William McChesney Martin, Jr., Papers Series IV, Subseries D \ Box 18/Folder 1 British Exchange & Devaluation, 1949

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis General Survey of Multilateral Trade and Payments

Before 1914 1. In the hundred years of relative peace before 1914- there was an unprecedented expansion of v/orld production and trade. This ex- pansion was accompanied by, and indeed made possible by, an increasingly complex multilateral pattern of trade and payments, under which general equilibrium v/as maintained while there were considerable dis- oquilibria in trade and payments between individual countries. The international system of payments depended on the operation of the gold standards which' produced*stability of foreign exchanges, short-term finance being provided by the monoy markets'and imbalance of payments being largely met by the movements of international capital and by automatic correctives. What one country could buy of a given commodity from another depended on its ability to sell some other product in a third country, which in turn could only buy because it could sell something else in a fourth - and so on through perhaps ten or a dozen apparently unrelated transactions which, together with capital trans- actions, helped to complete the circuit. Each individual trading transaction took place between private individuals in the two countries directly concerned, but the monetary settlement of the transactions v/as only made possible by the apparently unconscious and unplanned working of this highly complex pattern of international trade and finance. This pattern had been developed only slowly over several | centuries. The trade channels on which it depended were the result of habits of production and consumption in individual countries which had grov/n up and expanded over the years. Fluctuations occured constantly, but no such gross disparities between supply and demand as pressed on the v/orld in the intep-vmr period. The essence of the pattern was that it was almost v/orld-wide, not bilateral between countries or .groups of countries,""aneTTJIicrbalance as a whole depended upon the continued working of highly diverse and widely separated parts and on unquestioning public confidence in the natural rightnoss, and indeed inevitability, of the system*

2. With each advance of international trade the complexity of this pattern increased. During the period of its growth it had been able to accommodate the rise of Germany to a leading place in inter- national trade, the conversion of the United States economy from an exporter of pri^ary_products to an exporter ef manufactured goods, and the dovelopmunt of groat food exporting areas, such as Canada, Australia arid the Argentine, It could accommodate massive movements provided that they took place slowly and by natural processes of growth and it v/as tough enough to survive the various crises associated with the trade cycle which happened at recurring intervals. 3. The successful operation of this system of multilateral trade depended on the existence of certain general conditions which do not exist, at least to the sE'.ie extent, to-day. As already indicated it was c.n essential feature of this system of trading thr.t it enabled adjustments in the economy, industry and trade of tho various countries of the v/orld to be made in accordance with changing circumstance8$ and indeed exercised continuous pressure to bring about such adjustments. Adjustments of that kind arc inevitably painful since they are bound to involve doprossions and unomploj'racnt in particular trades or in particular local areas, but this painful- nuss was aitigatud by certain general conditions. Firstly, it is .broadly true -chat t!r. tcr.ipo of technical change uas slower in the nineteenth century than it is apt to be to-day, so that there v/as more ti:;;o in wliich to make the necessary adjustments. Secondly, certain safety valvde or easements existed. There were on balance fewer obstacles to international trade, especially because of the proportionately lai-ge market offered by free trade Brit ad n| so that if a particular country found one of its main industries declining i result of increased coupetition elsewhere, or a decline in ir.nd for its products, it v/as easier for that country to develop new industries and new export trades with which to replace the declining industry. There were also on balance fewer obstacles of

/Government al

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Governmental character to the movement of capital from one country to another and greater vdllinr-;ness on the part of owners of dis- posable capital to invest it overseas| so that again it uas easier to promote new industries in place of declining ones. Host important of all, large possibilities wore open for the free migration of peoples, especially to the American Continent, so that workers who found themselves unemployed owing to decline of trade in their own countries had the alternative of migrating as well as such opportuni- ties as existed of finding new employment in their countries of birth. This possibility of movement was an important safety valve in the whole system. Finally, apart from these factors, which mitigated the painfulncss to particular sections of the world community of natural economic adjustments, it was undoubtedly the case that general public opinion in the nineteenth century was more willing to tolorato hard- ship, whether in the form of unemployment or in the form of actual starvation, than it is to-day. The social conscience in all countries has nov; developed to tiio point where such hardships arc not easily tolerated and there is correspondingly less willingness to expose individual sections of the community to the pressures which would result from the unrestricted play of the trading forces which operated in the nineteenth century, particularly since the mitigating factors which then existed have nov/ largely vanished.

Period

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The inter-war period. 4.. The world war of 1914. administered a violent shock to the multilateral pattern. On the monetary side, the major belligerents had to make the gold standard inoperative on account of the inevitable dislocation of their balance of payments, and in order to use their foreign exchange resources as effectively as possible for war purposes. The normal channels of trade were cut or diverted: new trade links were established and new local manufacturers set up. After the war, the belligerent nations were faced with a huge task of reconstruction. The Austro-Hungarian Empire disappeared: the economy of Germany was laid in ruins: Russia was eclipsed by revolution. There were five years of chaotic currency conditions and general inflation reaching catastrophic levels in Germny and most other Central and Eastern European countries. In many countries savings, pensions, fixed incomes etc., were reduced or destroyed| and the resulting instabilities had far reaching social and political consequences. 5. The Genoa Conference in 1921 marked the beginning of an effort, largely centred in London, to restore monetary order in Europe. /The first important result was the restoration of the pre-1914 gold value of sterling, and the .adept ion cf a oxlifled gold stand ard" system, under which gold was reserved in the form of bars for making sterling held by non- residents convertible, Central Banks being encouraged to hold as monetary reserves "convertible currencies". Sterling was by 1925, v;ith the help of a New York credit, stabilised as a free and convertible currency at the rate of 4.86-2/3 and by 1928 most European currencies, except that of Russia were stabilised at a new level with the help of League of Nations loans and private loans floated in London, New York and other contros« The principle of convertibility against gold was upheld5 every Central Bank bought and sold gold at a fixed price but gold did not circulate internally in the form of gold coins. The system was maintained by an ample supply of foreign loans in the London, New York, Amsterdam and Swiss markets, and by the restoration of public faith in it. Exchange Control had not yet appeared but some economics v/cre pro- tected by high tariff barriers, quotas and discriminatory practices! the clearing device had already attained an embryonic form in Eastern Europe. During this period the sterling area took its present form as a unitary monetary system, employing sterling as its currency of settle- ment, irrespective of the gold value of sterling. 6. During the immediate post-war years, the dislocation of the prc-v/ar multilateral pattern of trade had been obscured by v/orId-wide shortages of goods which, as after the second war, had drawn trade through any and every channel available. Indeed, after the initial difficulties had. been surmounted , monetary order restored, and the direct damage caused by the war largely repaired, it was hoped to be able to restore something like the pro-war arrangements. By 192o the pattern of world trade displayed the United States in surplus against most parts of the world outside the tropics, but in deficit with the tropical countries. The United Kingdom on the other hand was in surplus with the tropical countries, and Europe, in turn, in surplus with the United Kingdom. The other parts of the world fitted in to this pattern and so long as it was supplemented by very substantial loans from the United States to Central Europe, the pattern could still support the foreign exchange system described in paragraph 5. 7. Towards the end of the twenties, however, it became apparent that the damage which the multilateral pattern of trade had suffered, as a result both of the first world war and of other longer terra changes in the world pattern, had not been effectively repaired. The broader conditions vrhich had made the working of the multilateral system possible were disappearing, and in particular there was fundamental disequilibrium between the U.S.A. and the rest of the world. The crisis v;as precipitated by the drying up of U.S. lending abroad, and the Wall Street crash of 1929 was a signal of general depression, £'• The main symptoms of the dislocation which had appeared and which to a greater or lesser extent continued to the second war can be grouped as follows:-

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (i) Since the broken pattern of trade had closed some of the channels by which the total demand of the country concerned on the rest of the world was offset by the demands of the rest of the world on it, the dislocation began to appear in inequalities between the capacity to consume and the capacity to pay. The spectacle became familiar of unsaleable supply in one part of the world side by side with unsatisfied demand, from another. Germany, for example, was able to generate pur- chasing power by exports to her natural markets, but was not able to use it to buy from her traditional sources of supply because some channel of trade and finance which previously had indirectly linked the two was no longer open. Thus the now familiar symptom appeared of unspendablc foreign currency balances. Inevitably the minds both of private traders and Governments turned in the direction of bilateral settlements. (ii) Under these bilateral arrangements price was no longer neces- sarily the determining factor for source of supply. Sellers who had previously held the business, and who could offer their goods at a price lower than their now competitors, frequently found themselves excluded from the trade. Moreover, as time went on price disparities tended to increase as the shortage of some currencies and the excess of others was intensified. This operated both ways. At times it excluded the more efficient supplier from the business| at other times the most efficient supplier would not only get the business but also get a higher price than less efficient competitors because the buyer had ample supplies of the currency of the efficient supplier. In such cases the relative efficiency of German and American or British production did not enter into the cal- culations. This disregard of price considerations appeared to the traders who had lost the, business (and to the Governments which represented them) especially the U.S. and U.K. Governments merely as undesirable and un- justifiable discrimination, (iii) As a result of these inequalities of trade and payments, monetary reserves tended to become inadequate to meet their normal responsibilities. While the pattern of world trade was in balance, reserves had acted as equalisers to accomodate temporary fluctuations in a flow of payments which was fundamentally in balance. So stable had the balance been, and so effective the self-correcting operation pf the fold standard in this balanced pattern, that reserves which would now seem inconsiderable had suffic.ed" to absorb all but the worst shocks, When the balance had been broken, however, reserves changed their nature. For deficit countries they became a jealously guarded hoard from which to eko out payments for essential goods that had to be bought from countries whose currency the buyer could not earn in the normal course of trade| for surplus countries gold, reserves began to rise to levels beyond any foreseuable needs. 9t The breakdown of the modified gold standard described in para, 4? which operated in a pattern of fixed rates maintained without Exchange Control and which permitted the free movement of capital, led, after sterling went off gold in September 1931, to a period of freely fluctuating rates of exchange in which Governments and Central Banks assumed no direct responsibility for the maintenance of any particular rate of cxchanre. The Exchange Equalisation Account method of management was adopted by the U.K. and many other countries, The general Foreign Exchange mechanism which thus developed took the form of intervention by Central Banks or monetary authorities in their own markets and with the consent of the relevant monetary authority in other markets, so as to prevent too violent fluctuations taking place at too short intervals, The whole system, however, was dependent upon every country bcinf- willing cither to buy or soil gold at a fluctuating price or to operate a free gold market in which both residents and non-residents could deal. The system, if it could be so called, depended upon there being available a sufficient volume of gold for settlements between Central Banks, While rates of exchange were inherently unstable and stresses in the economic system of any country manifested themselves by variations in the rate of exchange, convertibility of all currencies was ultimately assured by the availability of gold at a fluctuating price.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis There was a possibility of reviving a fixed pattern of rates of exchange at a new level up to the time of the Economic and Monetary Conference held in London in 1933. The abandonment of a fixed dollar price for gold and the depreciation of the dollar in terms of gold prevented the restoration of a stable exchange system. The return to a fixed gold price of $35 an oz, did little to restore international confidence, particularly as it undervalued the dollar in relation to those continental countries which had attempted to maintain their currencies on the Gold Exchange Standard, By 1936 their attempt collated under the weight of economic difficulty, mass speculation and loss of gold. By the outbreak of the Second World War, practically the whole of the non-dollar world was managing exchanges by intervention in the market, the majority of rates fluctuating more or less freely in terms of dollars. The effect on those continental countries which had already passed through severe inflations and currency depreciations in the early twenties was lamentable. Confidence in the domestic currency was again lost, and the habit of gold_Jioarding became more deeply embedded than ever, 11, The exchange crises of the early 1930's had compelled, countries to choose between the Pound sterling and gold as the measure by which to value their own currency and it was in these years that the sterling area acquired recognisable shape. To a number of countries outside the British Commonwealth it soon became apparent that the discomforts arising from violently fluctuating prices could be resolved only by allowing their own currency to fluctuate. As a voluntary act of policy, therefore, these countries "pegged" their exchange to sterling. The "sterling area" which thus took shape consequently included two types of member. First, and essentially, there were the British countries and some few others, such as Egypt and Iraq, which had an established relationship between their own currency and the pound sterling. Secondly, there were those other non-British countries, e.g, Scandinavia, which had elected to base their currency on sterling for reasons of economic comfort and convenience.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Second World War 12. When the monetary authorities in London began to contemplate financial measures required in the event of war, they came to the early conclusion that it wiiM be impossible to maintain a fluctuating rate system which by its nature is substantially influenced by psychological and political factors. They were also convinced that it would be equally impossible to organise a fixed rate system which allowed the free movement of capital. There was also the necessity of taking early measures to mobilise gold and exchange resources including securities not only in the U.K, but throughout the Common- wealth. They therefore worked out a comprehensive system of exchange control based upon a fixed gold price, a fixed dollar/sterling rate of exchange, and fixed relationships between sterling and other currencies. After arrangements with the Dominions had resulted in complete agreement on policy and methods, approaches were made to France and full agreement was reached on the basis of a general con- ception of a pooling of resources. 13. Before the outbreak of war there was a steady and inexor- able pressure against sterling on account of a mass flight of capital from Europe and the U.K. to the U.S.A.. As it was impossible to institute Exchange Control and politically difficult to allow the full expression of war fears to be shown in the sterling/dollar rate of exchange and the price of gold, it was found expedient to hold the sterling rate between 4«80 and 4-.60. When it became clear, however, that war was inevitable it was decided that the rate to be chosen as the key of the new pattern of exchange rates should bo about 4«00, This represented about a 20% depreciation of sterling on the average rate of previous years and would thus facilitate the immediate mobilisation of foreign exchange held by residents of the U.K. and would also anticipate some of the inevitable inflationary conse- quences of war-time finance. 14,. The war made it necessary to draw a sharp distinction betv/een the inner circle of sterling area members and the rest. The U.K, had to impose exchange control over a \"ide area of overseas monetary transactions, but, given the intimacy of the commercial and banking links between the U.K. and the rest of the sterling Empire, the imposition of an exchange control between head offices in London and branches and subsidiaries elsewhere could only have produced chaos and have impeded the war effort. The U.K. control vras therefore based from the start on the principle of free transfers within the "inner" sterling area (which vras, broadly speaking, co-extensive with the Commonwealth and Empire, excluding Canada and Newfoundland, but with the addition of Egypt, v/hich has since left the group, and Iraq), and of controlled transfers between the sterling area as thus defined and any non-enemy country in the rest of the world. The sharp definition which was thus given at the outbreak of war to the pre- viously vague concept of the sterling area did not entail, as is sometimes supposed, an agreement between the members to embark upon a pooling of foreign exchange resources which they had not practiced before. On the contrary, it amounted to an agreement to maintain the existing practice unchanged, so that foreign exchange and gold continued to flow to London as they had in the past. Nor was there any question of London sitting in judgment on the calls which in- dividual members made on the common exchange resources. Each country continued to decide its own import policy and pregramme, but each also agreed to formulate that policy BO as to make minimum demands for their domestic economies on the foreign exchange and gold which was required for the purchase of munitions of war, 15. The outbreak of the second war was responsible for the reintegration of a fixed pattern of exchange rates maintained by Exchange Control regulations and a comprehensive control over trade. The significance of the sterling area was enhanced as, in spite of the financial and other stresses of war, "normal" methods of finance and investment prevailed throughout the period and have done so to date. In a world in which almost all other countries, except the U.S.A., had been forced to increase their controls on all international

/transactions

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transactions, the maintenance of complete freedom of Davments within the sterling area has been a testimony to the inherent strength of the system. The fact that the system worked so smoothly, enormously facilitated the procurement of goods and services essential to the war effort from sterling area countries, in particular in the Mediterranean and Eastern war theatres, which it might otherwise have proved impossible to secure at all. It did so, however, at the cost of the building up of very large sterling balances in favour of India, Egypt, and other countries. Anglo-American consideration of Post-war Policy 16. The trade and financial measures adopted by the belligerents during the second Far and their implications and con- sequences are too familiar to require description in detail. It will be more pertinent in the present context to attempt to recall the stnges of consideration of Anglo-American post-war policy. It is well to stress in the first place that this had to be based on very inadequate evidence and hazardous forecasts, and that there were major differences of emphasis in the diagnosis of the pre-war situation and of likely conditions in the post-war world. 17. The first discussions oii post-war policy took place in connection with the decision of the United States Administration in 1941> many months before Pearl Harbour, to support the British war effort by the provision of supplies under Lend-Lease, a decision which averted the threat to collapse arising from the exhaustion of British dollar and gold reserves. The United States, like the United Kingdom, had suffered from the ever widening scope of exchange control measures in Europe before the war, and had been further disturbed since 1939 by the rigorous controls imposed by the U.K. Government as a war measure. Both Governments were agreed that at the end of the war a move must be made towards freeing world trade from tho impediments which had hampered its expansion during the 1930fs. At the request of the United States Government, the United Kingdom Government, therefore, undertook, in the agreement which governed the provision of Lend-Lease, to be ready to join with the United States in agreed action to these ends. 18. As the war advanced, it became evident that the U.K. would not be able to get rid of controls in the early post-war period. Increasing concentration of British industries oh war production was accompanied by a greater and greater loss of export trade, and importers turned to other suppliers, particularly the U.S.A. Strategic considerations led to tho British Isles being supplied more and more over the short North Atlantic seaway instead of from the more distant sources which were natural markets and supply grounds of the British economy. These dislocations, which were the inevit- able consequence of full concentration en the war effort, were aggra- vated by the obligations accepted by the U.K. Government in the Export White Paper of 10th September 1941 by which the U.K. undertook to withdraw, in favour of American exporters, from any export trade in which Lend^Loase or "similar" materials were employed. 19 • Simultaneously with these dislocations on the trade side, a serious weakening was imposed on the monetary side of the British economy by the draining away of its accumulated reserves of gold and marketable investments to provide means of payment for munitions purchased in North America before Lend-Lease. These reserves had afforded not merely the necessary buffer to absorb fluctuations in the normal course of trade and payments but, in so far as they con- sisted of revenue earning properties and securities, had been an important component in the world wide pattern of payments on which the multilateral system had depended. The loss by the United Kingdom of its external dollar assets, coming on the top of the loss by United Kingdom exporters of important parts of their external markets, was a major handicap. These difficulties were also certain to be present in differing decrees for many other countries, especially those of Western Europe.

/20. During Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 20. During these years, therefore, there was a difference of approach between the U.S. and U.K. Governments. The former were anxious to restore the pre-war pattern and procedures of trade and finance with the minimum of delay. The U.K., however, were so conscious of their un- favourable financial condition and the tremendous effort that would have to be made to convert from war to peace production that they were reluc- tant to assume an obligation to restore convertibility and non- discrimination or to reduce trade restrictions prematurely by a fixed date. At the preliminary conversations on international institutions in the field of trade and payments which were opened in September 19-43, the U.K. side felt it necessary to reserve the U.K. position and. to try (I) to secure suitable escape clauses for use in case the full working of liberal trade and payments policies should prove impossible. In parti- cular, they stood out for the necessity, on the monetary side, of restricting expenditures of scarce currencies (which were subsequently incorporated in Article VII of the International Monetary Fund) and, on the trade side, for the necessity of restricting imports which could not be paid for. When agreement was reached at Bretton Woods on the Articles of Agreement of the International Monetary Fund, the U.K. Delegation considered that a major advance in international monetary understanding and a major concession to the British point of view had been secured in Article VII, which recognised, or was then understood by the Delegation to recognise, that if a currency becomes scarce in the exchanges of the world, restrictions against that currency are legitimate. 21. The Fund Agreement gave- a right to contract out of converti- bility and transferability by war-damaged countries during a transitional stage which was intended to end in May 1951, i.e. five years after the date on which the Fund began operations. The Fund has now been in operation for three years but has been practically helpless in the face of the fundamental conflict between actual post-war international con- ditions and the purposes and obligations of the Agreement. 22. At the end of the war, the U.K. had an unmanageable burden of oversea sterling liabilities, a greatly reduced income from overseas investments and shipping, and negligible export trade, The monetary reserves were totally inadequate to bridge the balance of payments gap after the termination of the wartime supply arrangements. In an endeavour to meet this situation, the Anglo-American Financial and Commercial Agree- ment -./as negotiated in December 194-5, as a result of which there was a final settlement of Lend-Lease and Reciprocal Aid and, in addition, a Line of Credit was placed at the disposal of H.M.G. amounting to '}<3,750 millions. Similarly the Canadian Government gave the U.K. a Line of Credit of Canadian $1,250 millions. There is no doubt that without this Line of Credit the economy, not only of the U.K. but of the uholo of the Sterling Area, would have collapsed and brought Western Europe down with

Bilateralism was adopted as an inevitable expedient after the end of the war by many countries when they found themselves edthor with- out f;,old reserves or with reserves totally inadequate to meet the difficulties created by the war. The non-availability of f-old reserves prevented not only the restoration of convertibility in any recognisable form, but also deprived the world as a whole of any normal means of settlement of international balances. The U.K. therefore vigorously pursued the policy of negotiating "Monetary Agreements" for the purpose of making Governments and Monetary Authorities responsible for the bilateral rates of exchange. In the- absence of media of settlement, the device of holding currency balances was freely adopted but the magnitude of the bilateral disequilibria, necessitated the development of machinery of trade agreements. All this worked fairly well while massive U.S. and Canadian aid was available to the Western World (e.g. UNHRA, 194-5 Loan Agreements, Exlm Bank arid IBRD Loans, I.M.F. drawings), while Latin America and South Africa still possessed substantial gold and dollar re servo8 earned during the war, and while a buyer's market enabled any production to be sold, 24-, In 194-7 it bacame obvious that the degree and intensity of the difficulties of the transitional period had been underestimated. The

/premature

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premature using up of the U.S. loan and the breakdown of sterling con- vertibility, together with the continued, economic dislocation of Western Europe as a whole, led to a re-examination of the situation. As a result of the initiative of the United States Government a scheme of cooperation for recovery was worked out in Europe. The O.F..E.C. was brought into being and the scheme was put into effect with funds appropriated in accordance with the Economic Cooperation Act. The assistance which the United States has given under this programme came at a most critical moment in the efforts of European countries to attain a measure of recovery, when it seemed that the progress made in the first two years after the war was about to be lost because of insufficient recovery in their external earnings. It would not be appropriate in this paper to attempt to record the considerable advances which have been achieved in the first eighteen months of the programme, nor to analyse the further stops which the participating countries should take in cooperation, in order to move onward to a point where their economies can stand without extraordinary financial aid of the type provided under the programme. These matters are being urgently studied in Paris and it is anticipated that a report by the Organisation will be produced in the near future. It seems evident however, that some at least of the assumptions which have underlain the long term programme will require review. Vital as Marshall Aid has been to turn the tide and to set European recovery in the right direction, it is already clear that the; recovery of European production alone will not suffice to overcome the maladjustments of the world economy as a whole. 25. The world is again faced with the same fundamental economic Toblem as hasTTeen disturbing it since the first World War - that of a broken v/orld trade pattern and a lack of confidence in domestic currencies, and in present circiomstances little hope of the re- establishiiient of an international monetary system. As after the first war, a sellers' market for a time obscured the full extent of the problem, Shortages of every kind of goods, from heavy capital plant to the minor amenities of domestic life, have made trade pass along every channel that would serve to connect any available supply with the unsatiated demand. With incipient decline in the sellers' market, however, the symptoms of broken world trade pattern, already plainly visible even when the sellers' market was at its height, have begun to assert t. cmselves more strongly. Yet the waning of the sellers' market has only just begun. How the situation will develop when more and more products are available in full supply has yet to be seen. In many respects it compares unfavourably with that after the last war. The dislocation of the world trade pattern in 1949 is greater than it was in 1921, Europe has been cut in half by a line across v/hich only a meagre trade now passes between communities which, before the war, were fellov: citizens within single states or single empires; the vital role played by Germany has again painfully to be re-established, The en- croachment on British trade and the stripping of British reserves and investments has produced a new dislocation in what before the war was the largest single component in the whole world trade. In individual countries, the destruction of the second, war has far exceeded that of the first. To physical destruction of plant and houses has been added the less tangible loss of obsolescence and depreciation of capital equipment, ranging from the largest machines to the private wardrobe„ Side by side with these losses in the theatres of war (which this time were riore widespread than last) an opposite development has proceeded in the countries which happen to be remote from hostilities. The pro- duction of the Americas has been greatly increased. Technological advances v/hich have been developed there during the v/ar have been little explored in Europe, Disturbance of the balance has thus been pushed far on both sides, and the broader conditions v/hich made the working of the multilateral system possible, as described in paragraphs 1 to 3, have been still further modified. Conditions of progress towards the recreation of a pattern for multilateral trade and payments. 26. Certain lessons can be drawn from any study of financial and economic events between the two world wars or in the more recent past. The first lesson is that the problem before us is a world problem - not

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a problem that can be solved by the United Kingdom or by the United States or even one that can be solved by the sterling area or the dollar area. Even attainment of equilibrium between the dollar area and the sterling area, vitally important though it is, does not provide the complete answer. If the remainder of the world continues short of dollars, but balanced in sterling they will use their sterling to get dollars and will cut down their sterling imports to the extent necessary to get a sterling surplus for the purpose. Sterling cannot withstand such unbalance in other parts of the world. If it is to be convertible, the balance must be world-wide* In achieving this balance and the con- vertibility proper to it, a special effort is required of those who are responsible for sterling. Yet no efforts of theirs will maintain con- vertibility while an important part of the rest of the world remains seriously short of dollars. Widespread, and as far as possible world- wide, cooperative efforts are required in order to secure the restoration of a pattern for multilateral trade and payments. The second conclusion is that what is needed is the creation of the conditions under which multilateralism and convertibility can flourish; that is, a state of affairs in which there is a multilateral (not bilateral) balance of exchanges of goods and services or - to the extent that this is not practicable - a financial balance of payments achieved by capital move- Vncnt. It follows that what we need is a pattern of world trade and •reduction geared to a system of payments which is self-balancing. It is common ground that these conditions do not exist today and that to bring them about will require various and far-reaching changes in the current financial and economic circumstances and policies. Experience has shown that any attempt to reintroduce by edict, convertibility and multilateralism, even with substantial financial backing, is doomed to failure if the necessary basic conditions do not exist. Attainment of equilibrium is thus the first essential; the chief issue for consider- ation is the nature of th-: measures required t- establish this desirable state of affairs at the earliest possible moment. The core of the problem is represented by the lack of balance in the production of goods in the rest of the world as compared with North America, This lack of balance has widened in the course of the last ten years and finds its reflection in a United States aurDlus with the rest of the world which in recent years has varied between $6 billion and $11 billion dollars. That disequilibrium must be reduced to manageable proportions before there can exist the conditions required for the reintroduction of multi- lateralism and convertibility, 27, There are- certain obvious lines of attack upon the problem. All would agree that the desired equilibrium must be one at a high level and not at a low level of trade, Creditor and debtor countries alike must, therefore, maintain high levels of production, employment and. general business activity. That is fun.damental. Furthermore, (a) the special contribution of debtor countries must bes- (i) \o move as far as possible, and as rapidly as possible, in the direction of overall balance on external account; as part of that proofs a, to increase dollar earnings to the maxim1 practicable extent} (iii) to pursue dollar economy and the development of alternative sources of supply. This particular policy tends to be unpopular both in debtor and creditor countries. None the less, it is an essential part of the movement towards the desired equilibrium. During and since the war there has been an abnormal dependence by the rest of the world on imports from the dollar area, and this degree of abnormality in itself works against the restoration of the conditions in which multilateralism and convertibility can be restored; (iv) to promote conditions calculated to encourage investment (both private and institutional) by creditor countries. *- /(b)

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(b) the special contribution of creditor countries must be the reverse of those of debtor countries, viz.- (i) to encourage the import of goods and services! (ii) to recognise that, as part of the process of attaining oquilibrium as a condition precedent to the restoration of multi- lateralism, it may bedeflation of the kind experienced after the first world war, further action of an anti-inflationary or disinflationary character is required. Secondly, the drive to increase dollar earnings must now take account of the change from the seller's to a buyer's market. Increase of production and availability of goods have been the chief preoccupation of many debtor countries since 1945 • Great progress has been achieved, but the current and immediately prospective task is to ensure the maximum sales on a competitive basis both in the dollar i.iarketo the .-.salvos' and in those narkots where dollar and non- dollar exports ccupoto ono with the other. This acanc renewod con- contration on reduction of costs, increases in productiirii^ inprovo- :icnt of calos and .••r.rkcting techniques, etc.. It uay wo 11 no an, in addition, adjustment of exchange rates in appropriate cases. 30. Further special action will also be required by creditor countries if the world is ever to see again the conditions required for the reintroduction of multilateralism and convertibility. In particular, it is desirable that such countries should be prepared - (i) to facilitate imports by such measures as reductions in tariffs, easement of customs procedures, policy buying (e.£. for stockpiling purposes); (ii) to recognise that there is a fundamental inconsistency between, the pressure behind a large export surplus and the pressure for restoration of nultilateralisn and convertibility. Dollar savini? Try debtor countries cannot be avoided, at least for the time beinr, even at the cost of discrimination5 (iii) to base their policy on the realisation that marginally the solution will always have to be found in investment by creditor countries. For many years to come the margin is likely to be a large one. Apart from other directions for investment, there is no doubt that a substantial contribution can be made in the form of sound and economic investment in underdeveloped countries. As against the need for debtor countries to ensure conditions calculated to encourage investment from overseas, it is necessary also for creditor countries to liberalise the basis on which they are prepared to invest. This requires study of the actual conditions of lending (including the nature of demands for security). Probably the most important single requirement is that investment should ge genuinely •multilateral in character, i.e. not tied to purchases of particular goods or in particular places, and spread as widely as possible so that the funds so provided help to lubricate the whole system of trade and payments.

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31• It should be emphasised that on both groups of countries there lies a special responsibility for the development of under- developed areas both in order to reduce the gap in production of •wealth as between the rest of the world and North America, and in order to promote and maintain political and economic progress, 32. As has been suggested, there is little that is novel, or indeed contr_oj;^sial^-in the above diagnosis. The chief difficulties arise on questions of degree and of emphasis, and also of practical application from the point of view of what is feasible at any particular moment. There are many, valid reasons in the case both of creditor and debtor countries why theoretically correct solutions cannot be adopted at least for the timebeing. Creditor and debtor countries must try to understand why this is so and each must appreciate that progress is retarded by its own failure as well as by the failure of other countries to take the right action at the right time. The mere transference of blame or responsibility is a profitless exercise. The essential need is to agree upon the basic diagnosis,, to determine as far as possible the main contributions which debtor and creditor countries can make to the solution of their mutual problem and then to work out more precise proposals and their practical application. It may well be that in that process it will be necessary to canvass proposals of a more novel and less orthodox character than those mentioned above, 33. On any diagnosis, a substantial breathing space is required before- we can expect to see full_ restoration of multilateralism and convertibility. The United Kingdom and the rest of the sterling area will have to continue to take measures of an emergency character for some time to come5 otherwise the central reserves will run out with results so chaotic as to remove any chance of reaching the desired long-term objective. There are a variety of ways in which such emergency action, if it is to be effective, requires to be supplemented by cooperative help by the United States and Canada, Those points will require separate discussion; their only relevance to the present paper is that, unless current difficulties can be surmounted, discussion of long-term objectives is of no more than academic interest.

United Kingdom Delegation 27th August, 1949.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Dear Mr. Levy: Receipt is hereby acknowledged of your memorandum of August 5 entitled "Suggested Approach to the'Solution of the"British Dollar Problem." Many thanks for sending this on to me. Sincerely,

Vfm. McG. Martin, Jr.

Mr. Walter J. Levy Economic Cooperation Administration 3 Connecticut Avenue, M.W. shington, B.C.

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Digitized for FRASER 10/6/49 http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis STANDARD FORM NO. 64 Office UNITED STATES GOVERNMENT

TO : Assistant Secretary Martin DATErOctober 19, 1949

FROM : E. H. Foley, Jr.

SUBJECT:

Attached for your information is a suggested draft covering benefits to be derived from informal consulta- tions with the British and Canadians. Rowen and pierce, representing the U. K. and the Canadians respectively, have conferred with Jim Webb and returned to London and Ottawa. They are expected to come back to Washington for additional talks some time next month. Webb has also talked with Franks and Wrong. At the meeting yesterday in Webb's office, attended by Webb, Foster, Labouisse and me, it was decided that the next meeting should be attended by the principals for the purpose of bringing them up to date. Accordingly, Secretary Snyder has invited Secretary Acheson, Paul Hoffman, Jim Webb, Bill Foster and Harry Labouisse to have lunch with him in his dining room Tuesday, October 25, at 1:00 P.M. In addition to the above the Secretary would like to have you and me present. I hope it will be possible for you to attend.

Attachment

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BSNBFITS TO BE DERIVED FROM - CONSULTATION WITH BRITISH AND* CANADIANS.

The UK, US, Canadian talks did not solve the present British financial crisis but did create an atmosphere in which the situation may be susceptible of solution. The problem is a joint one arising in large measure from the economic and political relations between the US and the UK and between each and the rest of the world. Since the war, our economic relations with the UK have been marked by periods of crisis resulting first in the loan, then in ERP and now in devaluation of sterling, and by periods between crises when we hoped the solution had been found. The three- power talks and the present devaluation must not be allowed to become simply another shot in the arm and prelude to a period of hopeful waiting or we will be faced with another crisis. More specifically, informal discussions with the British and Canadians should lead to the following benefits: 1. The continued and orderly consideration of the matters referred to in paragraph 7 of the com- munique, and the continuing search for measures which will help mitigate the basic disequilibrium. 2. The full and free exchange, on a regular basis, of statistics and facts bearing on the dollar- sterling problem. 3. The analysis and appraisal of trends in the economic field of interest to the three govern- ments, and the development of policies and actions best suited to deal with them. 4. The frank consideration and discussion of parti- cular actions and proposed actions in the economic field in an effort to avoid serious and unnecessary misunderstandings. In the longer run, it is to be hoped that this closer cooperation between the three powers will extend, to problems beyond those arising from the immediate economic situation. Many of the most fundamental US policy objectives not only in Europe but in the rest of the world as well require active UK support, e.g. Germany, North Atlantic Treaty, European economic integration. Past experience has shown that the price cf whole- hearted UK support is, not unnaturally, participation in the formulation, not simply in the execution of policy.

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* Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis X

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FHTtaah 10/2^/49 Initialled Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis September 27, 1949,

OPERATION OF BRITISH EXCHANGE CONTROLS

The Bank of England acts as agent for tho British Treasury in operating tho British exchange control system. Payments for goods and services are controlled according to the following classification of countries: (a) The Sterling Area ~ The British do not impose any restrictions on the use of sterling by countries in the sterling area, They may receive sterling freely and may pay sterling freely to any country. Broad understandings are sought v/ith the governments of sterling area countries on the overfall amount of sterling which may "be converted into dollars, "but once a request for transfer is rv3ceived, the Bank of England must approve it. (b) American Accounts - Broadly speaking, the dollar area countries are included in what is called the American Accounts System* Residents of these countries may pay sterling freely anywhere in the v/orld, "but no country outside the sterling area is permitted to pay sterling to an American Accounts Country without the specific approval of the Bank of England.

(c) Transferable Accounts ~ These countries — Netherlands, Italy, ITonvay, and about a dozen others — are permitted to pay sterling freely to each other as well as to sterling area countries. They may not pay sterling to any other countries without specific approval of the Bank of England. (d) Other Countries ~ -The rest of the countries in the world pre on an administrative "basis and their ability to use sterling is determined by the Bank of England in conjunction v/ith the monetary authorities of the particular country, Many of these areas are not permitted to pay sterling to any country outside the sterling area but others are allowed to pay sterling quite freely except to American Accounts Countries,

In summary, the basic objective of the British controls is to permit the widest possible use of sterling which can be achieved without involv- ing any danger of losing dollars. Generally, sterling may always be transferred from hard currency countries to soft currency countries, but not fron soft currency countries to a hard currency country,.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3*ptO»*or m, 1949,

f ho Bank of laglaftd acrts at *g*&t for tho British frsatury in tho British oxoh«ngo control systo*.

(«) ?ha Storlift^ Ar*a - flMi British 4o not iviposo any rottriotion* on the u*e of sterling V countries in the sterling they may reo*ive sterling freely and aay i>*y sterling freely to any Imisd uad*rst«adiii«t «r« aou^ht vith th« foT*rai«nt« of «JT it eonn%ri»« an tb« 0T*f^«ai ndotznt of «t«rlin* vhioh »«y doll«r«t b«t one* • r««ni»«t for trnn»f*r is r«c«iv*dt *t>proTO It.

- Broidly »T»o«kin^t thu dollar «roi» eountriot aw iaaiudod in wiutt i« e«ll«a tii« Aaorioim Aceotmts Sy«t« Boftidomti of t&»«*« €jotu»tri*t »*y pay •t«rliag fro^l^ «nywh«r« in tiio world, Vat no ooiuitry out«i4o 111* sterling aroa is t>*mittod to storlin« to tn AaoHaiMi Account* Country vithout th« sroeifio of tl»o »*ak of (o) fr^sfoya^lo AcoountB - ¥&*%« eouatrios — fothorl«nd», Italy, fervor* »ad about a doiroa othors — naro p«mitt«d to nay *t«rlln« frooly to a«cti oth«r as woll as t^ tt^rliac aroa oomntrios. f hoy nay mot pa/ s tori ing to any otfeor eomntrio* without «p«cif io ap roval of tho laak of (A) CtiMr Count risa • Tha rost of tho count ri«* in the world ar* ©a an aAiinistr* tiv» oasis and their ability to uto sterling is dotorMinod %r tko la«k of ftujlaad in conjunction with tho «-r otary omthoritios of tto particular ootuntry. Hair ef tho^o aro»s ara aot tioniittod to pay starling ta ^«r oonniry omtsido tho starling ar*a othors aro «llov«d to r»«y starling

In tttiMBary, tho liasio oojoctiro of tho British oofttrols is to tho «id««t possi^ls mso f sterling whieh ean &o aehlovod without dangar of losing dollars, Q*&*rml lyt starling nay always %• tramsftr- fro* hard «orr«ncy oomatrios to soft ourrmoy oouatrias, out not fro* soft enrroacy cottntrl»« to a hard emrroney oeuntry.

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Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Treasury Department Office of International Finance

Date ...... 194

To: Mr. Willis From: Mr. ^

In the week following devaluation British reserves rose just under $5 million. The "dollar drain" was $18 million, or an annual rate of about $225 million. This was the lowest figure for any week since the end of February. EGA assistance was $22 million, thus accounting for the slight increase in reserves*

TOP SECRET

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Treasury Department Office of International Finance

Date... ._,Augu.st__2

To: Mr. Willis From: Mr. Wi

We have begun to receive weekly statements from the British on the trend of their reserves. The latest statement, received yesterday, reveals that total reserves were down to $1,515 million on July 23* This represents a drop of $125 million in three weeks. The dollar deficit for the five weeks ending on July 23 has averaged very close to $70 million per week, or $3.5 billion per year. In the -week ending July 23 the drain was $73 million.

cc: Messrs. Glendinning, Arnold, McNeil

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Date 2/23/H9....194.... To: Mr. Willis i From: Messrs. Elaser, Jtfidman and Dickei

This is the latest redraft to include data with respect to exports as well as imports and the effect of the Canadian devaluation.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Possible Effects on the United States of the Devaluation of Foreign Currencies

The effect of devaluation should "be to support United States exports and imports. It will not, however, necessarily offset the influence of other important factors which are tending to reduce the total value of United States foreign trade. Such factors are the reduction in the amount of foreign financial assistance, exhaustion of other countries reserves of gold and dollars, the decreasing degree of dependence upon the United States as a source of supply, and import prohibitions abroad. The value of imports into the United States should be stimulated by the sharp reductions in the prices of foreign merchandise that are possible as a result of the depreciation of European currencies. In particular the importation of manufactured specialties should be stimulated. Imports of crude materials show less price elasticity and would not be as greatly af-

fected. The commodities in which foreign countries seem most likely to increase i their dollar earnings by sales to this country are textiles, machinery, vehicles, rubber, wood pulp, furs, cheese, fish, wines, oils, pottery, leather manufactures, and the miscellaneous manufactures category. Dollar earnings from tourism ought to increase immediately and the devaluation should stimulate U.S. investments in foreign countries. We probably must expect serious complaints from U.S. producers of textiles, leather manufactures, wood pulp, furs, cheese, fish and wines, as well as producers of particular specialized manufacturing items. Foreign countries probably cannot expect increased dollar earnings from petroleum, non-ferrous metals, coffee, whiskey, leather, newsprint,

diamonds, shipping and insurance. Earnings from cocoa sales may even

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decline somewhat*

The foregoing judgments are "based on the assumption that appropriate anti-inflationary measures will "be taken in these countries to prevent a general increase in prices which would destroy the "benefits of the devalua- tion. In addition, it is assumed that the devaluation will increase the relative profitability of sales to the dollar area enough to result in significant diversion of exports to the dollar area without at the same time eliminating a price advantage resulting from the devaluation. The increased dollar earnings of foreign countries should serve to sustain United States exports at a relatively high level. This would not "be the result if the increased dollar earnings were added to reserves instead of being utilized for purchases. The latter is not expected to be an important trend among the European countries but might be with some countries of Latin America. It seems probable also that there will be some shifts in the character of our exports because the less industrialized parts of the world will probably buy manufactured goods from Europe that were previously obtained in this country. This might result in some countries transferring dollars to Europe in payment. Such payment in dollars would not be made until existing sterling balances are substantially utilized. Purchases might then be shifted to other types of manufactured goods and to foodstuffs and raw materials from the United States. In other words manufacturers of automobiles, machinery and specialty manufactures would be hurt somewhat and producers of foodstuffs

and raw materials benefited. These shifts are restricted in scope because Europe1s capacity to supply

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many types of manufactured articles is still limited and the United States is a necessary source of certain foodstuffs and raw materials. In the important Canadian market it is anticipated that United States exports will "be curtailed, with the chief impact falling on certain types of machinery and equipment, fruits and vegetables, textiles, unmanufactured cotton, and fats and oils. There may "be increased competition in this country from Canadian lumber, fish, meat, furs, whiskey and a few other articles*

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis IS, 1949 Awls twit 3eer»taiy of tfoa :araa«ury Hartia

British onnottBoad 30 peraant e>raliiati0i* f pound starling today* On baaia of Conrad etady prepared far you, and rMaphroy and tfruaatr ortwamiBii^ f ©Itorijig ax« praliminary ob»«r^ra Uoiw of on action with r*si*wst to .Uantaoha lories (1) %rat that oondltdona may warrant !%ata«ha Marie proportiooata to de-mLuaH^e ©f powad a tabling, lieiwiirtr, nould opp^ae Dauteehu :Jark danralttAtioii to »oa* latanaediata Hgure up to

25 **wlftf aa a mmm o£ eUsaiaatittg prwaant andaivalxialdon of Marit in relation to othar i«ro|>®an currencies. (a) Sima a© a^aham^a xmta haa ba«ii s«t for tha OaFutaeha ai^, auggaat tbat daralnatloti taka fotm of altaratioa of eomr«r»ion faetor,

experience with saw a«ia»aralon factor* (3) Baliava it la^eoaaaary to await action ay nawl Oowmjaent la matter of al taring ooiwiraioa faetor, altboag^ fiadag of d*finitiw aaeehaqga rat* could waH be ^dforred until that atlon i^aliar flaxibla eacehaaga rata ia praferabla to mort sgnlta® eould oa 4«oid0d at tiiaa of fixing «3eshajig» r&ts. k .(4) :-€o0gdJNi imjblaw of saomrlns atfraaaant of Freneh and ^rttiafa and wiH au|«>«*t action by ^om along auggwted lines. TOP SECRET Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TOP SECRET

» 2 ~ (5) «HX ke«p U.S. r;3eecutlve Erector IMF apprised of action which you take and suggestions aade here. (6) 3i* following countries have already declared to the IMF flra new par values representing a 50 percent devaluation In oorreapendemoe with devaluation of the pound gt4trli.net South Africa* India, Australia, Ilew -ieland, Norway and jPemftrk. *? (?) Continental Europe and other areaa a till oonaldering appropriate action. 4rre»0nt taridency among Bdgltqfe France, Italy is to maintain adislnietrative flexibility for present and not lor new par values. treasury position is to ap rove this approach but not to urge It strongly If they prefer par values. (B) In number of cases U.S. view in *und has been that adjustments needed are greater than &ose proposed, but 0.3. teeutive Director has not opposed any change on this score* (9) ^»«* observations not coordinated with State, but will do so as soon as possible, -'-duos other Surcpean countries have not yet acted, «uggeet you defer Gemaan action pending further exchange of

action*

TOP SECRET

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Oft fetffi* 30 p*rwnt devaluation «f potgft »t«rUac

«mmrt «f*d £»«* ^fritNi tarn *lre*<^ c^cl*rW t» IMT

far mjofll^f «f iwniyiMi «nd ••! liiln '-oitUi

'WVK ~ iw^P^P ^Pw w^P^P^pfc w^P '^Pv^p^Mv qr~ ^ft^^^P w ^^•T ^Plhg^P^R ^RJBPp^^P^"^B^P* ^WP**^BW^pNfcflP Jb** w^VJjp^HH AiMPMP^PBNBnWWp/ aetitm ift*Nfcly »»% f«^plr»4« IMMMI tivtl^l eett»:U«rattim mi, uttfe ^MhiaclMi *e«R«i»« prl^r t© ««tlim im raft*

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DEVALUATION DEVELOPMENTS — POSSIBLE COMMENT BY THE SECRETARY

It is too early to predict exactly what effect the recent adjustments of currencies will have on the relative prices of goods in various countries and how their international accounts will be changed. We may hope that the effect will be to re- duce the gap between their receipts and expenditures of hard currency and so permit relaxation of restrictions on trade and bring closer the day when convertibility of currencies may be restored. I would not want to lead you to think that devaluation provides the complete answer to current problems. It is a helpful step in the right direction. Among other steps, the maintenance of internal financial stability is particularly important.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis EFFECT OF DEVALUATION ON UNITED STATES BALANCE OF PAYMENTS AND SPECIFIC UNITED STATES INDUSTRIES

The dollar volume of United States imports ought to increase somewhat as a result of the devaluation of the major trading currencies. Most of the increased dollar earnings will be spent for dollar goods so that United States exports should be maintained at levels greater than would have otherwise been possible. It is probable that in the short-run, United States purchases will increase substantially since buyers will conclude that there is no further reason for delaying purchases. In the longer term, there will be a leveling-off from this short-term peak but at a level some-

what higher than that prevailing before the change in rates0 The foregoing judgments are based on the assumption that appropriate anti-inflationary measures will be taken in these countries to prevent a general increase in prices which would destroy the benefits of the devaluation. In addition, it is assumed that the devaluation will increase the relative profitability of sales to the dollar area enough to result in significant diversion of exports to the dollar area without at the same time eliminating a price advantage resulting from the devaluation. It is anticipated that foreign countries will increase their dollar earnings in the follomng important lines: rubber, wood pulp, tin, burlap, machinery, vehicles, textiles, furs, cheese, fish, \vines,

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oils, potteries, leather manufactures, and the miscellaneous category "all other manufactures.11 From this group it is anticipated that serious complaints mil most probably be received from domestic producers of textiles, wood pulp, furs, cheese, fish, wines, and leather manufactures. Foreign dollar earnings from tourism should increase materially. The devaluation action should also stimulate United States investments in foreign countries. No increase in dollar earnings accruing to foreign countries may be expected from the following commodities: petroleum, non-ferrous metals, coffee, whiskey, leather, newsprint, raw wool, and diamonds. Foreign shipping and insurance earnings probably will not increase. It is possible that foreign earnings through cocoa sales may decrease somewhat.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Canada devalued its currency about 9 percent and followed the devaluation with the lifting of some of its quantitative restrictions on United States imports* In the absence of devaluation, the Canadians wald probably hav® had to impose more severe quantitative restrictions OR imports froa the tTnited States.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Thailand^ devalued 20 percent from 10 baht to tl*QQ to 12.5 baht to 11.00

lias thus far not changed tiie rate of yen 360 to |1.00 which was established

Philippine Sepiblic haa airnounced its intuition of sain tain ing rat© of 2 pesos m l.CO, 70 perc^it of Philippine trade is with the United States.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Following the depreciation of sterling, the only L-tin American country which made any changes in its exchange rate structure vis-a-vis the dollar was Argentina. After an interval in which the exchange market was closed, Argentina a nounced new oultiple rates, more complex than before, involving no change for the dollarrate applicable to major ex- port* (neat and grain) but t .is involved an appreciation of the rate against sterling* In other rates there were depreciations of 1,.; to 47 percent against the dollar* There has been a radio report that Uruguay was discussing the question of its exchange rates with the International Monetary Fund, and some other Latin American countries m&y be contemplating similar dis- cussions* In a number of oases, however, including Mexico, Central American countries, Chile, Brazil, Colombia and Venezuela, there have been official indications that there would be no changes in the present rates*

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Egypt, Israel and Trans Jordan devalued by 30 percent. Iraq, which is in the sterling area, also devalued \yy 30 percent. Iran, Syria, Lebanon, Ethiopia, Saudi Arabia and turkey have not devalued.

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JBHMM.gy.fKK "T^'HLIEQ AfrSA

Union of >outfc Afrlaa

British I«l««iid«

1141 §Mi tttn&u* Ollb ltI«»A» Coloay i»U - («> Ooleiqr Ce) Sorth^m (d) fo^nlffAd itnd»r Brill th (Including furlci ^nd Calcot Islnnds ?»sd (Colony «md I tlnad* i -

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Mala/ States - Coatlnued

(b) Unfederated Malay States Johore Xedafc Kelantam P.rllt fregfaam Brunei Malta Mauritius ligerlai * (a) Colony (») Protectorate (c) Caiaeroons under British Mandate Horth Borneo, State of Northern Bhod»sia Iya»alaad Prot«ctorat« St. Helena and l)«pend«acl«« Sarawak S«ych«lle§ Slarra Leone (Colony and Protectorate) So»aliland Protectorate Straits Settleae&ts Sw&illa&d Tanganyika Territory fon^a Trinidad and Tobago Uganda Protectorate Windward Islands: * Dominica ftremada St. Lucia St. Vincent Zansigar Protectorate C. Other Countries Hot Members of the CoBuaonvesIth of Wat ions Bnrma lire Iceland fast

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United An•trail* Ooylon India Hov Z«aland Shod*fla Unloa of loutfc

BrUltfci British British Soleft»a I«l«Bd» It land a *ad U*p«ttd»!ici«« Fiji (Colaigr mid Kllle* IslftBdt Colony i»U Coiuti - (a) Colony (V) Athaatl («) Borth«ra fwrrltorloa (d) fo«9ls»d nnd*r Caleos Island* «sd tho Oagraan I«l%itds) K«iyi% (Colony aad Moattormt and Tlrgla I«la»ds

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(b) tfaf ederated Malay States Johore K*daa Kelaataa Perils •MMMsl

Halt* Mauritius Ilgerlat - (a) Colony (fc) Protectorate (e) Cwiarooa* tind*r British Mandate Horth Borneo, State of Northtm 3hod«sia Hyafftland Protectorate St. Helena aad Sarawak Seychelles Sierra Leone (Colony aad Protectorate) >o»alll«ad Protectorate Straits 3ettle**at» f amtfaagrika f erritory Ton^a Trial dad sad ?o>acB U«aada rrotaotorate Windward I»laade* - Do»lnicR St. St. Vincent Za»*lgar Protectorate 0. Other Qottatrlaa lot Members of the Coaueonva^lth of Nations Boraa Eire Iceland I rae;

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Subjects Recent Currency Adjustments

Following the announcement of the Chancellor of the Exchequer on September 18, that sterling would be devalued by 30.5 percent in terns of the dollar, there has been a series of adjustments in exchange rates* With the exception of Pakistan, the British colonies and dosdnicns in the sterling area have depreciated by the same percentage. This adjustment has raeant an increase of 43 percent in the cost of the dollar in terns of sterling. In continental Europe, the Scandinavian countries, Finland and the Netherlands followed the British example and depreciated by approximately the sase percentage* Switzerland announced no change in its exchange policy. The other countries of western Europe have made adjustnents which permitted some appreciation In terms of sterling associated with varying degrees of depreciation in terns of the dollar. The German conversion factor was depreciated by 21 percent to 23.&$ per Deutsche mark, which was the old rate under the Weiaar Republic. In Belgium the franc was adjusted downward by 10 percent to 50 Belgian francs to the dollar or 24 even. The French franerwas allowed to depreciate to 350 francs to the dollar, or 22§ percent. In Italy the rate is being allowed to Move within the limit® previously fixed at 575 to 650 lire to the dollar, the most recent rate standing at fiL8 lire to the dollar> or a depreciation of 7 percent, i'inee these four countri< did not adjust their currencies to t&e same degree as the British pound, "^ nave appreciated in tenss of sterling by varying

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percentages. This is also true of the Portuguese escudo which adjusted by 13 percent in terns of the dollar, ^ -^-^^*^—^ ~\Jf In the Western Hemisphere, the laost significant development the decision that Canada would depreciate the Canadian dollar by slightly over 9 percent, taking a position intermediate between the unchanged U.S« dollar and the aoveaent of sterling. Because of the large volume of trade between Canada and the United States, this adjustment may be the most significant in its iamediate short-tena effects, this adjustment any be expected to exert sons? influence in the direction of the more favorable trend in the Canadian dollar position which had recently become lees favorable. Countries of Latin America have in general indicated that they expect to maintain their present exchange rates, thus following the dollar rather than sterling. Only in Argentina has an adjustment of exchange rates been announced. In the Far East, there has been no change in the exchange rate of the Philippine peso or the Japanese yen* In the Middle Last the countries most closely associated with the sterling area have depreciated their currencies, while the reminder have taken no action.

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PRESS RELEASE NO. 91 For Release September 13, 1949 4; 30 pcin.

The International Monetary Fund announced today that the United Pfin^dom has proposed and the Fund has conciii'red in a change in the par value of the pound sterling from the previous rate of one pound sterling to 4.03 U.S. dollars to one pound sterling to

2.80 UWS, dollars. The Fund has also concurred in a proposal by the United Kingdon for a proportionate change in the par values of the separate currencies of all territories, except British Honduras, in respect of vrhich the United Kingdom has accepted the Articles of Agreement of the Fund,

The net; parities in terms of gold and in terms of the U0SS dollar of the weight and fineness in effect on July 1, 194-4? are as follows: Par Values of United Kingdom and Non-Metropolitan Areas

Currency Grams of units Currency fine gold per troy units per U.S. cents per ounc^ of U,S. per currency currency fine gold dollar unit unit

United Kingdom Pound 2,48323 12.5000 0.357143 :80eOOO Gambia ) Gold Coast ) West African) Nigeria ) Pound ) Sierra Leone ) ) Southern Rhodesia ) .Southern ) Northern Rhodesia ) Rhodesian ) 2.48828 12,5000 0.357U3 280.000 Nyasaland ) Pound ) Cyprus Cyprus Pound) Jibral^ar Gibraltar ) Pound )

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Grains of Currency fine gold units Currency per per troy units per U.S, cents currency ounce of U.S. per currency unit fine gold dollar unit Malta Maltese Pound ) Bahamas Bahamas Pound ) Bermuda Bermuda Pound ) 2,4.8828 12,5000 0.357143 280,000 Jamaica Jamaioan Pound) Falkland Island; Fall-land Is lards Pound ) Kenya Uganda East African Tanganyika Shilling 0. .•'244H 250C000 7,14286 14.0000 Zanzibar Barbados Trinidad British T7est British Guiana Indian dollar 0.518391 60.0000 1.71429 58.3333 {Mauritius Mauritius Rupee) Seychelles Seychelles )0,186621 166,667 4.76190 21.0000 Rupee ) Fijian Pound 2.24169 13,8750 0,396429 252.252

Tonga Torgan Pound lc98665 15,6563 C.4/7321 223.553 Hong Kong Hong Kong 0.155517 200.000 5,71429 17.5000 Dollar Malaya (Singapore Malayan Dollar) and Malayan Union) Sarawak The Sarawak ) 0.290299 107,143 3,06122 32,6667 British North and British ) •Borneo North Borneo ) Dollars i;hich ) circulate ) alongside the ) Malayan Dollar) (which is legal tender) have the same value

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PRESS RELEASE NO. 92 FOR RELEASE September 18, 19U9 U:30 PI!

The International Monetary Fund, announced today that the Government

of Australia has proposed and the Fund has concurred in a change in the

par value of the Australian pound. The ne.7 rate is one Australia:! pound

equals 2,2a U. S. dollars. It replaces the initial par value of one Australian pound to 3-22 t». S. dcllars.

In terms of gold and in tsn-S c-t the U. S. dollar of the v/eight and

fineness in effect on July 1, I^hk, the new T^arities aro as follows: 1.9/062 grams of fine gold per Australian pound;

15.6250 Australian pounds per troy ounce of fine c°L:i|

O.l|li6k29 Australian pounds per U. S. dollar; 22U.OOO U. S. cents per Australian pound.

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis NO. 93 FOit ,t September lo, 1949 4:30 PK

The International konetary Fund announced today that the uov^rn-

nient of the Union of South Africa has proposed arid the Fund has con-

currcri in a. change in the par value of the oouth African pouna. The

new rate id one jouth African pouna eqiaals 2tSO U. b. dollars. It replaces the initial par value of one ^outh African ;.ounu to 4.03

U. o. dollars.

In terms of ^old ana in tenris of the U. o. dollar of the v;eight

ana fineness in effect on Jui^r 1, 1944* the new parities are as

follows:

2,43828 grams of fine bolu per bouta African pjund; 12.5000 South African pounds per troy ounce of fine ;;.olcl;

0.357143 South African pounds per U. S. dollar ;

2(30.000 U. S. cents per South African pound.

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For Release rLiL^iojj NO. 94 September 13, 1949 4:30 Fh '

The International Monetary Fund, announced tctiay that the Government of Norway' has proposed, and the Fund has concurred in a change in the par value of the Norwegian krone. The new rate is 7.14286 Norwegian kroner equal one U. S. dollar, which replaces the initial par value of 4.96278 Norwegian kroner equal one iT. 6. dollar. In terms of gold and in tenus of the U. o. dollar oi' the weight and fineness in effect on July 1, 1V44> the new parities are nov; as follows: 0,124414 grams of fine ^old per Norwegian krone; 250.000 Norwegian kroner per troy ounce of fine ^old; 7.14236 Norwegian kroner per U. ;j. dollar; 14.0000 U. S. cents per Norwegian krone.

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PRESS RELEASE.NO. 95 FOR RELEASE September I 1;:30 p.m.

The International Monetary Fund announced today that the Government of India has proposed and the Fund has concurred in

a change in the par value of the Indian Rupee, The nev; rate is

21,0000 U.S. cents per rupee and replaces the initial par value of 30.22^0 U,S. cents per rupee.

In terns of gold and in terms of the U.S. dollar of the i/eight

and fineness in effect on July 1, 1.9hh, the nev; parities are as follovrs

Ocl86o21 grans of fine gold per Indian rupee; 166066? Indian rupees per troy ounce of fine geld;

lu76190 Indian rupees per U.S. dollar;

21.0000 U,S, cents per Indian rupeee

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FOR RELEASE PRESS RELEASE KG. 96 September 3.8, 194-9 4-:30 TM

The International Monetary Fund announced todey that the Government of Denmark hap proposed and the F'und has concurred in & change in the par value of the Danish krone. The now rato is 6,90714 kroner equal

one U. S. dollar, ond replaces the initial par value of 4.a 79901 kroner equal ore U. S, dollar, In terms of gold and in terms of the U. B. dollar of the weight and fineness in effect on July 1, .19-44-, the rev? paritf.es are ae follows: 0,123660 grams of fine gold per Danish krone;

241C750 Danish kroner pyr troy ource of fine pold; 6.90714 Danish kroner per U. S. dollar5 14.4778 II, S. cents r.er Danish krone;-,

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The International Monetary Fund announced today that the Gove.rni.ient of Egypt has proposed and the Fund has concurred in a change in the par value of the Egyptian pound. The nev.r rate is one Egyptian pound equals 2»6?l56 U.S. dollars and replaces the initial par- value of one Sqyptian pound equals 4.133 U.S. dollars. In terms of gold and in terns of the U.S. dollar of the

weight and fineness in effect on July 1, I9hh9 the new parities are as follows: 2.55187 grans of fine goM per Egyptian pound; 12.1885 Egyptian pounds per troy ounce of fine gold; 0.3^82^2 Egyptian pounds per U.S. dollar;

287*156 U.S. cents per Egyptian pound0

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PRESS RELEASE NO. 98 FOR RELEASE September 19, I9h9 3:00 p.nu

The International Monetary Fuad announced today that the Government of Finland has consulted it concerning a change in the U.S. dollar/Finnish Markka rate from loO iiarkkas to th-s U.S. dollar to 230 markkas per U*S. dollar effective September 1?, 19li?. The Fund has advised Finland it has no objection to the proposed cti

Digitized for FRASER http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis HOTBHATIOHAl MONET AEY 3TUND PRESS RELEASE NO. 99 tfot For Release Before 9J30 P.M., September 19,

Camille Gutt, Managing Director of the Puna, today announced that the French Government has consulted the Fund on changes which it proposes to make in the French exchange system in order to eliminate the multiplicity of exchange rates and to establish a uniform exchange rate for all transactions with every currency. The rate would "be based, in effect, on the dollar rate in the ITfreen market of Paris. The uniform exchange rate would, however, not be a fixed rate. It would vary in accordance with the rate quoted from time to time on the Paris "free" market.

Previously financial transactions in dollars, Swiss francs and escudos took place entirely on the basis of the free market rate while trade trans- actions in such currencies and all transactions in other currencies were based 50 per cent on the "free" market rate, and 50 per cent on the official rate of 21^.392 francs for one U. S. dollar,

The extent of the devaluation in the French franc will depend upon the action of the "free" fr The Fund welcomes the reform as a measure of unification of the French exchange system.

At the same time France consulted on two changes proposed in the exchange system applying to French Overseas Territories. These v/ere as follows 5 (1) The franc of the French Possessions in the Pacific (C.F.P. franc), which up to now was linked to the U. S, dollar by a fixed relation of ^9.627 CFP franc per U.S. dollar, would "be pegged to the metropolitan franc at a ratio of 5»50 metropolitan francs per CFP franc. The present par value will no longer be maintained.

(2) The par value of the Rupee of the French Possessions in India will be changed in the same proportion as the change in the par value of the Rupee of India, that is, by approximately 30 per cent. The Fund has concurred in this change.

In terms of gold and of XT, S. dollars, of the v/eight and fineness in effect on July 1, 19 ^4 » the new parities for the Rupee are!

0.186621 grams of fine gold per rupee;

166.66? rupees per troy ounce of fine gold;

^.76190 rupees per U. S. dollar; 21 » 0000 U. S, cents per rupee

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PRESS PEL3ASE HO. 100 FOR IMMEDIATE RELEASE September 19, 19^9

The International Monetary Fund announced today that Canada,

in accordance with Article IV Section 5(i) of the Fund Agreement,

after consultation with the Fund, has changed the par value of the

Canadian dollar to one Canadian dollar equals ,90 10/11 United States

dollar of the weight and fineness in effect on July 1, 19^4. This

new par value replaces the initial par value of one Canadian dollar

equals one United States dollar.

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PRESS RELEASE HO. 101 FOR RELEASE September 20, 9:00 a.m.

The International Monetary Fund announced today that the Government of Iceland has proposed and the i\ind had concurred in a change in the par value of the Icelandic krona. The new rate is 9.3-&0? kronur per U.S. dollar and replaces the initial par value of 6.48885 kronur per U.S. dollar* In terms of gold and in terras 01 the U.S. dollar of the weight and fine, ness in effect on July 1, 1944, tfetf naif parities are as follov/s: 0.0951359 grams of fine gold per Icelandic krona; 326.937 Icelandic kronur per troy ounce of fine gold; 9.3^107 Icelandic kronur per U.S. dollar; 10.705^ U.S. cents per Icelandic krona.

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PH3SS K3I3ASE 1TO. 102 Not For Release before 10SOO a.m. September 20,

The International Monetary ]PuncL announced today that the Government of the Netherlands hs.s proposed arid the Fund has concurred in a change

in the par value of the Netherlands guilder. The now rate is 3»8 Netherlands

guilders equals one U.S. dollar. This rate replaces the initial par value of 2.65265 Netherlands guilders equals one U.S. dollar.

In terms of gold and in terms of the U.S. dollar of the weight and fineness in effect on July 1, 19^, the new parities are as follows:

0.233861 grains of fine gold per Hetherlands guilder;

133*000 Netherlands guilders per troy ounce of fine gold; 3.80000 Netherlands guilders per U.S. dollar; 26.3158 U.S. cents per Netherlands guilder.

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PESSS BELEASE NO. 103 To "be released 12:00 noon, Hhiesday- September 20, 19^9

The International Monetary Fund announced today that the Government

of Greece has changed the exchange rates for the drachma to 15*000 drachmas

per U.S. dollar and 42,000 drachmas per pound, sterling. The Fund has

recognized with approval the establishment of orderly cross rates "by this

action.

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PSIOSS ESLFASE IT00 104 For Immediate Release September 20, 1949

The International Monetary Fund announced today that the Government

of Iraq has proposed and the Fund has concurred in a change in the par value of tho Iraqi dinar*, 2?ha nev? rate is one Iraqi dinar equals 2*80

U8S6 dollars and replaces the initial par value of one Iraqi dinar equals 4,03 U.S. dollarSo

In terms of gold and in terms of the U.S0 dollar of the weight and fineness in effect on July 1, 1944, the new parities are now as follows: 2,48828 grams of fine gold per Iraqi dinarj

12o5000 Iraqi dinars per troy ounce of fine goldj

0.357143 Iraqi dinar per U.S. dollar?

280t000 U.S. cents par Iraqi dinar.

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PRESS ESLEAS3 WO, 105 For Immediate Release September 21, 19^9

The International Monetary Fund announced today that the Government

of Belgium has proposed and the Fund has concurred in a change in the par

values of the Belgian franc and the Belgian Congo franc. The new rate

for the Belgian franc is 50 Belgian francs equal one U.S. dollar and

replaces the initial par value of 43*8275 Belgian francs equal one

U.S, dollar. Under Article IV, Section 9 of the Fund Articles of

Agreement, the Belgian proposal results in an equivalent change in the

par value of the Belgian Congo franc*

In terms of gold and in terms of the U.S. dollar of the weight and

fineness in effect on July 1, 19^4-, the parities are now as follows I

0,017773^ grains of fine gold per franc;

1,750*00 francs per troy ounce of fine gold;

50.0000 francs per U.S. dollar;

2*0000 U.S. cents per franc.

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PR3SS RELEASE NO, 106 For Immediate Release September 23, 19'#

!The International Monetary Fund announced today that the Government

of Luxembourg has proposed and the Fund has concurred in a change in the

par value of the Luxembourg franc,* The new rate is 50 Luxembourg francs equal one TJ.S. dollar and replaces the initial par value of 43 = 8275

Luxembourg francs equal one UCSC dollar. In terms of gold and in terms of the TJ, S. dollar of the weight and fineness in effect on July 1, 1944, the parities are now as follows?

0»017773^ grams of fine gold per Luxembourg franc; 1*750.00 Luxembourg francs per troy ounce of fine gold; 50o0000 Luxembourg francs per U.S. dollar;

2*00000 U. S0 cents per Luxembourg franc*

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Article Title: Gold-Mine Stocks Lead Strong London Market

Journal Title: Dow Jones Wire Service

Date: September 20, 1949

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Article Title: London Market Opening

Journal Title: Dow Jones Wire Service

Date: September 20, 1949

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Article Title: Heavy Trading in London

Journal Title: Dow Jones Wire Service

Date: September 20, 1949

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Article Title: Gold Shares Higher in Heavy London Trading

Journal Title: Dow Jones Wire Service

Date: September 20, 1949

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Article Title: French Markets

Journal Title: Dow Jones Wire Service

Date: September 20, 1949

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Article Title: Wide Swings in Italian Lira

Journal Title: Dow Jones Wire Service

Date: September 20, 1949

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