November 1949 NOTES ON FOREIGN CURRENCY ADJUSTMENTS Events leading to the devaluation of the pound selves to combination of devaluation with subsidiza- sterling on September 18 and to the subsequent tion of food and essential raw material imports and adjustment of many other currency values were prevention of excess profits in certain lines of export reviewed in the last issue of the BULLETIN. The business. Countries with multiple rates which de- present article reports, country by country, on valued thus increased the spread between the high- the principal technical changes and economic issues est and lowest rates. Most countries with unitary resulting from the currency adjustments. exchange rate systems, however, resisted the tempta- Within the few weeks since sterling devaluation tion to adopt the multiple currency device. the variety of national experience has been striking. Broadly stated, the policies adopted by most Possibly the best illustration of the wide range of countries during and immediately after the ex- results following the monetary decisions of differ- change rate adjustments appear to have been moti- ent countries is the contrast between the removal vated primarily by two considerations: first, the of obstacles to the achievement of the Benelux Eco- prevention of inflationary developments; second, nomic Union and the increase in economic friction the preservation of the competitive position of ex- between India and Pakistan. ports. The first consideration, for a long time the Departure of some countries from expected pat- main obstacle to devaluation, was finally subordi- terns of reaction also deserves mention. Devalua- nated in the countries that devalued. In many of tion should, in general, make it possible to relax these countries, however, concern with monetary economic controls and to eliminate or reduce dis- stability has since dominated domestic economic crimination against the dollar. Yet a number of policy and it has induced several other countries not countries are contemplating a series of new controls to devalue or to devalue less than sterling. In addi- and subsidies in order to minimize the effect of tion, several countries have sought benefits from an devaluation upon the cost of living, and at least one intermediate devaluation that would improve their country appears to have increased discrimination competitive positions in dollar markets and at the against dollar goods. same time permit cheaper imports from the sterling The impact of devaluation on the foreign ex- area. Some countries have hesitated to follow ster- change rate systems of different countries has varied ling devaluation because of concern lest a drastic widely. In some instances devaluation of the pound devaluation raise excessively the local currency cost has led to a more unified system of exchange rates. of dollar imports and thereby retard economic A few countries, notably France and Greece, have development. taken the occasion of devaluation of sterling to WESTERN EUROPE make their exchange rate systems reflect the new 1 official parity of the pound sterling with the dollar. United Kingdom. The recent world-wide currency Previously, the pound was officially quoted within adjustments were initiated by the announcement of these countries at a discount in relation to the the British Chancellor of the Exchequer on Sep- tember 18 that the exchange rate for the pound had dollar for certain foreign transactions. Also, devalu- been reduced by 30.5 per cent from U. S. $4.03 to a ation has permitted several gold-producing coun- new fixed rate of U. S. $2.80. The substantial per- tries to move toward the abolition of gold-mining centage of the devaluation was determined by three subsidies. In other countries, however, considerable main considerations: the need to provide an effec- impetus has been given to multiple pricing of for- tive incentive for exports to North America (taking eign currencies. Multiple exchange rate systems that into account the effect on export prices of increased were already in existence conveniently lent them- sterling prices for imports), the desire to terminate "cheap" sterling transactions in which the pound NOTE.—This article was prepared by the staff of the Inter- national Sections of the Board's Division of Research and 1 Statistics. It is a factual statement, based on published in- See also "Readjustment of Foreign Currency Values," formation, and necessarily incomplete at this time. Federal Reserve BULLETIN, October 1949, pp. 1169-81. 1328 FEDERAL RESERVE BULLETIN Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis November 1949 NOTES ON FOREIGN CURRENCY ADJUSTMENTS CHANGES IN CURRENCY VALUES [As of November 14, 1949] Currency value: Date of U. S. cents per unit of currency Reduction Country Monetary unit devalua- in value tion (per cent) Old New WESTERN EUROPE: United Kingdom1.. Pound Sept. 18 403.00 280.00 30.5 2 *.3676 France Franc—Commercial Sept. 20 22.3 Free *.3030 *.2857 5.7 Belgium-Luxembourg3. Franc Sept. 21 2.28 2.00 12.3 Netherlands4 Guilder Sept. 20 37.70 26.32 30.2 Western Germany Deutsche mark Sept. 19 30.00 23.81 20.6 NORTHERN EUROPE: Sweden Krona Sept. 20 27.78 19.31 30.5 Norway Krone Sept. 18 20.15 14.00 30.5 Denmark Krone Sept. 18 20.84 14.48 30.5 Finland Markka Sept. 19 .625 .4348 30.4 Iceland Krona Sept. 20 15.41 10.71 30.5 SOUTHERN EUROPE: Italy Lira Sept. 19 *.1739 *.1602 7.9 Greece Drachma Sept. 22 *.01 .0067 33.3 Portugal Escudo Sept. 21 4.00 3.48 13.1 Spain Peseta Oct. 7 MIDDLE EAST: 300.00 Israel Pound—Imports Sept. 18 6.7 Exports 403.00 280.00 30.5 Iraq. Dinar Sept. 20 403.00 280.00 30.5 Egypt. Pound Sept. 19 413.30 287.16 30.5 SOUTH AFRICA. Pound Sept. 18 403.00 280.00 30.5 SOUTHERN ASIA AND FAR EAST: India Rupee Sept. 18 30.23 21.00 30.5 Ceylon Rupee Sept. 20 30.23 21.00 30.5 Burma Rupee Sept. 18 30.23 21.00 30.5 Thailand Baht Sept. 27 10.08 8.00 20.6 AUSTRALIA AND NEW ZEALAND: Australia Pound Sept. 18 322.40 224.00 30.5 New Zealand Pound Sept. 19 403.00 280.00 30.5 CANADA. Dollar Sept. 19 100.00 90.91 9.1 LATIN AMERICA: 8 Argentina .. Peso—Imports Oct. 1 26.80 18.62 30.5 Exports 25.12 17.46 30.5 Uruguay.. Peso Oct. 6 (5) Paraguay. Peso Nov. 7 <*) Peru Sol Nov. 14 (*) * These rates are based wholly or in part on current quotations for the dollar in officially regulated free markets. 1 All local currencies of British dependencies, except British Honduras, have been devalued by 30.5 per cent. 2 All local currencies of French dependencies are pegged to the French franc, except: (1) the rupee of the French possessions in India, which is kept at par with the Indian rupee; and (2) the Djibouti franc, which retains its old dollar parity of .47 cent. 3 The belgian Congo franc remains at par with the Belgian franc. 4 The Indonesia guilder remains at par with the Netherlands guilder, but the Surinam guilder retains the old dollar parity of 53 cents. 6 See text for description of adjustment of multiple exchange rate system. 6 These rate changes apply to specified commodity transactions. See text for variety of effective rate changes applicable to trade transactions. The free market rate, for nontrade transactions, declined by approximately 46 per cent. was quoted below U. S. $3.00, and the need to make of commodities such as British automobile^ and clear that the new rate was a definitive one. cotton and woolen textiles was much more consid- One of the major benefits hoped for from devalu- erable. In general, price changes seem to aim at ation was an expansion of Britain's dollar earnings. cutting dollar prices only where this would result In some cases, British exporters appear to have in larger dollar earnings. adjusted their pound prices in accordance with To encourage the development of trade in new American market conditions. The sterling price products, the Government is preparing a program of whiskey, for example, was raised to the full guaranteeing exporters, under the Exports Credit amount of the devaluation. Prices of other prod- Guarantee program, a proportion of their prelimi- ucts have varied. While china prices were reduced nary losses in getting new products established in about 10 per cent in dollars, the cut in dollar prices the American market. The exporter would be in- NOVEMBER 1949 1329 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis November 1949 NOTES ON FOREIGN CURRENCY ADJUSTMENTS sured against loss resulting from the costs of market prices of United States goods compared to competi- surveys and trade promotion. tive British and European products as a result of The British Government has recognized the the currency adjustments; the cuts in dollar imports grave danger that a price-wage spiral would wipe following the recommendation of the Common- out the benefits to be derived from devaluation. wealth Finance Ministers who met in London last After considerable effort at "disinflation" in 1948, June; and prospects for expanded American and renewed inflationary pressures began to appear in Canadian purchases of sterling area raw materials. the course of 1949 as a result of the rising level of The third part of the deficit consisted of dollar Government expenditure and the continuing high payments on behalf of the entire sterling area to level of investment. With devaluation, the infla- nondollar countries, particularly Belgium, Switzer- tionary danger became more serious because of the land, Western Germany, and Iran. Since the cur- increased pressure on prices and wages through rencies of all these countries have been devalued less higher pound prices for imported raw materials and than sterling, their trade with the sterling area foodstuffs.