Some General Reflections

International Monetary Fund
Published Date:
January 1976
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The breakdown of the par value system of the Articles of Agreement is producing profound changes in international and domestic law and practice. Meanwhile, there are grave difficulties in applying existing provisions of law that were adopted on the assumption of an effective par value system. These difficulties have been increased by the abandonment by the United States of the practice of freely buying and selling gold for U.S. dollars on the basis of the par value of the dollar in transactions with other monetary authorities, with the result that there is no obvious way for determining the gold value of currencies. The definitions of gold value to be found in the laws of some countries are far from reality when compared with the exchange rates of currencies in the markets. Nevertheless, there is a disposition to apply this value as the official value because it has the formal appearance of a solution. There is evidence, however, of a willingness to find practical solutions in applying existing provisions of law to circumstances that were not foreseen. The Fund has been a pioneer in this movement by adopting a new method of valuation of the SDR in terms of a basket of currencies, in place of the former method of valuation, which relied on the maintenance of the value of the U.S. dollar by means of gold transactions by the monetary authorities of the United States. For the Fund’s purposes, the new method of valuation must be taken to establish gold values for the U.S. dollar and for other currencies. The fixed gold value for the Fund can be stated as SDR 35 per ounce of fine gold, which gives a value in terms of currencies that fluctuates from day to day because of the movement of exchange rates in the market.

A similar pragmatic approach can be seen in the development of a unit of account by the European Communities in advance of an amendment of the Treaty of Rome. The Hanseatic Higher Regional Court at Hamburg has refused to apply the par value of the deutsche mark for the purpose of determining the gold value of that currency, even though the par value has not been abrogated by law. The court has preferred to apply the central rate for the currency as established under a decision of the Fund, even though the par value continues to exist under the Articles. The central rate, however, does not provide a satisfactory technique for arriving at the gold value of currencies under the provisions of domestic law that give effect to the many treaties in which a gold franc is the unit of account. These treaties are designed to provide uniform treatment in the recovery of damages by plaintiffs and in the limitation of liability by defendants wherever proceedings may be brought and whatever may be the currency recovered or provided by way of the limitation of liability.

Central rates under the Fund’s amended decision on central rates and wider margins (see Appendix B) do not provide equal value among currencies, whereas application of the exchange rate for currencies in terms of the SDR as valued by the Fund provides equal value for the purposes of the Fund and would provide equal value under other treaties. The use by the courts of the Fund’s valuation of currencies in terms of the SDR, when the courts are called on to give effect to gold-value clauses, could be justified on the ground that this valuation is the one employed by the central organization of the international monetary system in giving effect to the provisions based on gold value in its own Articles. The Netherlands Supreme Court has emphasized the importance to be attached to the valuation of currencies endorsed by the Fund, although the court took this position in preferring a par value over the market price of gold. There has been no case yet in which the argument has been made that the Fund’s valuation of currencies in terms of the SDR should be followed in giving effect to gold-value clauses.

One of the most remarkable manifestations of the pragmatic approach is the action by the final appellate tribunal in the United Kingdom, the House of Lords, in reversing the principle, which had been observed for centuries, that English courts can give judgment only in sterling. The House of Lords has now held that in certain circumstances the courts can award another currency if it is the currency of account and payment. The floating of the exchange rate for sterling was a major factor in the reversal of the ancient principle.

Various techniques are being adopted in the amendment of existing legal provisions or in the formulation of new provisions. There continues to be a tendency to rely on the official values of currencies, sometimes in order to make it clear that the market price of gold is being rejected. Sometimes the choice of official value is a last resort when some other determination of the value of a currency cannot be made or is not acceptable. A solution may be unacceptable for political reasons. For example, the solution of the Fund’s method of valuation of currencies in terms of the SDR may be unacceptable for determining the value of the currency of a nonmember of the Fund, although this rejection does not mean that a value could not be found for the currency by applying the Fund’s method of valuation. One technique that has been adopted in order to determine the official value of a currency when the determination according to agreed criteria is difficult is to rely on the issuer of the currency for a decision on its official value. This solution has some resemblance to the “agreement to agree” that is regarded as inefficacious in domestic law.

Solutions based on official values are dubious because, as already noted, such values are usually out of touch with exchange rates. Moreover, they can mislead by giving the impression that they have international endorsement. A par value once established under the Articles retains that status in the law of the Fund until a new par value is established, and it may therefore retain the status under domestic law and be regarded as the official value of the currency. The Fund itself, however, is not applying par values in any of the operations and transactions that are governed by the Articles.

In a world of floating currencies, there is a strong tendency to adopt a unit of account defined in terms of a basket of currencies for the purposes of legal instruments. There are various reasons for this tendency. It may be the desire to maintain the value of rights and obligations and to distribute risk equitably, or to achieve the uniform application of treaties, or to simplify complex transnational operations. There may be other reasons, and there may be a combination of reasons. The parties to an instrument can arrange the composition of their basket as they see fit, subject to any limitations that may be imposed by applicable law. A number of units of this kind have been created, but widespread international acceptance may be advantageous. The unit that has the broadest endorsement is the Fund’s SDR.

The SDR has already been adopted, or is going to be adopted, as a unit of account by international organizations, governmental and international nongovernmental entities, and private parties. A crucial question that must be considered by the negotiators of instruments in which the SDR is to be used as the unit of account is whether they wish a change in the method of valuation of the SDR to have legal consequences for them. The Fund itself has had to consider this problem in negotiating borrowing agreements. When borrowing for the oil facility, the Fund adopted the solution of options exercisable by borrower and lender to make or receive repayment before a change in the method of valuation takes effect. Another solution adopted in recent international practice has been a discretion to apply the new method of valuation. A third solution has been provision for the automatic application of the new method with a discretion to prevent it from applying. The issuers of Eurobond obligations have decided that the balance of advantage is in favor of the “variable” and not the “fixed” SDR.

A related but distinguishable problem is whether a change in the valuation of the SDR should apply to rights and obligations in existence at the date of the change as well as to rights and obligations that might arise after that date.

It should not be overlooked that one reaction to the difficulties of reaching agreement on a unit of account may be abandonment of the effort. Negotiators may decide to select a currency as the currency of account in circumstances in which they would have preferred a unit of account in the past. Similarly, governments may decide to undertake new commitments expressed in currency and not subject to maintenance of value on the basis of a unit of account because of the frequent adjustments necessitated by a unit of account.162 Furthermore, when maintenance of value is based on par values in a par value system, adjustments must be made by the issuer of a currency only when it decides to change the par value of its currency. Maintenance of value based on a unit of account consisting of a basket of currencies may require the issuer of a currency to make adjustments not only as the result of changes in the exchange rate for its currency but also as the result of changes in the exchange rates for other currencies in the basket.

Gold will be eliminated from the definition of the SDR by the second amendment of the Articles, and a new definition will not be substituted. Instead, the Fund will be able to define the SDR from time to time in whatever way it considers desirable. A similar discretion has been proposed as a substitute for the definition of units in other international instruments. This flexibility seems particularly desirable in view of the uncertainty about the future development of the international monetary system. Similarly, the House of Lords has stressed the wisdom of the judicial adaptation of monetary law in preference to new legislation.

The need for new legislation on one aspect of U.S. law has been announced by the Secretary of the Treasury. He has proposed the modification of the Joint Resolution of Congress of June 5, 1933 to make it possible for U.S. businessmen to deal in securities denominated in units of account and carrying a multi-currency repayment clause. These clauses, he said, might not be enforceable because of certain decisions of the U.S. Supreme Court interpreting the Joint Resolution. An SDR clause might not be distinguishable from the unit referred to by the Secretary, but the present legal position in the United States is unclear, and will remain unclear unless the Supreme Court or Congress takes new action.

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