Journal Issue
Finance & Development, December 1977

International law and the IMF: The role of law in the working of the Fund and in the achievement of its objectives

International Monetary Fund. External Relations Dept.
Published Date:
December 1977
  • ShareShare
Show Summary Details

Joseph Gold

The Articles of Agreement of the International Monetary Fund, which entered into force on December 27, 1945, created international law for a large, and now vast, number of states. Although that phenomenon in itself is not unusual, the Articles had this effect on economic activities in which the formation of policy had been regarded as peculiarly a matter of national prerogative. The exercise of unlimited national authority may seem strange today after acceptance of the truism that the balance of payments of a country and the exchange rate for its currency necessarily imply relationships with the balances of payments and currencies of other countries. As a result of the old attitude, for which the clapping of one hand comes to mind, there was scarcely any international monetary law, whether customary or conventional and multilateral, under which countries were bound to cooperate in monetary matters or incurred responsibility for their monetary policies. International law of this kind was largely an invention of the Articles.

This is not the occasion for a detailed discussion of the purposes of the Fund, and it must suffice, therefore, to recall that they incorporate such propositions as the thesis that, over time, equilibrium in the balance of payments should be sought because it will promote the economic welfare of the populations of member countries and that exchange rates should be subject to international scrutiny and agreement. But the creation of international law that can be attributed to the Fund is more extensive than the prescriptions of the Articles that give expression to such ideas. The provisions of the Articles have been the basis of, or the model for, the provisions of numerous other treaties that deal with such monetary matters as the valuation of currencies, convertibility, maintenance of the value of holdings of currency, or avoidance of restrictions on or other impediments to international payments and transfers, or with such institutional topics as the structure of international organizations or their power to interpret their charters.

This article has been adapted from “A Note on the Role of International Law in the International Monetary Fund and in the Achievement of Its Objectives” prepared by the author for the eighth Conference on the Law of the World, held in Manila on August 21-26, 7977.

The Fund’s awareness of the effect of its Articles and practice on the law of other organizations is not limited to those occasions on which it agrees to assist in the drafting of other treaties or to exercise functions or to give advice under provisions in them. (These other treaties are mostly financial, but the number of them grows steadily as multilateral, regional, and specialized organizations become more complex.) The Fund’s central role in the international monetary system induces it to take account of the consequences of its decisions beyond its own legal boundaries. To cite a recent example, one reason why the Fund did not modify the composition of the currencies and amounts constituting the present definition of the special drawing right (SDR) in the review by the Fund two years after it adopted the definition was the disturbing impact so early a change might have had on the rapidly increasing use of the SDR as a unit of account in activities other than those conducted under the Articles of the Fund.

Development of monetary law

The law as drafted originally at the Bretton Woods Conference has not remained static. If the Fund had not responded to the continuously and sometimes convulsively changing problems of international monetary relations, the Articles would long since have become dead letter. The law has been developed or adapted to meet changing or new needs by means of modified or novel practices and by amendment of the Articles.

For the adoption of modified or new practices it has always been necessary to demonstrate consistency with the Articles and with broader international law, and, unless a departure from existing practice was intended, with the existing body of interpretations, decisions, and rules. The whole complex of legal materials has been considered a corpus juris, under which consistency with jus cogens (law that must be applied) was a necessity and consistency with existing jus dispositivum (law that may be applied) a desideration unless some element in it had to be changed because it had become inadequate to promote the purposes of the Fund and therefore the interests of the international monetary system.

The development and adaptation of the practice of the Fund has been an evolutionary process, but it has produced results of a novel legal character that were not foreseen by the drafters of the original Articles. It must suffice to mention such aspects of practice as the stand-by arrangement, a consensual but legally noncontractual instrument, by which the Fund gives members pursuing satisfactory economic programs the assurance that they will be able to purchase foreign exchange from the Fund during a stated period. Nor could the drafters have foreseen the importance of the doctrine of “conditionality,” in accordance with which the Fund has developed a body of practice on what constitutes satisfactory economic programs and how members can assure the Fund that they will pursue these programs so as to be able to use the Fund’s resources in support of their currencies.

For more than two decades the Fund relied exclusively on its express and implied powers to develop and adapt its practice in order to respond to the needs of the international monetary system. It was tacitly understood that any important amendment would be difficult to negotiate, and that amendment was so complicated a process that only important modifications of the Articles could be contemplated. The possibility of amendment disappeared from consciousness until the mid-sixties, but when it was finally undertaken it was in a cause that represented a remarkable advance in international monetary law. The main purpose of the first amendment was to give the Fund the authority to create a new monetary reserve asset, the SDR, to meet the global need of monetary authorities for international liquidity without having to rely on further acquisitions of gold or reserve currencies, to assist the Fund and members to pursue the purposes of the original Articles, and to enable the Fund by rational and concerted decision to influence the volume of global liquidity so as to avoid economic stagnation and deflation as well as excess demand and inflation in the world.

Re-creation and development of law

The first amendment, which took effect on July 28, 1969, made few changes in the original Articles apart from the addition of a chapter of provisions dealing with the SDR. August 15, 1971 is another date that will live in the history of monetary law. The announcement that the United States would no longer convert foreign official holdings of U. S. dollars into gold or other reserve assets led, ineluctably it now seems, to the end of the par value system that was a central feature of the original Articles. The widespread neglect by members of much of the law following the breakdown carried with it no intention on their part to accept the demise of law. Their conviction of the value of international monetary law had become unassailable. The Fund and national monetary authorities began almost at once to consider and then to negotiate the reform of the international monetary system by means of a second amendment of the Articles.

A proposed second amendment has been submitted to members of the Fund and is well on its way to acceptance in accordance with the requirements of the Articles. The proposal ranges over the whole breadth of the Articles, including the provisions introduced by the first amendment, and leaves little untouched. Once again this is not the occasion to examine the proposal in detail. The temptation, however, to mention two aspects of it is irresistible. If the SDR was the first bold leap after Bretton Woods toward an international monetary system based on new principles, a further leap has been taken by the agreement, which is incorporated in the provisions of the proposed second amendment, to bring about a gradual reduction in the traditional role of gold. Something old, however, is being undertaken alongside something new. Important aspects of the Fund’s corpus juris as developed by practice will be incorporated in the Articles by the second amendment. This feature of the amendment gives a special meaning to the apothegm that the life of the law is experience.

Techniques for development of law

Some of the techniques available to the Fund for developing and adapting its law, such as amendment and rulemaking, have been mentioned already. Among other techniques are the Fund’s powers to call for the collaboration of members in the promotion of certain general purposes of the Articles or in the pursuit of more specific aims. Another technique is the authority to vary certain formulas, criteria, quantities, or the like that are included in the Articles without amending them.

Powers drafted in terms of a broad discretion for the Fund, which are often referred to in the Fund as “enabling powers,” do in fact enable the Fund to eke out deliberately indefinite provisions with general principles that have legal effect. The second amendment will increase the number and importance of these powers. The authority that the Fund will have to adopt principles for the guidance of all members with respect to their exchange rate policies is a leading example of this group of powers.

The Fund’s power to adopt final interpretations of its Articles was a bold innovation when the original Articles were drafted, but it has now been copied by numerous financial and other international organizations. The Fund has adopted few authoritative interpretations under this power, but its existence has made it acceptable for the Fund to adopt a host of informal decisions of an interpretative character without resorting to the more formal procedure. In exercising both its formal and informal powers of interpretation, the Fund has relied on international law, including the law of treaties. This attitude has been apparent in the exercise of all powers of the Fund, but for obvious reasons the occasions on which this approach is most evident are those on which the Articles, or subordinate rules of the Fund’s law, are being interpreted.

All the techniques of interpretation known to international law have been employed. In conformity with the last sentence of Article I, which directs the Fund to be guided in all its policies and decisions by the purposes of the Fund, a teleological approach has been relied on often. Never, however, has it been suggested in the Fund that the power of interpretation is a power to go beyond the limits of the law.

Reasons for the role of law

Why do legal considerations exercise so constant and so powerful an influence on the activities of the Fund? At the head of a list of reasons one must place the normal preference for order and the realization of expectations. There are other reasons, however, although most of them may be extrapolations of the primary reason.

The Fund exercises a regulatory jurisdiction in connection with national policies of considerable sensitivity. Law must be invoked to decide not only where the line is to be drawn between the authority of members and the authority of the Fund but also whether the Fund is making a proper exercise of admitted powers.

The Fund is also a financial organization with major resources at its disposal that are contributed by members or are lent by them or other creditors. These resources are made available for temporary periods to help members in difficulties in their international payments to observe the purposes of the Fund. The subscribers, lenders, and users of the Fund’s resources require the safeguards that only the law can provide.

The Articles as drafted originally and as amended incorporate a principle of the uniform treatment of all members. Insistence on this principle by members is based on the belief that discrimination once practiced would be a contagion that could not be controlled. The only sound therapy is the preventive one of avoiding discrimination. The steadfast observance of the principle of uniformity requires a body of legal principles against which to test proposed policies of the Fund and the Fund’s application of enacted policies.

The principle of uniformity is an active force even though there are immense differences in voting strength among members. It is not surprising that members with small proportions of the total voting power see the law as a necessary protection. It is not so obvious that members with large proportions of the total voting power would take an enlightened view, but this they do, and did even before financial power became as diffused as it is now, because of their desire to avoid the charge of a despotic exercise of their voting strength.

The role of lawyers

The organs that take the decisions of the Fund are composed mainly of economists and bankers. They. do not regard themselves as charged with the task of creating, adapting, or even applying international law, except perhaps on the rare occasions when they are called on to draft an amendment of the Articles or on the more frequent occasions when they interpret the Articles. A distinguished American painter, the late Barnett Newman, once said that aesthetics for the artist is like ornithology for the birds. The remark can be applied to the law of the Fund. The persons who compose the organs of the Fund are Newman’s artists, the lawyers on the staff of the Fund are the aestheticians. The lawyers are constantly aware that the Fund is engaged in a process of the creation, adaptation, and application of international law. They seek to ensure that all decisions are in harmony with each other, so as to constitute a coherent code, and with applicable law. The legal advice they give is based on the Fund’s own corpus juris and on general international law and comparative law when necessary. The tendency to avoid a non liquet (an inability to arrive at a decision) when international monetary problems arise in the Fund provides many an opportunity for invoking these other branches of law.

The functions of the Fund’s lawyers are not to draft recommendations only after conclusions on them have been reached by their colleagues or to draft decisions only after agreement on them in principle has been reached by organs of the Fund. The lawyers participate from the outset in the formation of recommendations and in the negotiation of decisions. They have performed these tasks since the earliest days of the Fund, and therefore before it could have been maintained that a tradition had developed. The reasons why the stage was set for them to act as they do are no longer clear. One explanation may be the contribution of lawyers to the success of the Bretton Woods Conference, which was acknowledged so handsomely by Keynes in a famous speech. Another explanation may be the enormous influence of the United States in the earliest days of the Fund as the main progenitor of the Articles and the subscriber of almost the only currency in use in the Fund’s activities. The behavior of the United States in the Fund was in conformity with the characteristic attitude of the “Lawyers’ Republic” to the law. A third explanation may be that a critical question was not settled at Bretton Woods. This was the question whether members had unchallengeable rights to use the Fund’s resources if they had not formally been declared ineligible. Clearly, the Fund would have been unable to conduct its financial operations if this controversy had not been resolved. The United States was opposed to unchallengeable rights, but many European members favored them. The controversy was not inspired by legal considerations alone, but it was presented as a dispute about interpretation of the Articles. Of necessity, the lawyers had to be turned to for essential services in settling the complicated issue. The tradition developed thereafter.

Related reading

    R. W.Edwards Jr.The Currency Exchange Rate Provisions of the Proposed Amended Articles of Agreement of the International Monetary Fund,American Journal of International Law Vol. 70 (1976) pp. 72262.

    R. C.Effros #x201C;Maintenance of Value in the General Account and Valuation of the SDR in the Special Drawing Account of the IMF,Georgia Journal of International and Comparative Law Vol. 6 (1976) pp. 493518.

    JosephGoldThe Fund Agreement in the Courts (Washington1962).

    JosephGoldThe Fund Agreement in the Courts: Part VIII-X1 (Washington1976).

    JosephGoldThe Stand-by Arrangements of the International Monetary Fund: A Commentary on Their Format Legal and Financial Aspects (Washington 1970). Voting and Decisions in the International Monetary Fund: An Essay on the Law and Practice of the Fund (Washington1972).

    JosephGoldMembership and Nonmembership in the International Monetary Fund: A Study in International Law and Organization (Washington1974).

    JosephGoldFloating Currencies, Gold, and SDRs: Some Recent Legal Developments,IMF Pamphlet Series No. 19 (1976)

    JosephGoldFloating Currencies, SDRs, and Gold: Further Legal Developments,IMF Pamphlet Series No. 22 (1977).

    JosephGoldA Report on Certain Recent Legal Developments in the International Monetary Fund,Vanderbilt Journal of Transnational Law Vol. 9 (1976) pp. 22345.

    JosephGoldA Second Report on Some Recent Legal Developments in the International Monetary Fund (published by The World Association of Lawyers1977).

    JosephGoldLaw and Change in International Monetary Relations,The Record(of the Association of the Bar of the City of New York) Vol. 31 (1976) pp. 22338.

    International Monetary FundSelected Decisions of the International Monetary Fund and Selected DocumentsEighth Issue (Washington1976).

    StephenA. SilardMoney and Foreign Exchange,”inInternational Encyclopedia of Comparative Law Vol. 17 (1975)Chap. 20.

Other Resources Citing This Publication