Some Legal Effects of Floating
- International Monetary Fund
- Published Date:
- January 1976
Certain legal effects of the general floating of currencies and of the difficulty of determining a monetary price for gold that are considered in this pamphlet can be assembled, although somewhat arbitrarily, under three headings: application of existing provisions; changes in existing provisions; and new provisions and practices.13
Application of Existing Provisions
Valuation of the SDR
Within the Fund, one of the main problems of applying provisions of the Articles before the second amendment becomes effective has been the difficulty of finding an appropriate method for valuing the SDR in terms of currencies. The Articles define the unit of value of the SDR as equivalent to 0.888 671 gram of fine gold,14 which corresponds to the par value of the U.S. dollar of the weight and fineness in effect on July 1, 1944.15 For the purpose of determining the exchange rate of the U.S. dollar in terms of SDRs in transactions in them between participants in the Special Drawing Account,16 Rule O-3 of the Fund’s Rules and Regulations originally provided that the SDR was equivalent to the dollar at par. This rule was adopted not only because the United States was the only member that had undertaken to maintain the value of its currency by means of transactions in gold, but also because the U.S. dollar held a central position in the international monetary system as it had developed in practice. The exchange rate for another currency in terms of SDRs was taken to correspond to the representative rate in the exchange market for spot delivery of the U.S. dollar in exchange for the other currency.17 This procedure corresponded to the way in which many members established the exchange rates for their currencies, i.e., in relation to the U.S. dollar as the principal currency for intervention in the exchange market.
After August 15, 1971, a technique that assumed an equivalence between the SDR and the U.S. dollar began to be questionable. The withdrawal by the United States of its undertaking to buy and sell gold freely in return for U.S. dollars in transactions with the monetary authorities of other members, and the refusal to adopt other measures to ensure that exchange transactions involving the dollar took place within legal margins around parities, meant that it could no longer be concluded that the par value for the dollar was being maintained in accordance with the Articles. The Fund issued a press release on August 20, 1971 in which it announced that the U.S. dollar was floating. The continued assumption that the exchange rate for the U.S. dollar in terms of SDRs was the par value meant that when the dollar weakened in the markets against other currencies, the effect on transactions involving SDRs would not be that of a depreciation of the dollar but of an appreciation of the other currencies. The members issuing these currencies saw this development as a decline in the value of their holdings of SDRs in terms of their own currencies. Moreover, wide fluctuations in exchange rates produced wide fluctuations in the value of the SDR in terms of currencies other than the U.S. dollar. These were some but not the only reasons for the conclusion that a system of valuing the SDR should be found that would increase its stability in terms of currencies in general and not in terms of one currency exclusively.
A difficulty that had to be faced was that the unit of value of the SDR, which is defined in terms of gold, could not be changed without amendment of the Articles. Nevertheless, the need for a new method of valuation in terms of currencies could not be delayed, unless the Fund were to exercise its authority under the Articles to suspend the operation of the provisions relating to transactions in SDRs.18 That procedure was unacceptable because it would have been a surrender to the difficulty and not a solution of it. The problem, however, was that the withdrawal by the United States of its undertaking to engage in official transactions in gold eliminated the only obvious technique by which to determine the price of gold in terms of currencies for the purposes of the Fund. In these circumstances, the Fund chose a technique of valuing the unit of SDRs in terms of currencies that would be most effective in enabling the Fund to continue to operate in accordance with its purposes. The unit was defined by the Articles in terms of gold, and it was unavoidable, therefore, that the technique had also to be regarded as one that valued gold in terms of currencies. Legal logic required, moreover, that the value of currencies in terms of SDRs for the purposes of the Special Drawing Account should also be treated as the value of currencies for the purposes of the operations and transactions of the Fund conducted through the General Account. The effect was to determine the monetary value of gold by reference to the SDR instead of determining the value of the SDR by reference to gold.19
The choice of a technique was difficult even though it was agreed fairly soon that the value of the SDR should be related to a “basket” of currencies instead of being tied to a single currency. It is not necessary to rehearse the complexities of the problem or of the various possible solutions that were in competition,20 but many of those that were considered were rejected because they were based on the assumption that a system of par values was in operation even though some currencies might be floating. It became clear that whatever might be the comparative advantages of possible techniques in circumstances in which there was widespread, even if not complete, observance of par values, the solution at this time would have to be one that could be applied in circumstances in which no par values were being maintained. It did not follow that a solution that met this test could not be a satisfactory, or even the most satisfactory, technique when most currencies ceased to float, but this test was not one that had to be passed at a time when a par value system was not in operation.
The method of valuation that was adopted and put into operation on July 1, 1974 is based exclusively on rates in the exchange markets, which means that it can operate without the maintenance of par values but that it can continue to operate if a par value system is restored. The uncertainties about future exchange arrangements and about the method of valuation that will be most effective in connection with them are responsible for the reference to the solution that has been adopted as the “interim valuation of the SDR.”21 The decision by which the interim valuation was adopted declares that it will be reviewed after two years.22
Under the “standard basket” method of valuation, as it is called, the SDR is equal to a total of fixed amounts of 16 currencies. These currencies were chosen because the issuers had had a share in total exports of goods and services in excess of 1 per cent on average over the period 1968–72. A weight of 33 per cent of the total basket was assigned to the U.S. dollar because of its financial and commercial importance and because the formula for assigning proportions to other currencies would not have reflected this importance adequately. Lower percentages were assigned to the other 15 currencies in broad proportion to the shares in international transactions of the issuers of the currencies.
The basket based on the revised version of Rule O-3 is composed as follows:
|Weight||(In units of|
|Currency||(In per cent)||each currency)|
|South African rand||1||0.0082|
The amounts of the currencies were determined in such a way that on June 28, 1974, the last day on which the old method of valuation was applied, the old and the new methods yielded the same values for currencies in terms of the SDR. By avoiding a sporadic change, a smooth transition to the new valuation was achieved.
On each business day, the Fund publishes the exchange rates of a wide range of currencies in relation to the SDR. To arrive at the exchange rate for a currency in terms of the SDR, it is necessary to calculate the equivalent of all the components of the SDR in terms of that currency on the basis of exchange rates in the market. Instead of adopting the more inconvenient procedure of collecting rates for all currencies in the basket in exchange for any currency for which an SDR rate is required, the Fund makes a calculation in terms of the U.S. dollar in accordance with a detailed decision of the Executive Directors.23 Each currency in the basket, other than the U.S. dollar, is turned into its equivalent in U.S. dollars on the basis of exchange rates between these currencies and the U.S. dollar, because these rates are readily available for all currencies in the basket. The Fund receives the necessary rates, except for the yen, from London, and the rate for the yen from Tokyo. If the rate for any of the currencies cannot be obtained in this way, the rate in New York is applied, and if a rate is not available there, it is taken from the market in Frankfurt. If a rate for any currency in the basket cannot be obtained directly in any market, it is calculated by use of appropriate cross rates. If on any day a rate for a currency cannot be obtained, calculations are made on the basis of the rate for the previous business day, unless the Fund decides that it is more appropriate to adopt some other course.
The daily equivalent of the SDR in U.S. dollars is then translated, under Rule O-3, into the currency for which an SDR rate is sought, primarily by using the representative rate between that currency and the U.S. dollar in the exchange market of the currency. The representative rate is the exchange rate for a member’s currency as determined by a procedure or criterion agreed between the member and the Fund. Rule O-3 contains provisions by which the Fund can arrive at a rate for a currency in any circumstances in which the primary procedure cannot be followed. The procedure for arriving at an exchange rate for any currency in terms of the SDR is not confined to the currencies in the basket but applies to all currencies. The procedure has been described in some detail not only because of its importance for participants but also because the Fund’s calculation and publication of exchange rates in terms of the SDR for every business day have been emphasized by other entities as inducements to use the SDR as a unit of account in their own engagements.
The technique that has been described does not recognize a special position for the U.S. dollar comparable to the one that it had under the original Rule O-3. The basic difference is that under the original rule the U.S. dollar was always at par in relation to the SDR, whereas under the present version the rate for the U.S. dollar in terms of the SDR fluctuates from day to day in the same way as the rates for other currencies fluctuate. For example, on July 8, 1974, the rate in U.S. dollars for 1 SDR was $1.20758, and on August 26, 27, and 28, 1975, it was $1.18606, $1.18801, and $1.18777.24 To take another example, the rate in sterling for 1 SDR on the same dates was £0.505475, £0.564602, £0.563866, and £0.563191.25
It follows from Rule O-3 that although the composition of the basket is fixed and changes in it are unlikely to be frequent, the value of the SDR in terms of currencies fluctuates from day to day in response to the fluctuation of exchange rates. The effect of a change in the exchange rate for a currency affects the value of the SDR according to the proportion of the currency in the basket, which is a rough measure of its importance in international transactions. The number of currencies in the basket and the proportions in which they compose it are likely to produce a reasonably stable value for the SDR in terms of a broad group of currencies because the movements of some currencies can be moderated or offset by the movements of other currencies.26
Numerous provisions in treaties, statutes, and contracts refer to par values established under the Fund’s Articles or to parities or margins around parities that are consistent with the Articles.27 These references are likely to be troublesome in view of the current neglect of the provisions of the Articles that deal with exchange arrangements. In present circumstances, no member would be able to demonstrate that its arrangements were in accord with all provisions of the Articles. The par value of a member’s currency, however, does not cease to exist under the law of the Fund even when the member is not maintaining the par value as the basis for exchange transactions.28 A member cannot abrogate the par value of its currency under the present Articles even if it takes measures to make the par value ineffective. The only way in which a member can terminate the par value of its currency under the Articles is to establish a new one.29 Furthermore, there is no legal doctrine of desuetude that terminates a par value because it has been ignored for a prolonged period. Par values have continued to exist under the law of the Fund even though they had become remote from actual exchange rates and there was little prospect that there would ever be any consistency between them.30
A par value does not cease to exist under the Articles even when the Fund no longer applies it for any purpose. If a par value is effective, computations for the purpose of applying the Articles are made on the basis of it.31 The computations include those that are made for the purpose of the sale or receipt of currency by the Fund in operations and transactions through the General Account. If the par value of a currency is ineffective, the Fund determines the foreign exchange value of the currency and applies that value in computations for the purpose of applying the Articles, including those that are made for the maintenance of the gold value of the Fund’s holdings of the currency and for operations and transactions involving the currency.32 Even under the present Articles, the Fund would make no computations for these purposes on the basis of par values. One of the few legal consequences of the continued legal existence of a par value during any period of ineffectiveness might occur when the currency ceased to float. If the member were to resume support of the par value of its currency, it would not require the concurrence of the Fund, whereas concurrence is necessary for the establishment of an initial par value or for a change in par value. Resumption of the support of existing par values is, of course, unlikely in present conditions.
The continued legal existence of a par value notwithstanding its disappearance as a basis for exchange rates is not without rationale. Floating currencies were abhorrent to the negotiators of the original Articles even as a transition from one par value to another. The most effective pressure to deter a member from allowing its currency to float, and to induce it to return to a par value if it did resort to a period of floating, was to place it in violation of the Articles. This result was achieved by preserving the legal existence of the par value last established under the Articles and by treating the member as failing to perform its obligation to maintain the effectiveness of that par value. The law under the Articles as explained above will be changed radically by amendment of the Articles, but it is necessary to grapple with the problems that arise before amendment and to see how those problems are affected by the present Articles.
Legal provisions that refer to the par value of a currency or to the parities of a currency with other currencies under the Articles are likely to produce inequitable results if applied literally when the currency is floating.33 The negotiators of the Articles avoided the danger that the Fund itself would have to apply par values when this procedure became inappropriate. Provisions based on par values that were incorporated in other instruments were probably adopted on the assumption that there would be effective par values in accordance with the Articles for the currencies to which the instruments related. A court might find it possible, therefore, to conclude that some basis for computation other than the ineffective par value would have to be applied because the assumption had ceased to be realistic.
In Transarctic Shipping Corporation, Inc. Monrovia, Liberia v. Krögerwerft (Kroger Shipyard) Company,34 the Hanseatic Higher Regional Court at Hamburg delivered a judgment on July 2, 1974 that dealt with the question whether an ineffective par value should be applied under a provision of the law of the Federal Republic of Germany that had been adopted in order to give effect to a multilateral convention. The International Convention Relating to the Limitation of the Liability of Owners of Seagoing Ships was signed at Brussels on October 10, 1957, entered into force on May 31, 1968, and was incorporated in the law of the Federal Republic of Germany on June 21, 1972. The treaty employs, as do numerous conventions connected with transportation, the unit of value known as the Poincaré franc, which has a content of 65.5 milligrams of gold nine-tenths fine. According to the treaty, the amounts expressed in these francs are to be “converted into the national currency of the State in which limitation is sought on the basis of the value of that currency by reference to the unit defined above at the date on which the shipowner” takes certain steps to limit his liability. Paragraph 3 of Section 487a of the Commercial Code of the Federal Republic of Germany provides that the “parity” of the deutsche mark in relation to gold at the time when these steps are taken is to be the basis for calculating the bond that the shipowner must give in order to limit his liability.35
The Hamburg District Court decided on July 31, 1973 that the correct basis for the calculation was the central rate of the deutsche mark that took effect on June 29, 1973. The Federal Republic of Germany had declared this central rate in terms of the SDR under the first decision on central rates, which the Fund had adopted on December 18, 1971 to enable members to re-establish fixed relationships among their currencies on the basis of par values or informal central rates and margins wider than those that were permissible under the Articles.36 The decision was an effort to minimize disorder by encouraging members to follow certain practices defined by the Fund even though neither central rates nor wider margins were consistent with the obligations of members to maintain effective par values and narrow margins. A central rate under the decision could be communicated to the Fund in terms of gold, the SDR, or another currency, but if communicated in terms of the SDR or another currency it was recalculated by the Fund in terms of gold. If the communication was in terms of the SDR, the recalculation could be made because the SDR was defined by the Articles as a quantity of gold. If the communication was in terms of a currency, the recalculation could be made because the communication was accepted only if it was made in terms of a “stable” currency, i.e., one for which an effective par value or central rate was being maintained.
On February 26, 1974, the Hamburg Regional Court reversed the decision of the lower court and applied the par value, thereby increasing the amount of the bond from DM 566,258.69 to DM 643,676.67. The decision of the District Court was restored by the Higher Regional Court. It held that the relevant legal provisions left it to the courts to determine precisely how conversions into domestic currency were to be made. The par value of the deutsche mark became effective on October 26, 1969, and it had not been modified or annulled since that date in connection with any of the appreciations that had taken place. The court also noted that, as a “provisional measure,” a central rate had been established in relation to the SDR, which in turn had a fixed relationship to gold, although in accordance with the views of the Fund’s Committee of Twenty this link was to be cut and a relationship to a weighted average of 16 currencies substituted for it. This last comment by the court should not be understood to mean that the link between the SDR and gold can be cut without amendment of the Articles. Until amendment, the valuation of the SDR in terms of the basket of 16 currencies establishes the equivalent in terms of currencies of the gold value of the SDR and therefore the price of gold at which the Fund would deal in gold if any transactions in gold were to occur. They are not occurring, however, because it is agreed that members will have greater freedom to deal in gold under future arrangements as a result of the abolition of an official price for gold.
The court held that the earlier procedure of expressing the par value of the deutsche mark in relation to gold and the U.S. dollar was terminated when, in March 1973, the six members of the European Communities, including the Federal Republic of Germany, modified the exchange arrangements (the “snake”) to which they were parties.37 Under the modified arrangements referred to by the court, the rates of exchange for transactions between the six currencies would be kept within a margin of 2¼ per cent on the basis of fixed relationships among the currencies, but the rates for these currencies would not be maintained within agreed margins in relation to the U.S. dollar. In short, the six currencies would float together without any fixed relationship to the U.S. dollar. “… [T]he intervening changes [i.e., since establishment of the par value] in the value of the deutsche mark vis-à-vis the currencies of the other leading trading nations, especially the U.S. dollar, cannot be ignored without challenging the attempts described above at an internationally uniform definition of liability.”
The court held that provisions based on the par value could not be interpreted without taking into account the purposes of the treaty and similar treaties. One purpose was to avoid basing calculations on the market value of gold, because it was subject to severe and often speculative fluctuations. The other was to ensure uniformity in the limitation of liability wherever actions might be brought and whatever changes might occur in monetary relationships. The provisions had been based on par values because they provided easily ascertainable and officially established equivalents of gold under the Articles of the Fund. It had been assumed that other members of the Fund would apply par values, and in this way a uniform standard for calculating the values of currencies in relation to each other would be achieved. International monetary developments had deprived provisions referring to par values of any substance, and new par values were no longer being established.38 The court surmised that the latest par value of the deutsche mark had not been withdrawn, and that paragraph 3 of Section 487a of the Commercial Code had not been modified, because the legislature had been under the impression in 1972 that the par value would soon be restored to effectiveness. The court concluded that because the gold value represented by the par value was largely without significance, the purposes of the legal provisions would best be served by applying the most recent central rate of the deutsche mark.39 The central rate was being applied in other economic relations, at least with other members of the Fund.
The main feature of the decision is the Higher Regional Court’s pragmatism in refusing to arrive at an unrealistic solution based on the language of the provisions and the continued legal existence of the par value of the currency. The court took note of international monetary developments as a result of which the par value no longer corresponded to actual relationships between the deutsche mark and other currencies. It even noted the recommendations of the Fund’s Committee of Twenty, and wondered what effect they would have on later proceedings involving the same issue as in this case. The judgment of the court was delivered one day after the Fund’s new method of valuation of the SDR became effective, but the court did not base its ratio decidendi on the recommendations of the Committee of Twenty or on the new method of valuation.
The main influences on the court in arriving at its decision, apart from the divergence between the par value of the deutsche mark and the actual relationships of the currency with other currencies, seem to have been the principles that the central rate (a) had been established by governmental action, (b) had been recognized by the Fund, (c) could be translated into an equivalent amount of gold through the SDR, in terms of which it had been declared, and (d) would ensure the uniformity that was an objective of the legal provisions. Each of these principles will be examined in order to see what guidance they provide for the decision of other cases.
(a) All five of the categories of exchange practices that have been classified above in the section on Floating Currencies result from official action. A member cannot communicate a central rate to the Fund, however, even under its second decision, which is discussed under (c) below, if the member’s practice falls into category (i)—independent floating. A central rate might be communicated in connection with a practice in category (iv)—pegging to a single currency but with frequent changes in the peg—but the central rate would have little practical effect unless it was changed frequently. A central rate can be communicated for the purpose of a joint float in category (v). The fact that some practices could be the subject of a central rate communicated to the Fund under its decision on central rates does not mean that all members that follow these practices have established central rates.
(b) The importance of the recognition of exchange practices by the Fund has been emphasized in an earlier case, Hornlinie v. Société Nationale des Pétroles d’Aquitaine, which was decided by the Supreme Court of the Netherlands on April 14, 1972.40 The issue in that case was the effect of the termination, in March 1968, of the Gold Pool, an arrangement by which certain countries had kept the commodity price of gold close to the monetary price. The “two-tier” system, which was substituted for the former arrangement, provided for the withdrawal of monetary authorities from the commodity market. The issue in the Hornlinie case arose under the same provisions of the Brussels Convention as were involved in the Transarctic case and under a provision of the Commercial Code of the Netherlands according to which the Poincaré franc “is to be converted into Netherlands currency at the rate of the day.” The court decided that it would not apply the price of gold in the commodity market and that the objective of uniformity would be achieved most effectively by applying the official price of gold, because the latter was the common method of valuation under the Articles of the Fund, to which most parties to the Brussels Convention had adhered.41
The official price of gold is sometimes referred to as if it were an unambiguous concept. If the official price means the price under the domestic law of the forum, there can be complications. For example, a Norwegian expert has shown that there were difficulties in his law because, at the time at which he was writing in early 1974, the par value of the Norwegian krone had been established under the Articles at a little more than 0.1 gram of fine gold, whereas Norwegian monetary legislation continued to define the value of the krone at slightly more than 0.4 gram of fine gold. The author concluded that precedence should be given to the definition established for international purposes, although he recognized the difficulty of this argument because of the traditional principle of Norwegian constitutional law that in a conflict between an internal and an international norm the former prevailed.42
A reflection prompted by the example of Norwegian law is that if under the provisions of the second amendment of the Articles par values were to be reintroduced and expressed, as they will have to be, in terms of a common denominator other than gold (or a currency),43 a member might establish a par value for its currency but allow the more antiquated par value to continue to exist under its domestic law. Under the second amendment, a member will not be permitted to maintain the value of its currency in terms of gold under exchange arrangements of its choice even if it is not applying a par value.44 In view of the prohibition of the maintenance of the value of a currency in terms of gold, it seems unlikely that a member would deliberately define its currency in terms of gold for broad domestic purposes. The United States, however, which is recommending to Congress the abrogation of the par value of the U.S. dollar for all other purposes, proposes to retain it for the single domestic purpose of determining the value of outstanding gold certificates under Section 14(c) of the Gold Reserve Act of 1934 (31 U.S.C. 405b).
Some members have no provision of domestic law that defines the official value of the currency in terms of gold other than the measure by which a par value is established under the Articles.45 In these circumstances, even the readiness to apply any official gold value that can be found in a member’s corpus juris will fail to provide a basis for decision under the amended Articles because par values will cease to exist. Even if par values are reintroduced, gold will not be the common denominator in which they can be expressed.
There can be as much difficulty about the meaning of recognition of an exchange practice by the Fund as there can be about the official gold value of a currency. In the Transarctic case, the court considered the establishment of a central rate to be recognition by the Fund. The probable reasoning was that a central rate is communicated to the Fund under the Fund’s decision on central rates and becomes established under the decision unless the Fund objects to the rate as unsatisfactory. The absence of objection by the Fund, however, does not mean that a central rate is consistent with the provisions of the Articles on par values.
It has been seen that some exchange practices cannot be accommodated under the Fund’s decision on central rates, and that even if practices can be brought within the scope of the decision there is no obligation on members to establish them as central rates. The Fund’s decision on central rates was adopted under Article IV, Section 4(a)46 in order to suggest to members a way in which they could perform their obligation under that provision to collaborate with the Fund to maintain exchange stability and avoid certain harmful practices in circumstances in which members were not performing their obligation to make the par values of their currencies effective. The Fund has taken similar action under Article IV, Section 4(a) in adopting guidelines for the management of rates by members having currencies that are floating independently (category (i)).47 If these members observe the guidelines, they could claim that their arrangements were recognized by the Fund with as much justification as members that had established central rates, even though central rates cannot be established for currencies floating independently because they do not involve a fixed relationship of any kind.
(c) It has been seen that under the first decision on central rates48 there was no difficulty in determining the equivalence in gold of any central rate. Indeed, it was possible to establish a central rate only if this determination could be made, because a central rate was intended to be a practical substitute for a par value in the pattern of fixed relationships among all currencies, with gold as the common denominator, that was an objective of the decision. A member could communicate a central rate in terms of gold or the SDR. If the SDR was chosen, the calculation could be made quite easily in terms of gold because of the definition of the SDR in terms of gold. In addition, a member could communicate a central rate in terms of another member’s currency, provided that this currency was “stable.” A member was deemed to have a stable currency for this purpose if it was maintaining an effective par value or central rate. A stable currency, therefore, was one for which a gold value could be determined, and it followed that a central rate for a currency communicated in terms of a stable currency could be calculated in terms of gold.
It has also been seen that in March 1973 the members that were partners in the arrangements known as the “snake” decided to continue to maintain margins around relationships based on par values or central rates for transactions confined to their own currencies but no longer to observe margins for transactions involving their currencies and the U.S. dollar. The par values or central rates for their currencies and the par value of the U.S. dollar then ceased to be fixed points of reference for determining the relationships between their currencies and the U.S. dollar. The Fund did not decide that the new arrangements were incompatible with the maintenance of central rates for their currencies. On the contrary, it accepted without objection the communication of new central rates. In the Transarctic case, the central rate for the deutsche mark applied by the court was established in June 1973.
The Fund’s willingness to go on accepting the communication of central rates for currencies for which no fixed relationship was maintained with the U.S. dollar led to some criticism of the first decision on central rates. The critics objected that if the Fund was willing to accept the communication of a central rate for a currency that had no fixed relationship with the U.S. dollar, it should not refuse to accept the communication of a central rate for a currency because the rate was expressed in terms of a currency that was not stable. The objection was made largely because central rates had been communicated for some currencies in terms of sterling before the United Kingdom decided on June 23, 1972 that sterling would float independently, and there was advantage—for example, in the relations of some members with other international organizations—in insisting that they still had central rates.
The Fund changed its original decision on central rates in November 1973.49 The main amendment was designed to permit a member to communicate a central rate in terms of a currency that was not stable within the meaning of the original decision. The amendment was tantamount to recognition that currencies were tied to each other or to a single currency within a bloc without fixed relationships to other blocs. The decision abandoned the original intention of establishing a system similar to the par value system but with a degree of controlled flexibility. Calculation of a central rate in terms of gold became impossible for currencies that were pegged to a currency that was not stable, because it had already become impossible to regard a currency as having a gold value in any realistic sense when the issuer took no steps to maintain fixed relationships between its currency and the currencies of other members.
(d) According to the Hamburg court, an objective of the Brussels Convention was to achieve uniformity in the limitation of shipowners’ liability wherever action might be brought and whatever changes might occur in the relationships among currencies. For this purpose, the court applied the latest official value of the deutsche mark in terms of gold. Did this solution achieve the objective of the treaty? The solution can be taken to have had this effect among the currencies of the “snake,” if differences within the margin of 2¼ per cent are regarded as de minimis in connection with the concept of uniformity.50 In other respects, the solution can be shown to have three shortcomings.
First, under the original decision on central rates, margins of 4½ per cent were possible on either side of the relationship between major currencies based on par values or central rates. Margins of this width would produce sizable differences among currencies when the amounts to which liability was limited on the basis of central rates were compared with exchange rates. One currency might be at a premium of 4½ per cent over relationships based on par values or central rates and another currency might be at a discount of 4½ per cent. For exchange transactions involving some other currencies, the margins might be as wide as 6½ per cent.
Second, at the time of the decision in the Transarctic case, the central rate for the deutsche mark was no longer the basis for transactions involving that currency and the U.S. dollar. If the approach in that case was followed by a court in the United States, the court would choose the par value of the U.S. dollar, because the United States has never declared a central rate. If liability was limited on the basis of the par value for the U.S. dollar and the central rate for the deutsche mark, only the appearance of uniformity would be achieved. For example, if the U.S. dollar had appreciated in the market to a considerable extent in relation to the deutsche mark, with the appreciation measured in terms of the relationship based on the par value of the U.S. dollar and the central rate for the deutsche mark, a plaintiff would find it advantageous to pursue his remedy in the courts of the United States. Perhaps the Hamburg court felt that this effect could be ignored because the parties to the “snake” were maintaining exchange rates on the basis of par values or central rates among themselves whereas the United States was taking no action to maintain the effectiveness of the par value of its currency. The legal complexities of this distinction need not be pursued here. The only point to be made is that the distinction makes no contribution to a realistic uniformity in the application of the treaty.
Third, the lack of uniformity that was implicit in the solution when considered from the aspect of relationships between the currencies in the “snake” and the U.S. dollar has been made more apparent by the amended decision on central rates. That decision, by making it possible to communicate central rates in terms of a currency that is not stable, recognizes that there may be fluctuating relationships among groups of currencies.
This analysis of the principles on which the Hamburg court based its decision should have shown that, in the present complicated state of international monetary relations, the principles do not provide a satisfactory solution for applying the gold-value clauses in existing treaties. Each of the principles can be challenged. For example, all exchange practices are the result of official action, but they may not involve either a direct or an indirect official value for the currency in terms of gold. Similarly, a claim to “recognition” by the Fund cannot be confined to practices that involve an official value for a currency in terms of gold. The use of official values in terms of gold, when they are found to exist, will not produce the uniformity among all currencies that probably was the objective of a gold-value clause, even if they produce approximate uniformity among certain currencies.
A conclusion that can be drawn from the foregoing discussion is that, in present conditions, uniformity can be achieved only by a technique that takes exchange rates in the markets into account. This is the conclusion that was implied in the reference to realistic uniformity. A solution based on actual exchange rates would be more likely to deter litigants from selecting a forum on the basis of their expectations with respect to the value of currencies in the market. It is no longer possible to assume that the U.S. dollar or any other currency is maintained in value in such a way as to justify its selection as a reference currency that could perform the function fulfilled by the U.S. dollar under the Fund’s original Rule O-3 (see Appendix C).
A solution might be to base determinations of the gold value of currencies under gold-value clauses in existing treaties on the Fund’s current valuation of the SDR. The problem for the Fund was similar to the one that arises under these treaties. The Fund had to find a way in which to arrive at the gold value of a currency for the purposes of both its Special Drawing Account and its General Account in circumstances in which there was, and continues to be, no obvious way to make these findings. The problem was similar in another respect as well. The method of valuation of the SDR in terms of currencies had to be one that would meet the requirement of the Articles that the transferor of SDRs must receive equal value whichever transferee is designated by the Fund to provide currency in return for the SDRs and whatever currency the transferee provides.51 This requirement is similar to the objective of uniformity that the gold-value clause in certain treaties is intended to achieve. The similarity between the Fund’s problems and those that arise under other treaties strengthens the case for following the Fund’s solution as the one that has received international recognition.
Since the Fund’s adoption of its new method of valuation of the SDR, the courts have not decided a case in which the issue has been the application of a gold-value clause in a treaty such as the Brussels Convention, although the solution of applying the valuation of the SDR has already been recommended by one author.52 Two other authors have recommended the application of the price of gold in the commodity market.53 This solution, it has been seen, was rejected in both the Hornlinie and the Transarctic cases.54 It was applied, however, by the Athens Court of Appeals on January 10, 197455 and by a Swedish General Average Assessor on October 2, 1973.56 The preference for this solution is sometimes motivated by the wish to increase recoveries by claimants because of the low amounts to which liability is limited by the treaties.57
In the Hornlinie and Transarctic cases, the courts rejected the commodity price of gold because it was subject to frequent fluctuation, often as the result of speculation. The implication of this view may be that an objective of stability is associated with the objective of uniformity in the aims of treaties in which gold-value clauses appear. The official gold values of currencies have changed from time to time, but members have made these changes infrequently. The value of a currency in terms of the SDR changes day by day and can be affected by speculation, however that word may be understood. But in present conditions it is illusory to ignore the behavior of currencies in the exchange markets and to apply values that were to be the basis for exchange rates within narrow margins and were to be subject to infrequent change. It does not follow that the day-to-day fluctuation of the value of the SDR would negate the advantage of the Fund’s method of valuation over the commodity price of gold in applying gold-value clauses. The Fund’s method in terms of a weighted basket of currencies is designed to achieve a stable value for the SDR, and certainly a more stable value than could be achieved by tying the value to any one currency.58 The comparison of the SDR valuation and the commodity price of gold does not imply that there would be adequate legal or economic justification for applying the commodity price even if it should prove to be stable at some level.
The application of any gold-value clauses that might be adopted after the proposed second amendment of the Articles, and perhaps the application of any clauses that antedate that amendment, may be affected by the amendment of the provisions that deal with gold. An objective of the proposed second amendment of the Articles of Agreement is a gradual reduction in the role of gold in the international monetary system. One way in which this result is to be achieved is by eliminating an official price for gold. Furthermore, par values will cease to exist under and for the purposes of the Articles,59 and gold will not be the common denominator of a par value system if such a system was to be reintroduced under the amended Articles or the denominator in terms of which members may maintain the value of their currencies under other exchange arrangements.60 As a consequence, members will be free to deal in gold between themselves at any price. The Group of Ten has agreed, however, that during a limited period there would be no increase in the stock of monetary gold held by them and by the Fund, and that they would avoid pegging the price of gold at a new official level. Other members may subscribe to this agreement.61 Whatever effect these changes may have in the future, they contribute nothing to the solution of the problem of applying gold-value clauses at this time, which makes a solution all the more necessary because gold will not regain its present status under the Articles.
Changes in Existing Provisions
Currency Awarded by Courts
The floating of sterling has produced a change in the principle of English law, followed for almost four centuries, that English courts can give judgments only in sterling. In Jugoslavenska Oceanska Plovidba v. Castle Investment Co. Inc.,62 the issue was whether arbitrators could make an award in a currency other than sterling under a clause in a charter party requiring the arbitration of disputes in London. The charter party had been entered into between a Yugoslav shipowner and a charterer registered in Panama. The Court of Appeal decided on July 6, 1973 that in the circumstances of the case the arbitrators had authority under English law to make an award in U.S. dollars. Only one of the three members of the Court of Appeal expressly acknowledged the influence of the floating of sterling.63
In Schorsch Meier GmbH v. Hennin,64 the issue was whether an English court can give judgment in a currency other than sterling. The plaintiff, a limited company registered in the Federal Republic of Germany, claimed an amount in deutsche mark as the result of goods supplied to the defendant, who was doing business in England. The court of first instance refused judgment on the ground that there was no jurisdiction to give judgment in any currency other than sterling. The effect of a judgment in sterling would have been to deprive the plaintiff of approximately one third of the debt because of the depreciation of sterling against the deutsche mark. The plaintiff opposed judgment in sterling on the ground that the rule that an English court could award only sterling was incompatible with Article 106 of the Treaty of Rome, under which
[e]ach Member State undertakes to authorise, in the currency of the Member State in which the creditor or the beneficiary resides, any payments connected with the movement of goods, services or capital, and any transfers of capital and earnings, to the extent that the movement of goods, services, capital and persons between Member States has been liberalised pursuant to this Treaty….
The Court of Appeal regarded the case as one of first impression in the sense that no one had ever asked an English court to give judgment in a foreign currency, because it had always been assumed that an English court could not award a currency other than sterling. The explanation according to the Master of the Rolls, Lord Denning, was
… our faith in sterling. It was a stable currency which had no equal. Things are different now. Sterling floats in the wind. It changes like a weathercock with every gust that blows. So do other currencies. This change compels us to think again about our rules.65
Reconsideration of the origin of the principle that only sterling could be awarded showed that it was based on a rule of procedure under which it was adjudged that the plaintiff “do recover” a certain amount against the defendant. The plaintiff could then issue a writ of execution, which the Sheriff was able to execute because the judgment was in sterling. He would not have had the means to enforce a judgment expressed in some other currency. The court found that the form of judgment for money had been altered in 1966 by providing that it was adjudged that the defendant “do pay” the plaintiff a certain amount. The new form of judgment could be applied as appropriately to a sum in foreign currency as to a sum in sterling. The defendant could pay the amount in foreign currency or in sterling, but under the latter option, at the rate of exchange at the time of payment. The reason for the rule had disappeared, and therefore the rule itself could be discarded.66 The Court of Appeal also declared that Article 106 of the Treaty of Rome led to the same result.
The Master of the Rolls concluded his opinion with the following paragraph:
This is the first case in which we have had actually to apply the Treaty of Rome in these courts. It shows its great effect. It has brought about a fundamental change. Hitherto our English courts have only been able to give judgment in sterling. In future when a debt is incurred by an English debtor to a creditor in one of the member states—payable in the currency of that state—the English courts can give judgment for the amount in that money. This change will have effects, too, beyond the Common Market. It has already made us think again about our own laws. As a result, it is my opinion, that, whatever the foreign currency, be it United States dollars or Japanese yen, or any other, the English courts can give judgment in that money where it is the currency of the contract.67
The impact of new conditions was clear in the opinions of the other members of the Court of Appeal. It is difficult to resist quotations that illustrate the reconciliation of change with tradition and of philosophy with pragmatism. For example, according to one member of the court:
Traders from overseas have been coming to this country for centuries. When the merchants from the Hanseatic towns and the Low Countries gathered together at Cambridge for the midsummer fair in the middle ages they would not have wanted to be paid with clipped coins which from time to time some kings put into circulation; and if the law merchant enforced in the pie poudre court at that fair had made them accept clipped coins, it is probable that they would never have come again. If the judgment under appeal in this case is right, a foreign trader who has agreed in his own country—in accordance with his own law—to sell and deliver goods here and who is entitled under his contract to be paid in his own currency, must accept the modern equivalent of clipped coins, now called devalued currency. If this be so, our courts and our law will have a poor reputation in the market places of the world as long as our currency is unstable.68
He agreed with the other two members of the court on the effect of the Treaty of Rome but dissented from the principle that the courts had authority to give judgment in a foreign currency apart from the treaty.
In Miliangos v. George Frank (Textiles) Ltd.,69 a Swiss plaintiff claimed a sum of Swiss francs under a contract with an English defendant. If the judgment were given in Swiss francs, the defendant would have had to find roughly half as much sterling again to discharge his obligation. The court of first instance held that only sterling could be awarded notwithstanding the Schorsch Meier case, noting that Switzerland was not a member of the European Communities. The Court of Appeal held that the decision in the Schorsch Meier case must be applied on the ground that it involved two separate principles: one was that English courts had the power to give judgment in a foreign currency when it was the currency of the contract, and the other that the countries of the European Communities had a similar power under Article 106 of the Treaty of Rome. The first principle standing alone enabled an English court to give a judgment in Swiss francs in the present proceedings.70
The Miliangos case has now been decided on appeal by the highest tribunal, the House of Lords, which has confirmed, by a majority of four to one, that an English court can give judgment in a foreign currency when a debt is expressed and payable in that currency under a contract governed by the lex monetae.71 For the purpose of deciding this case, it was not necessary to adopt a broader proposition. The argument that the proposition would be inconsistent with an earlier decision of the House of Lords72 was rejected for a number of reasons, including the reason that a doctrine in conformity with commercial experience was to be preferred over one that had nothing but precedent to commend it. Another reason was that English law governs in matters of procedure in proceedings brought in an English court, but the procedure responsible for the earlier decision had been changed. This last consideration was given much less weight than in the Schorsch Meier case. A more important reason was that the substance of the debtor’s obligation was governed by Swiss law, and English law should not be allowed to transform it.
One of the reasons that weighed most heavily in the House of Lords, however, is apparent from the following passage:
The situation as regards currency stability has substantially changed even since 1961. Instead of the main world currencies being fixed and fairly stable in value, subject to the risk of periodic re- or de-valuations, many of them are now “floating,” i e they have no fixed exchange value even from day to day. This is true of sterling. This means that, instead of a situation in which changes of relative value occurred between the “breach-date” and the date of judgment or payment being the exception, so that a rule which did not provide for this case could be generally fair, this situation is now the rule. So the search for a formula to deal with it becomes urgent in the interest of justice.73
In the Schorsch Meier and Miliangos cases the Court of Appeal awarded the amount that was due in the foreign currency but permitted the defendant to discharge the judgment in sterling, in which event the rate of exchange at the date of payment would be applied. The House of Lords, in the Miliangos case, has confirmed this aspect of the judgment. By this form of judgment, the court rejected the practice, which has been much criticized, of awarding the equivalent in sterling of a debt expressed and payable in foreign currency at the rate of exchange at the date of judgment. The earlier practice subjected the plaintiff to a loss when the currency of the forum declined in value after the maturity of the unpaid claim.74 The argument that the rule of the so-called breach date gave certainty whereas a later date subjected the defendant to the risk of fluctuations in the exchange rate for the currency was rejected because in present circumstances it was indeed the debtor as the party in default on whom the burden should rest.
The need to deal in a practical and expeditious way with the complexities of the present time are recognized in the following remarkable passage in the opinion of Lord Wilberforce:
… [Difficult as this whole matter undoubtedly is, if once a clear conclusion is reached as to what the law ought now to be, declaration of it by this House is appropriate. The law on this topic is judge made; it had been built up over the years from case to case. It is entirely within this House’s duty, in the course of administering justice, to give the law a new direction in a particular case where, on principle and in reason, it appears right to do so. I cannot accept the suggestion that because a rule is long established only legislation can change it—that may be so when the rule is so deeply entrenched that it has infected the whole legal system, or the choice of a new rule involves more far-reaching research than courts can carry out.… [F]rom some experience in the matter, I am led to doubt whether legislative reform, at least prompt and comprehensive reform, in this field of foreign currency obligation, is practicable. Questions as to the recovery of debts or of damages depend so much on individual mixtures of facts and merits as to make them more suitable for progressive solutions in the courts. I think that we have an opportunity to reach such a solution here. I would accordingly depart from the Havana Railways case and dismiss this appeal.75
Modification of Gold-Value Clauses
Treaties drafted recently as the successors of earlier treaties have incorporated various attempts to deal with new monetary developments. For example, the Athens Convention Relating to the Carriage of Passengers and Their Luggage by Sea, 1974, which was agreed on December 13, 1974, continues to employ the Poincaré franc and to provide that the amounts referred to in certain provisions shall be converted on the basis of the official value of the currency of the state in which a court is seized of a case.76 The 1974 Convention, however, provides that “[i]f there is no such official value, the competent authority of the State concerned shall determine what shall be considered as the official value for the purpose of this Convention.”
The existence of an official value may be more of a problem than its absence. It has been seen that in Norwegian law there is a great discrepancy between the definition of the krone in domestic law and the par value established under the Articles of the Fund. It has been seen also that the par value for the deutsche mark in the law of the Federal Republic of Germany was not changed when a central rate was communicated to the Fund. In the Trans-arctic case, the court assumed that the law had not been changed because the authorities expected a return to a system of par values. It is likely that in many member countries in which a gold value for the currency has been incorporated in the law, the authorities have considered it inadvisable to establish a new official value under domestic law because of uncertainty about future monetary developments. Moreover, monetary authorities may have considered it disadvantageous to make changes in the official gold value of the currency because of obligations they have entered into under borrowing or other agreements.
The reference in the Athens Convention to the absence of an official value may provide a means to deal with some of the problems created by current monetary developments, although contracting parties may not apply uniform criteria in determining what should be considered the official values of their currencies for the purposes of the convention. The main object of the provision may have been to prevent the use of the commodity price of gold in the calculation of recoveries.
A more detailed approach to current problems was adopted in the Telegraph Regulations and the Telephone Regulations agreed at Geneva on April 11, 1973 as the Final Acts of the World Administrative Telegraph and Telephone Conference of the International Telecommunication Union. Under the Regulations, which became effective on September 1, 1974, the accounts of administrations and private operating agencies to which the Regulations apply are kept in Germinal francs77 and can be settled in a currency chosen by the creditor, unless there are special arrangements for settlement. If the account is kept in Germinal francs, the gold value of the currency selected is determined by the “gold par value” approved by the Fund or by the gold value of a subsequent central rate established under the Fund’s decision on central rates. Alternatively, the gold value of the currency selected may be determined by the gold par value or subsequent central rate established unilaterally (i.e., without the endorsement of the Fund) by the issuer of the currency. If there is no par value or central rate or if margins for exchange transactions recognized by the Articles or decisions of the Fund or previously established by the issuer of the selected currency are not being observed, the value of the currency is determined by its relationship on “the official or generally accepted foreign exchange market” to a currency for which there is a par value or central rate. If the par value or central rate for a selected currency is fixed unilaterally or its equivalent value must be determined by its relationship to a currency for which the par value or central rate is fixed unilaterally, the use of the selected currency must be acceptable to the debtor. “If there should be a radical change in the international monetary system (e.g., a substantial general change in the official price of gold, or if gold ceased to be used generally as a basic reference for currencies) which invalidates or makes [it] inappropriate” to apply the provisions of the Regulations on the valuation of currencies, the administrations and agencies would be able to agree on different provisions pending revision of the Regulations.
Adoption of New Units of Account
European Communities (Eurco-EUA)
The European Communities have adopted units of account in 16 areas of their activities. Units of account are employed to provide a guarantee of the maintenance of value of certain rights and obligations among member states, such as those related to the Communities’ budgets, the levies of the European Coal and Steel Community (ecsc), and the operations of the European Development Fund (edf). A unit is employed in applying conventions of the Communities with non-member states, and in equalizing the prices that prevail in a particular economic sector, such as agriculture.
The various units used for these various purposes do not always yield the same results in terms of a currency, and differences have been as large as 25 per cent. The units, which are composed of weighted amounts of the currencies of members of the Communities, were based originally on par values. At the end of 1973 the Commission of the European Communities introduced a method of valuation for the ecsc unit of account based on central rates for the currencies of members participating in the “snake” and on the trend of exchange rates for the currencies of members floating independently. This solution was not considered satisfactory by all members because the participants in the “snake” fixed the values of their currencies unilaterally whereas the values of the other currencies were adjusted in accordance with market forces.
The unit of account for the common agricultural policy of the Communities was fixed in 1962 at a weight in gold corresponding at that time to the par value of the U.S. dollar and was converted into national currencies on the basis of their par values under the Articles. Difficulties arose as the result of changes in par values, and further problems as the result of the independent floating of currencies. After 1973 representative rates fixed by the Council of Ministers of the European Communities were applied for some currencies, and after February 1975 for all currencies.
A unit of account called the European Composite Unit (Eurco) has been used in certain bond issues. The first issue denominated in Eurcos was offered on behalf of the European Investment Bank (eib), and the practice has been followed in other issues for the benefit of the eib and of other obligors. The Eurco is composed of specified amounts of the currencies of all members of the European Communities.78 The bonds issued on behalf of the eib provided that the value of the Eurco in terms of a currency, whether a component currency or another currency, would be determined by exchange rates for financial transactions in the markets according to prescribed procedures.79
On December 13, 1974 the Commission forwarded to the Council a document entitled Guidelines in Respect of the Unit of Account in which the Commission recommended the gradual introduction of a new unit of account. Use of one unit, the Commission stated, would simplify procedures within the Communities and relations with other states. The unit should be realistic in the sense that it reflected actual exchange rates. Linking the unit to a single currency or to the currencies of the “snake” would not be a solution. The unit might be linked to all the currencies of the Communities on the basis of their central rates only if all were floating jointly, but they were not. The solution, therefore, was to link the unit to the average movement of a basket of the currencies of all member states of the Communities. The Commission recommended that the weighting of the currencies should be based on factors that take into account the gross national product of each member state and its share in intracommunity and world trade.
The composition of the basket constituting the SDR was considered but rejected. The choice of the SDR as the unit would mean that the unit would be affected only as to 44.5 per cent by the average movement of the Communities’ currencies.80 The remaining 55.5 per cent would be determined by the average movement of other currencies, among which the U.S. dollar had a weight of 33 per cent. For various reasons, a guarantee in terms of the U.S. dollar to so large an extent was undesirable in connection with the operations and transactions of the Communities conducted within their own confines or with other states. Furthermore, a European unit of account, according to the Commission, would be a point of departure for developing a monetary identity for the Communities.81 It would eliminate the dislocations resulting from the use of other units, but in itself it would not be equivalent to the introduction of a new European currency.82
Under a decision of the Council taken on March 18, 1975 but published as a decision of April 21, 1975,83 the European Unit of Account (EUA) is to be composed of specified amounts of the nine currencies of the Communities.84 The initial value was made to equal the initial value of the SDR. A reason for this requirement seems to have been that the unit of account in the Treaty of Rome is defined as equivalent to virtually the same quantity of gold85 as in the definition of the SDR.86 By the same decision, the unit of account has been made to apply to the amounts of aid set forth in Article 42 of the acp-eec Convention of Lomé that are to be made available through the edf to the 46 countries of the acp.87 The decision declares that daily exchange rates in the markets are to be used for the purposes of calculation and that the daily values of the EUA shall be made available every day.88
The Governors of the eib decided on March 18, 1975 to adopt the EUA for its accounts, and the Commission decided that from January 1, 1976 the unit would be employed for the purposes of the ecsc. Initially, it will be used in calculating ecsc levies and in drawing up the operating budget and balance sheet, but at a later stage it may be used for other purposes, including loans. It is expected that the use of the EUA will be extended to other activities of the Communities.
The action taken by the eib has been described as an interim measure,89 because Articles 4 and 7 of its charter, which is a protocol to the Treaty of Rome, define the eib’s unit of account in terms of gold and provide that calculations of the equivalent of the unit in a currency shall be made on the basis of its par value as declared to the Fund.90 On July 10, 1975 the ministers of the member states of the Communities agreed that the provisions of the protocol should be amended because the definition of the unit of account and the method of calculating the equivalent in currency “are no longer entirely in keeping with the circumstances of international monetary relations,” and “the future evolution of the international and Community monetary system cannot be foreseen.” The proposed amendments, which have been submitted for ratification by the nine governments, avoid the definition of a unit and instead authorize the Board of Governors of the eib, acting unanimously on a proposal from the Board of Directors, and after receiving opinions from the Commission and the Monetary Committee of the Communities, to adopt and alter the definition of a unit and the methods of calculation.91
Montreal Protocols and other treaties (SDR)
The present confusion with respect to the application of gold-value clauses in treaties dealing with the limitation of liability in connection with transportation92 has led to the suggestion that all these treaties might be amended by a single treaty that would impose a solution. Studies conducted by Unidroit93 leading to this proposal in 1974 showed much support for retaining gold-value clauses for the time being but a difference of opinion on whether they should be applied according to the official or the commodity price of gold.94 The studies were carried out before the Fund had adopted its new method of valuing the SDR and before the most recent understandings were reached on the future role of gold in the international monetary system.
Norway proposed in 1975 that the Warsaw Convention, the Hague Protocol, and the Guatemala City Protocol on international carriage by air should be amended by substituting the SDR for the Poincaré franc as the unit of value in which to express the limitations of liability in these treaties. Norway pointed out in support of its proposal that there were difficulties in expressing the value of some currencies in gold, and that the abolition of the official price of gold was being studied by the Fund and was likely to take place. The result might be that in many countries the relation between the national currency and the Poincaré franc would have to be based on the price of gold in the commodity market, which could quadruple the limits in the treaties. Norway concluded that a new unit should be employed. It should be one that had received broad recognition, and a correct daily quotation should be available for it. The SDR calculated according to the method of valuation adopted by the Fund with effect from July 1, 1974 would meet these tests. Norway proposed that this method of valuation, or any other method substituted by the Fund for the purpose of its own operations and transactions, should apply for determining the value in terms of the SDR of the currency of any party to the conventions that was a member of the Fund, and that for the currency of any party that was not a member of the Fund the determination should be made in a manner decided by that state.95
The Norwegian initiative succeeded. Various additional protocols to existing conventions or protocols were adopted by the Diplomatic Conference of the International Civil Aviation Organization (icao) in Montreal in September 1975. Liability under the additional protocols is expressed in SDRs, and sums expressed in this way are to be converted injudicial proceedings into national currencies according to the value of them in terms of SDRs at the date of judgment.96 The value of the national currency of a contracting party that is a member of the Fund is to be calculated in accordance with the method of valuation of the SDR in effect at the date of judgment.
The additional protocols also deal with a problem that has to be faced by organizations that wish to adopt the SDR as a unit of account but include in their membership states that do not belong to the Fund. The additional protocols provide that the value of the currency of a High Contracting Party that is not a member of the Fund “shall be calculated in a manner determined by that High Contracting Party.” If the law of a nonmember of the Fund does not permit the application of the provisions of the protocol based on SDRs, it may declare that certain limits expressed in terms of the Poincaré franc shall apply. The amounts expressed in this way are to be converted into national currency according to the law of the state that makes the declaration.
If there is a problem involving the use of the SDR as a unit in relation to the currency of a nonmember of the Fund, the difficulty may be political. A nonmember may not wish to endorse a unit created by the Fund. It may not be a difficult technical problem, however, to arrive at an exchange rate for a nonmember’s currency in terms of the SDR on the basis of the Fund’s method of valuing the SDR. The solution could be based on the rate in the exchange market of the nonmember’s currency between that currency and the currency of a member for which a rate is calculated in terms of the SDR. This solution assumes, however, that there is a satisfactory market for the currency of the nonmember. Such a market does not exist for the currencies of all nonmembers. The draft of Article 5 of the Agreement Establishing the International Fund for Agricultural Development (ifad) that is being negotiated provides that the unit of account shall be the SDR. The value of the currency of a nonmember is to be calculated on the basis of “an appropriate exchange rate relationship” between a nonmember’s currency and a member’s currency.97 This formulation would not be confined to a market relationship between the currencies.
The Montreal protocols may be the pilot for changes in other conventions, including but not limited to conventions affecting transportation. For example, the United Nations Commission on International Trade Law (Uncitral) is drafting a Convention on the Carriage of Goods by Sea, and a number of countries have drawn attention to the Montreal protocols in support of the proposal that limits of liability should be expressed in terms of the SDR instead of gold francs. The proponents have pointed out that use of the SDR would solve the problems created by the disappearance of an official price for gold, fluctuations in the price of gold, and the calculation of exchange rates in the absence of par values.
Suez Canal Authority (SDR)
A governmental entity has adopted the SDR as a unit for determining the cost of the services it performs. The Suez Canal Authority was created by the Egyptian Government by the promulgation on July 10, 1957 of Decree Law No. 146 of 1957, which regulates the status and functions of the Authority as an entity that is wholly owned by the Government but is a public autonomous body. On May 24, 1975 the Authority announced that the transit tolls payable by vessels using the waterway would be expressed in prescribed amounts of SDRs.98
Prospective Adoption of New Units of Account
Organization of Petroleum Exporting Countries (SDR)
On June 11, 1975 the Organization of Petroleum Exporting Countries (opec) agreed at its meeting in Libreville, Gabon, to express prices for oil in SDRs. The communiqué issued at that meeting contained the following paragraph:
With regard to the protection of purchasing power of oil revenues on account of the dollar fluctuation, the conference has decided to adopt the use of the SDR (Special Drawing Rights) as a unit of account and that it will define the practical modalities for the implementation of the SDR at its next extraordinary meeting.99
The modalities were not defined at the meeting in Vienna in September 1975, and the change has not yet become effective, perhaps because of the recovery of the U.S. dollar, the main medium of oayment, in the exchange markets.
International Air Transport Association (SDR-IUV)
The opec is an intergovernmental organization, but the International Air Transport Association (iata) is a nongovernmental organization, incorporated under Canadian law, of 112 scheduled passenger and cargo carriers in 85 countries that determines fares, subject to government approval, and acts as the link of the air transport industry with governments and public.100 International fares and settlements between airlines have been based on U.S. dollars in some parts of the world and on sterling in other parts. The floating of currencies has required a freeze of fares as expressed in local currencies and a complicated system based on the par values of the U.S. dollar and sterling with surcharges for some currencies and discounts for others. These arrangements, which affect 168 currencies, have produced disputes about exchange rates.101 The Composite Passenger and Cargo Traffic Conferences (iata Unit of Value) of the iata, held in Nice from April 29 to May 5, 1975, resolved that the SDR, as defined by the Fund with effect from July 1, 1974, shall be used as the basis for “expressing all basic fares, rates, charges and, where appropriate, other monetary amounts, except as specifically provided in other Resolutions.” 102 The SDR, modified by two factors designed to maintain fares at approximately their present level, would be described officially as the iata Unit of Value (IUV). A fare expressed in a particular currency would be adjusted if the currency depreciated against the SDR by 2.5 per cent or appreciated against it by 5 per cent for 15 consecutive business days.103 It is contemplated that the new system will become effective on April 1, 1977. The Conference took this action because it doubted that there would be a return to a system of par values. In support of the resolution, it was argued that the complications could be avoided because the SDR was “a new currency” with exchange rate relationships to all national currencies.
The Conference considered the possibility of a change by the Fund in the method of valuing the SDR, and resolved that “in the event of (a) a change in the constitution of the components of the SDR, and/or (b) any fundamental change in the official SDR,” the iata would continue to use the SDR on the basis of the method of valuation as of July 1, 1974 until such time as a Composite Traffic Conference took a decision to the contrary. Further details of the proposal are to be considered at the iata Composite Currency Conference to be held in 1976.
Delta Air Lines, Inc., has filed comments on the proposal with the U.S. Civil Aeronautics Board, some of which relate to the use of the IUV and others to features of the proposal unrelated to the IUV.104 One point made by Delta is that at Nice there was much support for maintaining fares and rates without adjustment when currencies appreciated in terms of the IUV. Other points are that automatic adjustments in accordance with the IUV would be “tantamount to abandonment of sovereign governmental rights with respect to the control of rate and fare levels,” and would cause commercial difficulties in the quotation of fares for future travel or shipments.
One of the elements in the debate about the IUV is that the difficulties caused by floating are not acute—or perhaps do not exist—for travel confined to the Western Hemisphere because of the pegging of many currencies to the U.S. dollar. The Civil Aeronautics Board itself has raised certain questions, including those mentioned by Delta, and in particular about the effect of fluctuations in the value of currencies against the SDR on fares in the Western Hemisphere.105 Supporters of the proposal argue, however, that there would be no problem in applying the proposal within the Western Hemisphere, and that the fluctuations of fares and rates as currencies in the Western Hemisphere move against the SDR will cause no greater complications than have been caused by fluctuations in the past against the U.S. dollar.106
New Provisions and Practices
Financial Support Fund (SDR)
The use of the SDR as a unit of account has been proposed in connection with a number of international agreements that are now being negotiated. The negotiations have been completed on the Agreement Establishing a Financial Support Fund of the Organization for Economic Cooperation and Development (oecd) for the temporary purpose of financing the extraordinary financial needs of member countries of the oecd that become members of the Support Fund, but the agreement has not yet become effective. The quotas of members under the agreement are expressed in terms of the SDR.107 A member’s quota in the Support Fund will determine its share in financing loans and in the risks connected with loans, its voting rights, its maximum financial liability to the Support Fund, and the amount it may borrow from the Support Fund. Certain financial obligations will be denominated in terms of the SDR. The obligations of the Support Fund to a member in respect of a loan by the member will be denominated, at the option of the lender, in SDRs or in the currency transferred. When the Support Fund borrows with the guarantee of a member, the Support Fund will decide whether its obligation will be denominated in the currency or currencies borrowed or in SDRs. The denomination of loans by the Support Fund will correspond to the denomination of the financing of them.108 For all purposes of the agreement for which the value of a currency is calculated in terms of the SDR, the reference is to the valuation of the SDR in effect on July 1, 1974.109 If the International Monetary Fund changes the method of valuation, the Governing Committee of the Support Fund may decide to adopt the changed method. If the Committee decides to adopt the changed method, it will apply only to transactions, and the financial consequences of them, carried out after the date of the decision, unless the Governing Committee decides otherwise by a 90 per cent majority of the voting power.110
The provisions of the agreement face the issue of a change that the Fund might make in the valuation of the SDR, and the effect to be given to it in relation to accrued as well as to future rights and obligations. This issue must be faced by the drafters of all instruments in which a unit of account is employed that is subject to change. It has been seen that the European Communities’ unit will not be defined in the Treaty of Rome when amended, and that it too will be subject to change.
The original Rule O-3 and the present version of it were adopted by the Executive Directors of the Fund by decisions taken by a majority of the votes cast. This majority suffices for the adoption of decisions whenever the Articles do not prescribe that a special majority of the total voting power of members or of participants in the Special Drawing Account is necessary for the adoption of a decision.111 When the Articles were amended in 1969 to provide for SDRs, it seemed unnecessary to require a special majority for decisions on valuation. The Articles defined the unit of value of the SDR in terms of gold112 and did not go beyond that point except to provide that a transferor of SDRs should receive equal value in currency whatever currency was provided and whichever participant in the Special Drawing Account provided it.113 These provisions were considered sufficient because it was assumed that par values and narrow margins around parities would be maintained, and Rule O-3 was drafted on this assumption.114
When the assumption was shattered, and the time came to rewrite Rule O-3 in order to give effect to a new method of valuation,115 the absence of a provision requiring a special majority for this purpose meant that the decision could be taken by a majority of the votes cast. The importance of the step, however, raised the question whether a special majority should be required for changes in the method of valuation under the amended Articles. There was no disposition to question the desirability of a special majority. The issue has been whether the decision should be taken by a majority of 70 per cent or 85 per cent of the total voting power. The lower majority is foreseen for certain important decisions of an operational character under the Articles when amended, and the higher for decisions that have a special impact on the working of the international monetary system.
One of the difficulties that complicated agreement on a majority was that changes in the method of valuation might be of unequal importance. A change from the present technique based exclusively on exchange rates in the markets to one of the techniques based on par values would be regarded by most members as a fundamental change. A variation in the composition of the basket, either by the inclusion or exclusion of currencies or by a change in the weights among currencies, might be regarded as trivial, but it too might be considered fundamental if the change affected a currency with a large weight in the basket.
The difficulty of formulating an a priori distinction has led to agreement on a provision in the proposed second amendment under which the majority for the adoption of decisions on the method of valuation of the SDR would be 70 per cent of the total voting power, provided that decisions involving a change in the principle of valuation or a fundamental change in the application of the principle in effect would be taken by an 85 per cent majority of the total voting power.116 Decisions on the classification of proposed changes would be made by a majority of the votes cast. Any other majority, even a majority of the total voting power, might be unattainable on occasion.
Whatever may be the ease or difficulty with which it will be possible to take decisions to change the method of valuation under the future Articles because of the required majority, the prospect of change is likely to be a problem that parties will consider when contemplating the use of an SDR denomination.117 The Fund’s decision on the current method of valuation of the SDR is to be reviewed two years from the date of the decision (June 13, 1974). It is improbable, in present conditions, that there will be a readiness to make radical changes in the method of valuation. Nevertheless, the possibility of change will be taken into account by negotiating parties even if in the result they decide to accept the Fund’s method of valuation however it may change from time to time. It has been seen that the drafters of the Support Fund Agreement and the iata Conferences in April-May 1975 were concerned about this possibility and took decisions that dealt with the effect on their arrangements of a change. The Fund itself has taken the possibility of change into account in the agreements it has made for loans to finance purchases by members under the policy on the use of the Fund’s resources called the oil facility. These agreements, which have been made with members and other lenders, including Switzerland,118 are denominated in SDRs. The agreements provide that if the Fund “decides to make a change in the way in which the value of the unit of special drawing rights is determined,” the lender has an option to be repaid, and the Fund has an option to repay, before the change takes effect, on the basis of the unit of value of the SDR then in effect under Rule O-3.119 This provision applies whatever may be the change in the method of valuation.
The provision in the Fund’s borrowing agreements originated in the following circumstances. Transactions with members through the General Account involve no profit or loss for the Fund as the result of changes in the value of currencies. This result is achieved under the Articles because a member purchasing the currencies of other members from the Fund pays an equivalent amount of its own currency to the Fund and must maintain the value of the Fund’s holdings of its currency. In due course, the purchasing member must repurchase, with assets of equivalent value, the currency paid to the Fund in the purchase and maintained in value since that date.120 When the Fund was considering the terms on which it wanted to borrow for the purpose of financing the oil facility, one potential lender expressed concern that the Fund might exercise its power to change the method of valuation of the SDR in a way that a lender would consider detrimental to its interests. The question arose, therefore, whether the Fund could undertake to repay after a change in the method of valuation of the SDR on the basis of the method in effect when the loan was made. This question raised the issue whether the Fund had the legal authority to borrow on terms that might result in a loss (or profit) for the Fund notwithstanding the provisions of the Articles under which changes in the value of currencies cannot result in profits or losses for the Fund in connection with its sales of currencies to members. It was necessary to resolve this issue because a member that purchased currency borrowed by the Fund would repurchase the currency that it paid for the purchase on the basis of the valuation of the SDR at the date of the repurchase. The Fund would have no authority to compel repurchase on the basis of any other valuation. If the method of valuation of the SDR at the date when the Fund repaid the loan to it was different from the method of valuation applied for the purpose of repurchase by the member that had purchased the currency from the Fund, the Fund might suffer a loss (or make a profit).
The Fund concluded that legally it could assume a risk of loss when borrowing, but it was reluctant to take that step. Moreover, it was not disposed to agree to repay on the basis of a valuation of the SDR that was no longer in current use for other purposes. The existence of two methods of valuation of the SDR at the same time might detract from the status of the SDR as a reserve asset. The Fund was willing, however, to agree to give the lender the option to demand repayment before a prospective change in the method of valuation of the SDR was made effective. Repayment in this way would not result in profit or loss for the Fund, because it would repay with assets valued according to the same method of valuation of the SDR as would be used for discharging the debt, but the option would give the lender the assurance that it could require accelerated repayment if it concluded that repayment on the basis of the future method of valuation would be detrimental to it.
The option for the Fund was not necessary in order to prevent loss (or profit) for it in ordinary circumstances. That is to say, even if the lender did not exercise its option, and was content to have eventual repayment determined by the new method of valuation of the SDR, the Fund would not suffer a loss or make a profit. It has been seen already that the reason for this equilibrium would be that the members that had purchased the borrowed currency would be repurchasing on the basis of the new valuation. The option was included in the agreements notwithstanding the protected financial position of the Fund in ordinary circumstances because an extraordinary set of circumstances and decisions could be imagined that might result in loss for the Fund.121
Asian Clearing Union (SDR-AMU) and Arab Monetary Fund (SDR-Arab Dinar)
The Asian Clearing Union, which became effective on December 9, 1974, is designed as a mechanism for settling payments for current international transactions on a multilateral basis within the region of the United Nations Economic and Social Commission for Asia and the Pacific (escap).122 The accounts of the Clearing Union are kept in a unit of account designated the Asian Monetary Unit (AMU), which is to be equivalent to one SDR. The Board of Directors may change the value of the AMU at any time by a unanimous vote of all directors. A director appointed by the issuer of a currency that has changed in value in terms of the SDR since the entry intp force of the agreement in an amount at least equivalent to, and in the same direction as, a proposed change in the value of the AMU, is deemed to vote in favor of the proposed change. If a change is made in the value of the AMU, outstanding net debtor and creditor positions as of the date of the change are to be settled on the basis of the value of the AMU before the change.123 The instruments of payment that may be used to make payments through the clearing facility are confined to instruments denominated in the currencies of participating countries or in AMUs.124
It would seem that the value of the AMU would follow any changes made by the Fund in the valuation of the SDR, but the Board of Directors would be able to change the value of the AMU not only on the occasion of a change by the Fund but also in any other circumstances.
The Governors of 20 Arab central banks and other experts have been negotiating the charter of an Arab Monetary Fund. The text was agreed on April 27, 1976. It will come into force one month after the deposit of instruments of ratification by states with subscriptions that total not less than 55 per cent of the authorized capital. The Fund has broad economic objectives, including the correction of disequilibria in the balance of payments of its members, and will be able to make short- and medium-term loans.
The unit of account of the Arab Monetary Fund is the Arab dinar. It will be equal to three SDRs as defined by the International Monetary Fund. This equivalence and the method of valuation of the Arab dinar may be adjusted by a decision taken by the Board of Governors by a three-fourths majority of the total voting power. It would seem that an adjustment might be made at any time.
Eurobond Issues (SDR)
The prospect of changes in the value of currencies often induces contracting parties to include clauses in their agreements allocating the risk of change. The inducement to seek some guarantee of value is particularly strong in connection with long-term contracts. In recent years, the growth of international capital markets has been a factor in the revival of protective clauses. Before the par value system broke down, protection was sought largely because there might be changes in par values, but with floating currencies there is an even greater incentive for the adoption of protective provisions.
Clauses based on gold value or on a single foreign currency were subject to serious disadvantages. For example, gold-value clauses had been declared void under many systems of law and there was the risk that they might be declared void, even retroactively, under other systems. A foreign-exchange clause might impose loss on a party because of devaluation of the reference currency. The author of one study points out that these drawbacks led to the development of clauses based on a group of currencies.125 One type of multiple-currency clause gives the creditor the option to receive payment in any one of a number of currencies. Another type is the unit-of-account clause, which defines claims in terms of a composite of currencies. Present conditions have inspired new variants, such as the clause that provides for the adjustment of price by reference to an averaging of deviations from the official parities on a specified date of the currencies of certain major industrial countries.126
The same author notes that contracting parties may be disposed to construct their own units to serve their own purposes, but regional or personal units will lack the appeal of a universally accepted unit:
This is where the support of an accepted international authority may become crucial. At this point, one’s thoughts inevitably return to the potentialities of development in this direction on the basis of the SDR.127
In 1975, Eurobond issues were marketed for Alusuisse International N.V., a subsidiary of Swiss Aluminium Ltd.,128 the Sveriges Investeringsbank (Swedish Investment Bank),129 and Electricité de France130 on the basis of a denomination in SDRs.131
According to financial commentators, the first two issues, in particular, were successful,132 even though they were made on terms with respect to interest and period that were more favorable to the issuers than if they had been denominated in any of the currencies in the basket composing the SDR.133 All payments of principal, premium if any, and interest are to be made in U.S. dollars on the basis of the value of the dollar in terms of the SDR on the fifth (or, for one issue, the sixth) business day prior to the due date of the payment.
The prospectuses for the three issues referred to amounts in SDRs. The following passage in the prospectus for the issue on behalf of Electricité de France is typical:
Subject to the provisions under “Computation of the Value of the SDR” below, the value of the SDR, expressed in U.S. dollars, is equal to the value of one special drawing right of the International Monetary Fund (the “IMF”) in terms of the U.S. dollar. The IMF special drawing right is at present valued on the basis of specified amounts of 16 currencies as shown below. This basis may be changed by the IMF from time to time, including changes in the components, in which event the value of the SDR, subject to the provisions under “Computation of the Value of the SDR” below, will change accordingly.
In discussions of these pioneer issues, the practice of using the SDR as a unit of account has been welcomed because it will widen international capital markets by attracting a broader range of borrowers and investors. An advantage of the practice, it has been pointed out, is not only the composite character of the SDR, which limits the effect of fluctuations in the exchange rates of individual currencies, but also the content of the composite. The content is preferable to other units because it includes a wider range of currencies and, in particular, the U.S. dollar. Another advantage of the SDR is its future status in the international monetary system. The daily publication by the Fund of rates of exchange for currencies in terms of the SDR is emphasized not only because this is essential information but also because the availability of it under official auspices will tend to avoid or resolve disputes.134
The use of the SDR as a unit in private contracts gives rise to a problem similar to one that has been faced by the Fund itself and by other entities that have considered the adoption of this unit. The Fund may change the method of valuation of the SDR in force at the time when the parties enter into their contract. The choice they must make is between what has been called the “frozen” SDR and the “variable” SDR. The former is a unit that would be fixed in accordance with the method of valuation in force at a particular date, whereas the latter would be a unit that would be modified in accordance with any changes in valuation made by the Fund from time to time during the life of the contract. One expert has noted that the possibility of change may be a deterrent to the use of the SDR as a unit in transnational borrowing arrangements. He notes that the frozen SDR eliminates the uncertainties produced by the possibility of change, but the concurrent existence of different units might cause confusion among investors, and make trading in the secondary market for bonds more difficult. The variable SDR promotes uniformity, reflects changes considered appropriate by the Fund, and eliminates disputes that might arise in connection with the application of an earlier version of the SDR. If changes were made, the Fund, to judge by the first change that was made in Rule O-3, would be likely to avoid an abrupt change in the value of currencies in terms of the SDR.135 The variable SDR has been incorporated in the first three bond issues in which the SDR is the unit of value.136
This last point deserves further comment. The daily calculation and publication by the Fund of the value of the SDR in terms of various currencies is an important consideration for the parties that enter into arrangements based on the SDR as a unit of value.137 One reason for the choice of the variable SDR has been the absence of any assurance that the Fund would continue to publish similar calculations for a method of valuation that was no longer in use by the Fund itself.
Banking is another field in which the SDR has been introduced as a unit of account. Since June 1975, the Banque Keyser Ullmann en Suisse S.A. has been willing to open current and deposit accounts, and to conduct other financial operations, denominated in SDRs. Minimum amounts are prescribed according to the currency involved, although the accounts are denominated in SDRs.138
The Chase Manhattan Bank, since August 25, 1975, has been offering dollar transactions, including loans, time deposits, and future contracts, denominated in SDRs. To take one example, under a loan denominated in SDRs, the borrower’s obligation to repay would be determined by the equivalent in SDRs of the U.S. dollars borrowed at the time of borrowing multiplied by the value of U.S. dollars in terms of the SDR at the time of repayment. The loan and deposit transactions were being offered initially in the Bahamas, and the deposits in London, but it was expected that the services would be expanded to other places soon. For the time being, future SDR contracts were being offered only in New York.139 It appears that the services were initiated after inquiries from the Middle East and after the announcements by the iata and the opec about their prospective use of the SDR as a unit of account.
The banks and various commentators have stressed the potential usefulness of the new services for multinational enterprises, quasi-public institutions, industrialists producing merchandise for export, and businessmen engaged in the export-import trade.140 One assumption on which these new services are based is that contracts denominated in SDRs offer advantages to private parties, and that these contracts can be encouraged by the availability of the services.141