ECONOMIC

attempt was made to agree on a code of conduct to guide governments informulating their exchange rate and intervention policies, extensive consultationshave led to wide acceptance of some basic tenets that should influencethe formulation of policies in this area. An idea repeatedly expressedin official statements is that countries should intervene in the foreign exchangemarket when intervention is necessary to maintain orderly marketconditions. On the other hand, interventions aimed at obstructing oraccelerating a basic market trend would be generally regarded as harmful.There is probably also wide recognition that a country with meager reservesmay need more latitude for allowing its exchange rate to decline than a countrywith ample reserves; and, conversely, a country with ample reserves mayneed more latitude for allowing its exchange rate to adjust upward than acountry with meager reserves. Similarly, when its rate is rising, a country withmeager reserves should have wider latitude to intervene in the foreign exchangemarket than a country with ample reserves, whereas a country withample reserves should have a wider latitude to intervene in the foreignexchange market when its rate is falling.The conceptual basis for these conventions, if one may call them that, issimilar to the ideas put forward by the United States and some othercountries for reforming the international monetary system. The continuingdiscussion in the Committee of Twenty can be expected to give these ideasmore concrete form.Capital ControlsAnother development during 1973 has been the adoption of new measuresfor controlling capital movements, as can be seen in Table 54. (Controlsalready in force at the beginning of the year are not shown in thetable.) Capital controls were tightened further in the first part of 1973 bymany major industrial countries, when exchange market developments putupward pressure on many of the European currencies and several countriessought to moderate this pressure by imposing restrictions on banks and otherfinancial intermediaries. Some of the more common restrictions were discriminatoryreserve requirements, and penalty rates or prohibition of interestpayments on nonresident deposits. Capital controls did not, however, succeedin preventing large speculative short-term capital inflows, either prior to therevaluation of the dollar in February or from late May to early July.Some countries, on the other hand, took steps to discourage capitaloutflows or encourage capital inflows. Italy required noninterest-bearingdeposits against investments abroad in order to stem a continuing capitaloutflow. Japan relaxed controls on inward direct and portfolio investmentto reduce the overall balance of payments deficit which developed in 1973.Since the 1960's the United States has maintained three kinds of restraintson capital outflows: an interest equalization tax on purchases of foreignsecurities, restrictions on foreign direct investments by U.S. corporations,and limitations on foreign lending by U.S. financial institutions. Theserestraints were relaxed in December 1973, and removed entirely in January1974.200