Chapter

CHAPTER 27 The Amendments

Author(s):
International Monetary Fund
Published Date:
February 1996
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Author(s)
Joseph Gold

SPECIAL DRAWING RIGHTS

In the 1960’s the conviction grew that some more rational method of controlling international liquidity was needed in order to strengthen the international monetary system. The volume of reserves available to the community of Fund members was determined by the balance of payments deficits of the reserve currency countries, by the amount of gold production and the pattern of its absorption and use, by the conversion of reserve currencies into gold, and by fluctuations in the total of the newly recognized assets, gold tranches and readily repayable loan claims against the Fund, that arise as the result of the operations of the Fund. The determination of the reserve currency countries to reduce or eliminate their balance of payments deficits supported the credibility of the argument that unconditional liquidity might not increase sufficiently to prevent global stagnation and deflation. The long debate and negotiations on measures to deal with this threat led to the resolution of the Board of Governors at their Annual Meeting at Rio de Janeiro requesting the Executive Directors to prepare the text of an amendment of the Articles on the basis of an Outline attached to the resolution. The main tenet of the Outline was that the Fund should be empowered to allocate “special drawing rights” to its members as a supplement to existing reserve assets. The text of the amendments was prepared,1 approved by the Board of Governors on May 31, 1968, and submitted to members for their acceptance in accordance with Article XVII. The amendments became effective on July 28, 1969. They are the first that have been adopted in the history of the Fund. Although from time to time the idea of an amendment has been suggested, the general attitude has been that amendment was too complicated a process to undertake unless there was an overwhelming case for it. That case existed for the amendments that have been adopted. They represent the most important development in the Fund and in the legal regulation of the international monetary system since the original Articles became effective.

The facility through which special drawing rights will come into being is the Special Drawing Account, which became operative on August 6, 1969 in accordance with the provisions of the amendments.2 This facility within the Fund will coexist with the General Account. The Fund will conduct its original operations and transactions, as well as a few new operations and transactions involving special drawing rights, through the General Account. The two Accounts will be separate in the manner indicated in the amendments, but neither will be a legal entity in itself.3 The Special Drawing Account is not an affiliate, although that technique was considered possible at one time during the negotiations.4 The Fund will remain a single legal entity and will be the same international person as before the amendments.

All members of the Fund have the privilege of participating in the Special Drawing Account but are not bound to participate. Decisions to allocate or cancel special drawing rights will be taken by the Board of Governors by a majority of 85 per cent of the total voting power of participants on the basis of a proposal by the Managing Director concurred in by the Executive Directors.5 In decisions on matters pertaining exclusively to special drawing rights, only governors appointed by participants or executive directors appointed or elected by participants will be entitled to vote.6

Special drawing rights may be allocated to participants on the basis of their quotas for basic periods of five years. A participant may opt out of allocations.7 The central right of a participant is to use its special drawing rights to meet its balance of payments needs, or in the light of developments in its official holdings of gold, foreign exchange, and special drawing rights, and its reserve position in the Fund, by transferring its special drawing rights in return for currency convertible in fact to another participant designated by the Fund. Although a participant is expected to use its special drawing rights only in the circumstances described and not for the sole purpose of changing the composition of its official holdings as between the total of its gold, foreign exchange, and reserve position in the Fund on the one hand and its special drawing rights on the other hand, the use of special drawing rights cannot be challenged on the basis of this expectation, although the Fund may take certain actions after the event.8 A participant may use its special drawing rights up to the hilt but it must maintain an average balance of them over time, according to a prescribed formula, and must do this by an appropriate “reconstitution” of its balance of special drawing rights if they fall below the average for a time.9

There are three ways in which the provisions dealing with special drawing rights have been affected by the Fund’s past experience. First, some provisions have been based on the Fund’s practices and policies in the evolution of its original operations and transactions. Second, some provisions have been based on the original provisions. Third, some provisions deliberately depart from the original provisions.

(1) Some of the central characteristics of special drawing rights have been influenced profoundly by the experience of the Fund in the conduct of its original operations and transactions. For example, it was intended that special drawing rights should be a form of unconditional liquidity, and therefore the closest analogue in the General Account, the gold tranche, was the model for the unchallengeable right of a participant to use special drawing rights when it considers that it has a need to use them. The ability of a member to make gold tranche purchases without challenge rested on policy and practice before the amendments, but special drawing rights will begin life with a participant’s unchallengeable right to use them as a legal characteristic of special drawing rights.

A participant is entitled to use its special drawing rights in accordance with the expectation of need by transferring them to another participant designated by the Fund. Alternatives to the concept of designation were considered, notably use by agreement between participants or use as determined solely by the participant using its special drawing rights. The choice in favor of use in accordance with designation by the Fund 10 was made because of the success of the Fund’s policy on the selection of currencies purchased by members in exchange transactions with the Fund. The balance of payments and reserve criteria on which designation will be based have been adapted from that policy. Similarly, the provisions on the balanced distribution of special drawing rights among participants as a principle of designation derive from the attempt to achieve an equitable distribution of gold tranche positions under the policy.

There are other examples of a similar influence of policy on the new facility, but they need not be pursued here, except to note that the term “special drawing rights” itself is a link, although an odd one, with the terminology of the Fund’s original transactions. The importance of the point, however, goes beyond terminology. The original Articles speak of the purchase and sale of currencies and never of “drawings,” but this word has become the popular way of referring to the Fund’s exchange transactions. In the negotiations leading to the agreement on special drawing rights there was much dispute about whether the outcome should be a new monetary “unit” or “reserve asset” or a new form of “credit.” This was not decided at the international level, but each participant is enabled to decide for itself whether it will regard special drawing rights as a reserve asset and include them in its reserves for domestic legal or policy purposes, and special drawing rights have been given the qualities which will permit participants to come to that conclusion. At the international level, a number of compromises were made, one of which was that the new instrument of liquidity would be called special drawing rights. The words “drawing rights” were used as an echo of the exchange transactions of the Fund, because these words connoted to some a credit element, although the Articles avoid all language that suggests the indebtedness of members to the Fund or the extension of credit by it. The adjective “special” was added to the popular term “drawing rights” to indicate that new drawing rights differing from the old were being established, and the result was the creation of a new term of art.

(2) The provisions dealing with special drawing rights that have been adapted, with more or less fidelity, from the original provisions are too numerous to mention here in full. In Chapter 25 the inspiration for the provision setting forth “general obligations of participants” in Article XXVIII was identified as Article IV, Section 4 (a), which establishes general obligations regarding exchange stability. In addition, the association between the new provisions that give the Fund authority to adopt variations in the operation of certain Articles without the need to amend and similar provisions in the original Articles has been noted. Provisions closely parallel to the original provisions have been adopted on such matters as administration of the Special Drawing Account,11 emergency,12 settlement on the termination of participation,13 and interpretation.14

(3) In some ways, the decisions not to adopt parallel provisions are even more interesting. One of the most important divergences is the normal absence of any resources of gold or currency in the Special Drawing Account.15 A participant receiving special drawing rights from another participant will provide currency to the latter on the occasion of the transaction.16 The balance of payments need for which a participant may make a use of its special drawing rights does not distinguish between difficulties in the current and capital accounts of the balance of payments, whereas a distinction of this kind is made in connection with a member’s use of the Fund’s resources through the General Account.17 Special drawing rights have an absolute gold value guarantee,18 whereas it is possible, theoretically at least, for the gold value of gold tranches to be decreased. This would occur if the Fund were to waive the maintenance of the gold value of its assets on a uniform proportionate reduction in the par values of all currencies.19 The Fund sells currencies from the General Account at the par value,20 but currency will be provided by participants in return for special drawing rights on the basis of market rates of exchange.21 The liquidity of the Special Drawing Account is superior to that of the General Account because the net obligation of a participant to receive special drawing rights in transactions is equal to twice its net cumulative allocation of special drawing rights,22 whereas the member’s corresponding obligation in the General Account is limited to its subscription. The system of liquidation of the Special Drawing Account differs somewhat from that of the General Account23 in order to establish a more desirable apportionment among participants of the burden of a default by a participant in the liquidation settlement and in order to ensure that a participant’s exposure to risk will not be increased because it increases its holdings of special drawing rights.24

REFORM OF THE FUND

The resolution of the Board of Governors at Rio de Janeiro requested the Executive Directors to perform a second task: to proceed with their work relating to “improvements in the present rules and practices of the Fund based on developments in world economic conditions and the experience of the Fund since the adoption of the Articles of Agreement of the Fund” and to report on their proposals for amending the Articles and By-Laws for this purpose. The members of the European Economic Community had insisted that the establishment of the new facility and the improvement of the Fund had to be regarded as contemporaneous projects. One of the major developments in world economic conditions since the creation of the Fund which these members thought should be recognized by appropriate amendments was their economic and financial strength in the world and their role in the Fund. This had been reflected in the volume of the Fund’s sales of their currencies. Their voting strength in the Fund, however, was 16.45 per cent of the total in comparison with the 21.76 per cent of the United States.

All the basic reforms that have been incorporated in the amendments were proposed by the EEC members, although there are certain associated or consequential amendments that are the result of proposals by other members during the negotiations. The basic reforms proposed by the EEC members were few in number and only a small proportion of those originally considered by the EEC. They can be assembled into a few categories.25 Foremost among them in their dramatic effect are those amendments that introduce the need for a special majority of 85 per cent of voting strength by analogy to the majority that is required for decisions to allocate or cancel special drawing rights. The argument for these amendments was the logical link that was alleged to exist between these latter decisions and certain other decisions of the Fund. The link was the effect on global liquidity. It was argued that decisions approving adjustments in quotas as the result of a general review of quotas and decisions on uniform proportionate changes in the par values of all currencies affect the volume of global liquidity, and these decisions, therefore, should command the same general support as decisions on the allocation or cancellation of special drawing rights. It was agreed that the same majority should be required for quota adjustments resulting from a general review 26 and for uniform proportionate changes in par values as well as for a number of associated decisions.27

A second group of amendments relate to the original provisions governing repurchase and the calculation of monetary reserves by which repurchase obligations are determined. The negotiation of these amendments began with the thesis that two aspects of these provisions involving reserve currencies were unsatisfactory. One of these was the deduction of “currency liabilities” in the calculation of monetary reserves. The currency liabilities of a member, it will be recalled, are the holdings of its currency by the central or other official institutions of other members or by banks in their territories. The view was advanced that this was a preference for the reserve currency members because it was mainly their currencies that were held by others, and the deductions that were made in respect of these holdings had resulted in negative monetary reserves or monetary reserves below the quota level for both the United Kingdom and the United States. The other objection was to the abatement of repurchase obligations, i.e., the principle by which a calculated repurchase obligation was canceled if it accrued in the currency of a member which the Fund could not accept because the Fund’s holdings of that currency cannot be increased above 75 per cent of the member’s quota by repurchases. The member for which the obligation was calculated was not required to use another convertible currency or gold, which it might have had to obtain from a reserve center, in discharge of the obligation that was abated. It was contended that there was no economic justification for abatement because the repurchase obligation resulted from an improvement in the member’s monetary reserves. The effects of abatement had been enhanced in recent years because the Fund had been unable to accept either U.S. dollars or sterling. Indeed, in order to enable members to make a temporary use of the Fund’s resources in accordance with repurchase representations or commitments, the United States had made purchases of currencies from the Fund and had sold them, in return for dollars, to members which then returned them to the Fund immediately by way of repurchase. In view of the nature of these operations, the terms “turnstile” or “technical” purchases were in popular use for a time.

It was agreed that there should be amendments under which currency liabilities would not be deductible in the calculation of monetary reserves 28 and repurchase obligations that had been abated because the Fund could not accept the currency in which they had accrued would be discharged in another convertible currency which the Fund could accept.29 These two basic amendments were accompanied by a large number of other amendments in relation to repurchase,30 some of which were intended to soften the impact of the increase in repurchase obligations that might have followed from the two basic reforms. The possibility of eliminating the whole mechanism of repurchase and replacing it with a more discretionary system was raised but rejected, although the amendments introduce further qualifications of the principles of sharing or the concept of the Fund’s resources as a second line of reserves for members, on which the original provisions had been based.

Amendments have been made in relation to the use of the Fund’s resources. The gold tranche enters the third stage in its history and now receives constitutional recognition.31 The former policy by which representations made in connection with requests for gold tranche purchases were not challenged in practice although they remained challengeable in principle has been converted into a legal guarantee of immunity from challenge.32 This amendment has been accompanied by another which prevents the future creation of new forms of unconditional or virtually unconditional facilities in the General Account.33 Some of the members that had been vigorous supporters in the early days of the Fund of the thesis that access to the Fund’s resources should be unconditional, and that had opposed the Fund’s power to challenge requests or call for repurchase commitments, were among those that pressed for the prohibition of new forms of unconditional liquidity through the General Account. Their position was that the creation of this kind of liquidity in the future was a function of the Fund acting through the Special Drawing Account. In addition, they pointed out that it would not be logical to permit the creation of unconditional liquidity through one Account by a majority of votes cast while requiring a high majority for the same purpose through the other Account. Finally, Article VI, Section 2, which gave members that were not making a net use of the Fund’s resources a special privilege to make purchases of certain currencies without encountering the objection that the purchases were to meet a large or sustained outflow of capital, has been eliminated in that form.34 The original provision contained some fundamental obscurities, and in any event, it had not been useful because of the limitation on the currencies that could be purchased.

This brings the discussion to the next group of amendments, which can be described as improvements in the qualities of the gold tranche or in that part of it which is below the level of 75 per cent of quota and is sometimes referred to in practice as the “super gold tranche.” For example, requests may be made for any gold tranche purchases without challenge on the ground that they are to meet a large or sustained outflow of capital. Under the original provision this rule had been confined to purchases that did not increase the Fund’s holdings of the purchasing member’s currency above 75 per cent of quota. The limitation on the currencies that may be purchased in this way has been removed. Other improvements include the assured remuneration that is payable on “super gold tranches” 35 and the possible reduction or elimination of service charges on gold tranche purchases.36

Finally, an amendment has been made in Article XVIII, the provision on interpretation. It may seem extraordinary in view of the conclusions of this history that the question was raised whether the principle of final and authoritative interpretation of its Articles by the Fund itself should be replaced by the procedure of settlement by three arbitrators which applies to disagreements between the Fund and a member which has withdrawn or which arises in the course of liquidation. The legal, political, and other reasons why the issue was raised are complex and can be left to some future historian. Here it can be said that the arbitration tribunal as the final authority was not acceptable. Instead, a new organ with certain novel attributes was established within the framework of the Fund itself in order to provide a new mode of appeal. The Executive Directors will continue to take decisions on questions of interpretation in accordance with the original Articles. Within three months of any decision, any member may appeal to the Board of Governors, whose decision will continue to be final. However, any question referred to the Board of Governors in this way will be considered by a Committee on Interpretation of the Board of Governors. The Board of Governors is to establish the membership, procedures, and voting majorities of the committee, but each member of the committee is to have one vote. The decisions of the committee will be the only decisions within the structure of the Fund that are taken without weighted voting. This is particularly important because a decision of the committee will be deemed to be the decision of the Board of Governors unless the Board repudiates the decision by a majority of 85 per cent of the total voting power.

THE “CODIFICATION” OF POLICIES AND INTERPRETATIONS

In a chapter dealing with constitutional development it is appropriate to emphasize a further characteristic of the amendments. This is the incorporation of a number of policies and interpretative decisions into the amendments, a process that was frequently referred to in the discussions of the draft amendments as “codification.” The Executive Directors were aware that the transformation of policies in this way could be a dangerous process because it could inhibit the evolution of future policy. Similarly, there was a risk that it might be thought to be the view of the Fund that from time to time interpretations should be transformed into amendments. The Executive Directors recommended, therefore, that only a modest number of policies and interpretative decisions should be treated in this way.

Among the policies that are given a legal foundation, it has been noted already that the de facto unchallengeability of representations connected with requests for gold tranche purchases is now a de jure unchallengeability. The compensatory financing facility and its “floating” character are now recognized, although there is no compulsion on the Fund to perpetuate either the facility or its floating character.37 The Fund’s investment in U.S. Government securities of the proceeds of the sale of gold in order to establish a Special Reserve against future administrative deficits has been recognized indirectly by broadening the use of the Special Reserve to cover operational deficits as well.38 The policy by which various techniques have been adopted in order to soften the impact on members of the gold subscriptions payable on quota increases has been given a statutory basis by requiring an 85 per cent majority for decisions, taken as part of a general review of quotas, for the sole purpose of mitigating the effect of these subscriptions.39

Various important interpretative decisions are given statutory expression. The first of these is that the use of the Fund’s resources must be temporary.40 That word was not used in the Articles, although it was implicit in a number of provisions. Another relates to “conditionality” in the provision of Fund resources to members. Conditionality was inherent in the concept of “adequate safeguards,” but it is now made express in a provision which requires the Fund to have policies on the use of its resources and to examine the representation made in connection with a request to make a purchase, other than a gold tranche purchase, in order to determine the consistency of the request with the Articles and the Fund’s policies.41 A third example is the express reference to the voluntary and other repurchases that are not made as the result of obligations accruing under the repurchase mechanism in the Articles and that account for the bulk of actual repurchases.42

Finally, three concepts that have emerged in past practice have been recognized and given operative effect. One of these is “reserve position in the Fund,” which is now defined as the sum of the gold tranche purchases that a participant in the Special Drawing Account could make and the amount of any indebtedness of the Fund which is “readily repayable” to the participant under a loan agreement.43 Developments in a member’s reserve position in the Fund are among those that a member may take into account in deciding whether to use its special drawing rights.44 The concept also appears in the amendments in connection with the desideratum of the harmonized use by a member of its resources, including its special drawing rights.45 A readily repayable loan is one under which the lender may obtain early repayment at its request by representing that there is a balance of payments need for repayment. The concept, although not the term, was first used in the General Arrangements to Borrow46 and again in the 1966 loan agreement with Italy. It was adapted from the gold tranche by giving the lender’s representation the overwhelming benefit of any doubt. Lastly, “currency convertible in fact” also emerged from the General Arrangements to Borrow, where it was not defined.47 It is now elaborately defined, and is of course a vital concept in connection with special drawing rights.48 In particular, it is the currency that a participant designated to receive special drawing rights from another participant must supply in return for them.

“Each phrase and each sentence is an end and a beginning.”—T. S. Eliot, Four Quartets

1

Establishment of a Facility Based on Special Drawing Rights in the International Monetary Fund and Modifications in the Rules and Practices of the Fund: A Report by the Executive Directors to the Board of Governors Proposing Amendment of the Articles of Agreement (Washington, April 1968); below, Vol. III, pp. 497–541. And see Joseph Gold, Special Drawing Rights, IMF Pamphlet Series, No. 13; “The Next Stage in the Development of International Monetary Law: The Deliberate Control of Liquidity,” American Journal of International Law, Vol. 62 (1968), pp. 365–402.

2

Article XXIII, Section 1; below, Vol. III, pp. 525–26.

3

Article XXII, Sections 1 and 2.

4

Joseph Gold, “Legal Technique in the Creation of a New International Reserve Asset,” Case Western Reserve Journal of International Law, Vol. I, No. 2 (1969), pp. 105–23.

5

Article XXIV, Section 4.

6

Article XXVII (a).

7

Article XXIV, Section 2 (e).

8

Article XXV, Section 3 (b).

9

Article XXV, Section 6; Schedule G.

10

Article XXV, Section 5.

11

Article XXVII.

12

Article XXIX, Section 1.

13

Article XXX; Schedule H.

14

Article XXVII (c).

15

Article XXII, Section 2.

16

Article XXV, Section 4.

17

Article VI, Sections 1 and 2.

18

Article XXI, Section 2.

19

Article IV, Section 8 (d).

20

Article IV, Section 1 (b),

21

Article XXV, Section 8.

22

Article XXV, Section 4.

23

Article XVI, Section 2; Schedule E.

24

Article XXXI; Schedule I.

25

Joseph Gold, The Reform of the Fund, IMF Pamphlet Series, No. 12. For the revisions to the Articles see below, Vol. III, pp. 521–38.

26

Article III, Sections 2 and 4 (c); below, Vol. III, p. 521.

27

Article IV, Sections 7 and 8 (d).

28

Article XIX (e).

29

Schedule B, paragraph 1.

30

See Report (cited above in footnote 1), Section 35; below, Vol. III, p. 515.

31

Article XIX (j). See above, pp. 536–37.

32

Article V, Section 3 (d).

33

Article V, Section 3 (c).

34

Article VI, Section 2; below, Vol. III, pp. 194, 523.

35

Article V, Section 9.

36

Article V, Section 8 (a).

37

Article XIX (j).

38

Article XII, Section 6 (c).

39

Article III, Sections 2 and 4 (c).

40

Article I (v); Article V, Section 3 (c).

41

Article V, Section 3 (c) and (d).

42

Article XXV, Section 7 (c).

43

Article XXXII (c).

44

Article XXV, Section 3 (a).

45

Schedule G, paragraph 1 (b).

46

E.B. Decision No. 1289-(62/1), January 5, 1962, paragraph 11 (f); below, Vol. III, p. 250.

47

Ibid., paragraph 11 (a); below, Vol. III, p. 249.

48

Article XXXII (b); below, Vol. III, p. 534.

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