/ 17 June 1994

Rethink on rates

An extensive reshaping of the global monetary system, to include a return to a more managed system of exchange rates, has been proposed by the high-powered Bretton Woods Commission — established to mark the 50th anniversary of the IMF and World Bank.

The “confidential” final report of the commission, headed by former Federal Reserve chairman Paul Volcker, recommends a strengthening of the monetary role for the IMF to link directly in with the G7, extensive surgery to slim down the World Bank and a refocusing of development assistance on the private sector.

The report together with its detailed staff blueprint — analysing the changes — is to be dispatched to finance ministers and central bankers and to form the centrepiece of next month’s Washington conference to mark the anniversary of Bretton
Woods.

The core recommendation of the report is that the larger industrial countries move towards a system of “flexible exchange rate bands” as part of a new monetary system designed to bring an end to “costs of extreme exchange rate misalignment and volatility”.

The commission argues that extreme swings on the foreign exchange markets has been a contributory cause of the low growth seen among the industrial countries since the 1970s.

“The loss of exchange rate discipline has played a part” in this, the commission argues, calling for “better international co-ordination aimed at stabilising exchange rates”. It urges the G7 countries to giveco-ordination a “higher
priority”.

The attached staff report points out that more intense co-ordination to stabilise exchange rates “involves commitments to alter macro-economic policy to achieve some degree of currency stability”. To be credible this has to he backed by “currency intervention”.