Joseph Gold
Published Date:
September 1983
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1. The list of authorized holders of SDRs, apart from the Fund itself and members, has grown to 13 but is not closed. The terms and conditions prescribed by the Fund for all these “other holders” are the same. Other holders have begun to hold and deal in SDRs. The authorization of the Fund is not necessary for the use of the SDR as a unit of account or means of payment under contracts.

2. Increasing use is made of the SDR as a unit of account in the financial activities of the Fund and other international organizations, and for the purposes of new conventions or amendments of existing conventions. The Convention concerning International Transport by Rail for which the acronym, derived from the French text, is COTIF, has novel features in its provisions for increasing the limits on liability expressed in SDRs. These provisions might become a precedent for dealing with the widespread problem of adapting such limits in treaties. A procedure of the kind that is included in the COTIF would be an alternative to indexation, to which a number of states object.

3. The use of the SDR as unit of account in financial and commercial transactions can have reciprocal effects in encouraging the further use of the SDR. Not much evidence is available of use in commerce. FASB Statement No. 52 makes provision for the SDR and Lloyd’s has developed a form of contract for salvage that incorporates the provisions on the SDR in the Convention on Limitation of Liability for Maritime Claims, 1976 in advance of the effective date of the Convention. The amendment of the Convention of the International Telecommunication Union means that the SDR will be the unit of account for recognized private operating agencies as well as for official administrations.

4. The United Nations Commission on International Trade Law (UNCITRAL) has recommended that the SDR should be the preferred unit of account in conventions or revised conventions, particularly of global application, that contain provisions on the limitation of liability. The possibility of a second monetary unit for the benefit of nonmembers of the Fund is mentioned, but this possibility does not derogate from the choice of the SDR as the preferred solution.

5. UNCITRAL has responded to the request for study of a unit of account of constant purchasing power for use in conventions by recommending the alternatives of a price index appropriate for the particular convention and a special procedure for considering increases in the limits on liability. The latter alternative, perhaps based on the COTIF precedent, seems more likely to be adopted.


6. The Managing Director’s summing up endorsed by the Executive Board decision of April 9, 1982 after review of the Fund’s principles and procedures for surveillance over the exchange rate policies of its members contains important statements of the constitutional law and practice of the Fund, particularly in clarifying the functions of the Managing Director, the Executive Board, individual Executive Directors, and the staff in surveillance.

7. The summing up encourages members to discuss with the Fund, and in the Fund, the aspects of their policies that have or can have an adverse impact on other members. Members are exhorted also to cooperate by giving serious attention to the views and conclusions of the Executive Board.

8. The need for symmetry in surveillance among all classes of members is emphasized, but a symmetry that does not overlook differences in circumstances among members.

9. The summing up explains that the effectiveness of surveillance can be enhanced if it is exercised not only in relation to members individually but also within a multilateral framework. The idea is adumbrated of conducting consultations with a group of industrial countries or with those among them whose currencies compose the SDR basket.

10. The duty of members to provide comprehensive and prompt information on their exchange rate practices and changes in them is emphasized as essential to the effectiveness of surveillance.

11. The seven Heads of State and Government who participated in the Versailles Summit Meeting in June 1982 attached to their communiqué a joint statement on monetary undertakings in which they reiterated their support of Article IV and the Fund’s principles for the guidance of members, declared their intention to strengthen cooperation with the Fund, and referred to their willingness to develop multilateral procedures, particularly among those members whose currencies are included in the SDR basket.

12. The Second Amendment, in permitting members freedom to choose their exchange arrangements, does not absolve them from the necessity of obtaining the Fund’s approval of multiple currency practices in accordance with the Articles. It continues to be the law that the provisions on transitional arrangements do not authorize members to introduce or adapt multiple currency practices without the approval of the Fund.

13. The Second Amendment has made changes in the law relating to multiple currency practices as a result of the abrogation of the par value system. In particular, differential exchange rates that develop without official action by a member or its fiscal agencies no longer constitute multiple currency practices.

14. The Fund has adopted a new decision on multiple currency practices that establishes guidelines for determining when official action that produces differential exchange rates will be considered a multiple currency practice. The decision deals with official action relating to spreads between the buying and the selling rate for another member’s currency and deviations in the exchange rates for transactions in a member’s exchange market from the rates that would be derived for these transactions from transactions in other members’ exchange markets.

15. The Fund may be concerned with exchange rates under Article IV even though differential exchange rates in a member’s exchange market are not multiple currency practices under the new decision.

16. The new decision deals with the Fund’s policies on the approval of multiple currency practices. Past policies are substantially unchanged.

17. Legal consequences flow from the absence of authorization or approval of a member’s multiple currency practice: (i) the member is in breach of its obligations under the Articles, and the Fund may react in accordance with the Articles; (ii) the member may be automatically unable to use the Fund’s resources under a stand-by or extended arrangement in the present standard form; (iii) the member may be unable to borrow under agreements with official or private entities that are tied to a stand-by or extended arrangement approved by the Fund; (iv) the Fund may find that the member is not meeting the conditions of the two compensatory financing facilities, but this reaction would not be automatic; (v) exchange contracts contrary to exchange control regulations prescribing a multiple currency practice that is not consistent with the Articles are not unenforceable under Article VIII, Section 2(b); (vi) the invalidity under the Articles of a member’s multiple currency practice may affect the question of the validity of the exchange rate under the member’s domestic law; (vii) the administration of other treaties, and in particular the application of various provisions of the GATT, may be affected.

18. Discriminatory currency arrangements in the form of broken cross rates are more likely under present exchange arrangements, either by design or inadvertence. The Fund has not adopted a general decision on discriminatory currency arrangements comparable to the decision on multiple currency practices, but principles relating to discriminatory currency arrangements can be drawn from decisions and the Fund’s practice. Nine principles are formulated. A decision of the Court of Justice of the European Communities on alleged discrimination under the Treaty of Rome emphasized practical effect and not formulation as the test of prohibited discrimination. Therefore, differences based, directly or indirectly, on currency are not automatically discriminatory.

19. The variability of exchange rates has produced many effects in international and national monetary law and practice. One effect is the growing use of units of account. The role of the SDR is referred to in paragraphs 2–5 above. Some members of the European Community have taken steps to assimilate the ECU to foreign currencies in order to promote its use as a unit of account and a means of payment.

20. The floating of sterling, as well as other major currencies, has led to the revolutionary Miliangos doctrine, according to which English courts can now give judgments expressed in foreign currency and under which the rate of exchange at the date of payment applies if settlement is made in sterling. The effects of the doctrine have spread through many aspects of English law. The law as developed by the courts has been provisionally endorsed by the English Law Commission. The reasonable foreseeability of fluctuation by the parties is relevant for some purposes, but it is submitted that foreseeability should be presumed in present conditions.

21. The Miliangos doctrine has affected the solution of exchange rate problems in jurisdictions in which the doctrine does not prevail. The doctrine is likely to have these effects in jurisdictions in which English judicial decisions have persuasive influence. One Canadian court, however, has criticized the “instability” introduced by the Miliangos doctrine into the law of foreign currency obligations.

22. The English Law Commission has provisionally endorsed the economic principle that the rate of interest awarded by a judgment should be related to the currency of the judgment. This principle should be taken into account when plaintiffs are considering the currency in which to formulate their claims. Courts should apply an economic analysis, however, to ensure that the combination of currency of judgment, exchange rate, and rate of interest does not result in overcompensation.

23. Courts should apply an appropriate exchange rate when called upon to translate a foreign currency into the currency of the forum without reference to the consistency of the exchange rate with the issuing member’s obligations under the Articles (unless Article VIII, Section 2(b) applies). Only actual rates of exchange can do justice between parties. Problems of the legality under the Articles of the exchange rate for a member’s currency involve only the Fund and members.

24. The Articles do not prescribe or prohibit the Miliangos doctrine. But the effect of Article VIII, Section 2(b) may be to prevent recovery in a currency if recovery would be contrary to the exchange control regulations of another member. The absence of a multilateral international agreement on the Miliangos doctrine may encourage “forum shopping” by plaintiffs or the adoption of provisions in agreements for damages that reflect exchange losses because the Miliangos doctrine does not apply.

25. Legal consequences flow from the observance or failure to observe accepted standards of accounting. The variability of exchange rates has intensified problems of accounting. FASB Statement No. 52 in the United States prefers current exchange rates in lieu of historic exchange rates as recommended earlier by FASB Statement No. 8. The use of current exchange rates, however, may not always produce the most desirable results, as is illustrated by a change in one central bank’s accounting for its external assets.

26. Problems of the equitable allocation of exchange risks arise between the parties that have entered into a transaction with each other or among parties that have entered into individual transactions with a common opposite entity. The Miliangos doctrine is addressed to problems of the first kind; the principles for distributions in bankruptcy or liquidation are addressed to problems of the second kind. In the choice of one exchange rate rather than another, the Miliangos doctrine gives an advantage to one party and a correlative disadvantage to the other party when the exchange rate is compared with other conceivable choices. In bankruptcy or liquidation, equal treatment, whether advantageous or disadvantageous, for all creditors is the objective in selecting a rate of exchange. The Currency Pooling System of the World Bank is designed to deal with a problem of the second kind. The equal value principle of the Fund as applied to transactions in SDRs deals with a combination of the two kinds of problem.

27. Courts are working their way toward an idea of normal protection against exchange risks that a party should arrange in the present conditions of variable exchange rates. A party’s legal position may be affected if it does not arrange this protection up to the due date for payment or possibly up to the date of actual payment when payment is delayed, on the principle that it is choosing to assume exchange risks. The Articles may affect exchange rates for forward transactions.

28. The variability of exchange rates is responsible for a tendency to provide for the adaptation of features of legal instruments that are affected by fluctuations. Buffer stock agreements are examples of this tendency. Provision is made for special procedures to consider the adaptation of financial aspects of the agreement and to deal with them once the procedure is invoked. Another legal technique in other instruments is to provide for automatic adaptations as the result of changes in exchange rates. Present and proposed currency adjustment factors in the maritime industry are examples of this technique. The construction of a formula for adaptation that is satisfactory to all interests may be a difficult undertaking. The case for or against the SDR as the basic datum in a formula has been considered. The specific interests of a trade have a bearing on the acceptability of the SDR as the unit of account in that branch of commerce.


29. The Gold Commission was appointed under statutory direction in the United States to study and make recommendations on the policy of the United States Government concerning the role of gold domestically and internationally. The Commission reported in March 1982 and made recommendations that ranged from matters of minor domestic interest in the United States to matters of the broadest international impact.

30. The Commission was not in favor of restoring a par value system based on gold as the common denominator or in favor of a further “restitution” of the Fund’s gold to members that had transferred gold to the Fund. Restitution was opposed so that the gold could be retained by the Fund for possible use in various contingencies, including the restoration of a par value system with gold as the common denominator. The report does not consider what amendments of the Articles would be necessary if an international gold standard were to be instituted or were to evolve within a group of countries or multilaterally.

31. Courts continue to be faced with the problem of applying legal provisions that limit liability by reference to a unit of account defined in terms of gold because the amendment of existing treaties or the substitution of new treaties under which the SDR will be the unit of account has not yet become effective. Various solutions have been applied by courts in different countries or even in the same country. The Netherlands Supreme Court has applied the SDR on the basis of the former definiton of the SDR in terms of gold and the definition of the gold unit of account in a treaty. An appellate court in the United States has decided that provisions based on a gold unit of account will be unenforceable.

32. Some members have adopted legislation or regulations directing how gold units of account are to be translated into the domestic currency.

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