Changes in the Fund’s Rules and Practices that were made when the Articles of Agreement were amended to incorporate the SDR facility have been mentioned in earlier chapters. Since many of the changes dealt with the resources held in the Fund’s General Account, they are discussed in more detail here in Part Three.
Most of the amendments involved were proposed by the six eec countries, although the amendments finally adopted were only a portion of what these countries suggested initially.1 As we have also seen, the eec countries insisted that these changes in the rules and practices be made effective simultaneously with the establishment of the SDR facility.
Before the amendments relating to the General Account were approved by the Board of Governors in May 1968, they had been the subject of intensive deliberation, just as had the amendments dealing with the SDR facility. Successive drafts prepared by the staff had been considered at length by the Executive Board, and before completion of the final draft the Finance Ministers and Central Bank Governors of the Group of Ten, at their meeting in Stockholm in March 1968, had agreed to the proposed changes.
This chapter summarizes the nature of these amendments. The General Counsel discussed them in the earlier history and has elsewhere provided a fuller description of them.2 For a while they were referred to as “reform amendments.” But, the word “reform,” suggesting a radical overhaul of the Articles of Agreement or sweeping modifications of them, was too strong. Certainly in retrospect, and also in view of the deliberations after 1971 on reforming the Fund, the changes made in 1969 were modest in number and effect.
An 85 Per Cent Majority for Several Decisions
One of the major developments in the world economy after the creation of the Fund in 1944 was the phenomenal increase in the economic and financial strength of the eec countries. By the early 1960s this strength was reflected in the volume of the Fund’s sales of their currencies. For many years after the Fund started transactions in 1947, most drawings from the Fund were in U.S. dollars. However, beginning with the 1960s Western European currencies had become convertible and the Fund’s sales of Belgian francs, deutsche mark, French francs, Italian lire, and Netherlands guilders had become equally as great and, at times, even greater than sales of dollars. Nonetheless, the combined votes in the Fund of the six eec countries represented only about 16.5 per cent of the total voting power, compared with 21–22 per cent for the United States.
Foremost among the amendments in their dramatic effect, therefore, were those that introduced the requirement of a special majority of 85 per cent of the total voting power of the Board of Governors for several decisions affecting the General Account. An 85 per cent majority was required for increases in quotas resulting from a general review; previously an 80 per cent majority had been required. A like majority was required for any decision dealing with the payments related to such increases. Two kinds of decision were affected by the latter provision: decisions dealing with payments of subscriptions due in connection with quota increases, such as a decision to reduce the proportion payable in gold, and decisions dealing with the mitigation of the effects of such payments. In 1964, for example, the Fund had decided to sell gold to reserve currency members in order to mitigate the effect on the gold holdings of these members when they sold gold to the Fund’s other members to enable the latter to pay gold subscriptions due in connection with quota increases. These decisions had been taken by the Executive Board by a majority of the votes cast. The amendment to the Articles meant that decisions of this kind were to be reserved to the Board of Governors and would require a majority of 85 per cent of the total voting power. A majority of 85 per cent of the total voting power of the Board of Governors was also now required for uniform proportionate changes in par values; the original Articles had provided that the authority to take such a decision was reserved to the Board of Governors but could be taken by a majority of the votes cast.
The argument for an 85 per cent majority of the total voting power for these decisions related to the General Account was that there was a logical link between these decisions and decisions to allocate or cancel SDRs. The eec countries argued that decisions to adjust all Fund quotas, to mitigate the secondary impact of the payment of subscriptions as a result of a general quota review, and to bring about a uniform proportionate change in the par values of all currencies, all affected the volume of world liquidity. Accordingly, they should command the same general support as decisions on allocations or cancellations of SDRs, which also required an 85 per cent majority of the total voting power of the Board of Governors.
The special majority required for adjustment of a member’s quota not resulting from a general review, such as could be made in individual cases on the application of any member, was not changed, that is, a majority of 80 per cent of the total voting power of the Board of Governors continued to be required.
Amendments Governing Use of Resources
Some of the amendments enacted into law features of the Fund’s policies on the use of its resources that were already in practice. This was most notably the situation with respect to purchases in the gold tranche.
Very early in the discussions about world liquidity a number of suggestions had been made, especially by the Belgian authorities, for changes that would enhance the character of the Fund’s gold tranche and persuade more members to regard it as a reserve asset. These suggestions had been considered informally by the Managing Director as early as 1964, and Messrs. Cecil de Strycker and Hubert Ansiaux (Belgium) had addressed remarks to this effect at the Annual Meetings in 1964 and 1965.3 Thereafter, the Fund’s management had discussed in some detail the views of the Belgian authorities on this matter and had ascertained the opinions of other members. Hence, there was considerable background to this amendment prior to the adoption by the Governors of the resolution at Rio de Janeiro in September 1967.4
The Articles as amended provided that a member was entitled, without challenge, to purchase from the Fund the currency of another member if the proposed purchase was a gold tranche purchase. Gold tranche purchases, which had been virtually automatic as a matter of policy, thus were made legally automatic under the Articles. This was the least controversial, although not the least complicated, of the amended rules and practices. Furthermore, the term gold tranche purchase was defined for the first time:
Gold tranche purchase means a purchase by a member of the currency of another member in exchange for its own currency which does not cause the Fund’s holdings of the member’s currency to exceed one hundred per cent of its quota, provided that for the purposes of this definition the Fund may exclude purchases and holdings under policies on the use of its resources for compensatory financing of export fluctuations.5
There were also related amendments which could be described as improvements in the qualities of the gold tranche. For example, a member could make a request for a gold tranche purchase without challenge on the ground that the purchase was needed to meet a large or sustained flow of capital. Under the original Articles such drawings were permitted only in the super gold tranche and only in specific circumstances and in certain currencies.
Members were to be assured of remuneration on their super gold tranche positions, the term remuneration being used to indicate that it was not interest paid to a creditor and also to make the point that it was an expenditure which the Fund would have to make whatever its income position might be. The rate of remuneration was set at 1½ per cent per annum, but the Fund was authorized to make changes in this rate. Authority was conferred on the Fund to levy on members making gold tranche purchases a service charge lower than the former minimum (½ of 1 per cent) or to dispense with a service charge altogether.
In the light of the change in the status of the gold tranche, the Executive Board took a decision on September 15, 1969 making a number of changes in the Fund’s operational practices with respect to gold tranche purchases. Gold tranche purchases should not await the Board’s prior approval but should be effected automatically and as promptly as practicable, normally within two to three business days after the receipt of a valid request. The service charge on gold tranche purchases made after July 27, 1969 was abolished. The floating character of the compensatory financing facility was confirmed by deciding that the Fund’s holdings of currency resulting from purchases under the compensatory financing decision would be excluded for the purposes of defining a gold tranche purchase. Stand-by arrangements would be worded so as to exclude purchases in the gold tranche.6
Shortly after the amendments had gone into effect, Rule I-9 of the Rules and Regulations was adopted, according to which remuneration was to be paid as of the end of the Fund’s fiscal year in gold and the member’s currency. In April 1970, as discussed in Chapter 12, the Fund decided to offer to pay remuneration in SDRs; as described in Chapter 19, remuneration was paid in May 1970 and May 1971.
The amendment making gold tranche purchases legally automatic was accompanied by others which made explicit what had been implicit before: that use of the Fund’s resources must be temporary in character and that the Fund must adopt policies to this end. The fifth purpose of the Fund, stated in Article I, was amended by adding the word temporarily: “To give confidence to members by making the Fund’s resources temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” The last sentence of Article I was changed by adding the words policies and: “The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.”
These amendments to Article I were given operational effect by two new subsections in Article V, Section 3, “Conditions governing use of the Fund’s resources.” Subsection (c) now stated that a member’s use of the Fund’s resources should be in accordance with the purposes of the Fund, and directed the Fund to adopt policies on use that would assist members to solve their balance of payments problems in a manner consistent with the purposes of the Fund and that would establish adequate safeguards for the temporary use of its resources. Subsection (d) now provided that the representation made by a member when it requested the use of the Fund’s resources should be examined to determine whether the proposed purchase would be consistent with the provisions of the Articles and with the Fund’s policies, subject to the exception for gold tranche purchases.
The foregoing amendments were not intended to introduce policies or practices different from those that the Fund had already developed, nor to make the rules with respect to the use of the Fund’s general resources more restrictive than they had been. Nevertheless, these amendments did make an important change. The Fund no longer had the legal power to make the use of the Fund’s resources, other than in the gold tranche, quasi-automatic or quasi-conditional. One of the consequences of this change, as will be seen in Chapter 16, was that in 1971 the Fund could not permit virtually unconditional drawings to help members to finance the quota increases authorized under the fifth general quota review of 1970, as had been done in connection with the previous general quota increase in 1965–66.
Three factors were responsible for the amendments described thus far in this chapter.
One, there was a desire to crystallize a function of the Fund that had gradually evolved. The outside world tended to look upon a member’s drawing from the Fund as a sign of the Fund’s approbation of that member’s economic and financial policies. A drawing from the Fund should, accordingly, mean that the Fund had put its stamp of approval on the member’s policies.
Two, and more important, the SDR facility was to take care of any need for additions to liquidity of an unconditional nature. Unconditional liquidity should not be generated from the Fund’s regular resources, except in the form of drawings in the gold tranche.
Three, the proponents of these amendments argued that it would not be logical to permit the creation of conditional liquidity through the General Account by a majority of votes cast while a higher majority for the same purpose was required for unconditional liquidity created through the Special Drawing Account.
Amendments Governing Repurchases
Substantial changes were made in the original provisions of the Articles governing repurchase and the calculation of monetary reserves by which repurchase obligations were determined. These amendments formed the longest chain of all the amendments affecting the General Account.
The negotiation of these amendments stemmed from the thesis that two aspects of the original provisions were unsatisfactory insofar as they involved reserve currencies. One of these was that, when a member’s monetary reserves were calculated for the purpose of determining the member’s repurchase obligation, what were called its “currency liabilities” were deducted from its gross reserves (the currency liabilities of a member being the holdings of its currency by the monetary authorities, official institutions, and banks of other members). Some monetary officials contended that this calculation gave an undue advantage to the reserve currency countries. Because their currencies were held by other members, calculations for reserve currency countries included deductions to which the other members of the Fund were not entitled, and hence reserve currency countries were not subject to as stringent repurchase obligations as were other members.
A further objection to the original repurchase provisions related to what was known in the Fund as “abatement.” Abatement was the principle by which a calculated repurchase obligation was canceled if it accrued in the currency of a member which the Fund could not accept because the Fund’s holdings of that currency could not be increased above 75 per cent of the member’s quota by repurchases. The member for which the obligation was calculated was not required to use another convertible currency or gold for the repurchase transaction.
Abatement was criticized because repurchase obligations resulted from an improvement in the member’s monetary reserves and a member could be freed from discharging a repurchase obligation even if its monetary reserves had increased. The problem had become more acute since 1962 because the Fund had been unable to accept either U.S. dollars or pounds sterling in repurchase transactions. In order to enable members to carry out their repurchase commitments, and hence be able to continue to draw on the Fund’s resources, the United States had arranged with the Fund in 1964 and 1965 to draw currencies that were acceptable to the Fund in repurchases and to make them available at par to countries that held U.S. dollars and needed to fulfill repurchase obligations or commitments. The arrangements between the United States and the Fund were technical rather than substantive. The currencies were drawn under a stand-by agreement (although they were in the gold tranche) and they were normally returned immediately to the Fund by the country making the repurchase. This procedure was, accordingly, sometimes called a turnstile operation.
Two basic amendments relating to repurchase were introduced. The first provided that currency liabilities would not be deductible in the calculation of monetary reserves. The second provided that repurchase obligations that had been abated because the Fund could not accept the currency in which they had accrued could be discharged in another convertible currency which the Fund could accept. In sum, these changes in the repurchase provisions involved the transition from a concept of monetary reserves net of currency liabilities to a gross concept and the effecting of repurchase transactions in a greater number of currencies. These changes affected both the amounts to be repurchased and the media in which repurchases were made.
These two amendments were accompanied by others, some of which were intended to soften the impact of the increase in repurchase obligations that might have followed from the two basic reforms just described. Allowance was to be made for any decreases during a year in the Fund’s holdings of a member’s currency; thus, the calculation of repurchase obligations at the end of the year could give credit to the member for any other repurchases made during the year. Also, repurchase obligations were to be limited to the equivalent of 25 per cent of quota for any financial year; any excess would be postponed. Furthermore, repurchase obligations that would reduce a member’s monetary reserves below 150 per cent of its quota were to be abated; previously, the comparable figure had been 100 per cent of a member’s quota.
Interpretation of the Articles
Article XVIII, the provision on interpretation of the Articles and a topic of fundamental importance in international law, was amended to change the procedure for dealing with questions of interpretation. The Executive Board would continue to take decisions on questions of interpretation as provided in the original Articles, and any member could appeal to the Board of Governors, whose decision was final. But questions of interpretation referred to the Board of Governors were now to be submitted within three months after the Executive Board’s interpretation and would be considered by a Committee on Interpretation of the Board of Governors. The Board of Governors would establish the membership, procedures, and voting majorities of the committee, each member of which would have one vote. The decisions of this committee were now the only decisions within the structure of the Fund that were taken without weighted voting. This was particularly important because a decision of the committee would be deemed to be a decision of the Board of Governors unless the Board repudiated the decision by a majority of 85 per cent of the total voting power.
The possible size and composition of such a Committee on Interpretation of the Board of Governors were discussed by the Executive Board on several occasions, and the staff circulated a number of papers projecting alternative committee sizes and group formations and the corresponding percentages of quota and voting power that would be involved. But by the end of 1971 no consensus had been attained for a recommendation to the Board of Governors.
Part of the significance of the amendments to the Articles of Agreement that became effective in July 1969 was that they were the first modifications of the original Articles. However, as will be seen in Part Five, within a few months after these first amendments had gone into effect the possibility of additional and much more far-reaching amendments, especially concerning par values, was already under consideration. Moreover, the serious discussions about reforming the international monetary system that began at the end of 1971 were, in essence, deliberations concerning what basic alterations should be made in the Fund’s Articles of Agreement.
History, 1945–65, Vol. II, pp. 599–603; and Joseph Gold, The Reform of the Fund, IMF Pamphlet Series, No. 12 (Washington, 1969).
Statement by the Temporary Alternate Governor of the Fund for Belgium, Summary Proceedings, 1964, pp. 77–78, and Statement by the Governor of the Fund for Belgium, Summary Proceedings, 1965, pp. 131–32.
Resolution No. 22-8, adopted September 29, 1967; Vol. II below, pp. 54–55.
Article XIX (j).
E.B. Decision No. 2836-(69/87), September 15, 1969; Vol. II below, pp. 202–203.