CHAPTER 24 The Code of Conduct

International Monetary Fund
Published Date:
February 1996
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Joseph Gold


The basic premise of the provisions dealing with par values and rates of exchange, sometimes referred to as the par value system, was the novel idea that rates of exchange are matters of international concern and therefore should be the subject of international scrutiny and endorsement. It was provided that each member should agree on a par value for its currency with the Fund.1 Exchange rates should be fixed, and therefore should not fluctuate beyond narrow margins around the par value,2 and multiple currency practices should be avoided.3 To ensure stability without rigidity, it was agreed that a par value should be subject to change but only to correct a fundamental disequilibrium. Each member was to have the exclusive privilege of proposing a change in the par value of its currency, but it was required to consult the Fund and in most cases obtain its concurrence before making a change. In deciding whether to concur in or object to a change, the Fund would seek to deter a member from making a change that would be competitive.4

The Fund has had to deal with a world for which this model was not completely appropriate, with the result that the model has been adapted in some respects, although without any compromise of the principle that rates of exchange are matters of international concern. The most crucial issue of interpretation in which this principle was involved in the early years of the Fund was the question whether a member could adapt multiple currency practices, or in the case of some members introduce them, without the approval of the Fund because the member was availing itself of the transitional arrangements of Article XIV. Section 2 of that Article enables a member availing itself of the transitional arrangements to adapt restrictions on payments and transfers for current international transactions to changing circumstances, and introduce them where necessary if the member had been occupied by the enemy, and the question that had to be answered was whether this authority applied to multiple currency practices when, as is often true, they are also restrictions. Notwithstanding Article XIV, Section 2, the Fund decided that if a restriction is also a rate of exchange, the rate provisions, and basically Article IV, Section 4 (a), must be observed, and a member is obligated to obtain the approval of the Fund before making the change of rate that would be involved in the adaptation or introduction of a multiple currency practice. The objection that this conclusion put members maintaining multiple currency practices as a form of exchange control at a disadvantage compared with those maintaining other forms of exchange control did not prevail. The decision was communicated to members together with a statement of the Fund’s policies on multiple currency practices in a letter of December 19, 1947.5

The direct and indirect impact of the decision on the practice of the Fund has been enormous. It is obviously important because so many members maintaining multiple currency practices have availed themselves of the transitional arrangements of Article XIV and also because the postwar transitional period in which those arrangements operate has not been terminated. The ideological importance of the decision has been even more profound. It was animated by the conviction that jurisdiction over rates of exchange is at the heart of the Fund’s functions and the constriction of that jurisdiction could maim the Fund’s authority. The Fund’s letter of December 19, 1947 described the obligations of members in connection with exchange stability, orderly exchange arrangements, and the avoidance of competitive alterations as “fundamental considerations” in the interpretation of the Articles. The decision and the conviction on which it rests have influenced the attitude of the Fund on other questions involving exchange rates. No decision can be recalled in which the Fund has held that it does not have jurisdiction in connection with the adoption of exchange rates for a member’s currency. This does not mean that all issues affecting exchange rates have been settled. For example, the Fund has found it necessary to reconcile Article VI, Section 3, which gives members broad powers to control capital transfers, and Article VIII, Section 3, which prevents members from engaging in discriminatory currency arrangements without the approval of the Fund. The Executive Directors held on July 25, 1956 that the members’ authority to control capital transfers had to be given primacy and that they could discriminate in the application of their capital controls without the need for the approval of the Fund.6 The Executive Directors drew back, however, from extending this decision to multiple currency practices that applied to capital transfers, and they did this precisely because rates of exchange were involved. The Executive Directors reserved for later decision the question whether under Article VI, Section 3 members may freely introduce or adapt, without the approval of the Fund, multiple currency practices that apply to capital transfers or whether members must obtain the Fund’s approval of these actions under Article VIII, Section 3. The Executive Directors have not decided this question so far, but the staff has held the view that the approval of the Fund is required, and in a number of cases in which a multiple currency practice affecting capital transfers was introduced or adapted, and the Fund agreed that the practice was justified, the Fund adopted a formula by which it gave such approval as was necessary. This formula keeps the jurisdictional issue open until such time as it becomes so important in practice that its solution is necessary.

It is clear from the Articles that the drafters assumed that the prevention of competitive devaluation would be a major preoccupation of the Fund, but the overvaluation of currencies has been a greater problem than undervaluation. This phenomenon was reflected in the issue which arose as a result of the unauthorized change of par value by France in January 1948. The question was whether the Fund was required to concur in a change of par value which was in the right direction and not competitive but in the opinion of the Fund inadequate to correct the member’s fundamental disequilibrium. The Executive Directors decided on March 1, 1948 that the extent of the change in a par value that is necessary to correct a fundamental disequilibrium cannot be determined with precision, and that in considering a member’s proposal to make a change the Fund would give the member the benefit of any reasonable doubt. If, however, the Fund concluded, after giving the member the benefit of any reasonable doubt, that the proposed change was insufficient to correct the fundamental disequilibrium, the Fund had the authority to object to the proposal and was not bound to concur in it.7 Part of the reasoning on which the decision rested was that the phrases “correct a fundamental disequilibrium” or “necessary to correct a fundamental disequilibrium” mean that the change is sufficient to bring about a correction, with the result that the Fund is not bound to concur in any proposal that would not bring about a full correction.

Another decision that bears on the degree of flexibility in the par value system is the question whether the Fund may approve a fluctuating rate as a transitional device from one par value to another par value. Some experts have had a certain sympathy for a device of this kind because of the difficulty of determining the precise level at which a new par value should be fixed in order to correct a fundamental disequilibrium. A transitional fluctuating rate, it has been argued, would permit a period of experiment in which to determine what the new par value should be. On July 22, 1948 when Mexico ceased to ensure that its par value would be effective and again on September 19, 1949 when Belgium proposed to adopt such a regime, the Fund’s reaction was based on the principle that it had no legal power to approve the regime even as a temporary expedient. If a member ceases to ensure that exchange transactions within its territories take place only within the permitted margins around the par value established under the Articles, the member is failing to fulfill its obligations. The definitive statement affirming this position appeared in the Fund’s Annual Report for 1951 8 after Canada adopted a fluctuating rate in September 1950, and was repeated in the Annual Report for 1962.9

The discussion so far illustrates the sensitivity of the Fund to exchange rates as matters of international concern and the pervasiveness of its jurisdiction over them, but indicates that there are certain limits under the Articles on the ability of members to adopt or the Fund to approve certain exchange rate practices or regimes. This brings the discussion to those developments by which the Fund has been able to accommodate itself to something less than the optimal system as foreseen by the drafters. In the three cases in which Mexico, Belgium, and Canada felt that they must cease to support the par value in exchange transactions, the Fund refrained from applying sanctions, and even showed some sympathy, but there is even stronger evidence of the Fund’s tolerance. There have been instances in which the Fund has welcomed or encouraged the adoption of a fluctuating rate. In many of these cases the member was eliminating multiple currency practices or simplifying a complex exchange rate regime. In the case of simplification, the Fund is able to approve the remaining rates as multiple currency practices but it has no power to approve if rates are unified. It may seem odd that the Fund can approve multiple currency practices but not a unitary fluctuating rate, but the explanation is the assumption underlying the Articles that if a member is in a position to have a single rate for its currency it should be able to fix a par value and should not allow the rate to fluctuate. On a number of occasions the Fund has approved stand-by arrangements in support of a fluctuating rate as part of a stabilization program. The theory, usually tacit, on which the Fund has welcomed or encouraged a fluctuating rate has been that the member was making progress towards the establishment of an effective par value and the observance of the purposes of the Fund. Nevertheless, in some cases in which the rate has become stabilized no new par value has been established, presumably on the ground that it was not yet certain that the official rate was soundly entrenched.

In some of these cases in which the Fund has put its resources at the disposition of a member, the so-called fluctuating rate has been too rigid to ensure the success of the member’s stabilization program. The Fund has developed a number of techniques for incorporation in stand-by arrangements by which to encourage the member to pursue a policy of helpful exchange rate flexibility.

The Fund has exercised its authority over the use of its resources, particularly under stand-by arrangements, in a way that contributes to the adjustment of exchange rates even though they do not purport to be fluctuating rates. It is a member’s prerogative to propose what the par value for its currency shall be, but it is the Fund’s duty to husband its resources. The Fund has been unwilling, therefore, to make its resources available in support of a par value which it considers untenable. For example, the Fund’s criterion for the use of its resources in the higher credit tranches refers to programs aimed at “establishing or maintaining the enduring stability of the currency concerned at a realistic rate of exchange.” 10 The Fund’s unwillingness to make its resources available to a member that has an inappropriate par value for its currency does not entitle the Fund to make a proposal that the par value be changed. The initial discussion of a transaction with the Fund takes place with the Managing Director or staff so that the member need not be embarrassed by further debate of the appropriateness of the exchange rate for its currency.

The Fund has been patient if new members have felt that their adherence to the full exchange rate regime of the Articles might be premature. The standard form of membership resolution under which a new member joins the Fund contains a paragraph empowering the Fund to call on the member to proceed with the establishment of a par value. In recent years many new members have been new countries as well and for this or other reasons the establishment of a viable par value by some of them has been difficult. The Fund has refrained from initiating the procedure that would require these members to establish par values. This policy gives greater weight to the provision in membership resolutions under which a member may change exchange rates before the establishment of a par value only after consulting the Fund and reaching agreement with it on the change.

The Fund’s understanding of the special problems of these new members is apparent in more than its restraint in calling for the establishment of par values for their currencies. It has been forthcoming in its disposition to assist them with its resources. The general theory of the drafters was that after a member established a par value, it would be able to use the Fund’s resources for the purpose of defending the par value if it were tenable and if support for a temporary period became necessary.11 The Articles also provide that the Fund may determine the amounts of, and conditions for, purchases by a member belonging to a defined and limited class before it establishes a par value for its currency.12

In June 1953 the Executive Directors examined the question whether there was general authority to prescribe the amounts of and conditions for pre-par-value transactions, but there was no decision at that time largely because there was no authority in the Articles to do this for the benefit of one original member (Uruguay) that had not yet established a par value. After that member had established an initial par value and become eligible to use the Fund’s resources, the Executive Directors decided on April 22, 1964 that the Fund had authority under the Articles to provide in all membership resolutions that it might permit pre-par-value transactions in such amounts and on such conditions as it saw fit.13 The Fund would encourage members to follow policies leading to the establishment of realistic exchange rates and the adoption of effective par values at the earliest possible date, and, in deciding whether to give access to its resources, would take into account the efforts that the member was making to reach this objective. The Fund also decided that it would permit a member that had not yet established a par value to make gold tranche purchases and enjoy the benefits of the compensatory financing facility on the same basis as other members. The decision eliminated the anomaly that, whereas a member that has established an initial par value is able to use the Fund’s resources even after it is forced by events to cease to ensure its effectiveness in exchange transactions, with a few exceptions a member that had not yet established an initial par value did not enjoy access to the Fund’s resources even though its exchange rate regime might be an orderly one. The theory of the drafters was not offended because members in this latter condition were not entitled to use the Fund’s resources but could make use of them only in the amounts and on the conditions permitted by the Fund.

This survey of actions by the Fund in favor of greater exchange rate flexibility will be concluded with one that relates to the margins for spot exchange transactions. These are fixed by the Articles at 1 per cent from par, and members must adopt appropriate measures consistent with the Articles to ensure that these margins are not transcended in exchange transactions within their territories. This meant, in effect, that each member could establish a margin of ½ of 1 per cent for gold transactions in its currency. There is evidence that these were regarded as generous margins,14 although there is also evidence that the drafters thought that the margins might become inadequate.15 In December 1958, certain European members that were contemplating the adoption of “external” convertibility concluded that it would help them to restore convertibility and free exchange markets, but with a certain economy in the use of reserves, if they were to adopt margins up to ¾ of 1 per cent on the U.S. dollar for their currencies. This meant that the margins for exchange transactions between any two of these currencies might be as much as 1½ per cent from par. Moreover, if a currency pegged on a currency that was itself pegged on a convertible currency, the margin in an exchange transaction involving the first currency and a third currency might be more than 1½ per cent from par. Basing itself on some early decisions,16 the Fund decided that if a member takes official action to confine exchange transactions involving its own and another member’s currency within 1 per cent of par and permits transactions involving its own and other currencies to go beyond those margins, this constitutes a multiple currency practice. In order, therefore, to assist members to move towards convertibility, the Fund decided on July 24, 1959 that it would not object to the cumulation of margins in such a system provided that the resulting margin from par for transactions between any two member currencies was no more than 2 per cent.17


The establishment of a multilateral system of payments in respect of current transactions between members is one of the purposes of the Fund and it is to be attained by the avoidance of restrictions on the making of payments and transfers for current international transactions as defined by the Articles. Article VIII, Section 2 requires members to refrain from imposing these restrictions without the approval of the Fund unless they are authorized by the transitional arrangements of Article XIV. The question of the definition of restrictions for the purposes of Article VIII, Section 2 was raised as a problem of interpretation in 1951. There were forces pulling in opposite directions: some wished to arrive at a definition that would make it clear that the Fund’s jurisdiction did not embrace restrictions on trade, even if they were imposed for balance of payments reasons, because these were within the competence of the Contracting Parties to the GATT, whereas others were troubled by the fact that this might limit the competence of the Fund in connection with members’ balances of payments. There was a division of opinion on the primary question of definition and therefore no agreement on the secondary question whether the same measure might be a restriction on both payments under the Fund’s Articles and on trade under the GATT. The differences of opinion could not be reconciled and discussion petered out.

The problem did not come to the surface again until 1960 when it seemed that a solution should be found because of the likelihood that a number of European members would accept the obligations of Article VIII. By that time, attitudes had become less uncompromising, partly because the scope of consultations under Article XIV, and the manner of conducting them, had become established. It had become clear also that certain measures were of a mixed character and came under the jurisdiction of both the Fund and the Contracting Parties.

A 1959 staff study said that there were three possible approaches to the definition of what constitutes a restriction on payments and transfers for current international transactions under the Articles. One approach would deem a measure to be a restriction if the effect on the balance of payments was the motive with which the measure was adopted. The second approach was not concerned with motive but took account of the effect of a measure and would regard it as a restriction if the direct or indirect effect was to hinder payments or transfers for current international transactions. It was concluded that neither approach was acceptable and that the third of the possible approaches was correct. This looked simply at the way in which the measure was formulated and made to operate. The main elements responsible for this conclusion were the language of the Articles, which emphasized the financial or settlement aspect of a transaction, and the intention of the Bretton Woods Conference that there should be an international trade organization with a jurisdiction that would complement and in principle not overlap the jurisdiction of the Fund. Either of the other approaches would have resulted unavoidably in a very considerable coincidence of jurisdiction for the two organizations.

The conclusion that the test must be a technical one was accepted by the Executive Directors although with some regret by those who continued to feel a strong attachment to the balance of payments motive as the appropriate criterion. In their view, the fact that the Fund acted as the advisor of the Contracting Parties on balance of payments and reserve questions and that the Contracting Parties had bound themselves to accept the Fund’s advice was not an adequate substitute for the direct jurisdiction of the Fund because not all members of the Fund were contracting parties. Nevertheless, agreement was reached, and the Fund’s decision of June 1, 1960 records it in the sentence which reads: “The guiding principle in ascertaining whether a measure is a restriction on payments and transfers for current transactions under Article VIII, Section 2, is whether it involves a direct governmental limitation on the availability or use of exchange as such.” 18 In order to help reconcile those who had held a different view, although they would insist on it no longer, the formula is expressed as a “guiding principle” and not as a definition or interpretation. Some executive directors, however, said that they would regard the guiding principle as an interpretation, and in practice it has operated in that way.

The settlement of this fundamental question of jurisdiction is interesting for a number of reasons. It illustrates the caution with which questions of jurisdiction under the code of conduct have been approached. It is an example of self-imposed discipline, and one that is all the more noteworthy because it was inspired by a design for international economic organization even though that design had not been realized. The presumed intention of the drafters prevailed even though some thought that it had lost its cogency because it had been based on an expectation that had been frustrated.


Article XIV deals with a “post-war transitional period” and permits members to avail themselves of “transitional arrangements” under which, notwithstanding the provisions of any other articles, they may maintain, and adapt to changing circumstances, restrictions on payments and transfers for current international transactions. There was also a limited authority for some members to introduce restrictions of this kind. A member exercising its privileges under the transitional arrangements is not required to seek the approval of the Fund under Article VIII for the maintenance, adaptation, or introduction of restrictions in accordance with Article XIV, Section 2. One of the conditions on which these privileges can be enjoyed by a member is that it is satisfied that it needs the restrictions for balance of payments reasons. Once it concludes that it has no balance of payments justification for restrictions, they can be maintained, adapted, or introduced only with the approval of the Fund under Article VIII.

From time to time it has been assumed by some commentators that the transitional period was of defined duration. Sometimes, this misapprehension was induced by the references in Article XIV, Section 4 to a period of three years after which the Fund began to report on restrictions and a period of five years after which members began to consult the Fund on the further retention of restrictions. In fact, there is no transitional period of defined length, and there is evidence that this was deliberate because of the fear of some countries that they might be pressed to adopt a premature convertibility for their currencies. There is, however, a procedure by which the Fund can make representations to a member that conditions are favorable for the withdrawal of particular restrictions or the abandonment of all of them. The caution of the drafters is illustrated by the fact that these representations may be made “in exceptional circumstances,” but on January 6, 1947, the Fund’s concern that a too extensive use might be made of the privileges of Article XIV led to a decision emphasizing that the Fund is the judge of what is meant by “exceptional circumstances.” 19 If the Fund makes a representation to a member and finds that it persists in maintaining restrictions, the member becomes ineligible to use the Fund’s resources. The Fund has made general policy declarations recommending or urging all members to withdraw certain kinds of restrictions,20 and has adopted numerous decisions concluding consultations with individual members under Article XIV in which the Fund expressed the opinion in one way or another that the use of restrictions could be reduced or eliminated, but the Fund has never addressed a formal representation to a member under Article XIV, Section 4.

On a few occasions, but not since 1960, the question has been asked whether the Fund could terminate the transitional period by interpretation or in some other way. Another question that has been asked is whether the Fund could find that a member was no longer availing itself of the transitional arrangements and was in the same position as if it had given notice under Article XIV, Section 3 that it was prepared to accept the obligations of convertibility of Article VIII, Sections 2, 3, and 4. Neither of these questions has been resolved by the Fund.

The main reason why at least the first of these questions has not been answered is the transformation in the Fund’s attitude to Article XIV which can be traced to 1960. On June 1 of that year the Executive Directors adopted a decision in the expectation that in the near future there would be a concerted acceptance of the obligations of Article VIII by a number of European members.21 There was a widespread feeling that the legal convertibility of a currency under Article VIII should correspond with a real convertibility. It was clear that a member is entitled to decide for itself whether to give notice that it is prepared to accept the obligations of Article VIII, and the Fund cannot reject the notice, although it can refuse to approve any remaining restrictions. Once a member gives the notice, its currency is “convertible” under the Articles. Moreover, acceptance of the obligations of Article VIII is a one-way street, and a member cannot retreat to Article XIV after it has given the notice. There was no way to ensure that the convertibility of a currency would never be impaired, but it was at least possible to prevent convertibility from being turned into a legal fiction by discouraging a member from accepting the obligations of Article VIII if there was a risk that soon after acceptance it would have to request the Fund’s approval for the introduction of restrictions.

The Fund’s position can be discerned in paragraph 2 of the decision of June 1, 1960. The paragraph recognizes the right of members to give notice but states that before taking that step “it would be desirable that, as far as possible, they eliminate measures which would require the approval of the Fund, and that they satisfy themselves that they are not likely to need recourse to such measures in the foreseeable future.” The Fund warned that it would not readily approve the maintenance or introduction of restrictions by a member once it had accepted the obligations of Article VIII. If a member proposed to maintain or introduce restrictions for balance of payments reasons, the Fund would grant approval “only where it is satisfied that the measures are necessary and that their use will be temporary while the member is seeking to eliminate the need for them.” If the justification is not related to the balance of payments, “the Fund believes that the use of exchange systems for nonbalance of payments reasons should be avoided to the greatest possible extent.”

The implication of this declaration of policy is that the Fund will not be complaisant about the maintenance or introduction of restrictions by a member that accepts the obligations of Article VIII but might be more tolerant about the use of restrictions by a member that has not yet accepted those obligations. This attitude reflects a willingness to see members continue to opt for the transitional arrangements if there is still doubt about the strength of their position, with the result that the postwar transitional period has become literally a period, of undefined duration, after the war. Even new members joining the Fund in these days are allowed a choice between the regimes of Article VIII and Article XIV. Moreover, there are members that are still technically under Article XIV even though they maintain no restrictions and therefore can take no action under Article XIV. If these members were to wish to introduce restrictions, they would have to request approval under Article VIII. Presumably, they retain their status under Article XIV because they believe their position to be such that they cannot say with confidence that “they are not likely to need recourse to” measures requiring approval “in the foreseeable future.”


According to the first purpose of Article I, the Fund is to provide the machinery for consultation on international monetary problems, and the functioning of the Fund would be impossible without consultation with members. Under Article XIV, Section 4, members are required to consult the Fund each year on the further retention of any restrictions that are inconsistent with the Articles. This is a narrow jurisdictional basis for consultation and in earlier years there were difficulties in convincing some members that even the limited objective of this form of consultation required consideration of the economic context in which exchange restrictions were retained. Part of the problem was the suspicion that the Fund was extending its authority into the field of trade in which it had no jurisdiction to approve or disapprove trade practices. This problem persisted for a time even though it is a purpose of the Fund to facilitate the expansion and balanced growth of international trade and even though Article XIV, Section 2 requires members, as soon as conditions permit, to develop such commercial and financial arrangements with other members as will facilitate international payments and the maintenance of exchange stability.

One of the great advances in the Fund’s activities has been the progressive acceptance of the idea that consultation under Article XIV should encompass all aspects of a member’s economy that have a direct or indirect effect on the member’s balance of payments. The scope of these consultations has not been limited even though there has been a steady withdrawal of restrictions to the point where some members still availing themselves formally of the transitional arrangements have few or even no restrictions still in force. The scope of consultation under Article XIV has become more extensive as confidence has grown between members and the Fund and as members have realized that the review is useful to the member with which the consultation is conducted and to other members as well. It is useful to other members because the consultation report is often the most comprehensive international report of its kind. One evidence of the value of these reports has been the increasing requests for the descriptive part of them by other international organizations. Discussion of the reports has made it possible for the Executive Directors to maintain multilateral surveillance over members, propose the adjustment of their policies, and gather knowledge on the basis of which to formulate the general policies of the Fund.

The acceptance of broad consultations on the narrow jurisdictional basis of Article XIV has been accompanied by increased consultation in connection with the use of the Fund’s resources. Consultation clauses in stand-by arrangements have been refined over the years so as to make them more effective, and it is now established policy for a member to consult with the Fund whenever this seems advisable for as long as the member is using the Fund’s resources beyond the first credit tranche. It would be reasonable to conclude that the greater use of the Fund’s resources and the confidence that this has instilled in members have been influences in the progress towards searching but amicable consultations under Article XIV and even under Article VIII.

It is in relation to consultation under Article VIII that one of the most striking advances in the field of consultation was made by the decision of June 1, 1960. It had been understood that if a member had undertaken the obligations of Article VIII, Sections 2, 3, and 4, it could not be required to consult unless it maintained practices that were inconsistent with these provisions, and the decision states the principle with great firmness that consultation is not obligatory except in these latter circumstances. The decision goes on to acknowledge, however, that because the Fund is able to provide technical facilities and advice, or because of the opportunity to exchange views on monetary and financial developments, “there is great merit in periodic discussions between the Fund and its members even though no questions arise involving action under Article VIII.” 22 These modest words are a considerable achievement because they record the readiness of some members that had been free of any duty to consult under Article VIII and had been unenthusiastic about consultation to make the experiment, with an awareness, of course, of the advantages that would follow from similar consultations by other members that were about to undertake the obligations of Article VIII. The decision went on to state, therefore, that agreement would be reached on the place and timing of consultations, and that ordinarily they would occur at intervals of about a year. There was to be one difference, however, between consultations under Article VIII and Article XIV although it is not mentioned in the decision. Consultations under Article XIV are concluded with a decision of the Executive Directors, but, although the report on a consultation under Article VIII is discussed by the Executive Directors, they take no decision unless there are exchange measures that require approval. There is testimony in this to the seriousness with which members regard the formal decisions of an international organization even though the organization may take no action on the basis of the decisions. Notwithstanding the absence of a decision in an Article VIII consultation, the practice of consultation with all members has enabled the Fund to increase its contribution to the problems of adjustment by exercising some influence on members in surplus as well as those in deficit.

The distance traveled by the Fund and its members in the field of consultation is evident in the last paragraph of the decision also. This called on members which are contracting parties to the GATT and which impose import restrictions for balance of payments reasons to continue to send information concerning those restrictions to the Fund so as to facilitate the work of the Fund in advising the Contracting Parties. The decision concluded by envisaging agreements between the Fund and members that are not contracting parties under which the Fund would seek to obtain similar information.


It is possible to understand the international monetary system as embodied in the Articles as one in which convertible currencies are convertible into U.S. dollars and U.S. dollars held by the monetary authorities of other members are convertible into gold. This may be one meaning of the frequent but delphic reference to gold as the “final” or “ultimate” asset. If this was indeed the theory of the drafters, they probably assumed the continued invulnerability of the U.S. dollar and the readiness of other members to hold dollars in the quantities that were likely to become available to them. This view of the world and the assumptions on which it rested were not made explicit in the Articles. For example, there is no obligation under the Articles for the United States or any other member to buy and sell gold for its own currency. The Articles recognize the possibility that the monetary authorities of a member may freely buy and sell gold in fact, within the margins of par established by the Fund for gold transactions, for the settlement of international transactions.23 If a member engages in this practice, it will be maintaining the value of its own currency in direct relation to gold, and therefore the Articles provide that the member is deemed to be fulfilling its obligation to ensure that exchange transactions in its territories involving its own and another member currency are within the permitted margins for exchange transactions. In short, the Articles hold that the member is discharging the duty that is laid on each member to maintain the value of its own currency. The United States is the only member which has informed the Fund that it freely buys and sells gold within the meaning of the provision that recognizes that practice. In addition, France has informed the Fund that the monetary authorities of French Somaliland freely buy and sell gold by freely buying and selling U.S. dollars for Djibouti francs so that the exchange rate obligations of the Articles could be deemed to be fulfilled in respect of the Djibouti franc.

It may seem extraordinary that the Fund has not adopted a final view of the meaning of the provision dealing with the free purchase and sale of gold. The view held by the staff in January 1948 was that a member is freely buying and selling gold within the meaning of the provision if it satisfies two conditions, of which one is that the member in fact buys and sells gold for its own currency whenever requested to engage in these transactions by the monetary authorities of other members whether or not the practice is required by the member’s law. The other condition is that the member has no exchange restrictions on either current or capital transactions. The staff concluded that, if these two conditions are satisfied, the member is doing all that can be reasonably expected of it to maintain the value of its own currency, and it is not expected, in addition, to hold other currencies and intervene in the market with them, much less apply exchange controls, in order to maintain appropriate exchange rates. If exchange transactions involving the member’s currency and another member currency should take place at rates outside the permitted margins, the responsibility for them could not be attributed to the member that was freely buying and selling gold for its currency. When the question was considered in 1948, the Executive Directors did not endorse this as the sole or necessary meaning of the provision, but, in effect, left the full or final meaning for some future debate if there should ever be a challenge of the declaration of a member that it was freely buying and selling gold.

The reluctance to arrive at a full or final view of the provision was based less on the unwillingness of the United States to be held to so strict a standard than on the preference of some members for another standard that might be helpful to them. The staff opinion and the Executive Directors’ debate on the provision in February 1948 were the result of a contention by a member that had numerous exchange restrictions that it was freely selling gold for its currency to the extent that the monetary authorities of other members were able to acquire its currency. The incompatibility of that contention with the principle that the member must maintain the value of its currency in terms of gold by means of gold transactions induced the staff to dissent from the member’s contention that it was freely buying and selling gold within the intent of the provision. The member then withdrew its contention but without prejudice to the question of interpretation.

In March 1949 the Executive Directors held that a member that does meet the two conditions as explained by the staff will be freely buying and selling gold within the meaning of the provision, even if the provision can be satisfied by less rigorous conditions as well. It was on this basis that the Executive Directors were able to agree that the Djibouti franc was covered by the provision. The reasoning was that because the United States at the time clearly met the two conditions, monetary authorities that permitted the full convertibility of their currency into dollars also met the conditions, provided that the cost of converting their currency into dollars and then into gold was no greater than the cost of transactions involving the currency and gold directly. In these circumstances, monetary authorities could be said to be freely buying and selling gold indirectly. The Fund has adopted no other decisions on the meaning of the free purchase and sale of gold.

Another fundamental question involving gold on which the “last verse is not yet sufficiently explicated” is the role of the Fund itself in gold transactions. Gold enters and leaves the Fund in a variety of operations and transactions. The inflow results mainly from subscriptions, repurchases, and charges, the outflow largely from sales to replenish the Fund’s holdings of particular currencies. The Fund has been conscious of the effects of the flow of gold into and out of the Fund, and its policies have been affected by this awareness. An understanding of those policies would have to be derived from the study of such transactions and operations as sales of gold contemporaneously with borrowing under the General Arrangements to Borrow, sales of gold for investment of the proceeds in U.S. Government securities in order to create a special reserve to deal with possible administrative deficits, and the placing of gold on general deposit in order to counteract the effect of the provision of gold by the reserve currency countries to other members paying gold subscriptions to the Fund when increasing their quotas. These are only a few examples of issues relating to gold, sometimes legal and sometimes economic, that have been resolved by the Fund, but although some of them have been debated with great intensity and over long periods, probably none of them has so profound a legal and philosophical importance as a category of transactions that has occurred hardly at all.

Article V, Section 6 provides that a member desiring to obtain the currency of another member for gold shall “acquire it by the sale of gold to the Fund,” “provided that it can do so with equal advantage.” This provision is deemed not to preclude any member from selling in any market gold newly produced from mines within its territories. Article V, Section 6 resulted from a diversity of views among the negotiators of the Articles on the extent to which gold should be directed to the Fund so as to harden its resources. Clearly, not all gold had to be sold to the Fund and room was left for the restoration of a private market in gold once the Articles took effect.

Some have seen Article V, Section 6, coupled with Article VII, Section 2, as establishing the legal foundation for gold as a reserve asset. For them, it is possible to understand why the monetary authorities of members have no obligation under the Articles to engage in gold transactions between themselves because the historic acceptability of gold has been reinforced by agreement on a buyer that is required to buy. They believe that the Fund has this role. They believe that a member can be assured that if it wishes to acquire currency for gold, it will be able to sell its gold to the Fund because the member’s obligation to acquire the currency from the Fund in accordance with Article V, Section 6 connotes a reciprocal obligation on the Fund to purchase the gold and supply the currency. In its turn, the Fund can compel a member to supply its currency to the Fund for gold under Article VII, Section 2 whenever the Fund deems it appropriate to replenish its holdings of the member’s currency. Here then is the market assured to members by international monetary law for the disposition of gold.

Another view of Article V, Section 6 has become apparent since the institution of the two-tier gold system on March 17, 1968. This is the view that the only obligation under the provision is the obligation of a member to offer gold to the Fund if a member is seeking the currency of another member for gold, but the Fund itself has no obligation to purchase the gold. The Fund has a discretion to accept or refuse the offer, and in deciding whether to purchase any gold that is offered, the Fund must be guided by its purposes, including the maintenance of exchange stability.

Once again it may be surprising that so fundamental an issue was not settled by the Fund many years ago. In part, this is because there was little financial or other inducement for members to sell gold to the Fund under the provision, and there have been very few purchases by the Fund other than purchases of small amounts held by the Fund under earmark for members as the result of their transactions and operations with the Fund, or purchases of small amounts accepted in discharge of repurchase obligations that had accrued in currency. As part of its decision on voluntary repurchases adopted on March 8, 1951, the Fund held that if a repurchase obligation accrues in a currency under Article V, Section 7 (b), the member may combine the payment of that currency with a sale of gold to the Fund for the currency under Article V, Section 6.24 In effect, therefore, the member may substitute gold for the currency. The decision seems to have been based on the assumption that the Fund has no discretion to refuse the gold, but the issue was not raised, and the decision does not preclude the interpretation that the Fund was exercising a discretion. Apart from cases of this kind and purchases by the Fund of small amounts held under earmark for members, the last purchase of gold by the Fund under Article V, Section 6 took place in November 1948. One reason why the traffic has been negligible is that the Fund has not attempted to deflect gold sales to itself by reducing or forgoing charges so as to offer terms that would be competitive with those offered by the monetary authorities of members.

Other aspects of the role of gold under the Articles have been given greater precision as the Fund’s practice developed. It was apparent to the drafters that certain gold transactions by members at non-parity prices could have an adverse effect on par values. Article IV, Section 2 prevents purchases of gold at a premium or sales at a discount by members, whoever the other party may be. This provision permits members to sell gold at a premium or buy it at a discount, except in transactions with other members, because a sale by one member at a premium would be a purchase by the other party at a premium and a purchase by one member at a discount would be a sale by the other at a discount. Therefore, transactions in gold outside the margins from par established by the Fund are inconsistent with the Articles if both parties are members of the Fund.

The leading problems connected with this provision have involved the payment of subsidies to gold producers and external sales of gold by members at premium prices. On gold subsidies the Fund’s position basically was that the prohibition of the payment of a premium price by a member applied to purchases from domestic producers also, but other forms of subsidy were not precluded.25 More complex issues were involved in the controversy with respect to external sales at a premium. These were not sales to another member and therefore they did not fall within the prohibitions of the Articles. In June 1947, however, the Fund reached the conclusion that the volume of external sales of gold at premium prices tended to undermine exchange stability and that the interests of members would be served if as much gold as possible could be held in official reserves instead of private hoards. The Fund issued a recommendation to members that they take effective action to prevent external sales of gold at premium prices.26 The legal basis for this recommendation was Article IV, Section 4 (a), which obligates members to collaborate with the Fund for certain specific purposes. The part played by this obligation in the history of the Fund is considered in greater detail in the next chapter.

The difficulties in supervising and ensuring observance of its recommendation led to the Fund’s abandonment of the effort in its statement of September 28, 1951, although it did not resile from its judgment that gold should be channeled to official reserves.27 In March 1954, the London gold market was re-established, an action that could be taken consistently with the provision that permits members to sell gold at a premium except to other members and did not require them to sell it to the Fund if the gold was newly produced from domestic mines. The creation of the Gold Pool in the fall of 1961 and its operation through the London market solved the problem of premium prices because prices were kept within the margins established by the Fund for gold transactions. The solution of the problem was found in supplying the market instead of starving it as the Fund had recommended. In time, however, supplying the market became too costly for the active partners in the Gold Pool, and this led them to institute the two-tier system.


The development of the code of conduct in the Articles has called for delicacy because essentially it has been a process of clarifying the division of authority between the Fund and members in matters that were exclusively within the domestic jurisdiction before the Articles took effect. Exchange rates are at the heart of the code. The Articles subject rates of exchange to international scrutiny and, in most instances, agreement. The Fund has not been disposed to hold that an issue relating to exchange rates is beyond its jurisdiction. The system envisaged by the drafters was one in which par values would be established under the procedures of the Articles, and changed only in order to correct a fundamental disequilibrium. The Fund has held that members are not entitled to correct a fundamental disequilibrium by changes of par values in installments, and if a par value is to be changed a period of fluctuation as the prelude to a new par value is not permissible. Nevertheless, the Fund has been willing to support a fluctuating rate with sympathy and resources, even when the practice could not be validated by Fund approval, if the practice was an improvement in a member’s exchange system and represented progress towards the establishment of an effective par value.

The Fund cannot propose a change of par value but has been able to exercise influence in favor of realistic rates of exchange by withholding the use of its resources to support untenable rates. Although the support of par values is a basic objective of the availability of the Fund’s resources, the Fund has found it possible to engage in exchange transactions with a member on terms that the Fund prescribes even though the member has not yet established an initial par value.

A member must ensure that spot exchange transactions within its territories involving its own and another member currency take place within margins of 1 per cent from par. The Fund has been able to introduce additional flexibility by approving certain multiple exchange practices under which, in effect, the 1 per cent margin need apply only to transactions involving a member’s intervention currency and wider margins up to 2 per cent are possible for transactions involving other member currencies. The Fund has the authority to prescribe reasonable margins in excess of 1 per cent for other exchange transactions. The Fund has not prescribed margins for forward exchange transactions, and the effect has been to permit some additional flexibility in the management of exchange rates.

The Fund has not adopted the most extensive conceivable theory of what constitutes restrictions on payments and transfers for current international transactions. It has chosen the test of the technical formulation and operation of an exchange measure and not the tests of balance of payments motive or the effect on payments and transfers. Adoption of the more modest decision was influenced by the intention to establish a parallel international trade organization with authority over trade practices. That intention and the limited jurisdiction conferred on the Fund as a result made it difficult at one time to gain general acceptance of the idea that annual consultations under Article XIV should have a wide range. That difficulty has been overcome, and regular consultations are held now even with members that have accepted the obligations of Article VIII.

Members are still able to avail themselves of the transitional arrangements of Article XIV, which in many instances means only that they have not given notice of the acceptance of the obligations of Article VIII. The Fund has not discouraged this continued but largely or even wholly formal retention of the privileges of Article XIV. It has acquiesced in the protraction of the transitional arrangements in order to give greater reality to the concept of the convertibility of currencies under Article VIII.

The Fund has had to deal with the problems of gold at all stages of its history. Nevertheless, certain fundamental questions relating to the place of gold in the international monetary system as embodied in the Articles remain unresolved even at this date. In the earlier years of the Fund when the international monetary system was not being tested by some of the problems that have demanded attention in more recent years, there was little practical reason for trying to settle these questions. Now that the questions have a practical immediacy, the problems that have brought them to the fore impede easy agreement on the answers.


Article XX, Section 4; below, Vol. III, p. 208.


Article IV, Sections 3 and 4 (b).


Article VIII, Section 3.


Article IV, Section 5.


E.B. Decision No. 237-2; below, Vol. III, pp. 261–65.


E.B. Decision No. 541-(56/39); below, Vol. III, p. 246.


E.B. Decision No. 278-3; below, Vol. III, p. 227.


Annual Report, 1951, pp. 36–41.


Annual Report, 1962, pp. 58–67.


Annual Report, 1958, p. 24.


Article III, Section 3; Article XX, Section 4 (c) and (i).


Article XX, Section 4 (d).


E.B. Decision No. 1687-(64/22); below, Vol. III, p. 243.


Questions and Answers on the International Monetary Fund, Question 19; below, Vol. III, pp. 158–60.


Article XVI, Section 1.


See E.B. Decision No. 237-2, December 18, 1947, and the accompanying statement on multiple currency practices; below, Vol. III, p. 265.


E.B. Decision No. 904-(59/32); below, Vol. III, p. 226.


E.B. Decision No. 1034-(60/27); below, Vol. III, pp. 260–61. See also James G. Evans, Jr., “Current and Capital Transactions: How the Fund Defines Them,” Finance and Development, Vol. 5 (1968), No. 3, pp. 30–35; Stephen A. Silard, “The Impact of the International Monetary Fund on International Trade,” Journal of World Trade Law, Vol. 2 (1968), No. 2, pp. 121–61.


E.B. Decision No. 117-1; below, Vol. III, p. 269.


E.B. Decisions Nos. 433-(55/42), June 22, 1955, 201-(53/29), May 4, 1953, 955-(59/45), October 23, 1959; below, Vol. III, pp. 258–60.


E.B. Decision No. 1034-(60/27); below, Vol. III, pp. 260–61.


E.B. Decision No. 1034-(60/27); below, Vol. III, p. 261.


Article IV, Section 4 (b).


E.B. Decision No. 7-(648); below, Vol. III, p. 244.


E.B. Decision No. 233–2, December 11, 1947; below, Vol. III, pp. 225–26.


See below, Vol. III, p. 310.


E.B. Decision No. 75-(705); below, Vol. III, p. 225.

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