International Monetary Fund
Published Date:
January 1976
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The par value system of the Articles of Agreement of the International Monetary Fund solved many legal problems for the drafters of treaties, statutes, or contracts during the period in which the system was in operation. The objective of the drafters might have been to guarantee the value of rights, or uniformity in the application of legal provisions wherever a remedy might be sought, or some other objective. Whatever their objective might have been, they were able to rely on the existence of par values for currencies under the Articles of the Fund, the obligation of a member state to obtain the concurrence of the Fund before changing the par value of its currency, and the obligation of a member to maintain exchange rates for its currency within narrow margins around the parity relationships between currencies on the basis of par values.1

The breakdown of the par value system is producing numerous legal problems in both international law and domestic law. These are problems of the application of existing legal provisions that were based on the assumption of an effective par value system and of the drafting of new provisions that take account of the collapse of the system, the delay of uncertain duration before the Articles of the Fund will be amended, and the assurance that under the amended Articles the obligations of members with respect to exchange rates for their currencies will be different from their obligations under the present Articles.2 The amended provisions will permit greater flexibility with respect to exchange arrangements than in the past, for example, by accepting the principle that a member will not be required to maintain an exchange value for its currency in terms of a denominator, but will be able, if it wishes, to maintain an exchange value in terms of any denominator of its choice except gold.3 Some of the problems that have arisen or can be foreseen emerged from time to time as a single member of the Fund temporarily abandoned support of the par value of its currency.4 The legal difficulties have increased in number and complexity with the general abandonment of the maintenance of par values and with the difficulty of determining the value of gold for monetary purposes.

Two kinds of legal problem can be distinguished with respect to existing provisions in treaties, statutes, or contracts: (1) how to determine the value of a currency in terms of gold, and (2) how to determine the value of a currency in terms of other currencies. The two are related because gold is the common denominator under the present Articles of the Fund. The par value of each currency is expressed in terms of gold, with the result that the relationship between any two currencies (the parity) is determined by the relationship of each to gold.

If the drafters of new legal provisions seek a denominator of value other than gold, or if they assume, as they must at least for some indeterminate and possibly prolonged period, that there will not be a return to a par value system like the one in the present Articles, they will be faced with similar problems: (1) the valuation of a currency in terms of the denominator of their choice, and (2) the valuation of a currency in terms of other currencies.

When the par value system was in operation, calculations to apply certain provisions of the Articles could be made on the basis of par values. Under other provisions, however, calculations had to take into account movements in exchange rates within the margins permitted by the Articles. Moreover, a member might fail to keep the exchange rates for its currency within the margins. Whether or not margins were being observed for a currency, it could be assumed that its gold value or its foreign exchange value could be calculated on the hypothesis that the gold and foreign exchange values of the U.S. dollar were fixed and equal to each other. This technique was justified on the ground that the monetary authorities of the United States had undertaken to maintain the par value of the dollar by freely buying and selling gold in exchange for dollars for the settlement of international transactions with the monetary authorities of other members.5 No other member has ever given a similar undertaking with respect to its currency. As a result of the undertaking of the United States, the foreign exchange value of a currency could be taken to be equivalent to the exchange rate for the spot delivery of U.S. dollars in exchange for the currency in the main market of that other currency. Any movements in the exchange rate between the dollar and the other currency could be deemed to be fluctuations in the value of the other currency.6 Par values or the technique of determining the value of currencies as described above could have been employed for the purpose of applying legal provisions in instruments other than the Articles.

The technique became unjustifiable, however, when the United States withdrew its undertaking with respect to the free purchase and sale of gold and refused to adopt other measures to maintain the value pf the U.S. dollar in exchange transactions. This action has resulted in the collapse of fixed relationships among all currencies based on gold, and the impossibility of asserting that the value of any currency provides a basic datum for calculations. The U.S. dollar is now like all other currencies because it too has no fixed link to gold by means of gold transactions and because it fluctuates in value in the exchange markets. Nevertheless, means must be found to apply existing legal provisions in the Articles and in numerous other instruments. The determination for monetary purposes of a value for gold in terms of currencies requires the acceptance of the legal fiction that there is such a value even when no member undertakes to deal in gold, when gold is not being used for monetary purposes, and when gold is subject to fluctuations in price because of demands for industrial and artistic needs and for speculative operations. The adoption of new legal provisions, or the modification of existing provisions, must take into account not only the situation that precedes the forthcoming amendment of the Articles of the Fund but also the elimination of gold as the common denominator of the international monetary system under the amended Articles, which will give effect to the agreement among members of the Fund that the role of gold as a reserve asset should be gradually reduced.7 Satisfactory solutions must be found, not only for arrangements among official entities but also for arrangements between private parties or between official entities and private parties.

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