Chapter

Uniform Proportionate Changes in Par Values

Author(s):
International Monetary Fund
Published Date:
January 1971
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In the provisions on the maintenance of gold value, the Articles deal not only with the change in the par or foreign exchange value of one currency in relation to gold and to other currencies but also with uniform changes in the par values of all currencies in relation to gold. With the latter changes, currencies preserve the same relationship among themselves but sustain the same proportionate change in terms of gold. This is often referred to as a change in the price of gold. In order to avoid confusion, it should be clear that it is the Fund’s decision to make a uniform proportionate change for all currencies under Article IV, Section 7, which constitutes a uniform proportionate change for the purposes of the Articles. Any member is permitted to prevent the change from becoming effective in relation to its currency. The fact that a so-called uniform proportionate change may not affect some currencies will not prevent the change from being a uniform proportionate one for the purposes of the Articles. If that were not the position, each member would be able to veto a uniform proportionate change.

One of the modifications of the Articles that became effective on July 28, 1969 affected Article IV, Section 7. Formerly, it read as follows:

Notwithstanding the provisions of Section 5(b) of this Article, the Fund by a majority of the total voting power may make uniform proportionate changes in the par values of the currencies of all members, provided each such change is approved by every member which has ten percent or more of the total of the quotas. The par value of a member’s currency shall, however, not be changed under this provision if, within seventy-two hours of the Fund’s action, the member informs the Fund that it does not wish the par value of its currency to be changed by such action.

The first sentence of the provision has been amended, so that it now reads:

Notwithstanding the provisions of Section 5(b) of this Article, the Fund by an eighty-five percent majority of the total voting power may make uniform proportionate changes in the par values of the currencies of all members.39

Under the original provision, a decision could be taken by a majority of votes cast, provided that the decision was approved by each member that had at least ten per cent of the total of quotas. Two members have had quotas of that size: the United States and the United Kingdom. Under the amended provision, a much higher majority is required, and the proviso has been deleted. The argument for the new majority was that it is the one required for decisions to allocate or cancel special drawing rights.40 Decisions to change the price of gold and decisions to allocate or cancel special drawing rights affect global liquidity, and it should not be easier to take the one decision than the other. The argument against the proviso was the alleged discriminatory formulation of it: it favored two specific members in contrast to the anonymous, and more numerous, members that could prevent attainment of the high majority.41

There has been no uniform change in par values in the history of the Fund. It has not been necessary to settle the legal issues raised by the provisions relating to a uniform proportionate change in par values, and the Fund has adopted no interpretations or decisions under them. Nevertheless, these provisions have evoked much interest. One issue that arises is how it would be possible to meet the procedural requirements of Article IV, Section 7.42 Another issue that has been the subject of some intellectual exercise is whether the provisions of Article IV, Section 8, assure a member that the gold value of its gold tranche in the Fund is protected in all conceivable circumstances. The question that has arisen has been prompted by Article IV, Section 8(d). Formerly, it declared that:

The provisions of this Section shall apply to a uniform proportionate change in the par values of the currencies of all members, unless at the time when such a change is proposed the Fund decides otherwise.

The provision has been amended and now reads:

The provisions of this Section shall apply to a uniform proportionate change in the par values of the currencies of all members, unless at the time when such a change is made the Fund decides otherwise by an eighty-five percent majority of the total voting power.

The amendment, which substitutes a majority of 85 per cent of total voting power for a majority of votes cast, was inspired by the same consideration of the relationship of the provision to global liquidity that produced the amendment of Article IV, Section 7. There has been a further change, however. Under the original and the amended Article IV, Section 7, the power to take a decision was and still is reserved to the Board of Governors. The power to take a decision under Article IV, Section 8(d), could be and had been delegated to the Executive Directors,43 but now this power also is reserved to the Board of Governors.44

Under Article IV, Section 8(d), “unless … the Fund decides otherwise,” the provisions of Article IV, Section 8, apply to each member if the par value of its currency is changed in accordance with a uniform proportionate change. It should be noted that, under a uniform proportionate change, a special decision would have to be taken to prevent the application of the provisions of Article IV, Section 8.

Application of Maintenance of Gold Value Provisions

If there is a uniform proportionate devaluation and no decision is taken to prevent the application of the provisions of Article IV, Section 8, each member that permits the change to affect the par value of its currency must pay an additional amount of its currency to the Fund equal to the reduction in the gold value of its currency already held by the Fund. Correspondingly, the Fund would return currency equal to the increase in gold value if there is a proportionate revaluation. As a result, the gold value of the Fund’s holdings of currencies would be the same before and after a proportionate change. This might not be immediately true of all of the Fund’s holdings of currencies held at a rate other than a par value, but the Fund’s holdings of these currencies could be adjusted very soon on the basis of a de facto change in gold value. Finally, the value in terms of currency of the gold and special drawing rights held by the Fund in the General Account would be changed in accordance with the uniform devaluation or revaluation. After a uniform devaluation this value would be greater than it was, and after a uniform revaluation it would be smaller.

The effect of the situation as described would be that the financial relationship of all members to the Fund in terms of gold would remain unaffected. The gold value of the total of currencies that a member could purchase, either within the gold tranche or beyond it, would be the same as before the change. Similarly, the gold value of members’ repurchase commitments to the Fund would be unaltered. Naturally, any calculations that were made in units of a currency for which the par value had been changed would be different from what they would have been before the change. After a devaluation, the numbers would be larger, and after a revaluation smaller. In terms of gold, however, or in terms of the U. S. dollar of the weight and fineness in effect on July 1, 1944, there would be no change.

While the gold value of the Fund’s holdings of members’ currencies, their relationship to quotas, and repurchase commitments would not be affected, it does not follow that all other effects would be neutral. For example, if there was a uniform proportionate devaluation which affected the par values of the reserve currencies, other members’ holdings of these currencies would be reduced in gold value. This reduction would lower the gold value of their monetary reserves as calculated under the Articles and might delay the accrual of repurchase obligations under the provisions of Article V, Section 7, which base repurchase obligations on monetary reserves and increases in them.45 The gold value of potential repurchase obligations under those provisions, however, would be unaffected, and any repurchase commitments that members had given as a supplement to those provisions would remain constant in gold value and would have to be discharged at the same dates as had been prescribed. These obligations and commitments would have to be discharged with monetary reserves of reduced gold value if they included reserve currencies, and this result could seriously increase the effective burden on members that were using the Fund’s resources.

Another change in the status quo would involve the General Arrangements to Borrow. It has been seen that a member’s commitment to lend to the Fund under the General Arrangements is fixed in units of its own currency, and, therefore, any change in the par value of the member’s currency would produce a corresponding change in the gold value of its commitment. The fact that participants’ commitments under the General Arrangements would not be increased on a devaluation might create certain difficulties. Under the Fund’s practice, the amount of a stand-by arrangement granted by the Fund to a member is expressed in U. S. dollars, and these are dollars of the weight and fineness in effect on July 1, 1944. If the Fund had granted a stand-by arrangement to a participant in the General Arrangements for a certain amount, and other participants had agreed that calls might be made under their commitments for the purpose of this stand-by arrangement, the Fund might find after a uniform devaluation that the amounts of the agreed calls or even the full amounts of participants’ commitments were not sufficient to provide all the supplementary resources that the Fund required. Further, if a participant requested early repayment under Paragraph 11(f) of the General Arrangements because of a balance of payments need,46 it might be that the commitments of the other participants would not be sufficient to provide the Fund with the necessary resources with which to make the repayment.

Nonapplication of Maintenance of Gold Value Provisions

The provisions of Article IV, Section 8, apply to a uniform proportionate change, unless the Fund decides “otherwise.” What is meant by “otherwise” is not free from ambiguity, but it would seem that, as a minimum, it must mean that the Fund could decide—in the event of a uniform proportionate devaluation—that members need not pay additional currency to the Fund in order to maintain the gold value of the Fund’s holdings of their currencies. The major legal difficulty in these circumstances is that, with the exception of Article IV, Section 5(d),47 and the cryptic Article XII, Section 5(c),48 nothing is said in the Articles about the consequences of the Fund’s decision. What, then, are the possible theories by which the consequences can be determined?

One possible theory is that, although there has been a change in the gold value of the Fund’s holdings, there is no change in the gold value of quotas. That is to say, the amounts of old dollars in which quotas are expressed remain the same.49 If only verbal considerations were taken into account, this might be the easiest thesis to maintain. Quotas are expressed in Schedule A of the Articles of Agreement as defined amounts of dollars, and it might be argued on the basis of Article IV, Section 1, that quotas must at all times mean the same number of old dollars. In fact, for some time Membership Resolutions adopted by the Board of Governors have included the definition: “The term ‘dollar’ or ‘$’ means United States dollars of the weight and fineness in effect on July 1, 1944.”

Notwithstanding the textual simplicity of this theory, its practical effects make it highly suspect. To begin with, application of this theory could seriously disrupt the liquidity of the Fund. Assume a Fund with a balance sheet in which the main assets are holdings of gold and special drawing rights of $3 billion and currency holdings of $12 billion against quotas of $15 billion. After a uniform proportionate devaluation of 50 per cent, these figures, in old dollars, would be $3 billion of gold and special drawing rights, $6 billion of currencies, and $15 billion of quotas. In new dollars, the figures after the change would be $6 billion of gold and special drawing rights, $12 billion of currencies, and $30 billion of quotas. The postdevalua-tion balance sheet, therefore, would show a deficit of $6 billion in old dollars, or $12 billion in new dollars.

Furthermore, the reduction in the gold value of the Fund’s holdings of currencies would be accompanied by a decrease in the gold value of outstanding repurchase commitments, so that the impairment in the gold value of the Fund’s resources would not be made, good by repurchase. For example, suppose member A’s quota is $100 million and the Fund’s holdings of A’s currency are $200 million before a 50 per cent uniform proportionate devaluation. After the change, A’s quota would continue to be $100 million in old dollars, but the Fund’s holdings of A’s currency would also be $100 million in old dollars. Therefore, in terms of gold value, A’s repurchase commitments in old dollars would be reduced from $125 million to $25 million.

Now, assume that the Fund’s holdings of A’s currency are $150 million before the change. After the change the Fund’s holdings would be $75 million in old dollars, and A’s pre-existing repurchase commitment of $75 million would disappear altogether. In fact, in some circumstances a predevaluation “debtor” could be converted into a postdevaluation “creditor.” 50 For example, if the Fund’s holdings of A’s currency were $125 million before the change, they would be $62.5 million in old dollars after the change.

There would be similar anomalies in the position of the members that had not been in a “debtor” position before the uniform proportionate devaluation. Assume that member B has a quota of $100 million and that the Fund’s holdings of B’s currency are $75 million before the devaluation. This would correspond to B’s original position, in which it had contributed 75 per cent of its quota in currency and 25 per cent in gold. After the devaluation, the Fund’s holdings of currency would be reduced to $37.5 million in old dollars. If B were to withdraw, it would be entitled to gold in an amount equal to $62.5 million in old dollars under Schedule D, paragraph 2, of the Articles, even though it had contributed gold equal to only $25 million in old dollars and even though the Fund had made no net use of its currency.51

One feature of the theory that has been discussed so far is that, subject to one qualification, all members would benefit from it. The benefit would take the form of an addition, in terms of gold value, to a “creditor” position, or a reduction in a “debtor” position, or conversion from a “debtor” to a “creditor” position. Not all members, however, would benefit to the same extent, because the greater the Fund’s holdings of a member’s currency, the more the member would benefit. There would be no benefit at zero holdings of a member’s currency, but that member would still suffer no loss even though it made no gain. For example, suppose members A, B, and C each have quotas of $100 million, and the Fund holds $10 million of A’s currency, $100 million of B’s currency, and $200 million of C’s currency before a 50 per cent devaluation. After the change the Fund’s holdings in old dollars would be $5 million of A’s currency, $50 million of B’s currency, and $100 million of C’s currency. In old dollars, A would benefit by $5 million, B by $50 million, and C by $100 million.

This discussion of the first possible theory of the consequences of a uniform proportionate change has proceeded on the assumption of a devaluation. A uniform proportionate revaluation would produce different, but equally anomalous, results. The Fund could become vastly overliquid. For example, in the event of a revaluation under which the gold value of currencies is increased by 50 per cent, a Fund with $3 billion in gold and special drawing rights and $12 billion in currencies against $15 billion in quotas would become a Fund with $3 billion in gold and special drawing rights and $18 billion in currencies against $15 billion of quotas in old dollars. In new dollars, the Fund would hold $2 billion of gold and special drawing rights and $12 billion of currencies against $10 billion of quotas. The postrevaluation balance sheet, therefore, would show a surplus of $6 billion in old dollars, or $4 billion in new dollars.

The results would be even more astonishing when applied to individual members. It need only be pointed out that the effect would be to increase potential repurchase obligations, and perhaps create repurchase obligations for those members that had not used the Fund’s resources or even for those that had been “creditors.” For example, if the Fund’s holdings had been 75 per cent of a member’s quota, they would be at 112½ per cent after the revaluation, and the member would have to repurchase in respect of the increase of 37½ per cent. If the Fund’s holdings had been 60 per cent, so that the member had been a creditor, the holdings would be 90 per cent after revaluation, and the member would have to repurchase 15 per cent in due course. Moreover, in view of the general increase in the levels of currencies as proportions of quota, it might be found that no further currency would be acceptable in repurchase under Article V, Section 7(c)(iii), because the Fund’s holdings were all at or above 75 per cent of quota, with the result that all repurchases would have to be made with gold or special drawing rights.52

The consequences that might flow from the first theory are so thoroughly unreasonable as to suggest the view that it is unacceptable. An obvious alternative theory is that, if the Fund should decide not to maintain the gold value of its assets, quotas would not remain the same, as they would under the first theory. That is to say, after a 50 per cent uniform proportionate devaluation, a quota of $100 million would become a quota of $100 million in new dollars, or $50 million in old dollars. In terms of gold value, quotas would be reduced in proportion to the devaluation. After a 50 per cent uniform proportionate revaluation, a quota of $100 million would become a quota of $150 million in old dollars. In this case, quotas would be increased in gold value in proportion to the revaluation.

Under the second theory, the Fund’s currency holdings and members’ repurchase commitments would all be reduced in gold value after a uniform proportionate devaluation and increased after a uniform proportionate revaluation but would have the same relationship to the new quotas as they had to the old, in contrast to the situation under the first theory, under which the proportions would change except at zero holdings of a currency by the Fund. Under the second theory, if A and B had quotas of $100 million each and the Fund held $50 million of A’s currency and $160 million of B’s currency, the effect of a 50 per cent devaluation would be that, in old dollars, the quotas would become $50 million each and the Fund’s holdings $25 million of A’s currency and $80 million of B’s currency (i.e., the same percentages of quota). After a 50 per cent revaluation, the figures in old dollars would be quotas of $150 million each and holdings of $75 million of A’s currency and $240 million of B’s currency. The outstanding repurchase commitments of members would remain the same in nominal terms (i.e., in units of currency) and would not be reduced in those terms, much less disappear, as they could under the first theory, although they would be reduced, of course, in gold value after a devaluation and increased after a revaluation. This maintenance of relative position is what would happen between a member and other holders of its currency.

Furthermore, under the second theory, the maintenance of the relative positions of the Fund and its members would produce very different effects on the liquidity of the Fund. Again, assume a Fund with assets of $3 billion of gold and special drawing rights and $12 billion of currency holdings against quotas of $15 billion. After a 50 per cent devaluation, these figures would become, in old dollars, $3 billion of gold and special drawing rights and $6 billion of currencies against $7.5 billion of quotas. In new dollars the postdevalua-tion position would be $6 billion of gold and special drawing rights and $12 billion of currencies against $15 billion of quotas. Now, however, the Fund’s balance sheet would show a surplus of $1.5 billion in old dollars, or $3 billion in new dollars, because of the change in the currency value of its gold and special drawing rights. After a 50 per cent revaluation, the figures would become, in old dollars, $3 billion of gold and special drawing rights and $18 billion of currencies against $22.5 billion of quotas, or, in new dollars, $2 billion of gold and special drawing rights and $12 billion of currencies against $15 billion of quotas. In this case the Fund’s balance sheet would show a deficit of $1.5 billion in old dollars, or $1 billion in new dollars, because of the change in the currency value of the Fund’s gold and special drawing rights; and the liquidity of the Fund would be affected to its disadvantage.

Little can be derived from the text of the Articles to assist in solving the problem of interpretation. Only one provision has direct relevance. This is Article XII, Section 5(c), which appears among the provisions for voting.53 It is not apparent why the one problem of the effect on voting among the many that arise on a waiver under Article IV, Section 8(d), should have been the subject of special concern. It seems that the purpose of the provision was to ensure that the gold value of past net purchases and net sales, which decrease or increase voting strength under Article XII, Section 5(b),54 would be scaled down on a uniform proportionate devaluation, because without that safeguard, voting strength could be too seriously unbalanced if the adjustments continued to be based on the old par values. This view of the provision implies that the gold value of quotas is changed, because it is this change that would produce the unacceptable imbalance in voting strength that would occur in the absence of the provision. This line of reasoning, therefore, would give textual support to the second theory.

Notwithstanding what has been said of the comparative symmetry of the effects of the second theory on financial relations between the Fund and its members, some observers might feel that one of the consequences would not be equitable on a uniform proportionate devaluation. The essence of this criticism would be that although all members in a “debtor” position would benefit in terms of gold value because of the reduction in the gold value of repurchase commitments, “creditor” members would suffer a loss in the reduction of the gold value of their gold tranches. Some might take the view that this was a defensible result of the decision to waive, because, with world prices more nearly constant in terms of the new dollar and not gold, members’ repurchase commitments to the Fund should be scaled down in gold value.

After a uniform proportionate revaluation and a waiver under Article IV, Section 8(d), the equities might seem quite different. The gold value of gold tranches would be enhanced. Repurchase commitments would continue to be in the same number of units, but these would now be increased in gold value. The Fund would not show a surplus on its balance sheet, but on the contrary would suffer a loss to the extent that its holdings of gold were written down as a result of the revaluation.

A waiver under Article IV, Section 8(d), might create difficulties for the Fund under the General Arrangements to Borrow. These difficulties would arise if the Fund had borrowed resources under the General Arrangements, or any other agreements that contained similar terms, before a uniform proportionate devaluation. Under Paragraph 12(a) of the General Arrangements,55 the gold value of any transfer to the Fund is calculated as of the date of the transfer, and the Fund is obligated to repay an equivalent value. This provision would create no problem after a uniform proportionate devaluation but no waiver under Article IV, Section 8(d), because the member for whose benefit the Fund had borrowed would have to return to the Fund in repurchase the same gold value as the member had received in its purchase. If a waiver were adopted, however, the member’s repurchase commitments would be reduced in gold value. This reduction would mean that the Fund would have to use resources beyond the full repurchase for repaying participants that had made transfers to the Fund under the General Arrangements. There would be no net loss for the Fund, however, if its holdings of gold and special drawing rights equaled or exceeded the gold value of its debts to the lenders.

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