Post-war exchange rate policy - International Finance

Post-war exchange rate policy

Recall that in the Bretton Woods agreement it was recognized that countries, being compelled by circumstances, can change the value of their currencies in the face of persistent problems of the balance of payments. Therefore, in principle, it was assumed that the exchange rates are correctable. However, such changes were not welcomed, and the countries were not inclined to change the parity of their currencies in practice. The IMF was called upon to provide countries with short-term financing, so that they did not have to resort to devastating exchange rate changes when they encountered difficulties in the balance of payments. The articles of the IMF agreement impose on each of the member countries the obligation "to avoid manipulating exchange rates or the international monetary system in order to prevent the effective stabilization of the balance of payments or to obtain an unfair advantage in competition with other Member States."

At the same time, governments sought to eliminate protectionism that hampered the development of world trade. To prevent the resurgence of the damaging protectionist measures that characterized the 1930s, the United States emerged as the leader of a group of two and a half dozen countries in the formation in 1947 of the General Agreement on Tariffs and Trade ( GATT ) and the GATT member countries agreed on the first multilateral tariff cuts after the war. GATT and now establishes rules of conducting a policy in the field of foreign trade.

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Thus, in the post-war period, policy makers from different countries made efforts to combine fixed exchange rates with trade liberalization, despite the fact that these two policies in the past contradicted each other when countries faced balance-of-payments problems . This created a strong tension between the international monetary system presented by the IMF and the international trading system presented by the GATT. By discouraging exchange rate changes, the Bretton Woods system encouraged countries to impose import restrictions in order to promote balance of payments adjustment.

Article GATT recognizes that countries may limit their imports for balance-of-payments reasons, stating the following: "... any contracting party may limit the quantity or value in order to secure its external financial position and its balance of payments goods, allowed to import. Import restrictions established, maintained or enhanced by a contracting party in accordance with this article shall not be more significant than required: (1) to prevent an imminent threat of a serious reduction in its foreign exchange reserves or to stop such a reduction, or (2) the case of a contracting party with very low foreign exchange reserves to achieve a reasonable growth rate of its reserves. "

Search for a compromise. In 1973, for most major currencies, the floating exchange rate regime, , in which the prices of various currencies are determined by the foreign exchange market, acted primarily. However, many developing countries opted for maintaining fixed rates or currency-binding regimes.

It should be noted that in the postwar period, the foreign trade policy of developing countries in conditions of fixed exchange rates caused even more problems than in advanced economies. Although the goal of fixed rates is to ensure foreign exchange discipline and contain inflation, this has often been done in a suboptimal way, which has led to an overvaluation of the national currencies. As a result, developing countries have resorted to import containment measures, such as quantitative or currency restrictions, to compensate for overvaluation and reduce pressure on the balance of payments. Although such restrictions tend to accumulate over time and with their help managed to reduce imports, they almost never prevented the subsequent depreciation of the currency.

In the 1990's. the countries of Eastern Europe with a transition economy faced the need for the same compromise choice between their exchange rate and foreign trade policies. The former socialist bloc countries, such as Bulgaria, Hungary, Poland, Romania and Czechoslovakia (before dividing into the Czech Republic and Slovakia) sought to stabilize the nominal rates of their currencies, but failed to contain inflation within the country and increase labor productivity. As a result, the exchange rate of their currencies turned out to be too high. And, instead of changing their nominal exchange rates, these countries began to introduce tariff surcharges for imports and other trade restrictions. Such a policy negatively affected their foreign trade, not solving the fundamental problems of the balance of payments that arose from the deviation of the exchange rate from the equilibrium level. Even more difficult was the situation in the CIS, when Russia, rushing into the policy of monetary liberalization, faced the extreme understatement of the national currency, without gaining a single advantage in return. At the same time, currency speculators used cheaply purchased rubles to buy state-owned enterprises at par value, using the depreciated national currency for this purpose.

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