J. MARCUS FLEMING *
Economists and financial journalists, particularly in the United States and in the United Kingdom, often write as though they believed that the general abandonment of exchange rate pegging by the major countries in favor of independent floating had solved at a single stroke the difficulties besetting the international monetary system under the par value system.
In truth, however, while some of these difficulties have been overcome or greatly attenuated by the advent of floating, others persist in aggravated form. For example, the complex of problems arising out of asymmetries in the intervention system (involving asymmetries in the adjustment process and difficulties in the management of the world reserve supply)—problems to which the recent effort at international monetary reform1 was largely addressed—has been rendered in some respects more intractable than ever. It is the contention of this paper that, if these problems are to be solved, some of the proposals for reform of the par value system may have to be resurrected and adapted to the circumstances of floating.2
APPENDIX: Guidelines for the Management of Floating Exchange Rates
(1) A member with a floating exchange rate should intervene on the foreign exchange market as necessary to prevent or moderate sharp and disruptive fluctuations from day to day and from week to week in the exchange value of its currency.
(2) Subject to (3)(b), a member with a floating rate may act, through intervention or otherwise, to moderate movements in the exchange value of its currency from month to month and quarter to quarter, and is encouraged to do so, if necessary, where factors recognized to be temporary are at work. Subject to (1) and (3)(a), the member should not normally act aggressively with respect to the exchange value of its currency (i.e., should not so act as to depress that value when it is falling, or to enhance that value when it is rising).
(3) (a) If a member with a floating rate should desire to act otherwise than in accordance with (1) and (2) above in order to bring its exchange rate within, or closer to, some target zone of rates, it should consult with the Fund about this target and its adaptation to changing circumstances. If the Fund considers the target to be within the range of reasonable estimates of the medium-term norm for the exchange rate in question, the member would be free, subject to (5), to act aggressively to move its rate towards the target zone, though within that zone (2) would continue to apply.
(b) If the exchange rate of a member with a floating rate has moved outside what the Fund considers to be the range of reasonable estimates of the medium-term norm for that exchange rate to an extent the Fund considers likely to be harmful to the interests of members, the Fund will consult with the member, and in the light of such consultation may encourage the member, despite (2) above, (i) not to act to moderate movements toward this range or (ii) to take action to moderate further divergence from the range. A member would not be asked to hold any particular rate against strong market pressure.
(4) A member with a floating exchange rate would be encouraged to indicate to the Fund its broad objective for the development of its reserves over a period ahead and to discuss this objective with the Fund. If the Fund, taking account of the world reserve situation, considered this objective to be reasonable and if the member’s reserves were relatively low by this standard, the member would be encouraged to intervene more strongly under Guideline (2) to moderate a movement in its rate when the rate was rising than when it was falling. If the member’s reserves were relatively high by this standard it would be encouraged to intervene more strongly to moderate a movement in its rate when the rate was falling than when it was rising. In considering target exchange rate zones under (3), also, the Fund would pay due regard to the desirability of avoiding an increase over the medium term of reserves that were recognized by this standard to be relatively high, and the reduction of reserves that were recognized to be relatively low.
(5) A member with a floating rate, like other members, should refrain from introducing restrictions for balance of payments purposes on current account transactions or payments and should endeavor progressively to remove such restrictions of this kind as may exist.
(6) Members with a floating rate will bear in mind, in intervention, the interests of other members including those of the issuing countries in whose currencies they intervene. Mutually satisfactory arrangements might usefully be agreed between the issuers and users of intervention currencies, with respect to the use of such currencies in intervention. Any such arrangements should be compatible with the purposes of the foregoing guidelines. The Fund will stand ready to assist members in dealing with any problems that may arise in connection with them.
Executive Board Decision No. 4232-(74/67)
June 13, 1974
Mr. Fleming, Deputy Director in the Research Department, is a graduate of Edinburgh University. He was formerly a member of the League of Nations Secretariat, Deputy Director of the Economic Section of the U. K. Cabinet Offices, U. K. representative on the Economic and Employment Commission of the United Nations, and visiting Professor of Economics at Columbia University. He is the author of Essays in International Economics and numerous articles in economic journals.
Meetings of the Committee on Reform of the International Monetary System and Related Issues (Committee of Twenty), a committee of the Board of Governors of the International Monetary Fund, in 1973–74. See the report, International Monetary Reform: Documents of the Committee of Twenty, published by the Fund (Washington, 1974).
The present paper represents in certain respects a development of some of the ideas referred to in John Williamson, “Increased Flexibility and International Liquidity” (not yet published).
The guidelines were adopted by Executive Board Decision No. 4232-(74/67). June 13, 1974. See Selected Decisions of the International Monetary Fund and Selected Documents, Seventh Issue (Washington, January 1, 1975), pp. 21–26. Also see IMF Survey, Vol. 3, No. 12, June 17, 1974, pp. 181–83; Annual Report of the Executive Directors for the Fiscal Year Ended April 30, 1974, Appendix II, J, pp. 112–16; and International Monetary Reform: Documents of the Committee of Twenty (Washington, 1974), pp. 34–36.
For a description and analysis of these proposals, see J. Marcus Fleming, Reflections on the International Monetary Reform, Essays in International Finance, No. 107 (Princeton University Press, December 1974).
The Outline of Reform was prepared by the Committee of the Board of Governors on Reform of the International Monetary System and Related Issues (Committee of Twenty) and was made public on June 14, 1974. It appears in International Monetary Reform: Documents of the Committee of Twenty (Washington, 1974), pp. 7–48. Annex 4 appears on pages 33–37.
International Monetary Reform, Annex 3, pars. 7–8, p. 32.
International Monetary Reform, Annex 4, Section C, p. 37.
Both the market value and the norm of a currency are expressed in terms of its effective exchange rate, that is, some average of its exchange rates.
Articles of Agreement of the International Monetary Fund, pp. 60 and 84.
International Monetary Reform, p. 14 and pp. 41–42.
John Williamson, “Exchange Rate Flexibility and Reserve Use” (unpublished, International Monetary Fund, August 29, 1974).
Effective world reserves may rise or fall on a massive scale as a result of the accumulation of surpluses by the oil producing countries, but these appear to be invariant with respect to the exchange rate system.
For the modus operandi of an asset settlement, see the Outline of Reform, Annex 5, Section A, in International Monetary Reform, p. 38.
The possibility that under a system of generalized floating the autonomous variations in the supply of reserves would be of so benign a character that no international control over their supply would be necessary is considered in the following section.
See, for example, J. Marcus Fleming, Essays in International Economics (London, 1971), pp. 95–101 and 190–91.