The currency standard

Thailand’s Currency Law of 1928 had placed the baht on a gold (sterling) exchange standard, the par of exchange being 0.66567 grams of fine gold per baht, or 11 baht to £1. With the departure of sterling from gold in September 1931, the link with sterling was abandoned in favor of gold. In May 1932 the sterling link was re-established at the old parity, and the option of converting the baht into either gold or gold exchange was deleted from the currency laws.

Before the war, the issue of currency and the volume of money in circulation responded to changes in the balance of payments. When the payments position showed a surplus, the currency reserves and the monetary circulation increased; when it showed a deficit, both declined. Expansion and contraction were more or less automatic. The steady prewar increase in the volume of money in circulation reflected an increase in the demand for money resulting from the expansion of production and trade, and the capacity of the monetary system to provide additional money as the consequence of an export surplus and the accumulation of reserves. There was no deficit financing by the government. Before January 1942 the currency law did not permit baht government loans or treasury bonds to be held as part of the currency reserves.

When World War II spread to Southeast Asia, the convertibility of the baht into sterling was again suspended (January 1942), its gold value was fixed at 0.32639 grams of fine gold, and the currency authority was authorized to issue notes against gold delivered either abroad or in Bangkok. Simultaneously, government securities and treasury bonds (a treasury bond being defined as “a non-interest-bearing bond issued by the Minister of Finance to the Issue Department of the Bank of Siam on the general credit of Siam”) were added to the list of permissible currency assets. The gold value of the baht was further reduced to 0.25974 grams of fine gold in April 1942.

In June 1942 the baht was, in effect, placed on a yen exchange standard, the par of exchange being one baht to one yen. This meant a devaluation by approximately 36 per cent relative to the previous rate of exchange, which had been 100 baht to 155.70 yen. The convertibility of yen into baht was made conditional upon satisfactory evidence that the currency was needed for bona fide business purposes. The sums required to meet the needs of the Japanese occupation forces were determined for each half-yearly period by agreement between the Governments of Thailand and Japan. The Bank of Thailand Act of December 10, 1942 established the Bank of Thailand, with the customary central bank functions. At that time, the management of the note issue was transferred from the Ministry of Finance to the Issue Department of the Bank.

Thailand’s connection with Japan was severed on September 7, 1945, and the state of war with the Allies was formally terminated on January 1, 1946. On May 1, 1946, the link with the yen was abandoned, and the parity of the baht was fixed at 0.09029 grams of fine gold, or 40 baht to £1 and 9.925 baht to US$1.00 (or 100 baht to US$10.075). The currency authority was required to “receive or deliver pounds sterling or U.S. dollars in exchange for notes.” Simultaneously, treasury bills were added to the permissible components of the currency reserve. On September 26, 1949, following the devaluation of sterling, the par of exchange was altered to 35 baht per £1 and 12.50 baht per US$1.00.

Inflation and prices

During the war a large expansion of the money supply was necessary to cover budget deficits, to meet the baht currency needs of the Japanese occupation forces, and to pay for the export surplus with Japan. The budget deficits were met by turning over treasury bonds (amounting to 300.5 million baht between 1942 and 1945) to the Bank of Thailand, and the baht currency requirements of Japan were met by the issue of baht notes mainly against yen credits in Tokyo.

The issue of notes against yen credits accounts for by far the largest part (about 79 per cent) of the increased note circulation. In December 1942 the amount of yen credits in the currency reserves was 61 million yen (Table 1). The amount had increased to 571 million yen in December 1944, and the rapid increase during the last nine months of the Japanese occupation raised the figure to 1,346.80 million yen in September 1945. The note circulation rose from 392.72 million baht on December 31, 1942 to 2,096.13 million baht on September 30, 1945.

Table 1.

Notes in Circulation and Japanese Expenditure in Thailand

(Cols. 2-4, in millions of yen; cols. 5-8, in millions of baht)

¹Difference between military expenditures (column 5) and the sum of the annual increase in yen credits (column 4) and the sale of gold to the Bank of Thailand (column 6).

²Includes notes held in the Banking Department of the Bank of Thailand.

³The difference between the figures in columns 2 and 4.

Source: Bank of Thailand Annual Reports. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

Table 1.

Notes in Circulation and Japanese Expenditure in Thailand

(Cols. 2-4, in millions of yen; cols. 5-8, in millions of baht)

		Yen Credits in Currency Reserves			Japanese Military Expenditures in Thailand	Sale of Gold by Japan to Bank of Thailand	Trade Surplus with Japan1	Notes in Circulation2
End of Month		Issue Dept.	Banking Dept.	Total
(1)		(2)	(3)	(4)	(5)	(6)	(7)	(8)
Dec.	1942	61.00	....	61.00	24.00	15.00	52.00	392.72
Dec.	1943	159.00	78.05	237.05	192.71	29.00	12.34	657.62
Dec.	1944	571.00	186.89	757.89	514.00	60.00	66.84	1,174.62
Sep.	1945	1,346.80	211.003	1,557.80	799.40	25.00	25.51	2,096.13

¹Difference between military expenditures (column 5) and the sum of the annual increase in yen credits (column 4) and the sale of gold to the Bank of Thailand (column 6).

²Includes notes held in the Banking Department of the Bank of Thailand.

³The difference between the figures in columns 2 and 4.

Source: Bank of Thailand Annual Reports. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

View Table

Table 1.

Notes in Circulation and Japanese Expenditure in Thailand

(Cols. 2-4, in millions of yen; cols. 5-8, in millions of baht)

		Yen Credits in Currency Reserves			Japanese Military Expenditures in Thailand	Sale of Gold by Japan to Bank of Thailand	Trade Surplus with Japan1	Notes in Circulation2
End of Month		Issue Dept.	Banking Dept.	Total
(1)		(2)	(3)	(4)	(5)	(6)	(7)	(8)
Dec.	1942	61.00	....	61.00	24.00	15.00	52.00	392.72
Dec.	1943	159.00	78.05	237.05	192.71	29.00	12.34	657.62
Dec.	1944	571.00	186.89	757.89	514.00	60.00	66.84	1,174.62
Sep.	1945	1,346.80	211.003	1,557.80	799.40	25.00	25.51	2,096.13

¹Difference between military expenditures (column 5) and the sum of the annual increase in yen credits (column 4) and the sale of gold to the Bank of Thailand (column 6).

²Includes notes held in the Banking Department of the Bank of Thailand.

³The difference between the figures in columns 2 and 4.

Source: Bank of Thailand Annual Reports. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

If the yen credits held in the Banking Department of the Bank of Thailand are also taken into account, it would appear that out of a total of 1,686.80 million baht for Japanese expenditures up to the end of September 1945, 1,557.80 million had been met by yen credits to the Bank of Thailand and 129.00 million by the sale of gold to the Bank (earmarked in Japan). Of this expenditure, 1,530.11 million baht was for the requirements of the occupation forces and 156.69 million was payment for the export surplus to Japan.

After the conclusion of the war, the money supply continued to expand, but at a much less rapid rate (see Table 2). For the most part, this postwar expansion reflected the recovery, at high price and wage levels, of production and trade. In 1945 and 1946 the rapid increase in bank deposits was due largely to the increased number of commercial banks, and the increased use of checks for payments exceeding 1,000 baht. The supply of money rose substantially in 1946, then declined slightly in 1947, but rose again in 1948 and in the first half of 1949, when rice harvests were good and there was a rapid general expansion of production. By the end of August 1949, it amounted to 3,290.64 million baht.

Table 2.

Money Supply of Thailand

(million baht)

¹Excluding notes in the Banking Department of the Bank of Thailand.

Source: Bank of Thailand. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

Table 2.

Money Supply of Thailand

(million baht)

End of Month	Notes in Circulation1	Demand Deposits of Commercial Banks	Total
Dec. 1939	176.57	50.74	227.31
Dec. 1945	1,838.68	306.63	2,145.31
Dec. 1946	2,119.24	722.95	2,842.19
Dec. 1947	2,106.87	661.37	2,768.24
Dec. 1948	2,389.99	693.04	3,083.03
June 1949	2,499.15	780.38	3,279.53
Aug. 1949	2,497.76	792.88	3,290.64

¹Excluding notes in the Banking Department of the Bank of Thailand.

Source: Bank of Thailand. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

View Table

Table 2.

Money Supply of Thailand

(million baht)

End of Month	Notes in Circulation1	Demand Deposits of Commercial Banks	Total
Dec. 1939	176.57	50.74	227.31
Dec. 1945	1,838.68	306.63	2,145.31
Dec. 1946	2,119.24	722.95	2,842.19
Dec. 1947	2,106.87	661.37	2,768.24
Dec. 1948	2,389.99	693.04	3,083.03
June 1949	2,499.15	780.38	3,279.53
Aug. 1949	2,497.76	792.88	3,290.64

¹Excluding notes in the Banking Department of the Bank of Thailand.

Source: Bank of Thailand. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

Since September 1945, there has been no further issue of notes against treasury bonds. Budget deficits have been met by the issue of loans or treasury bills. The latter were not held by the Issue Department of the Bank of Thailand but part of the loans were held by the Banking Department, and to that extent there was deficit financing through the creation of central bank money. Budget deficits in 1945, 1946, and 1947 totaled in all 466.86 million baht. Between December 1944 and December 1947 the public debt outstanding increased by 533.45 million baht; 287.46 million baht of the debt as of December 1947 was held by the Bank of Thailand and 245.99 million by the commercial banks.

The postwar expansion of the volume of money was also checked by withdrawing from circulation profits from the sale of sterling and rupees (held in the “Stabilization Account,” whose operations are described below) on the free market, which amounted to 181.06 million baht as of December 31, 1948. Other minor steps taken to limit the note issue included the use of gold reserves held in the United States to purchase urgently needed imports and sales of small quantities of gold to the public. The anti-inflationary effect of the withdrawal in February-March 1945 of notes of 1,000 baht denomination was short-lived, as the savings bonds issued in exchange for them were redeemed by February 1947.

As inflation increased, prices and the cost of living rose, though not at exactly the same rate as the expansion of the money supply. In August 1949 the money supply was some fourteen times the volume in December 1939 (Table 2). The wholesale price index was about thirteen times, and the Bangkok cost of living index about eleven times, the prewar levels (Table 3).

Table 3.

Notes in Circulation, Prices, and Cost of Living in Thailand

¹As of end of year or month.

²Financial year ended March 31.

³In 1945 and 1946 publication of the index number was suspended.

Source: Bank of Thailand.

Table 3.

Notes in Circulation, Prices, and Cost of Living in Thailand

	Wholesale Price Index (1939-40 =100)	Cost of Living Index (1939-40 =100)	Notes in Circulation1
			Total (million baht)	Index (1939-40 =100)
1939-402	100	100	176.57	100
1940	147	110	234.78	133
1941	194	127	297.34	168
1942	215	172	390.52	221
1943	271	257	648.12	367
1944	354	456	1,161.03	658
1945	—3	876	1,838.68	1,041
1946	—3	1,040	2,119.24	1,200
1947	1,465	1,214	2,106.87	1,193
1948	1,421	1,211	2,389.99	1,354
1949 June	1,358	1,173	2,499.08	1,415
1949 August	1,319	1,109	2,497.76	1,415
1949 September	1,323	1,129	2,489.89	1,410

¹As of end of year or month.

²Financial year ended March 31.

³In 1945 and 1946 publication of the index number was suspended.

Source: Bank of Thailand.

View Table

Table 3.

Notes in Circulation, Prices, and Cost of Living in Thailand

	Wholesale Price Index (1939-40 =100)	Cost of Living Index (1939-40 =100)	Notes in Circulation1
			Total (million baht)	Index (1939-40 =100)
1939-402	100	100	176.57	100
1940	147	110	234.78	133
1941	194	127	297.34	168
1942	215	172	390.52	221
1943	271	257	648.12	367
1944	354	456	1,161.03	658
1945	—3	876	1,838.68	1,041
1946	—3	1,040	2,119.24	1,200
1947	1,465	1,214	2,106.87	1,193
1948	1,421	1,211	2,389.99	1,354
1949 June	1,358	1,173	2,499.08	1,415
1949 August	1,319	1,109	2,497.76	1,415
1949 September	1,323	1,129	2,489.89	1,410

¹As of end of year or month.

²Financial year ended March 31.

³In 1945 and 1946 publication of the index number was suspended.

Source: Bank of Thailand.

The increase in the money supply in 1948 and 1949 (when the progress of recovery was considerable) was not attended by any rise in prices or cost of living. The wholesale price index declined from 1,465 in 1947 to 1,421 in 1948 and to 1,323 in September 1949. The Bangkok cost of living index was steady in 1948 and declined to 1,129 in September 1949, from an average of 1,211 in 1948.

The statistics of currency, credit, and prices thus indicate that early in the postwar period Thailand had succeeded in calling a halt to inflation. Since the close of the war, treasury disbursements have to only a small extent exceeded proceeds from revenue. Though more than half of the internal public debt is held by the Bank of Thailand, the volume of debt outstanding is moderate. This, coupled with the increase in production, arrested the upward trend of prices which, since the middle of 1947, have been declining slightly.

Commercial banks and other financial institutions

In 1938 there were eleven commercial banks in Thailand (four incorporated in the country and seven abroad) with three branches. Since the war, with the increase in monetary circulation, new banks have been opened, and in August 1949 the number was 23 (10 Thai and 13 foreign) with 29 branches, which, with one exception, were of Thai banks.

As the bulk of bank funds are demand deposits, their investments are short term. Most of the banks are engaged in financing the movement of crops, principally rice, from the interior to Bangkok and their export abroad. They do not lend on long term either to industry or to agriculture.

In 1938 about 33 per cent of the total assets of commercial banks was invested in loans and advances, about 14 per cent in discounts and investments, and somewhat under 27 per cent in foreign exchange. The rest of the liquid assets was held in the form of cash which represented 36.87 per cent of demand deposits (Table 4). In August 1949, loans and advances represented 31 per cent of the total assets, discounts and investments 9 per cent, and investments in foreign exchange 17 per cent. The cash balances were larger than before the war, being equivalent to 43.30 per cent of demand deposits.

Table 4.

Summary Statement of Commercial Banks of Thailand

(Cols. 1-8, in millions of baht)

¹Including balances with other banks.

Source: Bank of Thailand. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

Table 4.

Summary Statement of Commercial Banks of Thailand

(Cols. 1-8, in millions of baht)

	Paid up Capital and Reserves	Deposits			Cash on Hand1	Loans and Advances	Discounts and Investments	Foreign Exchange	Per Cent of Demand Deposits
									Cash on Hand	Loans and Advances	Discounts and Investments
		Demand	Time	Total
Year	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)
1938	4.55	43.61	16.33	59.94	16.08	25.64	11.05	20.64	36.87	58.79	25.34
1939	4.55	50.74	16.60	67.34	15.94	25.64	11.05	20.78	31.42	50.53	21.78
1946	20.69	722.95	41.57	764.52	481.05	139.95	174.46	40.91	66.54	19.36	24.13
1947	27.59	661.37	52.27	713.64	324.56	281.96	176.20	84.86	49.07	42.63	26.64
1948	45.70	693.04	83.55	776.59	345.42	399.18	168.83	248.02	49.84	57.60	24.36
1949 (Aug.)	79.64	792.88	93.73	886.61	343.29	484.03	133.49	264.96	43.30	61.05	16.84

¹Including balances with other banks.

Source: Bank of Thailand. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

View Table

Table 4.

Summary Statement of Commercial Banks of Thailand

(Cols. 1-8, in millions of baht)

	Paid up Capital and Reserves	Deposits			Cash on Hand1	Loans and Advances	Discounts and Investments	Foreign Exchange	Per Cent of Demand Deposits
									Cash on Hand	Loans and Advances	Discounts and Investments
		Demand	Time	Total
Year	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)
1938	4.55	43.61	16.33	59.94	16.08	25.64	11.05	20.64	36.87	58.79	25.34
1939	4.55	50.74	16.60	67.34	15.94	25.64	11.05	20.78	31.42	50.53	21.78
1946	20.69	722.95	41.57	764.52	481.05	139.95	174.46	40.91	66.54	19.36	24.13
1947	27.59	661.37	52.27	713.64	324.56	281.96	176.20	84.86	49.07	42.63	26.64
1948	45.70	693.04	83.55	776.59	345.42	399.18	168.83	248.02	49.84	57.60	24.36
1949 (Aug.)	79.64	792.88	93.73	886.61	343.29	484.03	133.49	264.96	43.30	61.05	16.84

¹Including balances with other banks.

Source: Bank of Thailand. Since this article was prepared, certain of the figures in this table have been revised. For the revised figures, see International Monetary Fund, International Financial Statistics, September 1950.

The interest paid on commercial bank deposits is limited to prescribed percentages below the Bank of Thailand’s rediscount rate which, since February 1945, has remained unchanged at 8 per cent. The upper limit of interest payable on demand deposits is 2$\frac{1}{2}$ per cent below the central bank rate, and on time deposits 2 or 1$\frac{1}{2}$ per cent below the bank rate, depending upon the duration of the deposits.

Commercial banks are required to maintain minimum cash reserves of 10 per cent of total deposits. The Bank of Thailand may at its discretion alter this percentage within a range of 9 per cent and 20 per cent. Of these reserves, a minimum of 5 per cent of demand deposits and 2 per cent of time deposits must be held with the Bank of Thailand. The latter percentage may be raised to 3 at the discretion of the Bank.

In view of their large cash reserves and the uninterrupted progress of postwar economic recovery, the banks have seldom been obliged to borrow from the Bank of Thailand. When in need of funds they sell their portfolio of treasury bills to the Bank, which is always willing to buy them. Unsecured loans represented about 11.6 per cent of total loans and advances in December 1948, and about 6 per cent in August 1949. The interest on loans and advances charged by the local banks and two of the foreign banks varied between 5 and 12 per cent in 1947, and between 5 and 15 per cent in 1948. The rates charged by the other foreign banks varied between 5 and 8 per cent in 1947 and between 4 and 8 per cent in 1948.

The financial institutions of Thailand also include the Savings Bank, the Bank for Cooperative Affairs, cooperative societies, and insurance companies.

The Savings Bank is owned by the Government and governed by the Savings Bank Act, 1948. It was established to take over the business of the Treasury Savings Bank of the Post and Telegraph Department; at present it has 122 branches and agencies. Its main object is to attract the small savings of the rural population, through deposits and the sale of savings and prize bonds, the latter being the more popular. The Bank’s investment policy is controlled by the Minister of Finance, and 90 per cent of its resources is invested in government securities, the Bank being the second largest holder of the public debt (17.18 per cent of total). The rest of its funds are utilized for medium and long term advances to the Bank for Cooperative Affairs and to government industrial undertakings. As of November 15, 1949, 128.70 million baht was invested in government securities and 78.50 million baht in loans; of these loans, 53.75 million was to the Bank for Cooperative Affairs, 21.20 million to other government institutions, and 3.55 million to private individuals.

The Bank for Cooperative Affairs, whose activities are regulated by Royal Decree, works under the close supervision of the Cooperative Department, Ministry of Agriculture. The Bank has been in existence since 1947 and is the government’s agent for financing cooperative societies and therefore, indirectly, agriculture. As of December 31, 1948 its resources were 65.35 million baht, of which 10 million represented capital, 22.17 million the proceeds of government cooperative bonds, and 29.50 million loans from the Savings Bank. Outstanding loans granted by it to cooperative societies (principally credit corporations) amounted to 38.46 million baht in 1947, 64.24 million in 1948, and 99.27 million in 1949 (November).

Though the cooperative movement has been growing, its significance in agricultural finance is still small. The number of credit societies rose from 2,851 in 1941 to 6,196 in 1948. During the same interval, their membership increased from 43,723 to 109,247. Their assets in 1947 totaled 41.79 million baht, of which loans to members (short and long term) amounted to 37.73 million. During the year the societies had obtained loans of 38.30 million baht from the Bank for Cooperative Affairs. In 1948, loans to members amounted to 55.03 million baht.

In July 1949 there were 89 insurance companies in Thailand (36 incorporated in Thailand and 53 abroad). They all were privately owned. The foreign companies invested all their funds abroad, and the local companies invested practically all their funds in Thailand. The bulk of the loans and advances (about 75 per cent in 1947) is on personal security. In 1947, the total resources of the local insurance companies amounted to 45 million baht, and their loans in Thailand to 18.33 million.

The financial institutions of Thailand are primarily a source of credit to finance trade, both domestic and foreign. They are not presently an important factor for channeling savings into productive investment. If the Government is to undertake a large-scale development program, it will have to consider the establishment of appropriate institutions designed to make available the necessary funds without having an unduly inflationary impact on the economy.

Exchange controls

The currency reserve position of Thailand at the end of 1945 was very weak. The yen exchange, which in December 1945 amounted to 1,557.80 million yen, had become worthless and was subsequently written off.² The sterling assets, £14.50 million, had been blocked, as well as the gold held in Japan (39.66 million grams fine valued at US$44.63 million) and in the United States (8.00 million grams fine valued at US$9.00 million). Gold held in Bangkok (29.19 million grams fine valued at US$32.85 million), which was the only available part of the reserve, represented 7.61 per cent of the notes in circulation (1,838.68 million baht), and the subsequent release of the gold held in the United States and of a small part of the blocked sterling assets did not alter the position significantly.

Current import needs had, therefore, to be met from current export proceeds, the use of which had to be rationed in accordance with a schedule of priorities. An attempt was made to do this by exchange control and the control of imports and exports. Exchange control was imposed by regulations issued under the Exchange Control Act, 1942, as amended by the Emergency Decree of 1943. The allocation of foreign exchange was entrusted to the Foreign Trade Regulation Board, which was dissolved in the early months of 1947 and subsequently (June 20, 1947) replaced by the Foreign Exchange Control Board; during that interval, the allocation of exchange was made by the Governor of the Bank of Thailand. On the resignation of the Board on November 8, 1947, allocation of exchange again was vested in the Governor. The administration of the exchange control was entrusted to the Bank of Thailand, which worked in close cooperation with the Ministry of Commerce, other government departments, and the Trade Regulation Board (later the Exchange Control Board).

Neither exchange control nor control of imports and exports was a success. There was extensive smuggling of exports and extensive black market operations in foreign exchange, with black market rates stated by the Bank of Thailand to have been about twice the official rate for sterling and about 2$\frac{1}{2}$ times for dollars. From July 1, 1946 to December 31, 1946 the foreign exchange receipts (excluding proceeds from the sale of gold held in the United States) which passed through the foreign exchange control amounted to only 92.09 million baht, and foreign exchange disbursements to 87.95 million.

The reasons for this failure have been summarized by the Bank of Thailand as follows:

(1) The internal price of rice in neighboring countries was much higher than the export price fixed by the Tripartite Agreement with the United Kingdom and the United States. This was also one of the important factors which led to smuggling of rice out of the country on a large scale.

(2) Incompetency and desire for personal gains led to ineffective control of imports and exports. This was another factor which encouraged large scale smuggling of goods out of the country, in particular, of rice which was estimated to reach half the total tonnage legally exported.

(3) As exporters had to surrender the foreign exchange proceeds of their exports at the official rate, their baht income was low in comparison with the general internal price level. There was, therefore, neither incentive to export nor inducement for rice merchants to deliver rice for exportation to the United Nations.

(4) Under the foreign trade and exchange control regulations, any person was allowed to import any kind of goods whatsoever provided he did not apply for foreign exchange from official sources, and furthermore, persons with foreign exchange holdings abroad were not required to surrender their holdings to the central pool. The intention of this proviso was to encourage the importation of the much needed goods. However, it unwittingly opened the door to black market dealings and enabled smugglers to dispose of their foreign exchange proceeds. For the black market sterling rate was twice and the dollar rate two and a half times as high as the official rates.

(5) The greater part of foreign exchange in the central pool and what was acquired by the sale of gold from the Currency Reserve (already mentioned in the Bank’s Report for 1946) was utilized or earmarked for Government expenditures and for purchase of goods ordered by the Government for rehabilitation of the country. The balance left over was therefore insufficient to meet general trade requirements.³

Relaxation of controls

In these circumstances, the administration concluded that the continuance of controls might delay economic recovery. By several measures adopted during 1947, trade and exchange controls were therefore relaxed, and there then emerged a system of official exchange rates, free market rates, and hybrid rates which ensued from the “mixing system.”

Controls were retained on exchange proceeds from exports of rice, rubber, tin, and teak, which were in short supply and the world demand for which was strong. To this list cement was added toward the close of the year. The export of rice was a government monopoly and the entire exchange receipts from it accrued to the exchange control authorities. The full amount of the exchange receipts from the export of cement had also to be surrendered at the official rate. From the proceeds of other controlled exports, a percentage had to be turned over at the official rate. As of April 1, 1947, the surrender of a percentage of teak export receipts was no longer required.

The official rate of exchange was applied to sales of exchange by the Bank of Thailand only for the requirements of the government and of government-controlled enterprises, the importation of petroleum products, the expenses of students, and a few other items specified in the priority lists. For permissible imports which fell outside these lists, foreign exchange had to be obtained in the free market.

As of October 9, 1947, the commercial banks, authorized to deal in foreign exchange, were permitted to buy, sell, and transfer foreign exchange without restriction. Except when acting as agents for the surrender of exchange to, or for the purchase of exchange from, the exchange control authorities, they were not bound by the official rates or by the Bank of Thailand’s free rate for permissible imports. This was tantamount to giving official recognition to free market exchange transactions.

In 1947, as the combined result of increased production, better harvests, and measures taken to prevent the smuggling of rice, the volume of foreign exchange which passed through the Controls was larger than in 1946. Probably the “mixing system,” which permitted exporters to retain part of their exchange receipts, weakened the incentive to smuggle rubber and tin. In 1947, payments at the official rate exceeded receipts of foreign exchange by the Controls by 107.03 million baht. Foreign exchange receipts from July 1, 1946 to December 31, 1947 amounted to 558.91 million baht, and foreign exchange disbursements during the same period were 661.90 million. The sale proceeds (89.11 million baht) of the gold held in the United States covered the larger part of this deficit; the balance was met from the remaining reserves.

In 1948, controls were further relaxed. The Foreign Exchange Board was dissolved, and import controls practically ceased to exist. By Ministerial Regulation (No. 7) dated March 14, 1948, the restriction which limited foreign exchange dealings to authorized banks was re-moved. This, in effect, legalized the free market transactions of the bazaar. As of June 11, 1949, exporters of cement were released from the obligation to surrender their exchange receipts to the Controls.

The remaining controls are not important, except for rice, rubber, and tin exports. The export of rice is a state monopoly, administered by the Ministry of Commerce, and private export is prohibited. The export of tin, which until November 1949 was subject to international allocation, is governed by licenses issued by the Department of Mines. Apart from certain customs formalities, designed to ensure that the specified percentages of exchange receipts from rubber and tin exports are surrendered to the Bank of Thailand, and restrictions on the export of goods in short supply,⁴ virtually no other export controls exist.

Import licenses, which are issued by the Ministry of Commerce, are necessary only in respect to certain luxury goods listed in the Import Control Ordinance No. 2 of 1948. Foreign exchange to finance these imports has, however, to be acquired on the free market. The importation of gold is, in effect, banned, as all gold imported must be surrendered to the Bank of Thailand at its official price. Other import controls relate to security measures, are instruments of excise policy, or are designed to protect certain government monopolies.⁵

The entire foreign exchange receipts from the export of rice, 40 per cent of the proceeds from tin,⁶ and 20 per cent from rubber have to be surrendered to the Bank of Thailand at the official exchange rate. The exchange proceeds from other exports are not subject to any exchange control.

The supply of foreign exchange at the official rate is still restricted to government imports, imports of fuel and lubricating oils by scheduled companies (subject to maxima each year), certain educational and public health requirements,⁷ and such other purposes as the Governor of the Bank of Thailand might deem to be of national advantage. The Governor has not exercised this authority to expand the payments effected at the official rate.

No permit is required for the export of foreign currencies from Thailand, though certain customs formalities are required. With effect from January 27, 1949, the import of foreign currencies in amounts exceeding the equivalent of 1,000 baht is prohibited except under permit. Baht currency may be exported without a permit, but its importation is prohibited, though travelers are permitted to bring with them up to a maximum of 200 baht per person.

The rate structure

From these controls and policies there emerge on the export side at least four, and on the import side at least three, exchange rates. The export rates are (1) the official rate for rice, (2) mixed rates for rubber, (3) mixed rates for tin, and (4) a fluctuating free market rate or rates for other exports. The import rates are (1) the official rate for the Government and for favored private imports and remittances, (2) the Bank of Thailand’s free rate for imports which the Bank may approve, and (3) a fluctuating free market rate or rates for imports to which the Bank of Thailand free rate is not applicable.

The official buying and selling rates of the Bank of Thailand and of the authorized banks,⁸ as revised on September 27, 1949 subsequent to the devaluation of sterling, for U.S. dollars and sterling, are as follows:

		Buying	Selling
Sterling		(in baht)
	Bank of Thailand	34.85$\frac{3}{8}$	35.14$\frac{5}{8}$
	Authorized banks	34.56$\frac{1}{4}$	35.43$\frac{3}{4}$
Dollar
	Bank of Thailand	12.44$\frac{7}{8}$	12.55$\frac{1}{8}$
	Authorized banks	12.34$\frac{3}{8}$	12.65$\frac{5}{8}$

View Table

		Buying	Selling
Sterling		(in baht)
	Bank of Thailand	34.85$\frac{3}{8}$	35.14$\frac{5}{8}$
	Authorized banks	34.56$\frac{1}{4}$	35.43$\frac{3}{4}$
Dollar
	Bank of Thailand	12.44$\frac{7}{8}$	12.55$\frac{1}{8}$
	Authorized banks	12.34$\frac{3}{8}$	12.65$\frac{5}{8}$

The effective rate for rice is the authorized banks’ official buying rate. On the basis of free market rates of 24.00 baht per US$1 and 59.00 baht per £1,⁹ the effective rate for rubber (20 per cent at the official rate and 80 per cent at the market rate) is 21.67 baht per US$1 and 54.11 baht per £1; and for tin (40 per cent at the official rate and 60 per cent at the market rate) 19.34 baht per US$1 and 49.22 baht per £1.

The Bank of Thailand’s free rate for sterling, which was 59.50 baht in the last week of March 1948, was revised downward on three occasions before the close of the year by 0.25 baht each time, and remained at 58.75 baht between December 27, 1948 and October 8, 1949, when it dropped to 57.75 baht. The rate was further revised to 57.00 baht on October 22, 1949 and has not been changed since. The commercial banks’ average selling rate for sterling, which was 79.39 baht per £1 in February 1947, had risen by June to 83.84 baht. Thereafter it progressively declined. During 1948 and 1949 it fluctuated between 61.56 and 56.59 baht. The rate on January 28, 1950. was 58.78 baht.

To this rate structure must be added an export rate and an import rate for trade with Japan. This trade operates on an open account basis in U.S. dollars; the original agreement, concluded on December 4, 1948, provided for a monthly announcement of the baht-dollar rate to be used, so that changes in the rates for trade with Japan could be made, if necessary, when the market rate varied significantly or to adjust the balance of trade with Japan. This dollar rate remained unchanged at 20 baht during 1949. Allowance being made for the commercial banks’ commission, the effective rate for exports was 19.80 baht to US$1, and for imports, 20.20 baht.

The change in the official rates of the baht subsequent to the devaluation of sterling in September 1949 was not of great practical significance to the economy of Thailand. Its major incidence was on the distribution of profits from rice exports as between the Government and the Bank of Thailand.

Practically the entire export of rice is paid for in sterling, which is surrendered to the Bank of Thailand at the official rate. The revaluation of the baht therefore reduced the Government’s profit by 5 baht per £1. Correspondingly, the Bank of Thailand’s profits on the sale of sterling in the free market have increased. The market rate of exchange is unaffected by the official valuation of the baht, so that the difference between the official and the market rates is now larger. There has therefore been a redistribution of profits from the export of rice from the Government to the Bank of Thailand. The amount of sterling obtained in exchange for the rice exported remains unchanged.

The revaluation of the gold and foreign exchange assets of the Bank of Thailand resulted in a net gain in baht, as the gold and dollar assets in the Issue and Banking Departments of the Bank exceeded the sterling and rupee assets. This meant a reduction in the fiduciary issue of baht notes and a corresponding increase in the covered issue.

The official rates are of interest only to exporters of rice, rubber, and tin, since the proceeds from other exports are disposed of in the free market. Growers of rice have not been affected, as the baht price paid by the rice monopoly was not changed after the revaluation. Export statistics show that in 1948 and part of 1949, for which data are available, most of the exports of rubber and tin went to the dollar area. The new dollar rate meant, therefore, a slight advantage to the ex-porters of these commodities, and the advantage was greater for tin than for rubber exporters.

As import duties are payable on import valuations at the official rates, the new exchange rates involved an increase in the import duty on dollar goods and a reduction in the import duty on sterling goods. Export duties remained unaffected.

Free market for sterling

Since the end of the war there has been in Bangkok a relatively uncontrolled free market in foreign exchange, the principal currencies dealt with being sterling, currencies linked to sterling (chiefly Hong Kong dollars, Straits dollars, and Indian rupees), and U.S. dollars. The market was at first confined to the commercial banks and the bazaar. As of March 25, 1948, when the foreign exchange accruing to the Control had increased owing to a combination of favorable circumstances and the more effective prevention of the smuggling of rice, the Bank of Thailand entered the sterling part of the free market, “in order to prevent,” according to an official explanation, “violent fluctuations and depreciation of the baht-sterling rate and to reduce the money supply” and the cost of living.

Since March 1948 the sterling part of the free market has thus been composed of two sections: a market for sterling acquired from the Bank of Thailand at the latter’s selling rate (which may be called the free market for official sterling), and a market for sterling acquired from other sources (which may be called the open market for sterling).

The supply of sterling placed on the free market by the Bank of Thailand was drawn (after the requirements at the official rate had been met) from the whole of the sterling receipts from the export of rice, 40 per cent of the sterling receipts from the export of tin, 20 per cent from the export of rubber, and, for some time, 50 per cent from the export of teak.

In 1948, of the Bank of Thailand’s total sterling receipts of £16.37 million, £5.09 million was sold at the official rate, £9.65 million at the Bank of Thailand’s free rate, and the rest was held over for transfer to reserves. The sales at the official rate were made up of £2.60 million for imports and remittances on government account, and £2.48 million sold to private individuals and firms, mainly for petroleum products (£2.16 million).

During the first ten months of 1949, official receipts of sterling from the export of rice, tin, and rubber amounted to £32.31 million. Of this sum, £4.11 million was disposed of at the official rate, £15.49 million at the free rate, and £12.71 million was held over for addition to the official holdings of foreign exchange. Government requirements absorbed £1.93 million of the amounts sold at the official rate, and £2.17 million was used for imports of petroleum products.

The supply of sterling to the open market is drawn from 80 per cent of the sterling exports of rubber, 60 per cent of the sterling exports of tin, the whole of the sterling receipts from other exports excluding rice, and the sterling receipts from invisibles and smuggled exports. To this must be added sterling which may flow into Bangkok from neighboring countries, depending upon the rates ruling in the free market.

It is difficult to assess the size and relative importance of the free market for official sterling and the open market for sterling, since the volume of transactions in part of the latter is indeterminate. The Bank of Thailand has estimated that sterling supplied by the Bank of Thailand might represent somewhat over half of the total sterling sales (or purchases) in Thailand.

The demand for official sterling at the free rate is determined by the requirements for permissible imports (as approved by the Bank of Thailand) to which the official free rate is not applicable.¹⁰ The demand for sterling in the open market depends on the requirements for other imports, smuggled imports, capital transfers, and remittances for which official sterling may not be used.

Among the currencies linked to sterling, the Bank of Thailand has been selling in the free market, since August 19, 1948, Indian rupees, whose holdings by the Bank had risen from Rs 10 million in December 1946 to Rs 16.46 million in December 1947 and Rs 90.46 million in December 1948. With a view to protecting the market for its rupee sales, the use of official sterling to pay for imports from India was banned as of July 20, 1949. Such imports henceforth had to be financed exclusively in rupees. The Bank’s selling price for rupees was based on its free market rate for sterling and was, consequently, somewhat below the open market rate. The rate prevailing in June 1950 was 4.31 baht per rupee.¹¹ In 1948 the Bank’s sales of rupees at the free rate amounted to Rs 534,500 and during the first ten months of 1949 to Rs 8.86 million. Payments for rice exports to India in 1949 were received in sterling.

Sterling purchased from the Bank of Thailand at the free rate may be used to pay for imports from the sterling area (except, from July 20, 1949, India), and the banks have utilized this sterling to make good the deficit in their supplies of sterling area currencies. It may also be transferred, in payment for imports, to countries to which the facilities of the “Transferable Account” system have been extended.¹²

The profits from the sale of sterling and rupees in the free market are credited to a Stabilization Account held by the Bank of Thailand. As of December 31, 1948, this account amounted to 181.06 million baht. The amount has increased substantially since that date, though the exact figure is not known. In the first ten months of 1949, sales aggregated £15.50 million in sterling and Rs 8.86 million in Indian currency. The profits from these sales should have brought the Stabilization Account to about 480 million baht as of October 31, 1949. In the Bank’s weekly statements of accounts, the account appears under other deposits (i.e., other than government and bankers’ deposits). It is regarded as the property of the Bank of Thailand and has not so far been drawn upon for any purpose.

With the progress in the recovery of production, increase in exports, control of the monetary circulation, and improvement in the domestic price situation, the open market rate for sterling fluctuated downward. From the last week of March 1948 to the close of October 1949, it varied between 62.71 baht to £1 and 57.53 baht to £1. As the open market rate declined, the Bank of Thailand’s free rate was also revised downward (Table 5).

Table 5.

Average Free Market Sterling Rates of the Bank of Thailand and the Commercial Banks

¹Rate at which the Bank of Thailand sold sterling to commercial banks for resale to customers for the purpose of financing permissible imports.

²Figures from May 29, 1948 to December 24, 1948 are average rates quoted by six commercial banks in Bangkok. Figures from January 29, 1949 onward are weighted average rates for all transactions of all commercial banks in Bangkok.

Table 5.

Average Free Market Sterling Rates of the Bank of Thailand and the Commercial Banks

					Average Free Rates (baht per £)
		Date			Bank of Thailand average selling rate1	Commercial banks’ average buying rate2	Commercial banks’ average selling rate2	Difference between Cols. 2 and 4 as Per Cent of Col. 2
		(1)			(2)	(3)	(4)	(5)
1948
	Mar	27-Mar	31		59.50	59.41	60.53	1.73
	Apr	2-Apr	30		59.25	59.29	60.28	1.74
	Jun	28-Jul	31		59.25	59.42	60.35	1.86
	Aug	2-Aug	28		59.25	59.50	60.46	2.05
	Sep	27-Oct	30		59.00	58.83	59.67	1.14
	Nov	1-Nov	27		59.00	59.42	60.37	2.32
	Dec	27-Jan	29/49		58.75	59.12	60.47	2.93
1949
	Mar	5	(week ending)	…	58.75	59.51	62.71	6.74
	Apr	9	”	…	58.75	60.32	61.20	4.17
	May	7	”	…	58.75	59.90	61.96	5.46
	Jun	4	”	…	58.75	59.75	60.94	3.73
	Jul	9	”	…	58.75	59.47	60.18	2.43
	Aug	6	”	…	58.75	59.41	59.91	1.97
	Sep	3	”	…	58.75	59.94	60.60	3.15
	”	17	”	…	58.75	60.46	61.52	4.71
	”	24	”	…	58.75	58.42	59.36	—
	Oct	8	”	…	57.75	57.99	58.73	1.70
	”	22	”	…	57.00	57.28	58.11	1.95
	”	29	”	…	57.00	57.18	57.53	0.93
	Dec	12	.		57.00	55.91	56.39	—1.07
	”	30	.		57.00	57.25	57.46	0.81
1950
	Jan	21	.		57.00	58.68	59.59	4.54
	”	28	.		57.00	58.64	58.78	3.12

¹Rate at which the Bank of Thailand sold sterling to commercial banks for resale to customers for the purpose of financing permissible imports.

²Figures from May 29, 1948 to December 24, 1948 are average rates quoted by six commercial banks in Bangkok. Figures from January 29, 1949 onward are weighted average rates for all transactions of all commercial banks in Bangkok.

View Table

Table 5.

Average Free Market Sterling Rates of the Bank of Thailand and the Commercial Banks

					Average Free Rates (baht per £)
		Date			Bank of Thailand average selling rate1	Commercial banks’ average buying rate2	Commercial banks’ average selling rate2	Difference between Cols. 2 and 4 as Per Cent of Col. 2
		(1)			(2)	(3)	(4)	(5)
1948
	Mar	27-Mar	31		59.50	59.41	60.53	1.73
	Apr	2-Apr	30		59.25	59.29	60.28	1.74
	Jun	28-Jul	31		59.25	59.42	60.35	1.86
	Aug	2-Aug	28		59.25	59.50	60.46	2.05
	Sep	27-Oct	30		59.00	58.83	59.67	1.14
	Nov	1-Nov	27		59.00	59.42	60.37	2.32
	Dec	27-Jan	29/49		58.75	59.12	60.47	2.93
1949
	Mar	5	(week ending)	…	58.75	59.51	62.71	6.74
	Apr	9	”	…	58.75	60.32	61.20	4.17
	May	7	”	…	58.75	59.90	61.96	5.46
	Jun	4	”	…	58.75	59.75	60.94	3.73
	Jul	9	”	…	58.75	59.47	60.18	2.43
	Aug	6	”	…	58.75	59.41	59.91	1.97
	Sep	3	”	…	58.75	59.94	60.60	3.15
	”	17	”	…	58.75	60.46	61.52	4.71
	”	24	”	…	58.75	58.42	59.36	—
	Oct	8	”	…	57.75	57.99	58.73	1.70
	”	22	”	…	57.00	57.28	58.11	1.95
	”	29	”	…	57.00	57.18	57.53	0.93
	Dec	12	.		57.00	55.91	56.39	—1.07
	”	30	.		57.00	57.25	57.46	0.81
1950
	Jan	21	.		57.00	58.68	59.59	4.54
	”	28	.		57.00	58.64	58.78	3.12

¹Rate at which the Bank of Thailand sold sterling to commercial banks for resale to customers for the purpose of financing permissible imports.

²Figures from May 29, 1948 to December 24, 1948 are average rates quoted by six commercial banks in Bangkok. Figures from January 29, 1949 onward are weighted average rates for all transactions of all commercial banks in Bangkok.

As shown in Table 5, the open market selling rate for sterling has exceeded the selling rate for official sterling by more than the commission (1 per cent) which the commercial banks may charge their customers on sterling acquired by them from the Bank of Thailand. The two markets are separate from one another, though the rates have in general tended to move in the same direction. Between March and the end of November 1948, the average open market rate was above the Bank of Thailand’s free rate by a margin usually varying between 1.14 per cent and 1.86 per cent, but rising to 2.05 per cent during August 1948, and to 2.32 per cent in November. From January 1949 through the middle of September, it ranged between 1.97 per cent and 6.74 per cent. For this rather wide margin of difference, the Bank’s explanation is that it was “due to the fact that sterling purchases from the Bank could only be used for payments of certain permissible imports. Other transactions, many of a speculative nature, are financed entirely by exchange obtained from the market and at rates much higher than the Bank’s selling rates.”

After the devaluation of sterling, the open market rate, which was at 61.52 baht on September 17, 1949, declined by stages to 58.74 baht on September 30. It remained comparatively steady between 58.30 baht and 58.94 baht until the middle of October, but began to decline in the latter part of October, falling below 58 baht in the third week. Early in December 1949 it was less than the Bank of Thailand’s selling rate (57.00 baht), falling to 56.39 baht on December 12. The rate then recovered to 57.46 baht on December 30, 1949 and rose to 59.59 baht on January 21, 1950. It then fell a little, to 58.78 baht on January 28, 1950; it was 57.14 on June 30.

It is clear that the Bank of Thailand’s free rate and the commercial banks’ selling rate are interdependent. It is apparent, too, that if transactions in the two sections of the market were confined to Thailand’s imports and exports, the Bank of Thailand could, within limits, through its control over the larger part of sterling export proceeds, determine the free market rate. By keeping out of the market temporarily, it could force the rate up, and, by lowering its own rate sufficiently, bring the market rate down. Its ability to force the rate up is, however, conditioned by its willingness to resist the pressure, when such pressure may develop, to issue notes against sterling; and its ability to force the rate down is limited by the size of its sterling reserves.

The behavior, described above, of the open market rate after the Bank of Thailand decided to maintain its selling rate notwithstanding the weakness of sterling seems to support the view that the Bank of Thailand can peg the sterling rate. The market rate, which had fallen below the Bank’s free rate, rose above it after it became apparent that the Bank would not alter its rate. The resulting accumulation of sterling in the Banking Department of the Bank was about £12 million. As the market rate recovered, the Bank was able to dispose of part of this accumulation. Sterling in the Banking Department of the Bank was £8.77 million as of January 14, 1950.

Apparently when the supply of sterling in the open market is not sufficient to cover all sterling payments, the Bank of Thailand withholds its sterling by quoting a rate higher than the open market, and the demand for sterling drives the open market rate above the Bank’s offer.

Free market for dollars

Unlike sterling, there is only one free market for U.S. dollars. The Bank of Thailand does not place on the free market any part of its dollar receipts. Any dollar exchange which remains after meeting dollar payments at the official rate is either credited to currency re-serves or held in the Banking Department of the Bank.

The Bank of Thailand derives its supply of dollars from the dollar exports of rice, 40 per cent of the dollar exports of tin, and 20 per cent of the dollar exports of rubber. In 1948 these receipts aggregated $62.55 million, and in the first ten months of 1949 they were $37.68 million. In 1948, $22.40 million (about 36 per cent) was disposed of at the official rate, and $40.15 million was held for reserves. The sales cover $8 million to the Government (including $3.88 million for the purchase of gold for subscriptions to the IMF and IBRD), $6.33 million to the oil companies to pay for imports of petroleum products, $7.19 million for remittances, and $0.88 million to others. In the first ten months of 1949, $19.23 million (about 51 per cent) was sold at the official rate ($12.96 million to the Government and $6.27 million for oil imports). Statistics of remittances at the official rate during 1949 are not available. The dollar assets of the Bank of Thailand increased by $13.56 million in this period.

The supply of dollars in the free market comes from 80 per cent of the dollar exports of rubber, 60 per cent of the dollar exports of tin, the whole of the proceeds of other dollar exports and of smuggled exports sold against dollars. To this may be added the dollar proceeds of commodity arbitrage transactions effected through Bangkok, to take advantage of the broken cross rate in the free market for sterling and U.S. dollars,¹³ and the net inflow, if any, of speculative dollars which may be attracted to Bangkok when the prevailing quotations in the free market are favorable in comparison with those of neighboring free markets, the most important of which is Hong Kong. There is also a small quantity of dollar receipts from invisibles.

The demand for dollars in the free market comes from the requirements for dollar imports and dollar remittances for which the official rate is not applicable, for smuggled imports (including gold), and for capital transfers. The size of this demand cannot be determined.

The volume of transactions in the free market for dollars is not known. It is believed to be smaller than in the neighboring free market in Hong Kong. The principal dealers are the commercial banks (both foreign and Thai) and private firms of exchange brokers.

As in the free market for sterling, the improvement in production, trade, and the domestic price situation also brought the free market baht price of dollars down. From March through December 1947, the selling rate declined, with minor fluctuations, from 27.25 baht to 18.18 baht, the larger part of the decline occurring after July. During 1948 and the first ten months of 1949, the margin of fluctuation was narrower. In 1948, the average monthly rate fluctuated between 21.56 baht and 18.40 baht; and in the first nine months of 1949, it fluctuated between 19.83 baht (January) and 22.06 baht (August), the general trend being upward. In September the average rate was 21.64 baht and in October 21.90 baht. The upper limit reached in November (on the 26th) was 22.64 baht. In the second and third weeks of December, when the open market rate for sterling had fallen below the Bank of Thailand’s selling rate, the free market rate for dollars moved upward, reaching 23.62 baht on December 20. In the last week of January 1950, it rose to 24.48 baht.

Sterling-dollar cross rates

The official baht-sterling and baht-dollar rates of exchange have conformed to the official sterling-dollar exchange rate, the sterling-dollar cross rates in Thailand being $4.03 to £1 before, and $2.80 to £1 after, the devaluation of sterling in September 1949.

In the free market for sterling and dollars, however, the cross rate has varied (Table 6). In January 1949 the weighted average cross rate was about $3.06 and fluctuated downward thereafter, the lower limit for the year, which was touched in December, being $2.50. In the predevaluation week, it varied between $2.89 and $2.84. On September 20, the cross rate was $2.75. It then declined steadily, and early in January 1950 it was $2.43; thereafter it rose to $2.64 on June 30.

Table 6.

Thailand Commercial Banks’ Free Market Selling Rates for Sterling and U. S. Dollars¹

¹Because of the exchange control laws and regulations in force in 1946, not all banks sold or bought foreign currencies at the open market rate. The 1947 and 1948 figures are simple averages. The figures from January 1949 onward are weighted averages.

Source: Bank of Thailand.

Table 6.

Thailand Commercial Banks’ Free Market Selling Rates for Sterling and U. S. Dollars¹

	1947			1948			1949
Month	Sterling (bahts)	Dollar (bahts)	Cross Rate (dollars)	Sterling (bahts)	Dollar (bahts)	Cross Rate (dollars)	Sterling (bahts)	Dollar (bahts)	Cross Rate (dollars)
January	—	—	—	59.18	18.40	3.22	60.60	19.83	3.06
February	79.39	—	—	59.75	19.90	3.00	60.78	20.43	2.98
March	82.64	27.25	3.03	60.75	21.23	2.86	60.34	21.33	2.83
April	83.32	26.16	3.19	60.73	21.56	2.82	60.97	21.22	2.87
May	83.29	26.80	3.11	60.13	20.92	2.87	61.31	21.73	2.82
June	83.84	26.62	3.15	60.00	20.46	2.93	60.66	22.05	2.75
July	81.41	25.03	3.25	60.12	20.46	2.94	60.13	22.04	2.73
August	78.66	22.89	3.44	60.40	19.59	3.08	60.32	22.06	2.73
September	72.03	23.10	3.12	60.20	19.15	3.14	60.48	21.64	2.79
October	69.75	23.58	2.96	59.06	19.67	3.00	58.10	21.90	2.65
November	67.39	21.07	3.20	59.92	19.69	3.04	57.46	21.87	2.61
December	58.88	18.88	3.12	61.56	19.61	3.14	57.17	22.84	2.50

¹Because of the exchange control laws and regulations in force in 1946, not all banks sold or bought foreign currencies at the open market rate. The 1947 and 1948 figures are simple averages. The figures from January 1949 onward are weighted averages.

Source: Bank of Thailand.

View Table

Table 6.

Thailand Commercial Banks’ Free Market Selling Rates for Sterling and U. S. Dollars¹

	1947			1948			1949
Month	Sterling (bahts)	Dollar (bahts)	Cross Rate (dollars)	Sterling (bahts)	Dollar (bahts)	Cross Rate (dollars)	Sterling (bahts)	Dollar (bahts)	Cross Rate (dollars)
January	—	—	—	59.18	18.40	3.22	60.60	19.83	3.06
February	79.39	—	—	59.75	19.90	3.00	60.78	20.43	2.98
March	82.64	27.25	3.03	60.75	21.23	2.86	60.34	21.33	2.83
April	83.32	26.16	3.19	60.73	21.56	2.82	60.97	21.22	2.87
May	83.29	26.80	3.11	60.13	20.92	2.87	61.31	21.73	2.82
June	83.84	26.62	3.15	60.00	20.46	2.93	60.66	22.05	2.75
July	81.41	25.03	3.25	60.12	20.46	2.94	60.13	22.04	2.73
August	78.66	22.89	3.44	60.40	19.59	3.08	60.32	22.06	2.73
September	72.03	23.10	3.12	60.20	19.15	3.14	60.48	21.64	2.79
October	69.75	23.58	2.96	59.06	19.67	3.00	58.10	21.90	2.65
November	67.39	21.07	3.20	59.92	19.69	3.04	57.46	21.87	2.61
December	58.88	18.88	3.12	61.56	19.61	3.14	57.17	22.84	2.50

¹Because of the exchange control laws and regulations in force in 1946, not all banks sold or bought foreign currencies at the open market rate. The 1947 and 1948 figures are simple averages. The figures from January 1949 onward are weighted averages.

Source: Bank of Thailand.

The trend of the cross rate in Bangkok, in normal circumstances, closely follows the trend in Hong Kong (Chart 1 and Table 7). Hong Kong appears to be the leading free market in the Far East and the rates quoted there influence the rates quoted in Bangkok and other Far Eastern centers.

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Sterling-Dollar Cross Rate in Hong Kong and Bangkok

Citation: IMF Staff Papers 1950, 002; 10.5089/9781451971422.024.A006

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Table 7.

Sterling-Dollar Cross Rate in Hong Kong and Bangkok

Source: Bank of Thailand.

Table 7.

Sterling-Dollar Cross Rate in Hong Kong and Bangkok

Date			Hong Kong	Bangkok
1949
	Jan	5-8	US$3.19	US$3.14
	Feb	6-12	3.11	3.11
	Mar	6-12	3.08	3.06
	Apr	3-9.	3.05	3.13
	May	22-28	2.25	2.76
	Jun	5-11	2.63	2.84
	Jul	3-9	2.56	2.73
	Aug	7-13	2.61	2.74
	Sep	11-17	2.88	2.96
	Oct	3	2.68	2.73
	Oct	15	2.64	2.66
	Nov	1	2.63	2.63
	Nov	15	2.60	2.62
	Nov	26	2.51	2.56
	Dec	24	2.46	2.44
1950
	Jan	10	2.42	2.43
	Feb	13	2.48	2.47
	Mar	13	2.50	2.50
	Apr	11	2.62	2.62

Source: Bank of Thailand.

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Table 7.

Sterling-Dollar Cross Rate in Hong Kong and Bangkok

Date			Hong Kong	Bangkok
1949
	Jan	5-8	US$3.19	US$3.14
	Feb	6-12	3.11	3.11
	Mar	6-12	3.08	3.06
	Apr	3-9.	3.05	3.13
	May	22-28	2.25	2.76
	Jun	5-11	2.63	2.84
	Jul	3-9	2.56	2.73
	Aug	7-13	2.61	2.74
	Sep	11-17	2.88	2.96
	Oct	3	2.68	2.73
	Oct	15	2.64	2.66
	Nov	1	2.63	2.63
	Nov	15	2.60	2.62
	Nov	26	2.51	2.56
	Dec	24	2.46	2.44
1950
	Jan	10	2.42	2.43
	Feb	13	2.48	2.47
	Mar	13	2.50	2.50
	Apr	11	2.62	2.62

Source: Bank of Thailand.

During the first quarter of 1949, the cross rates in Bangkok and Hong Kong were close to one another, the Hong Kong rate being usually a fraction above the Bangkok rate. About the last week of March, the Hong Kong cross rate fell below the Bangkok cross rate, and during the second quarter the gap between the two widened with the progress of Communist successes in China. The Hong Kong rate suffered two precipitous drops in the last week of April and in the third week of May, the latter being probably related to the fall of Hankow on May 18. It reached its lowest limit (US$2.25) on May 28, the day after the fall of Shanghai. Political disturbances kept the two markets apart for a time. Those who had dollars in Bangkok appear to have preferred to keep them there, and there was an outflow of dollars from Hong Kong, representing a flight of capital from China.

The cross rate in Hong Kong then recovered almost as rapidly as it had fallen, though a wide gap between the two cross rates remained for some time, the Hong Kong cross rate being below that of Bangkok. The two, however, generally moved in the same direction.

Both rates rose in the first half of September 1949, the peak points being reached on the eve of the devaluation of sterling, on September 17. Later both rates declined, falling below the levels recorded a week prior to devaluation. About the middle of October 1949, the two cross rates came close to one another. This relation has since been generally maintained, with each of the two rates alternately above the other.

The wide margin between the official cross rate and the cross rate in the Bangkok free market, prior to the devaluation of sterling, is believed to have led to commodity arbitrage transactions in diamonds from South Africa, rubber from Malaya and India, and pepper from India, these commodities being shipped to the United States via Bangkok, instead of directly, in order to avoid the surrender of dollar receipts at the official cross rate to the controls of the exporting countries. In the respective producing countries, the commodities concerned were entered as exports to Thailand, payment for them being received in sterling. The dollar proceeds of the exports were then disposed of in the free market in Bangkok. The profits from these transactions resulted from the difference between the official sterling-dollar exchange rate and the free market cross rates in Bangkok less the difference between the higher cost of shipping the goods to the dollar area via Bangkok, and other incidental expenses, and the cost of shipping them directly.

After the 1949 devaluations, the margin between the official cross rate and the free market cross rate diminished, and as more stringent exchange and trade control measures were also applied by the sterling area countries concerned, the attractiveness of such transactions diminished. Three instances of pepper shipments from India to the dollar area via Bangkok were, however, recorded by early 1950.

Similarly, significant shifts in 1947 in the rubber exports of Thailand to Malaya at the expense of exports to the dollar area are indicated by the trade statistics of that year, according to the Bank of Thailand Report for 1948. The report suggests that the rubber, in fact, was meant for re-export from Singapore to the dollar area, the rubber being entered in the Thai customs as exports to the sterling area, but by the Singapore agents of the Thailand exporters as an entrepôt export to the dollar area in order to avoid the Straits Control. The dollars received were, in due course, disposed of in the free market at Bangkok, part of the baht proceeds being utilized for the purchase of 20 per cent worth of sterling for surrender to the Thai Controls. The profits from this transaction would be the difference between 20 per cent worth of the dollar export proceeds of rubber converted at the official and the market cross rates less the difference between the higher cost, if any, of shipment via Singapore and the commission payable to the agents in Malaya, and the cost of direct shipment. The amount of rubber smuggled into Thailand from Malaya appears, however, to have been larger than the flow of rubber in the opposite direction, as trade statistics show rubber exports to have exceeded Thailand’s rubber production (especially in 1948), the difference being due probably to the net volume of commodity arbitrage in rubber. In 1947, rubber exports were 21,750 metric tons and production was 21,330 metric tons. In 1948, the corresponding figures were 95,000 metric tons and 80,000 metric tons.