International Monetary Fund
Published Date:
January 1971
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One of the most puzzling features of Article IV, Section 8, is the contrast between subsections (b) and (c). Under subsection (b), express provision is made for an adjustment in the Fund’s holdings of a currency in the event of both devaluation and depreciation. Under subsection (c), express provision is made for revaluation but not appreciation. It is difficult to find a satisfactory explanation for this distinction. It would not be sound to assume that Article IV, Section 8, has the quality of a sanction; that if a member permits its currency to depreciate, the penalty for this violation of the member’s obligations is that it must pay more of its currency to the Fund; and that the corresponding penalty for a member which permits its currency to appreciate in violation of its obligations is that it cannot get the return of any of its currency from the Fund. The flaw in this set of assumptions is that a member may have an exchange system which enables the Fund to find that there is an appreciation but which is formally consistent with the Articles for the time being. This situation would exist if multiple rates of exchange had been temporarily approved by the Fund under its jurisdiction to authorize multiple currency practices.17

It is a possible explanation that the drafters of the Articles thought that appreciation was unlikely to occur. Certainly, they seem to have been highly preoccupied with the prospect of the diminished value of currencies.18 This preoccupation, however, did not deter them from drafting other provisions covering both devaluation and revaluation in general terms. It is possible to speculate that they believed that the Fund should not return a currency that had appreciated because it was likely to be in short supply among members, and that more extensive sales of the currency at par by the Fund could help to reduce the appreciation. There is no evidence that this was the intention, and once again it would be difficult to reconcile the theory with an appreciation involved in multiple currency practices that the Fund had approved. If it is concluded that the provision was not drafted as a sanction, it would not be difficult to hold that there is a gap which the Fund could fill by interpretation or by the adoption, under Article XII, Section 2(g),19 of rules and regulations necessary or appropriate to conduct the business of the Fund.

If a currency does appreciate, sales of it by the Fund at the par value could be open to the objection that they fostered disorder. If exchange transactions in the rest of the world were taking place at the appreciated rate, it would be hard to reconcile sales by the Fund at the par value with the fundamental concepts of exchange stability and orderly exchange arrangements in the Articles.20 Moreover, sales at the par value could operate unfairly among members. Those members that succeeded in obtaining the currency from the Fund would reap a special exchange advantage over other members that, for one reason or another, were unable or unwilling to purchase it from the Fund.

When there is an appreciation, in contrast to a depreciation, the Fund’s problem will not be its inability to sell the currency in the absence of an adjustment of its holdings. The reverse might be true. That is to say, the bargain rate which the Fund would offer if it dealt at the par value could lead to a too ready recourse to the Fund for the currency. It would not be possible for the Fund to sell the currency at the appreciated rate without an adjustment of the Fund’s holdings (i.e., while holding the currency at the par value), because the sale would result in an exchange profit for the Fund. It has been seen that a profit would be inconsistent with the purpose of Article IV, Section 8, as stated in the legislative history of that provision. It has also been seen that once a rate is used for sales of a currency, it must be used in all computations involving that currency. For example, if a member bought currency at the appreciated rate, it could not be expected to repurchase with the same currency at the par value. If it was repurchasing with the same currency, it would have to return to the Fund more units of the currency than it had obtained by the purchase in order to discharge its repurchase obligation arising from the purchase, even though no change had occurred in the foreign exchange value of the currency between purchase and repurchase.

It follows that the only practical solution for the Fund is to sell the currency at the appreciated rate and make all other computations at this rate, provided, however, that the Fund’s holdings can be adjusted to make them correspond to this rate. If Article IV, Section 8, permits the return of currency so as to enable the Fund to follow this course, the rationale of the provision would have to be refined even further. It would not be adequate to describe the provision as intended to enable the Fund to continue to conduct its operations, because it has been seen that in the event of an appreciation the problem is the reverse of the inability of the Fund to sell the currency at the par value. The rationale of the provision would have to be reformulated to state that the provision is intended to enable the Fund to continue to conduct its operations in a manner consistent with its purposes.

This brings the discussion to the question whether, notwithstanding the restricted drafting of Article IV, Section 8(c), the Fund has held that it is able to adjust its holdings on an appreciation. This question has been decided in connection with fluctuating rates of exchange.

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