Chapter 23: Other Adjustments in Exchange Rates (1966–70)
- International Monetary Fund
- Published Date:
- February 1996
Par Value Adjustments, especially by the developing countries, were fairly common in the years 1966–71. In addition to the changes in par values by three large industrial countries described in the previous two chapters, there were a number of other par value changes and a suspension of par value by Canada. Moreover, several members, also developing countries, that had not previously done so agreed with the Fund on initial par values. These developments in par values in the years 1966–70 are treated in this chapter. Similar events for 1971 are deferred to Chapters 25 and 26.
Initial Par Values
Several members that had joined the Fund in the first half of the 1960s and that had not yet established initial par values—especially former nonmetropolitan territories of the United Kingdom, such as Kenya, Malawi, Tanzania, Uganda, and Zambia—did agree with the Fund on initial par values in the second half of the decade. In 1966 these five countries established initial par values, choosing the same exchange rate relationships with the dollar and with the pound sterling as they had had since 1949, that is, US$2.80 per pound sterling or 14 U.S. cents per shilling. In the course of 1967, 1968, and 1969, The Gambia, Guyana, Malta, and Singapore, which had also been dependencies of the United Kingdom and which had joined the Fund after 1965, established initial par values for their currencies.
Nepal, Rwanda, and Zaïre also agreed on initial par values for their currencies in the period 1966–70. The dollar rate for the Nepalese rupee was fixed so as to maintain its accustomed relationship to the Indian rupee (NRs 135 = Rs 100); most of Nepal’s exchange transactions were in terms of Indian rupees. Botswana, Lesotho, and Swaziland notified the Fund in 1968 and 1969 that the South African rand was used as their currency. The par value of the South African rand, established in 1961, became applicable to them.
On September 4, 1970 the Republic of China—having been an original member—paid its gold subscription and set an initial par value. It used the exchange rate relationship between the new Taiwan dollar and the U.S. dollar that had been in effect since 1961. The Republic of China’s arrangements with the Fund were thus regularized.
Table 16 lists in chronological order the initial par values established with the Fund from January 1, 1966 to December 31, 1970.
|Date1||Member and Rate|
|March 9||Zambia—280.000 U.S. cents per Zambian pound|
|April 7||Rwanda—1.000 U.S. cents per Rwanda franc|
|May 27||Malawi—280.000 U.S. cents per Malawi pound|
|August 4||Tanzania—14.000 U.S. cents per Tanzania shilling|
|August 15||Uganda—14.000 U.S. cents per Uganda shilling|
|September 14||Kenya—14.000 U.S. cents per Kenya shilling|
|February 13||Guyana—58.3333 U.S. cents per Guyana dollar|
|June 12||Singapore—32.6667 U.S. cents per Singapore dollar|
|December 11||Nepal—9.87654 U.S. cents per Nepalese rupee|
|July 8||The Gambia—240.000 U.S. cents per Gambian pound|
|December 20||Lesotho—140.000 U.S. cents per South African rand|
|June 27||Malta—240.000 U.S. cents per Malta pound|
|August 13||Botswana—140.000 U.S. cents per South African rand|
|December 22||Swaziland—140.000 U.S. cents per South African rand|
|September 2||Zaïre (Democratic Republic of Congo)—200.000 U.S. cents per zaïre|
|September 4||Republic of China—2.500 U.S. cents per new Taiwan dollar|
The date given is that on which the initial par value became effective, which was not necessarily the same date on which the par value was agreed with the Fund; sometimes the Fund had agreed the par value a few days earlier.
The date given is that on which the initial par value became effective, which was not necessarily the same date on which the par value was agreed with the Fund; sometimes the Fund had agreed the par value a few days earlier.
As noted in Chapter 21, at the time the pound sterling was devalued in November 1967 there were changes in the initial par values established in May 1966 by Malawi and in February 1967 by Guyana.
Changes in Monetary Units
Many new monetary units were introduced and put into circulation as legal tender during the period 1966–70. A few members replaced currencies that had become excessively depreciated, mainly to reduce the number of digits involved in their monetary accounts. Several members, especially in the sterling area, replaced pounds with dollars as they converted their currencies to the decimal system. Still other members, newly independent politically, put their own currencies into circulation. For the most part, new monetary units did not result in any appreciation or depreciation of exchange rates.
Effective January 1, 1966, Yugoslavia replaced the dinar with a “new dinar” as the legal currency. The new dinar was equivalent to 100 old dinars. The Yugoslav authorities, with the Fund’s concurrence, accordingly restated the par value as 8.00000 U.S. cents per new dinar, which was now called simply dinar. On February 14, 1966 Australia replaced the Australian pound with the Australian dollar and established a par value of 112.000 U.S. cents per Australian dollar. On May 25, 1966 the U.K. Government notified the Fund of a change in the currency and the par value of the Bahama Islands, then a nonmetropolitan territory in respect of which the United Kingdom had accepted the Articles of Agreement: the Bahamian dollar replaced the Bahamas pound and a par value of 98.0000 U.S. cents per Bahamian dollar was established. On September 18, 1966 the Sheikdoms of Qatar and Dubai introduced the Qatar/Dubai riyal to replace the Indian rupee. An initial par value of 21.0000 U.S. cents per Qatar/Dubai riyal was established on March 11, 1969, on the proposal of the U.K. Government; this par value was the same as the Indian rupee had had prior to its devaluation on June 6, 1966 (described below).
In 1967 the Government of Brazil notified the Fund that a “new cruzeiro,” having a ratio to the old cruzeiro of 1 to 1,000, would be established effective February 13, 1967. (After May 15, 1970 this monetary unit was called merely the cruzeiro.) On February 23, 1967 Ghana introduced a “new cedi,” the third monetary unit introduced by Ghana since it had established an initial par value in 1958. The par value, set at 140.000 U.S. cents per new cedi, involved no effective change in the exchange rate. (The new cedi was devalued a few months later, as is discussed below.) Effective June 12, 1967, the Malaysian Government informed the Fund that the name of its currency unit would be changed from Malayan dollar to Malaysian dollar, with no change in par value. Simultaneously, the Singapore Government and the Government of Brunei (the latter a nonmetropolitan territory) replaced the Malayan dollar with the Singapore dollar and the Brunei dollar, respectively, with par values of 32.6667 U.S. cents per Singapore and Brunei dollar, the same as the Malayan dollar had had. Effective June 23, 1967, Zaïre (then the Democratic Republic of Congo), which had not yet established a par value, informed the Fund that a new monetary unit—the zaïre—would replace the Congo franc. A new exchange rate of 200.000 U.S. cents per zaïre was agreed upon. That rate became the initial par value in 1970. New Zealand introduced the New Zealand dollar to replace the New Zealand pound on July 10, 1967 and restated its par value at 139.045 U.S. cents per New Zealand dollar, the par value that was altered in November 1967.1
In 1968, in 1969, and early in 1970 other decimal currencies were introduced and par values accordingly redefined. On January 16, 1968, Zambia introduced the kwacha to replace the Zambian pound and agreed with the Fund on a par value of 140.000 U.S. cents per kwacha. The Fund concurred in a proposal of the U.K. Government for a par value for a new decimal currency, the pa’anga, introduced by Tonga to replace the Tongan pound, effective March 11, 1969. The par value was set at 112.000 U.S. cents per pa’anga, re-establishing the one-for-one relationship between the Tongan and Australian currencies that had existed before the introduction of decimal units. Effective May 14, 1969, the Fund concurred in a proposal of the Government of the United Kingdom that the Fiji dollar, which was replacing the Fiji pound, should have a fixed relationship to sterling of F$2.09 = £1. Jamaica introduced a Jamaica dollar to replace the Jamaica pound on September 8, 1969 and established a par value of 120.000 U.S. cents per Jamaica dollar.
The Government of Argentina notified the Fund that, effective January 1, 1970, a new monetary unit, the “peso,” having a ratio to the former “peso moneda nacional” of 1 to 100, would be circulated. On February 6, 1970 the U.K. Government notified the Fund of the introduction by Bermuda of the Bermuda dollar to replace the Bermuda pound, and the Fund concurred in a par value of 100.000 U.S. cents per Bermuda dollar. At the same time the Fund concurred in the proposal of the U.K. Government for a change in the par value of the Bahamian dollar to 100.000 U.S. cents per Bahamian dollar, which involved a slight adjustment in that par value.
Devaluation of Indian Rupee
One of the most interesting developments in members’ par values in the years reviewed here was the devaluation of the Indian rupee on June 6, 1966. This devaluation was unusual in several respects. First, the change in a par value of any large member was relatively rare at that time: the previous change in the par value of a large member had been more than 5 years before, in March 1961, when the Federal Republic of Germany had revalued the deutsche mark. Second, the par value of the Indian rupee had been unaltered for nearly 17 years, that is, since September 1949, when the rupee and many other currencies had been devalued along with the pound sterling. Hence, devaluation of the Indian rupee, unlike devaluation of the currencies of many other developing members, was not something that happened frequently. Third, a member of a major currency area, such as the sterling area, had not often undertaken a unilateral devaluation: the currencies of a currency area were usually adjusted together. Fourth, in view of the close commercial and economic relationships of India with neighboring countries like Ceylon, Nepal, and Pakistan, a decision by India to devalue the Indian rupee could have repercussions for these other countries.
The decision of the Indian Government to devalue the rupee was taken in the context of India’s general economic situation. For the previous ten years India’s balance of payments had been under almost continuous strain. In the two years immediately preceding the devaluation, the balance of payments deficits had been enlarged by increased imports, especially of foodgrains, to make up for shortfalls in domestic output. These shortfalls had been caused by the worst drought that India had had in the twentieth century. Because of these difficulties, India had been making substantial use of the Fund’s resources since 1964, including the large drawing made without a stand-by arrangement in April 1966, described in Chapter 17.
The Indian authorities had been trying for some years to reduce the balance of payments deficits by the use of selective incentives for exports and severe restrictions on imports. There had been introduced export promotion arrangements which had given rise to different implicit exchange rates—in effect, to multiple currency practices. Import duties and tariffs had been raised to very high levels.
The Fund management and staff and the Indian authorities had been discussing policies to manage India’s deficits, and after the drawing of April 1966 these discussions were intensified. It had become increasingly evident that India’s balance of payments problem required more fundamental measures than had hitherto been tried and that its economy would benefit greatly from a liberalization of the extremely tight import restrictions. Both the Indian authorities and the Fund management and staff came to the position that if a devaluation of the rupee was undertaken, the degree of devaluation ought to be sizable. It ought to be great enough not only to assist major exports but also to help marginal exports and to provide a safety valve for the future. The Indian authorities were very much concerned about the impact of devaluation on the landed costs of imports. Especially were they concerned that increasing the cost of capital goods imports, which made up a large proportion of the country’s total imports, would raise the cost of investment, including the cost of projects already under way.
In the end, the Government did decide on a devaluation, and on June 3, 1966 requested the Fund’s concurrence in a change in the par value of the rupee from 21.0000 U.S. cents per rupee to 13.3333 U.S. cents per rupee, a devaluation of 36.5 per cent, to be effective on June 6, 1966 at 2:00 a.m., Indian standard time (June 5, 1966 at 4:30 p.m., Washington time). The particular new par value had been chosen so as to make India’s exports more competitive in world markets and, even, to give them a slight edge. Along with the change in par value there were to be major exchange and trade reforms. Quantitative restrictions on a high proportion of imports were to be removed over the next two years, assuming that foreign aid was sufficient to permit such liberalization. In this connection, the Indian authorities were deliberating with the World Bank. Also, a program was worked out in which those quantitative restrictions that were being used for protection of local industry would gradually be phased out in favor of the use of tariffs. Eventually, import liberalization was to be supported by the expected growth of India’s exports after devaluation.
In evaluating the proposed change in the par value of the rupee, the staff viewed the devaluation and the accompanying removal of export promotion devices and the liberalization of imports as the most far-reaching changes in economic policy that the Indian Government had made in several years. The staff supported the magnitude involved and thought that the devaluation would make an important contribution to strengthening the Indian economy and accelerating its development along sound lines. When the Executive Directors met to consider the change of par value, the Managing Director told them that the Government had followed fully the advice of the management and staff and that, should the Indian authorities so request, he was prepared to support a sizable stand-by arrangement.
The Executive Directors expressed sympathy with India’s overwhelming problems and welcomed “the constructive and courageous” proposal to devalue. They recognized that the new exchange rate was not expected to bring the balance of payments into equilibrium or to permit the removal of all import restrictions. Rather, it was to pave the way for a substantial and beneficial liberalization of imports. Mr. Mansour noted the close relationship between the exchange rate of India and those of neighboring members, such as Ceylon, Nepal, and Pakistan, and hoped that adverse repercussions could be avoided.2 The Executive Board then concurred in the proposed change of par value.
About a week later the Finance Minister of India, Mr. Sachindra Chaudhuri, cabled Mr. Schweitzer to express his appreciation of the good will shown and the assistance given to India by the Fund.
When the staff went to India several months later in connection with the 1966 consultation under Article XIV, it reported that the Indian authorities had been carrying out a program of import liberalization but that it was too early to assess the beneficial effects therefrom and from the devaluation. In fact, India’s balance of payments position had actually deteriorated. When the consultation report was discussed in the Executive Board, Mr. Madan (India) and Mr. Saad stressed the importance of adequate capital inflows to India so as to assist that member with its basic problems of economic development.
At the time of the next Article XIV consultation, late in 1967, although exports had not increased very much, India’s economic prospects were more favorable, particularly as agricultural growing conditions had improved. When the 1968 consultation was completed, in February 1969, marked improvements had taken place. Agricultural output had increased. Domestic prices had become more stable. Exports had expanded. Balance of payments pressures had eased.
Devaluation by Ghana
In a letter dated July 5, 1967 to Mr. Schweitzer, signed by both the Chairman of the Economic Committee of the National Liberation Council of Ghana, Mr. E. N. Omaboe, and the Governor of the Bank of Ghana, Mr. A. Adomakoh, the Ghanaian authorities requested the Fund’s concurrence in a change in the par value of the new cedi. When the new cedi had been introduced in February 1967 there had been no effective change in the par value. The proposal now was to change the par value from 140.000 U.S. cents per new cedi to 98.000 U.S. cents per new cedi, a devaluation of 30 per cent.
A new government had taken over in Ghana early in 1966 and close relations with the Fund had been established. Ghana had been receiving substantial technical assistance from the Fund in the field of tax reform and in the preparation of government budgets, and since July 1966 the Fund had had a resident representative in Accra. Ghana had made several drawings on the Fund and had a stand-by arrangement. The Fund and the World Bank had also been collaborating closely in a number of meetings concerning a possible rearrangement of the payments on Ghana’s medium-term external debt.3
The Ghanaian authorities had been having extensive informal discussions about Ghana’s economic problems with staff of both the World Bank and the Fund and had for some time been considering informally with the Fund the exchange rate for their currency. In the summer of 1967 they suddenly decided to devalue. They proposed a devaluation of 30 per cent and asked for more financial assistance from the Fund. The staff proposed that the latter take the form of a change in the phasing of the amounts available under the stand-by arrangement that had just recently been approved.
The Executive Board concurred in the proposed change in the par value, effective July 8, and agreed to the change in the phasing of drawings under the stand-by arrangement. The Deputy Governor of the Bank of Ghana, Mr. G. H. Frimpong-Ansah, was present at the Board’s discussion. Mr. Nikoi (Ghana) explained that the change in par value should be seen in the context of the stabilization efforts that the authorities had embarked upon in May 1966. They believed that the time had come to move to a new and realistic exchange rate which, they thought, would lead to a better allocation of resources and enhance the prospects for long-term growth. Sir John Stevens (United Kingdom) supported the devaluation, which he considered to be of the right magnitude, and the accompanying economic measures. He thought that the devaluation would encourage exports, particularly of timber and gold, but that windfall profits to exporters, especially from cocoa exports, should be recaptured by the Government. Some Executive Directors, believing that producers had to have the necessary incentives to expand production and exports, did not agree about the need to recapture the extra profits of exporters.
Mr. Yaméogo likewise saw the Ghanaian devaluation as part of the stabilization program that had been launched in the early part of 1966 and was still in progress. He believed devaluation would lay the groundwork for the resumption of balanced economic growth. A disparity between domestic and external costs and prices, with a resulting balance of payments deficit, was a legacy of past inflation. Several Executive Directors commented favorably on the substantial liberalization of import and exchange controls that was planned.
Several months thereafter, in February 1968, on the occasion of the 1967 consultation under Article XIV, the economic situation in Ghana seemed to be coming along favorably. The Executive Directors commended the Ghanaian authorities for their achievements in the two years since they had embarked on their stabilization program.
Devaluation by Finland
Mr. Klaus Waris, Governor of the Fund for Finland, in a letter dated October 6, 1967, informed Mr. Schweitzer that the Finnish authorities were planning to ask the concurrence of the Fund in a change in the par value of the Finnish markka from 31.25 U.S. cents per markka to 23.8097 U.S. cents per markka, a devaluation of 23.8 per cent. Finland had last devalued the markka in September 1957. (The introduction of a new monetary unit and the establishment of a par value for that unit on January 1, 1963 had not represented an effective change in the par value.)
Mr. Waris explained that Finland’s economy was in fundamental disequilibrium. Since 1958 Finnish costs and prices had increased by at least 15 per cent more than the average in the countries with which Finland conducted most of its trade. He added that the Finnish authorities were also taking measures to strengthen investment in, and to enhance the productivity of, export industries.
The official request for the Fund’s concurrence in a change of par value was received by the Fund five days later. The Finnish authorities proposed that the devaluation take effect on October 12, 1967 at 9:00 a.m., Finnish time (3:00 a.m., Washington time). The staff supported the devaluation on two main grounds: after 1965 balance of payments considerations had set narrow limits to Finland’s growth, and the adjustment in par value ought to help Finland to bring about the structural changes that would enable it to make more productive use of its considerable reserves of skilled manpower.
At the Executive Board meeting, Mr. Jorma Aranko (Finland) explained that since 1965 Finland had given priority in its economic policy to the gradual restoration of balance of payments equilibrium. This had been the goal of monetary policy and, since mid-1966, of fiscal policy as well. In addition, certain more direct measures had been taken to improve the trade balance, and this program had slowly begun to produce results. Exports had become somewhat further diversified and the industrial structure was being rationalized. There had been disappointments, however. It had been more difficult than expected to restrain consumer demand. Even more important, external circumstances had been less favorable than expected, and reserves had diminished. A further tightening of monetary and fiscal policy would lead to unemployment and prejudice new investment. Import restrictions would intensify distortions and lead to higher domestic prices. Hence the decision to devalue had been taken. Mr. Aranko said that the proposed devaluation would be accompanied by taxes on exports, the lifting of tariffs on many imports, and the abolition of several import restrictions.
The Executive Board, recognizing the nature of the fundamental disequilibrium, concurred in the proposed change of par value.
Devaluation by Iceland
Iceland had devalued its currency four times after the first big wave of devaluations by Fund members in September 1949, changing its par value again in 1950, in 1960, in 1961, and, as described in Chapter 21 above, in 1967.4 In close consultation with a staff mission that was in Reykjavik at the time, the Icelandic authorities decided in November 1968 once again to devalue the króna. The par value would be changed from 1.75439 U.S. cents per króna to 1.13636 U.S. cents per króna, a devaluation of 35.2 per cent, effective November 12, 1968 at 9:00 a.m., Icelandic time (4:00 a.m., Washington time).
Mr. Asp (Finland) explained to the Executive Directors that Iceland was in an economic crisis. It had suffered a severe decline in export receipts in 1967 and 1968 because the herring catches had greatly diminished and the prices of several important fish products had fallen substantially. In the first nine months of 1968, the herring catch was 78 per cent smaller than in the corresponding period of 1967. At the beginning of the crisis, it had been hoped that the decline in the herring catch would be temporary. When this hope was not realized the Government took a series of actions to improve the situation, culminating in the imposition of an import surcharge in September 1968. These actions, together with the lowered income of the fishing industry, had reduced the country’s real income. As a result, imports had begun to decrease also. In fact, economic activity generally had started to decline and there were signs of increasing unemployment. A fundamental disequilibrium was evident. Eventually, changes would be made in Iceland’s economy, but diversification of its exports was difficult because of limited domestic resources.
The Executive Directors, noting that the gross national income per capita had fallen by 10 per cent in 1968, were very sympathetic. Some drastic changes had to be made, particularly as Iceland did not have a diversified economy. They understood that the authorities preferred the difficult political step of devaluation as a way to cope with export shortfalls rather than resorting to controls and restrictions on imports. Mr. Huntrods (United Kingdom), calling attention to the relative frequency with which the króna had been devalued, supported the staff’s call for the most strenuous efforts to prevent excessive increases in monetary incomes after devaluation, since pressures on prices, leading to a wage-price spiral, could be most severe. The Executive Board concurred in the proposed change of par value.
Devaluation by Turkey
In a communication dated July 31, 1970, the Government of Turkey requested the Fund’s concurrence in a change in the par value of the Turkish lira from 11.1111 U.S. cents per lira to 6.66667 U.S. cents per lira, a devaluation of 40 per cent. The new par value was to be effective on August 10, 1970 at 12:01 a.m., Ankara time (August 9, 1970 at 6:01 p.m., Washington time). The existing par value had been in effect since 1960. In addition, the Government requested a stand-by arrangement.
In June 1969, when the Executive Directors had considered Turkey’s economic situation, they had commented on the need for an overhaul of the country’s trade and exchange arrangements. The Turkish authorities thereafter had committed themselves to a comprehensive review of their exchange practices and had had several discussions with the staff. That review was now completed and had led to a wide-ranging reform.
The change in the par value, which the Turkish authorities stated to be necessary to correct a fundamental disequilibrium, was thus to be accompanied by a general reform of the trade and payments system. This involved a gradual liberalization of quantitative restrictions on imports, the termination of the remaining bilateral payments agreements with Fund members, and a considerable simplification of the various effective exchange rates being applied. Among other exchange rate measures, two of the four multiple rates—resulting from a premium of 33⅓ per cent paid on the amount of specified convertible currencies exchanged by tourists and other nonresidents in Turkey for local currencies and a premium of 25 per cent applied to purchases of convertible currencies acquired by residents in respect of air or road transport—were to be eliminated when the new par value went into effect. Temporarily, a multiple rate, less depreciated than the new rate, would apply to certain traditional exports.
The Executive Directors readily agreed that the Turkish economy was in fundamental disequilibrium. As Mr. de Maulde (France) expressed it, any improvement in Turkey’s balance of payments at the existing par value would have been impossible without a marked slowdown in the rate of expansion experienced in recent years and without quantitative controls, which had proved harmful in the past. Mr. Schleiminger, and others, especially commended the comprehensive stabilization program and the general streamlining of the trade and payments system worked out in close cooperation with the staff. The Executive Board welcomed the proposed change of par value and the responsiveness of the Turkish authorities to the Board’s views, and approved the related multiple exchange rate.
Devaluation by Ecuador
In a letter dated August 13, 1970, Mr. Joaquín Zevallós, General Manager of the Central Bank of Ecuador, requested on behalf of the Government that the Fund concur in a proposed change in the par value of the sucre from 5.55556 U.S. cents per sucre to 4.00000 U.S. cents per sucre, a devaluation of 28 per cent, to be effective on August 17, 1970. The existing par value had been in effect since July 1961.
As Mr. Arriazu (Argentina) explained, the Ecuadoran authorities defended the proposed change in par value as necessary to correct a fundamental disequilibrium. They cited the heavy use of multiple currency practices and restrictive measures that had been required to support the existing par value. In spite of these practices, the net international reserves of the Central Bank had declined by over $30 million in the first six months of 1970, leaving reserves equivalent to only two months’ imports. The principal reason for Ecuador’s balance of payments difficulties had been a rapidly growing deficit in the budget of the Central Government. The budgetary deficit, in turn, had come about because government expenditures had expanded sharply while revenues had expanded slowly.
In July there had been a comprehensive exchange reform aimed at eventually consolidating the official and free markets, which had been longstanding in Ecuador. The proposed change in the par value of the sucre represented achievement of that aim. The official and free market rates were to be replaced by a single fixed rate. Controls would restrict the capital transactions previously assigned to the free market. Tax measures were to be introduced which, together with the profits from the devaluation that would be reaped internally, would enlarge government revenues and reduce the budgetary deficit.
The Ecuadoran authorities asked that a staff mission be sent to Quito immediately both to discuss an overall financial program to follow the change in par value and unification of the exchange system and to negotiate a stand-by arrangement. The Executive Board, pleased to learn of the requested mission, agreed and also concurred in the change of par value. In the course of the discussion, some Executive Directors, notably Mr. Dale and Mr. Lieftinck, commented on the relatively large degree of devaluation, noting that the dangers of competitive devaluation should not be ignored. Nonetheless, they thought that the magnitude of the devaluation was probably not worrisome, considering the levels of the exchange rates effective under the former multiple rate system and the advance import deposits that would be removed.
Following Ecuador’s exchange reform, the Ecuadoran authorities were able to notify the Fund that Ecuador accepted the obligations of Article VIII, Sections 2, 3, and 4, of the Fund Agreement with effect from August 31, 1970. On September 11, 1970, when the Executive Board approved a one-year stand-by arrangement for Ecuador, it noted in a further decision that Ecuador had taken this step with regard to Article VIII.
Canada Returns to a Floating Rate
In the first quarter of 1968 Canada had a short-lived crisis and the Canadian dollar came under serious pressure, largely as a result of a succession of external events: the devaluation of sterling in November 1967, the announcement in January 1968 of a new U.S. balance of payments program, and the gold crisis of March 1968. The U.S. payments program had an especially great effect. Because the program involved some mandatory controls on the movement of U.S. capital, concerns arose about the continued feasibility of substantial transfers from Canada of funds held there by U.S. corporations.5 Hence, large amounts of U.S. short-term capital flowed out of Canada in advance. Canada’s current account balance was at about the same level as in the first quarter of 1967, but the outflow of short-term capital, combined with a reduced inflow of long-term capital, resulted in an external deficit of $0.7 billion.
A drawing on the Fund in February 1968 equivalent to Canada’s gold subscription and the amount of Canadian dollars purchased by other members from the Fund and the repayment by the Fund of loans from Canada under the General Arrangements to Borrow, totaling $426 million, together with activation of the swap arrangement with the U.S. Federal Reserve to the extent of $250 million, helped the Canadian dollar through these difficulties. On March 7 Canada was exempted from the U.S. controls on capital outflows. This exemption, together with the March 17 announcement concerning gold market arrangements, helped to restore confidence in the Canadian dollar.
A more serious but different problem arose about two years later. In May 1970, eight years to the month after Canada had set a par value of 92.5 U.S. cents per Canadian dollar following more than a decade with a fluctuating exchange rate, the Government again suspended the par value and returned to a fluctuating exchange rate. On Sunday, May 31, 1970, Mr. Benson, the Minister of Finance, cabled Mr. Schweitzer to let him know that the Government had decided that Canada would not, for the time being, maintain the exchange rate of the Canadian dollar within the present margins, but that it intended to remain in consultation with the Fund and to resume the fulfillment of its obligations under the Articles of Agreement as soon as circumstances permitted. Mr. Benson stated further that he planned to announce this decision publicly at 5:00 p.m. that day.
Precipitating Circumstances and Staff’s Reactions
The circumstances that led to the resumption of a floating rate in Canada were similar to those that had caused the member to float its currency in 1950: capital inflows, mainly from the United States, were adding to reserves and hence to the money supply and were making it more difficult to control inflation.6
The year 1970 had opened with a dramatic change in Canada’s balance of payments position. The current account, which had been in sizable deficit throughout 1969, moved into heavy surplus (seasonally adjusted) in the first quarter of 1970 as merchandise exports rose sharply and imports declined. Added to the upsurge in the current account was a continued heavy inflow of long-term capital.
Since an important element in the export boom was a post-strike recovery in exports of mining products, there was reason to believe that the extraordinary strength shown by the export sector might be short-lived. However, exports continued strong after the first three months of 1970 despite the weakness in 1970 of the U.S. economy, the major external market for Canadian goods, while imports remained weak. Moreover, the rapid easing of financial conditions in the United States and in the Eurodollar market began to manifest itself in a net inflow of short-term capital to Canada. Beginning in March, Canadian monetary policy had become more expansive, and direct steps had also been taken to encourage outflows of short-term funds by the removal of the ceiling on the amounts that banks could receive in the form of swapped deposits. By May 1970 interest rates in Canada were generally well below those prevailing at the turn of the year, and differentials between Canadian and U.S. interest rates had narrowed appreciably, after more than two years of unusually wide average spreads in favor of Canada.
Nonetheless, the increase in foreign exchange reserves continued at an accelerated pace. In the first four months of 1970, official reserves, including an allocation of SDR 124 million, had risen by more than $700 million, and in May there was a further increase of $260 million. In addition, as a result of official swap and forward transactions, $360 million was acquired by the authorities in May for future delivery.
The accumulation of reserves far in excess of Canada’s needs became troublesome. It greatly increased the cash requirements of the Government, and the authorities feared that speculative buying of Canadian dollars might be touched off, with disruptive effects on the entire international monetary system and large windfall profits for speculators.
Concurrent with the decision of the authorities to suspend the par value, the Bank of Canada, in an effort to reduce capital inflows, announced a reduction in the bank rate from 7½ per cent to 7 per cent.
The staff had been in Ottawa the month before, in April 1970, for discussions in connection with the Article VIII consultation, after a two-year interval, and was still writing a report on those discussions. The staff’s unfavorable response to the Canadian action in many respects paralleled its views on the floating of the Canadian dollar in 1950. This time, however, remembering the length of that period of floating, the staff placed somewhat less stress on the alternative ways in which the Canadian authorities might deal with capital inflows and much more emphasis on the possible repercussions on the par value system of a prolonged floating of a major currency. The staff suggested to the Executive Board that it adopt a decision noting the Canadian situation but emphasizing the undertaking by members to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements, and to avoid competitive exchange alterations, and requesting the Canadian Government to remain in close consultation with the Fund with a view to a resumption of an effective par value at the earliest possible date.
Executive Directors’ Positions
For some months the Executive Directors had been examining, in informal session, the workings of the par value system and the desirability of additional flexibility of exchange rates.7 Consequently, when they met on Sunday afternoon, May 31, 1970, an hour before Mr. Benson was to broadcast his decision, their positions on the floating of the Canadian rate reflected their differing views on flexible exchange rates. Some of them were eager to preserve fixed rates and were concerned lest the introduction of a floating rate in a major country upset the system of par values, while others were more inclined to recognize that certain circumstances might necessitate a floating rate.
Mr. Johnstone (Canada) stressed the promptness with which the Canadian authorities had acted to deal with a situation that was rapidly becoming unmanageable. Their action had been essential. It would avoid, rather than introduce, disruptive pressures on the international monetary system. He objected particularly to the “clearly critical judgment” implied by the Executive Board decision as drafted by the staff.
Mr. Plescoff, noting that the situation in Canada was analogous to that which had caused the Canadian authorities to resort to a fluctuating exchange rate in 1950, and that the fluctuating rate had then persisted for many years, proposed that the Fund place a short time limit on its concurrence, something like two months. Otherwise, more members might act in the same way and destroy the whole international monetary system. He was supported by Mr. Palamenghi-Crispi. Some Executive Directors, however, considered a time limit unwise; such a limit might, inter alia, encourage speculation against the Canadian dollar. Mr. Lieftinck regretted that the Canadian authorities had not allowed time for a genuine debate among the Executive Directors or for them to exercise any influence on the Canadian decision. Nor had the authorities provided the Fund with a clear statement of their policy intentions: Were they planning eventually to alter their par value? Did they consider Canada as having a fundamental disequilibrium? Meanwhile, he shared the staff’s concern that continued instability of a major currency could not fail to disturb international economic relations.
Mr. Schleiminger, on the other hand, likened the Canadian situation to that of the Federal Republic of Germany in September 1969 and understood why the Canadian authorities had decided to float the Canadian dollar. Mr. Huntrods, interpreting the Canadian move as temporary and as a way to achieve a more appropriate par value, welcomed it as a useful step away from overly rigid exchange rates.
After several Executive Directors had expressed displeasure that the authorities had not allowed the Fund more time, after Mr. Johnstone had assured the Executive Board that the Canadian Government would cooperate with the Fund, and after the Managing Director had pointed out that the staff would go to Ottawa within a few weeks for discussions with Canadian officials, the Executive Board took a decision along the lines of the staff’s suggestion but with adaptations in wording: the Fund noted the situation in Canada, emphasized the undertaking by members to collaborate with the Fund to promote exchange stability, and welcomed the intention of the Canadian authorities to remain in close consultation with the Fund with a view to the resumption of an effective par value at the earliest possible date.
Canada Continues to Have a Floating Rate
In the weeks and months to come the Fund followed intensively the developments pertaining to Canada’s exchange rate and general economic situation. Twice in June 1970 Mr. Johnstone reported orally to the Executive Directors, noting that quoted rates for the Canadian dollar were 3.3 to 3.85 per cent above the par value. The highest level reached after the first week was 96.82 U.S. cents per Canadian dollar, some 4.7 per cent above the par value. A staff team visited Ottawa June 15–19, 1970, to resume discussions in connection with the 1970 Article VIII consultation that had begun in April 1970, and conveyed to Canadian officials the views of the Executive Board and of the Managing Director that Canada should move promptly to restore an effective par value. The staff drew attention to the Fund’s concern that Canada’s suspension of its par value had increased uncertainty over exchange rates in the world and that Canada had acquired for its exchange rate policy a freedom that could not be widely extended to other members without undermining the trade and payments system of the whole world.
For these reasons, the staff urged the Canadian authorities to adopt policies and arrangements that would indicate a well-defined path for a speedy return to the par value system. Specifically, they suggested the pursuit of exchange rate and official reserve management policies that would enable an appropriate exchange rate to be tested in the market.
The staff also questioned the authorities about their stated intention of “maintaining orderly conditions in the market.” The authorities explained that their intention was to intervene in the market only to cushion the exchange rate against the effects of especially large transactions and to prevent unduly rapid movements of the exchange rate within a limited period of time. They did not plan to “fix” the rate prevailing in the market.
The Executive Directors supported the staff’s position. By the time the report on the 1970 Article VIII consultation was discussed in the Executive Board, on July 31, 1970, the Canadian dollar had appreciated to 97.5 U.S. cents, and the Canadian authorities had been intervening in the market to moderate the upward movement of the rate. Some of the Executive Directors focused on the courses of action that the authorities might take instead of letting the exchange rate float. For example, Mr. Lieftinck asked about the feasibility of (1) restrictions on capital imports, (2) monetary measures, such as raising reserve requirements and imposition of quantitative limits on credit expansion, and (3) the use of open market operations that would neutralize the impact of capital inflows. Messrs. Asp, Carlos Bustelo (Spain), de Kock (South Africa), Kharmawan, Phillips O. (Mexico), van Campenhout (Belgium), and others urged Canada to return to a par value. Mr. Johnstone reiterated that the Canadian authorities had found any alternatives to the floating rate difficult or self-defeating. They, too, wanted to move to a defensible par value as soon as they could. They viewed the floating rate as transitional, and did not expect Canada to be regarded as an exceptional case.
In August 1970 Mr. Louis Rasminsky, Governor of the Bank of Canada and former long-time Executive Director of the Fund, accompanied by Mr. Johnstone, the present Executive Director, called on Mr. Schweitzer and Mr. Southard for informal discussions. In cordial and friendly talks, both sides took the same positions as previously held concerning the best methods of handling the Canadian problem of persistent capital inflows. In other words, Mr. Rasminsky defended the need for a floating rate while the Fund management continued to believe in the usefulness of measures to curb capital inflows and to alleviate their impact on the domestic economy.
Meanwhile, the Canadian authorities began to make weekly reports to the Fund on the U.S. dollar rates for the Canadian dollar and to cable regularly information on the country’s official reserves. Toward the end of 1970 the Fund held the first of special quarterly consultations with a member that had suspended transactions at its par value. In this connection a staff team went to Ottawa on October 13–16, 1970. Following the visit, it was the staff’s assessment that, although unemployment was high, the balance of payments position and developments in Canada’s capital markets had become more normal, improving the climate for re-establishment of an effective par value.
The Executive Directors, meeting in December 1970 to hold these consultations at the Board level, commended the Canadian authorities for their efforts to attain stability. But a consensus existed that Canada, by being the only major country with a floating rate, was in a highly privileged position and that the Fund should press for re-establishment of a par value. A main argument, presented by Messrs. Erik Brofoss (Norway), de Maulde, de Vries, Suzuki, and van Campenhout, was that the existing status of the Canadian dollar created uncertainty for the international monetary system. Mr. de Vries pointed out that the Canadian authorities had set “an extremely bad precedent.” Messrs. Dale, Ronald H. Gilchrist (United Kingdom), and Schleiminger commented on the remarkable stability of the exchange rate of the Canadian dollar since September. To them, the calm that prevailed in the Canadian exchange market seemed to have set the stage for a return to a fixed rate. Mr. Madan, while appreciating the dilemma facing the Canadian authorities, thought that the lower current account surplus and reduced volume of capital movements indicated that in the not-too-distant future the Canadian authorities could re-establish a par value. However, at least three members of the Executive Board, Mr. Costa P. Caranicas (Greece), Mr. Eduardo da S. Gomes, Jr. (Brazil), and Mr. Massad (Chile), argued that Canada should be allowed more time.
Mr. Johnstone agreed that the delay in re-establishing a par value had in some degree been a cause of uncertainty for the international monetary system. But he stressed that developments regarding the Canadian dollar had not been the main destabilizing factor in the world monetary system. In the judgment of the Canadian authorities, two conditions should prevail before Canada returned to a fixed rate: one was exchange rate stability, which he acknowledged had already existed for a relatively long period, and the other was the certainty that the balance of forces reflected in the exchange market was “normal.” The latter condition had not yet been secured. He reassured the Executive Directors that the Canadian authorities were determined to re-establish an effective par value, but that Canada would set a bad precedent if it chose an exchange rate which, in the short term, proved inappropriate.
At the end of 1970 the Executive Board took a decision to the effect that the Fund had been in consultation with Canada on its exchange system, that it was the Fund’s view that Canada should place a high priority on the re-establishment of an effective par value for its currency, and that the Fund would remain in close consultation with Canada for this purpose.
Developments in Canada’s fluctuating exchange rate during 1971 and the Fund’s continuing relationships with the Canadian authorities form part of Chapter 25.
See Chap. 21, pp. 437–38.
The implication of the devaluation of the Indian rupee on the initial par value of the Nepalese rupee was noted earlier in this chapter; the implication for Ceylon was discussed in Chap. 21 above, pp. 438–39.
Additional description of the Fund’s close relationship with Ghana at this time, including the renegotiation of Ghana’s external debt, is contained in Chap. 29 below.
This U.S. payments program is described in Chap. 24 below, pp. 487–88.
History, 1945–65, Vol. II, pp. 159–65.
See Chap. 24 below.