Devaluation-bias and the Bretton Woods system

The exchange-rate system established at Bretton Woods was intended to combine a fixity of the par-value of each member’s currency in the short run with a flexibility of the parity in the longer-run. Because of this emphasis on the fixity of the spot rates and of the parity in the short run, the Fund’s par-value system can be regarded as a variant of fixed exchange rates. The presumption that there is a devaluation-bias in present international monetary arrangements rests primarily on the hypothesis that under any variant of a fixed exchange rate the deficit country is more likely to be forced unwillingly to devalue than the surplus country is to be forced unwillingly to appreciate. The present paper considers the validity of the presumption that a devaluation-bias does exist under the Fund’s system of the adjustable peg. The author reviews the actual experience among Fund members in making changes in the par-value and then considers the analytical and statistical evidence which might throw light on this experience.