CHAPTER 22 The Institution

International Monetary Fund
Published Date:
February 1996
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Joseph Gold

The articles of the fund are one of the great law-making charters of the postwar world. “Something very important happened at Bretton Woods in 1944, and that was that the world consciously took control of the international monetary system.”1 The Articles drafted at Bretton Woods have had the strength and suppleness to permit the institution, by interpretation, rule-making, policy, and practice, to adapt to a world of change.2 This part of this volume will deal with the Articles as a dynamic instrument of international law. It begins with an account of the career of certain provisions, in the course of which there will be some attempt to compare experience with expectation. The survey must be selective in the choice of both provisions and the episodes in which they have been involved. As is common in the literature on the Fund, the subject is divided into topics dealing with the institution, the resources (Chapter 23), and the code of conduct (Chapter 24). Chapter 25 deals with the techniques that have been employed by the Fund for flexible response to new needs, and Chapter 26 examines some characteristics of the Fund in action. Finally, there is a chapter on the amendments that entered into effect in July 1969. This stresses the uses of the past not only in the transformation of some of the original provisions but also in the fashioning of many of the new provisions.

Two preliminary remarks by way of apologia are in order. In the course of these chapters it is sometimes said that certain influences were responsible for certain developments, but, in the words of Francis Bacon, the causes of causes are infinite and their impulsion one of another. Again, there may be an undue emphasis on the difficulties that have arisen in the application of certain provisions, but no disparagement is intended. If we can see further than the drafters of the original Articles, it is because we are standing on their shoulders.


The great growth in the membership of the Fund has caused no grave constitutional problems. Membership is not available to countries as of right, but the criteria that the Fund has applied in permitting membership are few. The Fund satisfies itself that an applicant is in full charge of its external affairs and that all of the obligations of the Articles can be observed. The U.S.S.R. participated in the Bretton Woods Conference and influenced the drafting of certain provisions 3 but has not joined the institution. Poland and Cuba have been members but withdrew. Indonesia withdrew and was readmitted. Czechoslovakia withdrew after a decision of the Fund requiring it to withdraw.

The admission of small states has not given rise to the concern that has been felt in some other international organizations. This is largely the result of the system of weighted voting which exists in the Fund.4 There have been consequences, however, of the membership of small states. One of them has been the necessity to modify the Fund’s policies on minimum quotas. Another has been the need to solve legal problems and make special arrangements because of some unusual circumstance in the country’s situation, such as its use of the currency of another member as its own legal tender.

The senior organ of the Fund, the Board of Governors, has held only annual sessions. Its meetings have given governors the opportunity to express opinions on the conduct of the Fund and the policies that should guide it, but the actions of the Board are taken normally on the basis of preparatory work or recommendations by the Executive Directors. One consequence of the great increase in the size of the Board of Governors has been a tendency towards the expression of regional views in meetings of the Board.

The powers of the Fund are vested in the Board of Governors, but the Board can delegate all but a small number of reserved powers to the Executive Directors. All the powers that are not reserved were delegated to the Executive Directors by the Board of Governors when it adopted Section 15 of the By-Laws on March 16, 1946. Under the Articles of Agreement as amended, the Board of Governors will have additional reserved powers, some of which are connected with the original powers of the Fund and others with special drawing rights.

The Executive Directors have grown in number from the original twelve to the present twenty. They meet frequently and still retain the camaraderie of an executive committee, although as the number grew with the increase in the membership of the Fund fears were expressed that this spirit might be jeopardized. Under the Articles, five executive directors 5 were appointed by the five members with the largest quotas, two were elected by the American Republics not entitled to appoint directors, and five were elected by the rest of the members. The Board of Governors may decide by a four-fifths majority of the total voting power to increase the number of executive directors when new members join the Fund,6 and the Board has exercised this power in accordance with a policy based on the voting power of new members. By the time of the 1966 election, the number of executive directors elected by the American Republics had been increased to three and the other elected executive directors had been increased from five to twelve. The biennial election of executive directors by members not entitled to appoint executive directors is settled by negotiations among members in which the Managing Director and staff take no part.

The Articles provide for an increase, in certain circumstances, in the number of appointed executive directors.7 The drafters wanted to be certain that the members which were providing assistance through the Fund because of the net sales of their currencies by the Fund would be able to express their views directly in the Executive Directors and, as a minimum, balance the views of the members making a net use of the Fund’s resources. It was provided, therefore, that if the two currencies that had been used in the largest absolute amounts during the two years preceding a biennial election were the currencies of members that were not among those already entitled to appoint executive directors, these two members also were to be entitled to make appointments. Canada was entitled to exercise this right in 1958 and Italy in 1968. In 1950, the question arose whether a member entitled to appoint an additional executive director was bound to exercise the right. The reluctance to exercise it resulted from the fact that the executive director appointed by a member in this position would speak no longer for the other members that had voted for him in earlier elections, and the number of votes that he could cast would be reduced correspondingly. It was concluded that the right was also a duty, and on both occasions the other members, in order to maintain the earlier associations, refrained from participating in the election of executive directors, with the result that no executive director could cast votes corresponding to the votes allotted to these members. Instead, an informal procedure was followed by which these other members have requested the Canadian and Italian executive directors to take care of their interests in the Executive Directors.

The Articles do not define the status of executive directors, but in some ways the silence of the Articles is the most interesting contribution to the definition of their position. For example, the word “representative” is not used in the Articles although it appeared in some earlier drafts. It is not said, as it is in the case of the Managing Director and the staff, that they owe their duty entirely to the Fund and to no other authority, but they are officials of the institution and are paid by it. The absence of definition has enabled executive directors to work out their own relations with the members that appointed or elected them, and there is much variety in those relations. Only the United States 8 and a few other members 9 have provided by law for the way in which an executive director shall receive instructions on the positions he is to take on issues arising in the Fund.

It is impossible to understand the Fund without some discussion of voting. All members have an equal number of basic votes in deference to the classical principle of the equality of sovereign states, and further votes weighted according to quota in recognition of the fact that they belong to a financial institution and have made varying contributions to its resources. For two kinds of financial decisions, weighted voting power is adjusted on the basis of a member’s net purchases from the Fund or the net sales of a member’s currency to other members. In the drafting of the Articles and in legislative discussions of their acceptability, relative voting strength, possible blocs, and possible alignments on particular issues were a major preoccupation. This concern is apparent in the provisions of the Articles on voting and decisions. Although the basic rule is that decisions are taken by a majority of votes cast, there is an elaborate network of special majorities and safeguards.

In the Board of Governors voting is unavoidable because most issues are put to the Board by correspondence. It is remarkable, however, that voting by the Executive Directors, who are in continuous session, has been almost nonexistent. This has been the result of deliberate policy. As early as September 25, 1946, a rule was adopted declaring that “the Chairman will ordinarily ascertain the sense of the meeting in lieu of a formal vote,” although any director is entitled to call for a vote.10 It did not follow that voting strength became irrelevant, and it was decided on May 28, 1947 that in ascertaining the sense of the meeting the Chairman must take account of voting power, but the avoidance of formal voting has tended to moderate the effect of discrepancies in voting strength.

Most of the votes that have occurred took place in the early years of the Fund before satisfactory procedures were developed by which individual executive directors could record their views. If an executive director was not able to concur in a decision without qualification, almost the only way in which he could record his reservations was by voting against the decision. Many of the early votes were on successive motions on the same issue, so that the number of occasions on which there has been resort to voting has been much smaller than the number of votes. There has been no pattern in these votes, and certainly they have not all been on major issues.

For some years the threat of a vote has been regarded as regrettable. The effect of this distaste for voting on the operation of the institution has been profound. It has helped to avoid blocs or at least not to intensify any drive towards routine coalition. On any important question, the Managing Director and executive directors try to reach a decision which all can accept or at least not oppose, and they persist in this effort while there is still reasonable hope that it will succeed. Naturally, there are abstentions or dissents on occasion, but in an atmosphere in which normally more attention is given to the weight of argument than to the weight of voting power the minority does not feel that it has been overborne by force. It would be disingenuous to pretend that the influence of all members is the same, but a policy of not voting has given even members with small voting strength a sense of participation in the process of reaching decisions. In addition, the policy has induced members with great voting power to be restrained in working towards a decision. An incident which involved one of the few votes is revealing. A decision was taken on the morning of March 2, 1951 by 44,510 to 33,155 votes, but the majority consisted only of the U.S., British, and Canadian executive directors, whereas eight executive directors voted against the decision and three abstained. In the afternoon session one of the three executive directors asked that the discussion of the subject be resumed at a later date, and on March 7 there was general agreement on the minority position. The significance of any one incident must not be exaggerated, but it is a defensible proposition that the larger voting power of some members gives them an assurance that enables them to act with moderation. It is the desire for this assurance that has made relative voting power a continuing concern of members, particularly in the negotiation of the amendments to the Articles, even if voting power is exercised only on rare occasions.

One reason why voting has been avoided as a deliberate policy is that, in some of its functions, the Fund, in the international field, closely resembles the regulatory or administrative agency of national law.11 The exercise of the Fund’s functions as an international regulatory agency has an impact on the rights and duties of its members. It must have been clear at an early date that members would be more likely to accept the decisions and rules of the Fund if the Fund strove for consensus, at least on important issues. It must have been clear also that the objective of consensus would tend to deter the formation of permanent combinations among members and encourage a more fluid procedure for reaching decisions. The policy of seeking consensus does much to explain the authority of the Executive Directors, because it is largely through them that consensus, or at least widespread agreement, is reached.


The place of the Fund in international organization at large has helped to shape its role. Two aspects of international organization have had unusual importance. One of them has been the intention to establish an international trade organization, and the other has been the advent of additional institutions or groups with international monetary functions.

At the Bretton Woods Conference it was contemplated that the Fund and the International Bank for Reconstruction and Development (the World Bank) would be joined by a trade organization, and it was resolved that participating governments should reach agreement as soon as possible on the ways in which obstacles to international trade could be reduced, the orderly marketing of staple commodities at fair prices could be ensured, and other related objectives attained. The intention to create an international trade organization and the subsequent history of efforts to carry out this intention affected the Fund in various ways. The effects on the definition of “restrictions on payments and transfers for current international transactions,” on which much of the Fund’s jurisdiction in bringing about a multilateral system of payments and transfers depends, and on the scope of the Fund’s consultations with members, are discussed elsewhere in these chapters.

In the scales of history the emergence of other international entities with authority in monetary matters will probably have greater weight. There is no evidence that at the time of Bretton Woods the world contemplated more than one international monetary entity. A generation later, the Fund is the central but not the sole monetary institution. The Bank for International Settlements is not a newcomer, but its activities are broader now than in the past. Certain committees of the Organization for Economic Cooperation and Development and of the European Economic Community, the Group of Ten, and the members of the Gold Pool are among the entities that have taken an active part or exercised authority in international monetary matters. The Fund is the central institution in the sense that its resources are the most considerable, but, more to the present point, its formal authority is the broadest and its membership the largest of all of the monetary entities. As a result, as was seen in the liquidity debate which led finally to the amendments of the Articles, smaller combinations of members sometimes seem to be exclusionary and for this reason provoke political reactions.

The obligations involved in participation in other organizations or less formal bodies cannot derogate in law from the obligations of membership in the Fund. Inevitably, however, decisions have been taken in other entities that have had major importance for the Fund. The provisions of the Articles are extensive enough to have permitted the adoption of at least some of these decisions within the Fund even if there was no legal necessity that the decisions be taken there. Examples of decisions affecting the international monetary system taken outside the Fund are the establishment of the Gold Pool, the introduction of the two-tier gold system, the Basle Agreements relating to sterling, and the increases in swap arrangements. In some but not in all of the other entities the Managing Director or his representative has participated in the deliberations leading to decisions.

Observers may disagree on the reasons for the proliferation of other entities in international monetary matters. Some of the reasons that may be suggested are related more or less closely to the Fund itself. One of them may be the great growth in the membership of the Fund and the belief that other entities are needed that are based on more homogeneous interests or simply on geography. The original reaction in the Fund that the European Payments Union was an unwelcome discriminatory currency arrangement may have left a residual feeling that the reconciliation between particular interests and universal objectives is not always easy. Inequality of voting power in the Fund, even though voting power is not brandished, may have spurred some members to find an environment in which this disparity would be absent or less marked. The continued deficit in the balance of payments of the United States and its need to find acceptable forms of financing have made it easier to suggest that some other environment would be more convenient. The tranche policies of the Fund may have led the United States to conclude that the Fund was forum non conveniens. From time to time, the theory of the special responsibility of certain members for the monetary system has been heard. This is probably not an autonomous influence, but then most of the other reasons that have been suggested are related to each other in one way or another.

In the history of the effect on the Fund of other entities the greatest interest attaches to the Group of Ten. It came into being as part of the search by the United States for financing for its balance of payments deficit and as a result of the fear that the resources of the Fund would be inadequate to enable the United States to make a substantial use of them. As the result of complex negotiations, the Fund adopted the decision which is called the General Arrangements to Borrow.12 Under it, eight members and the central banks of two other members were invited, and by adherence to the decision have agreed, to lend the currencies of these members to the Fund to supplement the resources of the Fund for the financing of exchange transactions by any of the ten members with the Fund. The decision, which is also an agreement between the Fund and the participants, became effective on October 24, 1962 for a period of four years, and has been renewed for a further period of four years. The intention of the Fund was to establish a ring of lenders to the Fund and the decision retains evidences of a bilateral nexus between the Fund and individual participants.13 It became apparent early in the negotiations, however, that a more corporate spirit was intended and that a certain amount of authority would be exercised elsewhere by the incipient collectivity.

The substructure of the Group of Ten consists of the General Arrangements to Borrow and identical letters addressed on December 15, 1961, by Mr. Baumgartner, the then Minister of Finance of France, to the other nine participants.14 These letters, to which the Fund was not a party, established the procedures for consultation and decision among the Ten. It must be understood that under the General Arrangements participants are not obligated to lend to the Fund but only to consider whether they will accept calls on them by the Fund to lend. The letters establish the procedures by which the participants will reach their conclusions collectively, although each participant responds individually to the call on it made by the Fund. The desideratum stated in the letters is unanimity, but if that is not attainable, decisions are taken by a system of weighted voting that is unrelated to voting power in the Fund. Voting power according to the letters is weighted in relation to the total amount that each participant may be called on to lend under the General Arrangements. Two majorities are needed for a decision: two thirds of the participants voting and three fifths of the weighted votes. The participant requesting a transaction with the Fund, for the purpose of which the Fund seeks to borrow, is not entitled to vote on the question whether the participants asked to lend will agree to lend.

The Baumgartner letters state the understanding that a consultative meeting will be held if proposals for calls are made “or if other matters should arise under the Fund decision requiring consultations among the participants.” They also state that to further these consultations participants, to the fullest extent practicable, should use the facilities of the international organizations—the plural is used—to which they belong to keep each other informed of developments in their balances of payments that could give rise to a need to lend under the General Arrangements. The Ministers of Finance and Central Bank Governors of the Group of Ten, however, have given mandates to their deputies to perform other tasks. The work by the Group of Ten in connection with international liquidity is the leading example of an activity that goes beyond the General Arrangements and the Baumgartner letters. The United States has not attempted so far to make a use of the Fund’s resources beyond the gold tranche, and the Fund has not found it necessary to invoke the General Arrangements for the purpose of a transaction with the United States, although it has borrowed under them for transactions with the United Kingdom and France.

The General Arrangements caused uneasiness among some members of the Fund. The agreement establishing the General Arrangements seemed to them to be a preferential facility because it was not for the benefit of transactions with the Fund by nonparticipants. One reason why they could not welcome the agreement was that they could discern no convincing principle by which to explain the selection of the Ten as a distinctive group. The reaction of members outside the Ten may have contributed something to the willingness of the Fund community to establish the compensatory financing facility which on its face is available to all members but in practice is likely to be used only by the exporters of primary products.

In time, the disquiet of some members outside the Ten took another form because of the movement towards the deliberate control of more elements in the international monetary system. These members felt that decisions were being reached on problems affecting the international monetary system as a whole by a process in which the rest of the members of the Fund had no direct voice although their views could be communicated to the Ten by the Managing Director or his representative. Even if decisions had to be taken in the Fund on these matters, the outcome might be predetermined by the Ten because of their dominating voting power in the Fund. In the liquidity debate a solution was sought by holding four joint meetings of executive directors and the deputies of the Group of Ten. The problem of a modus vivendi remains.


Louis Rasminsky, speech at Guildhall, London, February 3, 1969.


For the text of the Articles, see below, Vol. III, pp. 185–214 and 521–38.


E.g., Article IV, Section 5 (e); Article XIX (c).


Article XII, Section 5.


In this and the following chapters the distinction drawn in the Articles between individual executive directors and the Executive Directors as an organ of the Fund is followed by reserving the use of capital letters for the latter.


Article XII, Section 3 (b).


Article XII, Section 3 (c).


Bretton Woods Agreements Act, P.L. 171, 79th Congress, 1st Session (59 Stat. 512 (1945)), Sec. 4 (Selected Decisions, pp. 147–50).


For example, Germany, Bundesgesetzblatt, Part II, No. 21, July 13, 1956, page 747, Article 5.


Rules and Regulations, Rule C-10; below, Vol. III, p. 290.


“Present-day administrative agencies are vested with authority to prescribe generally what shall or shall not be done in a given situation (just as legislatures do); to determine whether the law has been violated in particular cases and to proceed against the violators (just as courts do); to admit people to privileges not otherwise open to members of the public (as the Crown once could do); and even to render what amount to money judgments. Agencies vested with such powers are usually called ‘regulatory agencies’ in the United States, because their activities impinge upon the personal or property rights of private individuals and regulate the manner in which such rights may be exercised.” Bernard Schwartz, An Introduction to American Administrative Law, p. 8.


E.B. Decision No. 1289-(62/1), January 5, 1962; below, Vol. III, pp. 246–52.


Paragraph 7 (a); ibid., p. 248.


Below, Vol. III, pp. 252–54.

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