Abstract

The establishment of the Fund was an indication of the general acceptance of the principle that the exchange policy of one country affects the well-being of all others. In the difficult times of the past three years, the Fund has served as a center for continuous consideration of exchange policy. The cooperation of members through the Fund is the most effective means of obtaining and maintaining a pattern of exchange rates suitable to the world economy.

Exchange Policy

The establishment of the Fund was an indication of the general acceptance of the principle that the exchange policy of one country affects the well-being of all others. In the difficult times of the past three years, the Fund has served as a center for continuous consideration of exchange policy. The cooperation of members through the Fund is the most effective means of obtaining and maintaining a pattern of exchange rates suitable to the world economy.

As was indicated in the Annual Report of 1948, stability of exchange rates does not mean rigidity of exchange rates. A fixed exchange rate is desirable as long as a country is able to adjust its economy to changes in its real international economic position. But when the adjustments needed in face of a radical change in a country’s international economic position cannot be made through home prices and costs, it may be necessary to change the exchange rate. Such a change should not be regarded as meaning the abandonment of the policy of exchange stability but rather the focusing of this policy on a different parity better suited to the new conditions.

The Fund Agreement recognizes that changes in exchange rates can, and under appropriate conditions should, be an instrument of economic policy. It may be preferable for a country to change an unsuitable exchange rate through the machinery of Fund consultation rather than to subject its economy to the risks of serious deflation and unemployment or to impose restrictions that keep imports so low as to endanger its well-being and efficiency.

Orderly Cross Rates

For the reasons stated in last year’s Annual Report, the Fund attaches great importance to the maintenance of orderly cross rates as an essential element in a foreign exchange policy based on a realistic pattern of par values.

Disparate cross rates now exist in some countries on a legal basis, and in many instances on an illegal or tolerated basis. These practices impair the capacity of certain countries to maintain and expand their U.S. dollar earnings, and diminish the inducement for other countries to make the fullest effort to increase their direct U.S. dollar earnings. The emergence of disparate cross rates results from the operation of real economic forces. They are particularly an indication of the great difficulty that some countries have in earning U.S. dollars. They are an indication too of the difficulties which arise in attempting to maintain a strict bilateral trade balance that goes beyond the economic interests of the trading partners. Relative prices and exchange rates which are not appropriately adjusted strengthen the pressure to depart from the pattern of orderly cross rates. The conditions which have given a stimulus to practices incompatible with orderly cross rates are likely to persist until a better equilibrium in international accounts has been established and there is some relaxation of extreme restrictions and bilateralism.

The members of the Fund have a duty to cooperate in establishing conditions which will enable the pattern of orderly cross rates to be maintained. In some important instances, effective steps have been taken during the past year to assure the maintenance of orderly cross rates. The Fund welcomed, as an appropriate step in the direction of an agreed par value for the French franc, the arrangements whereby, in October 1948, the French Government eliminated, except for a few special cases, the differential exchange rates which had prevailed since January 1948 and which had been one of the main objections of the Fund to the system proposed at that time by the French Government. The Government informed the Fund that its objective remained the agreement of a new and stable parity as soon as conditions permitted, and consultations with the Fund have continued with this purpose in view. The Fund’s statement is given in Appendix IV.

A further important step was taken in November 1948, when the Fund was notified of an agreement between Italy and the United Kingdom which ensured that sterling-lira quotations would in future be pegged to the dollar quotations at the cross rate of 4.03.

Multiple Currency Practices

The Fund is interested in multiple rates not only because they may be restrictions but also because they are effective exchange rates, and the manner in which they are administered may have important consequences on exchange stability. The wide extension of differential rates to nearly all categories of payments is indeed much the same as a partial de facto depreciation or appreciation, and may in the course of time leave the official par value with merely a nominal status. During the year, the Fund has consulted with several members on this subject, and has approved certain modifications of their current practice. During the year there has, however, on the whole been little significant change in the extent to which Fund members have resorted to multiple currency practices. Statements issued by the Fund after consultations with Colombia and Peru are set forth in Appendices III and V.

At least until inflationary forces have been eliminated, countries with multiple currencies will face difficulties in unifying their exchange systems. In several of the countries where multiple currency practices are in operation, some progress has been made in getting inflation under control, but monetary stability is still far from being fully assured. The problem of controlling credit expansion often presents serious political and social difficulties, especially where the inadequacy of domestic savings leads to the use of inflation as an instrument for financing development. In an inflationary situation, delays in the adjustment of costs to rising prices may make it difficult to determine a single exchange rate which will effectively serve the dual purpose of providing an adequate incentive to exporters and placing a sufficient restraint upon imports.

In countries where the tax system is not very advanced and little reliance can be placed on corporation and personal income taxes, there may be great difficulty in correcting by taxation the distortions which would follow if exporters or importers were allowed to enjoy the windfall profits arising from the establishment of a uniform rate at a time when costs and prices are still out of line. In these countries the interest of the government in maintaining the revenue which flows from multiple currency practices also strengthens the resistance to proposals for their termination.

The Fund has continued to give advice and technical assistance to member countries to help make possible the removal of those conditions which seem to make these practices necessary, as well as to eliminate the more objectionable features of multiple rate systems, such as discrimination between countries of destination or of origin.

Par Values

On July 14, 1948, a par value was announced for the Brazilian cruzeiro at the rate of 18.5 cruzeiros = US$1. There were, therefore, at the end of the fiscal year eight members of the Fund-Austria, China, Finland, Greece, Italy, Poland, Uruguay, and Yugoslavia—for whom a par value had not yet been agreed.1

During the year only two members made application to the Fund for a change in the par values which—as for most members—had been established at the end of 1946. The changes proposed by the Colombian Government in the par value of the Colombian peso and by the French Government in the par value of the Djibouti franc are recorded in detail in Appendices I and II.

In July 1948, the Mexican Government informed the Fund that loss of reserves compelled the Bank of Mexico temporarily to interrupt its normal foreign exchange transactions and that it had to allow the Mexican peso to fluctuate and find its level in the free market. The Mexican Government has since that time been in continuous consultation with the Fund with a view to establishing a new par value for the peso.2

1

The establishment of an initial par value of 50 dinars = US$1 for the Yugoslav dinar was announced by the Fund on May 24, 1949.

2

A new par value for the Mexican peso of 8.65 pesos = US$1 was announced on June 17, 1949.