Chapter

CHAPTER 13 A Convertible Currency World

Author(s):
International Monetary Fund
Published Date:
February 1996
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Author(s)
Margaret G. de Vries

AFTER EXTERNAL CONVERTIBILITY was established by the European countries at the end of 1958, another period of the Fund’s policy as regards exchange restrictions began. It was the opinion of many of the Directors and staff that the time was ripe to push for the elimination of discriminatory restrictions, at least by the European members, and for the assumption of the obligations of Article VIII. To this end, two decisions were taken by the Executive Board, late in 1959 and in mid-1960. These decisions were followed by the acceptance of the obligations of Article VIII early in 1961 by 11 members. Since 10 others, all in the Western Hemisphere, had previously done so, 21 now had currencies that were fully convertible in the Fund sense of the word.

DECISION ON DISCRIMINATION

Pressure for action

One of the cardinal principles on which both the Fund and the GATT had been founded was that trade and exchange restrictions, as well as any other trade barriers, should be applied in a nondiscriminatory manner.1 However, it was generally conceded that so long as a chronic dollar shortage prevailed—that is, while many countries had serious payments deficits with the dollar area—and so long as European currencies remained inconvertible, discriminatory restrictions might have to be employed.

But while recognizing the inevitability of discrimination in the application of restrictions so long as inconvertibility prevailed, many economists feared that protected markets might thereby be developed in countries that continued, for many years, to discriminate. The industries growing up in these sheltered markets would be unable to compete with the industries of countries, such as the United States, that were highly competitive. Discrimination might therefore be long lasting. In addition, producers in countries such as the United States and Canada, whose products were being discriminated against in foreign markets, were complaining about their unequal export opportunities. This concern had already found expression in statements to the Board by the Executive Directors for the United States and Canada.

Among the countries continuing to maintain discriminatory restrictions, there had been increasing recognition of the costs to their economies of such discrimination. But there were a great many anxieties about eliminating practices that had been in effect for several years. In particular, these countries were uncertain whether their industries could compete in a world without discriminatory restrictions; and, if their industries were not competitive, what would be the effects on domestic employment and on their balance of payments positions?

Once the dollar shortage was over, therefore, and after external convertibility of European currencies was established, the Fund began to examine the questions raised by the remaining discriminatory restrictions. In mid-1959, however, the Executive Directors still could not agree on just what steps against discriminatory restrictions the Fund might take. They disagreed, indeed, on whether the establishment of external convertibility meant that discriminatory restrictions for balance of payments reasons had now become unnecessary. Even if the currency inconvertibility argument for discriminatory restrictions had been destroyed, commercial reasons remained. It was also evident that, where discriminatory restrictions had been maintained for a long time, a reasonable period would have to be allowed before countries could eliminate them completely.

Hence, it was not until late in 1959 that agreement among the Directors on a general decision on discrimination could be reached. A study by the staff concentrated on two types of discrimination—that against transactions with the dollar area and that arising out of bilateral arrangements. A survey of the extent of discrimination revealed that late in 1959 about twenty of the members that were taking advantage of the transitional arrangements of Article XIV discriminated against dollar imports and also had bilateral agreements, and about twenty other members discriminated against the dollar but had no bilateral arrangements. Only about fifteen members that were still under Article XIV had neither discrimination against dollar imports nor bilateral payments agreements.

The staff study also concluded that most of the members that still maintained discriminatory restrictions could eliminate them without important repercussions on their balance of payments or reserve positions. Either the remaining discrimination was slight, or their balance of payments and reserve positions were satisfactory, or, perhaps most important of all, the existing degree of liberalization vis-à-vis other countries was so great that the impact of the removal of discrimination could not really be expected to be onerous in its effects on the balance of payments. Therefore the staff believed that these members no longer had a balance of payments reason for discrimination.

The staff, nonetheless, recognized the existence of other considerations which might cause difficulties for members in withdrawing discriminatory restrictions, particularly if those restrictions had been in force for some decades. There might be practical problems, such as the need to formulate new regulations or to dismantle administrative machinery. International commitments might have been made to import specific goods from some other country or group of countries. Alternative ways had to be found to liquidate credits built up under bilateral arrangements. Most difficult of all was likely to be the impact of the removal of discriminatory restrictions on industries that had been operating under a mantle of protection.

Consideration by the Executive Board of the problem of discrimination, and the related staff study, followed by a few weeks the Annual Meeting, 1959. At that Meeting, Mr. Jacobsson said that the essence of the problem of the remaining discriminatory restrictions was that they were now seen to be “protectionist devices.” They had thus become a problem of commercial policy and were no longer to be considered a balance of payments problem. He expressed concern for future trade relations should such discrimination remain:

The maintenance of discrimination, moreover, undoubtedly acts as a strong irritant, liable to bedevil commercial relations; it may provoke a resurgence of protectionist sentiment, especially when the business trend turns downward; and if such possibilities are not guarded against, the result might well be a dangerous disruption of trade relations in general.2

It was his personal conviction that for the vast majority of countries there were no longer any balance of payments reasons for the maintenance of discrimination, and he thought that the time had come when, for many reasons, the practice of discrimination should be abandoned with the least possible delay.

The Governors for Canada (Mr. Fleming) and the United States (Mr. Anderson) endorsed these views of the Managing Director.3 They believed very strongly that the Fund should take early action to declare a position to the effect that there was no longer any balance of payments justification for discrimination.

Other Governors—for example those for Australia and the United Kingdom—while agreeing that the stage had been set for “the progressive removal of discrimination, including that arising from bilateralism,” called attention to various complications. The Governor for the United Kingdom (Sir Roger Makins) stressed that discriminatory restrictions had long been maintained and that many member countries would require a reasonable time to deal with the political, social, and economic problems associated with their removal.4 The Governor for Australia (Mr. Holt) expressed concern about the dangers of agricultural protectionism.5

A decision taken

After a relatively short discussion, the Executive Board took this decision in October 1959:

  • The following decision deals exclusively with discriminatory restrictions imposed for balance of payments reasons.

  • In some countries, considerable progress has already been made towards the elimination of discriminatory restrictions; in others, much remains to be done. Recent international financial developments have established an environment favorable to the elimination of discrimination for balance of payments reasons. There has been a substantial improvement in the reserve positions of the industrial countries in particular and widespread moves to external convertibility have taken place.

  • Under these circumstances, the Fund considers that there is no longer any balance of payments justification for discrimination by members whose current receipts are largely in externally convertible currencies. However, the Fund recognizes that where such discriminatory restrictions have been long maintained, a reasonable amount of time may be needed fully to eliminate them. But this time should be short and members will be expected to proceed with all feasible speed in eliminating discrimination against member countries, including that arising from bilateralism.

  • Notwithstanding the extensive moves toward convertibility, a substantial portion of the current receipts of some countries is still subject to limitations on convertibility, particularly in payments relations with state-trading countries. In the case of these countries the Fund will be prepared to consider whether balance of payments considerations would justify the maintenance of some degree of discrimination, although not as between countries having externally convertible currencies. In this connection the Fund wishes to reaffirm its basic policy on bilateralism as stated in its decision of June 22, 1955.6

POLICY AND PROCEDURAL ASPECTS OF ARTICLE VIII STATUS

During 1959 and the early part of 1960, further substantial progress was made by many countries in reducing or eliminating their exchange restrictions. The beneficial effects of the widening scope of external currency convertibility were felt in many areas, and there was an evolution toward freer, more orderly, and less discriminatory trade and payments. By early in 1960 the currencies of about half of the Fund’s members were convertible for virtually all nonresidents. In a number of countries, the remaining restrictions on current payments had dwindled to the point of insignificance.

Under these conditions, it was becoming increasingly possible to visualize for many of the Fund’s members the establishment of the multilateral system of current payments, without foreign exchange restrictions, that was foreseen in Article I of the Fund Agreement. It appeared that a number of members which had been availing themselves of Article XIV would soon be able to implement in full the obligations of Article VIII. Accordingly, the Fund began again to examine the legal, policy, and procedural aspects connected with a member’s formal acceptance of the obligations of Article VIII.

Some suggested definitions

Answers to the questions concerning the assumption of Article VIII status which had proved controversial or difficult in the past could no longer be postponed. Accordingly, the staff prepared some suggested solutions and presented these to the Board. First came the question of whether the Fund should—or even could—announce the end of the transitional period generally. The legal staff reached the conclusion that the Fund had no such legal authority. This meant that some countries could, if they so wished, continue under Article XIV more or less indefinitely. Second, the legal staff advised the Board that the initiative to give up Article XIV and to assume the obligations of Article VIII rested solely with the member, not with the Fund. Any restrictions that the member might have would of course have to be approved under Article VIII if the member accepted the obligations of that Article. Third, a decision by a member to take up Article VIII status was irreversible: if a country moved to Article VIII, it could not revert to Article XIV should the Fund disapprove of its remaining restrictions, or should it later wish to reintroduce restrictions.

Next came the matter of the long-debated definition of a “restriction on payments” that the Fund was called upon to approve under Article VIII. The controversy was not yet dead. In January 1959—immediately after the main European currencies had become externally convertible—Mr. Callaghan (Australia) had raised the jurisdictional question once more. In calling to the attention of the Directors the need to turn their minds again toward the transition from Article XIV to Article VIII, he was interested especially in seeking to get the Fund to clarify its “approval” authority.

The staff pointed out that the language of the relevant Articles was broad and comprehensive, not narrow and restrictive. Therefore, a good case had to be made before anything that appeared to be a qualification of this general language could be accepted as having been within the intention of the drafters of the Agreement. Secondly, any doubt about the Fund’s jurisdiction had to be resolved in the light of the wide purposes of Article I. Thirdly, no formula would provide automatic answers for all cases in which jurisdictional issues arise. Given these qualifications, the staff suggested that the guiding principle for determining whether a given measure was a restriction on current payments should be simply whether it “involves a direct governmental limitation on the availability or use of exchange as such.” Even so, members would often need to consult the Fund, not only where it was obvious that a measure was covered by the definition, but also where this was not clear until there had been adequate study of the underlying facts.

Proposed standards

Next came the question of the standards which the Fund should use for approving restrictions under Article VIII: how many and which restrictions would countries be permitted to retain when they gave up Article XIV and came under Article VIII? First, noting that the use of restrictions was still widespread, the staff commented that any general move to Article VIII would create the serious dilemma discussed by the Board in the past. On the one hand, there would be pressure on the Fund to give approval to many existing restrictions. This would tend to make approval of restrictions under Article VIII a mere formality. From a practical point of view, there would also be great difficulties in the Fund’s administering an “approval” jurisdiction in such conditions. Frequent changes in restrictive systems would require Board approval on the merits of particular restrictive practices, with all the difficulties of deciding in haste because of the emergency conditions in which restrictions are usually introduced. Alternatively, if strict standards were applied under Article VIII, many member countries would find themselves with restrictive practices not approved by the Fund.

The staff further noted that, in practice, the Fund had been attempting to develop the concept of Article VIII as a substantive goal—a goal which involved the elimination of restrictions on current payments, of multiple exchange rates, and of other practices. The Fund had been greatly facilitated in this endeavor by the fact that the ten member countries which had assumed Article VIII status prior to 1960—Canada, Cuba, the Dominican Republic, El Salvador, Guatemala, Haiti, Honduras, Mexico, Panama, and the United States—had very few or no exchange restrictions. Indeed the existing Article VIII countries had, in general, gone beyond the formal requirements of the Fund Agreement in that they had avoided capital controls as well as restrictions on current payments. Of even greater significance, Article VIII status had come to signify over the years either that a country had a sound international balance of payments position or that, if its payments position was threatened, it would avoid the use of exchange restrictions and take other corrective measures including, where appropriate, the use of the Fund’s resources. The record of Article VIII countries in this respect had been remarkably good.

The Article VIII countries, with one small exception, had not introduced restrictions. The exception had been Cuba, which had introduced a new multiple rate arrangement in September 1959. Because the multiple rate measures were one of a series of tax measures adopted by the Cuban authorities to deal with their balance of payments difficulties, and because the measure was intended to be provisional, the Fund did not object; but approval was specified for a limited time (until June 30, 1960) and meanwhile the Fund was to have further discussions with Cuba.

The staff further reasoned that the achievement of Article VIII status had come to be the objective of the consultations under Article XIV. To this end, there had developed an attitude that the Fund’s approval of restrictions must be based on a close scrutiny of the country’s over-all economic position—domestic as well as external—and of the possibility of alternative corrective measures, particularly in the monetary and fiscal fields.

Recommended strategies

On the basis of this analysis, the staff recommended to the Executive Directors that a selective course of action be adopted for the assumption of Article VIII status. Those countries which made little use of restrictions and whose balance of payments and reserve positions and prospects were good might advantageously move to Article VIII. There were a limited number of such countries, mainly in Europe. For these countries, approval by the Fund of any existing exchange restrictions would require relatively few difficult policy decisions. Since the prospects for the removal of any remaining restrictions for balance of payments purposes would, by definition, be good, the member could commit itself to some program or time schedule for their elimination. In this way there would be a period of grace under Article VIII during which some further few restrictions might be eliminated, but that period would be short and definite. Were such countries to assume formal Article VIII status, the paradox would be ended that their currencies were treated by the Fund, for various purposes and in the technical sense of the Articles, as inconvertible, although these currencies were fully, or largely, convertible in actual foreign transactions.

This procedure would also make it clear, the staff argued, that countries having multiple exchange rates, bilateral payments arrangements, or discriminatory restrictions should not aspire to Article VIII status unless they were able to eliminate these practices promptly. Perhaps some exceptions might be made for bilateral arrangements that were maintained for other than balance of payments reasons or that discriminated solely against countries that were not members of the Fund. Furthermore, countries which had few or virtually no restrictions, but which experienced considerable uncertainty about their balance of payments outlook and reserve positions, should also refrain from undertaking Article VIII status; in their situations there would be concern about their inability to cope with deterioration in their payments positions without recourse to restrictions.

The staff further suggested that countries giving up Article XIV and coming under Article VIII should agree to periodic reviews under Article VIII similar to the consultations they had been having under Article XIV. In consultations under Article VIII there would be relatively little concern with restrictions; but, even more than in the past, attention would be devoted to the general economic and financial situation of the country. Holding consultations with countries shifting from Article XIV to Article VIII would also raise the question of holding consultations with countries already under Article VIII, such as the United States; consultations had not heretofore been conducted with countries that had never been under Article XIV.

Board concurrence and decision

The Executive Board considered these staff suggestions at two meetings in March 1960. Most of the definitions and strategies presented by the staff were supported by the Directors. Mr. Southard (United States), Lord Cromer (United Kingdom), and Mr. Guth (Germany) were especially in agreement with the line of action proposed. Mr. de Largentaye (France) did not, however, assent to the idea that some countries, maybe even many, would continue to remain under Article XIV. In his view, Article XIV applied strictly to a postwar transitional period which, he thought, no longer existed.

With respect to the Fund’s jurisdiction, Mr. Southard accepted the opinion of the legal staff that the Fund does not have “approval” jurisdiction for nondiscriminatory import restrictions imposed for balance of payments reasons. He concurred with the legal staff that where a country imposes discriminatory import restrictions for balance of payments reasons, the currency considerations are so clear that the restrictions partake of exchange as well as trade, and fall under the parallel jurisdiction of the Fund and the GATT.

Two related questions concerning the requirements which the Fund would impose for the assumption of Article VIII status were discussed in the Executive Board at this time: (1) whether a country needed to have an effective par value before assuming Article VIII status, and (2) whether consultations under Article VIII should result in conclusions. The issues involved, and the Board’s decisions on both these questions in the negative, have been considered, respectively, in Chapters 4 and 11.7

For the next two to three months, efforts were made to draft a decision which would outline in some detail the Fund’s policies and procedures on the move from Article XIV to Article VIII. On June 1, 1960 such a detailed decision was finally taken.8

The decision contained four basic points. The first stated that the guiding principle to determine a “restriction on payments and transfers for current transactions” under Article VIII would be that the measure “involved a direct governmental limitation on the availability or use of exchange as such.” Members in doubt as to whether any of their measures did or did not fall under Article VIII were urged to consult the Fund.

The second point of the decision was that before members gave notice to the Fund that they were accepting the obligations of Article VIII, they should eliminate measures which would require the approval of the Fund and satisfy themselves that they were not likely to need to have recourse to such measures in the foreseeable future. The Fund would grant approval under Article VIII to measures for balance of payments reasons only where it was satisfied that the measures were necessary and temporary; exchange measures for other than balance of payments reasons should be avoided.

The second paragraph of the decision also stated that “members may at any time notify the Fund that they accept the obligations of Article VIII, Sections 2, 3, and 4, and no longer avail themselves of the transitional provisions of Article XIV.” No mention was made of the Fund’s ending the transitional period, nor was there any hint that members should be in a hurry to accept Article VIII. That countries should be cautious about undertaking the obligations of Article VIII reflected the strict standards adopted. But it also reflected the general recognition among the Directors of a difference between the industrial countries and the less developed countries—a difference in their attitudes toward policies as well as in their economic positions. Countries that found it difficult to discard restrictions would wish to remain under Article XIV. The consensus of the Board was that the wisest course would be to treat the continuation of the postwar transitional period as a sleeping dog, letting it continue without taking any action on it.

The third topic of the Article VIII-Article XIV decision concerned the matter of consultations; this is discussed in Chapter 11.9 The fourth paragraph concerned methods of dealing with import restrictions for all members, whether or not they are also members of the GATT; this is also discussed in Chapter 11.10

IMPLEMENTATION OF DECISION ON ARTICLES VIII AND XIV

Actions of 1961

The Fund’s decision on Article VIII status was followed by the acceptance of the obligations of Article VIII by nine European countries and Peru, effective February 15, 1961, and by Saudi Arabia, effective March 22, 1961. The European countries were Belgium, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Sweden, and the United Kingdom. This move resulted in all the major currencies which had been considered inconvertible in the sense of the Fund Agreement becoming convertible in the meaning of that term.

The undertaking of the obligations of Article VIII by these countries was preceded by intensive consultations and discussions, both formal and informal, between the members and the Fund. These were necessary to decide whether the arrangements for external convertibility that had been established by European countries could be maintained during the foreseeable future, and what the country’s remaining restrictions were that would require, and could probably obtain, Fund approval under Article VIII. Since a notice that a member accepts the obligations of Article VIII is irrevocable, an awkward situation would have arisen if a member had given notice and then found that the Fund withheld approval of a practice that the member wished to keep. In fact, because of these consultations and discussions, and the delay in the move to come under Article VIII, by the time the move took place only four of the European countries—Belgium, France, Luxembourg, and the Netherlands—had any measures requiring Fund approval under Article VIII, and these measures were not extensive.

The precise timing of the move by these countries to Article VIII had also been a question of considerable importance. The staff had argued that Fund action on any measures requiring approval should be taken before the effective date of Article VIII status. A certain amount of time had to be allowed, therefore, for preparation of staff papers on each country’s remaining exchange restrictions, if any, including the staff’s recommendations to the Executive Board. These papers were also agreed by the staff with the country concerned before submission to the Board.

However, the time needed for this preparation was not the only reason for the delay of several months between the Board’s general decision of June 1960 and the assumption of the obligations of Article VIII by the European countries. The staff’s reports were actually agreed by the end of October 1960; the subsequent delay was due to political difficulties. First, there was the question of whether or not the undertaking of Article VIII status would be a concerted one, carried out by several European members. So far it had appeared that European countries were hesitant to be first and alone, because of the strains such a position might place on their currencies; yet none of them wished to be a laggard, for reasons of prestige and also because of intra-European ties.

By early in September 1960, before the Fund’s Annual Meeting (September 26–30), the six countries of the European Economic Community (EEC) had apparently agreed to move simultaneously but had not yet agreed on the exact date. The United Kingdom, together with Ireland and Sweden, evidently intended to move when the EEC countries did. As Germany no longer had any exchange restrictions and was, it seems, the most eager of the six to come under Article VIII, the initiative for pressing for it lay with that country.11 However, although there are indications that Germany hoped to get agreement with other countries on the exact timing of such a step at an October meeting of the EEC, no decision was reached. Other countries were not yet ready to go ahead. A press report, for example, indicated that the French Government had postponed taking the Article VIII step until after the presidential elections in the United States in November 1960.12 By that time, the delay in making the move was causing increasing concern in the Fund, both to the staff and to certain Executive Directors, especially Mr. Southard. The fear was that the impetus toward a general shift to Article VIII status for European countries given by the Board decision of June 1960 might be lost and the decision itself might become inoperative.

However, shortly after the end of the year the difficulties that had inhibited concerted action were overcome. The Managing Director was informed between January 27 and February 2 by the Executive Directors of the countries concerned of these countries’ intentions to assume the obligations of Article VIII on February 15, 1961. The Board’s discussions of the countries’ intentions and remaining restrictions, if any, took place on February 6 and 8. As had been expected, Peru joined the nine European members. A few weeks later, in March 1961, Saudi Arabia also assumed the obligations of Article VIII. This brought the number of members that had achieved formal convertibility under the Fund Agreement to 21.

This widening of the area of formal convertibility had implications of consequence for the Fund’s general activities. Although drawings from the Fund had, from 1959 to 1961, included the use of the currencies of some of the countries which, in 1961, assumed the obligations of Article VIII, it had not been permissible under the Fund Agreement to use such currencies to make repayments to the Fund. The removal of this limitation proved an added encouragement to the use of a larger number of currencies in Fund transactions. Indeed, the question of which particular currencies should be drawn from the Fund was to become a vital one in the next few years.13

As stated above, the member countries that assumed Article VIII status early in 1961 had by that time eliminated all, or nearly all, restrictions on current payments and transfers. However, these countries in most cases restricted the making of some capital payments at official rates of exchange. Only Germany and Saudi Arabia permitted all current and capital payments to be made at market rates of exchange maintained within the limits permitted by the Fund Agreement. Peru had similar arrangements except that the exchange rate was a unitary fluctuating one.

By 1961 the European countries that had established external convertibility—and defended it against something of a crisis in 1960–61—had been joined by others. The Exchange Restrictions Report for 1961 recorded that two thirds of the Fund’s members permitted nonresidents to transfer freely to other nonresidents the local currency they acquired from current transactions.14 Most of these countries believed that their balance of payments prospects or remaining restrictions, or both, made it advisable for them to await further developments before assuming formal Article VIII status. Nevertheless, virtually every currency used in financing international trade was now convertible in terms of the Fund Agreement, and virtually all of the trade of the other Fund members was conducted in these convertible currencies. Thus, while important obstacles to international trade persisted, relatively few impediments remained to conducting that trade on the basis of a multilateral payments system.

CONTINUED RELAXATION OF RESTRICTIONS

The successful maintenance of widespread convertibility provided, in the next few years, the basis and incentive for further reductions in restrictions. Import restrictions were reduced or simplified in many countries in addition to those that had moved to Article VIII in 1961. Countries relaxing their import restrictions included Austria, Burma, Finland, Pakistan, Portugal, Spain, Turkey, and Yugoslavia. Discrimination against imports from Canada and the United States was eliminated, or virtually eliminated, by Australia, Austria, Finland, France, Greece, Italy, Japan, Malaysia, Norway, and Sweden. Several countries—France, Iceland, Italy, Japan, the Netherlands, Pakistan, Spain, Sweden, and the United Kingdom—were able to liberalize further the granting of exchange for payments for invisibles. By 1962, restrictions on trade and payments for the world as a whole were less than they had been for some decades.

Other members also accepted Article VIII status. In 1962–63 Austria, Jamaica, and Kuwait came under Article VIII. Japan and Nicaragua joined the list in 1964 and Australia and Costa Rica during 1965. Meanwhile, Cuba—an Article VIII member—had withdrawn from Fund membership. Thus, 27 countries had made their currencies convertible under the Articles of Agreement by the end of 1965; these are listed in Table 8.

Table 8.Countries with Article VIII Status, as at December 31, 1965
MemberDate1
AustraliaJuly 1, 1965
AustriaAug. 1, 1962
BelgiumFeb. 15, 1961
CanadaMar. 25, 1952
Costa RicaFeb. 1, 1965
Dominican RepublicAug. 1, 1953
El SalvadorNov. 6, 1946
FranceFeb. 15, 1961
GermanyFeb. 15, 1961
GuatemalaJan. 27, 1947
HaitiDec. 22, 1953
HondurasJuly 1, 1950
IrelandFeb. 15, 1961
ItalyFeb. 15, 1961
JamaicaFeb. 22, 1963
JapanApr. 1, 1964
KuwaitApr. 5, 1963
LuxembourgFeb. 15, 1961
MexicoNov. 12, 1946
NetherlandsFeb. 15, 1961
NicaraguaJuly 20, 1964
PanamaNov. 26, 1946
PeruFeb. 15, 1961
Saudi ArabiaMar. 22, 1961
SwedenFeb. 15, 1961
United KingdomFeb. 15, 1961
United StatesDec. 10, 1946

As the decade of the 1960’s got under way, many countries went even further in reducing their restrictions on payments than they were obliged to do under the Articles: although the Articles permitted controls on capital movements, liberalization was gradually extended even to these. A view that had been dominant before 1930 began to gain ground, namely, that freedom of capital movements was highly desirable in itself: the movement of short-term funds might be regarded as an equilibrating factor in international payments, diminishing the need for reserves.

Liberalization of capital movements, both for direct investment and for portfolio investment, was therefore undertaken in the countries of Western Europe and certain others, including Japan, New Zealand, and South Africa. Complete freedom to transfer capital among the member countries of the EEC, for example, was achieved in 1963 for direct investments, personal transfers, short- and medium-term commercial loans, and operations in marketable securities. Also, the United Kingdom permitted transactions in foreign securities, and in domestic securities by nonresidents, to be carried out in exchange markets separate from the market for current transactions. In 1964 restrictions on outward capital transfers were further relaxed by European countries. In most OECD countries, direct investment (both incoming and outgoing) was completely, or almost completely, liberalized or was treated liberally in practice; much the same was true of portfolio investment, other than new issues of securities.

The reductions in restrictions that had taken place were mirrored even in changes in the internal organization of the Fund’s staff. In 1965, the Exchange Restrictions Department, which had been set up in 1950 especially so that the Fund might center its attention on the problems of restrictions, became the Exchange and Trade Relations Department. Its functions were now broadened to include assessments of the aggregate international trade and payments situation and of programs for stabilizing the economies of Fund members.

RESTRICTIONS OF LESS DEVELOPED COUNTRIES

Nonetheless, problems of restrictions were not entirely ended. In fact, the elimination of restrictions and even the dismantling of controls that occurred laid bare one problem and created another. The problem that remained concerned the general persistence of restrictions among the less developed countries, which were now generally called developing countries. Several of these countries shared in the progress made between 1955 and 1965 toward the establishment and maintenance of a relatively free international payments system. Of the 27 members that had by 1965 accepted the obligations of Article VIII, about one half were among the developing countries.

Most developing countries, however, still had serious balance of payments problems, and continued to apply an extensive array of restrictions. In addition, from 1960 to 1965, 35 new members, practically all of which were newly independent states and in the early stages of economic development, joined the Fund; all but one chose to avail themselves of the provisions of Article XIV (the transitional arrangements).

The developing countries also began to use a greater range of practices. The use of advance import deposit requirements spread, and more countries applied surcharges to imports. A wide variety of arrangements began to be used to encourage exports—the granting of export credits on concessionary terms, refunds of import duties paid on materials imported for use in the production of exports, certain fiscal measures (including tax refunds and rebates), and export subsidies. A number of countries supported exports through export bonus schemes, whereby exports were granted import entitlements; these arrangements were, in many respects, similar to the retention quotas employed earlier by some of the industrial countries, discussed in the preceding chapter. While in some countries these techniques for exports were introduced as an alternative to other practices, in many countries they supplemented restrictions already in force.

Although many of the developing countries requested and received assistance from the Fund in order to avoid intensification of exchange restrictions, some, in an attempt to avoid undue pressure on their exchange rates and drains on their reserves, did intensify restrictions. In sum, while the industrial countries were able to maintain their external economic relations with few limitations on the acquisition or use of foreign exchange, many of the developing countries continued to rely on restrictions, sometimes in combination with multiple exchange rates. Possibly worst of all, in some of the developing countries restrictions seemed so entrenched as to offer little prospect of rapid removal.

As the Fund explored the trade and payments problems of the developing countries in greater depth, it increasingly recognized that there was no simple solution for the continuing restrictions of these countries. Their situations were very diverse. Many were primarily dependent on the export of a few commodities to provide the imports which accounted for a large part of their consumption and investment, but others had already achieved a high degree of self-sufficiency. Some were faced with serious population pressures, whereas others were able to absorb a fairly large number of immigrants. In many, export products were subject to wide price fluctuations, which made the determination of the prospective profitability of investment uncertain and the maintenance of balance of payments equilibrium difficult. Many had attained internal financial stability, but for a few inflation was almost endemic. By 1964, moreover, increasing international indebtedness and difficulties in servicing existing debt had added to the payments burdens of these countries.

The Fund’s policies toward restrictions reflected its awareness of the complexity of the problems of developing countries. Some years earlier (in 1955) the Executive Directors, in considering the impact that the restoration of the convertibility of European currencies would have on the developing countries, had been mindful that these countries might continue to apply restrictions for a long time despite the convertibility of European currencies. Although the revision of the GATT then being discussed contemplated more lenient treatment of restrictions imposed for purposes of speeding up economic development by “countries which can only support low standards of living and are in the early stages of development,” the Executive Directors of the Fund had attached significance to the fact that no such distinction had been made in the Fund’s Articles, which contemplated the use of generally applicable criteria. Nonetheless, in implementing its policies, the Fund was careful to take into consideration the particular problems of individual countries; these included problems related to economic development.

The staff and the Directors, therefore, stressed alternative measures to restrictions and put considerable effort into working out specific alternatives. In brief, in its consultations with individual members and in its technical assistance, the Fund argued against temporary expedients—such as price controls, import restrictions, currency overvaluation, multiple rates, and protectionist devices—and in favor of exchange rate adjustment, internal stabilization programs, freer trade and payments, and export promotion and diversification.

There was also, by the 1960’s, an enhanced appreciation by the Fund that financial problems—in which the Fund is necessarily most directly interested—account for only part of the difficulties of the developing countries. The Fund recognized, for example, that the search for broader solutions to their trade and payments problems had to include action by the industrial countries: industrial nations had to maintain a high level of economic activity and to reduce their own trade barriers, both tariff and nontariff restraints, against imports from developing countries, as well as export capital to the developing nations.15

NEED TO RESTRAIN CAPITAL MOVEMENTS

The second problem of the mid-1960’s concerned the massive revival of capital movements among the industrial countries which took place once European currencies had become convertible and restrictions on these movements had been eased. Prior to the late 1950’s any capital movements that might have been induced by international monetary developments, such as the emergence of differences in interest rates between countries, had been restrained by restrictions or by special exchange rates applied to capital transfers. But by the early 1960’s, either differential interest rates or the prospect of a change in the foreign exchange value of any leading currency—or even political changes—tended to cause large movements of capital. Transfers of short-term capital, in particular, became large and frequent. As these short-term capital movements were often speculative and disequilibrating, they presented the financial authorities, especially in industrial countries, with new problems. Sterling, for example, from time to time in the 1960’s was subjected to severe strains in the world’s exchange markets, at least partly because of rather sharp movements of short-term capital. For a while in 1962, severe pressures on Canada’s balance of payments could be traced mainly to capital flows. The unexpected magnitudes of capital flows from the United States were also responsible in part for the emergence and persistence of a sizable deficit in the balance of payments of that country.

These disturbing occurrences often necessitated official intervention—sometimes on a large scale—to enable countries to maintain their exchange rates within the margins specified in the Articles of Agreement. In order to avoid impairing the freedom already allowed to foreign payments, large amounts of reserves were utilized. There was heavy resort to the Fund. New forms of cooperation arose among the monetary authorities of the industrial countries, including mutual assistance to support each other’s currencies and the setting up in the Fund of the General Arrangements to Borrow (GAB).16

Despite these arrangements, the principal industrial countries had, by 1964, to take special measures to curb capital flows. On September 2 of that year, the United States enacted a tax to be applied to purchases by U.S. residents of foreign stocks and bonds. Only a relatively few transactions—such as direct investments, investments in less developed countries, purchases of stocks and bonds from other U.S. holders, and purchases of Canadian stocks and bonds—were exempted. In February 1965, this tax was extended to bank loans with a maturity of one year or more made to residents of countries other than the developing countries; and still later, the tax was further extended to nonbank lending of one to three years’ maturity. The United States also introduced a voluntary program to discourage capital exports by banks and other financial institutions.

As part of a series of steps to correct its balance of payments in 1964–65, the United Kingdom made changes in its exchange control regulations affecting capital movements. These included making slightly more stringent the criteria for the use of official exchange for direct investment outside the sterling area, and a strengthening of controls on travel expenditure so as to prevent evasion of the controls on capital movements.

True, the major industrial countries, while resorting to controls on capital movements, had avoided recourse to restrictions on current payments and transfers. Nonetheless, as 1965 came to a close there were evidences of continuing difficulties in the international monetary system. Some searching questions were being asked. Was there a risk that the large trading nations would go their own separate ways, introducing controls as needed? Might not the international monetary system thus even “collapse”? How could the functioning of the international monetary system best be improved? Would the introduction into the system of new liquidity solve the problems arising from capital movements? Should some procedure be arranged for enhancing the flexibility of exchange rates?

Debates on these, and similar questions, become more intensive after 1965, when the United Kingdom and the United States further tightened controls on capital movements and when other industrial countries—for example, France—began to reinstitute controls on capital movements.

For a brief description of the origins of the principle of nondiscrimination, see Gardner Patterson, Discrimination in International Trade, Chap. 1. For some criticisms of this principle, see Harry G. Johnson, The World Economy at the Crossroads, Chap. 4.

Summary Proceedings, 1959, p. 16.

Ibid., pp. 42, 52.

Ibid., p. 79.

Ibid., pp. 68–69.

E.B. Decision No. 955-(59/45), October 23, 1959; below, Vol. III, p. 260. On the decision of June 1955, see Chapter 14 of this volume, pp. 304–305.

Above, pp. 75–76, 247.

E.B. Decision No. 1034-(60/27), June 1, 1960; below, Vol. III, p. 260.

Above, pp. 246–48.

Above, p. 240.

See, for example, the statement by Mr. Blessing, Governor for Germany, in Summary Proceedings, 1960, p. 65.

Agence Economique et Financière (Paris), October 28, 1960.

See below, Chapter 19, p. 451.

Twelfth Annual Report on Exchange Restrictions (1961), pp. 4–5.

Annual Report, 1963, p. 71, and 1964, pp. 68–69.

See below, pp. 375–76.

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