Miss Romanis, economist in the Special Studies Division, is a graduate of Cambridge University. She was formerly on the staff of the Oxford University Institute of Statistics; the Programmes and Plans Division, Ministry of Production, London; the Economic Directorate, Organization for European Economic Cooperation, Paris; and the Economic Survey Division, United Nations, New York. She has published several articles on economic subjects.
Changes in foreign aid policy will not henceforward be separately referred to throughout the paper, and should be assumed to be included when changes in restrictions upon external transactions are mentioned.
The author is particularly indebted to Mr. M. Kuczynski for comments on this section of the paper.
For a fuller discussion of the system established after the war, see J. Marcus Fleming, “Developments in the International Payments System,” Staff Papers, Vol. X (1963), pp. 461–84.
“. . . many changes will have to be made before the pattern of exchange rates is suited to the radically altered conditions of the postwar world. The great task of the International Monetary Fund is to see that necessary adjustments in exchange rates are made promptly and in an orderly manner and that they are helpful in establishing a new economic balance in a greatly changed world.” (Camille Gutt, “Exchange Rates and the International Monetary Fund,” an address given at Harvard in February 1948, reprinted in Foreign Economic Policy for the United States, ed. Seymour E. Harris (Cambridge, Massachusetts, 1948), p. 219.) Although a change in parity was not an ultimate solution, and needed to be supported by appropriate policies to overcome the underlying causes of disequilibrium, the Fund could not object to such a change because a country was not taking adequate measures to correct its position, if the existing parity was already hampering the growth of exports and encouraging excessive imports and would make it difficult to re-establish equilibrium if appropriate policies were adopted. Ibid., pp. 224–25.
“. . . it appeared to the Fund that for the present the one practical test which could be applied to determine the suitability of an exchange rate was whether it enables a country to export.” Ibid., p. 221.
Notably in the United Kingdom throughout the postwar period, in the United States up to the mid-1950’s, and in Sweden in the later years of the decade.
The fact that investment goods were in short supply on world markets at this time enhanced the possibility of securing a rapid increase in exports by a slight slowing down of domestic investment.
If this condition held, it would of course be virtually impossible for certain developed countries to reach a position of surplus and full employment while other developed countries had deficits and less than full employment.
For instance: “If an implicit goal is a system of fixed exchange rates, what is required is differential rates of inflation between countries; surplus countries should let prices go up while deficit countries should either prevent them from going up or let them fall, depending on how the ‘burden of adjustment’ is agreed to be divided” (Robert A. Mundell, “On the Selection of a Program of Economic Policy with an Application to the Current Situation in the United States,” Banca Nationale del Lavoro, Quarterly Review, No. 66, September 1963, p. 267).
Walter S. Salant has recently suggested (“Does the International Monetary System Need Reform?” reprinted in Money in the International Order, ed. J. Carter Murphy (Dallas, Texas, 1964)) that changes in the relation between price levels of different countries are not entirely ruled out by the criteria of domestic price stability and the maintenance of high employment in both surplus and deficit countries. “A deficit country can reduce its average price level as rapidly as output per man-hour rises without making the real value of aggregate demand too small, if money wages can be kept constant and prices decline at the same rate as output per man-hour increases.” But to assume that all reductions in cost will be passed on to the consumer, when demand is adequate to ensure a high level of employment, implies a perhaps unrealistic degree of self-restraint on the part of both entrepreneurs and wage earners.
Walter S. Salant, op. cit.
The great attraction of the system of flexible exchange rates to its proponents, notably Professor Milton Friedman, lies in its automaticity, and the fact that, ideally, the system could work without the need for decisions on the part of a small number of individuals making it vulnerable to “accidents of personality and shifts of power.” However, as Professor Friedman has to admit, “it is possible for Governments to intervene and try to affect the rate by buying and selling”—a possibility which he naturally considers undesirable. See his evidence in Hearings Before the Joint Economic Committee of the Congress of the United States (88th Congress, First Session, November 12–15, 1963), p. 456. In fact, the assumption that a system of fluctuating rates would work automatically implies deliberate self-denial on the part of those in a position to influence the rate, in face of strong political pressures from various groups against changes in the rate. The relevant question is not so much that of the potential advantages of an automatic adjustment, as of the possibility of achieving these advantages in practice.
See, for example, Robert A. Mundell, “On the Selection of a Program of Economic Policy with an Application to the Current Situation in the United States,” loc. cit., and “The International Disequilibrium System,” Kyklos, Vol. XIV (1961), pp. 153–72; and J. Marcus Fleming, “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates,” Staff Papers, Vol. DC (1962), pp. 369–80.
Robert A. Mundell, “The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability,” Staff Papers, Vol. IX (1962), pp. 70–79. See also Rudolf R. Rhomberg, “A Model of the Canadian Economy Under Fixed and Fluctuating Exchange Rates,” The Journal of Political Economy, Vol. LXXII (1964), pp. 1–31.
An address in May 1963 on economic progress and the international monetary system, reproduced in the Hearings Before the Joint Economic Committee of the Congress of the United States (88th Congress, First Session, November 12–15, 1963), p. 563.
For a discussion of possibilities of changes in par values under the present system, see Irving S. Friedman, “The International Monetary System: Part I, Mechanism and Operation,” Staff Papers, Vol. X (1963), pp. 219–45.