Acentral core of the international monetary system set up at Bretton Woods was the regime of fixed exchange rates, embodied in a system of par values. This regime, which represented an entirely new venture in foreign exchange policy, has now been in operation for 20 years. Many of the other elements of the present international monetary system, such as liquidity, have been much discussed in recent years, and in some of these discussions the technique of par values has come under critical review. It is appropriate, therefore, to take a brief look at the major experiences with par values.

What Are Par Values?

The Articles of Agreement of the International Monetary Fund require each member country to agree with the Fund on an initial par value, that is to say, an exchange rate for its currency stated in terms of gold. The establishment of such a par value is basic; it was made a prerequisite for use of the Fund’s resources, and a member could be declared ineligible to use the Fund’s resources if it undertook an unauthorized change in its par value. Once a par value is agreed, it serves as a firm base price for a country’s exchange rate: each member is obliged to maintain the spot exchange rate of its currency within a range of 1 per cent of par. Any change from the initial par value has to be proposed by the member and (except for an initial cumulative 10 per cent) approved by the Fund. A member can propose a change in the par value of its currency only to correct a “fundamental disequilibrium” in its balance of payments; the Fund on its side cannot withhold its consent from a change that is necessary to correct such a disequilibrium.

The par value technique is thus one of “managed flexibility” of exchange rates—it stands between the permanently fixed exchange rates of the gold standard, and fully fluctuating rates. Economists often refer to it as the “adjustable peg” system, with par values being “pegs” that can be changed under specified conditions.

Its objectives are twofold: to achieve international participation in exchange rate changes rather than let countries take unilateral action, and to maintain stable—as against frequently changing—exchange rates.

Setting Up Initial Par Values

In mid-1946, as the Fund commenced its first deliberations, it was decided to establish initial par values almost immediately, even though persuasive arguments could have been marshaled against so doing. The war-devastated countries still had to undergo reconstruction, most countries were in the grip of serious inflation, there was a widespread shortage of goods and services, and international trade was badly distorted.

However, the Fund was anxious to get going and to make a start toward orderly exchange arrangements, and on September 12, 1946 it called upon its 39 members to communicate their par values. At this stage, however, the aim was not to encourage a general revision of the exchange rates then prevailing; the crucial problem of international trade was to restore the export capacity of member countries, and this was hampered more by disrupted production and transportation than by inappropriate exchange rates. So long as its exports continued to flow, the Fund believed that the par value proposed by a country was at least as satisfactory as any other rate that might be suggested. On December 18, 1946, initial par values were announced for 32 countries ¹ and also for many colonial territories. The other seven original members—Brazil, China, the Dominican Republic, Greece, Poland, Uruguay, and Yugoslavia—requested more time, and the Fund agreed.

In 1948 and 1949 initial par values were determined on much the same basis for the Dominican Republic, Brazil, and Yugoslavia and also for five new members (Australia, Lebanon, Syria, Turkey, and Venezuela). Greece and Uruguay, as well as Austria and Italy, which also joined in these early years, did not, however, set initial par values until much later.

Early Problems

In the aftermath of World War II many problems inevitably arose in the foreign exchange field. One which occurred frequently with par values was that of “broken cross rates.” These were rates of exchange quoted in free markets in various places in the world, especially between the U.S. dollar and the pound sterling, which differed from the parity relationships between these currencies. For example, instead of sterling being sold at the parity cross rate of US$4.03 per pound sterling, it would be sold at a discount, say $3.65 per pound sterling. This problem rose from the inconvertibility of currencies; in normal circumstances, where currencies are freely interchangeable, dealers in foreign exchange operate so as to take advantage of differences in rates and so keep the differences very small. The Fund attached great importance to the maintenance of cross rates because it feared that otherwise the direction of world trade that would be established would have little to do with the new pattern necessary for restoring the convertibility of major currencies.

Nor was this the only difficulty. Three members (France, Mexico, and Peru) very soon had to suspend their par values. In January 1948, France became the first nation in history that, instead of independently changing the par value of its currency, came to an international organization to ask its opinion and concurrence. The French proposal, however, involved not only a change in its par value, but also a provisional free market for certain currencies and transactions. It was to this free market that the Fund objected, as being liable to have serious adverse effects on other members. France proceeded with its measures despite the Fund objections, thus making an unauthorized change in its par value, and the Fund declared France ineligible to use its resources, the only occasion on which it has done so with reference to a member in good standing. (Czechoslovakia was also later declared ineligible, but as a step in a process that ended in its being voted out of membership.) France made subsequent changes in its exchange system in October 1948 and in September 1949 which the Fund welcomed, and in 1954 France was declared again eligible to use the Fund’s resources. In December 1958 a new par value for the franc was agreed with the Fund.

In July 1948 Mexico suspended transactions at its official rate and let the market determine an exchange rate. Although to some extent imports were excessive, the main difficulty was capital flight. During the following year there were extensive consultations between Mexico and the Fund, and in June 1949 a new par value was set.

Shortly thereafter, in November 1949, the Fund received a proposal by Peru to abandon its official parity and to permit the exchange rate to fluctuate freely until it found its “natural and stable level.” After extensive deliberation the Fund expressed no objection to this as a temporary measure, but with the understanding that Peru would remain in close touch with the Fund. (Peru still has not agreed another par value, but has a unitary fluctuating rate that has remained stable for some years.)

The Devaluations of September 1949

In the later 1940’s, it was becoming increasingly evident that the par values set in 1946 would soon have to be adjusted. When the Fund began to establish par values, many people feared that countries would resort to very frequent changes, but by 1948 it had become clear that such fears were misplaced. Countries had in fact tended to lean in the opposite direction and maintain rates which should have been changed. Reasons for this hesitancy included fear of the inflationary consequences of exchange depreciation, concern about raising the cost of imports and encouraging capital flight, as well as skepticism, more prevalent at that time than later, about the effectiveness of exchange rate changes.

In September 1949, after the exchange crisis of Western European countries had become pronounced, the only series of sweeping devaluations of the postwar period occurred. The Fund concurred in proposals for changes in the par values of 13 members in this order: the United Kingdom, South Africa, Australia, Norway, India, Denmark, Egypt, Iceland, the Netherlands, Canada, Belgium, Iraq, and Luxembourg, and for the currencies of most of the then colonial areas. Generally the currencies of these countries were devalued by 30.5 per cent; sterling, for example, went from US$4.03 per pound to US$2.80 per pound. The Fund also agreed to changes in the exchange rates of Finland, France, and Greece, for which no par values were in force.

Most of the par values that were readjusted in 1949 have been maintained. Problems were later to arise for the Canadian dollar (see below) and for the currencies of some countries with multiple rates. When France set its par value in 1958 another 14.9 per cent depreciation was undertaken, and in March 1961, 5 per cent appreciations for the deutsche mark and the Netherlands guilder were made to lessen the expansionary pressures in the German and Dutch economies. Except for these situations, however, exchange stability has been general, and was an important factor in the subsequent expansion of dollar earnings and in laying the basis for the restoration of convertibility of the European currencies which was achieved in 1958.

Further Developments, 1950-56

During the early and middle 1950’s, several countries joined the Fund and most of them agreed initial par values: Burma, Ceylon, Germany, Haiti, Israel, Japan, Jordan, Pakistan, and Sweden. Only a few of the new members in difficult circumstances (Afghanistan, Indonesia, Korea, and Viet-Nam) did not set par values.

An important break with par values, nonetheless, occurred in September 1950, when Canada suspended its fixed rate and announced that the rate would be permitted to fluctuate in response to market forces. The reasons for this action are described in a “Stabilization Series” article on Canada by Carl Blackwell in this issue. The Fund, legally unable under its Articles of Agreement to approve a fluctuating rate, recognized the particular Canadian circumstances that had caused such action, and it was agreed that Canada and the Fund would keep in close touch toward setting a new par value.

With Canada added to France and Peru, there were now three Fund members that had decided on a temporary abandonment of par values in favor of fluctuating rates. Italy and Thailand also had fluctuating rates but had never set par values.

In part because of these cases and in part because from time to time there still emerged exchange difficulties with other currencies, there began to arise in some circles advocacy not only of fluctuating exchange rates for a particular country but even of a large number of fluctuating rates. The Fund, therefore, in its 1951 Annual Report, emphasized the reasons for its firm continued belief in the doctrine of par values. Experience had shown that stable exchange rates were the objective of virtually all countries; even those countries with nominally fluctuating rates had in practice generally stabilized them over long periods. Moreover, there was no such thing as a “natural” level for an exchange rate; the proper rate depended, in each instance, upon the entire system of policies followed by both the country concerned and its trading partners. Fluctuating rates might also induce large speculative capital movements. In addition, fluctuating rates in individual countries required a fixed frame of reference—that is, fixed rates for major currencies—which would be lost if the rates for major currencies also fluctuated.

But the Fund also recognized that there might be occasional and exceptional cases where a country concluded that it could not maintain any par value for a limited period. In these circumstances, although the Fund could not give approval to the withdrawal of support of a par value, if it found the member’s arguments persuasive, it would accept them, even while it was working with the member toward the eventual re-establishment of a par value.

Another problem which arose increasingly during the early and mid-1950’s was that of multiple exchange rates. (See “What Does It Really Mean? : Multiple Currency Practices,” Finance and Development, Vol. Ill, No. 2.) Many of the less developed countries gradually introduced multiple rates and then shifted more and more transactions to exchange rates other than their par values. Hence, in several instances, the par values that had been established were no longer “meaningful”—that is, the bulk of the country’s transactions were no longer conducted at par values. This situation involved a dual problem—how to unify multiple exchange rates and how to attain new par values at a later date.

To these ends, the Fund had, since 1947, been evolving various procedures and policies. In mid-1957, it felt that the time was ripe for an intensification of its efforts in this direction. As part of this program, the Fund stressed with its members that complex multiple rates might be simplified and eventually a new realistic par value achieved by temporary use of a fluctuating rate.

Some Accelerated Trends Toward Par Values, 1957-66

Progress toward a universal system of fixed par values undoubtedly received a setback in the early 1950’s, both in practice and in the climate of acceptability. It was, however, only a temporary setback. In the second half of the decade progress was resumed. In 1958, following the establishment of external convertibility (i.e., convertibility of currencies when held by foreigners), the Fund was able to report that the problem of broken cross rates in Western European currencies no longer existed. In addition, countries which had had difficulties in maintaining or achieving par values have gradually introduced or reintroduced them. France—without a par value for 10 years—set one in 1958. Italy, after 13 years of Fund membership, and Greece, an original member, agreed initial par values in 1960 and 1961, respectively. In May 1962, after nearly 12 years with a fluctuating rate, Canada returned to the par value system with a new par value of 92.5 U.S. cents per Canadian dollar.

A steady wave of elimination of multiple exchange rates also commenced in the late 1950’s, as most of the less developed countries moved to abolish their multiple exchange rates. Several of them (Finland, Israel, Spain, and Turkey) devalued their currencies, eliminated multiple exchange rates, and set new par values all at a single stroke. Others—Costa Rica, Iran, Jordan, Nicaragua, the Philippines, Saudi Arabia, Thailand, and Yugoslavia—proceeded by stages; some of them first establishing unitary fluctuating rates and then stabilizing them. In due course they have all attained par values. Argentina, Bolivia, Korea, Lebanon, Paraguay, and Peru have attained unitary fluctuating rates. Even for some of these countries, such as Bolivia, Lebanon, and Peru, the rates have been fairly stable for a number of years.

Half of the 44 new members which joined the Fund from 1957 to 1966 have also set initial par values: Burundi, Cyprus, Ghana, Ireland, Jamaica, Kuwait, Libya, Malawi, Malaysia, Morocco, New Zealand, Nigeria, Portugal, Rwanda, Saudi Arabia, Sierra Leone, Somalia, Spain, the Sudan, Trinidad and Tobago, Tunisia, and Zambia.

However, it has been especially important to the Fund that the par values established are realistic. Rather than hasten the establishment of initial par values that might be inappropriate, the authorities in many member countries believed that it would encourage the establishment of realistic par values if the Fund would permit access to its resources to new members prior to the establishment of initial par values. Hence, in June 1964 the Board of Governors of the Fund approved an amendment to the membership resolutions of those members that had not agreed initial par values. This amendment permitted these countries, if the Fund’s

Executive Board so agreed, to draw on the Fund’s resources prior to setting initial par values. The Directors also decided that this provision should be incorporated in future membership resolutions. Since then, 6 of 29 countries concerned have agreed to initial par values.

Criticisms—and the Fund’s View

In the last few years several economists, especially in university circles, have been advocating some change in the par value regime. Some have again recommended fluctuating exchange rates. Others have suggested widening the range of fluctuation permitted under the par value technique—something like 5-7 per cent either side of par value instead of the present 1 per cent. A few have suggested a “crawling peg”—that is, automatic annual adjustments. Among other things, the economists who favor such changes stress the problems which result from the adjustment of par values and the consequent infrequency of exchange rate adjustments.

The method of par values has, of course, many academic defenders. In addition, the official views of the Fund and also of practically all central banks have continued to favor—strongly—fixed exchange rates. It is argued that they provide a firm foundation for international trade and capital movements, whereas fluctuating rates create great uncertainties. Other arguments are that national monetary authorities are forced to integrate their policies; that fixed exchange rates have to be defended by anti-inflationary policies; and that they eliminate the danger of competitive depreciation. The Fund’s view has also been based on two additional arguments. First, the process of international collaboration in financial matters would be far more difficult under fluctuating rates. Second, the experience of several countries with fluctuating rates has been that they usually aim to stabilize their exchange rates. This trend toward more stable rates and eventually to par values is indeed evident.

For all these reasons, when major industrial countries, the “Group of Ten,” agreed to study proposals for reform of the international monetary system, changes in the exchange rate system were explicitly ruled out. It was explained in a Fund press release that “The underlying structure of the present monetary system—based on fixed exchange rates and established price of gold—has proven its value as the foundation for present and future arrangements.”

Staff Papers

Staff Papers is a publication through which the Fund makes available some of the studies on monetary and financial problems prepared by members of its staff. The studies published thus far have dealt with such subjects as international liquidity, balances of payments and exchange rates, inflation in relation to economic development, and national monetary and fiscal policies. Summaries in French and Spanish are appended to each article. There are three issues each year.

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