Approaches to Greater Flexibility of Exchange Rates

Approaches to Greater Flexibility of Exchange Rates

C. Fred Bergsten
George N. Halm
Fritz Machlup
Robert V. Roosa
EDITED BY George N. Halm
Copyright Date: 1970
Pages: 454
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  • Book Info
    Approaches to Greater Flexibility of Exchange Rates
    Book Description:

    This volume contains the papers presented and comments made at two conferences on the controversial subject of greater flexibility of exchange rates. The first of the conferences was held at Oyster Bay, New York, early in 1969, the second at Bürgenstock, Switzerland, in the summer of 1969. One half of the 40 conferees were academic economists, the others were practitioners of the foreign exchange markets, mostly bankers and a few executives of international business firms. Both the opposition to greater flexibility of exchange rates and the advocacy of more flexible systems are represented in these papers. The contrast between fixed or jumping exchange rates and gliding exchange rates is clearly described and the various systems of increased flexibility, such as the "wider band" and the "crawling peg," are explained and examined.

    Originally published in 1970.

    ThePrinceton Legacy Libraryuses the latest print-on-demand technology to again make available previously out-of-print books from the distinguished backlist of Princeton University Press. These paperback editions preserve the original texts of these important books while presenting them in durable paperback editions. The goal of the Princeton Legacy Library is to vastly increase access to the rich scholarly heritage found in the thousands of books published by Princeton University Press since its founding in 1905.

    eISBN: 978-1-4008-6727-1
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Preface
    (pp. v-viii)
    George N. Halm
  3. Table of Contents
    (pp. ix-xiv)
  4. Part I. Introduction
    • 1 Toward Limited Flexibility of Exchange Rates
      (pp. 3-26)

      In its 1964 report on the balance of payments,¹ the Joint Economic Committee of the United States Congress recommended that “the United States, in consultation with other countries, should give consideration to broadening the limits of permissible exchange rate variations,” and in its March 1965Reportit urged once more a study of this idea: “Broadening the limits of exchange rate variations could discourage short-term capital outflows through free market forces, on which we should continue to place our main reliance; permit greater freedom for monetary policy to promote domestic objectives; discourage speculation against currencies by increasing the risk; and...

    • 2 Two Lists of Topics for Further Study and a Proposed Outline for Conference Papers
      (pp. 27-30)
      Robert V. Roosa, Milton Friedman and C. Fred Bergsten

      (1) The essential elements of the existing exchange-rate system and its shortcomings.

      (2) The operational design of the wider band and crawling peg proposals and the problems of transition.

      (3) The impact of the proposed exchange-rate arrangements on balance-of-payments adjustment—including trade and capital flows, domestic economic performance, and international coordination.

      (4) The functions of forward markets and speculation in the performance of alternative exchange-rate systems.

      (5) Special problems relating to the role of the U.S. dollar, its link to gold, and the International Monetary Fund.

      Given a band of ±Xper cent, and a sliding parity ofYper...

    • 3 On Terms, Concepts, Theories, and Strategies in the Discussion of Greater Flexibility of Exchange Rates
      (pp. 31-48)

      I am known, or even perhaps notorious, for my fondness of semantic exercises. Some of my friends will probably wince at reading this lead sentence and will mutter under their breath, “There he goes again!” Fear not! I shall not unravel 57 varieties of meaning of flexibility, 15 of band, 14 of crawl, and 13 of peg. I shall try to do only the most necessary cleaning-up job preparatory for a discussion in which the participants will not want to waste time by misunderstanding one another as they use words in ambiguous ways.

      Not that I shall attempt to dictate...

    • 4 Currency Parities in the Second Decade of Convertibility
      (pp. 49-56)

      As the international monetary system enters the second decade of convertibility, new questions arise. In the earlier stages of the Bretton Woods system, as country after country moved toward resumption of the unrestricted use of its currency for making current account payments, the overriding question was where to establish the parity for each currency. Today, the questions are when and how those established parities should be charged.

      That transition should come as no surprise. The dynamic changes around the world that have flourished in the monetary environment of the past decade have necessarily brought a scattering out among nations—in...

    • 5 Comments on Mr. Roosa’s Paper
      (pp. 57-60)

      Mr. Roosa’s rejection of “full and free flexibility” of foreign-exchange rates rests on an interesting new argument. A floating rate of exchange suffers, according to Mr. Roosa, “from the same kind of circularity that made the old ‘needs-of-trade’ doctrine a mischievous guide to the determination of the money supply within nations.”

      I confess that I cannot see any similarity between the defunct commercial-loan theory and the argument for floating exchange rates, short of the claim in both cases that a given problem would be solved automatically.

      The “needs-of-trade” theory said that the discounting of prime commercial paper would automatically adjust...

    • 6 The United States and Greater Flexibility of Exchange Rates
      (pp. 61-76)

      The United States is by far the most important single country in the international monetary system, and the dollar is the key currency of the system. It is difficult to imagine any significant change in the system that is unacceptable to the United States. Any proposals for change, such as those for increasing the flexibility of exchange rates, must, thus, be tested for their effect on the United States alone, as well as for their broader effects on the system as a whole.

      This paper will attempt to assess those effects. It will avoid repeating the general analyses of greater...

    • 7 Decision-Making on Exchange Rates
      (pp. 77-88)

      Now that the pound sterling and the French franc have been devalued, the German mark revalued, and the price of gold is back to $35 an ounce, it is tempting to sit back and say what had to happen has happened. It was unpleasant while it lasted, but things will be all right from now on. This view will appeal to those who feel that our recent difficulties have not been due so much to the present exchange-rate system, as to a series of bad decisions by politicians with insufficient economic understanding and political courage. In their view, salutory lessons...

  5. Part II. The Case for Greater Flexibility of Exchange Rates
    • [Part II. Introduction]
      (pp. 89-90)

      In his essay, “The Case for Flexible Exchange Rates, 1969,” Harry G. Johnson argues for floating exchange rates, because they would permit countries to use their economic policies primarily for domestic objectives and to remove quantitative restrictions on international trade and capital movements. However, he is willing to experiment with limited exchange-rate flexibility.

      Gottfried Haberler’s paper, “The International Monetary System: Some Recent Developments and Discussions,” points to the drift toad hoccreation of international liquidity and to quantitative restrictions, criticizes the view that fixed parities would be better because they would permit inflation to spread, and argues, as do...

    • 8 The Case for Flexible Exchange Rates, 1969
      (pp. 91-111)

      By “flexible exchange rates” is meant rates of foreign exchange that are determined daily in the markets for foreign exchange by the forces of demand and supply, without restrictions on the extent to which rates can move imposed by governmental policy. Flexible exchange rates are, thus, to be distinguished from the present system (the International Monetary Fund system) of international monetary organization, under which countries commit themselves to maintain the foreign values of their currencies within a narrow margin of a fixed par value by acting as residual buyers or sellers of currency in the foreign exchange market, subject to...

    • 9 Comments on Mr. Johnson’s Paper
      (pp. 112-114)

      Harry G. Johnson argues that for those persuaded of the case for flexible rates, the crawling peg is definitely preferable to the wider band because the latter would provide only a once-and-for-all increase in the degree of freedom of exchange rates to adjust to changing circumstances. However, the question need not be which of the two instruments for greater flexibility weprefer:the band or the crawl. There is no need to choose. In all probability both band and crawl will be used and in this cooperation of band and crawl the band is more important than Johnson suggests.


    • 10 The International Monetary System: Some Recent Developments and Discussions
      (pp. 115-124)

      Since 1967 the international monetary system has been buffeted in rapid succession by acute crises: the run on sterling and sterling devaluation in November 1967; speculation against the dollar and a huge deficit in the balance of payments of the United States in the last quarter of 1967 and the early months of 1968; the gold rush leading to the discontinuation of the gold pool and introduction of the two-tier gold market in the spring of 1968; the rebellion of students and workers in France in May and June 1968, which, overnight, transformed the French franc from one of the...

    • 11 Fixed Exchange Rates and the Market Mechanism
      (pp. 125-128)

      “Good” economic policies must conform to the economic system in which they are applied. Price fixing, for instance, does not fit the logic of the market economy that relies on reactions to price changes. When prices are frozen, equilibrium between supply and demand must be maintained artificially by collective or governmental buying and selling operations and, eventually, by quantitative restrictions. Such controls often tend to multiply as if by chain reaction. Selective rationing, for instance, will have to include more and more articles because the purchasing power released by keeping prices artificially low and limiting demand shifts to other products....

    • 12 The Adjustment Process, Its Asymmetry, and Possible Consequences
      (pp. 129-144)

      As preamble to this discourse on balance-of-payments adjustment, I want to present my credentials. As president of the Nederlandsche Bank from 1946 to 1967, I have been responsible for monetary policy and, in an advisory capacity, have participated in the shaping of fiscal policy in the Netherlands during most of the post-World War II period. In the early 1950s, I set out in the Annual Reports of the Bank (particularly in the reports for the years 1950, 1951, and 1953) my philosophy about the relationship between internal monetary and fiscal policies and external equilibrium, and this philosophy has served as...

    • 13 Entrepreneurial Risk under Flexible Exchange Rates
      (pp. 145-150)

      The purpose of this note is to show that, under flexible exchange rates, entrepreneurial risk need not be greater than under a regime of rigidly fixed rates. Greater variations in exchange rates will not lead to greater variations of expected profits from activities involving foreign exchange transactions:

      if the exchange rate varies such as to even out different trends in wage costs and price levels;

      if the exchange rate varies such as to neutralize cyclical fluctuations of foreign demand;

      if the exchange rate varies such as to make domestic monetary policy more effective, thus reducing the need for variations in...

    • 14 The Wider Band and Foreign Direct Investment
      (pp. 151-166)

      The value of outstanding private foreign direct investments of the United States amounted to $59 billion at the end of 1967. The rate of growth was so great that this amount was nearly double that at the beginning of the decade. With such large sums involved, both businessmen and politicians, in considering proposals for a wider band for exchange rates, are bound to turn their attention to the question: “How would a wider band affect the foreign direct investment activities of American firms?” Their decision to endorse or oppose a wider band is likely to be significantly influenced by their...

    • 15 The Business View of Proposals for International Monetary Reform
      (pp. 167-176)

      This paper attempts to outline, from the viewpoint of firms in the United States, the important implications of the proposed reforms based on “crawling pegs” and “wider bands” for trade and investment between countries with established parities.

      The business view of crawling pegs and wider bands represents somewhat of a paradox. On the one hand, it is natural for businessmen to resist the uncertainty embodied in any change to the monetary mechanism, after recent record growth in international trade and investment. On the other hand, this strong growth indicates that a considerable degree of accompanying unrest and uncertainty is not...

  6. Part III. The Case Against Flexible Exchange Rates
    • [Part III. Introduction]
      (pp. 177-178)

      In his paper “The Outlook for the Present World Monetary System,” Peter M. Oppenheimer expresses the belief that “neither SDRs nor the possibility of gradual alterations in exchange rates seems likely to bring about a decisive strengthening of the monetary system,” though he admits that limited flexibility of exchange rates may make a contribution to the adjustment process. He fears, however, that a sliding parity adjustment would be neutralized by an offsetting trend of domestic wages and prices, would not rule out bigger jumps of exchange rates, and would actually heighten the conflict between internal and external objectives of monetary...

    • 16 The Outlook for the Present World Monetary System
      (pp. 179-185)

      Tension and uncertainty in the world monetary system have shown themselves, during recent years, in three broad ways.

      First, several countries have felt constrained by balance-of-payments weakness to adopt measures detrimental to free trade and payments. Earlier in the 1960s we had the Canadian and British import surcharges; later examples are the British and French limits on tourist spending, the increased tying of development aid by the United States and other countries and, most striking of all, the progressively tightening controls on capital exports from the United States since 1965. It is true that balance-of-payments problems did not prevent the...

    • 17 Comments on Mr. Oppenheimer’s Paper: A More Optimistic View
      (pp. 186-186)

      I should like to register a more optimistic view than that of Peter Oppenheimer concerning the workability of a less golden international monetary system. Oppenheimer’s case for increasing the price of gold rests upon a Triffin-Kenen view of reserve asset preferences under a gold-exchange standard.¹ However, as Lawrence H. Officer and I argue in our paper, “Reserve-Asset Preferences and the Confidence Problem in the Crisis Zone,”² there have been several factors at work in recent years that have tended to reduce the likehhood of the instability of reserve asset behavior pointed to by the Triffin-Kenen model and analogies with Gresham’s...

    • 18 Could the Crises of the Last Few Years Have Been Avoided by Flexible Exchange Rates?
      (pp. 187-198)
      MAX IKLÉ

      Before the present system is replaced with flexible exchange rates, the causes of the monetary crises in the recent past should first be analyzed and examined to see if a system of flexible exchange rates could have prevented them.

      Since the change-over to convertibility at the beginning of 1959, the following crises or disturbing factors have arisen:

      In the autumn of 1960, the price of gold on the London gold market rose to over $40 per ounce, which was taken as a sign of a coming devaluation of the dollar. The persistent deficit in the balance of payments of the...

    • 19 Notes for the Bürgenstock Conference
      (pp. 199-202)

      The international dimension of the monetary problem originates in the existence of many national currencies, each administered by a more or less independent sovereign state under different economic policies. This leads to unequal degrees of inflation in the various countries.

      Rigid parities, to be adjusted only in the face of “fundamental disequilibrium,” add an element of potential stability to the international monetary system because fixed parities compel each country to keep its inflation in line with that of other countries to avoid external imbalances and losses of reserves. However, inflationary pressures in certain countries may be so strong that their...

    • 20 Why I Am Not in Favor of Greater Flexibility of Exchange Rates
      (pp. 203-208)

      The points I had examined in my initial paper were the following:

      (A) How much additional forward cover would be required?

      (B) Would such an additional cover be forthcoming? How? Would new institutions be required?

      (C) What would be the cost of the additional forward cover obtainable?

      (D) How would these results affect the volume of trade, capital investment, liquid flows including the Euromarket?

      I shall treat these points here again, but I should like to emphasize that they do not constitute the only negative aspects of a greater flexibility.

      (A)Let us suppose that the band be increased, to...

    • 21 Greater Flexibility of Exchange Rates: Effects on Commodities, Capital, and Money Markets
      (pp. 209-210)

      It seems to me that any expose on the possible effects of wider trading margins on the futures markets should particularly emphasize the problems that are most likely to arise in theinternational capitaland, above all, in theinternational money markets(Eurodollar, Eurocurrency markets), which are all too often underestimated.

      Wider trading margins for spot transactions would inevitably mean wider fluctuations for futures, which, incidentally, have neither an official “floor” nor an official “ceiling.” Wider official trading margins alone could bring about a contraction of the present volume of Eurodollars because a great many holders of dollars would no...

    • 22 Selected Case Studies Relating to Foreign-Exchange Problems in International Trade and Money Markets
      (pp. 211-215)

      Currency problems of some magnitude arise in connection with trade in capital goods (heavy equipment such as machine tools, generators, farm machinery, computers, jet planes) which involve extended delivery and payment terms. This is a difficult situation to cope with even under our present system of fixed parities and narrow trading ranges. How much more difficult it would be under a system of wider trading margins, not to mention floating rates, may be illustrated by the following business, which actually has taken place:

      The American subsidiary of a Swiss company contracted to sell heavy equipment to an American company (the...

    • 23 Comments on Mr. Kuster’s Papers
      (pp. 216-218)

      Emil Kuster gives us several examples where wide actual or expected movements in exchange rates would discourage foreign trade. His remarks present a perspective very different from that of the economist, who is typically concerned with the operation of the system as a whole rather than with particular transactions. He cites three cases—machinery, grain, and steel—where profit margins are small relative to the possible movement in exchange rates within the period of contract. This relationship raises the possibility that a movement in the exchange rate will turn what was thought to be a profitable transaction into an unprofitable...

  7. Part IV. Practical Proposals and Suggestions for Implementation
    • [Part IV. Introduction]
      (pp. 219-222)

      With the exception of the plan proposed by Donald B. Marsh, the following contributions are different versions of band and crawl proposals. However, two of them make use of variations of monetary reserves, which play a key role in Marsh’s suggestions. Several papers favor a certain amount of asymmetry in band and crawl, with the purpose of building an anti-inflationary bias into the system.

      Lawrence B. Krause’s essay “The International Monetary Game: Objectives and Rules” deals with operating restraints resulting from the trade-off between price stability and unemployment. These restraints relate to the adequacy of the adjustment mechanism, the maintenance...

    • 24 The International Monetary Game: Objectives and Rules
      (pp. 223-232)

      Changes can be made in the present international monetary system by altering some of the rules by which it operates. Before setting down suggested “rules of the game,” however, it would appear desirable to make explicit the “objectives of the game” in order to make the discussion meaningful. Also, it was found to be insufficient to merely state the “fundamental” objective of the international monetary system without also stating some operating constraints, for it may well be the latter that are determinants in a choice between alternative sets of rules.

      At the outset, one must decide whether the international monetary...

    • 25 When and How Should Parities Be Changed?
      (pp. 233-236)

      In the introductory section of this collection of papers, I wrote that there seemed to be a greater similarity among the objectives of various proposals for increased flexibility than in the mechanics of the proposals themselves. Indeed, sympathy for the underlying objective of releasing exchange-rate parities from the often perverse influence of political exigency, can be detected among many who are not in favor of any of the newer proposals. Perhaps the answer may lie in going back to one of the original conceptions of the International Monetary Fund, that of modest changes of par values by individual countries from...

    • 26 A “Realistic” Note on Threefold Limited Flexibility of Exchange Rates
      (pp. 237-244)

      This note is motivated by the belief that a specific variety of limited flexibility of exchange rates has a better chance of receiving consideration from policy makers in the near future than do other varieties. The flexibility I have in mind was, I believe, first described for Germany—and for that country alone—in the 1966–1967 Report of the Council of German Economic Experts.¹

      Disregarding for the time being the possibility of gold-revaluation—a possibility to which I shall return later—we will have to face the need to find monetary arrangements acceptable to the rest of the world,...

    • 27 Asymmetrical Widening of the Bands Around Parity
      (pp. 245-250)

      Encouraged by a comment in Harry Johnson’s paper,¹ and particularly by William Fellner’s recommendation of a formula for limited flexibility,² I should like to suggest that our group consider asymmetrically wider bands for the major currencies as one feasible step toward the long-range objective of increased flexibility for exchange-rate parities.

      In brief, the idea is to modify the IMF Charter to give member countries the option to increase the upper bands, but leave lower bands where they are. Such freedom would be useful at the present time for the stronger European currencies; in the longer run most convertible currencies could...

    • 28 Sliding Parities: A Proposal for Presumptive Rules
      (pp. 251-260)

      A system of “sliding parities” is among the proposals for improving the international adjustment process. This note attempts to indicate the nature, effectiveness, and limitations of a particular system of sliding parities.

      A country would be expected to change its exchange parity weekly whenever its payments position warranted a change. The weekly change in parity would be fixed at 0.05 per cent, cumulating to about 2.6 per cent a year if changes were made in the same direction every week. A change in parity would be triggered by a movement in the country’s international reserve position. If reserves rose more...

    • 29 The Fixed-Reserve Standard: A Proposal to “Reverse” Bretton Woods
      (pp. 261-270)

      Proposals for floating exchange rates or other reforms may relate to one country only. Thus, it may be argued that it is in Canada’s economic interest, as I believe it is, to float the Canadian dollar against all other currencies.¹ This chapter deals, not with an exchange-rate policy for one country, but with an international system designed to achieve automatic external balance for all its members. Such a system will certainly require floating exchange rates on a fairly wide, but not necessarily universal, scale. The goal is not floating exchange rates as such, but automatic external balance for all countries...

    • 30 Rules for a Sliding Parity: A Proposal
      (pp. 271-274)

      There has been growing interest in greater flexibility of exchange rates as a means of improving the international adjustment mechanism. Too often political decisions on exchange rates have been based on national prestige rather than economic reality. Greater flexibility of exchange rates offers the possibility of smoother, more gradual, adjustment in place of the jerky operation of the adjustable peg in recent years. As a result, changes of exchange rates might be depoliticalized to a large degree, and excessive rigidity might thereby be avoided.

      Permissive changes in the IMF Articles of Agreement to allow more gradual adjustment of exchange rates...

    • 31 Some Implications of Flexible Exchange Rates, Including Effects on Forward Markets and Transitional Problems
      (pp. 275-279)

      After consideration of some of the practical implications of a change in the international monetary system toward greater flexibility in exchange rates, we favor such a change. Specifically, we favor a widening of the trading bands around parities vis-a-vis the U.S. dollar, initially at least to no more than ±2½ per cent, with additional provision for changes in parities whenever conditions warrant, after consultation with, and the approval of, the International Monetary Fund, of no more than 1 per cent on each occasion. This change in exchange-rate policy should apply only to the major industrial and trading nations.

      The transitional...

    • 32 A Technical Note on the Width of the Band Required to Accommodate Parity Changes of Particular Size
      (pp. 280-282)

      During the discussion of band-and-crawl proposals, Marius Holtrop made a technical point that may be worth recording. The point in question is that, for smoothness of operation of the foreign-exchange market, adjustment of the parity value of the currency should not force a change in the market exchange rate. To ensure this, the band around the parity must be wide enough so that, when the parity is changed, the market rate of exchange prevailing just prior to the change falls within the new band around the new parity. Otherwise, the change in parity would force a change in the market...

    • 33 Short-Term Capital Movements and the Interest-Rate Constraint Under Systems of Limited Flexibility of Exchange Rates
      (pp. 283-294)

      One of the major areas of concern over the effects of limited exchangerate flexibility, specifically of proposals for a crawling or gradually adjusting peg,¹ is that such systems might seriously constrain the ability of countries to use monetary policy for domestic purposes. If a country’s currency were confidently expected to crawl down at (say) 2 per cent per annum, then, in order to neutralize this incentive to shift funds out of the country, interest rates would have to be raised by a corresponding amount relative to those in nondepreciating currencies.² Would the introduction of a crawling-peg system thus mean that...

  8. Part V. Exchange-Rate Flexibility and the Forward Market
    • [Part V. Introduction]
      (pp. 295-296)

      In his article “The Forward-Exchange Market: Misunderstandings between Practitioners and Economists,” Fritz Machlup gives examples of remarkably different uses of terms by members of the two groups. He then goes on to show how these different definitions of demand for, and cost of, forward cover can lead to conflicting theoretical conclusions and attitudes toward policy questions, such as the question about the capacity of exchange dealers to satisfy an increasing demand for forward cover or the problem of social cost involved in maintaining fixed exchange rates.

      In “Forward-Currency ‘Costs’: A Zero Sum Game?” John H. Watts takes issue with Fritz...

    • 34 The Forward-Exchange Market: Misunderstandings Between Practitioners and Economists
      (pp. 297-306)

      As they listened to the foreign-exchange dealers talking about the “supply and cost of forward cover,” the economists were bewildered by the practitioners’ theoretical pronouncements. The economists soon realized that they did not understand the language of the trade, and that their own language was probably equally strange and confusing to the practitioners. Perhaps I can render a service to members of both parties—especially persons who did not have the benefit of hearing the discussions at Oyster Bay and Bürgenstock—if I attempt a confrontation of the two technical jargons and an interpretation of the misunderstandings that arise from...

    • 35 Forward Currency “Costs”: A Zero Sum Game?
      (pp. 307-308)

      Experts in the theory of international finance have made the tautological, although not widely understood, observation, that in a global sense there is no real factor “cost” incurred when businessmen insure against exchange risk via the forward market. In this view, when the forward-exchange rate between two currencies differs from the spot rate, one man’s gain is another’s equal loss. Therefore, the price mechanism for traded goods could be expected to equate conditions to those obtaining when spot and forward rates were equal. Fritz Machlup, in the preceding paper, notes, in addition, that in order to gauge the impact that...

    • 36 Comments on Mr. Watts’s Paper
      (pp. 309-310)

      Mr. Watts is perfectly correct in saying that an exporter losing previously profitable business will not be comforted by any gains that importers may make when exchange rates change in the forward market, or, for that matter, in the spot market. Such losses (or reduced profits) in some industries and profits (or reduced losses) in others are the essentials of real economic adjustment.

      If German exporters scream about a serious loss of business as a result of an upward adjustment of the German mark, this is circumstantial evidence of “real adjustment at work.” This adjustment—retrenchment of export industries and...

    • 37 Exchange Risks and Forward Coverage in Different Monetary Systems
      (pp. 311-316)

      Greater scope for exchange-rate variability is almost universally associated with greater risk for international trade and capital movements. Greater risk of trading and investing abroad would, in turn, reduce economic intercourse between nations, a most regrettable development.

      Let it be remembered, to begin with, that increased variability of exchange rates is never recommended for its own sake, with everything else remaining unchanged. The abandonment of official manipulation of exchange rates within narrow limits is primarily intended to reduce or remove the substantial risks that now arise in connection with balance-of-payments maladjustments: economic stagnation that may be forced upon a country...

    • 38 The Effect on the Forward-Exchange Market of More Flexible Rates
      (pp. 317-319)
      W. F. J. BATT

      The Forward-Exchange Market reached saturation point at least twice during 1968, once in March and again in November when the market became completely one way. For banks in England this situation was reached, for the first time, in November 1964, when their purchases of forward sterling began to exceed their sales of forward sterling by amounts greater than the limits imposed by the Bank of England. This was only one reason why the Bank of England came into the market as a buyer of forward sterling, thereby enabling the London banks to sell forward sterling and reduce their net position...

    • 39 Comments on Mr. Batt’s Paper
      (pp. 320-322)

      The first sentence in Section III of Mr. Batt’s paper reads as follows: “Obviously the greater the demand for forward cover the greater become the premia.” I do not understand why this should be obvious, since the opposite may happen just as well. Assume that the forward rate of the pound sterling has a discount of 10 per cent. Someone intending to import from England may wish to secure this cheap price of the pound for his future payments and, therefore, gives an order to buy pounds sterling forward. This is clearly an increased “demand for forward cover,” but it...

    • 40 Flexible Exchange Rates and Forward Markets
      (pp. 323-331)

      The conference has requested our views concerning the effect of greater exchange-rate flexibility on forward-exchange markets. The particular questions asked are: whether more forward coverage would be required; whether the additional coverage would be forthcoming; what its cost would be; and what the effects might be on trade, international investment, and the international movement of liquid funds.

      This memorandum contains our tentative replies to these questions in relation to two hypothetical exchange-rate regimes: (1) a regime of “wider bands,” in which the agreed margins of intervention have been widened to 2–2½ per cent on either side of parity; and...

  9. Part VI. Potential Impact of Exchange-Rate Flexibility on Different Countries or Groups of Countries
    • [Part VI. Introduction]
      (pp. 332-336)

      In his paper, “Canada’s Experience with a Floating Exchange Rate,” Donald B. Marsh undertakes to show that the Canadian experiment worked well at first, but was, in the end, the victim of incompetent monetary policies. Canada enjoyed an unprecedented increase in international trade in the 1950s, and betweeen 1955 and 1957 the appreciation of the Canadian dollar supported the anti-inflation policies of the central bank. From 1957 to 1961, however, the government continued its policy of monetary restraint in spite of growing unemployment. High interest rates attracted foreign capital and caused an appreciation of the Canadian dollar, which discouraged exports...

    • 41 Canada’s Experience with a Floating Exchange Rate, 1950–1962
      (pp. 337-344)

      Canada is not, of course, the first or only country to have a floating exchange rate. To cite only the outstanding examples, we have the famous “paper pound” of the Napoleonic period,¹ the Austrian gulden and the Russian rouble of the late nineteenth century,² the variously floating and manipulated rates of the 1930s and the floating-rate “concessions” granted from time to time by the IMF to underdeveloped countries in exchange difficulties. However, Canada is the first country, at least in the twentieth century, to embark on a floating rate from a position of strength, not weakness; and Canada is also...

    • 42 A Floating German Mark: An Essay in Speculative Economics
      (pp. 345-356)

      Proponents of fixed parities frequently argue that greater flexibility of exchange rates would most probably end up in something near chaos. In order to investigate whether this fear is justified, it appears useful to discuss what might have happened, had a major industrial country adopted a floating rate:

      What new difficulties might have arisen?

      What policy conflicts would have disappeared?

      What policy adjustments would have been necessary?

      The case of West Germany suggests itself as a good example for such a speculative study on the grounds:

      that the country has enjoyed stable political and economic conditions for over two decades,...

    • 43 Japan’s Twenty-Year Experience with a Fixed Rate for the Yen
      (pp. 357-364)

      The exchange rate of the Japanese yen against the U.S. dollar was set at Y360 in April 1949, after a runaway inflation following World War II. This exchange parity has been maintained in all the years since then. In other words, after the war, Japan adjusted her economy properly on the basis of the par value of 360 yen to the dollar, and achieved a remarkable economic growth as well as a surplus in her international balance of payments. In the case of Japan, the fixed exchange parity, thus, has demonstrated itself to be a desirable system.

      The following is...

    • 44 The Problem of Floating Exchange Rates from the Swiss Viewpoint
      (pp. 365-370)
      MAX IKLÉ

      To a small country like Switzerland with a heavy volume of export trade, as well as a banking system closely tied to foreign money markets, with insurance companies operating internationally, and world-wide commercial and industrial firms and groups, a fluctuating rate of exchange, even within a range of, say, ±5 per cent, does not offer a workable solution. Countries with a small domestic market have to aim at the integration of their economies with those of other countries to the maximum extent possible. This integration is made more difficult by customs barriers and currency crises, just as it is facilitated...

    • 45 Balance-of-Payments and Exchange-Rate Problems in Sweden, Denmark, and Finland
      (pp. 371-384)

      The common feature of these countries is their close dependence on foreign trade. The present value of their imports as a percentage of GNP may be taken as a rough indicator: Denmark 30 per cent, Finland 20 per cent, Sweden 25 per cent. The volume of imports tends to rise more rapidly than real GNP—both in the short run during the expansionary phase of the cycle and in the longer run. Measurements of import-propensities and elasticities are apt to be hazardous for a number of reasons. But the order of size of the longer-run import-elasticities (with regard to real...

    • 46 European Integration and Greater Flexibility of Exchange Rates
      (pp. 385-387)

      It is frequently maintained that pegging exchange rates is a legitimate and forceful tool to achieve greater international integration. This view appears to be particularly popular with “professional Europeans,” who hold that balance-of-payments disequilibria and the frictions of internal adjustment have to be borne as a price for the EEC.

      In my view, the concept of integration behind this standpoint is too much centered around an institutional, organizational, and legalistic, not to say bureaucratic, notion of what international integration means. Rather, international integration should first of all aim at the welding together of national markets, so that potential buyers have...

    • 47 Comments on Mr. Kasper’s Paper: Requiem for European Integration
      (pp. 388-391)

      I consider Wolfgang Kasper’s ideas on European economic integration highly controversial. Disillusioned by the yet unfulfilled promises of the ten-year-old Treaty of Rome, and using classical economic analysis, Kasper holds a rather pessimistic view of the integration process in the Old Continent. He seems to think that European integration can proceed by slow and almost imperceptible steps. I, on the contrary, believe that this process is one of transformation set in motion by the will of men who, confronted with the obvious failure of nationalist policies, want to do away with these policies.

      While waiting for European integration to come...

    • 48 Comments on the Papers by Messrs. Mosconi and Kasper: Red Herrings, Carts, and Horses
      (pp. 392-400)

      Probably no two papers in this volume contain so many emotive and ideological overtones as those by Mosconi and Kasper. This is very understandable. The cause of European integration inspires—and requires—an emotional commitment. But it also requires careful analysis of the economic and political processes of integration, and a willingness to modify preconceived ideas in the light of evolving experience. The instinctive reaction against somewhat more flexible exchange rates may be a case in point. The purpose of this note is to suggest that if the studies now underway lead to a consensus that a more flexible interpretation...

    • 49 The Agricultural Regulations of the European Economic Community as an Obstacle to the Introduction of Greater Flexibility of Exchange Rates
      (pp. 401-406)

      In the Common Market support prices are fixed for certain agricultural products (the principal ones being grains, sugar, milk, and milk products) in units of account that have the same gold parity as the dollar. In this paper I shall, for simplicity, restrict the discussion exclusively to wheat.

      A basic support price for wheat is set for Duisburg as the center of that area (Ruhr District) of the Common Market that is the largest “importer” of wheat. From this basic price are calculated regional support prices for altogether 610 different intervention points, of which 113 are in West Germany. The...

    • 50 The Concept of Optimum Currency Areas and the Choice Between Fixed and Flexible Exchange Rates
      (pp. 407-415)

      From the standpoint of maximizing the usefulness of money, there should be a single world currency. This would not require a full-fledged world government, and the high capital mobility that a genuine world currency would foster would greatly ease financing deficits. The institution of a world currency would not be without costs, however. At a minimum, constraints would have to be placed on individual countries’ abilities to create money to suit their own desires and on their abilities to use external measures, such as exchange-rate adjustments, to escape domestic deflation in the face of payments deficits. High capital mobility is...

  10. Part VII. Miscellany
    • 51 Import Border Taxes and Export-Tax Refunds Versus Exchange-Rate Changes
      (pp. 417-424)

      It is well known that a uniform ad valorem tax ofXper cent on all imports plus a uniform ad valorem subsidy ofXper cent on all exports is equivalent, as far as commodity trade is concerned, to anXper cent devaluation of the currency. Similarly, an equal and uniform reduction of the rate of tax and subsidy is equivalent to an appreciation of the currency.

      The reader may recall that prior to the devaluation of sterling in 1931, Keynes had recommended a system of import tariffs and export bounties. He claimed that such a scheme would...

    • 52 Government and the Corporation: A Fallacious Analogy
      (pp. 425-426)

      In the course of the discussion of the definition of the balance of payments and the determination of balance-of-payments policy, Robert Roosa developed an analogy between the problems of the government as policy-maker and the problems of the corporation in making foreign-investment decisions. Out of the analogy he concluded that governments would, justifiably, not be willing to give up control over the determination of the exchange rates. Both the analogy and the conclusion drawn from it are fallacious for the reasons given here.

      First, the corporation has to make a profit satisfactory to its shareholders. A government is subject to...

  11. Contributors
    (pp. 427-428)
  12. Index
    (pp. 429-436)