Devaluation Procedures and the Role of the International Monetary Fund

Abstract

PRIOR knowledge of the intention to devalue the currency of a country inevitably leads to a desire to export c-apital directly or indirectly in the form of goods, usually underinvoiced,3 or in the urge to purchase from abroad as much as is possible before the devaluation becomes effective.4 The result of any or all of these activities is to aggravate the deficit already present in the nation's international accounts. It is conceivable that such a drain may further endanger the position of the currency in such a way that the subsequent devaluation might not bring the desired relief.5 The purpose of this note is to examine the rules and laws of member countries relating to devaluation of their respective currencies and the provisions for devaluation made by the Fund and to assess whether the national legal requirements co-ordinate with the Fund's regulations. Since one of the major requirements for an effective devaluation is a swift and sudden announcement of the move, we shall attempt to evaluate whether a swift move can be accomplished by member countries at this time. The International Monetary Fund's resources are available to assist member countries by providing financial assistance to overcome temporary disequilibriums in their balance of payments and so to help them avoid policies that re,,Associate professor of finance, University of Chicago. 2 New York City. 3 The following observations refer to the French experience. Part of the external deficit is undoubtedly only apparent. So long as the rise in prices destroys confidence in the national currency, exporters will try to build up holdings in stable currency and the simplest way to do this is to undervalue exports in their declarations to the authorities and leave the balance abroad. It is noteworthy that the average unit value of exports in I947 was steadily falling while the index of wholesale price was continuing to rise.... It may be assumed that clandestine French holdings of foreign assets have increased considerably more than known French holdings of such assets have declined (M. Pierre Uri, quoted in United Nations Economic Commission for Europe, Economic Survey of Europe in I948, p. I39, n. 2). A similar observation is reported in the Economist (London), December 25, I948, p. I052: the first half of I948 exports were i5 per cent lower than the previous year by dollar value, but 36 per cent higher by weight. Though there are some other partial explanations of this paradox, the main explanation is that French exports are underinvoiced. In other words there is a large flight of capital, which unofficial estimates put at $500 million, a sum equal to half the American aid extended to France this year.