One characteristic of the second amendment is the transformation of policies that the Fund has developed over the years into law by incorporation in the Articles. The provisions of the second amendment that deal with repurchase obligations, the selection of currencies for use in purchases and repurchases, and stand-by arrangements are among the many examples that are sometimes referred to as constituting the modernization of the Fund.
There are two dangers in the process of incorporating policies in the Articles, both of which are related to future flexibility in the operation of the Fund and the adaptation of its practice to changing needs. One danger is that this process may diminish the freedom that permitted the development of the policies in the first instance. Drafters must avoid the temptation of regarding current policies, particularly if the drafters helped to develop them, as an expression of permanent wisdom. The second danger is that the amended provisions on a particular topic may be regarded as a complete code so that the scope for implied powers is restricted. Drafters must avoid the fallacy of assuming that they have foreseen the future and have made full legal room for it in their specific prescriptions.
In the drafting of the second amendment, efforts were made in many ways to avoid both the danger and the fallacy, but only experience will determine how successful these efforts have been. Certain formulas in the original Articles that produced or affected obligations have been eliminated and principles substituted. Powers to vary specific prescriptions have been created. The provisions on repurchase are an example of these techniques. The logic of the original Articles prevented mention of any definite period for the temporary use of the Fund’s resources. Repurchase obligations accrued at dates not determined a priori but on the basis of complex calculations of monetary reserves as defined by the Articles. The Fund developed a policy of regarding three to five years as the basic period for the use of its resources, but it also adopted other periods for the purpose of special policies. The formulas in the Articles have been abrogated by the second amendment, and the basic period has been included in it, together with powers to change that period and to adopt different periods for special policies. These powers will give the Fund flexibility, but perhaps not as much flexibility as it has had in the past. Hitherto, policies have been adopted under decisions taken with a majority of the votes cast, but the exercise of the Fund’s authority under the amended Articles will require high majorities of the total voting power.
The amended provisions on repurchase illustrate changes that may result from the second amendment in the legal analysis of certain concepts in the Articles. The impact of the new provisions on the character of the special drawing right (SDR) has been mentioned in the previous article. The drafters of the original Articles held the view that it was impolitic to regard the transaction involving the sale of currencies by the Fund as a loan, and this view led them to avoid a fixed date for repurchase. A fixed date is included in the second amendment, but the Fund may require repurchase in certain circumstances before the terminal date. Moreover, the ability of the Fund to sell a member’s currency, the effect of which would be to reverse its transactions with the Fund, has been strengthened. It may be that the Fund’s sale of currency from the General Resources Account must continue to be regarded as a transaction sui generis.
The second amendment as a system
Whatever may be the content of the Articles as the central legal instrument of the international monetary system, there is always a system in the sense that there is interaction among currencies and balances of payments. Eppur si muove. There is, however, another sense in which the word “system” is used:
The concept of an international monetary system in which due emphasis is placed on the word “system” now implies a body of coherent purposes and principles, together with rights and obligations accepted by countries in order to give effect to the purposes and principles, and probably an organization to perform the duties of surveillance and administration—Joseph Gold, “Law and Reform of the International Monetary System,” The Journal of International Law and Economics, Vol. 10 (1975), p. 371.
In considering whether there is such a system, economists tend to emphasize purposes and principles and lawyers rights and obligations, but the disciplines of the two professions cannot be isolated from each other, if only because both are practiced in the central organization that performs the duties of surveillance and administration. There is no great advantage, however, in discussing the question whether the new Articles will establish a system that accords with the definition. Responses to the question tend to become statements of the elements that the respondents would prefer to see in a system.
Official opinion in the United States has emphasized the view increasingly that the second amendment would give legal validity to a new system in the sense described above. This opinion has been influenced as much by the absence as by the presence of certain elements. The absent elements are those components in the system of the original Articles that, in the opinion of the United States, had denied it the choice of policies in relation to the exchange rate for its currency that had been available to other members with respect to their currencies. In addition, the United States sought to eradicate from the second amendment any obligation to convert foreign official holdings of a currency and to avoid any impression that the United States would be willing ever again to undertake such a commitment in relation to the dollar.
This campaign had curious legal consequences. All references but one to convertibility and conversion were eliminated from the Articles. The one exception is the provision of the original Articles requiring the issuer of what was then called a convertible currency to convert foreign official holdings of the currency to the extent that conversion could be made with the aid of the Fund’s resources. It was impossible to dislodge this provision from the second amendment because of the unwillingness of some members to appear to be accepting the principle that official convertibility was not a desideratum and would never be revived. The Executive Board’s commentary on the amendments explains, however, that the provision had not been employed in the practice of the Fund, had no application in present conditions, and probably would have none in the future because, if there were to be a case for official convertibility, a revised provision would be more appropriate.
As the result of outlawing other references to convertibility and conversion a new vocabulary was coined that includes the expression “freely usable currency” and the “exchange” of currencies. These expressions are associated with a new phenomenon that is the reverse of the treatment of official convertibility as described above. They relate to new obligations of members to facilitate the transactions of the Fund. A member will be required to exchange its currency, when purchased from the Fund, for a freely usable currency, and to provide its currency, when needed for repurchase, in exchange for a freely usable currency. These obligations, however, will not apply to the issuers of freely usable currencies as determined by the Fund. This limitation is another consequence of opposition to obligations of official convertibility.
Amendment ad interim
Part II of the Outline of Reform adopted by the Committee of Twenty referred to the “interim period” before “a reformed system can be finally agreed and fully implemented.” When the drafting of the second amendment began, some and perhaps most of those involved in the project had the impression that the task was a restricted one because the changes in the Articles would be designed for no more than a limited period. Although there was little consideration of, or even reference to, a more permanent revision of the Articles, there was a feeling that what was being undertaken was a project that might have to be completed by a third amendment.
The attitude that an amendment ad interim was being prepared affected the early stages of the drafting of the second amendment. On occasion, the objection was heard that a proposal went beyond the requirements of an interim period. This criticism was made, for example, of certain drafts dealing with exchange arrangements. The assumption on which some early drafts were prepared was that, for some time to come, members would continue to apply a multiplicity of exchange practices but that, at some future date, which is to say after an interim period, exchange arrangements would conform to a widely observed model. Proceeding on this assumption, the drafters had to deal in some way with the post-interim period, but it was then that the objection was heard that the drafts went beyond the interim period.
The approach of the earlier drafts was to provide in some detail for what is referred to above as a widely observed model but to suspend the operation of the provisions defining the model for a definite period, which the Fund could prolong, or alternatively for an indefinite period, which the Fund could terminate. This approach was not acceptable to those who did not wish to create the impression that the future exchange arrangements, which were, of course, based on a par value system, had some legal or moral superiority over floating, whether during or after the interim period, even though at all times floating would be valid.
As the drafting of the second amendment progressed, the feeling that it was destined to operate only during an interim period diminished and was replaced by the desire to have amended Articles under which the Fund and members could act effectively for an unlimited period. The outcome of the involved negotiation of the provisions on exchange arrangements illustrates this process. Members are free to choose their exchange arrangements, possibly for all time to come. If ever the Fund were to find, by a high majority of the total voting power, that conditions permitted the introduction of a widespread system of exchange arrangements based on stable but adjustable par values, the provisions of a schedule regulating such a system would begin to apply, although each member could decide for itself not to establish a par value for its currency under these provisions.
The compromise on exchange arrangements still implies the possibility, although not the inevitability, of change to a particular system of exchange arrangements at some unspecified future date. The other modifications of the Articles incorporated in the second amendment are not based on the assumption that they will apply only before or after some future change in the international monetary system. These modifications could be retained whatever happens, and they need not be changed even if there were to be a third or subsequent amendment.
The view that the second amendment is an interim or stopgap measure can have practical consequences. At one time during the negotiation of the text it was assumed that the Council would come into existence immediately on the effective date of the second amendment, but later it was agreed in the Interim Committee that the Council would be called into being at whatever date a decision, supported by a high majority of the total voting power, was taken for the purpose. There were a number of reasons for this change in intention, but one of them was the disinclination of some members to call a new organ into being to help administer a treaty that in its new form would apply for no more than a temporary period.
An evolutionary process
The point has been made already that the Fund will have powers to adapt to changing circumstances. Early in the drafting of the second amendment, the attention of the Executive Board was drawn to various legal techniques that could serve this purpose. Much was made of so-called enabling powers, although these powers were not absent from the original Articles. The question that these powers raise is the extent to which regulation of the international monetary system should be divided between fixed rules on the one hand and discretions exercisable by the Fund as the central organization on the other hand. The desirability of flexibility was one reason for the willingness of members to concur in the inclusion of a range of enabling powers in the second amendment, but another reason was the prolonged difference of opinion on some subjects. An enabling power was a technique for deferring resolution of a contentious issue once it became clear that the expenditure of further effort was unlikely to be rewarded with agreement. The willingness of members to accept enabling powers did not go to the length of dispensing with the normal procedures by which members decide on amendments. The experience of the Bretton Woods Conference was repeated in the refusal to allow organs of the institution to amend the Articles.
The new enabling powers make room for the evolution of the international monetary system, without the necessity for amendment of the Articles. Amendment will be even more difficult in the future because of a change in one of the two requirements that must be met for the adoption of amendments. Formerly, acceptances by members having 80 per cent of the total voting power sufficed, but the proportion is increased to 85 per cent as part of a compromise on increases in quotas under the sixth general review of quotas that included a reduction in the voting strength of the United States below 20 per cent of the total voting power.
The provisions of the second amendment on exchange arrangements are an example of the use of techniques that foresee evolution without amendment. These provisions permit the Fund to recommend general exchange arrangements that accord with the development of the system, and require the Fund to adopt specific principles, which may change over time, for the guidance of all members with respect to their exchange rate policies.
One power included in the second amendment deserves special mention because of the uses that could be made of it in connection with the evolution of the system. The Fund has concluded that it has an implied power to perform financial and technical services for members, including the administration of resources contributed by members and others, if the services are consistent with the purposes of the Fund. The Fund’s administration of the Subsidy Account and the Trust Fund, and the services the Executive Board authorized the Managing Director to perform in connection with the Basle agreement on sterling balances, are examples of recent exercises of this implied power. The second amendment makes the power explicit. By exercising it, the Fund would be able to make agreements with members that would reflect or assist the evolution of the system without the necessity for amendment, provided that there was no inconsistency with the Articles. The second amendment provides that the Fund must take certain circumstances into account in deciding whether the par value system, for which provision is made, shall be called into existence. Among these circumstances are arrangements on such matters as intervention and the treatment of imbalances. It is conceivable that the Fund could agree to administer arrangements entered into among members, and even sponsored by the Fund, on such matters. It is also possible to imagine a substitution account that the Fund would administer for the benefit of members but, of course, without involving its own assets in any obligation or liability.
Enabling powers are not the only instruments that the Fund will have at its disposal to keep pace with or to encourage evolution of the system. Enabling powers can be defined as discretionary authority for the Fund to take specific actions, such as recommending general exchange arrangements. Another kind of instrument has been drafted as obligations of the Fund and not powers, but drafted so broadly as to give the Fund much flexibility in performing its obligations. The duty of the Fund “to oversee the international monetary system in order to ensure its effective operation” is an example of this technique. A third instrument is the obligation imposed on members to collaborate with the Fund or with other members for a particular purpose, such as the obligation to collaborate regarding policies on reserve assets. The Fund will be able to invoke these obligations and call for action or behavior pursuant to them. What use will be made of these instruments cannot be foreseen. Their usefulness at this time is the confidence they give that the Fund will be able to develop the system or, in the words of Keynes at Bretton Woods, “to go on being sensible in unforeseen conditions some years hence.”
A characteristic of international organizations since the Second World War has been renunciation of the rule of unanimity in arriving at decisions and acceptance of the principle of weighted voting power, at least in financial and economic organizations. The voting provisions of the Fund’s Articles were early examples of this new tradition. Moreover, in the Fund the original Articles made few exceptions from the rule that decisions were to be taken by a majority of the votes cast. The preference for this majority was based on a policy of ensuring that decisions could be taken and business conducted with maximum facility. The exceptions provided for varying proportions of the total voting power as special majorities for a few categories of decision that were thought to have unusual political or economic importance.
Special majorities were required for more categories under the first amendment. The main purpose of this development was to give the then members of the European Community a veto over important decisions relating to the SDR, and a new majority was created to give effect to this intent. The second amendment represents a further and more extensive move away from the policy of the past. The original Articles required special majorities for 9 categories of decision, the first amendment for 21, and the second amendment for 53 (or even more according to one mode of classification).
The increase in the number of categories of decision for which special majorities are required under the second amendment has been accompanied by a reduction in the number of special majorities. The original Articles prescribed five different special majorities. The number was increased to six by the first amendment. The reason for adopting a particular proportion in the past, and for differentiating it from other proportions, is not always clear. Subject to the exception of an absolute majority of the total voting power for one category of decision, special majorities are reduced to two by the second amendment. They are 70 per cent and 85 per cent of the total voting power. The tendency was to confine the smaller majority to those categories of decision that are operational in character, but this principle was not followed steadfastly.
There were many reasons for the increase in the number of categories of decision for which special majorities are required under the second amendment and for the selection of particular categories. One reason was the feeling that enabling powers give the Fund authority over its members that should be exercised only with the assurance that members having a large majority of the total voting power concur in the exercise. But this explanation is too simple. Sometimes the motive was the self-regarding one of a veto for a single member or a particular group of members or the wish to make it difficult for the Fund to exercise a power that was accepted as a compromise but without enthusiasm on the part of some members. Economic and political changes in the world have made it necessary to take the interests of more members and more groups of members into account in reaching agreement on the need for special majorities.
The increase in the number of categories moderates the effect of weighted voting power and approaches closer to a rule of unanimity for these decisions. Nevertheless, the effect must not be exaggerated. Many of the decisions for which special majorities are required are not routine and will be taken infrequently or probably not at all. Most of the ordinary business of the Fund as both a financial and a regulatory organization will continue to be conducted by means of decisions taken with a majority of the votes cast.
On the basis of the present distribution of voting power, developing countries would be one of the groups that would have a veto or almost a veto under the two special majorities of the second amendment. The formula in the Articles for determining the voting power of a member is not changed by the second amendment. The distribution of voting power among members is related to quotas, which are adjusted from time to time as the result of general reviews. The drafting of the second amendment raised the issue not of the voting power of developing members but of special provisions for their benefit.
The Articles have included a few provisions under which certain members are singled out for special treatment. The original Articles, for example, gave the American Republics not entitled to appoint Executive Directors the assurance that they would be able to elect a certain number of Executive Directors, but this special provision disappears from the second amendment. Apart from the few provisions of this kind that are retained, no distinctions are made by the Articles among members or among classes of them. Their rights and obligations are the same, and they are entitled to the same treatment under the policies of the Fund. In the language of the Fund, the Articles establish a principle of uniformity.
Since the time of Bretton Woods, the Fund has refused to adopt formal positions that would be inconsistent with the principle of uniformity. The justification for retaining the principle has been based on both law and policy. The justification of policy has been that preferences for some members could promote practices that would be detrimental over time to the interests of all members. Nevertheless, the Fund has found it possible to adopt decisions that were intended to be of special benefit to developing members without confining the benefit of the decisions to them.
The Outline departed from the past in supporting a number of special benefits for developing members, at least some of which would have had to be incorporated in the Articles to make them effective. None of these benefits found its way into the second amendment, in part because they were related to broader features of reform that were not the subject of amendments. When the provisions on exchange arrangements began to approach their final form, efforts were made to introduced language into the provisions that would be particularly favorable to developing members. These proposals were rejected, but they resulted in langauge under which the Fund would be able to take account of the special circumstances of all members. A further attempt to put a gloss on this language in favor of developing members in particular was made during the drafting of the commentary, but once again the attempt did not succeed.
For the first time, however, the Articles, after the second amendment, will refer expressly to developing members in a few contexts and will provide special benefits for them in connection with the disposition of the Fund’s gold. The exceptions are narrow but surprising, and they will probably give rise to difficulties in defining the beneficiaries.
This recollection in tranquillity of the preparation of the second amendment should have shown that the task was undertaken with considerable reluctance on the part of some members and with a determination to confine its content within narrow limits. These attitudes were related to the view, based on Part II of the Outline, that the amendment was designed for no more than an interim period. This view disappeared as the drafting progressed.
The most important modifications of the Articles deal with exchange arrangements, gold, and SDRs, but the changes leave few provisions untouched. The Articles are “modernized” by transmuting many policies into law by incorporation in the Articles.
Opinions differ on whether the amended Articles establish a new international monetary system in any refined sense. Techniques have been adopted for enabling the Fund to promote or to respond to an evolutionary process in international monetary relations. These techniques are one reason why there has been a remarkable increase in the number of categories of decision for which a special majority of the total voting power of members is necessary. Developing members will constitute one group that will have a veto over many of these decisions, but the principle of uniformity has been retained, with only minimal modification, so that the rights and obligations of all members remain substantially undifferentiated.
This article and its companion (which appeared in the March 1978 issue of Finance & Development) are based on an address delivered by Mr. Gold to a seminar arranged by the Fund for senior officials from member countries in Asia.