Mr. Gardner was Chief of the International Section of the Federal Reserve Board before becoming Chief of the Balance of Payments Division of the Fund. Recently he has been appointed Assistant Director of the Research Department.
Mr. Tsiang, economist in the Balance of Payments Division, is a graduate of the London School of Economics, and was formerly Professor of Economics in the National Peking University and the National Taiwan University. He is the author of several articles in the Economic Journal and Economica.
Some acquisition of foreign assets by private residents of the devaluing country may be subject to the control of the monetary authorities to such an extent that they should be considered as equivalent to reserves. Furthermore, foreign monetary authorities may make some use of their accumulated reserves in the devaluing country. While such use would be an evidence of balance of payments surplus in the devaluing country, it would take the form of a repayment of its foreign debt. An exchange adjustment that would permit such repayment of short-term debt, as well as moderate prepayments of the country’s long-term foreign debt and a reasonable accumulation of reserves, would appear to be justified, even though a surplus financed by loans and grants from the devaluing country would indicate an excessive exchange adjustment.
This case should be distinguished from that discussed earlier in which a correct exchange adjustment was followed by various readjustments abroad. It was there noted that, whether or not these responses were appropriate, the devaluing country would have to accept the situation as it was and adjust its rate accordingly. Presumably there would be enough freedom left in the markets of the world for its devalued rate to be effective. That assumption had been made at the outset of the discussion. There was no assumption, however, that an excessive devaluation would be allowed to work out its full effects.