proceeds to finance their EPU deficits. Yet these countries maintained restrictions which were more severe against imports from the dollar area than against imports from other EPU participants. Noting that other OEEC countries had liberalized to a considerable extent without discriminating between EPU liberalization and dollar liberalization, the U.S. and Canadian Directors questioned the reasons for the discriminatory restrictions given by some of the individual members of the OEEC. They disagreed, for example, with the argument presented by the representatives of one of the OEEC countries that a certain amount of discrimination against dollar imports was required if European integration was to be achieved. They doubted that the Fund could tolerate indefinitely the policy followed by EPU countries of earmarking dollar earnings for settlement of their deficits within the EPU.

In the hope and expectation that a push by the Fund against bilateral payments agreements might help to end the discrimination resulting from those agreements, and might also hasten convertibility and thus put an end to currency discrimination, the Board, in June 1955, took a decision urging members to re-examine the need for their bilateral agreements and calling upon them to reduce their use of these agreements.38

In addition, in September 1955, preparatory to a Board discussion of the general problem of discriminatory restrictions, the staff undertook a survey of the extent of discrimination still being applied by members. The staff study concluded that the degree of discrimination against dollar imports had diminished and was continuing to diminish, and that this was in line with the improved balance of payments and reserve positions of most members. Late in 1955 and early in 1956 the Directors held an intensive series of meetings on the topic of discriminatory restrictions. But it was evident that there remained considerable differences of opinion among them concerning whether greater progress toward reducing discrimination could be made by the majority of the Fund’s members.

During the Board’s discussion, Mr. Rasminsky (Canada) took strong issue with the position of the staff that some Western European countries felt obliged to maintain a significant degree of restriction because of a sense of European solidarity, or to discriminate against dollar imports in view of the nature of the EPU settlement arrangements. He believed it was becoming increasingly clear that the basic reasons for continued discrimination were commercial policy considerations, including special export advantages gained by European countries through their regional or bilateral arrangements.

Drawings to avoid intensifying restrictions

Meanwhile, the Fund’s immediate aim was to ensure that relaxation of restrictions continued or, at a minimum, that countries avoided tightening their restrictions. The Fund was especially concerned that any retrogression would be likely to delay movements toward convertibility. To this end, it began to apply the policies regarding the use of its resources which it had been developing since 1952. These new policies, involving gold tranche drawings, stand-by arrangements, and the application of the waiver provisions of the Articles of Agreement, had been worked out so as to provide additional exchange resources to members that undertook to make their currencies convertible. The policies were also intended to assist members through renewed balance of payments crises without their having to tighten restrictions which they had previously relaxed.39

These policies of the Fund relating use of the Fund’s resources to relaxation of restrictions and steps to convertibility proved useful in the latter part of 1956 and in 1957, when both industrial and primary producing countries experienced a new round of financial difficulties. Boom conditions and overspending, aggravated by the Suez Canal crisis, led to various strains and stresses. The Fund, in two exceptional years ending April 30, 1958, lent resources totaling $1,780 million, including substantial sums to the United Kingdom, France, India, Japan, the Netherlands, and Argentina. In general an intensification of restrictions was avoided. Countries were enabled to gain the time required for putting into effect the measures contemplated or already initiated to check deteriorations in their payments positions.

But the Fund also considered these crises as temporary and hoped to encourage greater movement toward the further relaxation of restrictions and the establishment of convertibility. It recognized that governments, anxious to avoid being compelled by unfavorable developments to reverse decisions already made, must proceed cautiously in relaxing restrictions. But at the same time, the Fund did not wish to see progress delayed unduly. Hence, in its decisions on consultations, especially in the years 1957–58, the Board pressed for more rapid progress by members in eliminating their restrictions, and especially in reducing discrimination and bilateralism.


The year 1958 witnessed the most signal achievement of the postwar period in the field of exchange restrictions. On December 29, 1958, fourteen Western European countries—Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, and the United Kingdom—made their currencies externally convertible for current transactions; that is, nonresidents would now be freely permitted to exchange their earnings of these currencies from current transactions into any other currency at rates within the official margins. Greece took the same step on May 25, 1959. Fifteen other countries, most of which were associated in a monetary area with one or another of these Western European countries, adjusted their exchange control regulations to the new conditions; these were Australia, Burma, Ceylon, Ghana, India, Iraq, Jordan, Libya, Malaya, Morocco, New Zealand, Pakistan, the Sudan, Tunisia, and the Union of South Africa. It thus became a matter of indifference to the exchange control authorities in what currency or to what account authorized payments to nonresidents were made by the residents of their country.

Except for Germany, however, none of the other countries with newly restored external convertibility granted nonresident convertibility, at rates within the official margins, for all payments of a capital nature. In some of the countries, a free exchange market existed in which capital transactions were unrestricted. Germany also took the opportunity provided by the moves toward nonresident convertibility—and the very strong gold and foreign exchange reserve position of Germany justified this—to announce convertibility of the deutsche mark for residents. By a series of general licenses, the German public was given complete freedom in foreign exchange transactions. The connection between licensing of imports (and of service transactions) and foreign exchange transactions was eliminated.

Before 1958 only ten member countries had been maintaining fully convertible currencies. But a number of other members had, for varying lengths of time, maintained free exchange markets in which their currencies could be converted at will into the major trading currencies. The decision taken in December 1958 was, therefore, very significant; it meant that a majority of the Fund’s members now permitted nonresidents to transfer current earnings of their currencies to any other country. A system had been formally established in which the currencies used for the great bulk of international payments were convertible into other currencies or into gold. By and large, this was true whether the payments were received from residents of countries whose currencies were externally convertible or from residents of other countries, since the foreign trade of the latter was, to a very great extent, financed in currencies which were now convertible.

Significance for the Fund

Since none of the 30 countries that had made their currencies externally convertible was yet ready to accept the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement, their currencies were still inconvertible in the technical meaning of the Fund’s Articles; that is, their currencies remained unacceptable to the Fund in repurchases. Nonetheless, the currency moves in Europe at the end of 1958 had immediate and long-run significance for the Fund. The introduction of external convertibility followed the substantial strengthening, during the past few years, of the reserve and balance of payments positions of the Western European countries taken as a group, and the considerable improvement in the position of sterling during 1958. External convertibility, plus the subsequent favorable developments in early 1959 in the external financial situations of the European countries concerned, reflected the fact that these countries had, on the whole, attained a balanced position internally and increased strength in relation to other countries. And it was expected that, should that improvement continue, one country after another would be able to eliminate restrictions still further.

Indeed, the Managing Director, Mr. Jacobsson, in addressing the Governors at the Fourteenth Annual Meeting in Washington on September 28, 1959, spoke of the introduction of external convertibility as “the consummation of the first stage of a process extending over many years for strengthening the economic and financial position of countries all over the world.” Long an advocate of the importance of monetary and credit policies for overcoming the balance of payments deficits of European countries, Mr. Jacobsson also saw in these developments some vindication of his beliefs:

The monetary disturbances which were brought about by the Second World War could not be easily overcome; but through increases in national income and the more effective application of flexible fiscal and credit policies, the excessive liquidity which weighed on many economies in the postwar years has gradually been worked off, so that by now the authorities in many countries have got a firm grip on the monetary position.40

While nonresident convertibility by itself did not necessarily produce a reduction of trade restrictions, it had important repercussions upon trade relations, and countries were thereby brought closer to the time when the Fund’s objective of avoiding restrictions on current payments would be fully achieved.

All in all, the Fund warmly welcomed the establishment of nonresident convertibility, especially the remarkable cooperative effort of European countries in making a concerted move.41


Annual Report, 1947, pp. 2, 35, and 1948, p. 30.


Annual Report, 1955, p. 77.


Annual Report, 1946, p. 12.


Annual Report, 1948, p. 31.


Summary Proceedings, 1947, p. 10.


Annual Report, 1947, p. 35.


Annual Report, 1948, p. 32.


Ibid., p. 23.


Annual Report, 1949, p. 30.


Summary Proceedings, 1949, pp. 37–39.


First Annual Report on Exchange Restrictions (1950), p. 35.


Ibid., pp. 36–37.


Annual Report, 1950, pp. 55–69.


E.B. Decision No. 144-(52/51), August 14, 1952; below, Vol. III, p. 257.


Seventeenth Annual Report on Exchange Restrictions (1966), pp. 588–91.


Summary Proceedings, 1950, pp. 44–45.


The first such consultation in which the Fund participated was on South Africa’s import policy at the Fourth (Geneva) Session in the spring of 1950.


Details are given in Frederic Boyer and J. P. Salle, “The Liberalization of Intra-European Trade in the Framework of OEEC,” Staff Papers, Vol. IV (1954–55), pp. 179–216.


Second Annual Report on Exchange Restrictions (1951), pp. 31–32.


Ibid., pp. 19–21.


Fourth Annual Report on Exchange Restrictions (1953), p. 12.


Summary Proceedings, 1952, pp. 169–70.


E.B. Decision No. 201-(53/29), May 4, 1953; below, Vol. III, p. 258.


Third Annual Report on Exchange Restrictions (1952), pp. 188–91.


Department of State Bulletin, March 16, 1953, p. 399.


U.S. Commission on Foreign Economic Policy, Report to the President and the Congress (January 1954), pp. 72–73.


U.S. Department of State, Press Release No. 143, March 17, 1954.


Annual Report, 1954, pp. 8–10.


Ibid., p. 8.


Summary Proceedings, 1954, p. 44.


Annual Report, 1957, pp. 20–21.


Annual Report, 1955, p. 33.


Ibid., p. 13.


Summary Proceedings, 1956, p. 125.


The papers presented by the principal speakers and the background paper on Monetary Analysis prepared by the Fund’s staff are to be found in Staff Papers, Vol. V (1956–57), pp. 303–433.


Annual Report, 1956, p. 89.


Summary Proceedings, 1955, pp. 37, 39, 41.


See below, p. 304.


Annual Report, 1955, pp. 77–78.


Summary Proceedings, 1959, p. 13.


Annual Report, 1959, pp. 3–4.

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