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Legal and institutional Aspects of the international Monetary System
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1 Developments in the International Monetary System, the International Monetary Fund, and International Monetary Law Since 1971

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International Monetary Fund
Published Date:
December 1984
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Section I International Monetary System, International Monetary Fund, and International Monetary Law

Three Basic Concepts

The relations among States, or between States and international organizations, or between international organizations in matters that are commonly considered monetary involve three associated concepts: the international monetary system, the sphere of the International Monetary Fund’s activities,1 and international monetary law as

Note.—This essay was the basis for a course of lectures delivered at the Academy of International Law at The Hague in 1982 and was published originally in Receuil des Cours, Vol. 174 (The Hague/Boston/London: Martinus Nijhoff, 1982), pp.111–365.

a sector of public international law. The activities of the Fund are not confined to the Fund’s regulatory jurisdiction to approve or disapprove certain monetary measures, or to its financial transactions, in accordance with which it can make its resources available to a member if it is pursuing a financial and economic program that meets the Fund’s standards.2 Such a program might have to include policies over which the Fund has no power of approval or disapproval. The Fund’s activities that go beyond its regulatory and financial functions may be referred to explicitly in the Articles of Agreement or they may be implicit in the Fund’s broad purposes as set forth in Article I or in other general provisions.

The relationships among the three concepts, and in particular the extent to which they overlap, have not been the subject of study hitherto. Aspects of this subject are considered from time to time in these lectures, but not as one of the main topics of the lectures. The main topics are, first, an attempted clarification of what is meant by the international monetary system now that it has become a legal concept and, second, a discussion of three elements that are covered by all three concepts. These elements are rates of exchange, convertibility, and reserve assets.

Keynes and White

The international monetary system, the Fund, and international monetary law have undergone radical changes since 1971. That year is chosen because of the consequences of the announcement by the President of the United States on August 15, 1971 that, in effect, the United States would no longer undertake to maintain a specific external value for the U.S. dollar.3

The two extraordinary men who prepared plans that led ultimately to the Articles of Agreement of the International Monetary Fund did not use such grandiloquent language as an international monetary system in describing their objectives, although they were aware of the radical innovations that their plans would introduce. The Proposals for an International Currency (or Clearing) Union of John Maynard Keynes in England 4 and the Preliminary Draft Outline of a Proposal for an International Stabilization Fund of the United and Associated Nations of Harry Dexter White in the United States 5 plunge almost at once into the practical problems of creating an international monetary organization and endowing it with resources and powers. The novelty and boldness of White’s plan could not be illustrated more vividly than by the accumulation in the title of two nouns (Outline, Proposal) and two adjectives (Preliminary, Draft) to give the impression of tentativeness.6

The years between the two World Wars were a period of intense difficulty and strife in international monetary affairs. It is astonishing that Keynes’s consideration of international economic plans for the era that would follow World War II and his proposal of a Clearing Union were inspired originally by an official attempt to counteract Nazi propaganda. The story has now appeared in Keynes’s Collected Writings.7 In 1940, Harold Nicolson, Parliamentary Secretary to the British Ministry of Information, informed Keynes that the Ministry was contemplating a campaign to contest the proposals for a German “New Order” by Walther Funk, German Minister of Foreign Affairs (1938–43) and President of the Reichsbank (1939–45). Nicolson hoped that Keynes would launch the British campaign with a broadcast, for which purpose he enclosed some notes.

Keynes replied hesitantly on November 20, 1940. He wrote that he had read the notes to mean that the British should pose as “champions of the pre-war economic status quo and outbid Funk by offering good old 1920–1921 or 1930–1933, i.e., gold standard or international exchange laissez-faire aggravated by heavy tariffs, unemployment, etc., etc.” 8 He declined to preach the beauties and merits of the prewar gold standard and to ridicule Funk because Funk proposed to abandon that standard. In fact, Keynes thought much of the German broadcasts would be excellent if the name of Great Britain were substituted for Germany. The way to attack Funk was to question his bona fides: not what he said but what he would do. It was Keynes’s opinion

that we should not produce at this stage any post-war economic scheme of our own, if only on the ground that no one I have yet seen has the foggiest idea of what such a plan ought to be (it would be too hypothetical both in the minds of ourselves and of our audience). …9

Keynes concluded by writing that he did not feel greatly inspired to compose a broadcast even on these lines, but if Nicolson pressed, Keynes would take his first moments of leisure to attempt a draft and see what it looked like before committing himself further.

A few days later, Lord Halifax, the British Ambassador in Washington, asked the Chancellor of the Exchequer if Keynes would prepare a statement exposing the fallacies in the German promises of a “New Order.” As promptly as December 1, 1940, Keynes circulated a draft of his proposals for the purpose that Halifax had in mind. Keynes began by writing that a purely negative approach was valueless and that it would be better to be silent if there was nothing positive to propose. He then set forth some positive declarations designed to achieve a transition to an “international economic system.” 10 That system would have liberal objectives but it would abandon the abuses of the “old laissez-faire international currency arrangements.” 11 The tyranny of gold would be ended while giving it a “proper place … as a central reserve and as a means of international settlement.” 12 It would be necessary to retain exchange control, at least during a transitional period in which the world would still be impoverished. The purpose, he made clear later, would be a multilateral system in which all international monetary transactions would be cleared between central banks, operating on their accounts with an International Clearing Bank.

Keynes’s draft was circulated to various government departments and the Bank of England for comment. In addition, Keynes discussed it with Harry Hopkins, adviser to President Roosevelt, in January 1941. A watered-down redraft went to the Prime Minister on January 30. In May 1941, Anthony Eden, the Foreign Secretary, delivered a speech along the lines of Keynes’s draft. Keynes had suggested some minor amendments after discussions in Washington with the President and U.S. officials.

By this time, Keynes was concentrating much more on postwar currency policy. On September 8, 1941 he circulated memoranda that included Proposals for an International Currency Union. The plan was well on the way to its maturity.13

According to the first Historian of the Fund, it appears from the evidence of White’s associates that he began to think about a comprehensive international agreement in the monetary field not later than the early part of 1941 and that a plan had taken shape during the rest of that year. In December 1941, he presented his ideas to Henry Morgenthau, Jr., Secretary of the U.S. Treasury, who instructed White on December 14 to prepare a plan for an interallied stabilization fund. White responded by the end of December with an outline that contained almost all the features of his later fully developed proposals.14

White’s plan did not reach London until July 1942.15 There is no need to recapitulate the history of the negotiations between the teams led by Keynes and White to reach agreement on a single plan.16

If Keynes and White put little emphasis on the concept of an international monetary system as such when they were busy creating one, Keynes in particular was clearly aware that the system would be governed by law if their ideas were adopted. He discussed such problems as the extent to which the international organization that he foresaw should administer its affairs according to fixed rules or according to decisions taken in the exercise of discretionary powers. Legal criteria were important for him, and his understanding of certain provisions of the Articles was affected by the presence or absence of such criteria. These matters have been discussed in detail elsewhere.17

The System as a Legal Concept

There seems to have been little awareness of the concept of an international monetary system in the days when there would have been no doubt that a system did exist.18 There was no reference to it in the original Articles, which were drafted at the Bretton Woods Conference of July 1–22, 1944 and which became effective on December 27, 1945. The phrase begins to appear with some frequency when international monetary events gave rise to the fear that, although they were beneficial developments, they could lead to international monetary instability. The events were the decisions by a number of European members at the end of 1958 to make their currencies convertible for nonresidents (externally convertible), followed by decisions, early in 1961, to make their currencies fully convertible in accordance with the Fund’s Articles.19 These moves were associated with greater freedom for commercial banks to operate in the exchange markets in convertible or externally convertible currencies. This freedom was not confined to payments and transfers for current international transactions, because some members permitted freedom, in varying degrees, for capital transfers as well, and so went beyond the requirements of convertibility under the Articles.20 As a consequence, short-term capital could be transferred among countries that issued leading currencies.

In these circumstances, the Fund readied itself to recycle these flows. For this purpose, it sought to supplement the resources subscribed by members by entering into standing arrangements to borrow the currencies of ten of its main industrial members from eight of those members 21 and from the central banks of the other two.22 The decision is still in effect. The instrument under which the Fund can borrow from these potential lenders is a decision of the Executive Board of the Fund called the General Arrangements to Borrow (GAB), to which the potential lenders have adhered.23 The GAB has had important consequences in international monetary matters. The ten members that adhered to it, or authorized their central banks to adhere, promptly took on a quasi-corporate personality as the Group of Ten, and have exercised much influence in the affairs of the Fund and in the consideration of monetary matters elsewhere. Furthermore, some of the legal aspects of the GAB have influenced later borrowing agreements of the Fund, the characteristics of certain obligations of the Fund, and even some features of the SDR (special drawing right), the reserve asset created by the Fund that is discussed in Section IX.

The essential idea that produced the GAB was that if short-term capital flowed from one of the ten members to another, the country of outflow could request a transaction from the Fund, which could be financed by loans to the Fund by members of the ten in a strong balance of payments and reserve position. These members were likely to include the countries of capital inflow. For the present purpose, what must be noted is the rationale of the decision establishing the GAB. The first sentence of the preamble declares that:

In order to enable the International Monetary Fund to fulfill more effectively its role in the international monetary system in the new conditions of widespread convertibility, including greater freedom for short-term capital movements, the main industrial countries have agreed that they will, in a spirit of broad and willing cooperation, strengthen the Fund by general arrangements under which they will stand ready to lend their currencies to the Fund up to specified amounts under Article VII, Section 1, of the Articles of Agreement when supplementary resources are needed to forestall or cope with an impairment of the international monetary system in the aforesaid conditions.24 [Emphasis added.]

The Managing Director was not to initiate the procedure for loans under the GAB unless he considered, after consultation, that the use of the Fund’s resources was necessary in order to forestall or cope with an impairment of the international monetary system.25

It is worth noting that the Fund’s agreements to borrow in response to the difficulties caused by the increased costs of importing petroleum and petroleum products in 1973 and 1974 do not refer to the defense of the international monetary system. The agreements were entered into to finance the Fund’s policies called the oil facilities of 1974 and 1975.26 Similarly, there is no such reference in the agreements negotiated by the Fund to help the Fund provide resources under its later policies on supplementary financing 27 and enlarged access.28 All these agreements were entered into after 1971, in the period in which differences of opinion emerged about the existence of an international monetary system.

In the 1960s, references to the international monetary system became more common. In this period, the world seemed to be drifting toward a critical situation in which international trade and payments might be impeded by a shortage of the reserve assets available to members for unconditional use in support of their currencies. This problem of inadequate reserve assets was considered a threat to the international monetary system because it might lead to restrictions or competitive exchange depreciation in order to husband reserves or to draw them away from other members.29

Nevertheless, there is no reference to the international monetary system in the First Amendment of the Fund’s Articles, which became effective on July 28, 1969. Its principal purpose was to solve the problem of inadequate global reserves by creating the SDR as a reserve asset that can be allocated to members.30 The First Amendment, in not referring to the concept of the international monetary system, was following the precedent of the original Articles.

After the collapse of the par value system, references to the international monetary system became abundant in official instruments and other documents. The term now appears in the Second Amendment of the Fund’s Articles, which became effective on April 1, 1978. The Board of Governors of the Fund, in a resolution that became effective on October 1,1971, expressed distress because of the dangers of instability and disorder that existed, but noted that conditions offered the opportunity for constructive changes in the international monetary system. The Board of Governors called for various actions, including the consideration of improvements in the international monetary system.31 By a further resolution, which became effective on July 26, 1972, the Board of Governors established its Committee on Reform of the International Monetary System and Related Issues (the Committee of Twenty).32

When the Committee of Twenty concluded that it could make no further progress toward agreement on the shape of a reformed system because of uncertainties relating to inflation, the energy situation, and other unsettled conditions, it reported to the Board of Governors on June 14, 1974 and attached to its report an incomplete Outline of Reform.33 The Committee referred to future evolutionary reform and declared that the Outline indicated the general direction in which the Committee believed that the system could evolve. The verb was “could evolve” and not “should evolve” or “would evolve.” The Committee of Twenty was disbanded, and by a resolution of October 2, 1974, the Board of Governors established an Interim Committee on the International Monetary System.34 The Interim Committee was to concern itself with the evolution of the international monetary system as part of its functions and in effect, therefore, carry on the work of the Committee of Twenty, but without the burden borne by the earlier committee of having to produce a comprehensive plan and without the pressure of limited time. The Outline of Reform recommended certain immediate steps, some of which would require amendment of the Fund’s Articles.

International Monetary System and Second Amendment

The task of drafting the Second Amendment of the Fund’s Articles was undertaken by the Executive Board of the Fund, with the understanding that the Interim Committee would recommend solutions of problems that could not be resolved by the Executive Board. The Second Amendment, which emerged from this process, was a thorough overhaul of the Articles. As a result of the Second Amendment, the Articles refer for the first time to the international monetary system. The expression is to be found in a number of contexts.

The expression has not been inserted in Article I, however, even though that provision sets forth the purposes of the Fund. It would have been appropriate to include a reference to the international monetary system in Article I if there was going to be mention of the international monetary system in the Articles. In the drafting of both the First and Second Amendments, the drafters were reluctant to revise Article I. Two minor and uncontroversial modifications were made in the provision by the First Amendment, but none by the Second Amendment. Article I was the result of such strenuous negotiation in the drafting of the original Articles that there has been great unwillingness to consider substantive amendment of the provision ever since.35 Instead, as a result of the Second Amendment, the expression is to be found in the first sentence of Article IV, Section 1, which deals with the general obligations of members regarding exchange arrangements:

Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. [Emphasis added.]

References to the international monetary system can be found elsewhere in Article IV. Section 2 provides in part that:

(b) Under an international monetary system of the kind prevailing on January 1,1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice.

(c) To accord with the development of the international monetary system, the Fund, by an eighty-five percent majority of the total voting power, may make provision for general exchange arrangements without limiting the right of members to have exchange arrangements of their choice consistent with the purposes of the Fund and the obligations under Section 1 of this Article. [Emphasis added.]

Under Section 4 of Article IV:

The Fund may determine, by an eighty-five percent majority of the total voting power, that international economic conditions permit the introduction of a widespread system of exchange arrangements based on stable but adjustable par values. The Fund shall make the determination on the basis of the underlying stability of the world economy, and for this purpose shall take into account price movements and rates of expansion in the economies of members. The determination shall be made in light of the evolution of the international monetary system, with particular reference to sources of liquidity, and, in order to ensure the effective operation of a system of par values, to arrangements under which both members in surplus and members in deficit in their balances of payments take prompt, effective, and symmetrical action to achieve adjustment, as well as to arrangements for intervention and the treatment of imbalances. Upon making such determination, the Fund shall notify members that the provisions of Schedule C apply. [Emphasis added.]

The expression occurs in two provisions that deal with the developing role of the SDR. Article VIII, Section 7 sets forth the obligation of members to collaborate regarding policies on reserve assets:

Each member undertakes to collaborate with the Fund and with other members in order to ensure that the policies of the member with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system. [Emphasis added.]

The other provision on the role of the SDR is Article XXII, which prescribes the general obligations of participants in the Special Drawing Rights Department: 36

In addition to the obligations assumed with respect to special drawing rights under other articles of this Agreement, each participant undertakes to collaborate with the Fund and with other participants in order to facilitate the effective functioning of the Special Drawing Rights Department and the proper use of special drawing rights in accordance with this Agreement and with the objective of making the special drawing right the principal reserve asset in the international monetary system. [Emphasis added.]

Finally, the Articles provide that the Board of Governors may call a new organ, the Council, into existence,37 and if that action were taken, the terms of reference, according to Schedule D, paragraph 2(a), would be as follows:

The Council shall supervise the management and adaptation of the international monetary system, including the continuing operation of the adjustment process and developments in global liquidity, and in this connection shall review developments in the transfer of real resources to developing countries. [Emphasis added.]

The provisions of the Articles have conferred a legal character on the concept of the international monetary system, but the Articles do not attempt to define it. In the absence of a definition, it cannot be said with assurance what the concept means for the purposes of the Articles until the Fund adopts an interpretation. If a problem of interpretation were to arise, the purposes of the Fund in Article I could not be ignored. It has been seen, however, that no substantive change was made in Article I when the SDR was created by the First Amendment or when the par value system was abandoned by the Second Amendment. It would seem from this evidence that the purposes of Article I would not be constraining if the necessity should arise to interpret references in the Articles to the international monetary system.

An Example of Interplay Among the Three Concepts

Interplay among the concepts of the international monetary system, the sphere of the Fund’s activities, and international monetary law was involved when the terms of reference of the Interim Committee and of the Council were being drafted. The process began with a paragraph in the communiqué issued by the Committee of Twenty on January 18,1974 at its meeting in Rome:

The Committee discussed certain aspects of the future structure of the International Monetary Fund. They agreed that in the reformed system it would be desirable to establish, between the full Board of Governors and the Executive Directors, a permanent and representative Council of Governors with twenty members. They agreed that the Council should meet regularly, three or four times a year as required, and should have the necessary decision-making powers to manage and adapt the monetary system, to oversee the continuing operation of the adjustment process, and to deal with sudden disturbances which might threaten the system, while maintaining the role of the Executive Board. As an interim step, pending the establishment of the Council, it was agreed that a Committee of the Board of Governors should be created, with an advisory role in the same areas as the Council and with the same composition and procedures. This Committee would come into being when the Committee of Twenty has completed its work. The Executive Board was invited to prepare for the Board of Governors a draft resolution to create such a Committee, giving due consideration to the need for adequate consultative machinery and the protection of the interests of all Fund members.38

This paragraph was based on an aide-mémoire submitted by the Managing Director to the Committee of Twenty. He explained that the Fund would have more extensive powers as a result of reform of the international monetary system and, therefore, the Fund should be authorized to take a comprehensive view of the system. Decisions in the exercise of these powers would be more acceptable to members if the decisions were taken by officials who had senior political or financial responsibilities in their own countries. The assumption was that all matters relating to the international monetary system were within the purview of the Fund or would be brought within its purview by the creation of the Council, but he did not put forward any definition of the system. The creation of the new organ would be seen as the assertion of the role of the Fund as the preeminent organization for consideration of the problems of the international monetary system. Furthermore, the Fund should have the authority to deal with sudden disturbances in the system. For this purpose also a new organ should be created, composed of high-ranking representatives of governments who would have the political authority to solve difficult monetary problems that could not be solved by the Executive Board, which is not composed of such persons. The Committee expected that the Council would deal with the adjustment problems of powerful countries and would consider the application of pressures if necessary to encourage these members to adjust their balances of payments.

The words “manage and adapt” the international monetary system were intended to convey most of these ideas, but particularly the idea that the Council would be able to take decisions on basic issues such as structural changes in the system. The communiqué was preceded by much discussion in the Committee of Twenty of more precise terms of reference for the Council, even though this effort was hardly compatible with the breadth of the functions contemplated for the Council. Those who favored precision in the terms of reference were not anxious to limit the activities of the Fund. They were seeking to avoid a jurisdictional conflict between the Council and the Executive Board and to prevent an impairment of the status of the Executive Board.

The Outline of Reform followed the language of the Rome communiqué closely but made a change in formulating the terms of reference of the Council. That organ was to have

the necessary decision-making powers to supervise the management and adaptation of the monetary system, to oversee the continuing operation of the adjustment process, and to deal with sudden disturbances which might threaten the system.39

Under the Rome communiqué the Council was to have powers to manage and adapt the international monetary system, but according to the Outline of Reform the Council’s powers would be to supervise the management and adaptation of the system. The change was intended to avoid the impression that the Council would be able to amend the Articles in the course of managing and adapting the international monetary system. No member wished to provide an alternative to the procedure by which proposed amendments become effective only if the prescribed number of members with the prescribed proportion of voting power accept the proposals.40 It is also possible, although this was not said, that supervision implied limits on the regulatory authority of the Fund and left room for action by members outside the Fund that would not be subject to regulation by it.

A proposal to insert the words “in accordance with the Articles” to qualify the reference to management and adaptation of the international monetary system was not adopted. The language of supervision gave an assurance that the Council was not being authorized to act inconsistently with the Articles. It was accepted that no organ or body within the framework of the Fund could act otherwise than consistently with the Articles, but this limitation did not prevent proposals for amendment in accordance with the Articles.

Another reason for the new language was the wish to preserve the functions and status of the Executive Board. It is the organ of the Fund that is in continuous session 41 in order to play the part that is assigned to it in the international monetary system by the Articles. There was no intention to reduce its part by adopting language that suggested a transfer of functions to the Council. A nuance of the word “supervise,” however, was that the Council would be able to scrutinize the Executive Board’s work. The Executive Board had begun to draft the Board of Governors resolution to establish the Interim Committee, as requested by the Rome communiqué. The Executive Directors had been able to express their concern both about amendment of the Articles and the functions of the Executive Board before the Outline of Reform was transmitted to the Board of Governors on June 14, 1974.

Other changes were made in the terms of reference of the Interim Committee, which ultimately were formulated as follows:

The Committee shall advise and report to the Board of Governors with respect to the functions of the Board of Governors in:

(i) supervising the management and adaptation of the international monetary system, including the continuing operation of the adjustment process, and in this connection reviewing developments in global liquidity and the transfer of real resources to developing countries;

(ii) considering proposals by the Executive Directors to amend the Articles of Agreement; and

(iii) dealing with sudden disturbances that might threaten the system.

In addition, the Committee shall advise and report to the Board of Governors on any other matters on which the Board of Governors may seek the advice of the Committee.

In performing its duties, the Committee shall take account of the work of other bodies having specialized responsibilities in related fields.42

The Rome communiqué had placed on an equal plane management and adaptation of the international monetary system, oversight of the continuing operation of the adjustment process, and dealing with sudden disturbances that might threaten the system. The terms of reference of the Interim Committee elevate to a primary position supervision of the management and adaptation of the international monetary system. This change was made in recognition of the logic that the combination of management and adaptation of the international monetary system was the broadest possible concept. It embraced the working of the existing system in the word “management” and the evolution of the system in the word “adaptation.”

In deference to the Rome communiqué, which had given equal prominence to the operation of the adjustment process, the terms of reference of the Interim Committee state the obvious fact that supervision of the management and adaptation of the international monetary system includes supervision of the continuing operation of the adjustment process.

An important implication of the resolution is that the functions of the Board of Governors include the matters on which the Interim Committee is to give advice. The Articles did not declare that supervision of the management and adaptation of the international monetary system was a function of the Board of Governors, and the Articles do not say so even after the Second Amendment. The present Articles do make this function explicit for the Council, but the Second Amendment had not yet been drafted when the terms of reference of the Interim Committee were formulated. The implication of the resolution and the explicit terms of reference of the Council reflect the Fund’s understanding that all matters relating to supervision of the management and adaptation of the international monetary system are within the purview of the Fund.

Far more difficulty was created by a further departure from the language of the Rome communiqué. That document had said nothing about global liquidity or the transfer of real resources to developing countries. If it was appropriate to mention the adjustment process notwithstanding the breadth of supervision of the management and adaptation of the international monetary system, there was equal reason to mention developments in global liquidity. The adjustment process was a leading interest of the Fund but so was global liquidity since the creation of the SDR by the First Amendment for the purpose of meeting the global need for a supplement to existing reserve assets.

The transfer of real resources to developing countries gave much more difficulty. The Outline of Reform supported the argument by spokesmen for developing countries that special mention, and equal mention, should be made of this subject. Developing countries had succeeded in pressing for the inclusion in the Outline of Reform of the subject of the transfer of real resources to them. The subject could be approached as one that was related to the adjustment process: other countries should be encouraged to adopt corrective policies that would not obstruct the transfer of real resources to developing countries.43 Moreover, the Committee of Twenty was concerned not only with reform of the international monetary system but also with “related issues.” The developing members of the Fund were in a strong position because of the high proportions of the total membership that were necessary for acceptance of the proposed amendments of the Articles that would emerge from the work of the Committee of Twenty.44

Developing members were not in an equally strong position when it came to drafting the terms of reference of the Interim Committee. A resolution of the Board of Governors establishing the Interim Committee could be adopted by a majority of the votes cast by Governors.45 A number of objections were advanced to the transfer of real resources to developing countries as a subject that was suitable for inclusion within the terms of reference of the Interim Committee. Development assistance was not an aspect of the international monetary system and was not within the purview of the Fund. The subject was within the province of other international organizations, including the International Bank for Reconstruction and Development (the World Bank), and it would be within the terms of reference of the Joint Ministerial Committee of the Boards of Governors of the World Bank and the Fund on the Transfer of Real Resources to Developing Countries (the Development Committee).46 This Committee was to be established at the same time as the Interim Committee. Developing members were not satisfied that their cause would be promoted sufficiently by the Development Committee; they wanted the Ministers of Finance who would be likely to compose the Interim Committee to be involved directly in considering the transfer of real resources to developing members. But another objection advanced by some members was that even if the subject of the transfer of real resources to developing members was within the purview of the international monetary system, it was improper to introduce by resolution into the province of the Fund matters that states had not assigned to the Fund by the Articles.

A solution was reached for reasons that were basically political. The transfer of real resources was to be associated with the adjustment process. The transfer of real resources was coupled with global liquidity “in this connection,” that is to say, in connection with the continuing operation of the adjustment process. In this way, the transfer of real resources was brought within the terms of reference by limiting it to its relationship with the adjustment process, which is unquestionably within the purview of the Fund.

Some of the objections were met by the last paragraph of the terms of reference in the resolution, which directed the Interim Committee, in performing its duties, to take account of the work of other bodies having specialized responsibilities in related fields. The word “bodies” was chosen with care in order to avoid the limitations of the word “organizations.” The latter word might be understood to refer to international organizations. The Development Committee, with terms of reference that include the transfer of real resources to developing countries,47 is not an international organization if the word “organization” connotes authority to take decisions binding on countries.

The paragraph directing the Interim Committee to take account of the work of other bodies with specialized responsibilities in related fields was offered to the representatives of developing countries as a compromise. The hope was that they would be content with this sentence and agree that nothing further need be said in the resolution relating to the Interim Committee about the transfer of real resources to developing countries. The effort failed. The resolution contains both the proposed sentence and the reference to the transfer of real resources.

This episode came to an end with the terms of reference of the Council as stated in the Second Amendment. The terms of reference have been quoted earlier. It will be observed that a further change has been made, and that there is a difference between the formulation of the terms of reference in the resolution and the formulation in the Articles. The words “reviewing developments in global liquidity” no longer follow the words “and in this connection.” Instead the words “and developments in global liquidity” follow the phrase “including the continuing operation of the adjustment process.”

The effect of the change is to give equal prominence to the adjustment process and global liquidity as elements in the management and adaptation of the international monetary system. The change recognized that developments in global liquidity were an aspect of the international monetary system and of the activities of the Fund that did not need to be drawn from, and justified by, the relationship of global liquidity to the adjustment process.

What conclusions can be drawn from the history of this episode? First, and most important, is the principle that the most comprehensive terms of reference involving the international monetary system are supervision of the management and adaptation of the system. Second, the adjustment process and global liquidity are preeminent among the elements of the international monetary system that are to be supervised. Third, the Fund’s sphere of interest is the international monetary system, however the system may be defined, and the Fund’s function is supervision of the management and adaptation of the system. Fourth, the transfer of real resources to developing countries is within the scope of the international monetary system or the sphere of interest of the Fund to the extent that it is related to the adjustment process and global liquidity. Fifth, the Fund’s interest in some aspect of the international monetary system does not authorize it to change international monetary law by imposing legal obligations on countries beyond those obligations that countries have accepted by becoming members of the Fund. Supervision of the management and adaptation of the system is not the same as management and adaptation of the system. The obligations of members, including the obligations that subject members to the regulatory authority of the Fund, are those that members have accepted by subscribing to the Articles. New obligations can be created only by amendment of the Articles in accordance with the procedures for amendment as set forth in the Articles.

The last of these conclusions may seem obvious, but it will be seen from the discussion in Section V of exchange arrangements under the Second Amendment, that language was proposed for inclusion in the Articles that appeared to give the Fund authority to change or add to the obligations of members by a procedure that did not involve amendment.48 The language was rejected because the membership refused to give the Fund such authority.

The Fund and the International Monetary System

The conclusion that the Fund’s sphere of interest is as extensive as the international monetary system, and that the Fund’s function within that sphere is supervision of the management and adaptation of the system, is confirmed by the first purpose set forth in Article I:

To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

“International monetary problems” must be taken to include all problems of the international monetary system whatever they may be from time to time.

The concern of the Fund with a problem of the international monetary system does not mean that the Fund has regulatory authority under its Articles to advance a solution of the problem and to bind its members to accept the solution. The Articles may provide that in some particular aspect of the international monetary system a member has freedom of choice. This freedom from regulation by the Fund will not mean that the Fund cannot consult with the member and express concern at the way the member is exercising its freedom. If there is a gap in the Fund’s regulatory authority, members may fill it by action outside the Fund, provided that the way in which they fill it is not in conflict with the Articles. The Code of Liberalization of Capital Movements, adopted by the Council of the Organization of Economic Cooperation and Development (OECD) on December 12, 1961 and amended many times since then, is an example of this process. The code governs capital movements, over which the Fund does not have regulatory authority that enables it to approve or disapprove of capital controls.49 The code declares that nothing in it shall be regarded as altering the obligations of a member of the OECD as a signatory of the Fund’s Articles or any other existing multilateral international agreement.50 Therefore, the code does not derogate from the definition of payments for current international transactions under Article XXX (d) of the Articles. The definition includes some payments that economists would consider capital transfers.

Even when the Fund has regulatory authority, such as its authority to approve restrictions on payments and transfers for current international transactions,51 two or more of the Fund’s members may enter into an agreement to forbear from the application of such restrictions between or among themselves, which means that each of these members undertakes not to approach the Fund with a request to be allowed to apply restrictions covered by the agreement.52

Organizations can have overlapping authority in matters involving the international monetary system. The provisions on the exchange rate mechanism of the European Monetary System (EMS) is an example of this phenomenon because the mechanism does not absolve participants from their obligations on exchange arrangements under the Fund’s Articles. The resolution of the European Council of December 5, 1978 on the establishment of the EMS and related matters declares that the “EMS is and will remain fully compatible with the relevant articles of the IMF Agreement.”53

It follows, of course, that the Fund, although recognized as the central organization of the international monetary system because of the breadth of its membership, its powers, and the size of its resources, is not the only organization that has a place in the system. The number of organizations and less formal bodies, both international and regional, has grown steadily since the Fund came into existence. Another conclusion is that international monetary law is not confined to the corpus juris of the Fund but includes the constitutive and other legal instruments of these other organizations and bodies, as well as such customary international law in relation to monetary matters as may be found to exist.

The content of the international monetary system, of the activities of the Fund, or of international monetary law is not fixed. The creation of reserve assets by the Fund for the benefit of members, which in the form of bancor was a central feature of Keynes’s plan, was rejected in favor of White’s view that the Fund should conduct its financial activities with the subscriptions of members and should borrow if it needed to augment its resources. White would not accept a proposal in which the United States, then expected to be the major country with surpluses in its balance of payments, would have been compelled to accept unlimited amounts of bancor from other members. Under such a plan, the full burden of financing the deficits of other members, or a major part of them, could fall on the United States. White preferred a plan under which the United States knew that the burden on it was limited to its subscription.54 In the 1960s, members decided that the assurance of supplements to global reserves as and when needed was a problem of the international monetary system. From that time forward, it became common to assert that liquidity was the business of the Fund.55 There could be no challenge to this assertion once the First Amendment empowered the Fund to allocate SDRs. This event was, at the same time, a development in the international monetary system, the activities of the Fund, and international monetary law.

Section II Definitions of the International Monetary System

Approaches to an Understanding of the Concept

The Articles contain no definition of the international monetary system. Few attempts have been made to define it as a legal concept, but economists, political scientists, and politicians have explained their understanding of the concept in terms of their own disciplines or interests. Two of the most intensive efforts have been made by the Executive Board of the Fund in Chapter 2 of the Annual Report of the Fund for 1965 56 and by Professor Lazar Focsaneanu in an article published in 1968.57 These discussions took place before references to the international monetary system were included in the Fund’s Articles.

Many approaches have been followed in explaining the concept. One approach discusses the international monetary system in terms of its objectives. Article IV, Section 1 of the present Articles of the Fund is close to this approach by referring to the “essential purpose” and the “principal objective” of the international monetary system.58

The 1973 Economic Report of the President of the United States contained a discussion of the requirements—really the objectives—that had to be met by an international monetary system that would facilitate the continued expansion of world trade. First, the system should be market oriented. The mechanism for balancing each country’s total foreign exchange receipts and expenditures over the long run should minimize interference with individual market transactions. Second, the settlement of payments balances among countries should be multilateral. Each country should be able to offset its deficits with some countries against its surpluses with others. To meet this objective, the ultimate settlement of claims in commonly accepted reserve assets should be possible. Such a generalized payments system would make it possible to achieve a far higher level of international trade and investment than would be possible with a network of barter relationships between each country and its individual trading partners. Third, the system should be stable. International commerce often entails long-run commitments, and therefore stable expectations about conditions affecting the future profitability of international transactions were necessary.

To meet these requirements, the report continued, the system must fulfill certain functions. First, the system must provide an effective and equitable mechanism for adjustment of payments imbalances among countries, so that imbalances would not persist. Second, the system had to provide liquidity. International monetary reserves in adequate amounts and in acceptable forms had to be available. If the system permitted the creation of excessive international reserves, international inflationary pressures would be created; if the system permitted the creation of inadequate reserves, deflationary pressures or pressures for restrictions on international transactions would result. Third, the system must operate in a way that would produce and maintain confidence in its continued viability and in the value of international reserve assets associated with it.59

Another approach to an understanding of the international monetary system attempts to develop a list of the elements that compose it or that should compose it. Much of Professor Focsaneanu’s article is devoted to the elements existing at the time when he wrote. The Outline of Reform of the Committee of Twenty adopts a similar technique by listing the main elements that should compose an “international monetary reform.” 60 The Committee was describing what it considered to be the essential elements of a desirable international monetary system and was not describing a system already in operation. The list is as follows:

(a) an effective and symmetrical adjustment process, including better functioning of the exchange rate mechanism, with the exchange rate regime based on stable but adjustable par values and with floating rates recognized as providing a useful technique in particular situations;

(b) cooperation in dealing with disequilibrating capital flows;

(c) the introduction of an appropriate form of convertibility for the settlement of imbalances, with symmetrical obligations on all countries;

(d) better international management of global liquidity, with the SDR becoming the principal reserve asset and the role of gold and of reserve currencies being reduced;

(e) consistency between arrangements for adjustment, convertibility, and global liquidity; and

(f) the promotion of the net flow of real resources to developing countries.61

The same technique of listing the elements of an international monetary system was followed in the resolution of the Fund’s Board of Governors of October 1, 1971. Paragraph III(b), which has been referred to in Section I, requested the Executive Board to study all aspects of the international monetary system, including the role of reserve currencies, gold, and SDRs, convertibility, the provisions of the Articles on exchange rates, and problems caused by destabilizing capital movements.62 The list was not intended to be exhaustive.

A Digression: Excluded Elements?

The approach that relies on a catalog of elements justifies a digression to consider elements that sometimes are said to be outside the international monetary system.

Paragraph 2 (a) of the resolution of the Board of Governors that established the Committee of Twenty requested it to advise and report to the Board of Governors on “all aspects of reform of the international monetary system, including proposals for amendments of the Articles.” 63 Paragraph 2 (b) requested the Committee to take other matters into account:

In considering and reporting on the matters covered by (a) above, the Committee shall give full attention to the interrelation between these matters and existing or prospective arrangements among countries, including those that involve international trade, the flow of capital, investment, or development assistance, that could affect attainment of the purposes of the Fund under the present or amended Articles.64

Paragraph 2 (a) implies that the elements listed in paragraph 2 (b) are not aspects of the international monetary system.

A surprising element in paragraph 2 (b) is “the flow of capital.” The Articles have always included certain provisions on capital, among which Article VI, Section 3 65 is the most obvious but not the only one. The flow of capital is of concern to the Fund in a number of its activities even if the Fund is not authorized to approve or disapprove of controls on capital transfers. To take one example, restoration of the conditions for capital inflow has been an essential objective of many economic programs supported with the Fund’s resources. An example from more recent practice, not available to the Committee, is that the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital is one of the developments that may indicate the need for special consultation with the Fund under its procedures for the surveillance of the exchange rate policies of members.66

The resolution of the Board of Governors of October 1, 1971 provided that the Executive Board, in reporting to the Board of Governors on the measures necessary or desirable for the improvement or reform of the international monetary system, was “to study all aspects of the international monetary system,” including various specified topics “and the problems caused by destabilizing capital movements.” 67

The Committee of Twenty, however, held a view in conformity with the resolution under which it was appointed rather than the earlier resolution requesting the Executive Board to report on reform.

It is recognized that the attainment of the purposes of the reform depends also upon arrangements for international trade, capital, investment, and development assistance, including the access of developing countries to markets in developed countries; and it is agreed that the principles which govern the international monetary system and arrangements in these related areas must be consistent.68

It has been seen in Section I that Article IV, Section 1 of the present Articles states that an essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries. This language does not necessarily mean that the exchange of capital is considered to be within the scope of the international monetary system. The reference to goods is evidence that the provision does not purport to define the scope of the system.

The better view is the one implicit in the earlier of the two resolutions of the Board of Governors that have been cited. That is to say, the international flow of capital is part of the subject matter of the international monetary system. The true implication of the later resolution may have been that, in view of the Fund’s limited jurisdiction over capital transfers, the Committee of Twenty should consider whether there ought to be some form of international regulation of the flow of capital. The Committee and its subordinate bodies did indeed discuss this matter.69

Further Approaches to an Understanding

A third approach to an understanding of the concept of the international monetary system also dwells on the ideal but the desiderata are expressed in terms of the qualities rather than the elements of an international monetary system. An author who has followed this third approach has written that the international monetary system

implies a mechanism of interrelated parts, functioning for some clearly defined end, according to known laws. It implies knowledge, certainty and predictability. All these attributes the international monetary system possesses but in a varying degree.70

It is not surprising that the author of this passage finds it illusory to speak of an international monetary system. He writes that a system having these qualities can exist in economic theory, but that in the real world one leaves the realm of system and precision for a world of approximation that operates not by law but by tendency.71

Another author has argued that a logically consistent and tightly controlled international monetary system would be undesirable. The motives that foster proposals for such a system, according to this author, are the desire for assured and logical solutions for all possible problems or for a reduction in the economic, political, and other benefits that the United States is thought by some official or other commentators to derive from the absence of such a system. The major difficulty, this author continues, is that the proposals would require countries to cede substantial amounts of traditional sovereignty to automatic rules or to discretionary international authority, or that the proposals would institutionalize the de facto hegemony of the United States, apparently by putting de jure bounds to it.72

The focus of a fourth approach is on the problems to be resolved by the international monetary system. A report by a group of economists sets forth “three major problems concerning the present international monetary system,” as follows:

(1) the problem of payments adjustment, deriving from the need for correcting persistent imbalances in the payments positions of individual countries;

(2) the problem of international liquidity, connected with the need for long-term adaptation of the total volume of world reserves to the full potentialities of non-inflationary economic growth; and

(3) the problem of confidence in reserve media, implied in the need for avoiding sudden switches between different reserve media.73

These problems have been regarded sometimes as problems that an international monetary system must solve whatever its content may be from time to time.

“International

The approaches to an understanding of the concept of the international monetary system that have been noted, although helpful, do not provide a definition. A clarification of the adjectives “international” and “monetary” is necessary in order to attempt a definition. Of these adjectives, the first refers to relationships among countries and the second to a particular category of relationships.

At this point it is convenient to consider the word “international.” There is a basic ambiguity in it. The word can be understood to refer exclusively to relationships among monetary authorities, whether they be treasuries, central banks, stabilization funds, or similar fiscal agencies.74 Alternatively, the word can be taken to apply to all relationships (including transactions) that cross national boundaries, whether the parties are public or private.

Another problem in clarifying “international” in the concept of the international monetary system is the determination of the countries among which the relationships, on the basis of either of the interpretations mentioned above, are conducted. The common view is that ordinarily references to the international monetary system do not embrace all countries of the world. The countries that are assumed not to belong to the international monetary system are members of the Comecon group that do not belong to the Fund, although there are financial and economic relationships between all Comecon countries and other countries.75

What is the principle by which the countries that belong to the international monetary system can be determined? If a question arises about the participants in the system for the purpose of the provisions of the Fund’s Articles that refer to the system, it would seem prima facie that the participants are the members of the Fund. This conclusion would not imply that all members of the Fund have the same kind of economy. On the contrary, their economies stretch across a wide band from open economies to economies that are centralized. Scholars have distinguished between “command economies” and “market economies.” Professor Milton Friedman has concluded, however, that “there are no pure command or market economies, either as ideals or in practice.” 76 There is no doubt, of course, that although the Articles reflect the model of a market economy, the original proponents of the Fund and the drafters of its Articles always understood that membership in the Fund would not be closed to countries that based themselves on the model of a command economy.77 Moreover, the Articles do not require a member to move from a command to a market economy. On the contrary, the Articles have always provided that the Fund “shall not publish a report involving changes in the fundamental structure of the economic organization of members.” 78 Nevertheless, there is controversy about the appropriateness of the Fund’s standards for the use of its resources (conditionality) by certain developing countries because of the character of their command economies.79

The problem is broader. How should the Fund steer a course between two extremes? At one extreme would be the view that in dealing with command economies the Fund must have a more reserved role because the economic and social objectives and instruments of command economies differ from those of market economies. At the other extreme would be the view that the Fund’s role in relation to command economies must be more extensive because the central authorities exercise greater control of the economy. The Fund must avoid the danger of working with two different codes in applying its regulatory jurisdiction and two different sets of policies in administering its resources.

What, then, justifies the prima facie view that the international monetary system consists of members of the Fund? One of the conditions on which membership is open to a country is that it is willing to perform the obligations imposed by the Articles, but these obligations are subject to certain derogations,80 and these derogations can be applied with sufficient flexibility to permit membership for countries whatever their economies may be. It is better, therefore, to express the justification not as willingness to perform the obligations, but as a complex: adherence to standards of fairness in relations with other members,81 willingness to consult with the Fund on matters within its authority, collaboration with the Fund and other members, and receptiveness to the Fund’s advice on policies to increase national and international prosperity.82

It has been suggested above that membership in the Fund can be considered a prima facie criterion for determining the countries that belong to the international monetary system. The reason for this cautious formulation is that it would be unreasonable to conclude that all nonmembers of the Fund are outside the international monetary system. A nonmember may observe the same standards of fairness in relations with other countries that are observed among members and may go far in collaborating with the Fund and with its members. Switzerland is the leading example of a nonmember that fits this description. Switzerland is unparalleled among nonmembers in its special relationship with the Fund. It has associated itself with the General Arrangements to Borrow and has made loans to members as a result of that association, it has entered into agreements to lend to the Fund itself on various occasions,83 its central bank has been prescribed by the Fund as a holder of SDRs,84 and a representative attends meetings of both the Interim Committee and the Development Committee. Even these arrangements do not exhaust the relationship of Switzerland with the Fund. Swiss officials have held the view that their monetary authorities observe the highest standards of monetary conduct that membership in the Fund would call for.

The words “international” and “monetary” are the subject of further examination later in this Section, but it will be useful to precede that examination with a summary of the discussion of the international monetary system in the Annual Report of the Fund that has been mentioned earlier.

Fund’s 1965 Annual Report

The 1965 Annual Report of the Fund attempts to isolate the international monetary relations with which the international monetary system is concerned.85 The discussion begins with the statement that the system

comprises a spectrum of customary institutional and legal arrangements which govern the conduct of international economic transactions, the methods of financing deficits and surpluses in international payments, and the manner in which countries are expected to respond to such deficits and surpluses.86

“Customary,” “institutional,” and “legal” arrangements must be considered three categories of arrangements and not two as the absence of a comma between “customary” and “institutional” might suggest.

In this widest sense, the report continues, the international monetary system includes the broad network of banking and commercial practices through which day-to-day international transactions are undertaken. This network tends to be founded on the currencies of a few countries that have a large role in the total trade of the system.

The report then moves to a narrower meaning. In this sense, the system is

the complex of international rules and understandings which have evolved in an effort to ensure, by international agreement, a fair and efficient method of conducting international transactions.87

This complex includes the Fund’s Articles and also the provisions of the General Agreement on Tariffs and Trade under which restrictions on trade are normally permissible only in situations of balance of payments difficulty.

The authors of the report might have intended this version of the concept of the international monetary system to be legal in character and subsumed under public international law, because of the reference to “international agreement.” There is room for doubt, however, that they intended to narrow this version to the field of public international law because of the imprecision of the phrase “international rules and understandings” and the de facto practical arrangements that are discussed next.

The report states that the concept of the international monetary system, even in the narrower sense, embraces “all those de facto practical arrangements which give life and reality to the legal provisions.” 88 Examples of these arrangements are provided: the practice of the United States in freely buying and selling gold for U.S. dollars in transactions with the monetary authorities of other members, the gold pool, intervention in the exchange markets, and the fairly widespread de facto liberalization of capital movements.

The exposition of the report will be interrupted here to discuss these examples of so-called de facto practical arrangements. They cannot be understood as de facto in contrast to de jure arrangements in any rigid sense. All were the subject of provisions of the Articles. Before the Second Amendment, the Articles declared that if a member chose to engage freely in the purchase and sale of gold as defined by the Articles, the member was deemed to be performing its obligation with respect to exchange rates in exchange transactions that took place in its territories and involved its currency.89 The gold pool was established by agreement among certain members, but they were bound by a provision of the Articles that prohibited them from selling gold for a currency at a discount (namely, at less than the par value of the currency minus the margin established by the Fund) or buying gold at a premium (namely, at more than the par value plus the margin established by the Fund).90

Intervention in the exchange markets was the technique chosen by many members to perform their obligation to adopt appropriate measures to ensure that exchange transactions in their territories did not depart from limits around parities that were consistent with the Articles.91 The broad liberalization of capital movements occurred under a provision that allowed members to control capital movements or not, as they saw fit, provided that, if members did impose controls, they exercised them in a manner that did not restrict payments for current international transactions or unduly delay a payee’s transfer of the proceeds of such transactions to his own country.92 What the report seems to mean is that each of these examples involved a choice of policies by members that was permitted by provisions of the Articles, and not that there were no relevant provisions. Only in this sense were the chosen policies de facto practical arrangements.

The excursus has been completed, and discussion of the report is resumed. It states that the international monetary system, in the narrower sense, covers the arrangements under which monetary reserves are held. The report mentions, as reserves, gold, reserve currencies, unconditional rights to use the Fund’s resources,93 and rights to the ready repayment of loans under the General Arrangements to Borrow.94 The report, going beyond reserves, then refers to members’ conditional rights to use the Fund’s resources and the network of mutual credit arrangements (“swap arrangements”) between the United States and each of a number of major industrial countries.95 Similar arrangements, the report notes, had been made on a number of occasions between the United Kingdom and other industrial countries.

The report explains that reserves and other forms of international liquidity make it possible for countries to finance deficits in their balances of payments. The volume, distribution, and manner in which these reserves (and, one must assume, other forms of liquidity) are made available have an important bearing on that aspect of the international monetary system that is concerned with the adjustment of such disequilibria.

After the analysis as outlined above, the report arrives at what can be considered a broad, and perhaps preferred, definition of the international monetary system:

The system as described thus combines two features that are complementary in character: the financing of imbalances and the elimination of imbalances.96

The report then proceeds to examine the objective of an international monetary system defined in this way. The task of managing the international monetary system as an individual and a common responsibility of countries is to harmonize the two elements in the definition. This task is one for the Fund as well. According to the report, the task would be simpler if the objective were only to finance imbalances or, alternatively, only to ensure that disequilibria were eliminated as quickly as possible. But it is not sufficient to finance deficits, because financing that is excessive in amount or duration can constitute an undesirable distortion in the flow of real resources. Nor is it satisfactory that international payments should be brought into balance without regard to the measures employed for this purpose.

Practically speaking, the aim must be the achievement of balance with the least possible sacrifice of the generally accepted objectives of economic policy, including full employment, an adequate and sustained rate of growth, maintenance of reasonable price stability, and the maximum degree of freedom in current international transactions. It is also important that distortions in the international flow of capital and financing be avoided.97

This passage is not far from the opening language of Article IV, Section 1 of the present Articles, which has been quoted in Section I.

The analysis presented by the report is concluded with discussion of the problem of reconciling the economic and social objectives of the internal economy with external equilibrium. Governments now reject the thesis, implied in the gold standard, that deflation and economic stagnation, or inflation and overheating the economy, must be accepted automatically in the interests of external equilibrium. Governments facing balance of payments disequilibria, particularly of a persistent character, will be confronted with difficult choices among external and internal objectives. A country in deficit in its balance of payments will need to decide whether to seek a solution in a degree of deflation or at least a slowing down of the rate of growth, in measures to restrain payments for visible or invisible imports or capital transfers, in an adjustment of the exchange rate for the currency, or in some combination of these courses. A country in surplus in its balance of payments will be forced to choose among inflationary pressure, steps to restrain the inflow and promote the outflow of capital, and revaluation of the currency. The problem for the international monetary system is to achieve order when countries are pursuing, by a combination of policy instruments, their choice of an appropriate balance among a number of internal and external objectives.

A number of authors writing since the 1965 Annual Report was published arrive at conclusions derived from the report or consistent with it. For example:

[T]he system is concerned, first, with those economic policies of its members that affect other nations—with how nations act, deliberately or otherwise, to influence their balance-of-payments positions (each country’s balance of payments being the mirror image of the balance of payments of the rest of the world with it). Of particular importance here are policies that affect exchange rates, since each country’s exchange rate with another country is also the exchange rate of the other country with it. The system is concerned, second, with how nations settle their accounts with one another—how they pay or receive money in some form to finance deficits and surpluses. Third, the system is concerned with the amount and form of international money; …

In broad terms, then, the international monetary system involves the management, in one way or another, of three processes: (1) the adjustment of balance-of-payments positions, including the establishment and alteration of exchange rates; (2) the financing of payments imbalances among countries by the use of credit or reserves; and (3) the provision of international money (reserves).98

Further Consideration of “International”

The 1965 Annual Report, in discussing the concept of the international monetary system, poses a choice between two basic versions. They are close to the two meanings that can be attributed to the word “international” as discussed earlier in this Section. Neither version can be dismissed for logical reasons: both are, as the report states, defensible as a wider and as a narrower version. Perhaps one can detect a certain preference for the version based on the regulation of governmental relations. This version probably would prevail in the interpretation of the concept in the Fund’s Articles, if interpretation became necessary, because the Articles are a compact among members. It is highly unlikely that the Fund’s authority to supervise the management and adaptation of the international monetary system was intended to include supervision of the multitudinous practices of private parties and the vast panorama of national legal provisions. Nor is there likely to be any disposition on the part of the Fund to assume so daunting a responsibility.

If the concept of the international monetary system encompasses governmental relations, it should not be assumed that the relations are confined to those that prevail among the political authorities that have monetary functions (i.e., treasuries). The concept should apply to other official authorities that have monetary functions, among which central banks are outstanding examples. “Governmental” in this discussion is a convenient adjective because of the obvious contrast to “private.”

The distinction between “governmental” and “private” must not be taken to imply that the activities of private parties cannot be affected by agreements at the governmental level. Governments may agree to regulate or otherwise affect 99 the activities of private parties subject to their jurisdiction.

If the international monetary system is understood to be a system of intergovernmental relations subject to intergovernmental agreement, it becomes necessary to consider what kinds of agreement are embraced by this understanding. This question has been noted already as one that is raised by the 1965 Annual Report. Are the international agreements limited to treaties stricto sensu like the Articles of Agreement of the Fund? Even on this view, many more treaties would have to be taken into account. They would include multilateral, regional,100 and even bilateral agreements.

The corpus juris of the international monetary system as a system of intergovernmental relations should include not only these treaties but also the legal instruments that can be considered “subordinate legislation” because they are adopted under the authority of a treaty. The decisions of an international organization authorized by its constitutive treaty are examples of the instruments referred to here.

Agreements, even when formal in character, entered into by monetary authorities, especially central banks, are often considered to be instruments that cannot be classified with treaties. Yet these agreements have been responsible for important developments in international monetary relations. Moreover, central banks are often the official entities that enter into agreements because they have the necessary authority under their national laws, but the central banks enter into the agreements with the advice and consent, and even the direction, of their treasuries or foreign offices. There have been meetings of the representatives of monetary authorities when it was deemed desirable, at a critical stage of negotiation, to confine attendance to the treasury ministers, even though national delegations were composed of the representatives of central banks as well.101 An agreement reached as the result of such procedures may still purport to be an agreement among central banks. The legal independence of some central banks does not provide an insight into the forces that bring about such agreements.102 The author of an article on the problem of the immunity from suit of a central bank in courts outside its national territory begins his study by noting that the problem has arisen

in the course of the complex and extensive differentiation of the modern State: sovereign power today has branched out into the many new activities of a growing number of bodies which it is increasingly difficult to characterize as “State” agencies.103

An even wider net can be cast to sweep up agreements of an inter-governmental character. Some of them are informal, such as the communiqués of international organizations, including bodies that exist within the framework of organizations but are not organs. These communiqués often record intergovernmental understandings. The communiqués of the Fund’s Interim Committee are examples of this kind. These understandings are not decisions or in any other way binding in law, but in practice the understandings are observed in the activities of the Fund’s organs even when the understandings are not transformed into decisions of the organs.

The communiqués of bodies that do not exist within the framework of an international organization can have a similar practical effect. The communiqués of the Group of Ten can be cited as examples. The Group of Ten was formed as a result of the Fund’s General Arrangements to Borrow, but it was not created by that decision. In fact, the Fund sought originally to avoid a collective personality for the ten participants in the GAB.104 The Group’s communiqués have had considerable influence on international monetary relations, including relations not involving the GAB.

Agreements among monetary authorities can be implicit in the practices they follow even though the agreements are not recorded in formal or informal documents. The following statement by an official of the Federal Reserve Bank of New York may be an example of such an agreement:

In order to work toward a compatibility of economic objectives without the discipline of fixed “rules of the game,” intergovernmental consultation has become a much more important instrument, at least among the industrialized countries. Over the past five years, the consultative machinery among the major countries has been greatly enhanced bilaterally, multilaterally, and institutionally in the IMF. Within the central banking community, the relationships between the Federal Reserve and its counterparts abroad are of long standing, being firmly rooted in the financing arrangements of the 1960s. These relationships, too, have been strengthened. We now make daily calls to our counterparts abroad, sometimes from our bedsides. In addition, multilateral consultations take place daily at the technical level, and periodic discussions of policies and common problems occur as needed at various policy levels.105

The line of thought pursued above arrives at the conclusion that if the international monetary system is thought to consist of the agreements prevailing at any time among or between governments, realism requires that both “agreements” and “governments” should be given an extensive meaning. The agreements should not be limited to treaties or the international agreements that are given other names but are classified with treaties.106 The international monetary system, according to this approach, can be taken to be the international monetary relations that are regulated by the body of rules and practices that monetary authorities, whether political or nonpolitical, consider themselves legally or morally bound to observe or engage in. On this view the international monetary system would be broader than the area covered by international monetary law.

“Monetary”

It is as difficult to give precision to the word “monetary” as it is to the word “international” in the expression “international monetary system.” “Monetary” is narrower than “economic” and different from “financial.” The adjective “monetary” relates to means of payment and “financial” to the provision or use of monetary resources, but the distinction is difficult to apply rigidly. For example, payments and transfers for current international transactions are at the heart of the Fund’s regulatory jurisdiction but they can be considered “financial” in the sense in which the word has been used here. The difficulty of definition is demonstrated by the circularity of the following attempt to define monetary institutions:

Monetary Institutions, in the present context, are international organizations the principal and specific object of which is the initiation and implementation of monetary policies and facilities.107

The learned author from whose work this passage is quoted goes on to make the following statement in which the main emphasis is on “the principal and specific object”:

Such Institutions, accordingly, do not include financial, particularly banking organizations like the International Bank for Reconstruction and Development or the European Investment Bank, whose functions lie outside the field of monetary policies. Nor do they comprise entities whose manifold and very general purposes of an economic character extend incidentally to monetary ones with the result that on occasion such entities may supplement and reinforce the tasks and responsibilities of monetary Institutions stricto sensu. A significant illustration is supplied by the Constitution of the Organization for European Economic Cooperation, or of its successor organization, the Organization for Economic Cooperation and Development. The principal aim of the latter is the achievement of the “highest maintainable economic growth.” In consequence, the Member States … have entered into a number of undertakings; among them is the duty to “pursue their efforts to reduce or abolish obstacles to the exchange of goods and services and current payments and maintain and extend the liberalisation of capital movements.” 108

A distinction along these lines may be the only practicable one in attempting to formulate a distinction between monetary and financial or other nonmonetary institutions. It does not follow from an acceptance of this distinction, however, that the monetary function of a nonmonetary institution cannot sensibly be considered an aspect of the international monetary system. This conclusion would not be invalidated because the institution performed only one monetary function in contrast to many nonmonetary functions.

To support this view, it is sufficient to cite the example of the General Agreement on Tariffs and Trade (GATT). The economic problems with which the GATT is primarily concerned are, as indicated by its name, tariffs and trade. The Agreement directs the Contracting Parties (CPs) to seek cooperation with the Fund so that the two can pursue a coordinated policy on exchange questions within the jurisdiction of the Fund and questions of quantitative restrictions and other trade measures within the jurisdiction of the CPs.109 The CPs are called upon to consider or deal with problems concerning monetary reserves, balances of payments, or foreign exchange arrangements under various provisions, and on these matters the CPs must consult fully with the Fund. The CPs must accept all findings of statistical and other facts presented by the Fund and determinations made by the Fund on specified matters relating to foreign exchange, monetary reserves, balances of payments, and the financial aspects of other matters covered in certain consultations of the CPs with contracting parties.110 The implications of another provision are even more general:

Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.111

These provisions show that the Contracting Parties become involved in issues that the drafters of the GATT considered monetary. The technique they followed to prevent conflict between the decisions of the CPs and the Fund was to require the CPs to accept findings and determinations by the Fund on what were considered monetary matters. The International Bank for Reconstruction and Development (World Bank) is regarded as a financial institution, but it too has functions that can be classified as monetary. It is odd that although the Articles of Agreement of the Fund and of the World Bank were drafted at the Bretton Woods Conference, the drafters did not follow the approach of the GATT in requiring that the one organization should accept findings and determinations made by the other in that other’s field of primary responsibility. The drafters may have assumed that the two organizations would cooperate closely so as to avoid conflict.112

The difference in technique is all the more remarkable because the Bank’s Articles contain language that does not confine its activities to loans or guarantees for the purpose of specific projects of reconstruction or development:

Loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development.113

The World Bank has interpreted its Articles as empowering it to make or guarantee loans for programs of economic reconstruction and the reconstruction of monetary systems, including long-term stabilization loans.114

The World Bank has exercised its authority to make or guarantee loans under two policies that have a marked relationship to the balance of payments, although the policies are justified by the promotion of development. “Program loans” are not for the purpose of financing a specific project but are intended to provide foreign exchange for the importation of commodities that are important for development and are used in developing particular sectors of the economy or particular areas or the economy as a whole. The loans are intended to finance a specific kind of deficit in foreign exchange: the excess of foreign exchange expenditures planned for a national development program over foreign exchange prospectively available for financing the program.115 The World Bank’s “structural adjustment” policy is designed to reduce deficits in the current account of the balance of payments so that these deficits will not jeopardize current investment programs and activities that produce foreign exchange.116

The treaties that have established the World Bank and the GATT are not the only treaties that confer functions that can be considered monetary on organizations that have primarily nonmonetary functions. The multilateral and regional treaties of this character increase steadily in number. Only rarely do they follow the technique of the GATT to achieve consistency with the activities of the Fund when monetary functions are exercised. Articles 104–109 of the Treaty of Rome, which deal with the balance of payments, do not provide expressly for consistency with the activities of the Fund, but a requirement to this effect might be drawn from Article 229 or Article 234.

Some instruments that have been called subordinate legislation earlier in this Section have been more explicit. The Code of Liberalization of Capital Movements of the Organization for Economic Cooperation and Development (OECD) provides that:

Nothing in this Code shall be regarded as altering the obligations undertaken by a Member as a Signatory of the Articles of Agreement of the International Monetary Fund or other existing multilateral international agreements.117

The Resolution of the European Council of December 5, 1978 on the establishment of the European Monetary System (EMS) and related matters declares that: “The EMS is and will remain fully compatible with the relevant articles of the IMF Agreement.” 118

Even in the absence of texts of this character, contracting parties that are members of the Fund are likely to assume that their new treaties, and activities under them, are, and will remain, consistent with the Fund’s Articles in matters considered to be monetary. The Fund, however, has been worried about consistency on some occasions. The creation of the European Payments Union was one such occasion. The instructions approved by the Executive Board in March 1950 to a mission that was to participate in discussion of the proposed European Payments Union have been summarized as follows:

1. The Fund should assist in formulating satisfactory payments arrangements compatible with its purpose.119

2. Regional payments arrangements should facilitate the attainment of convertibility, avoiding tendencies toward a closed monetary area.

3. While inflation threatens, the element of credit should be moderate; settlements should be increasingly in gold and dollars.

4. The Fund mission should stress that the conditions needed for convertibility were the same as those needed for the functioning of a satisfactory payments agreement.120

The solution of problems of consistency may be found in arrangements for consultation and collaboration between the Fund and other organizations. Broad authority for the Fund can be found in Article X of its Articles:

The Fund shall cooperate within the terms of this Agreement with any general international organization and with public international organizations having specialized responsibilities in related fields. Any arrangements for such cooperation which would involve a modification of any provision of this Agreement may be effected only after amendment to this Agreement under Article XXVIII.

“Specialized responsibilities in related fields” is broad language because “related fields” are not confined to monetary matters.

Arrangements have been entered into by the Fund for consultation and cooperation with the World Bank,121 the CPs to the GATT,122 and other international organizations. The arrangements provide mainly for contacts between the staffs, although under the arrangements with the CPs the Executive Board, on the advice of the staff, makes the findings and determinations that are required for the purposes of the CPs. The Executive Board also approves the circulation to a substantial number of organizations of memoranda prepared for the purposes of the Fund, with due regard for confidentiality. This service is authorized by Article I(i) and by the second sentence of Article VIII, Section 5(c):

It [the Fund] shall act as a centre for the collection and exchange of information on monetary and financial problems, thus facilitating the preparation of studies designed to assist members in developing policies which further the purposes of the Fund.

A reasonable implication of the necessity for consistency between the activities of other organizations and of the Fund when there could be inconsistency in monetary matters is that the activities of other organizations should promote the purposes of the Fund in these matters. It must be assumed that this result is likely to be achieved if the Fund decides to collaborate with another organization, because the Articles direct that “The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.” 123

Further Consideration of “Monetary”

The discussion so far has not attempted to isolate those relationships among governments that can be called “monetary” and therefore can be taken to be the subject matter of the “international monetary system.” The question is how these relationships can be isolated from other governmental relationships. One of the conclusions of the 1965 Annual Report was that the international monetary system combined two complementary features: the financing and the elimination of disequilibria in balances of payments. The common element in these two features is the balance of payments. A reasonable deduction, therefore, is that monetary relationships are those that involve the balance of payments. The word “involve” in this formulation lacks precision because what are normally considered trade and financial relationships, as well as many other relationships, can affect the balance of payments. A tariff can have an effect on the balance of payments that is equivalent to a multiple currency practice, but the former measure is considered a trade measure and the latter monetary. Again, a quantitative restriction on trade transactions can have exactly the same effect on the balance of payments as a restriction on payments and transfers for the same current international transactions. It can be concluded that, for working purposes, monetary relationships are those that are connected reasonably closely with the payments and transfers that enter into the balance of payments. The payments and transfers are not confined to those that are connected with current international transactions, but include international capital transfers as well. International in this context means transnational.

The fact that balance of payments accounting is often said to depend on a set of conventions is hardly an objection. Balance of payments accounting in the form adopted by the Fund for the guidance of members when reporting to the Fund is improved from time to time in order to reflect changing economic conditions, give as much useful information as possible to the Fund and members, and take account of progress in economic learning.124

The line of thought developed above relies on the obviously loose qualification that payments and transfers should be connected reasonably closely with the payments and transfers that enter into the balance of payments. There are two motives for the use of this language. First, there is no defensible understanding of the word “monetary” that would exclude from its embrace such matters as exchange rates, adjustment of the balance of payments, reserves, and the provision of credit for financing the balance of payments. Matters such as these have a direct impact on payments and transfers and on the balance of payments. It has been seen that some authors have advanced these and similar elements as the components of the international monetary system as they understand it.

The second of the two motives is that room must be found for the answer to the question whether “monetary” policies or measures are confined to those that are intended to affect the balance of payments. This question will be discussed after an examination of the evidence in the Fund’s law and practice in support of the criterion of the balance of payments for determining what is meant by “monetary.”

Fund and Balance of Payments

If it is agreed that the Fund’s field of interest is all matters affecting the international monetary system, the Fund’s law and practice strongly suggest that this statement is equivalent to the statement that the Fund’s field of interest is all matters reasonably closely related to the balances of payments of the Fund’s members. The last purpose listed in Article I, which seems to embrace all the preceding purposes, is formulated as follows:

(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

Of the other provisions that mention balances of payments, the second sentence of Article XII, Section 8 is particularly interesting because of its breadth:

The Fund may, by a seventy percent majority of the total voting power, decide to publish a report made to a member regarding its monetary or economic conditions and developments which directly tend to produce a serious disequilibrium in the international balance of payments of members.

It is of special interest that “the economic conditions and developments” on which the Fund may publish a report are those that “directly” tend to produce the specified effect on “the international balance of payments of members.” The balance of payments may be that of the member to which the report has been made or the balances of payments of other members.

It is of even greater interest to note some activities of the Fund in matters for which it does not have primary international responsibility but in which the involvement of the Fund is justified because of the relationship between these matters and the balance of payments. In contrast to Article XII, Section 8, an explicit text for these activities cannot be found in the Articles. For example, the Fund does not have primary international responsibility for the oversight of import restrictions, but the stand-by arrangements the Fund approves to authorize the use of its resources 125 frequently provide that the benefit of the stand-by arrangement will be unavailable if the member imposes or intensifies import restrictions for balance of payments reasons.126

The Fund does not have primary responsibility for development,127 but it has established a special policy, the extended Fund facility, under which members may use the Fund’s resources if their balance of payments problems are affected by structural maladjustments of the economy or by conditions that are impeding growth.128 The balance of payments is the justification for other special policies of the Fund on the use of its resources. These policies apply, for example, when members suffer payments difficulties because of shortfalls in the proceeds of their exports of primary commodities 129 or because of their contributions to buffer stocks,130 but the Fund’s primary responsibilities do not include commodities or buffer stocks.

When the Fund established the oil facility as a special policy to assist members in balance of payments difficulties resulting from the initial impact of the increased cost of importing petroleum and petroleum products, the decision declared that a member wishing to benefit under the policy had to represent to the Fund that it was following certain policies. These policies included the avoidance of an escalation of restrictions on either trade or payments. Furthermore, a member was expected to represent that while a transaction under the oil facility was still outstanding, the member would refrain (i) from imposing new, and intensifying existing, restrictions on current international payments inconsistently with the member’s obligations under the Articles 131 and (ii) from imposing new, or intensifying existing, restrictions on current international transactions without prior consultation with the Fund.132 It is of particular interest that the Fund was willing to give balance of payments assistance under this policy only if a member consulted the Fund before applying trade restrictions, over which the Fund has no regulatory authority. The Fund did not go beyond prior consultation and make approval necessary because it did not want to provoke the charge that it was exceeding its jurisdiction. The Fund took the unusual step of requiring consultation on trade restrictions under the oil facility because the crisis caused by the increased costs of importing petroleum might lead to widespread restrictions and the serious impairment of balances of payments.

It will be apparent that the Fund seeks assurances on matters not within its primary responsibility if the use of its resources is sought when a member is in balance of payments difficulty and if these matters affect the member’s ability to overcome its difficulty without creating balance of payments problems for other members. The examples that have been cited are not exhaustive. The Fund does not claim an enlarged regulatory jurisdiction to approve or disapprove the policies of a member because understandings are necessary as a basis for the proper use of the Fund’s resources. The existence of a balance of payments problem can give the Fund considerable influence, however, in matters not within its primary responsibility or within its regulatory jurisdiction.

An outstanding example of the Fund’s restraint in claiming regulatory jurisdiction is its understanding of what constitutes a restriction on payments and transfers for current international transactions. Members may not impose these restrictions without the approval of the Fund.133 A view strongly urged in the Fund at one time was that restrictions, whether applied directly to payments and transfers for current international transactions or to the transactions that would give rise to payments and transfers, fell within the provision requiring the Fund’s approval if the restrictions were imposed for balance of payments reasons. This view did not prevail. The Fund decided that restrictions are subject to its regulatory jurisdiction only if they are applied directly by governmental authorities as a limitation on the availability or use of exchange as such for making payments and transfers for current international transactions.134 Restrictions on the current international transactions with which payments and transfers are associated are not within the Fund’s regulatory jurisdiction even if the motive for them is adjustment of the balance of payments.

The known intentions of governments when they reached agreement on the creation of the Fund was a major reason for the adoption of this solution. The governments intended to establish an international trade organization with regulatory jurisdiction over trade practices. Governments did not-want the two international organizations to have overlapping jurisdiction on the vast scale that would follow if the motive of adjusting the balance of payments were the criterion for the Fund’s regulatory jurisdiction. The fact that the proposed International Trade Organization was stillborn did not expand the Fund’s regulatory jurisdiction. Moreover, the GATT had come into force in the field of tariffs and trade.

The Fund’s decision rejects motive in favor of technique in determining whether measures are subject to the Fund’s regulatory jurisdiction. In addition, the decision implies that the effect on the balance of payments of measures subject to the Fund’s regulatory jurisdiction rather than the intention to affect the balance of payments is the underlying principle of the Fund’s regulatory jurisdiction over payments and transfers for current international transactions. Restrictions within the Fund’s regulatory jurisdiction as understood by the Fund affect the balances of payments of a member and of other members whatever the motive may be for imposing the restrictions.

The balance of payments was the justification put forward for an attempt to extend the regulatory jurisdiction of the Fund so that it would embrace restrictions on some transactions. The appendix to the Outline of Reform135 stated that certain members had expressed a wish to subscribe to a declaration that would discourage the escalation of restrictions on payments and on trade for balance of payments purposes. According to the declaration as formulated by the Committee of Twenty, a member of the Fund that subscribed to the declaration would represent thereby that it would observe its obligations with respect to payments under the Fund’s Articles but, in addition, that it would not on its own discretionary authority introduce or intensify trade or other current account measures for balance of payments purposes that were subject to the jurisdiction of the GATT, or recommend them to its legislature, unless the Fund made a prior finding that there was a balance of payments justification for the measures.

The Fund was not to become involved in considerations of commercial policy or take any action to determine the consistency of measures with the GATT or decide on the consequences of inconsistency, because these functions are performed by the CPs. A prior finding by the Fund of a justification related to the balance of payments was the crucial element of the proposed declaration. The assumption was that international scrutiny before the introduction or intensification of measures, such as the Fund applies to proposed restrictions on payments and transfers for current international transactions, was a more effective discouragement of unjustified trade measures than a post hoc procedure, such as the one normally conducted by the CPs.

Under the proposed declaration, therefore, a subscribing member would notify the Fund as far in advance as possible of its intention to impose trade or other current account measures for balance of payments purposes. If circumstances precluded the Fund from making a finding under the proposed declaration promptly after notification, the member might proceed to impose the measures. The member would withdraw them, however, within whatever period the Fund might stipulate in consultation with the member, if the Fund found that there was no balance of payments justification for the measures. The declaration was to become effective among subscribing countries when accepted by members having 65 percent of the total voting power of the Fund, and it was to remain in existence for two years from the effective date unless it was renewed.

The Fund invited members to subscribe to the proposed declaration, but it did not become effective.136 One reason, but not the only one, why many members did not subscribe was the desire to avoid a coincidence of the responsibilities of the Fund and the CPs. An effort was made to include a provision similar to the proposed declaration in the Second Amendment, but this effort also did not succeed.

Once again, it must not be assumed that the Fund has no role in connection with restrictions on trade when the balance of payments is the motivation for imposing the restrictions. It has been seen that the Fund makes findings and determinations for the CPs on matters closely related to the balance of payments and that the Fund’s interest extends to restrictions on trade when authorizing the use of its resources. Furthermore, the Fund takes note of restrictions on trade and on the inflow or outflow of capital, as well as other policies, that are applied for balance of payments purposes in its exercise of surveillance over the exchange rate policies of its members.137

Balance of Payments: Purposes and Effects

The preceding discussion will have demonstrated that although the Fund has a general interest in the balance of payments, the Fund expresses its interest in a variety of ways. The Fund’s interest is based sometimes on effects and sometimes on motives (or purposes). No principle can be formulated that would provide a comprehensive test for distinguishing between these two general categories. Nor are the two categories clearly distinguished from each other, because the Fund takes objective criteria into account even when its interest depends on a finding of balance of payments motivation.

Objective criteria have a role because a member may be silent about its motive when adopting a measure. In these circumstances, the difficulty of determining motive may be reduced if the measure, such as quantitative restrictions, surcharges on imports, or advance import deposits, is frequently adopted for the purpose of balance of payments adjustment. Nevertheless, on occasion these measure are imposed for purposes not related, or not directly related, to the balance of payments. The purpose may be protection, the promotion of development, or the pursuit of fiscal policies. Other difficulties may make the use of objective criteria necessary. A member may have more than one motive when imposing trade measures, and even if it is not motivated, or not primarily motivated, by a policy of managing its balance of payments, the measures may have a substantial impact on the balances of payments of other members.

The broad approach of the Fund is that measures for balance of payments purposes are those that influence the outcome of a member’s balance of payments or affect the exchange rate of its currency by causing the rate to move or by preventing it from moving. These measures are in contrast to measures that a member retains indefinitely whatever the condition of its balance of payments may be from time to time.138

A member may declare that its intention in imposing a measure is, or is not, to manage its balance of payments. The member’s representation is given the benefit of any reasonable doubt, but the Fund reserves the right to pass upon the representation on the basis of the facts. These facts include the rationale offered by the member for its measures, the effect of the measures on the balance of payments and on exchange rates of the currency of the member in relation to the currencies of other members, the member’s domestic and external conditions or policies that may explain its choice of the measures, expectations regarding the duration of the measures, and the prevailing practice among members in general with respect to the use of the measures for the purpose of managing the balance of payments. There can be no mechanical test for deciding whether a measure is imposed for balance of payments purposes, so that an assessment must be made in each doubtful case. It does not follow, however, that in most cases there is grave uncertainty.

The Fund reserves the right to decide whether there is a balance of payments purpose for a measure or a balance of payments effect. If a member had exclusive authority to decide this question, it would be able to withdraw the measure from international oversight notwithstanding international interest.

A Non-System?

Various commentators have concluded that since 1971 an international monetary “system” has not existed. Some commentators hold this view because the international monetary relations that they take into account are not coordinated into a logical whole. These views were heard even before the breakdown of the par value system. In 1964, the Deputy Managing Director of the Fund at that time spoke as follows:

The international monetary system, unlike the Federal Reserve System, is not to be found described in any one convenient set of laws or regulations; in fact much of it is not the subject of law or regulation at all, nor are its institutions neatly located in readily identifiable buildings at one place or another around the world. It is a highly informal system, some of it represented by national institutions based on national laws, some of it consisting of international agencies such as the Fund, and some of it existing in a complex of practices and facilities. For these reasons, some people argue that it is not a system at all, and that precisely what is needed is systemization. … The international monetary system is a half-planned, half-unplanned amalgam or meshing of … national monetary systems.139

In the same year a study group of 32 economists made the following statement:

The present international monetary mechanism is not a simple and logical “system.” Rather, it is a set of arrangements which is the composite result of agreements, compromises among conflicting interests and opinions, adaptations to unforeseen developments in the evolution of world trade and finance, and precedents that grew out of ad hoc arrangements or individual policy decisions. As such, it represents a mixture of different techniques evolved to carry out different principles, of policies which sometimes follow given principles and sometimes contravene them, and of mechanisms which probably would be common, in greater or less degree, to any system.140

Much the same view was expressed the next year by Valéry Giscard d’Estaing, who described the situation as a de facto system:

The international monetary system is first of all a de facto system. Unlike other areas of administrative or political life, it is not the result of texts. It is a mixture in which one finds texts, which is to say international agreements, but also practices, i.e., the manner in which traders, private parties, industrialists, effect their settlements. Finally, there are psychological elements that are fundamental and that consist of the opinion that people form at any given time of the value, either of the world monetary system itself or of the currencies that compose it. One may not reason upon this basis as one would on a systematic text. It is a de facto system.141

Professor Focsaneanu concludes from statements such as these and other aspects of his study that

the expression “international monetary system” does not designate a coherent legal concept with strictly defined contours. We are confronted with a term in common use, with a floating and evolving meaning comprising a moving ensemble of incongruous elements. …142

It will be observed that one reason why commentators such as these have reached the conclusion that there is no international monetary system, or that there is only a de facto system, is that they include the practices of private persons among the transnational monetary relations they would like a system to regulate.

Other experts arrive at the conclusion that there is no international monetary system for a different reason. They base their conclusion not on the complexity and incoherence of international monetary relations but on the instability and disorder they observe since the breakdown of the par value system. Gordon Richardson, the Governor of the Bank of England, reaches the following conclusion principally because of the present volatility of exchange rates: 143

I have remarked elsewhere that what we have at present is best described not as an international monetary system, but rather as a set of international arrangements.144

This view and the views of those who take account of the complexity and incoherence of international monetary relations must lead to different conclusions about prospects for the future. It is hardly likely that those who hold the latter views could ever be persuaded that an international monetary system, or a de jure international monetary system, was in existence. To persuade them that this had happened would require the integrated legal regulation of public and private activities on a scale beyond credibility. Mr. Richardson, however, could agree that an international monetary system had come into existence if the disadvantages and abuses of present arrangements were eliminated. He looks forward to such a possibility, although he sees more hope that it will come about as the result of collaborative arrangements among monetary authorities than as the result of “a fully articulated system with a set of written rules.” 145

The provisions of the Second Amendment on exchange rates, which permit members to choose their exchange arrangements, are the result of the successful advocacy by the United States of this freedom of choice. It is not surprising, therefore, that officials of the United States, when recommending endorsement of the proposed Second Amendment by U.S. congressional committees, insisted that the Second Amendment would establish a new international monetary system. The chief American negotiator of the present provisions declared that:

The new system is organically complete and workable. It has the flexibility to evolve as the world evolves, and it can be expected to function well in the years ahead without major revision. Its adoption has been widely accepted as a positive and beneficial move, a major structural improvement for the world economy.146

If it [the new system] does not satisfy every enthusiastic reformer—and any theorist tends to measure a new system against his own subjective judgment of the ideal monetary system—it does certainly constitute a workable and pragmatic system that is a major improvement on the Bretton Woods system as it operated from 1950 to 1970. This new system is better suited to dealing with today’s problems than any conceivable variation of the stable but adjustable par value system.147

Denial of the existence of an international monetary system for whatever reason is an expression of dissatisfaction with international monetary relations. But there are always international (or transnational) monetary relations, because countries have balances of payments. The way in which these relations are conducted, according to one view, or are regulated according to another view, constitute the international monetary system for the time being even if for esthetic or pragmatic reasons the word “system” seems inappropriate.148 “Not having a system is having one nonetheless.” 149

Some Consequences of Perception

Legal consequences can be produced by the perception that an international monetary system does or does not exist. Some of the consequences are discussed in the following paragraphs.

In the days when the existence of an international monetary system was not questioned, the par value system was considered a central element in it. On no occasion did the Fund decide that it lacked jurisdiction over some aspect of exchange rates. If, on a problem of interpreting the Articles, an unqualified decision might have compromised the Fund’s jurisdiction, the Fund would include a caveat in the decision. For example, members are permitted to control capital transfers,150 but members must obtain the Fund’s approval for discriminatory currency arrangements or multiple currency practices.151 The question arose whether a member needed the approval of the Fund if the member controlled capital transfers by means of discriminatory currency arrangements. The Executive Board decided that members were authorized to discriminate in controlling capital transfers, but in approving the report of the Committee that came to this conclusion 152 the Executive Board approved a reservation by the committee 153 with respect to multiple currency practices because these practices involved exchange rates.

Sometimes, the Fund, when interpreting a provision of the Articles that did not involve exchange rates, would be influenced by its reluctance to take a decision that might compromise its jurisdiction over exchange rates by analogy. The Fund’s interpretation of restrictions on payments and transfers for current international transactions adopted for reasons of national or international security is an example of this attitude. Various arguments were advanced in support of the view that the provision 154 under which a member must obtain the Fund’s approval of these restrictions did not apply if the motive for restrictions was security. One underlying reason why the Fund decided that it had jurisdiction over all restrictions on payments and transfers for current international transactions whatever the motive for them might be 155 was the concern that a more limited decision might become a precedent for narrowing the Fund’s jurisdiction over exchange rates.

The conviction that an international monetary system was in existence has exercised influence on legal problems outside the Fund as well. The award 156 delivered on May 16, 1980 by the Arbitral Tribunal for the Agreement on German External Debts (London, February 27, 1953) 157 interpreting the expression “the least depreciated currency” in Article 13 of the Agreement is an example of this tendency. A major difference among the arbitrators was the assumption by the majority, but not the minority, that the Articles created an international monetary system and that the drafters of the Agreement on German External Debts had intended to fit the Agreement into the structure of the system.158

The view that an international monetary system does not now exist can also produce consequences. For example, Swiss official opinion has favored the retention of a statutory provision that defines the value of the Swiss franc in terms of gold because the contours of a new international monetary system are not yet discernible.

Section III Former Par Value System

Rationale of International Supervision

Exchange rates are at the heart of the international monetary system, the activities of the Fund, and international monetary law. The exchange rate of a currency is the price of a currency in terms of other currencies, and it affects not only the economy of the issuer of the currency but also the economies of other countries. The Group of Thirty issued a statement on May 7, 1982 that included the following paragraph:

In an open trade and payments system exchange rates are bound to lie at the centre of economic relations between sovereign States. At the same time, they are strongly influenced by, and have a strong influence on, domestic economic performance and the conduct of domestic economic policies. For most countries, there is no other single price which has such an important influence on both the financial world—in terms of asset values and rates of return, and on the real world—in terms of production, trade and employment.

The price of a country’s currency can be unfair to other countries and it can be incompatible with the adjustment of the balance of payments of the issuing country if there is disequilibrium in its balance of payments. The need exists, therefore, for arbitrament by law and administration by an international organization if the interests of countries and of the international monetary system are to be protected and promoted. To understand the present position, and possibilities for the future, it is necessary to examine the par value system established by the original Articles and now abrogated.

The par value system represented a major departure from the principle of the past that each country was sovereign in the determination and management of the exchange rate for its currency. Even if a country observed the rules of the gold standard, it did so in accordance with national law and policy, and not because of an international compact. The Tripartite Agreement of September 25, 1936 was the outstanding example of a compact, entered into before the Articles became effective, under which a party accepted responsibility to other parties for the external value of its own currency. The agreement was clearly in White’s mind when he was considering his plan.

The original parties to the Tripartite Agreement were the Governments of France, the United Kingdom, and the United States. The Governments of Belgium, the Netherlands, and Switzerland were later adherents. The six recognized that although in their individual policy toward international monetary relations they had to take into full account the requirements of internal prosperity, the constant object of their policy would be to maintain the greatest possible equilibrium in the system of international exchange and to avoid to the utmost extent the creation of any disturbance of that system by domestic monetary action. Each party retained the right to change the gold value of its currency, but there was to be prior consultation with the other parties, although no machinery was established for the purpose. The parties undertook to avoid an unreasonable competitive exchange advantage that would hamper the effort to restore more stable economic relations. If the monetary authorities of a party accumulated the currency of another party, the holder could get gold for the currency within 24 hours at the exchange rate at which the currency had been obtained. A party could terminate its undertaking to sell gold on 24 hours’ notice. It is worth recalling that the form of the agreement was not a single instrument executed by all parties but parallel declarations by each.159

A rationale was required for the immensely more radical ideas on international authority over exchange rates that Keynes and White were proposing. The rationale was explained at length in the April 1942 version of White’s plan. He wanted to ensure the joint consideration of a proposed change of par value and the avoidance of unilateral action to obtain a competitive advantage without regard to the effect of the change on other countries. The procedure of joint consideration would be a powerful deterrent to unnecessary changes.

White recognized that some countries would object that the necessity for the approval of other countries was a serious infringement of sovereignty. Although he agreed that there was some truth in this objection, it should not be a decisive impediment. Other countries would be affected, and they should have a voice in the matter. All would be surrendering the same degree of sovereignty.

He added one further, and perhaps more powerful, argument. The unilateral action by one country could be neutralized by the unilateral actions of other countries. When a competitive, but not unfair, advantage was being sought by a country, it was essential, if the measure to be taken for this purpose was to succeed, that other countries did not take similar measures that would counteract the advantage.160

Bretton Woods Principles

The rationale as explained by White was endorsed at the Bretton Woods Conference. A rapporteur announced that early agreement had been reached on the principle that “an exchange rate in its very nature is a two-ended thing, and that changes in exchange rates are therefore properly matters of international concern.” 161

If it were necessary to select the most fundamental principle of the par value system, the choice might be this principle of international concern. But other broad principles can be recognized as essential elements in the infrastructure of the par value system. Par values, by hypothesis, were fixed, but they were to be changeable. Changes were to be made only to correct a fundamental disequilibrium. These principles were often expressed as a desideratum of stability without rigidity. Competitive exchange alterations were forbidden. Fixed rates of exchange had to be enforced to make par values effective; floating exchange rates were invalid. Exchange systems were to be unitary, and therefore they should not include multiple currency practices. Discriminatory currency arrangements were prohibited. A member was to have ultimate authority over the exchange rate for its currency. Each of these principles will be examined in turn.162

International Concern

It has been explained in Section II that the Fund’s practice was consistent with the assumption that no aspect of exchange rates was beyond the Fund’s interest. All aspects of exchange rates, therefore, were subject to international scrutiny in the Fund. The agreement of the Fund was necessary when an initial par value was communicated 163 and the concurrence of the Fund was required when a change in par value was proposed.164

A par value was fixed in terms of gold as the common denominator of the par value system.165 A par value could be expressed directly in terms of gold or indirectly by expressing it in relation to the U.S. dollar of the weight and fineness in effect on July 1, 1944. The latter option was recognized because the law of a number of countries defined the domestic currency in terms of the U.S. dollar.

The concurrence of the Fund was not necessary if the change did not affect the international transactions of members.166 This provision was included in the Articles at the request of the U.S.S.R. at Bretton Woods. Other leading countries were skeptical that any such demonstration could be made, even by the authorities of a command economy. The Fund never found that a change came within the provision.

The Fund was not entitled to object if a proposed change of par value, together with all earlier changes in whatever direction they might have been made, was within 10 percent of the initial par value. The purpose of this provision was to give a member some room for adapting its initial par value in the uncertain circumstances prevailing soon after World War II. The provision might encourage members to take the risk of establishing an initial par value promptly.

The Fund was required to concur in all other proposed changes if it was satisfied that a change was necessary to correct a fundamental disequilibrium. In particular, the Fund was not authorized to object to a proposed change because of the domestic social or political policies of the member proposing the change.167 Under this provision, the Fund was not entitled to object to a proposed change that was necessary to correct a fundamental disequilibrium on the ground that the member should follow deflationary policies and accept prolonged or increased unemployment instead of changing the par value of its currency.

Consultation with the Fund was necessary before a member made any change of par value.168 This rule applied even when the Fund was required to concur in, or was not entitled to object to, a proposal. The purpose of requiring consultation even in these cases was to give other members an opportunity to express their views and to give the member proposing the change the opportunity to take these views into account before acting further.

A decision by the Fund agreeing to an initial par value, or concurring in a change, was made by a majority of the votes cast.169 Therefore, no single member was able, through its Executive Director, to exercise a veto that would prevent the Fund from deciding in favor of an initial par value or a change in par value. To mitigate the surrender of sovereignty and the normal weight of the voting power of richer members, White suggested at one time that each member should have only one vote when voting took place on changes in par values 170 but this suggestion made no headway.

Stability Without Rigidity

A member was entitled to change the par value of its currency, after consulting the Fund and after obtaining its concurrence when required, but only if the change was necessary to correct a fundamental disequilibrium.171 A change would not be necessary if a member’s disequilibrium was temporary and the member would be able to ride out its balance of payments problem with the aid of the Fund’s resources.

The word “correct” conveyed the thought that a change must not be an overcorrection or an undercorrection. A proposed undercorrection was objectionable because it could lead to several changes. They were undesirable because they might promote the instability of the currency. Speculation might be encouraged because further changes were expected. Moreover, an inadequate change might impose the remaining burden of adjustment on other members. A proposed overcorrection was objectionable as a competitive devaluation. The Fund recognized, however, that it was difficult to determine with precision the amount of a change that would not be objectionable for either reason. The Fund concluded, therefore, that there was room for judgment and that it must give a member the benefit of any reasonable doubt. In arriving at its judgment about the adequacy of a proposed change, the Fund took into account the policies that would accompany the change, but insisted that they must be compatible with the Articles.

The expression “fundamental disequilibrium” was crucial but was not defined by the Articles. The choice of words was unfortunate because below the surface there seemed to be a suggestion of failure by a government to maintain equilibrium. Governments were often reluctant for political reasons to make a declaration of fundamental disequilibrium because it might be interpreted as a confession of failure. The delay in proposing a change might intensify a member’s difficulties.

The absence of a definition was not an oversight in the drafting of the Articles. The drafters feared that a definition might be too narrow or too rigid. They expected that the Fund would work out a definition fairly soon after the organization came into existence.172 The Fund never did adopt a definition. The difficulty of reaching agreement on a definition was one reason, but the desirability of not promoting the rigidity of exchange rates was another.

Not until 1970 did the Executive Board engage in a systematic examination of the concept of fundamental disequilibrium. The Executive Board published a report entitled The Role of Exchange Rates in the Adjustment of International Payments,173 after intensive discussions had been held because of widespread dissatisfaction with the operation of the par value system. One useful clarification made by the report was that a fundamental disequilibrium might exist even though a disequilibrium had not appeared in the balance of payments. A member might be in this situation because it had suppressed a disequilibrium by domestic or external policies that were harmful to itself or to other members and were inconsistent with the purposes of the Fund. The imposition of restrictions was an obvious example of such an unsatisfactory situation.174 Notwithstanding the breadth of the discussion of fundamental disequilibrium, the report did not arrive at a definition, and no action was taken on the basis of the report.

A member’s right to change the par value of its currency, whatever constraint might be imposed by the criterion of fundamental disequilibrium, was in contrast to the theory of the gold standard. The essential features of the gold standard were, first, that the money supply was determined by the amount of a country’s gold reserves and that inflows or outflows of gold resulted in increases or decreases of the money supply. Second, gold and currency were interchangeable at a fixed or nearly fixed price through the free coinage of gold and the convertibility of currency into gold. Third, the main objective of economic policy was to preserve the immutability of the gold value of a currency. The United Kingdom obtained an authoritative interpretation by the Fund to clarify that the deflationary rigors of the gold standard need not be endured under the Articles. The Fund held that “steps which are necessary to protect a member from unemployment of a chronic or persistent character, arising from pressure on its balance of payments, are among the measures necessary to correct a fundamental disequilibrium.” 175

Competitive Exchange Alterations

The competitive depreciations and devaluations of the period between the two World Wars inspired agreement that it should be a purpose of the Fund to prevent,176 and an obligation of members 177 to avoid, these actions. The Articles provided no definition of objectionable competition, again, it can be assumed, in order to permit flexibility of administration by the Fund. Where the line had to be drawn, however, was not easy to determine, if only because a member’s intention in devaluing its currency was necessarily to give it a competitive advantage. An early study by members of the Fund’s staff suggested that a partial test might be whether the rate of accumulation of reserves that might follow a devaluation would be so rapid and so persistent as to give the member more than an appropriate share of the monetary reserves of all members.178 The authors were aware that this test was imprecise, required many qualifications, and placed great burdens of judgment on the Fund and on a member considering devaluation.

The Fund rejected the argument that, in reacting to a proposed devaluation, it had only to find that the change would not be competitive. The argument had been advanced to justify an inadequate change, which, by hypothesis, would not be a competitive devaluation. The Fund decided that nevertheless it must object to the proposal of inadequate change for the reason already mentioned: the change might promote instability.

Over the years, the problem for the Fund proved not to be competitive devaluation. Members tended to delay necessary devaluations, so that their currencies became overvalued. Moreover, members in persistent surplus in their balances of payments were reluctant to propose the revaluation of their currencies. The expression “competitive nonrevaluation” came into being to describe this form of rigidity.

Fixed Exchange Rates

Par values would have been meaningless if there had been no provisions to make them effective as a basis for exchange transactions. The Articles provided that a member had to adopt appropriate measures for this purpose. The choice of measures was left to a member provided that they were consistent with the Articles. A member had to ensure, by means of its measures, that, in spot exchange transactions in its territories, exchange rates did not deviate from the parity between its currency and the other member’s currency exchanged in the transaction by more than 1 percent. The parity was the ratio between the two currencies based on their par values. The margins for exchange rates in other transactions could exceed the margins for spot transactions by the amount that the Fund considered reasonable.179 The underlying principle was that each member was legally responsible for maintaining the effectiveness of the par value of its own currency. For this reason, a member’s obligation related only to exchange transactions involving its own currency. The principle is an application of a broader principle of the responsibility of each member for its currency under the Articles. The principle still exists even though some of the applications of it are different because of the disappearance of the par value system.

The Articles specified a practice that was deemed to be the most compelling evidence of the discharge of a member’s obligation to maintain the effectiveness of the par value of its currency, although the provision was regarded by some officials as an unfortunate diminution of responsibility. The provision that authorized the practice was negotiated by the United States because it did not want to take other measures to ensure that exchange rates in transactions involving U.S. dollars within its territories were confined to margins consistent with the Articles. It is desirable to quote the provision because of the importance it had for the par value system:

Each member undertakes, through appropriate measures consistent with this Agreement, to permit within its territories exchange transactions between its currency and the currencies of other members only within the limits prescribed under Section 3 of this Article. A member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold within the limits prescribed by the Fund under Section 2 of this Article shall be deemed to be fulfilling this undertaking.180

Section 3 prescribed the margins for exchange transactions. Section 2 provided, in effect, that gold transactions between the monetary authorities of members had to be at a price that corresponded to the par value of the currency for which the gold was bought and sold, plus or minus the margin adopted by the Fund for these transactions. If monetary authorities did not observe these prices in their transactions with each other, the soundness of the par values of the currencies for which gold was bought and sold might be doubted by the exchange markets.

The Fund never adopted a comprehensive interpretation of the provision quoted above. A practice that was considered indubitably to fall within the scope of the provision was one that satisfied two conditions. First, the monetary authorities of a member were ready to buy and sell gold without exception in transactions with the monetary authorities of all other members, whenever approached by them, whether or not the transactions were required by the member’s law (“in fact”). The purchases and sales had to be in return for the member’s currency, and at prices for the gold that were consistent with the Articles. Second, the member imposed no restrictions on payments and transfers for current international transactions or on capital movements. If the member imposed restrictions on these payments and transfers or on these movements, the restrictions might be responsible for exchange rates that were incompatible with the Articles. The exchange rates in exchange transactions in the member’s territories might be attributable to the cost of circumventing the restrictions and not to the unwillingness of the other member whose currency was involved in the exchange transactions to engage in gold transactions with the member freely buying and selling gold. These gold transactions, according to the theory of the provision, would put the other member in a position to defend the legal margins for exchange rates in exchange transactions involving its currency.

The theory of the provision was that a member freely buying and selling gold under the provision must be deemed to be maintaining the effectiveness of its par value because, as a consequence, it was buying and selling its own currency for gold, the common denominator of the par value system, at a price consistent with the par value. If balances of the member’s (Terra’s) currency were accumulated by another member (Patria) as a result of intervening in the exchange market with its currency to maintain the effectiveness of the parity between its currency and Patria’s currency, and if Patria did not want to retain the balances in its reserves, Patria could obtain gold for them from Terra if it was freely buying and selling gold. If the currency of Terra was needed by Patria for intervention in the exchange market with the currency in order to enable Patria to maintain the effectiveness of the parity between the two currencies, Patria could obtain balances of the needed currency for gold. The price prescribed by the Articles for gold transactions by members 181 meant that Patria could retain in its reserves balances it obtained by intervention without the likelihood of loss. Similarly, with balances obtained for gold Patria could intervene at exchange rates consistent with the Articles without suffering loss.

The practice of freely buying and selling gold by a member would not necessarily ensure that all exchange transactions in its territories would be conducted at exchange rates compatible with the Articles. If exchange transactions did not involve the member’s currency, its willingness to deal in gold for its own currency had no direct effect on exchange rates in these transactions. Furthermore, even if its own currency was exchanged in transactions in its territories, the monetary authorities of the other member whose currency was involved, Patria, might be unwilling to sell gold to the member that was freely buying and selling gold. For both reasons, Keynes, soon after the Bretton Woods Conference, repented of his willingness, “weakly and illogically and mistakenly,” 182 to accept the provision on the purchase and sale of gold. He wrote to White on October 6, 1944 hoping that the United States would legislate against transactions at exchange rates outside the margins prescribed by the Articles:

I take this opportunity to point out that the second sentence of IV 4(b) by which, in effect, the US contracts out of this clause [on margins for exchange transactions], is in fact illogical. For, whilst gold convertibility prevents the dollar from depreciating, it does not prevent other currencies from depreciating in the New York market. Thus unless you legislate to the contrary, New York will become … the chartered black market where all dubious transactions and weak currency deals will be concentrated. Let us hope that in spite of the Statue of Liberty pointing to New York as, under the Constitution, the proud home of black markets as the symbol of Freedom, you will in fact legislate!183

The United States did not legislate. A purpose of the United States in negotiating the provision was to avoid any responsibility for regulating exchange markets.

Keynes’s regret so soon after the Bretton Woods Conference is all the more remarkable because the provision to which he objected became the primary norm of the par value system in operation. The practice of freely buying and selling gold as defined by the Articles was voluntary and could be terminated if undertaken. The only member that undertook to follow the practice in respect of its currency was the United States,184 until it abandoned the practice on August 15, 1971.

The undertaking became the primary norm of the par value system because, with the assurance of the willingness of the United States to buy and sell gold for U.S. dollars at a price consistent with the par value of the dollar, and with the confidence that the policies of the United States would make devaluation of the dollar unnecessary and almost inconceivable, other members could hold dollars comfortably as their main reserve currency. They could intervene in the exchange markets by standing ready to buy and sell dollars for their own currency to keep exchange rates in relation to the dollar within the limits prescribed by the Articles. Intervention in this way was an appropriate measure under the Articles for performing exchange rate obligations because maintenance of a proper relationship to the dollar, which was tied securely to gold in value, was maintenance of a proper relationship to gold as well. Intervention with sterling by members of the sterling area or with French francs by members of the French franc area was also an appropriate measure. Once these two currencies became convertible into U.S. dollars, they were convertible through dollars into gold.185

The importance attached to the practice of freely buying and selling gold by the United States was demonstrated further by the First Amendment. Under it, a member was entitled to obtain currency by transferring SDRs to a transferee of them designated by the Fund on the member’s (transferor’s) request.186 In the negotiation of the First Amendment, the United States protested that SDRs would not be useful to it because normally it did not intervene in exchange markets with the currencies of other members and did not hold their currencies in its reserves. Members that were in surplus in their balances of payments and accumulated balances of U.S. dollars were able, if they wished, to tender the balances to the United States for gold. SDRs would be helpful to the United States if it could redeem these balances with SDRs and economize in the use of gold. This protestation was successful, but with the qualification that the member tendering the balances agreed to accept SDRs.187 In short, the holder could refuse SDRs and insist on receiving gold.188 The provision on the practice of freely buying and selling gold was preserved without modification by the First Amendment.

Floating Exchange Rates

A corollary of the obligation of each member to ensure that exchange rates in exchange transactions in its territories involving its currency did not depart from margins consistent with the Articles was that exchange rates that were allowed to float outside the margins were inconsistent with the Articles. The member that permitted floating was violating its obligation on exchange rates. The Fund had no authority to approve the floating of a currency even when floating would have been a temporary measure that was intended to determine at what level a new par value should be established because it was difficult to make the determination without the evidence of exchange markets.189

If a member permitted its currency to float in violation of its obligations, the par value of the currency was not abrogated even though it had become ineffective. It continued to exist in the contemplation of the Fund, even though the ineffective par value might have no practical consequences. The continuing legal existence of an ineffective par value could complicate the administration of other treaties or the interpretation of other legal instruments that had been entered into in the belief that par values approved by the Fund would be maintained effectively at all times. Par values were relied upon because the Fund was recognized as the organization that was at the center of the international monetary system, and because the Fund has authority to require members to comply with their obligations on par values and exchange rates.

The law as explained here demonstrates the emphasis on fixed rates of exchange as a principle of the original Articles. Authority to approve floating exchange rates even for limited purposes and periods was not conferred on the Fund for fear that members might be tempted to abandon their support of par values for prolonged periods. Some critics thought it anomalous that the Fund was able to approve a floating rate for some, and even many, transactions involving a member’s currency if the floating rate was a multiple currency practice.190 It seemed to these critics anomalous that the Fund could validate a floating rate if a member departed further from the principles of the Articles by resorting to the floating of its currency and, because the currency did not float for all transactions, to multiple currency practices as well. A unitary floating rate was not a multiple currency practice. The explanation of the apparent anomaly is discussed in connection with multiple currency practices in general.

Multiple Currency Practices

The principle of the Articles was not that members were entitled to maintain or impose multiple currency practices if authorized by the Articles or approved by the Fund, but that members were obliged not to maintain or impose multiple currency practices unless they were authorized by the Articles or approved by the Fund.191 Experience between the two World Wars showed that multiple currency practices were often employed as devices to discriminate against other countries or to depreciate the currency so as to gain unfair competitive advantage over them without explicit legal action and without admission that discrimination or unfair depreciation was being practiced.192 Multiple currency practices are essentially systems of taxes and subsidies. Their restrictive effects on trade and payments and their distorting effects on domestic patterns of consumption and production can be severe.193 For these reasons the Articles, in principle, prohibited multiple currency practices, and the Fund encouraged members to eliminate them even when the practices were authorized by the Articles or approved by the Fund temporarily.194

The Fund developed a substantial body of jurisprudence on what did and did not constitute multiple currency practices. It was never possible to encapsulate the Fund’s practice in a simple formula. If differential rates of exchange were all within the margins for exchange transactions prescribed by the Articles, the rates were never regarded as multiple currency practices. In addition, as noted already, a unitary floating rate (with buying and selling rates closely related to each other) was not a multiple currency practice. For the rest, a rough generalization would be that multiple currency practices were two or more rates of exchange that were not as closely related to each other as they would be if market forces only were in operation.

In view of the evils of multiple currency practices, it is immediately understandable that they should be prohibited but not that the Fund should be empowered to approve them. There were various reasons for giving the Fund this power. First, the abrupt elimination of the practices might be painful for a member. Second, some countries lacked the administrative machinery for exchange control, and for them multiple currency practices were the traditional substitute. The Articles would have discriminated against these countries if the Fund had been able to approve restrictions on payments and transfers for current international transactions but not able to approve multiple currency practices. But why should the Fund have been empowered to approve either kind of practice? The answer was that it might be less harmful for a member to impose these practices under the regulatory jurisdiction of the Fund than to see the member driven into other unsatisfactory practices that were not subject to the Fund’s jurisdiction when the member faced an emergency or other difficulty. Experience showed that sometimes members did select measures because they were not subject to the Fund’s regulatory jurisdiction. Another reason for enabling the Fund to approve multiple currency practices may have been the view that an appropriate exchange rate for some imports or some exports was preferable to an inappropriate exchange rate for all imports or all exports.195

None of these reasons implied that the Fund would approve multiple currency practices without evaluating the possible harm to the member imposing them and to other members, or without considering possible alternative measures. Nor was it implied that approvals, if granted, would be for prolonged periods or free from the Fund’s pressure to terminate the practices as soon as possible.196

If multiple currency practices included a floating rate for some exchange transactions, the approval did not imply that floating was a satisfactory arrangement that a member should be able to retain indefinitely.197 A member was expected to eliminate multiple currency practices in all their forms, and when it was able to take this step, the theory was that the member should be able to maintain not simply a unitary rate of exchange but a unitary fixed rate of exchange. The Fund should not be allowed to approve a unitary floating rate in such circumstances because there should be no need for this power.

Discriminatory Currency Arrangements

The discussion of multiple currency practices is equally applicable to discriminatory currency arrangements. The Articles treated these measures in the same way, and in the same provision, as multiple currency practices.198 Discriminatory currency arrangements affecting payments and transfers for current international transactions almost invariably would be restrictions also, and often multiple currency practices as well. An example of a discriminatory currency arrangement that did not fall into either of the other two categories as well would have been the requirement by a member that its resident payees must receive convertible currencies from payors resident in some member countries but might receive inconvertible currencies from payors resident in other member countries. A restriction on the currencies to be received in payment was not a restriction that required the Fund’s approval because it was on receiving payments and not on the making of payments and transfers for current international transactions.199 An explanation of the reason for the distinction between the making and the receipt of these payments and transfers will be found in the discussion of the multilateral system of payments in Section IX.

The specific prohibition of discriminatory currency arrangements, in addition to the other categories of prohibited measures with which they frequently overlap, demonstrates the abhorrence with which governments viewed discrimination. This attitude influenced the Fund’s practice. As time went by, the Fund became increasingly reluctant to approve discriminatory currency arrangements, and although it discouraged adoption of the nondiscriminatory practices for which approval was necessary, its attitude toward them was somewhat more tolerant and more patient.

The essence of a discriminatory currency arrangement was that it departed from equal treatment for all other members, some of which, therefore, were treated less favorably than others. A restriction or a multiple currency practice that applied uniformly to all members was not a discriminatory currency arrangement. To be treated as a discriminatory currency arrangement, a measure had to be directly connected with currency, but the measure could be imposed unilaterally. The word “arrangements” did not mean that discriminatory currency arrangements were necessarily the result of a bilateral or multilateral agreement with other countries. A member required the Fund’s approval for a discriminatory currency arrangement whether the motive for the measure was the balance of payments or something else. Similarly, the legal necessity for approval by the Fund of multiple currency practices or restrictions on payments and transfers for current international transactions did not depend on the motive with which these measures were applied.

The Articles authorized discrimination under transitional arrangements but also in other circumstances. When the Articles were being negotiated, it was feared that a member with a large economy might impose hardship on other members by having a persistent surplus in its balance of payments and by following illiberal policies so that its currency did not become available to other members. The main fear was that there would be a shortage of U.S. dollars after World War II because of the situation and policies of the United States. A solution to counteract this risk of serious disequilibrium was found in the so-called scarce currency clause.

If it became evident to the Fund that the demand for a member’s currency threatened the Fund’s ability to supply it, the Fund was to make a formal declaration of the scarcity of the currency and was to apportion its existing and accruing supply of the currency with due regard to the relative needs of members, the general international economic situation, and any other pertinent considerations. A formal declaration had the effect of authorizing members, after consulting the Fund, to impose temporary limitations on the freedom of exchange transactions in the scarce currency. A member was free to determine the nature of the limitations it imposed, subject to two qualifications. The limitations were to be no more restrictive than was necessary to correlate demand with supply of the scarce currency, and the member could not cease to maintain the effectiveness of the parity between its currency and the scarce currency. A member had to relax and withdraw the limitations it was imposing on the freedom of exchange transactions as rapidly as conditions permitted. The authorization to impose limitations would expire whenever the Fund formally declared the scarcity to be at an end.200

A declaration of scarcity would imply criticism of a member’s policies and would result in severe consequences for it. For these reasons, and probably because a declaration has never been clearly justified for economic reasons, the Fund has made no use of the scarce currency clause. Even if there had been a better case for invoking the clause, the Fund’s distaste for discrimination and for the harsh treatment of members would have been deterrents.

Nevertheless, the scarce currency clause has had historic importance. It contributed to confidence that the Articles would operate symmetrically in relation to members whether they were in persistent surplus or in persistent deficit in their balances of payments. In this way, the clause did much to facilitate agreement in the negotiation of the Articles.201

Member’s Ultimate Authority

The provisions regulating the par value system struck a balance between the authority over exchange rates conferred on the Fund and the authority retained by members. White and Keynes favored different distributions of authority, with White proposing more authority for the Fund than Keynes was willing to concede. White was affected by the belief that the United States might be the future victim of competitive devaluation and discrimination, and he wanted the Fund to have enough authority to resist these practices.

The authority retained by members over exchange rates for their currencies was safeguarded by a number of provisions in the original Articles:

1. Only a member was entitled to propose a change in the par value of its currency.202 This rule meant that the Fund could not make a change by fiat or take a decision to propose a change. The Managing Director, however, was not debarred from discussing with a member the advisability of a change in the par value of its currency. Nor was the Executive Board debarred from discussing the appropriateness of a member’s par value if, for example, the member wished to use the Fund’s resources. In these circumstances, a member’s currency was likely to be overvalued. If a member’s currency was undervalued, the symmetrical authority of the Fund, in theory, might be to declare the currency scarce if the demand for it threatened the Fund’s ability to supply it.203 It has been seen that the Fund has never made a declaration of scarcity.

The rule that a proposal to change the par value of a member’s currency could be made only by the member was subject to one exception. The Fund could decide that there should be uniform proportionate changes in the par values of the currencies of all members.204 A decision would amount to a change in the price of gold in terms of all currencies. If the Fund took such a decision, a member could inform the Fund within 72 hours after the decision that the par value of the member’s currency was not to be changed in accordance with the decision. The Fund never took a decision to change the price of gold.

2. If a member proposed to change the par value of its currency by an amount that, together with all other changes that had been made, exceeded 10 percent but did not exceed 20 percent of the initial par value, the Fund had to declare whether or not it concurred in the change within 72 hours if the member so requested.205 The purpose of this rule was to give a member some further room for adjusting the par value of its currency without the deterrence of delay by the Fund.

3. The Fund held that in determining the extent of a change necessary to correct a fundamental disequilibrium, the Fund would give the member the benefit of any reasonable doubt,206 whether or not the member was availing itself of the transitional arrangements.207 The Fund also decided that it would give “due consideration” to a member’s views regarding the political and social consequences of a change in the par value of its currency greater than the one proposed. “Due consideration,” however, did not mean automatic deference to the member’s views.208

4. The Articles also implied that a member would receive the benefit of the doubt on the necessity for a change. This implication was conveyed by the use of the word “concur” for the Fund’s positive reaction.209 The word suggested a degree of complaisance that would not have been conveyed by the word “agree” that was used in other contexts.210

5. The United Kingdom was anxious to have the principle accepted that a member had ultimate authority over the external value of its currency if the Fund and a member disagreed about a proposed change in par value. Keynes persuaded the United States and the Bretton Woods Conference to accept what he called the “Catto clause” because it had been suggested originally by Lord Catto, the Governor of the Bank of England.211

The Articles gave expression to the Catto clause in a provision that dealt with an “unauthorized change” of par value.212 If a member proposed a change in par value in circumstances in which the Fund was entitled to object, and the member made the change notwithstanding objection by the Fund, the member nevertheless was deemed not to be in violation of an obligation. The member was saved, therefore, from the odium that attaches to the violator of a treaty, but the member became ineligible automatically to use the Fund’s resources unless the Fund decided that the member should remain eligible. The Fund was not compelled to provide financial resources in support of a par value to which the Fund had objected. Support might be needed if the change was inadequate. Moreover, if the difference of opinion between the Fund and the member continued beyond a reasonable period, the Fund could require the member to withdraw from membership, although the Fund was not bound to take this step.

A member was shielded from the stigma of violation only if certain conditions were satisfied. First, the member must have consulted the Fund before making the unauthorized change. Second, the member must have proposed a fixed value for its currency and must have adopted that value. Third, the member must have declared that it was making the change to correct a fundamental disequilibrium.213 These conditions demonstrated the importance attached to the principles of international scrutiny, fixed exchange rates, and stability.

Only one unauthorized change of par value took place during the history of the par value system. The member that made the change became ineligible to use the Fund’s resources, and although the period of ineligibility was prolonged, the Fund did not require the member to withdraw.

Section IV Proposals to Reform Law on Exchange Arrangements

United States Announcement of August 15, 1971

On August 15, 1971 the President of the United States announced that he had instructed the Secretary of the Treasury to suspend temporarily the convertibility of the U.S. dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States. The President declared that the United States, in full cooperation with the Fund and the countries that traded with the United States, would press for the necessary reforms to set up an urgently needed new international monetary system. Stability and equal treatment were in the best interests of all countries. He was “determined that the American dollar must never again be a hostage in the hands of the international speculators.” 214 To protect the dollar, improve the U.S. balance of payments, and increase U.S. exports, he was imposing a temporary additional tax of 10 percent on all imports into the United States.215 The Secretary of the Treasury informed the Fund that the United States was no longer undertaking to buy and sell gold freely with the monetary authorities of other members for the settlement of international transactions under the second sentence of Article IV, Section 4(b) of the Articles.

The disequilibrium in the international monetary system had become massive. It had provoked speculative movements in which billions of U.S. dollars had been exchanged for other currencies within the period of a few days. These movements had greatly increased the holdings of dollars by the monetary authorities of other countries. The reserve assets of the United States had been reduced, and it did not wish to see them reduced even further.

The effect of the announcement was that all currencies floated. The President and the Secretary of the Treasury were emphatic that the U.S. dollar had not been devalued and that the par value remained at $35 per ounce of fine gold. The depreciation or the appreciation of the dollar against the currencies of other members would be determined by what those members did in relation to the dollar.

The action by the U.S. Administration, and its analysis of the circumstances that had prompted the action, could not lead to the conclusion that other members were bound by the Articles to maintain the effectiveness of established parities with the dollar. Each member, it has been seen, was obliged to maintain the effectiveness of the par value of its own currency, in accordance with the principle of each member’s responsibility for its own currency. The observance of this obligation by each of the members whose currencies were exchanged in transactions ensured that the parity between the two currencies was maintained. A member could not transfer its own responsibility to other members and look to them to maintain the effectiveness of parities.216 The United States had ceased to maintain the effectiveness of the par value for its currency because it was no longer prepared to buy and sell gold freely in accordance with the Articles, and it had not adopted other appropriate measures to ensure that transactions within its territories involving dollars were carried out at exchange rates within margins consistent with the Articles. A member was entitled to withdraw an undertaking it had given to buy and sell gold freely, but it had then to adopt other appropriate measures to perform its obligation on exchange rates because it was no longer deemed to be performing this obligation by means of the undertaking.

The refusal of the United States to take other appropriate measures was not the only violation of its obligations. A further violation was its refusal to convert official holdings of U.S. dollars by other members in accordance with one of the obligations of convertibility under Article VIII, Sections 2, 3, and 4, which will be discussed in Section VIII. These obligations were independent of the undertaking to buy and sell gold freely if that practice was undertaken and they were not replaced by the practice.

The structure of the par value system was shattered by the repudiation of the norm on which it had rested, namely, maintenance of the effectiveness of the par value of the U.S. dollar by means of gold transactions. Other members were not willing to go on using their reserves to maintain the legal parities with the dollar by intervention in the exchange markets. Nor were they willing to revalue their currencies so as to relieve the United States of any contribution to a realignment of exchange rates by means of a devaluation of the dollar.

On December 18, 1971 the so-called Smithsonian Agreement was entered into for the realignment of exchange rates among certain leading currencies. On the same date, the Fund adopted a decision on central rates and wider margins that was to apply pending the return to legality under the existing or amended Articles.217 The decision was intended to establish a degree of order in the exchange markets by formulating certain practices that the Fund recommended and that members might wish to follow, even though these practices could not be treated as valid under the Articles. The recommended practices would give members more flexibility than was permitted by the exchange rate provisions of the Articles.

The main practices were, first, “central rates,” which could be defined in terms of gold but did not have to comply with the provisions of the Articles or of domestic law on the establishment of par values; and, second, margins for exchange transactions that were wider than those prescribed by the Articles. The underlying belief was that a temporary regime of this character might be validated in more or less the same form by eventual amendment of the Articles. The United States undertook, as part of the Smithsonian Agreement, to place before Congress and the Fund a proposal to devalue the dollar to $38 per ounce of fine gold. The United States did not undertake, as part of the Smithsonian Agreement or by subsequent commitment, to convert other members’ official holdings of dollars into gold or other reserve assets. The defense of exchange relationships with the dollar, to the extent that these relationships were defended, was undertaken by other members.

The assumption of the Smithsonian Agreement was that the international monetary system would return to what was described as a regime of stable but adjustable par values, but this assumption soon proved to be unfounded. There is no need to recall the events that brought about a general return to floating in March 1973, but with a joint float against the dollar of the currencies of some members of the European Community under their arrangement on common margins for exchange rates in transactions between their currencies (the “snake”).218

Committee of Twenty: U.S. Proposals

The Committee of Twenty held its inaugural meeting on September 28, 1972, and reported to the Board of Governors with an Outline of Reform on June 14, 1974. The Committee’s discussions were an international debate on the international monetary system at a level of ministerial and official responsibility that was unprecedented, at least since the Bretton Woods Conference. It is useful to recall the position taken by the United States in the deliberations of the Committee because of the weight of that country in the international economy and because of the influence exerted by the United States in the negotiation of the Second Amendment.

An implication of the par value system was that members would maintain reasonably stable prices and costs so as to avoid large and persistent surpluses or deficits in their balances of payments. If an imbalance were to occur, members were expected to follow policies that would eliminate it, and if measures taken for this purpose did not succeed, members would find it necessary to change the par value of their currencies. The United States did not succeed in maintaining reasonable stability of prices and costs. It suffered, therefore, from a persistent deficit in its balance of payments, but, for various reasons, it was reluctant to propose a change in the par value of the dollar. One reason was the instability that would be produced by a devaluation of the central currency of the international monetary system. Some people even believed in the myth that the Articles prevented a change in the par value of the dollar. This belief was produced by a confusion between the dollar as legal tender and the dollar of the weight and fineness of July 1, 1944 as a denominator equivalent to an amount of gold.

The United States had negotiated the original Articles in the belief that it would be in persistent surplus in its balance of payments and, therefore, that the United States would need the protection of tight obligations for all members that would prohibit retaliatory policies directed against the United States. It was ready, however, to behave as a “good” creditor country, and as an earnest of its goodwill it accepted the scarce currency clause under which the Fund could approve discrimination against the dollar in exchange transactions if the United States proved to be a “bad” creditor country. By the time the United States presented its plan for reform of the international monetary system to the Deputies of the Committee of Twenty in November 1972,219 the United States had concluded that the successive deficits in its balance of payments in recent years were likely to continue unless it could be protected by adequate new provisions.

The United States presented a brief for the contention that its central position in the international monetary system had forced it to compete against other members with one hand tied behind its back.220 The international monetary system had failed to provide adequate inducements for members to achieve and maintain balance of payments equilibrium, defined as a situation in which external payments were in reasonable balance at normal levels of employment and economic activity, and without the inappropriate use of controls. It had become possible, however, to prolong deficits by borrowing, which in the case of the United States took the form of increased holdings of U.S. dollars by the monetary authorities of other countries, and by controls. Countries in surplus had been able to accumulate reserves more or less indefinitely and had been under even less pressure to adjust, although there had been a tendency to impose controls on the inward flow of capital.

Surplus in the balance of payments had been pursued as more comfortable and more desirable than deficit. A country in surplus could avoid the politically embarrassing actions that a country in deficit had to take in order to adjust its balance of payments. A strong trading position was often regarded as a means to domestic economic expansion and the preservation of full employment. A persistently strong currency and large reserves were regarded as bulwarks against unexpected external influences and as symbols of prudent economic management. Moreover, before the creation of the SDR, the international monetary system had depended on balance of payments disequilibrium, because the desired increase in global reserves over time could be achieved only by deficits in the balance of payments of the United States and surpluses in the balance of payments of other countries.

The dangers of incentives for surplus had been recognized in the prohibition of competitive devaluation. Although there had been no marked resort to competitive devaluation, countries had more or less consciously sought surpluses and had adapted their economic policies with this aim. At the least, the international community had tolerated surpluses while regarding deficits as a source of concern and the need for ameliorative action. Nothing in the system ensured compatibility of the balance of payments objectives of countries. Nor were there agreed criteria to determine whether and when deficit or surplus countries should take the initiative to adjust.

The pressure to achieve surpluses and the undervaluation of currencies as a means to this end had produced a pattern of surpluses and deficits in which the United States as the largest economy, and with the least flexibility to change the exchange rate for its currency, had been in a position of persistent deficit in its balance of payments. Devaluation of the U.S. dollar had been considered an inappropriate remedy because of the disturbing consequences devaluation would have on the stability of the system. In the negotiation of the Smithsonian Agreement, the attitudes of the trading partners of the United States had seemed to confirm their reluctance to forgo a surplus position. Nevertheless, some countries had regarded the United States as having a privileged position because, in their view, the accumulation of dollars by other countries as a result of US deficits had relieved the United States of the pressure to adjust that other deficit countries had been forced to endure.

The United States had had less flexibility than other members, not only because of the widespread belief that the central role of the U.S. dollar in the international monetary system precluded devaluation but also because the United States could not be certain that if there were to be a change in the par value of the dollar other countries would forbear from making corresponding changes that would deprive the United States of the benefit of the devaluation.

The United States had had less flexibility than other members for the additional reason that they intervened in the exchange markets with U.S. dollars while the United States refrained. As a result, other members, and not the United States, determined the movement of exchange rates for the U.S. dollar within the permissible margins. Furthermore, the effective band for movements in exchange rates for the dollar was narrower than the band for movements in exchange rates in exchange transactions that involved the currencies of any two members that used the U.S. dollar as their intervention currency. The margins for exchange rates in these transactions were the cumulation of the margins for each currency against the U.S. dollar. This cumulation produced broader margins around parities and therefore a more extensive band within which exchange rates could shift and give more maneuverability in efforts to achieve adjustment.

The proposals of the United States, based upon its exposition as summarized above, had primary importance not only because of its economic and financial position in the world but also because no similarly comprehensive proposals were advanced by any other country. The United States explained that some of the objectives that it hoped to achieve by its proposals for reform were symmetrical treatment as between countries in surplus and countries in deficit in their balances of payments, the allocation of responsibility for adjustment of the balance of payments, including adjustment by changes in exchange rates, and equal flexibility for all members, including the United States, in the means available for adjustment.

The United States took as the point of departure for its proposals the proposition that neither full national discretion nor the discretionary authority of a central institution could promote adjustment satisfactorily if it were the sole approach to a solution. National discretion alone could not ensure an equitable sharing of responsibilities. International discretionary authority as the solution could lead to stalemate or political decisions. Moreover, this latter approach called for at least the appearance of a greater cession of authority to an international organization than countries would be willing to make. A third approach, “objective indicators,” could not point unerringly to the country that should undertake adjustment. A combination of all three possible solutions was the answer.

The combination would involve objective indicators to note the existence of an undesirable degree of balance of payments disequilibrium, to locate it, and to create a strong presumption that effective policies of adjustment should be initiated by the country to which the indicators pointed. The country should have substantial discretion to determine the selection of those policies, which might include a change in par value. The policies might also include the floating of a currency if specified standards of behavior were observed at all times while the currency was floating. International consultation would take place to determine the applicability of the indicators to particular situations and to consider exceptional cases in which the indicators might be overridden. Particular situations in which the applicability of indicators might have to be modified could include the situation of a group of countries that were moving toward monetary union or the situation of oil producing countries that were holding external assets as long-term investments and not as reserves for the support of their currencies.

The U.S. proposals were based on the assumption that most countries would want to maintain established values for their currencies in conjunction with the convertibility of foreign official holdings of these currencies into international reserve assets. In such a system, a disequilibrium in a member’s balance of payments would become manifest in changes in the member’s reserves. The main objective indicators, therefore, should be persistent movements of reserves in one direction or the other.

The Fund would decide what the appropriate normal stock and rate of increase of global reserves should be, and would take similar decisions for the reserves of each member within the global framework. Certain points would be established above and below each country’s base level of reserves as determined by the Fund. Pressures to adjust would be applied against a member graduated in severity according to the distance of other predetermined levels from the base level. The Fund might prevent the automatic application of pressures if a member reached agreement with the Fund on a program of adjustment.

The U.S. proposals did not earn the support of other members. Some feared, for example, that the actual pressure on them to adjust would be greater than it would be on the United States because of the size of the fluctuations in reserves that would be permissible for the United States. A second cause for concern was that the United States might decide to let the dollar float, in which event, under its proposals, it would not have to convert holdings of dollars by other members. They would not be released from their obligations of convertibility, however, if they decided to go on maintaining par values among themselves. A third concern was that although the proposals of the United States included an obligation of convertibility by a member maintaining a par value for its currency, conversions of foreign official holdings of the currency would take place only if a member holding balances of the currency demanded conversion. Other Members feared, therefore, that the experience of the past would be repeated: political reasons would deter them from requesting the conversion of dollar balances they did not want to retain in their reserves. Critics of the proposals of the United States worried more about asymmetry between the issuers of reserve currencies, among which the United States was paramount, and other members in the operation of the international monetary system, while the United States was more concerned with asymmetry between members in surplus and members in deficit in their balances of payments.

Many members were cool toward the proposals of the United States on objective indicators and pressures. Most European members supported return to a par value system and feared that objective indicators might provoke speculation because they would be taken to predict changes in par values. Some countries suspected that there might be excessive automaticity in the application of pressures notwith-standing the Fund’s authority to countermand the application of them in some circumstances. Other countries held the opposite view. They suspected that if the Fund had to decide whether pressures should or should not be applied, it would decide invariably or too frequently that they should not be applied, particularly if the question was whether they should be applied against a powerful country.221

The proposals of the United States and the reactions of other countries raised fundamental issues of the international monetary system, international monetary law, and the powers of the Fund. First, an international monetary system, law, or organization will not be considered satisfactory unless it operates equitably in its treatment of discrete classes of members. Equitable treatment is expressed as the symmetrical treatment of classes.222 What determines a class depends on the perception by countries that they have common interests. Some of the classes that have affected the law and practice of the Fund and projects of reform have been developed and developing Members, different groups of developing members, reserve centers and other members, members in surplus and in deficit in their balances of payments, and members that peg their currencies in some way and members that allow their currencies to float independently.

Symmetry requires a distribution of rights and duties, or of benefits and burdens, that is considered fair. Such a distribution can be achieved most effectively, and probably only, by international agreement and the international administration of agreement. A second issue then arises: how much of the agreement should take the form of fixed rules and how much should be left to the discretion of the administering organization?

These issues, and other issues, such as the role that should be assigned to “pressures” or “sanctions,” are not confined to the international monetary system. The problems must be faced in all international organizations of widespread membership, but the solutions are not the same for all of them.

Outline of Reform

In Part I of the Outline of Reform, the Committee of Twenty indicated the general direction in which the Committee believed that the international monetary system could evolve in the future. Part II set forth the immediate steps that could be taken before final agreement on a reformed international monetary system was reached and made fully effective. The Annexes to the Outline of Reform were prepared by the Chairman and Vice-Chairmen of the Committee’s Deputies to record the state of the discussion on some aspects of reform on which the Committee had not reached agreement.

In Part I of the Outline of Reform, the Committee described the exchange rate mechanism on which it had agreed as part of a reformed international monetary system.223 Exchange rates would continue to be a matter for international concern and consultation. Competitive depreciation and the undervaluation of currencies would be avoided. The exchange rate mechanism would be based on stable but adjustable par values. Members, whether in surplus or in deficit in their balances of payments, would act promptly to make appropriate changes in the par values of their currencies. Changes would be subject to approval by the Fund, but it might establish simplified procedures, with appropriate safeguards, for approving small changes.

Members would be obliged to maintain specified maximum margins for exchange rates in transactions involving their own currencies, except when members were authorized to adopt floating rates. The Fund would be authorized to vary the margins by decisions taken with a special majority of the total voting power. The Fund did not have this power under the original Articles. Exchange margins and intervention should be more symmetrical than they had been. (This principle expressed a reaction against the past practice of nonintervention in the exchange markets by the United States and the narrower margins that had applied to transactions involving the U.S. dollar, as explained earlier in the discussion of the U.S. proposals.)

Countries might adopt floating rates “in particular situations,” 224 subject to authorization, surveillance, and review by the Fund. The phrase “in particular situations” was deliberately vague because of the remaining differences of opinion among members on floating. Authorization to float would relieve a member of the obligation to maintain margins for exchange rates. The Fund would authorize the floating of a member’s currency in accordance with whatever provisions were adopted by amendment of the Articles, and on conditions that the member undertook to act in conformity with guidelines that the Fund would establish for the management of floating. Guidelines would be established also for intervention in a floating currency by other Members. The intention was that other members, in their intervention practices, should not frustrate a member’s management of the exchange rate for its floating currency. The Fund would be empowered to withdraw authorization to float if the issuing member failed to act in conformity with the Fund’s guidelines or if the Fund decided that continued authorization would be inconsistent with the international interest.

Annex 3 of the Outline of Reform set forth two possible approaches to a more symmetrical system of exchange margins and intervention.225 One approach relied on “multicurrency intervention,” according to which a number of members, including those members whose currencies were widely traded in the world’s foreign exchange markets, would meet their obligation to observe margins for exchange rates by intervening in each other’s currencies at the limits of the margins. For exchange transactions between the currencies of members participating in this arrangement, the margins would be uniform at 4½ percent above or below the parity between the currencies. A member not participating in this arrangement could meet its obligation by intervening with the currency of a participating member within margins of 2¼ percent on either side of the parity between the currencies of the two members. Multicurrency intervention would provide the United States with obligations and benefits that were equivalent to those borne or enjoyed by other members. In addition, the United States would be able to float the dollar without destroying a par value system, because each participant would intervene to maintain a pegged relationship between its currency and each other currency among the members that continued to maintain par values.226

The other approach in Annex 3 was similar to the practice of the purchase and sale of gold as described in Section III, except that SDRs would perform the role of gold. The transactions would take place within margins of 2¼ percent on either side of the par value, which would be expressed in terms of the SDR as the common denominator of the par value system.

Annex 4 of the Outline of Reform dealt with various matters relating to floating currencies.227 An illustrative example of how the Fund could proceed when considering whether to authorize the floating of a currency is of interest. The Fund, after taking account of all factors relevant to a member’s situation, would decide whether floating would be consistent with the international interest and would be more likely to contribute to international payments equilibrium than an attempt to establish, or to continue to maintain, a par value. In arriving at its decision, the Fund would give special consideration to

(i) conditions of particular uncertainty regarding the future development of the country’s balance of payments, and whether floating in these conditions might facilitate transition to a par value;

(ii) very large disequilibrating capital flows; and

(iii) a rate of price inflation that was substantially different from the rate of the member’s main trading partners or competitors and that was expected to continue to be substantially different for some time to come.228

The discussion in the Outline of Reform of methods to ensure timely and effective adjustment of the balance of payments 229 found a modified role for objective indicators. Members would aim to keep their reserves within limits that would be agreed with the Fund from time to time and that would be consistent with the volume of global liquidity. Reserve indicators would be established on the basis of these agreements, but many matters relating to indicators were left to Annex l.230 The Fund would undertake special examination of a member’s situation if a disproportionate movement in its reserves had taken place and if the imbalance had substantial international repercussions. The Fund would assess the member’s situation in the light of all relevant considerations, which meant that the assessment would be based on judgment and would not be reached automatically as the result of objective indicators, although the Fund would attach major importance to disproportionate movements of reserves.

Part II of the Outline of Reform recognized an interim period before a full reform came into existence. During this period, the Fund would seek to gain further experience with objective indicators, including reserve indicators, on an experimental basis, as an aid in assessing the need for adjustment, but the Fund would not use such indicators to establish any presumptive or automatic application of pressures. The determination of what was a disproportionate movement in reserves would be made in the light of the broad objectives of members for the development of their reserves over a period ahead, as discussed with the Fund. The pressures that might be applied to members in large and persistent imbalance would continue to be those already available to the Fund.231 The converse was the proposition really intended: the Fund should not try to create new pressures during the interim period. The Board of Governors adopted a resolution on immediate steps, in part of which it endorsed these recommendations of the Committee of Twenty.232 The Fund has taken no action, however, to establish reserve or other objective indicators, whether experimentally or permanently.

Among the possible amendments of the Articles to give effect to certain immediate steps, the Outline of Reform listed a proposal “(b) to enable the Fund to legalize the position of countries with floating rates during the interim period.” 233

Many of the ideas in the Outline of Reform, particularly in Part I, have influenced the provisions of the Second Amendment on a possible future par value system, although not all the ideas have been followed. The par value system that could be called into operation under the Articles is discussed in Section VII.

Section V Present Law on Exchange Arrangements

Abandonment of Interim Period

It has been seen in the preceding Section that on the subject of exchange arrangements the Outline of Reform foresaw amendments of the Articles that would apply until a full reform of the international monetary system could be instituted. During the interim period, the floating of currencies that was taking place and that was inconsistent with the original Articles would be validated by amendment. After the interim period, a system of stable but adjustable par values would be part of the full reform, but the validation of floating would continue to be possible in particular situations. The implication was that particular currencies might float from time to time but that there would not be general floating.

The Executive Board began to consider amendment of the Articles as early as April 1974, even before the Committee of Twenty reported in June 1974. The earliest approach to an amendment on exchange arrangements proposed that the par value provisions of the original Articles should be retained but that the Fund should be empowered to authorize a member at any time to let its currency float. All the provisions on par values, including this modification, could be suspended, however, for a specified period, which the Executive Board could terminate before expiry or could extend.234 This proposal was followed by an alternative under which there would be no interim period of specified length during which the par value provisions would be inapplicable, but instead the Articles would authorize the Fund to decide when the par value provisions would begin to apply.

Various problems began to emerge on the relative importance to be attributed to effective par values and floating. The result was a bewildering range of proposals. According to one view, floating would be an exception to the rule of effective par values and would be permitted, under individual or general approval by the Fund, only as a temporary measure, and on conditions intended to ensure return to an effective par value for the currency of each member. Under another view, members would be free to allow their currencies to float for as long as they wished, without having to obtain the approval of the Fund, provided that members observed guidelines that the Fund would promulgate. A variant of this latter view would permit the Fund to define the situations in which members would be free to resort to floating. These various proposals related to the postinterim period, but there was also a difference of opinion on whether there should be an interim period.

A later proposal was made that the Fund should be authorized to terminate the interim period by a high majority of the total voting power if the Fund found that a large number of members having a substantial share of all international transactions were able and willing to establish and maintain par values for their currencies.

Members continued to propose modifications of all these ideas as the negotiations wore on, including a proposal that provision should be made for the looser concept of central rates as well as for par values. By April 1975, the details of two extreme approaches had been made clear by drafts submitted by France and by the United States. Under the French draft, there was no interim period. Par value provisions would apply at once. The Fund would be able, in exceptional circumstances and on the request of a member, to authorize the member to float its currency, for such periods and subject to such conditions as the Fund determined. The U.S. draft also dispensed with an interim period. A simple provision would authorize each member to apply the exchange arrangement that it considered best suited to its situation. The Fund would exercise surveillance over policies affecting exchange rates, and it would adopt principles for the guidance of members with respect to those policies.

The idea of an interim period made some members reluctant at first to proceed with any amendments of the Articles because a full reform of the kind they favored was not feasible until after an indeterminate and possibly prolonged interim period. The kind of reform that would be desirable at that future time could not be foreseen. Their reluctance was overcome by the strong desire for legality on the part of some powerful members, including the United States, and also because the Sixth General Increase in the quotas of members was under way.235 It would be embarrassing for governments to ask legislatures to take action on an increase in the national quota and subscription under the Articles of an organization in which governments were failing to perform fundamental obligations. With this change in attitude it began to be accepted that amendments need not be confined to those that had been listed as immediate steps in Part II of the Outline of Reform. The idea then emerged that it was desirable to undertake a comprehensive amendment of the Articles under which the Fund would be able to operate without an express or implied limit of time and under which evolution of the Fund and the international monetary system would be possible without further amendment. The process of negotiation and amendment with so large and so diverse a membership was lengthy and wearisome, and there was no enthusiasm for a commitment to further amendment.

It appeared increasingly unlikely that a par value system could be restored immediately when an amendment of the Articles became effective. An important issue then was whether the amendment should emphasize that restoration of a par value system at some time was assured and that floating was a temporary expedient. The United States opposed an assurance of this kind and the implication that floating was less desirable as an exchange arrangement. The attitude of the United States had changed radically once it had become clear that economic conditions would prevent return to a system of stable but adjustable par values when the Second Amendment became effective. The United States had withdrawn its support for such a system and for objective indicators to make it work, and instead it favored freedom for members to choose their exchange arrangements, including freedom to float. The objective, however, was unchanged. Under a par value system, adjustment by surplus countries would have been ensured by objective indicators, graduated pressures, and the Fund’s surveillance over members’ exchange rate policies. Under a floating system, adjustment by surplus countries would be ensured by the development of appropriate exchange rates in the exchange markets and by the Fund’s surveillance over the exchange rate policies of members, including policies on intervention. The Fund would exercise surveillance over intervention to prevent members from interfering with the development of appropriate exchange rates.

The difference of opinion between the United States and European countries on the most desirable form of exchange arrangements for the future reflected their positions in the world economy. For the United States, the external sector, although substantial in absolute terms and growing, was a relatively small part of the total economy. The United States, therefore, preferred freedom to determine its domestic policies without the constraint imposed by maintenance of a par value for its currency. For European members, the external sector was a much larger proportion of the total economy, and the exchange rate had a heavier impact on domestic economic conditions. They preferred the assurance of greater stability in the exchange rate, which, of course, had been a principal objective of the par value system.

The United States and France were able to agree that an immediate return to a par value system was impracticable because of the widespread instability of domestic conditions, including high and diverse levels of inflation, in the leading industrial countries. They could agree, therefore, that the achievement of orderly domestic conditions was essential for the success of any exchange arrangement. This agreement contributed to a solution notwithstanding the difference in their attitudes to the assurance and timing of a later return to a par value system. Their understanding that orderly domestic conditions are essential is a principle of the compromise finally reached on the exchange rate provisions of the Second Amendment.

The problem for the membership of the Fund was the choice to be made among three possible solutions that were being advocated: a par value system after an interim period with derogations after that period in favor of central rates or other exchange arrangements including floating, an immediate par value system with derogations in favor of floating if permitted by the Fund, and full freedom to choose exchange arrangements with no provisions on par values. The choice seemed to narrow down to the French preference for the second solution and the American preference for the third, but this narrowing did not make it easier to choose between the two options. The problem proved to be intractable for the Executive Board and even for the Interim Committee, in which there is greater opportunity for the interplay of political considerations.

The agreement reached in the Interim Committee, and announced in its communiqué of August 31, 1975,236 on the controversy about the future treatment of gold helped to bring about a solution of the exchange rate problem because the agreement on gold incorporated elements that had been strongly advocated by France. These elements were something of a quid pro quo for the acceptance of elements that the United States considered important in its proposal on exchange arrangements. Nevertheless, the communiqué of August 31, 1975 announced no solution of the problem of exchange arrangements because the Interim Committee had requested the United States and France to work out a compromise that both could accept, with the implication that such a compromise would be satisfactory to other members, although no assurance of uncritical acceptance was given.

France and the United States succeeded in reaching a compromise. The fact was noted with approval in the communiqué issued on November 17, 1975 by the Heads of State and Government at their summit meeting in Rambouillet. The agreement between the two countries had been initialed on the same date,237 but the details were not spelled out in the communiqué. By the time the Interim Committee met in Jamaica on January 7–8, 1976, the agreement had been put into the form of a draft amendment of the Articles and had been revised to a modest extent by the Executive Board. The draft was submitted to the Interim Committee and was endorsed in its communiqué of January 8, 1976.238

The main feature of the compromise is the freedom of members to choose their exchange arrangements, as advocated by the United States. The interests of France have been met, to some extent, by giving the Fund authority to call into operation a par value system as elaborated in the Articles. There is no express or implied superiority of the par value system and therefore no assurance that it will be put into operation at some particular date or ever.

The legal provisions now in effect under the Second Amendment will be examined in this Section and the provisions on par values will be discussed in the next Section. In both Sections, the subject will be treated under the same subheadings as appear in the discussion of the original par value system in Section III.

Principles of Provisions Now in Operation

International Concern

The principle that exchange rates are the subject of international concern, and therefore subject to international scrutiny, continues to be a principle of the Articles, even though members are free to choose their exchange arrangements and to determine the external value of their currencies. Members must observe certain obligations of behavior, however, in the exercise of this freedom. International concern is not relaxed in these conditions, and it is arguable that scrutiny must be even closer now than under a par value system.

The present freedom of members is recognized by the declaration that, under an international monetary system of the kind prevailing on January 1, 1976, the exchange arrangements that members may adopt include:

(i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or

(ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or

(iii) other exchange arrangements of a member’s choice.239

Category (iii), with the deletion of the word “other,” could have made categories (ii) and (iii) as written unnecessary. Category (i), however, was spelled out in order to prohibit the use of gold as a denominator for maintenance of the external value of a member’s currency because a gradual reduction in the role of gold in the international monetary system is an objective of the Second Amendment. The denominator, with this one exception, may be selected freely by individual members that wish to peg their currencies. Category (ii) was spelled out in order to place beyond controversy the freedom of members to enter into an agreement such as the European arrangement on common margins for exchange rates (“the snake”).

The provision that gives members freedom of choice refers to an international monetary system of the kind that prevailed on January 1, 1976. The principal purpose of this reference is to recognize that a par value system might come into operation at a future date, although Section VII shows that members will have broad, although not complete, freedom of choice even under that system. In addition, the reference takes tacit account of a subsection under which, to accord with the development of the international monetary system, the Fund, by an 85 percent majority of the total voting power, may make provision for general exchange arrangements.240 Under this authority, the Fund may recommend to members that they adopt a particular kind of exchange arrangement. Members would not be bound to act in accordance with a recommendation notwithstanding the phrase “make provision for,” because the Articles state that recommendations will not limit the right of members to have exchange arrangements of their choice that are consistent with the purposes of the Fund and the general obligations of members with respect to exchange arrangements. This right was emphasized to make it clear that new obligations could be imposed on members only by amendment of the Articles and not by decisions of the Fund.

General exchange arrangements are not defined. An example might be “central rates” on the models developed by the Fund in the period between the Smithsonian Agreement and the effective date of the Second Amendment.241 Central rates were exchange arrangements involving a degree of fixity but more flexibility and adaptability than were characteristic of par values. Classification of a practice as a general exchange arrangement or as an exchange policy under the Second Amendment might be controversial. If a practice like target zones for exchange rates was contemplated, the issue would be whether the practice was a general exchange arrangement, which the Fund could recommend only by a decision taken with 85 percent of the total voting power, or whether the practice was an exchange policy, which therefore could be the subject of a specific principle for the guidance of the exchange rate policies of members. The Fund can adopt a specific principle by a majority of the votes cast. The problem of classification would be resolved by a decision taken with a majority of the votes cast.

It is not clear what exchange arrangements as such, other than maintenance of the external value of a currency in terms of gold, would be inconsistent with the purposes of the Fund or the obligations of members on exchange arrangements. The caveat in favor of consistency may refer to such proscribed exchange arrangements as multiple currency practices and discriminatory currency arrangements. If the caveat refers also to the behavior of members in applying the exchange arrangements of their choice, the caveat to that extent would not refer to the choice of exchange arrangements as such.

Although recommendations on general exchange arrangements are not binding on members, the high majority of the total voting power that is necessary for a decision to address a recommendation to members makes it likely that they would observe the recommendation. It is unlikely that they would submit themselves to the moral pressure of a recommendation if they intended to ignore it. Finally, the general exchange arrangements that may be recommended do not include a par value system. The Fund’s decision to call that system into being is the subject of a different provision.242

The exchange arrangements that members have been applying are extremely varied. At the end of March 1981, 39 currencies were pegged to the U.S. dollar, 14 to the French franc, 1 to sterling, and 4 to other currencies. Fifteen currencies were pegged to the SDR, and 21 to a variety of other composites. Some of the composites were the SDR together with a currency not in the basket that constitutes the SDR, or a basket of internationally traded currencies weighted with reference to a member’s external transactions, or a basket of currencies used in a member’s settlements weighted according to its use of the currencies. The exchange rates for 4 currencies were adjusted according to an individual set of indicators. Eight members maintained cooperative arrangements among themselves. Thirty-eight members maintained other exchange arrangements of great diversity.243

The international interest in exchange arrangements and exchange rates is responsible for a provision that requires the Fund to oversee both the international monetary system in order to ensure its effective operation and the compliance of each member with the general obligations of members regarding exchange arrangements.244

In order to fulfill these functions, the Fund is directed to exercise firm surveillance over the exchange rate policies of members, and to adopt specific principles for the guidance of all members with respect to those policies.245 Each member must provide the Fund promptly with information about any changes in its exchange arrangements246 and all information necessary to enable the Fund to conduct firm surveillance. When requested, a member must consult with the Fund on the member’s exchange rate policies.247 The principles adopted by the Fund and certain aspects of the Fund’s procedures for surveillance are discussed under the next heading of this Section.

Something should be said here, however, on the subject of two basic decisions of the Fund on procedures.248 The first decision, which sets forth specific principles for the guidance of members, requires members to consult the Fund at regular intervals, which in principle means annually.249 The consultations include consideration of the observance by members of both the principles and the general obligations of members with respect to exchange arrangements. No later than three months after the end of the discussions between a member and the staff, the Executive Board must reach “conclusions” and thereby complete the consultation. A limited period is prescribed so that conclusions will not become stale and lose their practical effect as the result of delay by the Fund or a member. The conclusions take the form of the Executive Board’s endorsement, with modifications if insisted on, of the summing-up of the Board’s discussion as delivered by the Managing Director, who is also Chairman of the Board.250 The word “conclusions” instead of “decisions” has been chosen because of the sensitivity of official animadversions on exchange rates, and the risk of speculation that they might provoke if they were to become public. Notwithstanding this nuance of procedure, the Executive Board’s conclusions have the same legal character as admitted decisions.

The first decision lists certain developments as among those that might indicate the need for discussion with a member on its observance of the specific principles. Once again, the language is guarded, this time so as to avoid a prima facie impression that a member may not be observing the principles. The developments have relevance for both periodic consultations and special discussions.251

If, in the interval between periodic consultations, the Managing Director, taking into account any views that may have been expressed by members, considers that a member’s exchange rate policies may not be in accord with the Fund’s specific exchange rate principles, he must raise the matter informally and confidentially with the member. He must conclude promptly whether there is indeed a question of the observance of the principles. If he concludes that there is a question, he must initiate and conduct a confidential discussion with the member within the framework of the Articles.252 The discussion at this stage although confidential is no longer described as informal. Nevertheless, the word “discussion” is used in preference to “consultation” because the procedure of consultation with the Fund is understood to be one that terminates with a debate and decision of the Executive Board.

A discussion, however, need not be carried to this length. As soon as possible after the completion of the discussion conducted by the Managing Director, and in any event not later than four months after its initiation, he must report to the Executive Board on the results of the discussion. If he is satisfied that the specific principles are being observed, he must advise all Executive Directors informally, and the staff reports on the discussion only when the next periodic consultation is held. The Managing Director does not place the matter on the agenda of the Executive Board unless the member with which the discussion was conducted requests him to follow this procedure.

The Fund adopted the second decision 253 on surveillance because resort to the procedure of the first decision may create the impression, even though faint, that the member is at fault. The language of the first decision was drafted so as to avoid even a prima facie suggestion of criticism, but it seemed advisable to find an alternative procedure that was without any risk of misunderstanding. The second decision, therefore, concentrates exclusively on the importance of what is happening without any implication that developments may be worrisome. The second decision, however, does not modify or rescind the first decision, so that the Fund has a choice of procedures.

Under the second decision, whenever the Managing Director considers that a modification in a member’s exchange arrangements, whatever they may be, or in its exchange rate policies, or in the behavior of the exchange rate for its currency may be important, or may have important effects on other members, the Managing Director must initiate an informal and confidential discussion with the member before the next periodic consultation. “Behavior” of the exchange rate may be either mobility or immobility in the exchange rate. If the Managing Director considers, after this first discussion, that the matter is indeed important, he must initiate an ad hoc consultation with the member. He must report to the Executive Board, or informally advise Executive Directors without placing the matter on the agenda of the Executive Board, about the consultation as promptly as circumstances permit after conclusion of the consultation. The caution with which the surveillance of exchange rates is approached has placed increased responsibility on the Managing Director.

Consultations with individual members are conducted within the framework of the views that the Fund reaches in its examinations of the world economy. These examinations are conducted periodically because economic conditions are in constant flux. The task of surveillance of the worldwide economy and of individual economies is complicated by different opinions among members on the role of the exchange rate and the consequences of variability or volatility. Each member is expected to cooperate by taking serious account, when forming its policies, of the conclusions reached by the Fund in consultations with the member.

Stability Without Rigidity

Stability remains an objective of the present Articles, but stability of something different. Article I (iii) has not been amended, because of the unwillingness of members to grapple with the complications of modifying the purposes of the Fund. Therefore, it is still a purpose of the Fund “to promote exchange stability,” but the former obligation of members to collaborate with the Fund to promote exchange stability 254 has been amended. Each member now undertakes to collaborate with the Fund and other members “to promote a stable system of exchange rates.” 255

The new language is not clear, but the rationale of the change is well understood. It is that the former language attached too much weight to the steadfastness of exchange rates 256 and led to rigidity when there should have been change in the interest of adjustment. Under the new provisions, exchange rates should change if they are not in harmony with underlying conditions. The principal objective that members must pursue is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability. “Underlying conditions” is an expression that has provoked some inquiry, but at least it is clear that the aim is financial and economic stability and the avoidance of “erratic disruptions.” Intervention to prevent response of the exchange rate to underlying conditions, whatever they may be, will aggravate a member’s difficulties. If members attain financial and economic stability because proper policies have succeeded in establishing orderly underlying conditions, the result will be a stable “system” of exchange rates. An implication of the word “system” is that in these circumstances the exchange arrangements of members individually and as a whole will operate effectively and harmoniously. Another implication is that the international monetary system as now constituted will be durable. If developments in exchange rates are unsatisfactory, members may need to modify their policies to achieve stability but there should be no international crisis that would make it necessary to negotiate new provisions on exchange arrangements. The system exists; its effectiveness as a stable system depends on the conduct of members.

The new concept of stability appears in Article IV, Section 1, under the heading “General obligations of members”:

Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:

(i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and

(iv) follow exchange policies compatible with the undertakings under this Section.

This provision deals with exchange rates, in contrast to Section 2 of Article IV, which deals with exchange arrangements, while Section 3 deals with surveillance over exchange rate policies and applies to both rates and arrangements.

The obligations of members under Section 1 apply at all times.257 They apply to the exchange arrangements now in operation, they would apply to general exchange arrangements that the Fund might recommend to accord with the development of the international monetary system, and they would apply to the par value system under Schedule C of the Articles if the Fund were to call the par value system into operation.

The language of Section 1 that precedes the statement of members’ obligations has no independent normative effect. To avoid the impression that it has such an effect, the language begins with the word “recognizing” and not the words “each member recognizes,” which were suggested during the drafting of the provision. One reason why the latter formulation was rejected was that it might suggest too extensive a jurisdiction of the Fund over nonmonetary international relations and over the domestic policies of members. An objective of the United States and probably of some other governments was that members should have as much freedom as possible to determine domestic policies notwithstanding obligations of cooperation in international monetary matters.

Further evidence of the same objective is apparent in the formulation of the four particular obligations of members in Section 1. Subparagraphs (iii) and (iv) deal with exchange rate policies, and the obligations under these subparagraphs are expressed in mandatory language (“avoid,” “follow”). Subparagraphs (i) and (ii) refer to policies that are primarily domestic, and here the language is hortatory (“endeavor to direct,” “seek to promote”). The first decision on surveillance over the exchange rate policies of members states, however, that the appraisal of a member’s exchange rate policies must be made within the framework of a comprehensive analysis of its general economic situation and with the understanding that domestic as well as external policies can contribute to timely adjustment of the balance of payments.258 This statement refers to economic analysis and cannot modify the obligations as set forth in Section 1.

Developing members sought to introduce into Article IV, Section 1 mention of the need to take account of their special circumstances. This proposal was rejected because of the principle of uniformity in the obligations of members that has been a tradition of the Fund.259 Certain expressions have been accepted that are general in formulation and do not refer to developing members but would allow flexibility in relation to them. Among these expressions are “sound economic growth,” although not “economic development” as was proposed, and “reasonable price stability.” Even though developing members are mentioned in the Second Amendment for the first time in the history of the Articles,260 there continues to be no reference to the process of development by this class of members for fear of creating the misunderstanding that development is a purpose of the Fund.

The proper place for recognizing flexibility was deemed to be not in the definition of obligations, which were to be uniform for all members, but in the provision on the Fund’s surveillance of compliance with obligations. Therefore, the provision that deals with surveillance and specific principles for the guidance of the exchange rate policies of members concludes with this sentence:

These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.261

Even this sentence is applicable to all members and not to any one class of them.262 The sentence reproduces a concept of the original Articles in referring, in effect, to domestic social and domestic political policies, but not to economic or international policies. It is not always easy, however, to determine how a particular policy is to be classified among these categories.

One of the most troublesome problems for developing members in the drafting of Article IV, Section 1 was the reference to “orderly economic growth” and “reasonable price stability” in the first subparagraph. They were apprehensive that the Fund in dealing with these potentially contradictory concepts might favor stability rather than growth. It was agreed, therefore, to include the clause “with due regard to its circumstances.” Once again, however, the clause is not drafted so as to apply to developing members only.

The compromises that were made in the negotiation of the text were responsible for a number of obscurities. In addition to those mentioned already, there is the difficulty of distinguishing between “the essential purpose” and “a principal objective” 263 of the international monetary system. These phrases were meant to reflect the difference between the “ends” of the system and the “means” to be adopted by members to achieve the ends.

Article IV, Section 3 (b) requires the Fund to adopt specific policies for the guidance of “all members” with respect to their exchange rate policies. The emphasis on all members was intended to avoid the asymmetry of the guidelines for the management of floating exchange rates adopted by a decision of June 13, 1974.264 The decision had applied only to those members that were permitting their currencies to float independently, which meant that the currency was not pegged within reasonably narrow margins to any other currency or to a composite of currencies.265 The decision was adopted before the Second Amendment at a time when it was thought that in the reformed system of the future the Fund’s authorization would be required for floating because most members would be enforcing par values.266

The specific principles that the Fund must adopt are for the guidance of members with respect to their exchange rate policies and not their exchange arrangements or their polices that are too remote from exchange rates to be considered exchange rate policies. The choice of language was designed to avoid interference with the freedom of members to choose their exchange arrangements and their purely domestic policies. This caution is responsible also for the direction that the principles must be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice that are consistent with the purposes of the Fund and the general obligations of members on exchange arrangements. A sharp distinction between arrangements and policies was not attempted. The understanding was that “arrangements” refer to the broad structure of a member’s exchange system while “policies” refer to the actions or inactions of members in the operation of their arrangements.

The Fund has adopted three specific principles for the guidance of members with respect to their exchange rate policies:

A. A member shall avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

B. A member should intervene in the exchange market if necessary to counter disorderly conditions which may be characterized inter alia by disruptive short-term movements in the exchange value of its currency.

C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.267

Principle A substantially repeats an obligation in Article IV, Section 1 and is the only principle expressed in mandatory language. The other two principles are expressed in hortatory terms (“should”). Principle B contains no definition of “disorderly conditions,” and it would be difficult to reach agreement among members on what meaning should be attributed to those words. European members, for example, would prefer a more comprehensive definition than the one the United States has favored. The division of opinion on the question whether governments should follow a more active and more collaborative policy of intervention provokes repeated intergovernmental debate. Agreement on what the guideline should mean in practice has not been possible because attitudes to it reflect differences on basic issues of political economy. The discontent caused by the absence of international understanding is responsible for the treatment of monetary matters in the communiqué of the Versailles Summit meeting, which is discussed on pages 134–36 of this Section.

If the Fund were to find that a member was not observing a principle, the finding would not be equivalent automatically to a decision that the member was failing to perform its obligations. The member’s behavior, whether in the form of acts or omissions, could be a violation, but before this conclusion could be reached the Fund would have to find that the member was neglecting an obligation imposed by the Articles. The further finding would be necessary because a specific principle of guidance is not equivalent in law to an obligation. The function of the word “guidance” is to avoid the suggestion of obligation. This analysis does not apply to Principle A because it does repeat an obligation imposed by the Articles.

The three principles are the only principles adopted by the Fund so far (mid-1982), but the Fund could amend them or add to them. American officials explained to U.S. congressional committees that were considering the proposed Second Amendment that the Fund could be expected to develop a code of specific principles over time as the result of a common-law approach.268 This process may still take place, but knowledgeable observers have explained the first decision on surveillance as setting forth not so much principles as procedures for a case-by-case approach to surveillance that abjures a detailed code of principles. The variety of economies and exchange arrangements, and the desirability of not limiting the range of policies available to individual members in managing their situation, are among the reasons for the emphasis so far on procedure rather than on a code of principles.269

The current law that gives operational effect to international concern with exchange rates differs from the par value system of the past in two fundamental respects. First, the par value system permitted only one type of exchange arrangement, but the present law permits a choice of exchange arrangements limited only by imagination and by the prohibition of gold as a denominator. Second, the par value system required a member to reach agreement with the Fund before establishing the external value of its currency, but under the present law there is no requirement of agreement with the Fund either before or after the external value of a currency is established. A member must notify the Fund of its exchange arrangements and changes in them, but this obligation does not mean that notification must precede change. Nor does it mean that the Fund is entitled to approve or disapprove a change as such.

The role of the Fund is now an a posteriori one in the sense that the Fund exercises surveillance over the exchange rate policies that members are already pursuing, in order to see whether members are complying with their obligations under Article IV, Section 1. The view is widespread that an a posteriori function for an international organization exerts less pressure on members to observe international standards than an a priori function. The greater disciplinary effect of an a priori function explains why an effort was made to have the Fund scrutinize restrictions on trade or other current account transactions before they were instituted, as explained under the heading of Fund and Balance of Payments in Section II.

Little in the way of a record exists that can be considered travaux préparatories and helpful in dispelling doubt if problems of interpreting Article IV should arise. The text is in substance the one prepared by U.S. and French officials. Although the Executive Board discussed the draft placed before it and made some changes, the record is not extensive, and certainly not as rich as the minutes on provisions of the Second Amendment that the staff prepared for examination by the Executive Board.

Competitive Exchange Alterations

The purposes of the Fund as set forth in Article I have not been amended, so that the avoidance of competitive exchange depreciation is still among them.270 The former obligation of members to collaborate with the Fund to avoid competitive exchange alterations 271 has disappeared in favor of an obligation to collaborate with the Fund and other members to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.” 272 The importance of this obligation can be gauged from the repetition of it as Principle A.

An implication of the obligation is that members must have neither an overvalued nor an undervalued currency. The latter practice could be deemed to be a manipulation to gain an unfair competitive advantage over other members. The obligation is an obvious example of the standards of fair conduct to which countries subscribe by becoming members of the Fund as discussed in Section II.

Various questions have been raised about the meaning of the obligation.273 For example, to be “unfair” must a member’s competitive advantage be unfair against every other member? If not, an average exchange rate must be intended, and in that event which among the various methods of calculating an average should be chosen? 274 “Effective balance of payments adjustment” by a member implies some relationship to its reserves, but how shall a reasonable growth in its reserves in a growing world economy be determined? Can a member achieve effective balance of payments adjustment and still have an unfair competitive advantage? 275 “The guiding principle” for determining what is meant by manipulation according to one distinguished economist “should be that in their actions countries should not impose costs on other nations except when that is unavoidable from the nature of the problem being addressed.” 276

Fixed Exchange Rates

The present law avoids any impression of the legal, economic, or moral superiority of fixed over floating exchange rates. The United States in particular was on the alert to prevent the appearance of any such explicit or implicit preference in the Second Amendment. Cooperative arrangements by which members maintain the value of their currencies in relation to the currency or currencies of other members are mentioned but not with the intention of underlining the superior quality of this model.

It has been seen that a large proportion of the members of the Fund peg their currencies in some way or engage in cooperative arrangements. There is, of course, no common denominator for all of these currencies. Nor is there an obligation that requires a member to go on pegging its currency. An outstanding feature of present exchange arrangements is that currencies with leading roles in international trade and payments are floating against each other: the U.S. dollar, the Japanese yen, sterling, and the currencies of the European Monetary System. All these were the group of currencies for which the maintenance of fixed exchange rates was particularly important in the days of the par value system, while it was of less or even little consequence if many other currencies floated. Nowadays, it is these other currencies that tend to be pegged in one way or another.277

Floating Exchange Rates

On flexible exchange rates, little need be added to the discussion of fixed exchange rates. It is worth noting that although there is support among some economists for target zones for floating exchange rates, the Fund has not adopted a specific principle of guidance that endorses this practice. Nor has the Fund recommended a general exchange arrangement of this kind.

The absence of official support for the idea of target zones is in contrast to the guidelines for the management of floating exchange rates that the Fund adopted on June 13, 1974.278 One of the assumptions on which those earlier and now abrogated guidelines were based was that it might be desirable to form a reasonable estimate, if possible, of the medium-term norm for the exchange rate and to resist movements in exchange rates that appeared to be deviating substantially from the norm. A target zone could be defined in relation to a range of reasonable estimates of the norm. The Fund had specific functions to perform in connection with the operation of such a target zone.

The ancient debate about the comparative advantages of fixed and flexible exchange rates has not come to an end.279 Exchange rates have fluctuated, sometimes turbulently, without apparent relationship to underlying conditions, and changes even in the right direction have tended to go beyond the level justified by underlying conditions (“overshooting”).280 Flexible exchange rates have been considered by some to be a phenomenon related to other forms of disintegration that have been spreading through society,281 while others have regarded flexible exchange rates as part of the movement to free private activities from the heavy hand of official interference.282

Most of the critics of flexible rates propose not the institution of a par value system but improvements in the management of present exchange arrangements. Proposals fall into three categories: greater convergence or coordination of policies among members,283 a more active and more concerted practice of intervention among members, and the attribution of greater weight to the effect on the exchange rate of the choice of domestic policies by individual members.284 Understandings about exchange relationships among the U.S. dollar, Japanese yen, and EMS currencies are considered particularly important. The implication of these proposals is that maximum autonomy for the determination of domestic policies, which some countries considered a major advantage of flexible exchange rates, may not be in the individual or the collective interest to the extent that was assumed.

Multiple Currency Practices

The desirability of unitary rates of exchange continues to be a principle of the Articles. The freedom of members under the Second Amendment to choose their exchange arrangements does not authorize them to engage in multiple currency practices. If members wish to impose these practices, they must still obtain the approval of the Fund.285 Multiple currency practices can be restrictive, discriminatory among members, or unfairly competitive, and they can be objectionable for all these reasons. As in the past, the Articles do not define multiple currency practices, so that the Fund must decide how to apply this concept. Nevertheless, the Second Amendment has changed the earlier law on this subject.

Some of the changes result from the abrogation of the par value system. The provisions governing that system were interpreted to mean, first, that if any rate of exchange developed in a member’s territories outside the legal margins around parities, the member was answerable to the Fund even though the rate did not result from the member’s initiative. A member had an absolute obligation to see that exchange transactions involving its currency within its territories took place at exchange rates only within the legal margins around parities. Official tolerance of a rate of exchange was deemed to be official action. Second, the legal margins were relevant to the question whether there was a multiplicity of rates. If some exchange transactions took place within the legal margins while other transactions took place at an unrelated rate of exchange outside the margins, the member was deemed to be engaging in a multiple currency practice. These two statements about the margins have been made here in broad terms; they were encrusted with numerous refinements developed by the Fund in practice.

The provisions of the Articles now in operation do not prescribe margins for exchange transactions. Even if members observe margins, whether fixed unilaterally or as part of a cooperative arrangement, the practice does not have the legal character of the margins that formerly had to be observed under the Articles. The irrelevance of margins at the present time in determining what practices are multiple currency practices is demonstrated further by a change in the language of the provision that prohibits multiple currency practices unless approved by the Fund. The modified language makes it clear that the Fund may find that multiple currency practices exist whether exchange rates are within or beyond margins that a member is observing. With the abrogation of a member’s former responsibility for all exchange rates for its currency within its territories, a member is not deemed to be engaging in a multiple currency practice if it has not taken an official initiative to produce independent rates of exchange.

The Fund has adopted a decision as guidance in determining what practices it will now consider to be multiple currency practices. The rationale of the decision is that official action should not cause spreads between a buying and a selling rate for a currency, or discrepancies between cross rates among currencies, that differ unreasonably from the rates that would emerge if they were affected only by the normal commercial costs and risks of exchange transactions. On the basis of this rationale, a member’s official action that in itself imposes a spread of more than 2 percent between the buying rate and the selling rate for a currency when exchanged for the member’s currency in spot transactions in its exchange market is considered a multiple currency practice.286 If a spread exceeds 2 percent without official action, it will not be considered a multiple currency practice. Such a spread would arise solely as the result of commercial forces. Deviations in other than spot exchange transactions from the exchange rates for a currency in spot transactions are not considered multiple currency practices if the deviations represent only the additional costs and exchange risks of these other transactions.

“Broken” cross exchange rates also may be multiple currency practices. Suppose that in the exchange markets of members A, B, and C the U.S. dollar is quoted in terms of the domestic currency. The cross rate of exchange between any of the currencies A, B, and C in their exchange markets should be consistent with the rates derived from the exchange rate of each currency, in its market, in terms of the U.S. dollar. These conditions will exist as the result of market forces unless the consistent pattern is broken by a member’s official action in its market. The Fund has decided that a multiple currency practice exists if, as the result of a member’s official action, midpoint 287 spot exchange rates for the currencies of other members against its currency differ by more than 1 percent from the midpoint spot exchange rates for these other currencies in their principal markets. The difference must result exclusively from official action and must persist for more than a week to be considered a multiple currency practice. A difference up to 1 percent gives sufficient scope for normal arbitrage to eliminate differences. The leeway of a week for differences of more than 1 percent wholly attributable to a member’s official action gives the member enough time to adjust official quotations and reduce the difference to 1 percent or less in accordance with developments in the principal exchange markets of quoted currencies. The volatility of exchange rates under present arrangements creates the necessity for a reasonable period of tolerance of broken cross rates.

The Fund has jurisdiction over multiple currency practices whether they are imposed for balance of payments reasons or for other reasons, but the Fund’s policy distinguishes between these two categories. If a member applies a multiple currency practice for balance of payments reasons, the Fund will not approve the practice unless the member is endeavoring to eliminate its balance of payments problem, the measure is not inconsistent with adjustment, is temporary, and does not give the member an unfair competitive advantage over other members or discriminate among them. The Fund will not approve complex multiple currency practices unless the member is making reasonable progress toward simplification and ultimate elimination of the practices, and the Fund will be even more reluctant to approve multiple currency practices in the form of broken cross rates because of the discrimination among currencies that they involve.

The Fund’s attitude to multiple currency practices applied for reasons other than the balance of payments is that these practices should be avoided to the greatest possible extent. The reason for this attitude is that multiple currency practices can be applied as substitutes for measures that would be subject to the jurisdiction of other organizations such as the Contracting Parties to the GATT. The Fund does not want to encourage circumvention of the jurisdiction to which measures should be subjected because of the purpose for which they are imposed. The Fund urges a member to find an alternative to multiple currency practices applied for reasons other than the balance of payments, but is prepared to grant temporary approval, provided that the practices do not materially impede adjustment of the member’s balance of payments, do not harm the interests of other members, and do not discriminate among them.

When the Fund does approve a multiple currency practice, it normally does so for periods of approximately one year. This procedure enables the Fund to keep the practice under periodic review.288

The Fund’s policy on approvals illustrates the importance that may attach to the distinction between the effect of a measure on the balance of payments and the intention to affect the balance of payments. This topic has been discussed in Section II. Either effect or purpose may be a sufficient basis for the Fund’s interest. The Fund’s policy on multiple currency practices shows that while effect may be the basis for regulatory jurisdiction, purpose may be the basis for a difference in the exercise of jurisdiction.

Discriminatory Currency Arrangements

The present Articles continue to provide that members must avoid discriminatory currency arrangements, although the Fund retains authority to approve them. Broken cross rates are one form of discriminatory currency arrangement because the exchange rate for at least one currency must necessarily be less favorable than the exchange rates for other currencies. The Fund’s law and practice on broken cross rates have been discussed above in the subsection on multiple currency practices. It will be recalled that broken cross rates constitute both discriminatory currency arrangements and multiple currency practices even within margins for exchange rates that a member is applying.

The Fund’s attitude to other discriminatory currency arrangements is not less severe than its attitude to broken cross rates. The scarce currency provisions of the original Articles have not been changed by the Second Amendment.289

Member’s Ultimate Authority

In Section III it was shown that the provisions of the par value system sought a balance between the powers over exchange rates conferred on the Fund and those retained by members. A member had ultimate authority over the exchange rate for its currency, however, because the member could change the par value of its currency notwithstanding the objection of the Fund without violating treaty obligations. Radical changes have followed from the abrogation of the par value system.

The balance between the authority of the Fund and of members under the provisions now in force has shifted in favor of members. Formerly, the Articles prescribed only one form of exchange arrangement, and the Fund’s concurrence in the external value of a currency was necessary. Under the present Articles, a member has freedom to choose its exchange arrangement and to determine the external value of its currency. It is more appropriate now to speak of the primary and not the ultimate authority of a member over the exchange rate for its currency.

This change is responsible for the more explicit expression of the vigilance that the Fund must exercise in protecting the international interest. The Fund is directed to exercise this vigilance as overseer of the international monetary system and of the compliance of members with their obligations. The Fund’s function of firm surveillance over the exchange rate policies of members has a similar purpose.

Versailles Communiqué

There has been much discontent with the operation of present exchange arrangements because of the behavior of exchange rates. Differences of opinion have become more pronounced on the extent to which, and the manner in which, members should manage exchange rates in the collective interest. Different opinions exist on the extent to which the impact on the exchange rate should be taken into account when domestic policies are being chosen, and on the circumstances in which members should intervene in the exchange markets. The United States has attached less importance to exchange rate considerations than other members, and its view of what are disorderly conditions in exchange markets that justify intervention has been much narrower than the views of others.

These different attitudes have become disturbing politically as well as economically. They have led to a pronouncement on monetary matters in the communiqué issued after the seven-nation summit held in Versailles on June 4–6, 1982. The Heads of State and Government have expressed their concern with the gravity of the world economic situation and have agreed on a number of objectives and lines of action to improve the situation. More stable exchange rates are among the results to be achieved by following these lines of action. The communiqué states that:

It is essential to intensify our economic and monetary cooperation. In this regard, we will work toward a constructive and orderly evolution of the international monetary system by a closer cooperation among the authorities representing the currencies of North America, of Japan, and of the European Community in pursuing medium-term economic and monetary objectives. In this respect, we have committed ourselves to the undertakings contained in the attached statement.

The attached statement on “International Monetary Undertakings” reads as follows:

1. We accept a joint responsibility to work for greater stability of the world monetary system. We recognize that this rests primarily on convergence of policies designed to achieve lower inflation, higher employment, and renewed economic growth; and thus to maintain the internal and external values of our currencies. We are determined to discharge this obligation in close collaboration with all interested countries and monetary institutions.

2. We attach major importance to the role of the IMF as a monetary authority and we will give it our full support in its efforts to foster stability.

3. We are ready to strengthen our cooperation with the IMF in its work of surveillance; and to develop this on a multilateral basis taking into account particularly the currencies constituting the SDR.

4. We rule out the use of our exchange rates to gain unfair competitive advantages.

5. We are ready, if necessary, to use intervention in exchange markets to counter disorderly conditions, as provided for under Article IV of the IMF Articles of Agreement.

6. Those of us who are members of the EMS consider that these undertakings are complementary to the obligations of stability which they have already undertaken in that framework.

7. We are all convinced that greater monetary stability will assist freer flows of goods, services, and capital. We are determined to see that greater monetary stability and freer flows of trade and capital reinforce one another in the interest of economic growth and employment.

Much of this statement paraphrases the present law of exchange arrangements, but the intention of those responsible for the statement may be to ensure a more effective operation of the law. Future developments will show whether important changes in substance or procedure will flow from the statement.

Section VI Some Effects of Present Exchange Arrangements on International Law

Present exchange arrangements have not prevented the variability and volatility of exchange rates. The major causes of these phenomena are differences in the rates of inflation among countries, differences in interest rates, changes in the current account of the balance of payments, and expectations about these developments. The abrogation of the par value system has produced uncertainty that has been aggravated by the fluctuation of exchange rates. These conditions have had numerous effects on the law, some of which in the field of international law are examined in this Section.

Problems Under Treaties

Measurement of Variation

It may be necessary for the purposes of a treaty to measure the extent to which the external values of currencies have deviated from some norm as a result of changes in exchange rates. There was no difficulty in making this measurement when the par value system was in existence because there was a common denominator, gold, in terms of which changes could be measured whether the exchange rates for a currency were consistent or inconsistent with the Articles. If the exchange rate for a currency was inconsistent with the Articles because the currency was floating, the gold value of the currency in these circumstances could still be determined. The finding could be based on the exchange rate for the currency in its principal market against the U.S. dollar. The gold value of the dollar could be the norm because of the practice of buying and selling gold freely that the United States followed as explained in Section III.

At present there is no common denominator in terms of which all members are required to maintain, or do in fact maintain, the external value of their currencies. The negotiators or administrators of a treaty can choose a standard of reference for their particular purpose or purposes and measure changes in the external value of a currency against that standard. Maintenance of the value of the Fund’s holdings of currencies in its General Resources Account is required by the Articles. For this purpose, the Fund measures changes in the external value of currencies resulting from movements in exchange rates by using the SDR as its standard. The Fund’s holdings of the member’s currency are adjusted on specified occasions to take account of a change in external value measured in this way that has occurred since the last adjustment.290

The “divergence indicator” of the European Monetary System (EMS), which is discussed later in this Section, measures movements in exchange rates. The divergence indicator points to the country participating in the exchange rate and intervention arrangements of the EMS that prima facie should be responsible for taking action to eliminate the divergence. The measurement of divergence is made against the European Currency Unit (ECU) as the standard.

A more complicated problem arises when the measurement of variation is necessary under a provision that continues to refer to par values. Article II 6 (a) of the GATT is such a provision. Bound tariffs may take the form of a specific duty, i.e., a fixed amount for a physical unit of an import, expressed in currencies at the par value accepted by the Fund. If the par value is reduced by more than 20 percent consistently with the Articles, the specific duties can be adjusted in accordance with the devaluation. The problem for which the provision gives a remedy has not disappeared with the abrogation of par values.

The GATT Council of Representatives has endorsed a solution recommended by the staff of the Fund for giving effect to the purpose of the provision in current conditions.291 The solution is an index for a country’s currency based on each of the countries from which the country imports, with weights in the index proportioned to the shares of each exporting country in the importing country’s total imports. The Fund calculates the size of a depreciation according to this concept of the effective exchange rate.

Units of Account

The SDR and the ECU function as a standard of value for many purposes in international law. The SDR, for example, is the unit of account on the basis of which the Fund conducts transactions and operations through its General Resources Account.292 The ECU is the common denominator for the exchange rate and intervention arrangements of the EMS. Participants in those arrangements undertake obligations based on parities between currencies resulting from the definition of their currencies in relation to the ECU.

A unit of account is necessary in the operation of numerous treaties. Private international law treaties that limit the liability of entrepreneurs in a particular activity constitute one category. The treaties of this character and the activities to which they apply increase steadily in number. A unit of account other than a currency was chosen in the past so as not to make the amounts of liability depend on the fate of any one currency. Recoveries were to be uniform in value so that “forum shopping” by claimants to obtain what they considered to be the most advantageous recoveries would be discouraged. In earlier days, a unit of account defined as a quantity of gold, such as the Poincaré franc (65.5 milligrams of gold, nine-tenths fine) or the Germinal franc (10/13 gram of gold, nine-tenths fine), was the frequent choice. Now, however, gold has ceased to be the common denominator for the expression of the external value of currencies and the gradual reduction of its role in the international monetary system is an objective of the Second Amendment. The variability of exchange rates is another reason for finding a substitute unit of account and one that is not a currency.

A composite of currencies is a solution because a downward movement in the external value of one currency may be matched by an upward movement for another currency in the composite. Moreover, the weight attributed to each currency in the composite helps to moderate the effect of movements in the external value of individual currencies. Over time, a composite of currencies is likely to be more stable in external value than any one currency in the composite.

The SDR, which is composed of a basket of currencies, is the unit of account that is chosen most often for private international law and many other treaties. It is the unit of account of the central organization of the international monetary system. The Fund publishes the daily equivalent of the SDR in terms of currencies. These data are readily available and authoritative. Under some treaties, the unit of account is not the SDR, but some multiple of it. A unit of account called something other than the SDR, although tied to it, may be preferred not only for political reasons but also because the administrators of the treaty are empowered to break the link to the SDR and redefine their unit of account. The ECU also has been selected as the unit of account for many international purposes, probably because it was thought desirable when European considerations predominate to avoid the effects of the large share that the U.S. dollar has in the composition of the SDR.

What is often called maintenance of value is another purpose for which a unit of account is wanted in a world in which the external value of currencies fluctuates. Maintenance of value is often discussed in connection with financial contributions to international organizations or in relation to the holdings of currency by the organizations. At least three different meanings have been given to maintenance of value when the provisions of treaties are under consideration. First, the expression is used to connote uniformity in the exchange value of payments made in accordance with the treaty at different times. Second, the expression is used to mean that the external value of an organization’s holdings or currencies is to remain stable over time. For both purposes, a unit of account other than a currency is chosen and payments are made according to the exchange value of the currency of payment in relation to the unit of account at the date of payment.

Maintenance of value in a third sense is directed toward stability in the economic value, and not simply in the exchange value, of currencies. To achieve this objective, payments would be determined on the basis of both a unit of account and an index of economic value. A Working Group of the United Nations Commission on International Trade Law (Uncitral), with the assistance of the staff of the Fund, has been discussing the case for an acceptable index, such as a composite consumer price index. So far (mid-1982), no provision for maintenance of value in this third sense has been negotiated for inclusion in a treaty.293

In the negotiation of a number of treaties or amendments of treaties under which the SDR will be the unit of account, some nonmembers of the Fund have insisted on the option of a second monetary unit, defined in terms of gold. Sometimes, the stated reason has been a problem of applying the SDR as a unit of account under the nonmember’s domestic law. It is probable, however, that political considerations have had an influence, including the absence of a voice for nonmembers in decisions on the method of valuing the SDR. In the Uncitral Working Group in which an index has been discussed, the U.S.S.R. changed its position by announcing through its delegate that, in future conventions in which the SDR is chosen as the unit of account, the U.S.S.R. will be content with it and will not insist on the option of a second monetary unit of account. The Working Group has decided to recommend to the plenary session of Uncitral that all future provisions in treaties limiting liability should be expressed solely in terms of the SDR as the unit of account, without prejudice to whatever might be done to achieve the maintenance of economic value.294

Other Problems

The variability of exchange rates has made it necessary to deal with other problems of drafting or administering the financial provisions of treaties that would not have arisen in the past because of the availability of par values approved by the Fund. It has been necessary, for example, to prescribe which exchange rates for a currency are to be applied under financial provisions. If the choice for a single date seemed risky because of the possibility of temporary conditions in the exchange markets, the problem has been to define a desirable method of averaging exchange rates over time.

A change in the assumptions on which agreement was reached on financial provisions might prove to be more than temporary. Some treaties, therefore, establish special procedures for convening the representatives of contracting parties to determine what adaptations should be made in the provisions or in the administration of the treaty.

Pooling of Exchange Risks

A special technique is being applied by the World Bank to equalize exchange risks among its borrowers. Under the terms of loan agreements negotiated before July 1, 1980, borrowers were required to repay in the various currencies that had been disbursed to them. It was impossible to disburse the same currencies and in the same proportions under all loan agreements. The absence of this uniformity meant that borrowers undertook different risks whatever might be the standard according to which risk was calculated.

All loans negotiated by the World Bank on or after July 1, 1980 are subject to an arrangement called the Currency Pooling System, the purpose of which is to equalize among all borrowers the risks resulting from the variability of exchange rates and from the differences in external value among currencies. Equalization is achieved by the notional pooling of all currencies disbursed and outstanding under the loan agreements that are affected by the system and by expressing the outstanding principal amount of each loan as a share of the pool. The share of each loan is determined by the relationship between the value of the outstanding principal amount under the loan and the aggregate value of the outstanding principal amounts of all such loans. Calculations of the value of the pool of currencies and of the shares are made daily on the basis of the U.S. dollar as the common denominator. By this procedure, the currencies disbursed and outstanding in the pool are, in effect, prorated among all loans according to their shares in the pool.295

The Currency Pooling System can be considered an arrangement by which all loans of currencies are indexed in U.S. dollars. The risks for borrowers reside in the variability of exchange rates between these currencies and the U.S. dollar, but the risks are equalized among all borrowers affected by the scheme. The Fund’s system differs in that risks resulting from the transactions in which it transfers currencies to, or receives them from, members are equalized among members by conducting the transactions on the basis of the same composite unit of account, the SDR.

European Monetary System

A senior official of the Commission of the European Community has said that:

The Treaty of Rome created a system which, for its proper functioning, requires some form of monetary organization. When the treaty was drawn up this framework was provided by the Bretton Woods system, and it was provided in such a solid and convincing way that monetary matters were almost ignored in the Treaty. The Common Market cannot survive for long in a state of monetary anarchy. Seen in this light, it is not surprising that the issue of European monetary integration was first raised in coincidence with the unmistakable signs of decline of the Bretton Woods system, in the late sixties.296

One of the most important consequences of the variability of exchange rates under the exchange arrangements authorized by the Fund’s Articles is the creation of the European Monetary System (EMS). Members of the European Community (EC) had entertained the prospect of an economic and monetary union, but progress had been limited. The main achievement had been the common margins arrangement (the “snake”), which, in its original form, took effect on April 24, 1972.

The instability of exchange rates, particularly for the U.S. dollar, had produced disturbing effects on European economies. Movements out of dollars and into deutsche mark had destabilized exchange rates among Community currencies, brought about an unwelcome appreciation of the deutsche mark, and threatened trade within the Community. These developments gave an impetus to European monetary coordination and to the hope that, if it could be achieved, it might lead to a closer political relationship.

Section V has recalled that the “snake” was responsible for the mention in Article IV of the Second Amendment of “cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members.”297 Furthermore, members undertake “to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.”298 These provisions embrace the exchange rate and intervention arrangements of the EMS, as they did the “snake,” which the EMS has superseded.

The initiatives taken in the Community that led to the EMS were prompted by concern that the instability of exchange rates might endanger even the limited integration already achieved. The European Council, composed of the Heads of State and Government of the members of the Community at that time, issued a communiqué at Bremen, after a meeting on July 6 and 7, 1978, in which they declared that they had agreed on a common approach to the economic problems of the Community. They would move toward closer monetary cooperation, “leading to a zone of monetary stability in Europe.”299 The annex to the communiqué set forth, in five paragraphs, an outline of some main elements of the EMS that would create this zone of monetary stability. The European Council adopted a resolution of December 5, 1978 on the establishment of the EMS, which came into existence on March 13, 1979.300 This resolution, certain agreements among the central banks of members of the Community, decisions of the Board of Governors of the European Monetary Cooperation Fund, and other resolutions of the Council constitute the legal framework of the EMS. All members of the Community are members of the EMS, but members need not participate in the exchange rate and intervention arrangements. The United Kingdom and the most recent member of the Community, Greece, had not become participants in these arrangements by mid-1982, but participation at a later date is not precluded.

The resolution of December 5, 1978 dealt primarily with an initial and preliminary period of two years, after which the provisions and procedures of the EMS were to be consolidated into a final system. The second phase has been postponed, but without abandoning the original intention. The reasons for the delay have been political and economic but, to some extent, legal as well.

The discussion of the EMS here is concentrated on the exchange rate and intervention arrangements. The European Currency Unit (ECU) has a number of vital functions in the EMS, including functions in these arrangements. The ECU, like the SDR, consists of a basket of fixed amounts of currencies. At the outset, its composition and value were the same as those of an existing unit, the European Unit of Account (EUA). On March 13, 1979 therefore the composition of the ECU was as shown in the following table:

CurrenciesAmounts

of

Currency
Percentage

of

Total
ECU 1 =

Currency

Units
Deutsche mark0.82833.02.51064
French franc1.1519.85.79831
Pound sterling0.088513.30.663247
Netherlands guilder0.28610.52.72077
Belgian franc3.66}9.6}39.4582
Luxembourg franc0.14
Italian lira109.009.51,148.15
Danish krone0.2173.17.08592
Irish pound0.007591.20.662638

The composition of the basket is not changed automatically because the central rate in terms of the ECU of a Community member’s currency is changed, whether the member is a participant or a nonparticipant in the exchange rate and intervention arrangements. The composition of the basket is to be reviewed at intervals of five years and, in addition, whenever the percentage share of any currency, based on exchange rates, has changed by at least 25 percent and a review is requested. The revisions are made in accordance with “underlying economic criteria” and “have to be mutually accepted.”301

Two of the leading factors that were taken into account in the past to determine the composition of the EUA basket were gross national product and intra-Community trade. If the amount of a currency in the ECU basket is to be changed, the amounts of all other currencies will be adapted, so that the value of the ECU in terms of currencies, of both members of the Community and of other countries, will be the same immediately before and immediately after the change in composition.302

Each participant in the exchange rate and intervention arrangements establishes a central rate for its currency in terms of the ECU. As a result, bilateral parities are created between each pair of currencies of the participants. Margins of 2.25 percent above and below these parities must be observed as limits for exchange rates in exchange transactions. The original margins may exceed these margins, up to a maximum of 6 percent, for currencies that were not in the “snake,” but the wider margins must be reduced gradually “as soon as economic conditions permit.”303 Italy has exercised the option to apply wider margins.

Central rates in terms of the ECU can be adjusted by “mutual agreement by a common procedure which will comprise all countries participating in the exchange rate mechanism and the Commission.”304 Consultation is to take place within the Community framework between participants and nonparticipants in the mechanism on important decisions concerning exchange rate policy. Criteria for changes, such as the criterion of fundamental disequilibrium for the purposes of the former par value system under the Fund’s Articles, are not specified.305

“In principle,” intervention is conducted in participating currencies.306 This formulation leaves room for intervention in other currencies, notably the U.S. dollar. The emphasis, however, is on intervention with participating currencies, in contrast to the “snake” under which the main intervention currency was the U.S. dollar. Intervention within the margins in participating currencies is permissible, but apparently “prior concertation” among central banks is required in order to ensure that intervention is not conducted at cross purposes and that the legitimate interests of all participating central banks are safeguarded. In particular, the consent of the central bank whose currency is used is necessary for intramarginal intervention. According to a publication of the Deutsche Bundesbank, the rules on intervention are “also intended to guarantee that the provisions of the Articles of Agreement of the International Monetary Fund and the decisions taken on a world-wide basis in accordance with these Articles are complied with in the framework” of the Community.307

Intervention within the margins may be appropriate if the “divergence indicator” gives the signal for which it is designed. The divergence indicator has an interest beyond its role in the EMS because it functions as an “objective indicator,” to use the terminology that became familiar in the deliberations of the Committee of Twenty, although the divergence indicator relies on movements in exchange rates and not in monetary reserves. The divergence indicator is the only objective indicator that has been given international legal status since 1971. The intervention and exchange rate arrangements of the EMS also involve what was called multicurrency intervention in the Committee of Twenty. Furthermore, the arrangements attempt to achieve symmetry in the obligations of all participants whether their balance of payments position is weak or strong. The Committee of Twenty emphasized the desirability of such a principle.

The purpose of the divergence indicator is to give an early warning before exchange rates reach the limits at which intervention must take place. The warning is flashed when a currency crosses its “threshold of divergence.”308 The threshold is fixed at 75 percent of the maximum spread of divergence for a currency.309 The formula for demarcating the threshold for a currency is

0.75 × 2.25 (or 6 percent for Italy) × (1 minus the weight of the currency in the ECU basket 310)

The divergence indicator was a compromise between opposing views on intervention. One view was that intervention arrangements should be based on parities, as they were under the “snake”; the other view was that intervention arrangements should be based on a basket of currencies. The supporters of the first of these solutions argued that, under the second solution, a participant’s currency might reach its upper limit without the currency of another participant reaching its lower limit, so that only the one participant would be obliged to intervene.

The supporters of the basket solution argued that although under the parity solution the currencies of two participants always reached the intervention limits at the same time, it was not possible to say with certainty which of the two participants was responsible for the situation. They argued also that even if a participant with a strong currency intervened under the parity approach and obtained the currency of a participant with a weak currency, the effective burden would be borne by the latter participant because of the settlement arrangements. This necessity to settle might arise from circumstances to which a participant obliged to settle had not contributed, such as circumstances in which an inflow of U.S. dollars into the Federal Republic of Germany caused an appreciation of the deutsche mark against other Community currencies. The country in deficit would bear a heavier burden because it would have to use reserves or adopt contractionary policies, while countries in surplus would have the lighter burden of dealing with an increase in the domestic money supply.

The solution incorporated in the EMS is a compromise because it gives effect to both contending views: the obligation of intervention is based on parities, but a presumption is created, by reference to the basket represented by the ECU, that a particular participant should take corrective action because exchange rates for its currency show that it is the currency that has diverged from the Community average as represented by the ECU. A currency crosses its divergence threshold whenever the exchange rate for the currency deviates from its central rate in terms of the ECU by more than 75 percent of the deviation from the central rate that would occur if the currency were at its upper or lower intervention limit against all other currencies in the ECU simultaneously. The theory of the divergence from average is that it sidesteps the dilemma created by the impossibility of determining under the parity system whether the currency at the upper or the lower limit of the margins is responsible for that situation. The indicator points to the participant that may be in the best position to relieve the pressure on other participants that is created by deviation of the participant’s currency from the average for all other currencies. The indicator was defended as a symmetrical way of apportioning responsibility because it could point to a surplus or to a deficit country as the participant with the divergent currency.

Although intervention at the limits of the margins is obligatory, if a currency crosses its threshold of divergence there is a presumption that the issue will “correct this situation by adequate measures.”311 Only a presumption arises that a participant will take measures because the policies of other members may be responsible for the situation. The measures that may be taken are listed as (a) diversified intervention, (b) measures of domestic monetary policy, (c) changes in central rates, and (d) other measures of domestic policy. The participant may choose among these measures. Diversified intervention implies that a participant may intervene in a number of currencies so as to distribute the effects fairly and so as not to concentrate them on the currency of a single participant even though the exchange rate for the currency of that participant may be furthest away in the opposite direction from the currency of the intervening participant. The expression “diversified intervention” may refer, in addition, to intervention with a non-Community currency, such as the U.S. dollar. If, because of “special circumstances,”312 measures are not taken, the participant failing to take them must explain the reasons for inaction to other participants within the Community’s procedures for consultation.

The Council’s resolution of December 5, 1978 deals with the external relations of the EMS.313 The resolution declares that the durability of the EMS and its international implications require the coordination of exchange rate policies in relation to countries outside the Community and, as far as possible, concerted understandings or actions (“concertation”) with the monetary authorities of those countries. Harmonized policy on intervention with the U.S. dollar would be within the scope of this provision.

The resolution provides also that European countries with “particularly strong economic and financial ties” to the Community may participate in the exchange rate and intervention arrangements. Sweden and Norway participated in the “snake” for a time. If European countries wished to participate, agreements for this purpose would be necessary among central banks.

The EMS is of outstanding interest for a number of reasons. It has been created by “subordinate legislation” of the Community without a new treaty or amendment of the Treaty of Rome. The creation of a cooperative arrangement among a group of countries, some of which are the issuers of leading currencies, might provide experience that the Fund could take into account in making recommendations of general exchange arrangements or in considering whether international economic conditions permitted the introduction of the par value system that is discussed in the next Section. The divergence indicator,314 multicurrency intervention, and symmetrical obligations for all participants have been mentioned already as innovations. The exchange rate and intervention arrangements are not the only feature of the EMS that may have more than a regional interest. The ECU, for example, might develop characteristics and uses that enhance its role as a reserve asset.

According to widespread opinion, the EMS, notwithstanding the changes in central rates that have occurred, has been responsible for considerable stability in exchange rates among Community currencies. Less success is claimed for the objective of harmonizing domestic policies, reducing differences in rates of inflation, and coordinating exchange rate policy in relation to the U.S. dollar. The divergence indicator is intended to contribute to satisfactory exchange rate relationships among participants in the exchange rate and intervention arrangements: it does not contribute to satisfactory exchange rate relationships between the participants and other countries. Some commentators have noted that fixed exchange rates almost by hypothesis reduce exchange rate movements, and that the strength of the U.S. dollar and the uncharacteristic weakness of the deutsche mark have contributed to the stability of exchange rates among the currencies of participants in the exchange rate and intervention arrangements. None of these reactions diminishes interest in the EMS as a structural development in the international monetary system.

Section VII A Possible Par Value System

Conditions for Par Value System

The exchange rate and intervention arrangements of the EMS can be considered a par value system among the participants because they establish external values for their currencies in terms of the ECU as a common denominator. The Articles of the Fund contain detailed provisions on a par value system in which all members could participate if that system were brought into existence. There is no certainty that this event will ever occur. The inclusion of provisions for a par value system in the Second Amendment was part of the compromise in which the views of the United States prevailed on exchange arrangements in existing circumstances for the indefinite future. The provisions dealing with a par value system were a concession principally to France, although it was not alone among European members in retaining the hope of such a system and certainly a preference for it in principle. Although the provisions were a concession intended to bring about a compromise under which agreement would be reached on the law that would apply at once and indefinitely, it must not be thought that the provisions on a possible par value system of the future were taken lightly. These provisions also were the subject of hard bargaining by drafters who were intent on learning from past experience in order to improve on the former par value system.

The conditions in which the par value system could be brought to life under the Articles are set forth in the following provision:

The Fund may determine, by an eighty-five percent majority of the total voting power, that international economic conditions permit the introduction of a widespread system of exchange arrangements based on stable but adjustable par values. The Fund shall make the determination on the basis of the underlying stability of the world economy, and for this purpose shall take into account price movements and rates of expansion in the economies of members. The determination shall be made in light of the evolution of the international monetary system, with particular reference to sources of liquidity, and, in order to ensure the effective operation of a system of par values, to arrangements under which both members in surplus and members in deficit in their balances of payments take prompt, effective, and symmetrical action to achieve adjustment, as well as to arrangements for intervention and the treatment of imbalances. Upon making such determination, the Fund shall notify members that the provisions of Schedule C apply.315

The Articles contain no provision that would expressly authorize the Fund to put an end to the par value system once the system had been called into existence. Paragraph 1 of Schedule C, however, directs the Fund to notify members that they may establish par values for the purposes of the Articles “in accordance with Article IV, Sections 1, 3, 4, and 5 and this Schedule.” Article IV, Section 4 establishes the conditions that the Fund must take into account in making its determination that the par value system can be called into operation. The issue is whether the reference to Article IV, Section 4 has consequences only for the determination, after which the provision has no further function, or whether the provision has continuing effect. If the latter interpretation were adopted, the Fund would be able to withdraw its determination if the conditions ceased to exist. Some of the conditions, it will be seen later in this Section, would be the result of agreements reached outside the Fund and not of obligations imposed by the Articles, so that the parties to the agreements could terminate them without violating the Articles. In support of the interpretation that the Fund could withdraw its determination for good cause is the fact that all the other provisions referred to in Schedule C, paragraph 1—namely, Article IV, Sections 1, 3, and 5 and Schedule C—are meant to have continuing effect. If the interpretation were adopted that the Fund was authorized to decide on a withdrawal of its determination, one problem would be the majority necessary for that decision.316

Some Features of Article IV, Section 4

(i) The high proportion of the total voting power required for a determination that current conditions were in conformity with those set forth in Article IV, Section 4 would ensure that the determination was concurred in by a substantial number of members. The United States would be the only member that could veto a proposed decision without the support of other members.

(ii) Even if current conditions were as set forth in the provision, the Fund would not be required to make the determination (“may determine”). If, however, the Fund did make the determination, the Fund would have to notify members that the provisions of Schedule C, which would regulate the new par value system, were in operation. The Fund could not refrain from applying those provisions because it preferred to rely instead on recommendations of general exchange arrangements under another provision.317

(iii) The conditions “on the basis of” and “in light of” which the determination is to be made can be read to suggest that “a widespread system of exchange arrangements based on stable but adjustable par values” cannot be installed until the ideal conditions exist in which the system could be maintained. On this reading, the par value system would not be called into operation in order to contribute to the achievement of ideal conditions if they had not yet been achieved. Another reading is possible. The difference between “on the basis of” and “in light of” could be understood to mean that the conditions to which the phrase “on the basis of” applies must exist before the determination is made but that the conditions to which the phrase “in light of” applies might still be evolving.

(iv) Most of the conditions in the light of which the Fund must make the determination would not be the result of obligations imposed on members by the Articles in any direct sense. The conditions relate to “sources of liquidity,” “arrangements under which both members in surplus and members in deficit in their balances of payments take prompt, effective, and symmetrical action to achieve adjustment,” “arrangements for intervention,” and “the treatment of imbalances.” Some of these conditions, particularly those that refer to “arrangements,” imply understandings, almost certainly precise in character, among the members that would be prepared to participate in “a widespread system of exchange arrangements based on stable but adjustable par values.”

(v) The understandings referred to in (iv) above would not require and need not result in amendment of the Articles. Amendment is obviously not contemplated because Article IV, Section 4 and Schedule C are presented as a complete code that could be made to operate immediately if the Fund were to make the necessary determination. Formality could be given to the understandings, without amendment, by agreement of the Fund to provide services under the following provision:

If requested, the Fund may decide to perform financial and technical services, including the administration of resources contributed by members, that are consistent with the purposes of the Fund. Operations involved in the performance of such financial services shall not be on the account of the Fund. Services under this subsection shall not impose any obligation on a member without its consent.318

(vi) The language of Article IV, Section 4 that deals with conditions implies that settlements would be necessary among the participants in the par value system as the result of intervention. Settlement could take the form of the official convertibility by a member of balances of its currency held by other members as the result of intervention, or it could take the form of payment by a member for the currencies of other members advanced to it by them for intervention. The first form of settlement was within the scope of official convertibility under the original Articles, the second form is the one adopted by the EMS.

A member called upon to make settlements would not be entitled to make automatic use of the Fund’s resources for this purpose because members had entered into an agreement to make settlements, even if the Fund were administering the agreement under the provision quoted in (v) above. The language of the provision is explicit on this point. A member would be able to use the Fund’s resources to make settlements, however, if it qualified under other provisions of the Articles and the policies of the Fund. The language that authorizes the use of the Fund’s resources is broad. It covers three categories of need

the member represents that it has a need to make the purchase because of its balance of payments or its reserve position or developments in its reserves.319

The report of the Executive Board on the Proposed Second Amendment contains an illuminating remark on this provision:

Under the concept of need …, a member will be able to purchase the currencies of other members from the Fund if its balance of payments position or its reserve position is unfavorable, or if there is an unfavorable development in its reserves, e.g., because of an impending discharge of liabilities, even though it does not have a deficit in its balance of payments according to accepted definitions of the balance of payments.320

The references in the Second Amendment to developments in reserves and in the report to an example of such developments were made as the result of an initiative by members that had used the Fund’s resources to redeem balances of their currencies in accordance with settlement obligations under the “snake” at a time when some of the members had not been in deficit in their balances of payments. The Fund’s resources can be used now in connection with settlements under the exchange rate and intervention arrangements of the EMS.

(vii) The conditions that the Fund must take into account in deciding whether to make a determination that a par value system could operate successfully are an echo of issues that were considered by the Committee of Twenty when it was working on the assumption that a system of stable but adjustable par values was within reach. Some of these issues have been discussed in Section IV. If the Fund were ever to discuss the reintroduction of a par value system, the Fund would undoubtedly benefit from the work of the Committee and its subordinate bodies. Section VI has made the point already that the experience of the EMS might be a valuable influence on the understandings among members that would be necessary for the operation of a par value system. The decisions of the Fund on the provisions of the original par value system could be a source of interpretation of the new provisions whenever the new was closely related to the old.

Principles of Schedule C

International Concern

The par value system that would be regulated by Schedule C will now be examined under the same headings as those that appear in Sections III and V.

Schedule C would recognize as strongly as ever the principle that exchange rates are matters of international concern and therefore must be subject to international scrutiny. A member that wished to propose an initial par value would submit it to the Fund within a reasonable time after the Fund had notified members that the par value system was in effect.321 The Fund would have to concur in or object to a proposed par value within a reasonable period after receipt of the proposal.322 A proposed par value would not take effect for the purposes of the Articles if the Fund objected to it.323 If the Fund objected, the member would be in the same position as a member that did not intend to establish a par value for its currency and did not make a proposal.324 The Fund would not be entitled to object because of a member’s domestic social or political policies.325

As was the law before the Second Amendment, a change in the par value of a member’s currency could be made only on the proposal of the member and only after consultation with the Fund.326 A member would be entitled to propose a change in par value only to correct, or to prevent the emergence of, a fundamental disequilibrium.327 This provision modifies the corresponding provision in the Articles before the Second Amendment by permitting a member to propose a change in par value to prevent the emergence of a fundamental disequilibrium. The original provision was considered unsatisfactory because it seemed to require that a member must await the emergence of a fundamental disequilibrium before it could propose a change in the par value of its currency even if it seemed likely that a fundamental disequilibrium would develop. The importance attached to the maintenance of stability and the avoidance of competitive depreciation explain the severity of the original provision. It was possible that a fundamental disequilibrium, even though probable, would not emerge. A premature devaluation would then be unfairly competitive. In practice, the Articles were not applied with such inflexibility if it was reasonably certain that a member would be in fundamental disequilibrium in the near future, for example, because of the relationship of the member’s economy to the economy of another member that was proposing to change the par value for its currency.

Another reason for authorizing a change in par value to prevent the emergence of a fundamental disequilibrium was that a member should be able to make small changes and in this way avoid the delays in adjustment that would make a large and even more disturbing change necessary at a future date. Toward the end of the original par value system there was much concern that the concept of fundamental disequilibrium seemed to prevent small and prompt changes. 328 The Outline of Reform expressed the same concern and suggested that the Fund might establish simplified procedures for small changes, under appropriate safeguards,329 but the suggestion has not been followed. Nevertheless, the provision permitting a change to prevent the emergence of a fundamental disequilibrium is typical of a number of provisions that would make the new par value system more flexible than the original system.

Schedule C contains no provision that dispenses with the need for the Fund’s concurrence in a change of par value that would not affect the international transactions of members. The provision that made the Fund’s concurrence unnecessary under the original Articles 330 was never applied and no proposal was made for its retention during the drafting of the Second Amendment.

Stability Without Rigidity

Schedule C provides that the common denominator of the par value system would be the SDR or some other denominator that the Fund would choose. The Fund would be able to establish the common denominator by a decision taken by a majority of the votes cast.331 This majority is the most modest of all majorities under the Articles, but it would probably be impossible to assemble the majority of 85 percent of total voting power that would be necessary to call the par value system into existence unless equal support existed for the choice of the common denominator.

The Fund is prohibited from choosing either gold or a currency as the common denominator.332 Gold may not be selected because an objective of the Second Amendment is to bring about a gradual reduction in the role of gold in the international monetary system. The choice of a currency is prohibited because experience has shown that the weakening of a currency that performs a central role in the international monetary system weakens the system as well. Moreover, many members held the view that a central role for a currency in the international monetary system gave the issuer of that currency advantages not enjoyed by other countries. The critics were not reconciled to these advantages by the explanation that the issuer’s balance of payments deficits should be tolerated because it was acting like a good banker in increasing the liquidity of other countries, or by the explanation that they should accumulate balances of the issuer’s currency as compensation for the passivity of the issuer in the exchange markets.

The assumption of Schedule C is that the common denominator will be the SDR as a nonnational and more stable unit. Nevertheless, the choice of the SDR, although preferred, is not made mandatory. Flexibility was desirable because the method of valuing the SDR is left to the discretion of the Fund,333 and undoubtedly the method in effect334 would be relevant to a decision on the common denominator. The present method involving a defined basket of currencies has been considered appropriate when currencies are floating,335 but a different method might be more appropriate in a par value system.336 There could be no assurance, however, that a more appropriate method would be supported by the necessary majority. Schedule C does not require that a common denominator once chosen must be retained permanently. The Fund would be able to change the common denominator, but a change would be a serious action.

The provisions on changes in par values are designed to achieve stability but without rigidity. This principle is illustrated by continued reliance on the criterion of fundamental disequilibrium to justify a change. Stability must be understood in accordance with Article IV, Section 1. Paragraph 1 of Schedule C, it has been noted earlier in Section VII, refers to Article IV, Section 1 as one of the provisions in accordance with which par values may be established. The reference to Article IV, Section 1 makes it clear that the concept of stability in that provision continues to apply when the par value system is in existence and is not confined to the period before the par value system becomes effective. As explained in Section V, the concept of stability is that of a stable system of exchange rates achieved by the maintenance of orderly underlying conditions.

In addition, the general and particular obligations of members set forth in Article IV, Section 1 would continue to bind members when the par value system was in operation. The reference to Article IV, Section 3, in Schedule C, paragraph 1, means that Article IV, Section 3 also would remain effective. One consequence, therefore, would be that the Fund would still be authorized to adopt specific principles for the guidance of all members with respect to their exchange rate policies.

Schedule C, paragraph 1 does not refer to Article IV, Section 2. The implication is strong, therefore, that once the par value system is in operation under Schedule C, the Fund would be able no longer to make recommendations on general exchange arrangements under Article IV, Section 2 as substitutes for provisions of the par value system under Schedule C. The reason, of course, would be that the Fund had shown its preference for the par value system of Schedule C as the general exchange arrangement that could be, and should be, in widespread use. Any general advice that the Fund might wish to give might be formulated under Article IV, Section 3 (b) as a specific principle for the guidance of all members with respect to their exchange rate policies or under Article IV, Section 1 as a decision that gave specific content to the undertaking of members to collaborate with the Fund.337

Competitive Exchange Alterations

The objection to competitive exchange alterations would continue to be a principle of the par value system under Schedule C. The purpose of the Fund that expresses this principle has not been amended and remains in force at all times: “To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.”338

The continuing effect of Article IV, Section 1 after the par value system was in operation would mean that members were still subject to the obligation

to avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.339

Fixed Exchange Rates

The principles of the original Articles with respect to fixed and floating exchange rates would be modified in their application to the par value system. Some of the changes have been made in the way the principle of fixed rates would be made effective.

If a member established a par value for its currency, margins for exchange rates would have to be observed for exchange transactions in the member’s territories involving its currency and the currency of another member for which a par value was being maintained. There would be no departure from the principle of the original par value system that a member was responsible for maintaining the external value of its own currency in these transactions. A member would continue to have no obligation with respect to exchange rates for its currency in transactions involving nonmembers’ currencies unless a member was following practices in relation to those currencies that were contrary to the provisions of the Articles or the purposes of the Fund.340

In some respects, however, the law relating to margins would be radically different from the law of the original Articles. The margins before the Second Amendment were 1 percent above and below the parity between the two currencies involved in a spot exchange transaction.341 Under Schedule C, the margins would be 4½ percent.342 Margins of this breadth were recognized by the Fund in its decisions on central rates and wider margins in the period between the Smithsonian Agreement and the date when the Second Amendment became effective.343 The Fund would have authority, which it did not have in the past, to vary the margins by a decision taken with a majority of 85 percent of the total voting power.344 The margins could be wider or narrower than 4½ percent. Moreover, the Fund could establish margins that were not the same for all exchange transactions without exercising its authority to approve multiple currency practices. For example, the Fund could establish one margin for the currencies of members participating in a multicurrency intervention system and another margin for transactions involving these currencies and the currencies of other members.345

Schedule C contains no provisions on margins for exchange transactions other than spot exchange transactions. Before the Second Amendment, the Fund was authorized to establish, for other exchange transactions, margins reasonably in excess of the margins for spot exchange transactions,346 although the Fund never did adopt arithmetic margins under this power. The original formula was thought to be too restrictive and was not retained, mainly in order to give members flexibility in dealing with forward exchange transactions and capital transfers.

Schedule C would require all members having par values for their currencies to apply appropriate measures compatible with the Articles to ensure that exchange transactions did not take place at exchange rates outside margins consistent with the Articles. As in the past, members would be able to choose their measures, subject only to the caveat of consistency with the Articles. Nothing is included in Schedule C that resembles the practice of freely buying and selling gold under the original Articles, which released a member from the obligation to take other appropriate measures. Schedule C does not give the same legal effect even to a member’s practice of freely buying and selling SDRs with the monetary authorities of other members. Under Schedule C, neither the United States nor any other member would be in what Keynes, and many members, regarded as the privileged legal position of not having to behave like all other members in ensuring the observance of margins for exchange rates.

Floating Exchange Rates

A crucial difference between the original Articles and the Second Amendment is that Schedule C makes provision for floating exchange rates and for other exchange arrangements that do not involve the maintenance of a par value in accordance with Schedule C. If the Fund gave notice that the par value system was to come into existence, a member would be able to decide that it was not going to establish a par value for its currency.347 Furthermore, a member that did establish a par value would be able to terminate it later by giving notice to the Fund.348 The member might then allow its currency to float or might adopt some other exchange arrangement. Floating when the par value system was inaugurated or at a later date would be valid, subject to certain conditions that are discussed in the last subsection of this Section.

Multiple Currency Practices

The principle of the desirability of a unitary rate of exchange for a member’s currency would be maintained if the par value system of Schedule C came into operation, whether or not the member established a par value for its currency. The Second Amendment makes it explicit349 that multiple currency practices could be found to exist even within the margins for exchanges rates under Schedule C. This possibility, which did not exist when the original Articles were in effect, has been made clear in the present Articles because of the greater width of margins under the par value system of Schedule C.350 It would be necessary to decide how much of the law relating to multiple currency practices under present decisions as discussed in Section V would be applicable to the par value system under the Second Amendment.

Discriminatory Currency Arrangements

The prohibition of discriminatory arrangements would not be affected if the par value system under Schedule C were to be in operation. The present law, including the provisions on scarce currencies, would continue to apply. As with multiple currency practices, discriminatory currency arrangements could be found to exist even within margins for exchange rates that were consistent with Schedule C.351

Member’s Ultimate Authority

Schedule C would make important changes in the distribution under the original Articles of authority between the Fund and a member over the external value of the member’s currency. The principle of international concern with exchange rates would be applied in a different way.

1. It may be expected that, if the Fund were to give notice that Schedule C was in operation, many members would establish par values for their currencies because the Fund could not give the notice unless the decision in favor of it was supported by members having 85 percent of the total voting power. Nevertheless, in contrast to the original Articles, there would be no implication, much less an express requirement, that a member had to establish a par value then or at any later date. In the drafting of Schedule C, the proponents of freedom to float wanted to avoid any suggestion of the legal, moral, or economic superiority of par values over floating. Schedule C gives each member the option to establish a par value or to adopt, or go on applying, an exchange arrangement of its choice, which could be floating but could be some other exchange arrangement.352

If a member elected not to establish a par value for its currency after the Fund had given notice that Schedule C was in operation, the member would be required to consult the Fund to ensure that its exchange arrangement was consistent with the purposes of the Fund and adequate to fulfill the general and particular obligations with respect to exchange arrangements that all members must observe.353 This obligation to consult does not imply that the member was in an inferior position compared with members that were establishing par values. The obligation was intended to be symmetrical with the obligation of members to consult the Fund when establishing par values for their currencies.

2. A member intending to establish a par value would have to make its proposal within a reasonable time after the Fund’s notice,354 but it is implied that a member could make a proposal at any time after having had a different exchange arrangement.355 The Fund would have to concur in or object to a proposed par value, whenever the proposal was made, within a reasonable period after receipt of the proposal. A majority of the votes cast would be sufficient for a decision to concur or object. If the Fund objected, the proposed par value would not take effect for the purposes of the Articles. The member would then be in the same position with respect to consultation with the Fund as a member that had not intended to establish a par value and had not proposed one to the Fund.

The importance attached to a member’s opinion with respect to the external value of its currency is demonstrated by the repetition of the rule that the Fund shall not object because of the domestic social or political policies of the member. This rule is stated in connection with the proposal of both an initial par value356 and a change in par value.357 In the original Articles, the rule was stated only in connection with proposed changes.

3. Only a member would be able to propose an initial par value for its currency.358 Similarly, only a member would be able to propose a change in the par value of its currency. In this respect, and in the requirement that consultation with the Fund must precede a change, no departure has been made from the original Articles.359 An exception has been made, as it was under the original Articles. The Fund may decide, by a 70 percent majority of the total voting power, to make uniform proportionate changes in all par values. The Fund would be able to take this decision only if the SDR was the common denominator of the par value system and if the changes would not affect the value of the SDR.360 Uniform proportionate changes would not be made in order to affect the volume of global liquidity, which would have been the objective of such changes under the original Articles because they would have altered the official price of gold in terms of currencies. Increases or decreases in global reserves can be achieved under the present Articles by the allocation or cancellation of SDRs. Uniform proportionate changes in par values under Schedule C of the present Articles would be intended to deal with discrepancies that might develop in certain circumstances between par values and the values of currencies in terms of the SDR in transactions.361 A member would continue to have the right to prevent the par value of its currency from being changed by the Fund’s action, provided that the member gave the Fund notice within seven days after the Fund’s action.362

If a member changed the par value of its currency despite the objection of the Fund, the member would be in violation of its obligations 363 and subject to the penalties of ineligibility to use the Fund’s general resources and compulsory withdrawal if the Fund should decide to impose these penalties.364 This treatment of a change in par value despite the objection of the Fund means that the special concept of the unauthorized change of par value under the original Articles as an action that was not a violation, although subject to penalties, has been abandoned. The legal technique by which the Catto clause has been eliminated from the Articles has been explained elsewhere.365 No suggestion was made during the drafting of the Second Amendment that the concept should be retained. The explanation may be that under Schedule C a member would be able to terminate a par value and therefore adopt some other exchange arrangement if the Fund objected to a proposed change in par value. The termination of par values is discussed later in this Section.

The legal effect of the Fund’s objection to a proposed initial par value differs from the effect of its objection to a proposed change in par value. If a member were to make a change in par value despite the objection of the Fund, the member would be in violation of the Articles and the change would not take effect for the purposes of the Articles. If the member were to adopt an external value for its currency notwithstanding the Fund’s objection to that value as an initial par value, Schedule C does not declare that the member would be in violation of its obligations. Schedule C provides only that the external value would not take effect as a par value under the Articles.366

4. A provision of Schedule C that was not included in the original Articles requires the Fund to discourage the maintenance of an “unrealistic par value.”367 This expression is not satisfactory but its meaning was well understood in the days of the original par value system. The adjective “unrealistic” is unsatisfactory because a par value that is being made effective is in operation and therefore is “real.” What is meant is that the par value does not contribute to the needed adjustment of the member’s balance of payments and should be changed for that reason. Critics have complained that one of the weaknesses of the original par value system was that the Fund could not propose a change in par value in these circumstances. This rule has been retained because members consider it to be crucial for their control over the external value of their currencies. The duty of the Fund to discourage the maintenance of an unrealistic par value is a compromise, but what discouragement means has been left vague by design. It might be possible to interpret the provision as permitting the Fund to express dissatisfaction with a par value but not as authorizing the Fund to propose a specific par value to which the Fund would want to see the member make a change.

Past practice does not suggest that the Fund would be willing to take decisions that give advance signals of changes in par values, because the decisions might provoke speculation. Probably, the Managing Director would be expected to provide the discouragement, because this procedure would be likely to avoid the publicity that often follows decisions of the Executive Board. The procedure would be consistent with the role that the Managing Director now performs under the procedures for firm surveillance of the exchange rate policies of members.

5. Another leading difference between the former par value system and the par value system of Schedule C is that under the original Articles a par value could not be abandoned legally without the immediate establishment of a new par value. Legally, a member was never without a par value for its currency once it had established an initial par value. Even if a member was failing to give effect to the most recent par value for its currency that had been established under the Articles, the par value remained in existence under the Articles as interpreted until a new par value was established. Under Schedule C, a member would be able to inform the Fund that it intended to terminate the par value for its currency. The member’s intention could be resisted by the Fund, but only by a decision taken by an 85 percent majority of the total voting power.368 This majority makes it more likely that the member’s intention would prevail than if a lower majority had been required.

If the Fund decided to object to a member’s intention to terminate the par value for its currency, but the member nevertheless carried out its intention, the Fund would be able, although not compelled, to apply the penalties of ineligibility to use the Fund’s general resources and compulsory withdrawal from the Fund. The terminated par value would cease to exist for the purposes of the Articles.369 There was no need to preserve the former principle that the par value continued to have legal existence in such circumstances. Under the original Articles the conclusion that floating was illegal was drawn from a member’s failure to ensure that exchange rates were within the margins around parities. This conclusion had to rest on the continued legal existence of the most recent par value established under the Articles. Under Schedule C, if a member terminates a par value despite the objection of the Fund, the action is expressly declared to be a violation of the member’s obligation.370 The violation is the termination of the par value and not the failure to enforce margins. The new approach of Schedule C avoids the embarrassment of insistence by the Fund that a par value abandoned de facto retains its existence de jure.

6. The par value of a member’s currency may cease to exist under Schedule C on the initiative of the Fund and not, as in the case of the notice of termination, on the initiative of the member. Once again, therefore, in contrast to the legal position under the original Articles, there could be a break in the continuity of par values after an initial par value had been established. A par value would cease to exist if the Fund were to find that a member did not maintain exchange rates for a substantial volume of exchange transactions within margins consistent with the Articles. The finding might be made in either of two situations. In one situation, a member allows its currency to float without informing the Fund that the member was terminating the par value. In the other situation, a member adopts multiple currency practices, with or without the Fund’s approval, under which a substantial volume of exchange transactions take place at exchange rates outside the margins prescribed by the Articles or under the Fund’s power to establish margins.371

Schedule C adopts safeguards for members against precipitate action by the Fund. The Fund could not decide that the par value of a member’s currency had ceased to exist for the purposes of the Articles unless the member had received 60 days’ notice of the Fund’s intention to consider whether to find that a substantial volume of exchange transactions were taking place outside the margins prescribed by the Articles or by the Fund. The delay would give a member the opportunity to take corrective action or at least to express its views. Moreover, circumstances might change even without corrective action so that exchange transactions were no longer taking place outside legal margins to the same extent as formerly. The Articles do not define or give other guidance on what is meant by a substantial volume of exchange transactions. The criterion might be the frequency of transactions or the total amount of exchange that was being traded. In contrast to many other decisions on exchange rates, a decision that a par value had ceased to exist could be taken by a majority of the votes cast.372 The probable assumption was that members issuing major currencies would not be in either of the situations in which the Fund could make a finding that a par value had ceased to exist.

If the par value of a member’s currency ceased to exist because of termination by the member, whether or not in the face of objection by the Fund, or because of a finding by the Fund that prescribed margins were not being observed, the member would have to consult the Fund and ensure that its exchange arrangement was consistent with the purposes of the Fund and adequate to fulfill its obligations under Article IV, Section 1.373 A member whose par value had ceased to exist would be able to propose the establishment of a par value for its currency at any time.374 The member could propose to re-establish the former par value or establish a new one.

If the provisions of Schedule C are considered as a whole, it is difficult to assess whether a member would have more or less authority over the external value of its currency than it had under the original Articles. In a proceeding before the Constitutional Council of France, the argument was advanced that the Second Amendment had brought about a basic change in the original equilibrium between the rights and obligations of members, and therefore that the change amounted to an impairment of national sovereignty. Another argument was that elimination of the par value system constituted the replacement of one international monetary system by another. These arguments were made in support of the contention that although the acceptances by members of the proposed Second Amendment satisfied the provisions of the Articles on amendment,375 France was not bound by the Second Amendment unless it gave its acceptance. France had not taken that action. Acceptance by France, it was argued, would require parliamentary action.

The Constitutional Council decided that the Second Amendment had become binding on France even though it had not given its acceptance. The Council noted that Schedule C, like the earlier Articles, provided that no change could be made in a par value except on the proposal of a member. The purpose of this provision was to safeguard the sovereignty of members. The same purpose was served by the provisions on exchange arrangements as a whole, and in particular by the provision assuring members of the right to apply the exchange arrangements of their choice before the par value system came into effect.376

Section VIII Convertibility

Convertibility in General

Exchange rates are relationships between currencies. The convertibility of currencies also can be considered a relationship. Convertibility is a crucial element in the international monetary system, the province of the Fund, and international monetary law. Changes in convertibility have occurred in all three since 1971. In the discussion of convertibility, a problem that arises at once is the complexity of the concept and the difficulty of defining it. A study published in 1971377 attempted a definition in the abstract by proposing that a currency could be said to be convertible if it met three criteria. First, the currency could be used without restriction of a currency character for any purpose whatsoever. Second, the currency could be exchanged for any other currency without restriction of a currency character. Third, the currency could be used or exchanged at its par value, or at a rate of exchange based on the par value, or at some legal rate of exchange, or at a rate defined in any other way considered desirable. The third criterion was obviously imprecise. The idea embedded in it was that the use or exchange of the currency was not subjected to some penalty relating to cost. This idea would not lose its relevance because of the abrogation of the par value system.

Other points made by the study were that the three criteria could be satisfied in full or in part, and, therefore, that it was not necessary to insist that the concept of convertibility was an absolute. Indeed, the Fund itself applied numerous versions of convertibility. Legal instruments could define convertibility to suit the purpose of the instrument and could define the concept in more ways than one to serve different purposes.

The original Articles contained a definition of convertible currencies.378 This definition was considered the main concept of convertibility for the purposes of the Fund. The concept so defined was relied on in the drafting of innumerable legal instruments inside and outside the Fund. A member’s currency was deemed to be convertible if the member, instead of availing itself of the transitional arrangements,379 had given notice to the Fund380 that it was prepared to perform the obligations set out in Article VIII, Section 2, 3, and 4, which were often referred to, therefore, as the obligations of convertibility.

A member’s acceptance of the obligations of convertibility had two main consequences. First, the member could not retreat from the obligations of convertibility under Article VIII, Sections 2, 3, and 4; and, in particular, it could not resume use of the transitional arrangements. The member was not entitled, therefore, to exercise the privilege under the transitional arrangements of maintaining or adapting restrictions on payments and transfers for current international transactions without the need for approval by the Fund. Second, the convertibility of a currency had certain consequences for the transactions and operations of the Fund. For example, if the currency was held by other members it was included in the calculations of their monetary reserves, and of increases in these reserves,381 that the Fund made for the purpose of computing certain obligations. One example was the obligation of a member to repurchase holdings of its currency obtained by the Fund when it sold other currencies to the member.382 Again, a member could use convertible but not inconvertible currencies in making these repurchases of its own currency.383

It will be seen that the Second Amendment has eliminated the former definition of convertible currencies from the Articles and has not substituted a new definition. New terminology has been coined to serve certain purposes of the Fund under the Second Amendment. The change was made because of the relativity of the concept of convertibility, the difficulty of reaching agreement on a new definition, changes in the provisions under which the definition had been necessary, and the wish of the United States to avoid any impression that it would undertake certain obligations that it had assumed in the past and that it considered to be intimately related to a par value system. The absence of a definition of a convertible currency has made it more difficult for the drafters of legal instruments to refer in a simple way to payments in the currencies that they consider desirable.384

Convertibility will be discussed further under the main headings of market convertibility and official convertibility.

Market Convertibility

“Market convertibility” is not a term of art but it is a convenient, although somewhat misleading, expression to describe the provisions of the Articles that are designed to give effect to the following purpose of the Fund:

“To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.385

Under all three versions of the Articles, Article VIII, Section 2 (a) has been the main provision designed to give effect to this purpose. It has always declared that no member shall impose restrictions, with-out the approval of the Fund, on the making of payments and transfers for currency international transactions. These transactions have always been defined extensively:

Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:

(1) all payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;

(2) payments due as interest on loans and as net income from other investments;

(3) payments of moderate amount for amortization of loans or for depreciation of direct investments; and

(4) moderate remittances for family living expenses.

The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions.386

“Payments” are the financial remittances made by or on behalf of payors to payees to settle obligations387 arising from current international transactions. “Transfers” are remittances by payees to their residence abroad of the proceeds of recent current international transactions.

Freedom for “transfers” as well as for “payments” is essential for the multilateral system that is a purpose of the Fund. A resident of country X can decide to enter into a current international transaction with a resident of country Y, who offers the most favorable terms, in the confidence that the proceeds of the transaction that the resident of X is to receive will not be blocked or restricted in any way by country Y. If the resident of country X obtains his own currency in the exchange market of country Y in exchange for the proceeds of the transaction, the resident of country X will be able to transfer his own currency to his own country. Even if the resident of country X must surrender the proceeds in the currency of country Y to the monetary authorities of country X, he will be able to surrender the proceeds and obtain his own currency in return. Whichever procedure is followed, the resident of country X is now in a position to use his receipts in his own currency to obtain the currency of country Z to make payments to a resident of that country who offers the best terms for the next transaction. The monetary authorities of country X must not prevent its resident from obtaining and using the currency of country Z for this purpose. If the resident of country Z is willing to receive payment in the currency of country X, that country must not impede the payment. In effect, the proceeds of the transaction with the resident of country Y have been used to finance the transaction with the resident of country Z. These procedures among all members produce the multilateral system of payments and transfers for current international transactions.388

A member may not restrict the ability of its residents to make payments in domestic or foreign currency to nonresidents in settlement of current international transactions. A member may not restrict the ability of nonresidents to receive and repatriate in their own currencies the proceeds of recent current international transactions. Nor may a member restrict the ability of nonresidents to use proceeds in the member’s currency received in recent current international transactions to make payments of their own in that currency for further transactions of this kind instead of repatriating the proceeds. Proscribed restrictions may take the form of prohibitions, undue delays, or other hindrances. It has been seen in Section II that the guiding principle in ascertaining whether a measure is a restriction under Article VIII, Section 2 (a) is whether it involves a direct governmental limitation on the availability or use of exchange as such.389 This test concentrates on the technical character of measures or practices as measures or practices that relate directly to currency and on their effect. A measure may seem prima facie to be a restriction, for example, because the measure requires licenses, but it will not be considered a restriction if the effect is not restrictive, for example, because licenses are always granted.

The term market convertibility is somewhat misleading, as noted above, because the payments and transfers that must be free from restriction can be made by foreign official entities as well as by private parties, even though private parties are more commonly thought of as the frequenters of the market. Moreover, the market can be the monetary authorities of a country if they monopolize, or to the extent that they centralize, exchange transactions in which their residents can obtain foreign exchange for the purpose of making payments for current international transactions and nonresidents can obtain their currency for the purpose of transferring the proceeds of recent current international transactions. The Articles do not prohibit the centralization of some, or the monopoly of all, exchange transactions, but if the monetary authorities engage in such a practice they must provide exchange so that the making of payments and transfers for current international transactions is not restricted.

Article VIII, Section 2 (a) prohibits restrictions on the “making” of payments and transfers. For this reason a measure that requires residents to surrender foreign exchange to their authorities is not in itself such a restriction.390 For the same reason, members can prescribe the currencies that their residents must receive in payments to them for current international transactions. A member is able to insist, for example, that its residents must receive these payments in the currencies in which traditionally trade or other current international transactions are conducted. This practice does not impair the multilateral system of payments. If country X prescribes that its residents must receive, let us say, U.S. dollars from the residents of other member countries, country Z must not interfere with the ability of its residents to obtain dollars to “make” payments to the residents of country X.

Another convertibility provision designed to safeguard the multilateral system is Article VIII, Section 3. It prohibits members from engaging in, or permitting any of their fiscal agencies to engage in, discriminatory currency arrangements or multiple currency practices. These obligations of members have been discussed in earlier Sections of this Chapter.

The obligation to avoid restrictions does not prevent a member from controlling international capital transfers, provided that the member’s controls for this purpose are not exercised in a way that restricts payments for current international transactions or that unduly delays the transfer of the proceeds of these transactions.391 A member may not delay unduly the transfer of such proceeds and declare that they have become capital balances that cannot be transferred because the transfer of capital is restricted. The Fund has decided that the discriminatory control of capital transfers is not a discriminatory currency arrangement for which approval must be obtained under Article VIII, Section 3.392 The Fund has refrained from deciding whether a multiple currency practice limited to capital transfers requires the approval of the Fund under Article VIII, Section 3.

The Second Amendment has made only two substantive modifications of the provisions relating to market convertibility. Article VIII, Section 3 has been modified to provide that discriminatory currency arrangements or multiple currency practices can exist even within margins for exchange rates that are prescribed by the Articles or by the Fund under the authority of the Articles.

The other modification relates to the transitional arrangements that derogate from the convertibility obligations of Article VIII, Sections 2, 3, and 4 for the benefit of members that are availing themselves of the arrangements. Before the Second Amendment, the transitional arrangements were authorized in “the postwar transitional period,”393 but many members, including both original and other members,394 were still availing themselves of the arrangements at the time of the Second Amendment. In practice, the transitional arrangements had become a privilege that members could enjoy in circumstances that had no relationship to the difficulties created by World War II. Members could go on availing themselves of the transitional arrangements until they decided to undertake to perform the obligations of convertibility however delayed that decision might be. The Second Amendment has brought the Articles into line with practice by eliminating the reference to a postwar transitional period.395

If market convertibility as required by the Articles is tested against the criteria of usability, exchangeability, and value that have been suggested as criteria for measuring the extent to which convertibility is ensured, the following limitations must be noted:

  • (a) The Fund may approve restrictions on payments and transfers for current international transactions, multiple currency practices, and discriminatory currency arrangements.396

  • (b) Members may control inward or outward movements of capital, provided that payments and transfers for current international transactions are not impeded.397

  • (c) The exchange rates at which currencies can be exchanged are not prescribed, but the exchange arrangements that give rise to exchange rates must be consistent with the Articles.

The obligation of market convertibility does not extend to capital transfers,398 but countries have entered into agreements to avoid or reduce restrictions on capital transfers. Members of the Organization for Economic Cooperation and Development (OECD) may adhere to the Code of Liberalization of Capital Movements that was adopted on December 12, 1961 and has been amended often since then. The objective is the reduction of restrictions on capital movements among OECD members, but they must endeavor to extend measures of liberalization to all members of the Fund. Under the Treaty of Rome,399 to the extent necessary to ensure the proper functioning of the common market, members of the European Community must abolish progressively all restrictions between them on the movement of capital belonging to their residents.400

Official Convertibility

Although market convertibility to ensure freedom to make payments and transfers for current international transactions was not necessarily confined to the acquisition and exchange of currencies through the private channels of commercial banks, transactions of that character were considered typical of market convertibility. By contrast, official convertibility necessarily involved monetary authorities as parties on both sides of a transaction. The monetary authorities making a conversion did so by converting their own currency into another currency or a reserve asset for the benefit of the monetary authorities of another member.

Before the Second Amendment, the Fund recognized four forms of official convertibility, that is to say, four ways in which the monetary authorities of a member would convert balances of their currency.401 The purposes of all these forms of convertibility could be regarded, in a sense, as support for the multilateral system as described earlier in this Section, but this support was not the direct purpose of three of them. The four forms of convertibility will be considered under the headings of the purchase and sale of gold, convertibility through the Fund, the redemption of balances with SDRs, and currency convertible in fact.

Purchase and Sale of Gold

The practice of freely buying and selling gold has been discussed in Section III. The practice can be considered a form of convertibility because a member following the practice undertook, although voluntarily, to provide gold in exchange for balances of its currency in transactions with the monetary authorities of other members. The practice was associated with the par value system because a member following the practice was deemed to be maintaining the par value of its currency in terms of the common denominator of the system.

A member freely buying and selling gold in accordance with the practice as defined by the Articles was not required to take other measures to perform its exchange rate obligations, but the practice was intended nevertheless to achieve symmetry in the operation of the international monetary system. Members not freely buying and selling gold used reserves (or negotiated loans or the use of the Fund’s resources) to meet deficits in their balances of payments. If a member in surplus in its balance of payments accumulated the currency of a member that was freely buying and selling gold, the member in surplus could obtain gold for the balances from the member following the practice. It will be recalled that the only member that undertook to follow the practice of freely buying and selling gold for its currency was the United States.

Convertibility Through the Fund

Article VIII, Section 4 provided that the monetary authorities of a member that had undertaken to perform the convertibility obligations would convert balances of its currency when presented for conversion by the monetary authorities of another member.

Article VIII, Section 4 was a complex provision that was formulated as follows before the Second Amendment:

  • (a) Each member shall buy balances of its currency held by another member if the latter, in requesting the purchase, represents

  • (i) that the balances to be bought have been recently acquired as a result of current transactions; or

  • (ii) that their conversion is needed for making payments for current transactions.

The buying member shall have the option to pay either in the currency of the member making the request or in gold.

  • (b) The obligation in (a) above shall not apply

  • (i) when the convertibility of the balances has been restricted consistently with Section 2 of this Article, or Article VI, Section 3; or

  • (ii) when the balances have accumulated as a result of transactions effected before the removal by a member of restrictions maintained or imposed under Article XIV, Section 2; or

  • (iii) when the balances have been acquired contrary to the exchange regulations of the member which is asked to buy them; or

  • (iv) when the currency of the member requesting the purchase has been declared scarce under Article VII, Section 3(a); or

  • (v) when the member requested to make the purchase is for any reason not entitled to buy currencies of other members from the Fund for its own currency.

The holder of balances was not bound to present them for conversion. The issuer was required to convert balances, if presented, only if they met one of two conditions. First, the balances were the proceeds of recent current international transactions and, therefore, were not capital. It was not a condition that conversion was needed for making payments for current international transactions. Alternatively, the balances, though capital, had not been restricted as such by the issuer, but it was a condition that conversion was needed to enable payments to be made for current international transactions. The proceeds of current international transactions became capital if the balances were not transferred before the transactions ceased to be recent. Clearly, convertibility under Article VIII, Section 4 was for the direct support of the multilateral system of payments and transfers for current international transactions.

Why was this form of convertibility, which prevailed only between monetary authorities, designed for the support of market convertibility (the multilateral system)? One reason was the assumption by negotiators of the original Articles that members might require the surrender of foreign exchange by their residents to their monetary authorities. It has been seen that this requirement was not prohibited by the Articles. The surrender of foreign exchange would provide residents with their own currency and would enable the monetary authorities to get conversion of the foreign exchange through official channels if they wished. The amounts of foreign exchange obtained by monetary authorities might be substantial. Conversion through the exchange markets might not be practicable or possible because markets might be inadequate or nonexistent. The use of reserves might be necessary to effect conversion, but reserves might be inadequate. The member called upon to convert might find it necessary to use the Fund’s resources for making the conversion. Why use of the resources was convertibility through the Fund will be explained in due course.

Article VIII, Section 4 was intended also to serve as support of the par value system. Each member had an obligation under the par value system to maintain the effectiveness of the parities of its currency with the currencies of other members when its currency was exchanged in transactions within its territories. A principle of mutuality was implicit in the par value system, according to which each member supported its own currency in its own market. (It was clearly established in the Fund’s practice as a corollary of this mutuality that if a member allowed its currency to float, other members were released from the obligation to confine exchange rates in transactions in their territories involving the exchange of their currencies and the floating currency within margins consistent with the Articles.) Intervention in the exchange market was an appropriate measure that a member could adopt to perform its obligation, with the result that from time to time a member would obtain balances of the currency of another member. It was reasonable to expect that a procedure for settlement between the two members would be an essential concomitant of the principle of mutuality in a par value system.

Article VIII, Section 4 established this procedure. If member X held balances of the currency of member Z and presented them for conversion to Z, because Z had undertaken to perform the obligations of Article VIII, Sections 2, 3, and 4, Z had an option to make the conversion with the currency of X or with gold. Member Z could perform this obligation by drawing on its reserves or by using the Fund’s resources to obtain the currency of X, but Z was not compelled to perform the obligation at all unless it was in a position to use the Fund’s resources. This caveat appeared in Section 4(b)(v) of Article VIII, which has been quoted above.

If, for any reason, Z was not able to use the Fund’s resources, the obligation to convert foreign official balances of its currency was in abeyance until the impediment to use of the Fund’s resources ceased to exist. During any period of abeyance, however, Z’s obligation of market convertibility remained unaffected. That is to say, Z was not entitled to impose restrictions on market convertibility because it was unable to use the Fund’s resources.402 If, on the proposal of Z, the Fund approved restrictions on market convertibility, Z was not obliged to convert through official channels balances of its currency subject to the restrictions that X obtained, for example, by intervention or from residents under surrender requirements. If Z’s position was protected by restrictions on balances of its currency approved by the Fund under Article VIII, Section 2(a), or by restrictions on capital authorized by Article VI, Section 3, the protection could not be rendered nugatory by a demand for conversion of the balances between monetary authorities under Article VIII, Section 4.403

The aspect of Article VIII, Section 4 that remains to be considered is how convertibility through the Fund worked. It has been seen that Z had the option to convert balances of its currency held by X with the currency of X. Member Z could purchase the currency of X from the Fund for this purpose. If Z made the purchase, Z reduced its rights to make further use of the Fund’s resources by the amount of the purchase and increased the rights of X by the same amount. The purchase produced this result because the formula for the amount of further use of the Fund’s resources that a member could make with-out the necessity for a waiver by the Fund was expressed as the amount by which 200 percent of the member’s quota exceeded the Fund’s total holdings of the member’s currency.404 In the example involving Z and X, the Fund’s holdings of Z’s currency were increased and its holdings of X’s currency were decreased. Z used an amount of its rights and, in effect, transferred them to X. If X should need foreign exchange at some time, X would be able to obtain it from the Fund by exercising rights that had been augmented by Z’s earlier purchase. In effect, therefore, X had obtained conversion of its holdings of currency Z into other currencies through the medium of the Fund.405

Redemption of Balances with SDRs

In Section III a brief discussion will be found of the provision introduced into the Articles by the First Amendment under which a member (M) was authorized to agree with another member (P) that M would redeem with SDRs balances of M’s currency held by P.406 The provision was a mitigation of the Fund’s strict control of transfers of SDRs by means of designating transferees.407 Transactions under the provision differed also from the other transactions that members might enter into by agreement under the authorization of the Articles. These other transactions were part of the ordre public of the SDR plan because they were designed to promote the functioning of the Special Drawing Account as it was then called.408

The redemption of balances under the provision could be considered a form of convertibility with SDRs. The provision was the result of an initiative by the United States in the negotiation of the First Amendment. The United States pointed out that it did not hold the currencies of other members in its reserves because it did not intervene in the exchange markets in support of the par value of the U.S. dollar. Furthermore, the United States did not receive the currencies of other countries when it was in surplus in its balance of payments. The members in deficit used their holdings of U.S. dollars to meet their deficits. The surplus of the United States was reflected in the cancellation of its liabilities in the form of other members’ holdings of dollars. The United States protested that it would be inequitable to expect it to redeem balances of dollars, when it was in deficit, with currencies it did not hold and did not receive when it was in surplus. Agreement was reached on a provision under which the United States could redeem balances of dollars with SDRs, and therefore could use SDRs in a way appropriate to its situation when it was in surplus, which was to cancel currency liabilities.409 The United States was not able to negotiate a right to insist on redemption with SDRs. The agreement of the member holding the balances was necessary, so as not to impair its right to get conversion of them with gold. Finally, the provision authorizing redemption by agreement was formulated in general terms that were applicable to the currencies of all members and did not refer expressly to the United States or to members that issued reserve currencies.410

Currency Convertible in Fact

The concept of “currency convertible in fact” was created by the First Amendment for the purpose of prescribing currency that had to be provided by a designated transferee of SDRs. The concept embraced two categories: first, currencies prescribed as currencies and, second, particular balances of currencies not prescribed as currencies. The first category consisted of the currencies of members that (a) had accepted the obligations of Article VIII, Sections 2, 3, and 4, or had undertaken to buy and sell gold freely within the meaning of the Articles, and, in addition (b) had made arrangements for interconvertibility among all currencies of the first category at the exchange rates prescribed by the Articles. The particular balances of a currency in the second category were those for which the issuer had made arrangements to convert the balances into at least one of the currencies of the first category at the exchange rates prescribed by the Articles. The currency as such did not have to meet the condition that the issuer freely bought and sold gold or had accepted the obligations of Article VIII, Sections 2, 3, and 4.411

The purpose of the complex definition was to make it probable that a transferee of SDRs would be able to provide a currency of its choice from its reserves, and that the transferor would be likely to receive the currency of its preference because of the arrangements for conversion required by the definition. Moreover, the transferor would obtain the same value that it would have obtained had the final currency it received been provided by the transferee in the first instance.

The concept of currency convertible in fact could be regarded as a form of official convertibility because the arrangements that have been mentioned required the monetary authorities of the issuer of such currency to ensure that, when it was provided in return for SDRs, the currency could be converted into another currency. That other currency had to be one that was covered by the definition as a currency of the first category, so that ultimately the transferor of SDRs would be likely to get the currency convertible in fact of the first category that it wanted. Similarly, the issuer of balances deemed to be currency convertible in fact would stand ready to convert them into one of the currencies of the first category, after which the arrangements for inter-convertibility among these currencies could be invoked if necessary.

Some Characteristics of Official Convertibility

Under the Articles before the Second Amendment certain characteristics were common to all forms of official convertibility or were shared by some of them:

1. All forms of official convertibility called for the conversion by monetary authorities of their own currency.

2. The practice of freely buying and selling gold and the redemption of balances with SDRs involved convertibility into a nonnational asset. The essence of convertibility through the Fund was the transfer of rights that were nonnational because they were rights to use the resources of the Fund. Moreover, gold was specified as an asset in which conversions could be made without use of the Fund’s resources. For a currency to qualify as a currency convertible in fact of the first category, the issuer of it had to buy and sell gold freely within the meaning of the Articles or undertake to perform the obligations of Article VIII, Sections 2, 3, and 4, but the arrangements for the convertibility of currency convertible in fact provided in exchange for SDRs called only for conversion into other currencies and not into a nonnational asset.

Only convertibility through the Fund was associated directly and expressly with the multilateral system of payments in respect of current international transactions.

3. A high degree of voluntarism was characteristic of all four forms of official convertibility. No member was under an obligation to buy and sell gold freely, and a member that did undertake the practice could terminate it at will. A member decided when to give notice that it was willing to perform the obligations of Article VIII, Sections 2, 3, and 4. Once the notice was given, however, it could not be withdrawn. The redemption of balances of a currency with SDRs depended on agreement between the holder of the balances and the issuer of the currency. Although the Fund decided whether currency came within the definition of currency convertible in fact, the issuing member had to give notice that it wanted its currency, or certain balances of it, to be recognized as currency convertible in fact, and the member had to make the arrangements that were necessary to have the currency, or certain balances of it, qualify for recognition. A member could give notice, or the Fund might find, that a currency, or specified balances, no longer conformed to the definition.412

Reform: Asset Settlement

The Committee of Twenty conducted its discussions of reform of the international monetary system on the assumption that a par value system of some kind would be restored. Such a system, it has been pointed out earlier in this Section, implies mutual responsibilities for the maintenance of parities. It is also implied that balances of a partner’s currency obtained as a result of the observance of these responsibilities will be settled between the member that has obtained the balances and the member issuing the currency. The resonance of the word “settle” is that an obligation must be undertaken to do something about the balances. The former provision on the practice of freely buying and selling gold, for example, referred to the practice as one that was “for the settlement of international transactions.”413

In the par value system as it developed in practice, the maintenance of parities did not result in the acquisition by members of the currencies of many other members. Most members performed their obligations relating to exchange rates by intervening in the exchange markets with the U.S. dollar, or a few currencies convertible into the dollar, to maintain the parity of their own currency with their intervention currency. The maintenance of parities, directly or indirectly, between a member’s currency and the dollar produced an orderly pattern of legal exchange relationships among all currencies.

If members needed U.S. dollars for intervention, dollars could be bought for gold, and if members obtained dollars they did not want to retain in their reserves, the dollars could be sold for gold, in transactions with the monetary authorities of the United States. These transactions were feasible because the United States had undertaken to buy and sell gold freely for dollars at a fixed price in transactions with the monetary authorities of other members. But a member in deficit in its balance of payments could obtain dollars from the Fund or other currencies that could be converted into dollars in the market or under collaborative arrangements with the members that issued these other currencies. In such conditions, it was not surprising that the official convertibility of the dollar through the Fund, under Article VIII, Section 4, had not functioned in practice.414 The provision might have had more of a function for the conversion of other currencies, but few had been used in intervention. The provision was not invoked for even these few currencies, however, because of the arrangements that applied among the countries that belonged to a currency area, under which they held a particular currency other than the dollar. In addition, many aspects of Article VIII, Section 4 were unclear, the provision was difficult to apply, and it was limited in amounts. Finally, exchange markets developed beyond the legal requirements of the multilateral system of payments and were not inadequate even for this broader scope, so that an assumption that had been responsible for the adoption of the provision proved to be unfounded.

In the discussions of reform of the international monetary system in the Committee of Twenty that followed the collapse of the par value system, there was a consensus that arrangements for the settlement of imbalances would be necessary. There was no disposition, however, to infuse vitality into Article VIII, Section 4. At the same time, the United States criticized the mechanism of settlement as it had operated and objected to it as a model for the future. The mechanism, for example, had not assured the United States of accruals to its reserves when it was in surplus in its balance of payments.415 Moreover, the United States might have lost reserves even though it was in surplus because other members in surplus might have earned their surpluses in dollars and might have decided to present dollar balances to the United States for conversion with gold.

Even if other countries recognized the justice of these criticisms, they held the view nevertheless that the United States had been in a privileged position because it had financed its deficit with currency liabilities (i.e., with dollars) rather than with reserves, and because other members had been reluctant to present dollars for conversion with gold. Some members had been reluctant to request conversion because the Unites States might have regarded the presentation of dollars for gold as unfriendly. The reluctance of these members might have been increased by the actions of members that had presented dollars for the avowed or unannounced but obvious purpose of putting pressure on the United States to change its policies and achieve adjustment of its balance of payments. There was an economic as well as a political reason for reluctance: it was feared that persistent requests for gold might destroy the par value system by making it apparent that the United States did not own enough gold to give reality to its undertaking.

Two possible innovations were proposed as a means of achieving greater symmetry among members in a reformed par value system. The Committee of Twenty did not reach agreement on either proposal, and the Outline of Reform contains only the expression of broad aspirations in relation to them.416 The two new ideas were multicurrency intervention and a symmetrical form of convertibility for the settlement of imbalances. The latter idea was given the name “asset settlement” to distinguish it from earlier forms of convertibility.417 The stages reached in the discussions of these topics in the Committee of Twenty are described in Annexes 3418 and 5419 attached to the Outline of Reform.

Annex 3 mentioned three approaches to a possible scheme for asset settlement. Each would be designed to give effect to the objective of sufficient control by the Fund over the aggregate volume of currencies in reserves. This objective was supported for reasons that were considered fundamental for the future of the international monetary system. One reason was widespread dissatisfaction with the effect on the international monetary system of unlimited capacity for the United States as the principal issuer of a reserve currency to finance disequilibria in its balance of payments by means of increases in its currency liabilities. Another reason was the hope that the SDR as a nonnational reserve asset would become the principal reserve asset and dislodge gold and the dollar from their positions of eminence. The status of the SDR could be improved by providing that asset settlement would be made with SDRs.

The first approach in Annex 3 (“a more mandatory system”) would provide close control over the volume of currencies in reserves by requiring full asset settlement. The Fund would reach agreement periodically with the issuers of leading reserve currencies on an appropriate total level for their currency liabilities to other members, and if the total rose above this level the reserve currency country would redeem the excess with reserve assets. If a multicurrency intervention system were created, participants in it would undertake to present to the issuer without delay balances the participants had obtained by intervention. European and other members supported this first approach because of the desire to impose obligations on the United States equivalent to those that they would bear.

The second approach (an “on demand system”) was designed to ensure a sufficient but less rigorous degree of international control over aggregate currency balances in reserves. The issuer of a reserve currency would be entitled to request members holding its currency to limit further increases in their holdings of it, if necessary by presenting balances for conversion, and the holders would respect these requests.

The third approach had an objective similar to the second approach, but it was coupled with some assurance that a sufficient degree of asset settlement would take place. Amounts would be established for total currency liabilities in the same way as under the first approach. The Fund would have a discretion to require the issuer to redeem an excess beyond a total if the Fund determined that the excess reflected longer-term and not temporary and reversible factors. If the excess were more than a predetermined amount, the issuer would be required automatically to redeem the excess above that amount unless the Fund decided otherwise. Settlements under a multicurrency intervention system would be outside these arrangements. The United States favored a more flexible approach to asset settlement than the more mandatory system.

If a reserve currency country was in surplus, as evidenced by reductions in its currency liabilities, it would receive SDRs corresponding to the reductions under arrangements that might include a special account called a Substitution Account. Settlements of imbalances through a Substitution Account would be made in SDRs, in accordance with the chosen approach, when a reserve currency country was in surplus or in deficit.420

Second Amendment

Market Convertibility

The provision imposing the obligation of market convertibility remains unchanged in the Second Amendment.421 The Report on the Proposed Second Amendment refers to this provision as having become the “basic convertibility provision” of the Articles even before the Second Amendment.422 Article XIV, which had been entitled “Transitional Period” and is now headed “Transitional Arrangements,” continues to be an authorized derogation from the obligation of market convertibility. The amendment of Article XIV that is reflected in the heading of the provision does not represent a change in practice but disposes of the criticism that the Fund had permitted the “post-war transitional period”423 to be prolonged improperly.

Purchase and Sale of Gold

The former provision on the practice of freely buying and selling gold424 has been eliminated from the Articles and has not been replaced by any comparable provision. The disappearance of the provision was dictated by the demise of the par value system in which the practice of the United States had become the primary norm. In addition, an objective of the Second Amendment is the gradual reduction of the role of gold in the international monetary system.

Convertibility Through the Fund

Convertibility through the Fund under Article VIII, Section 4 was another form of convertibility that could have been considered so closely connected with the settlement arrangements of the par value system as to justify deletion of the provision from the Articles. The provision has not been condemned to this fate. Its survival is a strange phenomenon in the law of treaties.

The United States was opposed to all provisions on obligations of official convertibility, including Article VIII, Section 4. The United States wished to avoid any impression that it looked forward to the restoration of a par value system, which, in its opinion, had imposed inequitable burdens on it. Members of the European Community resisted the deletion of Article VIII, Section 4. They did look forward to the restoration of a par value system, and although they admitted that the provision was obscure and unsatisfactory in many ways, it did impose a settlement obligation. The provision was better than nothing in circumstances in which the United States would not accept an improved provision. These members were also perturbed by the thought that the sacrifice of Article VIII, Section 4, without any new provision on official convertibility, however delayed its operation might be, would imply that they were reconciled to the idea that there would be no restoration of a par value system or no improvements in exchange arrangements. Article VIII, Section 4 was an important symbol for them. They were even willing to accept the dilemma that retention of so unsatisfactory a provision might impede return to a par value system.

The differences among members could not be composed, and it was agreed therefore that Article VIII, Section 4 should be retained with one textual change. A member called upon to convert balances of its currency held by another member would have an option to make the conversion with SDRs or the currency of the member holding the balances instead of an option to use gold or the currency of the holder. Gold was to lose its cachet even in a provision that was to have no practical application.

The compromise included a statement in the Executive Board’s Report on the Proposed Second Amendment that explained how Article VIII, Section 4 was to be regarded in the future.425 The statement began by declaring that market convertibility as the basic mechanism of convertibility was available to all parties, whether private or governmental. Official convertibility under Article VIII, Section 4 had been intended to supplement market convertibility. The drafters had provided this supplementary mechanism because of certain assumptions they had made about the character and operation of the international monetary system after 1944. They had assumed, for example, that governments might centralize foreign exchange receipts, with the result that conversions through exchange markets might be modest. Settlements between monetary authorities might be so enormous in such circumstances that the use of the Fund’s resources would be necessary. The Report referred to some of the limitations on convertibility under Article VIII, Section 4 to demonstrate its shortcomings. The international monetary system had not developed as had been expected, and Article VIII, Section 4 had never been invoked. Instead, the Fund had supported market convertibility with the use of its resources by members.

Finally, the Report came to the compromise. Agreement had been reached on the Second Amendment with the understanding that the situation as it had developed would continue to prevail, and that there would be no resort to the obligation of official convertibility while conversions could be made through the normal operation of exchange markets. Members were not prevented from agreeing to make official conversions between themselves of official holdings of their currencies. It had been considered unnecessary, therefore, to modify the provision, but the possibility was taken into account that circum-stances might emerge similar to those that the drafters of the original Articles had assumed, “thus justifying more reliance on the provisions of Article VIII, Section 4. Any study of a possible future modification of the provision could be undertaken more usefully in the light of developments in connection with exchange arrangements under Article IV.”426

Part of the compromise was the thought that a member approached for official conversion under Article VIII, Section 4 would not be able to say that the obligation under the provision was dead, but if the member had an effective exchange market it could respond that the demand was not in accordance with the understanding on which the Second Amendment was based. The possible emergence of conditions that would justify the invocation of Article VIII, Section 4, although not expected, had to be recognized in order to make a concession to, and reach a compromise with, those European members that hoped for a resumption of official convertibility. Recognition of the possibility of changed conditions also made retention of the provision seem more reasonable. It was implied, however, that if reliance on Article VIII, Section 4 became justified, amendment of the provision would be considered in the light of actual circumstances.

Some form of official convertibility could be established, however, without amendment and without the compulsion of the Articles. It has been seen in Section V that the Fund may recommend general exchange arrangements. A recommendation could include some form of the management of exchange rates, intervention, and the convertibility of accumulated balances. Even if a par value system were not introduced, a case for convertibility obligations could be made in support of a floating regime if agreement were reached on how exchange rates should be managed and how intervention should be conducted. It could hardly be expected that an obligation of official convertibility would be undertaken if each country pursued its own policy on intervention and acquired balances of other currencies by intervention as it saw fit in its own interest. Some members had supported the retention of Article VIII, Section 4 with the argument that it might be useful in conjunction with general exchange arrangements recommended by the Fund.

It has been seen in Section VII that the Fund may give operational effect to the par value system of Schedule C. Before the Fund could adopt that decision, the Fund would have to take account of certain developments, which include “arrangements for intervention and the treatment of imbalances.”427 This language contemplates the possibility that a sufficient number of members might make arrangements among themselves for official convertibility. The arrangements could give effect to asset settlement in some form, even though the Second Amendment does not impose or mention this mechanism.

Redemption of Balances

The provision of the First Amendment authorizing members to agree on redemption with SDRs of balances of the currency of one member held by the other428 has been absorbed into a broader provision that now permits members to agree on the exchange of SDRs for any currency.429

Another new provision in the Second Amendment is intended to facilitate redemption by a member of balances of its currency held by another member when redemption was in accordance with the wishes of the two members.430 Under the Second Amendment, the Fund must adopt policies and procedures on the selection of the currencies it sells from the General Resources Account to a member in exchange for its own currency. For this purpose, the Fund must take into account, in consultation with members, the balance of payments and reserve position of members and developments in the exchange markets, as well as the desirability of promoting over time balanced positions for members in the Fund.431 Neither the purchaser of a currency nor the issuer of it is legally entitled to veto the Fund’s selection of the currencies it provides under its policies.

The provision on the selection of the currencies that are appropriate for sale in the Fund’s transactions contains a proviso. If a member represents that it is proposing to purchase the currency of a particular member in order to redeem an equivalent amount of the purchaser’s own currency held by the other member and offered by it for redemption, the purchasing member is entitled to obtain the currency of that other member. The purchasing member must be in a position to make purchases from the Fund in conformity with the provisions of the Articles and the policies of the Fund on the use of its resources, but if the member is qualified to purchase, it is entitled to purchase the currency necessary for redemption even though that currency would not be selected by the Fund if redemption were not the aim. The transaction is equivalent to convertibility through the Fund, but it is not obligatory for the member holding the balances to request conversion or for the issuing member to agree to make the conversion.

The purchasing member may find it advantageous to make a redemption on which agreement has been reached by purchasing the necessary currency from the Fund and not in the market. If the member made the purchase in the market, the transaction might affect the rate of exchange to the member’s disadvantage.

Although a member must satisfy the Fund’s policies for the use of its resources in order to qualify for a purchase of the currency necessary for redemption, the transaction is not subject to the various conditions and limits of Article VIII, Section 4. The purchaser will be able to meet the legal condition that it needs to make a purchase because, as noted earlier in this Section, unfavorable developments in reserves are recognized by the Articles as a category of need.432 The discharge of liabilities falls into this category, and an undertaking to redeem balances is a liability.433

Freely Usable Currencies

The definitions of a convertible currency and of currency convertible in fact that were included in the Articles have been eliminated from the Second Amendment. Furthermore, the language of convertibility has been abandoned, except in connection with official convertibility under Article VIII, Section 4.

A reason for the disappearance of the two definitions and of the former terminology was the wish of the United States to avoid any implication of a return to official convertibility, whether obligatory or voluntary. Another reason, however, was that basic changes were made in financial aspects of the Fund’s activities. For example, an objective of the Second Amendment was that in principle the Fund should be able to dispose of all currencies in its transactions. For this purpose, a member whose currency was not prominent in international payments should be obliged, when the Fund sold the currency in its transactions, to exchange it for a currency that was in common use. The Articles imposed no such obligation before the Second Amendment. An obligation to exchange the currency into what had been called a convertible currency would not be effective, even though members are still encouraged to undertake to perform the obligations of Article VIII, Sections 2, 3, and 4. By April 1, 1978, 55 members had already given this undertaking, but few currencies among them were in common use in international payments. It followed logically that the currencies that members could use in repurchase should not be limited by law and certainly not limited to those currencies that had been covered by the former definition of convertible currencies.

The Second Amendment includes a new concept for application in the activities the Fund conducts through the General Resources Account of the General Department and through the Special Drawing Rights Department. The new concept is the “freely usable currency,” which is defined as follows:

A freely usable currency means a member’s currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets.434

The list of freely usable currencies can be modified by the Fund from time to time by deletions or additions. The original list is brief and has remained unchanged so far (mid-1982): U.S. dollar, deutsche mark, pound sterling, French franc, and Japanese yen. These currencies have been selected because they are reserve currencies and as such they facilitate transactions and operations under the Articles, but it must not be assumed that all other currencies are subject to restrictions or are not traded in the exchange markets.

The concept of the freely usable currency is applied by the Fund in many ways. For example, if the Fund sells the currency of a member that is not freely usable, the member must exchange it for a freely usable currency for the benefit of the purchasing member.435 If the Fund designates a member to receive a transfer of SDRs, the member must provide a freely usable currency to the transferor in exchange for the SDRs.436

The concept of a freely usable currency, like the former concept of a convertible currency under the Articles, has been created to serve the Fund’s purposes. These concepts, however, have been useful for the drafters of other legal instruments, both official and private.437

Section IX Reserve Assets

Definition

The discussions of intervention and convertibility in earlier Sections of this Chapter call for an examination of the subject of reserve assets. There is now no definition in the Articles of a member’s monetary reserves. Before the Second Amendment, a member’s monetary reserves were defined as its official holdings of gold, of the convertible currencies of other members (i.e., the currencies of members that had undertaken to perform the obligations of convertibility under Article VIII, Sections 2, 3, and 4), and the currencies of such nonmembers as the Fund might specify.438 The First Amendment recognized a member’s “reserve position in the Fund.”439 It consisted of a member’s right to make “gold tranche purchases” and its “readily repayable” claims under agreements by the member to lend to the Fund.440 The Articles provided that requests for gold tranche purchases could not be challenged by the Fund;441 requests for the repayment of readily repayable claims were virtually unchallengeable by agreement.

The First Amendment created the SDR as “a supplement to existing reserve assets,”442 but avoided overt reference to SDRs themselves as reserve assets. This policy, in some contexts, required complicated circumlocution.443 The cumbersome language was intended to avoid embarrassing France or any other member that preferred to explain the SDR not as a reserve asset like gold but as something closer to a right to engage in the traditional transaction in which a member obtains the currency of another member from the Fund. The similarity was thought to be close enough even though the SDR enables a member to obtain currency from other members. The compromise was responsible also for the expression “special drawing right,” which is less than apt to convey the legal or economic character of the SDR.444 The compromise did not prevent the Fund and members from regarding the SDR as a reserve asset and from treating it as a component in a member’s monetary reserves. The political concerns that led to the compromise have disappeared. The Second Amendment has swept away the circumlocutions of the First Amendment.

Monetary reserves were defined by the Articles before the Second Amendment by reference to specific categories of reserve assets and not by reference to any common characteristics. This author has ventured a definition of the latter kind:

For practical purposes, a reserve asset can be defined as an asset held by the monetary authorities of a country, or by their fiscal agencies, with which, at their will, they can support the exchange value of the country’s currency, or an asset with which they can obtain such assets without legal impediment or undue cost.445

The definition of monetary reserves was included in the Articles before the Second Amendment in order that certain obligations of Members could be calculated. The Second Amendment has introduced changes in these obligations that dispense with the necessity for a definition and that provide for discretionary administration by the Fund instead of the inflexibility imposed by definitions.

For the same reason, the expression “reserve position in the Fund,” which was coined by the First Amendment, no longer appears in the Second Amendment. The term “reserve tranche,”446 however, does appear, in substitution for “gold tranche.” Although the expression “reserve position in the Fund” has been eliminated, the rights to which it was applied are still regarded as reserve assets.447 The fact that the word “reserve” is no longer attached to these rights by the Articles is responsible for the reference in the definition quoted above to an asset with which other reserve assets can be obtained for the purpose of supporting a currency. Another reason for the reference is the fact that although most reserve assets can be transferred directly in support of a currency, some part at least of the reserve position in the Fund cannot be used in this way. A member’s right to make reserve tranche purchases cannot be transferred directly to another member, but can be “encashed” only by making purchases of SDRs or currency from the Fund, with which payments can then be made.448 The holder of a readily repayable loan claim against the Fund is normally able to make direct transfers of it in accordance with the agreements under which the Fund has borrowed.

It would be wrong to assume from the absence of a definition of monetary reserves that they are no longer of interest to the Fund. The provisions under which they are of interest can be classified as related either to the Fund’s financial activities or to the Fund’s concern with the operation of the international monetary system. Examples of the first category are provisions under which the Fund must take into account the balance of payments and reserve position of members as a factor when the Fund selects the currencies that are appropriate for sale449 or for use in repurchase (repayment) by members that are using the Fund’s resources.450 Similarly, if the Fund is called on to designate members to receive transfers of SDRs from other members, one of the factors the Fund must take into account in selecting recipients is whether their “balance of payments and gross reserve position is sufficiently strong.”451 The reserves of members may be relevant under policies of the Fund as well, such as the policies that deal with the use by members of the Fund’s general resources under stand-by arrangements.

The Fund’s interest in reserve assets as they affect the international monetary system is apparent in the provisions that refer to the future of the SDR as the principal reserve asset in the international monetary system.452 One of these provisions demonstrates an even broader concern with the relationship between reserve assets and the international monetary system. The provision has the title “Obligation to collaborate regarding policies on reserve assets” and is formulated as follows:

Each member undertakes to collaborate with the Fund and with other members in order to ensure that the policies of the member with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.453

This provision had its origin in proposals of a provision under which members would undertake an obligation to collaborate with the Fund and other members in order to reduce the role of gold in the international monetary system. The reduction in the role of gold was accepted as an objective of the Second Amendment.454 One of the most vigorous proponents of this objective was the United States. When the proposals on gold were advanced, some members wished to link reserve currencies with it. The main reserve currency was then, and still is, the U.S. dollar. The members that wished to add reserve currencies to gold in the proposed provision held the view that a leading role for a currency in the international monetary system would hinder the evolution of a stronger international monetary system. The United States, however, objected to mention of reserve currencies in the provision. It did so by resisting the mention of gold. The rationale for this objection was paradoxical: it was undesirable to recognize a role for gold even in the form of an obligation to reduce its role. The compromise was a provision binding members to collaborate with the Fund and among themselves to ensure that their policies on reserve assets (without specifying particular reserve assets) will be consistent with better international surveillance of international liquidity and making the SDR the principal reserve asset of the international monetary system.

Surveillance of international liquidity is not the same as the control of international liquidity. Nor is it said for what purpose “better international surveillance” is to be conducted. The role projected for the SDR may imply, however, that the ideal would be control of the volume and composition of liquidity and control through the medium of the SDR.

Two provisions suggest how such a result might be brought about if circumstances permitted. One provision states the principles for the allocation and cancellation of SDRs and directs that the Fund shall act in these matters “to promote the attainment of its purposes and … [to] avoid economic stagnation and deflation as well as excess demand and inflation in the world.”455 It would be desirable that members should not have reserves of such magnitude that there would be little pressure on them to adjust their balances of payments or reserves of such inadequacy that there would be an inducement to resort to restrictions and other measures contrary to the purposes of the Fund.

The other provision sets forth the conditions the Fund must take into account in determining whether the par value system of Schedule C can be brought into operation,456 as discussed in Section VII. The provision mentions “the evolution of the international monetary system, with particular reference to sources of liquidity.” This language implies that deficits in the balance of payments of the United States should not be a primary source of growth in the reserves of other countries. The First Amendment had already expressed this aspiration.457

The language of the Second Amendment that speaks of the sources of liquidity could be understood to refer also to a degree of control of the international capital markets, to which some members have re-sorted to augment their reserves. The result sometimes has been de-lay in the adjustment of their balances of payments that made adjustment more painful when inevitably it had to be undertaken.458 It will be recalled from Section V that under the Fund’s first decision on surveillance over exchange rate policies, an unsustainable level of official or quasi-official borrowing for balance of payments reasons may signal the need for special discussion between the Fund and a member.459

Need for Reserves

Members hold monetary reserves for a variety of reasons. Members hold reserves in order to intervene in the exchange markets to manage the exchange rates for their currencies. More currencies are pegged in some way than are floating independently. Maintenance of the peg by intervention requires the use of reserves. Even a member that allows its currency to float without pegging it in some way may intervene from time to time to deal with disorderly conditions in the exchange market or to smooth out exchange rates when conditions are not disorderly. A world in which floating is legal does not dispense with the need for reserves or for increases in them so that growth in the economy will not be hindered.460 Experience seems to have rebutted the presumption that floating would reduce the demand for reserves.461

Under the par value system, reserves were needed mainly to finance temporary disequilibria in the balance of payments that might arise while the prevailing par value was maintained. If a disequilibrium was fundamental, the solution would be a change in par value because the disequilibrium would persist and the drain on reserves would be permanent if the change were not made. With the freedom of members to choose their exchange arrangements and to determine the external value of their currencies, subject to the observance of certain obligations, the problem of choice between allowing exchange rates to vary according to market pressures and financing with reserves arises continuously and not merely from time to time as under the par value system.462

Intervention is not the only reason why members hold reserves. Even if the former official convertibility has no practical role at the moment under the Fund’s Articles, members may have to discharge other financial obligations with reserves. They may have to discharge certain obligations to the Fund with reserves, and participants in the exchange rate and intervention arrangements of the EMS have to use reserves in settlements required by those arrangements, to cite two examples of financial obligations.

Members hold reserves also to give them a sense of ease in the pursuit of their policies. If members did not hold reserves, even tem-porary differences between external expenditures and receipts could impose the necessity for sharp changes in policies. Reserves give confidence to the world in the strength of the economy and the currency. Reserves serve as tacit security for lenders, and sometimes reserves are the subject of a real pledge to secure repayment. Finally, reserves are a kind of “war chest” that members maintain in order to meet emergencies.

Types of Reserves

The major types of reserves at the present time are reserve currencies, SDRs, gold, ECUs, and reserve positions in the Fund. The main reserve currency for some decades has been the U.S. dollar. Sterling and the French franc also have been reserve currencies for many years, although in 1977 the United Kingdom attempted to reduce foreign official holdings of sterling to working balances.463 In recent years, an increase in the number of reserve currencies has occurred. The main additions to the group have been the deutsche mark, the Japanese yen, and the Swiss franc, in varying degrees, notwithstanding earlier resistance to this role by the issuers of these currencies.464 The role of a reserve currency is not imposed on the issuer by international monetary law, but evolves in response to need. The monetary authorities of the issuer of a currency are able, however, to encourage or discourage development of the role.465

A reason for the increase in the number of reserve currencies has been variability in the exchange rate for the U.S. dollar.466 An objective of diversifying reserve currency holdings has been reduction of the risks of wide variations in exchange rates and in interest rates, but the movement into other currencies that began with a period of weakness of the dollar did not cease with the succeeding period of strength. Other objectives of diversification have been the desire to match reserve assets with official liabilities, particularly liabilities arising as the result of official borrowing, and to match reserve assets with the pat-tern of external trade.

The development of diversification among currencies is evidence of the unwillingness of countries to concur in a central role for the U.S. dollar in the international monetary system of the kind that it had in the days of the par value system, although the dollar continues to be the predominant reserve currency. Another implication of the development is that there does not yet exist a satisfactory nonnational asset that would be available in sufficient quantities for members that wished to hold it in preference to currencies. Recent new forms of borrowing by the Fund from monetary authorities offer them the opportunity to exchange holdings of reserve currencies for claims against the Fund and new financial instruments, both of which are denominated in SDRs.467

So far, the emergence of new reserve currencies has not produced changes in international monetary law. No internationally endorsed guidelines exist on the diversification of currency holdings in reserves. If guidelines were to be considered, the question of guidelines on intervention also might arise. The evolution of more reserve currencies did help to inspire an effort to introduce a new element in the international monetary system, the activities of the Fund, and international monetary law. The Fund considered the creation of a Substitution Account, to be administered by the Fund, in which members could deposit U.S. dollars and receive claims denominated in the SDR as the unit of account. A purpose of this arrangement would be to enable members, in effect, to diversify their holdings of reserve currency among the currencies of the SDR basket without disturbing the exchange markets by diversifying into these currencies through the exchange markets.468 Another purpose would be to enhance the status of the SDR. Consideration of the project has been suspended, but perhaps it has not been abandoned.469

It will be apparent from the discussion of the types of reserves that they can be national in origin (reserve currencies) or nonnational (SDRs, ECUs, gold). They can be created deliberately by international agreement (SDRs, ECUs), or they can emerge in practice by a kind of widespread recognition not based on agreement. Reserve currencies fall into the latter category, but so also does gold.

SDRs

It is appropriate to begin the discussion of some individual reserve assets with the SDR because, since the Second Amendment, the Articles declare that it is to become the principal reserve asset in the international monetary system.470 The Articles do not clarify what is meant by this objective. It was taken over from the Outline of Reform,471 under which the role of reserve currencies would be reduced, the aggregate volume of official currency holdings would be kept under surveillance and managed, and members would be able to exchange official currency holdings for SDRs through a Substitution Account. The role of gold also would be reduced, and the Fund might be able to purchase gold from members for SDRs. The Fund would allocate SDRs to its members so as to ensure that the volume of global reserves was adequate and was consistent with the proper functioning of the adjustment and settlement systems.472 The Annexes to the Outline of Reform assumed that the SDR would be the common denominator of a system of stable but adjustable par values, and that margins for exchange rates would be maintained either by multicurrency intervention or by a member’s practice of freely buying and selling SDRs against its own currency.473

Most of these elements of the Outline of Reform have not been incorporated in the Second Amendment. Action has been taken to reduce the role of gold. The main effort of the Second Amendment to promote the role of the SDR, also an objective taken over from the Outline of Reform,474 has been to improve the characteristics of the SDR and to extend its uses. The Second Amendment itself makes changes in characteristics and uses but also empowers the Fund to make further changes.

The report of the Executive Board on the Proposed Second Amendment lists 20 changes.475 Only some of the more important changes will be mentioned here, first under the heading of characteristics and then under the heading of uses.

Characteristics

1. The Articles no longer define the method of valuation of the SDR. Instead, the Fund is authorized to determine the method. The majority for the exercise of this power is 70 percent of the total voting power, but a majority of 85 percent is necessary for a change in the principle of valuation or a fundamental change in the application of the principle in effect.476 A majority of the votes cast suffices for the classification of a proposed decision on the method of valuation. The Fund decided, with effect from January 1, 1981, that the method of valuation shall be based on a basket of specified amounts of five currencies. The Fund has also announced the criteria according to which revisions may be made in the basket at quinquennial intervals.477

2. The rate of interest on holdings of SDRs used to be controlled by the rate of remuneration paid to members for the net use of their currencies through what was then the General Account.478 The Second Amendment provides that the rate of interest on holdings of SDRs shall control the rate of remuneration, which shall be not more than, nor less than four fifths of, the rate of interest.479 The rate of remuneration may be lower 480 so that the Fund can levy charges for the use of its resources below what the charges would be if the two rates were the same and the Fund continued to follow the policy of maintaining a sound financial position.

The Fund has decided that the rate of interest on holdings of SDRs shall be determined by the same basket of currencies, weighted in the same way, as is used for the purpose of valuing the SDR. The basket consists of specified instruments denominated in these currencies and available in the markets. With effect from May 1, 1981, the rate of interest was increased from 80 percent to the full amount of the combined market interest rate arrived at on the basis of the basket of instruments.481

3. Members have always been able to use their holdings of SDRs in full, but under the First Amendment they were required to maintain over specified periods an average balance of 30 percent of the net cumulative allocations482 of SDRs that the Fund had made to them. If necessary, members had to “reconstitute” their holdings so as to maintain this average. The Fund could modify or abrogate the obligation of reconstitution but only at certain intervals and by decisions taken with an 85 percent majority of the total voting power.483

The Second Amendment permits these decisions to be taken at any time and by a 70 percent majority.484 The Fund reduced the average minimum balance to 15 percent of net cumulative allocation, and later, with effect from April 30, 1981, abrogated the obligation of reconstitution altogether.485

Uses

1. The SDR has always rested on the legal foundation of two basic obligations: the obligation of the Fund to designate a transferee of SDRs if the Fund was requested by an intending transferor to make a designation, and the obligation of the designated transferee to provide, formerly, currency convertible in fact and, now, a freely usable currency.486 Under the First Amendment, the emphasis was strongly on the designation of transferees by the Fund as the normal procedure for transfers. Only limited opportunities were recognized for transfers of SDRs by agreement between members.487 Under the Second Amendment, the doors to transfers by agreement between members have been opened in full,488 without closing the doors to transfers with designation by the Fund on request by a transferor.

2. Transfers of SDRs for currency by agreement have been encouraged by another change. Under the First Amendment, a transferor was expected not to transfer SDRs to another member for currency unless the transferor had a need to use reserves because of a balance of payments deficit or because of the discharge of liabilities, and was not making the transfer for the sole purpose of changing the composition of its reserves.489 The use of reserves without observing this expectation was not a violation of obligations but the Fund could reverse the effect of the transaction by designating the transferor to receive SDRs from another member that wished to transfer SDRs even though the normal economic criteria for designation were not met.490 A member could transfer SDRs without observing the expectation only if the Fund waived the expectation for the purpose of the few defined and narrow categories of transactions for which a waiver was possible.491 Similar provisions appear in the Second Amendment, but it is now provided that the expectation of need does not apply to a transferor in transactions entered into by agreement with another member.492

3. The Articles authorized a member to use SDRs in certain “transactions” and “operations” with the Fund.493 “Transactions” in SDRs are exchanges of SDRs for other monetary assets. “Operations” include all other uses of SDRs.494 The range of transactions and operations with the Fund is broader under the Second Amendment. In particular, SDRs may or must be used by a member in transactions and operations with the Fund whenever gold was formerly the medium of payment.495

4. The First Amendment did not authorize the use of SDRs in operations between members. The Second Amendment authorizes the Fund, by a majority of 70 percent of the total voting power, to prescribe operations in which a member may engage in agreement with another member on such terms and conditions as the Fund deems appropriate.496 By mid-1982, the Fund had prescribed the following categories of operations: the direct settlement of financial obligations, loans, pledges, transfers as security for the performance of financial obligations, swaps, forward operations, and donations.497

5. The Fund was able, under the First Amendment, to permit three limited classes of official entities to accept, hold, and use SDRs as “other holders,” in transactions and operations with members.498 The classes have been increased by adding the general category of “other official entities,” and prescribed holders may now enter into transactions and operations with each other as well as with members.499 The Fund has adopted standard terms and conditions for all prescribed holders, under which holders may enter into the same transactions and operations involving SDRs as may be entered into by members.500

By mid-1982 the Fund had prescribed the following 12 entities as holders: Andean Reserve Fund, Bogotá; Arab Monetary Fund, Abu Dhabi; Bank of Central African States, Yaoundé Bank for International Settlements, Basle; Central Bank of West African States, Dakar; East Caribbean Currency Authority, St. Kitts; International Bank for Reconstruction and Development (World Bank), Washington, D.C.; International Development Association, Washington D.C.; International Fund for Agricultural Development, Rome; Islamic Development Bank, Jeddah; Nordic Investment Bank, Helsinki; Swiss National Bank, Zurich.

The changes discussed above have simplified the method of valuation of the SDR, increased the rate of interest on holdings of SDRs to the full combined market rate of interest on the basket of selected instruments, abrogated the obligation of reconstitution, permitted transfers of SDRs by agreement between members in return for an equivalent amount of currency, abolished for the purpose of these transfers the expectation that they will be made only if the transferor has a need to use reserves, expanded the classes of entities that may hold and deal in SDRs, and extended the uses of SDRs in transactions and operations with the Fund, members, and prescribed holders.

These changes have improved the characteristics and extended the uses of SDRs, but the changes have also eliminated drawbacks that were imposed on the SDR at the time of the First Amendment. Three attitudes among members in the negotiation of the First Amendment explain these drawbacks. First, the venture was novel and experimental, and it was feared, therefore, that the SDR plan might not function effectively. One fear, for example, was that some members might use their SDRs, not as monetary assets to deal with a temporary balance of payments difficulty, but in order to obtain a permanent transfer of real resources to them. The temporary use of reserves implies that reserves will be restored, although not necessarily in the same form, after the balance of payments difficulty has been solved. The concern that restoration might not occur when SDRs were used was one reason why the obligation of reconstitution was established, even though some members protested that the obligation detracted from the quality of the SDR as a reserve asset. They pointed out that no obligation of restoration was attached to the use of other reserve assets.

There were fears that the plan might work inefficiently in other ways. Some of these fears were contradictory. For example, there was concern that the United States might obtain a disproportionate amount of total SDRs because many members might want to transfer them to the United States for U.S. dollars. To fend off this risk, only limited transfers by agreement between members were permitted, the main emphasis was placed on transfers with the designation of transferees by the Fund, and one principle of designation was the promotion over time of a balanced distribution of holdings of SDRs among members in a sufficiently strong balance of payments and gross reserve position.501 Some members feared that they might have to accept too many SDRs. Both the First and Second Amendments provide that a member cannot be compelled to hold SDRs in excess of three times the net cumulative allocation of SDRs that has been made to the member, but it may agree to hold more.502

To reinforce these and other safeguards against possible inefficiencies in the operation of what was then called the Special Drawing Account, a general obligation was imposed on members, in addition to all other obligations, to cooperate with the Fund and with other members to facilitate the effective functioning of the Account and the proper use of SDRs in accordance with the Articles.503

A second attitude among members was that the SDR should not be as attractive as gold, so as to preserve the status of gold as the central reserve asset of the international monetary system. The First Amendment provided, therefore, that SDRs could be transferred only for currency and not for gold.504 Moreover, a member should not use its SDRs to obtain gold indirectly. It was feared that a member might transfer SDRs for dollars so as to be able to present the dollars to the United States for conversion with gold. A member was expected, therefore, not to transfer SDRs solely to change the composition of its reserves.505

Similar provisions have been retained in the Second Amendment,506 but these provisions and certain decisions of the Fund that prohibit transfers of SDRs for gold now have a different motive. The provisions of the First Amendment were intended to prevent any threat to the dominance of gold as a reserve asset, but the later legal provisions and the Fund’s practice are designed to reduce the role of gold in the international monetary system and help the SDR to become the principal reserve asset.507

A third attitude among members was manifested mainly by the United States. Although an enthusiastic original sponsor of the SDR, the United States did not want the new reserve asset to undermine the status of the U.S. dollar. This attitude was reflected in the low rate of interest on holdings of SDRs.508 A justification advanced for the low rate was that the exchange value of the SDR was maintained in terms of gold as a result of defining the SDR in relation to gold. Another justification was that SDRs were allocated and not earned, but they were earned to the extent that holdings exceeded allocations. Interest was a net receipt on this excess because charges were levied on allocations at the same rate as the rate of interest on holdings. Again, in order to limit the competitiveness of the SDR with the dollar, the rate of interest was controlled by the rate of remuneration paid by the Fund on the net use of a member’s currency through the General Account, and a majority of 75 percent of the total voting power was required for a change in the rate of remuneration that would take it outside a narrow range.509 This majority, in effect, would give the United States a near veto over decisions to increase the rate of interest on holdings of SDRs above 2 percent per annum.

Alleged Continuing Disadvantages

Some commentators have pointed out that there remain disadvantages that obstruct an enhanced role for the SDR as a reserve asset. Some but not all of these alleged disadvantages could be removed by further improvements in the characteristics, or further extensions in the uses, of the SDR without amendments of the Articles.

1. Preeminent among undoubted disadvantages is one that is unrelated to characteristics or uses of the SDR. This disadvantage is that SDRs are a small proportion of total reserves, even when gold is excluded from the calculation. Moreover, the proportion has declined drastically 510 since the end of the first basic period in which SDRs were allocated by the Fund. The future of the SDR is affected not only by the total amount in existence but also by the proportion of total reserves that the SDR represents and the pace and direction of changes in that proportion. Allocations were made in the first and third basic periods,511 under decisions taken for the periods immediately after the First and Second Amendments became effective. Intensive debates occurred on each occasion to ascertain that the criteria for allocations in the Articles were satisfied, but the recent invention of the SDR by the First Amendment and the declaration in the Second Amendment that the SDR was to be the principal reserve asset in the international monetary system may have exercised a psychological influence in favor of allocations. There is much room for judgment because the criteria are imprecise,512 and although there is repeated debate, full agreement on the meaning and application of them does not exist among members.

The criteria are set forth in the Articles as follows:

In all its decisions with respect to the allocation and cancellation of special drawing rights the Fund shall seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and deflation as well as excess demand and inflation in the world.513

Much of the debate revolves around the expressions “long-term global need” and “to supplement existing reserve assets”. As many as four ideas, relating to both the quantity and the quality of reserve assets, were combined in the second of these expressions as a result of various positions taken in the course of the negotiations that preceded the First Amendment:514

  • (i) The statement that SDRs are a supplement to existing reserve assets does not compel anyone to subscribe to the notion that SDRs themselves are reserve assets. This creative ambiguity was a compromise between the members whose objective was to create a new reserve asset and at least one other member that, for political reasons, wanted to explain the SDR as close to a form of credit. The heat has gone out of this controversy, and the present Articles contain abundant evidence that all members regard the SDR as a reserve asset.515

  • (ii) The characteristics of SDRs enable them to function as a form of international liquidity that is comparable to the existing reserve assets they supplement.

  • (iii) SDRs are a supplement to existing reserve assets because SDRs can compensate for any deficiency in the global stock of existing reserve assets.

  • (iv) SDRs are a supplement to existing reserve assets because the creation of the SDR is not intended to deprive other reserve assets of their character as such. If, however, a reserve asset were to lose that character as the result of other international action, or if the volume of an asset were to be reduced so that a global need for reserve assets arose, the SDR could fill this gap. The assumption that reserve currencies and gold would continue to function as reserve assets is apparent from the First Amendment. SDRs could not be used to make direct payments, except to the Fund, but had to be transferred for currency with which payments could then be made, and the SDR was defined in terms of gold.

The third of the ideas listed above is closely related to the controversial question of the meaning of long-term global need. Originally, it was assumed that SDRs would augment an inelastic supply of existing reserve assets. Further accruals of U.S. dollars to reserves would be reduced if the expectation was realized that the balance of payments position of the United States would improve. Indeed, the First Amendment declared that special considerations had to be taken into account to justify the first decision to allocate SDRs. Among these considerations were “the attainment of a better balance of payments equilibrium, as well as the likelihood of a better working of the adjustment process in the future.”516

Total holdings of currencies in reserves have increased dramatically notwithstanding the fact that allocations for the first basic period were deemed to be compatible with the general criteria and the special considerations set forth in the Articles. One source of the expansion of currency holdings in reserves has been the “Euro” capital markets. Members have resorted to these markets, in which resources have been plentiful, to increase their reserves or to prevent a reduction in them. These markets have not been subjected to national or international control.

A majority of 85 percent of the total voting power, which is necessary for decisions to allocate SDRs,517 could not be found for the Second basic period. For the third basic period a new approach was taken to the criterion of global need. A high level of reserves did not negate the existence of a global need to supplement them, because members wanted increased reserves as the volume of their international transactions expanded. Continuing demand for more reserves could be considered evidence of global need. It was not necessary that every member should share in this demand.

The analysis went on to assert that the criterion of global need did not mean that allocations of SDRs were the only way in which the need could be satisfied. Even if reserves could be augmented by borrowing in international capital markets, allocations of SDRs might reduce the propensity of members to borrow for this purpose. Allocations were more advantageous than borrowing because borrowing made refinancing necessary from time to time, and refinancing might be difficult to negotiate. Allocations gave members a greater sense of ease in the management of their economies than they received by borrowing. This line of reasoning was reminiscent of the fourth idea compressed into the language of a supplement to existing reserve assets as explained earlier. If members preferred to refrain from borrowing because of the assurance of allocations, there would be a gap that could be filled by allocations.

Not all of this reasoning appeared in the Managing Director’s proposal for allocations in the third basic period.518 Citation of the fourth idea might have provoked demurrers on the ground that the finding of a global need that could be filled by allocations should not be based on the assumption that allocations would be made. It might have been objected also that allocations could not give the assurance that borrowing would be reduced in an equivalent or any other amount.

The proposal did mention that the objective of making the SDR the principal reserve asset in the international monetary system was a relevant consideration. Exclusive reliance on the accumulation of currencies to provide needed increases in reserves would not be compatible with that objective, which was already threatened by the declining proportion of SDRs in total reserves.519 In this presentation, the objective was given normative force. The objective adds an explicit consideration of the quality of reserves to what seemed to be expressed solely as a consideration of quantity, although it has been seen that much more was compressed into the language of the First Amendment. The original criteria were retained without modification by the Second Amendment and were not displaced by the new objective. The criterion of quantity had to be satisfied. The objective may have been advanced, not in rebuttal of an argument that allocations could give no assurance of a reduction in borrowing, but as a balancing item on the other side of the ledger of arguments. On this assumption, the objective would affect the question of the burden of proof or the benefit of doubt if the arguments were not all on the same side of the ledger.520

The problem of allocations, apart from the weight to be given to the objective of making the SDR the principal reserve asset in the international monetary system, goes beyond the issue of the meaning of global need. Another issue is whether allocations would be inflationary or would suggest to governments that the Fund did not consider the problem of inflation to be of first importance. This issue might be formulated as follows: are there allocations that would be neither excessive nor derisory, and that would both avoid inflationary effects and preserve the role of the SDR as the principal reserve asset of the future?

If the objective of the future role of the SDR is given normative effect, the question must arise of the international monetary system in which the SDR is to function in that role. Something of a paradox is apparent in the history of the SDR. The First Amendment did not refer to the role that the SDR was to perform in the system, but there were no doubts about the character of the system in which it would perform. The paradox is that although the par value system and official convertibility have disappeared, and although there is no indication of the way in which the international monetary system is to evolve, the future role of the SDR is now declared to be that of the principal reserve asset in the system. It is improbable that the role of the SDR would be the same in all possible forms of an international monetary system.

2. The First 521 and Second Amendments 522 have provided that SDRs are to be allocated to members at the same rate expressed as a percentage of their quotas. Some critics have objected that this provision prevents the creation of a “link” between the allocation of SDRs and development assistance for the benefit of developing countries. The Outline of Reform did not record agreement on a “link,” but it did describe two techniques for establishing it: allocation of larger proportions to developing countries than they would receive on the basis of a uniform percentage of quotas, and the direct appropriation by the Fund of a share of total allocations to multilateral or regional organizations functioning in the field of development assistance.523

The “link” has been responsible for a mass of published studies and much advocacy in favor of it.524 The Outline of Reform emphasized that no more SDRs than were justified by the criteria of the Articles would be allocated whatever technique might be adopted to establish the “link.” The main criticism of the opponents has been that the “link” could exercise undue influence in favor of allocations because decisions would be based not on valid monetary considerations but on the desire to increase development assistance or to relieve national budgets of the burden of contributions for assistance. The effects would be inflationary, and the character of the SDR would be subverted. The SDR would be an instrument for the permanent transfer of real resources from developed to developing countries. It has been argued also that the “link” would be contrary to the interests of developing members because developed members might oppose decisions to make allocations that they would support in the absence of the “link.”

Advocates of the “link” have replied that they do not propose that SDRs should be allocated beyond the limit of the global need for reserves, but that SDRs should be distributed according to need. Developing countries, it is argued, have a greater need because of greater instability in their export earnings. The effect of the “link” would be a more equitable distribution of the burden of adjustment. A report of March 1981 prepared under the auspices of the United Nations Conference on Trade and Development (Unctad) proposed that developing countries other than those in structural surplus in their balances of payments should receive 150 percent of their shares based on quotas with a compensating decrease in the allocations to developed countries. Pending amendment of the Articles for this purpose, voluntary arrangements should be made within the framework of the present Articles to reach an equivalent result.525

3. The SDR has been criticized on the ground that it cannot be held by private parties. The SDR is at a disadvantage when compared with currencies because it is more limited as a means of payment or of exchange. Central banks, it is pointed out, cannot use SDRs for the purpose of intervention in the exchange markets in support of their currencies. According to these criticisms, the SDR is deficient both as a monetary instrument and as a reserve asset.526

The negotiators of both the First and the Second Amendment agreed without difficulty that only official entities should be allowed to hold SDRs. In the opinion of the negotiators, private markets in SDRs might weaken the SDR as a reserve asset. The Second Amendment has made it possible for more official entities to hold SDRs. With the collaboration of members, it would be possible to settle obligations that arise between private parties or public entities not authorized to hold SDRs by means of transfers of SDRs between the members to whose jurisdiction the parties or entities are subject. SDRs could be used indirectly for intervention by settlements in SDRs between monetary authorities as the result of transactions by commercial banks in the exchange markets on behalf of the authorities.527

Gold

Change in Role of Gold

The par value system was a “gold exchange system.” Gold was the common denominator of the par value system, and the United States maintained the value of its currency in terms of gold by undertaking to buy and sell gold freely for U.S. dollars with the monetary authorities of other members of the Fund. They, however, were entitled to refrain from asking the United States to convert their holdings of dollars with gold if they preferred to invest the dollars. No return could be earned on gold. The official holders of dollars would tend to invest their holdings if they were confident that the United States would pursue policies that would preserve a stable economy and avoid the need to devalue the dollar. In this system, however, gold was the fundamental reserve asset, to which the contradictory adjectives of the “ultimate” and the “primary” reserve asset were often applied. Gold had this position even though monetary authorities had no obligation among themselves to buy gold that was offered or sell gold that was requested. Countries preferred to have freedom to determine the composition of their reserves. In addition, there was no obligation to sell because countries did not wish to be compelled to part with gold, and there was no obligation to buy because the acceptability of gold was axiomatic.528 There were obligations to pay gold to the Fund in discharge of certain obligations, however, so as to enhance the liquidity of the Fund.529

Discontent with the performance of gold in the international monetary system grew over time. Private markets for gold became a source of instability for the par value system. “Private” is a misleading adjective because both monetary authorities and private parties could resort to these markets. What was meant by “private” was that the prices in these markets could diverge from the official price in certain transactions, while the official price had to be observed in all transactions between the monetary authorities of members. The discrepancy between the two prices led to successive efforts by monetary authorities to starve the private markets, to supply them to the full extent of demand, and then to confine official gold transactions to the circle of monetary authorities, which were to abstain from dealing in the private markets. All these efforts failed to eliminate the destabilizing effects of the private markets.530

Another reason for discontent with gold was that it was an uncertain and unsystematic source of the new reserves that members thought were necessary to support a growing world economy. There were even periods in which gold was drained from reserves into private markets.

The United States became the main official critic of the role of gold in the international monetary system. As confidence on the part of other members in the stability of the U.S. dollar declined in the late 1960s, requests were made for the conversion of dollar balances with gold, and the United States stock of gold declined substantially. The decline led to a further erosion of confidence. The requests were inspired by nervousness but also by the desire to insist on symmetry between the United States and other members, which had to use reserves when they were in deficit in their balances of payments. The United States created new financial instruments and took other steps to head off requests for conversion. To the extent that these efforts succeeded, the function of gold as the primary or ultimate reserve asset in the international monetary system began to be a legal fiction.

The creation of the SDR was one of the measures that the United States sponsored in order to reduce requests for conversion with gold. It has been seen that an official holder of U.S. dollar balances and the United States could agree that the United States would redeem the balances with SDRs. In retrospect, the SDR can be seen to be a signal that the conceptual role of gold was weakening, even though the SDR was defined originally in terms of gold. The SDR offered potential advantages over gold. For example, SDRs could be allocated according to rational principles, which could give some hope of controlling the volume of global reserves, and a return could be earned on holdings of SDRs.

Eventually, the United States became unwilling to accept the restraints imposed on it by its role in the international monetary system, including the obligations or voluntary undertakings to convert foreign official holdings of U.S. dollars. As a result, gold has lost its central position in the international monetary system. The U.S. dollar has continued to be the main reserve currency, although other currencies have become reserve currencies to some smaller extent, and gold is still a respected reserve asset. As long as the U.S. dollar remains the main reserve currency, and as long as the United States does not engage systematically in conversions of U.S. dollars with gold or other reserve assets, the dollar can be said to be the ultimate or primary reserve asset at present although not in the legal sense in which gold performed that function.

It is necessary next to see what measures have been taken in international monetary law to bring about or to reflect a change in the role of gold.

Gold Under Second Amendment

The Outline of Reform coupled the objective of gradually reducing the role of gold with the objective of elevating the SDR to the position of principal reserve asset in the international monetary system. The document recognized, however, that “gold reserves are an important component of global liquidity which should be usable to finance balance of payments deficits.”531 Agreement went no further, and the Outline of Reform could do no more than record the different approaches to arrangements for gold that had been supported.532 The agreement on objectives in relation to gold and the SDR was made as part of a plan that foresaw the restoration of a par value system, but the objectives have survived as aims of the Second Amendment without the restoration of that system.

The Report on the Proposed Second Amendment referred to “a reduction in the role of gold” 533 and “the gradual reduction of the role of gold”534 as one of the main themes of the Second Amendment. The latter expression, by including the adjective “gradual,” suggests a continuing process. The objective is not mentioned in the amended Articles but is implied. Efforts to include a clear statement did not succeed because of proposals to refer to reserve currencies as well. The outcome of these efforts is the provision requiring members to collaborate in promoting better international surveillance of international liquidity and in making the SDR the principal reserve asset in the international monetary system.

The Second Amendment seeks to bring about a reduction in the role of gold in the international monetary system by radical changes in the role of gold in the Fund, as well as by changes that affect gold both inside and outside the Fund.

The official price of gold is abrogated, so that members may deal in gold between themselves or in transactions with other parties at whatever prices can be negotiated. To avoid the restoration of an official price, however informal the price may be, the Fund is required, in all its dealings in gold, to avoid management of the price, or establishment of a fixed price, in the gold market. Among other changes are the abrogation of obligatory payments in gold by members to the Fund and by the Fund to members, and the disposition by the Fund of a total of one third of its gold holdings under two programs, which have been completed. This disposition helped to bring about a solution of the controversial problem of general arrangements for gold. One program involved the distribution (“restitution”) of gold to members at the former official price, and the other program involved the public auction of gold coupled with a distribution of some of the gold to some members. Both distributions demonstrated the wishes of members to obtain gold, probably as an addition to their reserves notwithstanding the reduction in the role of gold. Nothing in the Second Amendment expressly prohibits the continued role of gold as a reserve asset.

The Fund has powers to dispose of its other gold. The Fund can sell gold it owned at the date of the Second Amendment (April 1, 1978), at the former official price, to members that were members on August 31, 1975, the date when agreement was reached in principle on arrangements with respect to gold. The Fund can also sell gold, whether owned on April 1, 1978 or obtained later, to members or other purchasers at prices based on prices in the market. The Articles regulate the treatment of the proceeds of such sales. The Fund can exercise its powers to sell gold, at the former official price or at a price related to prices in the market, only under decisions taken by an 85 percent majority of the total voting power.535

Gold is no longer the common denominator in terms of which members maintain the external value of their currencies. Moreover, a member may not maintain the external value of its currency in terms of gold as a denominator for the member acting alone or under cooperative arrangements.536 If the par value system that is the subject of Schedule C is called into operation, the Fund may not select gold as the common denominator of that system.537 The SDR is no longer defined in terms of gold.538 Members must maintain the value of the Fund’s holdings of their currencies in the General Resources Account in terms of the SDR as the Fund’s unit of account and not in terms of gold as in the past.539

Gold is not an obligatory means of payment in relations between the Fund and members. Formerly, a number of obligations were imposed on members to make payments to the Fund in gold. The purpose of these obligations was to increase the Fund’s stock of gold, because of the greater liquidity of gold for the Fund. With gold the Fund could require a member to replenish the Fund’s holdings of the member’s currency for use in the Fund’s transactions.540 The willingness of members to undertake such an obligation was testimony to the unquestioned acceptability of gold. Under the Second Amendment, the obligations that formerly had to be discharged in gold are now discharged with SDRs or the currencies of other members that are not in abundant supply in the Fund. The Fund’s right of replenishment is now exercisable with SDRs instead of gold.

Against this backgound, it is strange to observe a provision of the Second Amendment that authorizes the Fund to accept payments from a member in gold instead of SDRs or currency in transactions or operations under the Articles.541 Payments to the Fund under this provision would have to be at a price reached by agreement between the Fund and the paying member for each transaction or operation on the basis of prices in the market. A majority of 85 percent of the total voting power is required for any decision to accept gold. This high majority demonstrates the caution that is to be observed in preventing reversal of the policy of reducing the role of gold.

The explanation of the anomalous provision is that it was part of a compromise reached in the drafting of the provisions on gold in the Second Amendment. Some support was expressed for recognition, even though slight, of a potential function for gold under the Articles. The provision might never lead to a receipt of gold by the Fund, but the existence of the provision would be official recognition in itself that gold was not deprived of all official status as a reserve asset. The likelihood that gold would not be accepted under the provision made it easier to concur in the proposed provision as part of the compromise that it facilitated than to resist the proposal for ideological reasons.542

Some consequences of fluctuating price

The abolition of an official price for gold and the absence of any attempt by the Fund or national monetary authorities to control the market price have resulted in fluctuating, and sometimes rapidly changing, prices for gold in the market. These variable prices have produced a number of legal and other difficulties.

One problem is the necessity to value gold for a variety of purposes. Many treaties, for example, include a unit of account that is defined in terms of gold, such as the Poincaré franc, the Germinal franc, or the U.S. dollar of a particular date. In time, a new unit of account will be substituted for gold units, and international agreement has been reached in many instances on the substitution of the SDR for a gold unit. A number of the amendments on which agreement has been reached have not yet become effective. Courts and the administrators of treaties are faced with the difficulty of translating into currency a gold unit of account that has not yet been replaced. The broad issue is whether the solution should be the market price of gold, the last official price, a price based on the ratio between the gold unit of account and the former gold value of the SDR coupled with the Fund’s valuation of the SDR in terms of currency, or some other price that is not the market price. Courts throughout the world have not been unanimous in selecting a solution, but a growing opposition to the market price can be detected.543

The problem of valuation arises for the Fund and for national monetary authorities in relation to the gold they hold. The calculation of a member’s monetary reserves is necessary for various purposes under the Fund’s law and practice. The Fund has not yet decided with finality how it will value a member’s gold. At this time, the Fund is awaiting the development of further practice among members. The Fund’s decision on the valuation of its own gold holdings is included in the Fund’s Rules and Regulations:

Gold held by the Fund on the date of the Second Amendment shall be valued on the basis of one SDR per 0.888 671 gram of fine gold, and gold accepted by the Fund after that date shall be valued in terms of the SDR in such manner as the Executive Board shall decide.544

The Fund has not acquired gold since the Second Amendment became effective, so that the Executive Board has not yet had to decide how the Fund’s “new” gold shall be valued.

Among members, there has been a movement toward the valuation of gold held in reserves on the basis of market prices. The members that have joined the movement have not adopted a uniform solution in relation to market prices. The reason for diversity is that prices in the market have been volatile over a broad range, so that an automatic and undeviating application of the market price would produce undesirable fluctuations in the accounts of monetary authorities. Members have the further problem of deciding what to do about the profit that accrues when a market-related price is substituted for the former official price.545

The fluctuating market price is one reason why monetary authorities have been reluctant to dispose of their gold. For many members, gold is a cherished but dormant reserve asset. Some members, however, have found uses for their gold without parting with it. They have raised resources by means of pledges or swaps under which ownership is retained or is reacquired. Members of the European Community have engaged in revolving swaps of gold (and U.S. dollars) in return for ECUs. This procedure has made it possible for monetary authorities to avoid the final transfer of the ownership of gold, but at the same time to use gold to obtain a more liquid asset.

Domestic price of gold

The Articles prohibit maintenance of the external value of a currency in terms of gold but do not interfere with a member’s valuation of its currency in terms of gold for domestic purposes. It might be difficult to distinguish between external and domestic value in some circumstances, particularly if the U.S. dollar was involved. A number of legislative proposals on the relationship between the U.S. dollar and gold were introduced in the Congress of the United States and would have raised this difficulty and the problem whether the Articles impeded adoption of the proposals. A dominant motive for these proposals and for other proposals that were not incorporated in congressional bills was the desire to find institutional arrangements that would ensure reasonable approximation to price stability and would eliminate persistent inflation in the United States. The proposals led to the establishment by Congress of a U.S. Gold Commission charged with the responsibility of conducting a study to assess and make recommendations with regard to the policy that the U.S. Government should follow concerning the role of gold in the domestic and international monetary systems.546 The Commission issued its report in March 1982.547

The Commission’s recommendations, with various dissents and glosses by individual members, recommended that a program of sales of gold medallions that had been contemplated should be pursued. In addition, there should be an issue of gold coins, of specified weight but not dollar denomination. The coins would be legal tender but would be exempt from capital gains and sales taxes. The Commission opposed the issue of gold-backed treasury notes or bonds. The proponents of this idea had foreseen the possibility of an eventual full convertibility of all dollar obligations into gold. The Commission was satisfied with existing procedures on the public accounting for the official gold stock and gold certificates that represented claims, payable in dollars, held by the Federal Reserve System against the Treasury. The Commission recommended that while no precise level was necessarily appropriate for the official gold stock, and while the Treasury should retain the right to conduct sales of gold at its discretion, adequate levels should be maintained for contingencies. One of the contingencies mentioned in the discussions was the possibility that the role of gold in the international monetary system might be examined by an international monetary conference and that the role of gold in the system might be restored.

The Commission considered proposals to change the current valuation of the gold stock by the Treasury at the last official price ($42.22 per ounce). One proposal had been an international agreement to value gold at the market price as a step toward the use of gold for settling disequilibria in balances of payments or for intervention in exchange markets. The Commission recommended that the Treasury and the Federal Reserve System should conduct studies of the issues involved in a move toward valuing gold “realistically” at something more closely approximating market prices. The change should be subject to the legislative restraint that the proceeds of new valuation would not be monetized by the Treasury or in any way used to enhance the Government’s spending power. The studies should develop a formula and timetable for valuing the U.S. gold stock in a manner realistically related to market value.

The Commission had heard proposals of “unconventional” uses of gold that were intended to be constructive and to put an end to the immobility of the official stock. The Commission did not favor these uses because the objectives sought by adding gold to the policy instruments of the monetary and fiscal authorities could be attained in other ways and without the possibly undesirable effects of using gold. But the Commission did favor the continued study of gold in the domestic monetary system and recommended congressional hearings on the subject.

Proposals were made for the restoration of a gold standard under which the monetary stock would be related to the volume of the official gold stock valued at a fixed or fluctuating price in some predetermined way. The Commission recommended that the Congress and the Federal Reserve should study the merits of establishing a rule specifying that the growth of the money supply would be maintained at a steady rate that ensured long-run price stability. But the Commission concluded that, under present circumstances, restoration of a gold standard did not appear to be a fruitful method of dealing with inflation. Congress and the Federal Reserve should study ways to improve the conduct of monetary policy, including such techniques as a monetary rule.

The Commission considered a gold standard with a fixed price of gold in terms of which the United States and its main trading partners could establish par values. The Commission noted that although U.S. dollars were not convertible into gold at a fixed price, they were “convertible” into U.S. goods and services and gold at market prices. Even if the United States, other countries with substantial gold stocks, and the major gold producing countries were to agree on an international gold standard, it would be necessary to face the problem of what to do about the vast quantity of dollars abroad that would be potential claims to conversion with gold. There was no evidence of foreign interest in a gold standard, and indeed some foreign officials had expressed their opposition. The Commission recommended that there should be no change in the present flexible exchange rate system and no change in the use of gold under present exchange arrangements.

The Commission considered the argument that as gold does not now have a central role in the international monetary system, the Fund’s holdings of gold should be distributed to its members at the former official price (“restitution”), in accordance with the provision of the Second Amendment that authorizes such sales. The Commission opposed action by the United States to seek restitution. It noted the argument that the international community had the same interest in supporting a substantial stock of gold in the Fund as the United States had in retaining a similar stock for itself. The gold could be helpful in dealing with various contingencies.

Chapter I of the report concludes with a placatory peroration of four paragraphs, of which the second and third are as follows:

The majority of us at this time favor essentially no change in the present role of gold. Yet, we are not prepared to rule out that an enlarged role for gold may emerge at some future date. If reasonable price stability and confidence in our currency are not restored in the years ahead, we believe that those who advocate an immediate return to gold will grow in numbers and political influence. If there is success in restoring price stability and confidence in our currency, tighter linkage of our monetary system to gold may well become supererogatory.

The minority of us who regard gold as the only real money the world has ever known have placed our views on record: the only way price stability can be restored here (indeed, in the world) is by making the dollar (and other national currencies) convertible into gold. Linking money to gold domestically and internationally will solve the problem of inflation, high interest rates, and budget deficits.548

ECUs

Issue of ECUs

The ECU is a newcomer in the reserves of members of the European Community. The invention and development of the ECU may help to shape the future international monetary system itself. The ECU may imply that the system will not be centered on a single currency as in the past but will consist of various monetary associations. The Fund would ensure that orderly relationships were maintained among the associations. It is recognized already that the operation of the EMS must be consistent with the provisions of the Fund’s Articles.

Each participant in the exchange rate and intervention arrangements of the European Monetary System was required to contribute to the European Monetary Cooperation Fund (EMCF) 20 percent of the participant’s gold holdings and 20 percent of its gross U.S. dollar holdings as at the last working day of February 1979.549 The EMCF credited each participant with an amount of ECUs corresponding to its contribution. A central bank not participating in the arrangements may make a similar contribution. The United Kingdom is a nonparticipant and has made a contribution.

The contributions of gold and dollars are made under revolving swaps, of three months in duration, against ECUs. The swaps may be unwound on two working days’ notice. A participant has this right because the liquidity of ECUs is limited, as will appear later in this discussion. Swaps avoid the necessity for final transfers of the ownership of contributed gold and dollars. Legal and political difficulties made an outright transfer unacceptable in the first stage of the EMS. The right to unwind a swap on short notice gives a participant further assurance that it can cancel the EMCF’s temporary ownership. Another measure of control retained by participants is that each central bank enters into a contract with the EMCF that deals, inter alia, with the management of the contributed assets insofar as management is entrusted to the central bank. Under a contract, a central bank can invest and otherwise manage the assets it has contributed as if the central bank had unencumbered ownership. A central bank earns interest on the investment of its contributed dollars and bears the risk of fluctuations in the price of gold and in the exchange rate of the dollar.

The swaps differ from the legal arrangements under which members pay part of their subscriptions to the Fund in reserve assets. Those payments transfer unencumbered ownership to the Fund. Provisions on the liquidation of the Fund do not contradict this legal consequence. Nevertheless, some members of the Fund expressed the view in the Committee of Twenty and in the Interim Committee that they retained some unexplained legal dominion over the Fund’s gold because they had paid a portion of their subscriptions in gold. This mystical belief helps to explain the word “restitution” that was often used in relation to the sale of one sixth of the Fund’s gold to members at the former official price as part of the compromise on the arrangements for gold connected with the Second Amendment.

For the purposes of the initial and subsequent swap operations of the EMS, the value of the gold portion is calculated as the average of the prices, converted into ECUs, recorded daily at the two London fixings during the previous six calendar months, but the value is not to exceed the average price of the two fixings on the penultimate working day of the period. This maximum is intended to prevent an average price that is too far removed from current prices. The amount of U.S. dollars to be contributed is determined by the market rate two working days prior to the value date for the transfer.

On the renewal of a swap at the beginning of each quarter, the central banks and the EMCF adjust the contributions that have been made. The purpose of the adjustment is to ensure that the contribution continues to represent at least 20 percent of a central bank’s gold and 20 percent of its dollar reserves on the last working day of the preceding quarter, and that account is taken of changes in the price of gold and in the exchange rate for the U.S. dollar since the initial contribution or previous adjustment. The criteria for adjusting contributions can produce substantial variations in the amount of ECUs and in the total reserves of a central bank. The ECUs a central bank holds are shown as part of its reserve assets, while its contributed assets are excluded from this presentation. The practice is intended to avoid any increase in a central bank’s reserve assets as a result of the EMS. An increase may take place, however, if a central bank does not value its gold on the basis of market prices or if the method of valuation for the purpose of the EMS assigns a higher price to gold than the price according to the central bank’s method of valuation.

The issue of ECUs against gold results in an activation of gold. It is obvious, however, that a number of elements assure members of the Community of continued legal and practical control of their gold contributions. The treatment of gold in a later phase of the EMS may be one of the most difficult political problems to be faced.

Settlements

ECUs are used in intra-Community settlements under the exchange rate and intervention arrangements according to established rules. Under these rules, when intervention takes place at the margin, the debtor central bank may decide whether or not to have recourse to “very short-term financing,” which is arranged as follows. To enable participants to intervene in Community currencies, each participating central bank must make available to its partners drawing rights in its currency of unlimited amount. Currencies are made available by spot sales and purchases credited or debited to accounts denominated in ECUs in the books of the EMCE Currencies are translated into ECUs at the rate ruling on the day of intervention, which is also the value date of the financing operation.

A central bank holding fewer ECUs than the amount it would have to return on the reversal of a swap pays interest in ECUs to the EMCF on the shortfall. A central bank holding more than the amount receives interest in ECUs. The effect is similar to the payment of net charges and the receipt of net interest under provisions relating to the SDR.550 The rate of interest paid or received in ECUs is equal to the average of the discount rates of all Community central banks, weighted in accordance with the weights of their currencies derived from central rates in terms of the ECU.

The initial settlement date in respect of a financing operation is the last working day preceding the sixteenth day of the second month following the one in which the value date of the financing operation fell. Provisions have been adopted for the automatic postponement of the initial settlement date on the request of the debtor central bank. Further automatic renewal of a debt is not possible if the debt has remained continuously outstanding for six months, or if the total of a participant’s indebtedness would exceed a specified quota. Other financing facilities may be made available if a deficit is prolonged.

Provisions of the EMS deal with the postponement of settlement by agreement between a debtor and a creditor central bank beyond the maximum period for outstanding debt under the provisions on automatic postponement; the order of repayment of claims; the automatic offsetting of all debts and claims of a central bank; advance settlement on the request of a debtor central bank; and the holding of working balances in Community currencies.

Settlement may be made at any time before the due date in the currency of the creditor central bank. This privilege enables a debtor central bank to settle when, as the result of it operations, it obtains the creditor central bank’s currency. By settling in this way, the debtor central bank avoids the loss of reserves it would suffer if it had to settle in ECUs or other reserve assets. Participants may hold balances in Community currencies only within limits laid down by the Committee of Governors. The limit in a currency may be exceeded only with the consent of the central bank of the issuer of the currency.

At the due date, settlement is made first with the currency of the creditor central bank if held by the debtor central bank. ECUs are then payable, but a creditor central bank is not compelled to accept settlement in ECUs for more than half the debit that is being settled, although the creditor may agree to take more. The remainder of a debt is settled by transferring other categories of reserves in accordance with the composition of the debtor central bank’s reserves at the end of the month preceding settlement, but the parties may agree on some other form of settlement. Daily rates are applied for the translation of debts denominated in ECUs when settlements are made with assets denominated in currencies or SDRs. Settlements may be made with currencies under these provisions, and SDRs may be used to settle a debt denominated in ECUs.

The categories of reserves for applying the formula on settlement of the balance of debts not settled in the creditor’s currency and in ECUs are assets denominated in SDRs (SDRs and reserve position in the Fund) and currencies. The debtor central bank may choose within each category the assets it will use in settling the proportion of its debt due in the category as a whole. Gold may be used in settlement by agreement between debtor and creditor, at a price agreed between them. If a debtor central bank does not resort to the very short-term financing mechanism, the transaction is not denominated in ECUs, but the two banks can agree that all or part of the settlement is to be made in ECUs. Intramarginal intervention takes place by agreement with the central bank that issues the currency to be sold, but the debtor central bank has no right to use the very short-term financing facility. The debtor may have the benefit of this facility, however, with the concurrence of the creditor central bank, or the parties may agree on some other arrangement. If the facility is resorted to, the rules for settlement are those that apply after intervention at the margin. Proposals have been made to free intramarginal intervention from some, at least, of present constraints. The proposals have been questioned on the ground that a large volume of intramarginal intervention has taken place, so that safeguards are necessary to enable a central bank whose currency is used in substantial amounts to ensure that its monetary policy is not undermined.

Exchanges and unwinding

The central banks may transfer ECUs to one another against U.S. dollars, Community currencies, SDRs, or gold. For the purpose of meeting a decline in its dollar holdings, a central bank may acquire dollars against ECUs from the EMCF between two periodic adjustments by unwinding a swap to the extent necessary. The transfers of ECUs to central banks or to the EMCF under these provisions may not be made for the sole purpose of altering the composition of a central bank’s reserves. This rule is intended to prevent harm to the ECU by implying a lack of confidence in it or a preference for other reserve assets, and to prevent maldistribution of ECUs that would be detrimental to the functioning of the asset. The rule is similar in both intention and formulation to the one that applies to transfers of SDRs in which the Fund designates the transferee.551 There is no rule, however, that authorizes transfers by agreement when the transferor has no need to use reserves. The Second Amendment permits such transfers of SDRs.

The rights of a central bank to unwind a swap at short notice and to manage its contributed assets prevent the EMCF from exchanging or investing the assets it holds under swaps. Nor is the EMCF able to “convert” ECUs for the benefit of a central bank into other assets: the only possibilities are the return of contributed assets by unwinding a swap or transfers by agreement between central banks for other re-serve assets as described above. The role of the EMCF in relation to ECUs is largely that of an accounting agent.

The swaps were to be unwound finally at the end of a two-year transitional period, unless the participants took a unanimous decision to put off this action. A decision was taken to renew quarterly swaps until March 13, 1983 unless a new system of the transfer of assets was initiated before that date as a feature of the “institutional” phase of the EMS. Provisions exist that would apply on the liquidation of the scheme.552 Countries give scrupulous attention to liquidation provisions even when they intend a scheme for the creation of a reserve asset to be permanent, because they regard rights in liquidation as an important component in the economic and legal quality of the asset.

Development of ECU

Even in a later state of the EMS, ECUs may be issued against contributed assets, but the contributions may be made in a different legal form. The development of the ECU may require participants to transfer the unencumbered ownership of contributed assets to the EMCF. That step may be difficult for technical as well as for political reasons. Obvious questions would arise in connection with gold because of its fluctuating price, its dormancy as a reserve asset, and the absence of interest earned by holding it.

A difference between the ECU and the SDR is that ECUs are issued against other reserve assets while SDRs are allocated without any quid pro quo. The resolution of the European Council of December 5, 1978 on the establishment of the EMS and related matters referred to a final stage of the EMS in which there would be “the full utilization of the ECU as a reserve asset and a means of settlement.” 553 The intended implication might have been that all intra-Community settlements would be made in full in ECUs, and that other reserves would be used in extra-Community transactions. It has been suggested that at a later stage of the EMS, ECUs might be issued to a central bank against its own currency.554 The EMCF would be authorized to create ECUs for issue to a member in return for its currency in credit operations. Something like the present very short-term financing facility could be retained, but advances of ECUs by the EMCF under credit arrangements probably would be substituted for the various other current arrangements under which individual participants are lenders, make bilateral loans, and lend currencies. The question could arise whether the availability of ECUs under credit arrangements of the future might make members of the EMS more reluctant to vote in favor of allocations of SDRs than they would be in the absence of such arrangements. The Council’s Resolution of December 5, 1978 avers that the EMS “will remain fully compatible with the relevant Articles of the IMF Agreement.” It would be difficult to determine that inaction—refraining from support for allocations of SDRs—was incompatible with relevant provisions of the Fund’s Articles.

The objective of full utilization of the ECU as a reserve asset and a means of settlement implies that at a later stage in the development of the ECU more debts would have to be denominated and settled in ECUs. The present limit of 50 percent of each settlement beyond which a creditor central bank cannot be compelled to accept ECUs could be modified, for example, by providing for full use of ECUs or for use until a central bank holds a certain proportion of its reserves in ECUs.

The use of ECUs in transactions between central banks could be freed from all restrictions, including the condition that a participant must not be motivated solely by the desire to change the composition of its reserves when transferring ECUs. The extent of the use that would be made of ECUs if there were greater freedom for participants would depend on improvements in the ECU that made it attractive to recipients without being so attractive that holders would be reluctant to part with it.

Improvements might be made in mechanisms for transferring ECUs. There is no provision at present for the designation of recipients by the EMCF comparable to the provision that requires the Fund to designate transferees of SDRs on the request of a transferor that wants a freely usable currency. An alternative to designation would be authority for the EMCF itself to provide, in return for ECUs, currency from resources within its ownership and power of disposition, free from the encumbrance of swaps. Unless there were some such authority of the EMCF, and right of a participant to obtain the “conversion” of ECUs into other reserve assets on demand or when the participant was in need, it might not be possible to increase the use of ECUs in settlements or to increase the contributed proportion of reserves, because a procedure for designation might not be sufficient in itself.

A difficulty at the moment is that ECUs have less liquidity than the reserve assets in return for which they are issued. ECUs are held now only by participants in the exchange rate and intervention arrangements. A procedure for designating transferees among participants and requiring them to accept ECUs and provide currency might not be considered a substantial advance in liquidity. The participants are few, and they might all be in deficit to the outside world, with the result that on the basis of normal economic criteria it would not be appropriate to designate any one of them. In the Fund, because of the breadth of membership, deficits and surpluses among members must coexist, so that it is always possible to designate transferees of SDRs according to economic criteria.

If the ECU were to be held as a reserve asset outside the Community, questions might arise about the effects of uniform characteristics and uses of all ECUs in existence. The Fund has established uniformity among members and authorized other holders of SDRs without any consequential difficulties. A widespread use of the ECU outside the Community could have a considerable effect on the operation of the ECU within the Community, for example, because the scope for exchange of the ECU would be increased and could lead to fewer transactions with the EMCF or among participants.

The Fund is not bound to “convert” SDRs into other assets, or other assets into SDRs, but it is empowered to accept SDRs from a member in return for an equivalent amount of the currencies of other members, or to provide a member with SDRs in return for an equivalent amount of the currencies of other members, in transactions conducted through the General Resources Account. The concurrence of the member whose currency is provided or accepted by the Fund is necessary in these transactions.555 A member engaging in these transactions may be doing so solely to change the composition of its reserves. A participant in the EMS may not transfer ECUs to the EMCF to obtain U.S. dollars between two periodic adjustments for the sole purpose of changing the composition of its reserves.

ECU and SDR

The Fund has authorized a range of operations between members involving uses of SDRs. A number of these operations permit the use of SDRs in connection with obligations denominated, inter alia, in another unit of account that is composed of currencies and is applied under an intergovernmental agreement, provided that arrangements have been completed for determination by the Fund of equal value in terms of the SDR in accordance with the Fund’s law and practice. The operations include the use of SDRs in settling financial obligations, loans, and transactions to secure the performance of financial obligations.556 The description of the other unit of account would apply to the ECU, and was formulated primarily with the ECU in the minds of the drafters.

Another tie between the ECU and the SDR might be created by the Fund’s prescription of the EMCF as an authorized holder of SDRs. 557 Members of the Fund that are also members of the European Community would be able to pool SDRs under arrangements with the EMCF, but pooling might be a practical and legal possibility for the Community only as an element in the next phase of the EMS.

The creation of the ECU illustrates a phenomenon that is not uncommon among international organizations in the same or in related fields, particularly within the international monetary system. The legal provisions and experience of existing organizations are inherited by newcomers, which may follow earlier solutions, or improve them, or adapt them to new needs. It will be apparent from the discussion of the ECU that experience with the SDR has had an influence on the ECU. But the newcomer itself may have an influence on the predecessor. It has been suggested in Section VI that the evolution of exchange arrangements under the Fund’s Articles might benefit from the experience of the EMS with its exchange rate and intervention arrangements.

Reserve Currencies

The Outline of Reform set forth the main features of an international monetary reform, and included as one feature:

  • (d) better international management of global liquidity, with the SDR becoming the principal reserve asset and the role of gold and of reserve currencies being reduced.558

The better international management of global liquidity was considered desirable because excessive or inadequate liquidity might induce monetary authorities to adopt policies that encouraged excess demand and inflation or economic stagnation and deflation.559 These consequences might have international effects, and it is these effects that justify international concern about the volume of global liquidity. The Fund’s concern is apparent in the provision that authorizes the Fund to allocate or cancel SDRs,560 and in the provision under which members undertake to collaborate with the Fund and other members to ensure that policies on reserve assets are consistent with the objectives of promoting better international surveillance of international liquidity and making the SDR the principal reserve asset in the international monetary system.561

Gold and currencies as reserve assets have been responsible for massive increases in global reserves. The elimination of the official price of gold and the right of members to value their gold holdings on the basis of market prices have produced an increase in the value of global reserves. The Fund has not adopted any guideline on the appropriate method of valuing gold. An attempt was made to control the increase in global reserves that would result from applying the market price to gold held in reserves by proposing that the gold should be deposited in a Substitution Account in return for SDRs issued over time, but the attempt did not succeed.562

The Fund has no obvious regulatory authority to control the increase in holdings of currency in the reserves of its members. An increase has occurred not only in the total holdings of currency in reserves but also in the number of reserve currencies.563 The latter increase has resulted from the attempt by monetary authorities to maintain the real value of currency reserves or at least to increase the return on them in a world of floating exchange rates.564

In the Committee of Twenty, many members had another reason for concern about the increase in the volume of international liquidity. They objected to an increase in currency reserves that resulted from an asymmetrical position for the United States that enabled it to finance the deficits in its balance of payments with U.S. dollars and without the use of its reserves. The proposals on asset settlement and a Substitution Account for reserve currency were reactions to this view of the situation.565 The Second Amendment has not given effect to these proposals.

The increase in the number of reserve currencies in recent years has led to concern because movements by monetary authorities out of one currency and into another through the exchange markets in the management of their reserves can have adverse effects on exchange rates. For this reason also a Substitution Account has been proposed. The theory is that currency holdings could be deposited in such an account in return for claims denominated in SDRs.566 The effect would be equivalent to the diversification of deposited balances into the currencies that compose the SDR basket, in their proportions in the basket, without going through exchange markets.

Subject to one qualification, concern about reserve currencies has not led to greater international regulatory authority over the volume or composition of global reserves. The qualification is that in June 1971 the central banks of the Group of Ten and Switzerland announced that they had decided for the time being not to place additional funds in the Euromarket and even to withdraw funds when that action might be prudent in the light of market conditions.567 The agreement was renewed in 1979. The motives for the agreement were the possible effects of these placements on the stability of exchange markets and also the increase in global reserves that can result from subsequent transactions made possible by the placements. Proposals in a subordinate body of the Committee of Twenty to extend the agreement among the Group of Ten to other countries were resisted by representatives of these countries because of the advantages the Euromarkets offered to the countries both as depositors and as borrowers.568

Section X A Summary

The discussion of some aspects of the international monetary system, the Fund, and international monetary law in these lectures is summarized in this Section.

Sections I and II

1. Since the Second Amendment of the Fund’s Articles, “the international monetary system” has become a term of art in that treaty. The principal function of the term in the Articles is to refer to the international relations that are subject to the Fund’s authority under its power to supervise the management and adaptation of the international monetary system. The term has not been defined by the Articles, although some broad topics are specified as coming within its reach. The 1965 Annual Report of the Fund contains a discussion of the concept that has had some influence on the attempts by authors to define what is meant by the system.

2. The international monetary system has been defined or described in many different ways. An approach that concentrates on the normative elements of the system does not define the system, because this approach does not isolate those international relations that are the subject matter of the system. Moreover, a listing of normative elements is not equivalent to a definition because the elements change from time to time. Similarly, an approach confined to the objectives or qualities of the system, or the problems that it should solve, does not isolate the relations among countries that are the subject matter of the system.

3. A persuasive definition of the international monetary system, at least for some purposes, is that it consists of the rules governing the relations of countries through their balances of payments. Normally, the monetary authorities of a country are in charge of these relations. The monetary authorities are the treasury, central bank, stabilization fund, or other similar fiscal agency of a country. An alternative definition is that the international monetary system consists of the rules governing the adjustment of balances of payments and the financing of imbalances that monetary authorities are legally bound to observe or consider themselves morally bound to observe.

4. The balance of payments, for the purpose of these definitions, must be given an extensive meaning. It embraces such topics as exchange rates, convertibility, reserve assets, and reserve credit.

5. For the purpose of the definitions suggested above, a reasonably close connection with the balance of payments is implied. Many activities can affect the balance of payments that are not normally regarded as monetary in character. The provisions of the GATT, for example, are not normally considered to be among the rules governing the international monetary system, except to the extent that the provisions deal specifically with the adjustment of the balance of payments or the financing of imbalances.

6. At one extreme, some definitions of the international monetary system sweep up all the rules and practices according to which both governments and private parties conduct their transactions across national boundaries. Authors who hold this view tend to arrive at the conclusion that these rules and practices are so complex and so uncoordinated that they deprive the word “system” of its normal meaning when applied to the international monetary system. At the other extreme is the view that the system consists only of those rules that governments have undertaken to observe by international agreement stricto sensu.

7. According to an intermediate view, the rules governing the international monetary system are not limited to those established by the agreements referred to in paragraph 6 above. The rules should be taken to include in addition all understandings that governments, including their monetary authorities, consider themselves bound to observe. Governments, including their monetary authorities, may consider themselves bound by informal agreements, including agreements implied by practice, that would not be classified as international agreements stricto sensu. On this view, agreements among central banks can be included among the agreements that monetary authorities consider that they must observe. The same view can be taken of the communiqués recording understandings on international monetary matters issued by international groups or bodies composed of the representatives of monetary authorities.

8. It follows from some of the views referred to above that the international monetary system is a system of relationships governed by rules and understandings that are more extensive than international monetary law defined as a branch of public international law.

9. The Articles of Agreement of the International Monetary Fund are the central legal instrument of the international monetary system and of international monetary law. The constitutive or other legal instruments of other international organizations, whether multilateral or regional, are also part of the corpus juris of the system insofar as they deal with the balances of payments of countries. The members of these organizations recognize that their legal instruments, to the extent that they deal with the balance of payments, must be consistent with the provisions of the Fund’s Articles.

10. All aspects of the balances of payments of the Fund’s members, and therefore all aspects of the international monetary system, are within the Fund’s field of interest. The criterion by which to decide whether a matter is within the Fund’s field of interest may be whether the matter has an effect on the balance of payments or whether a member’s intention is to affect the balance of payments, but even the latter criterion can be applied according to objective standards. The Fund’s judgment on whether the balance of payments is involved is decisive for the Fund’s purposes.

11. The criticism that there is no international monetary system is a judgment that international monetary relations affecting balances of payments are not being conducted satisfactorily. The criticism may be made because the rules of the system are not sufficiently comprehensive or because they permit too much freedom for monetary authorities to act, or not to act, in disregard of the interests of other monetary authorities. The view that an international monetary system is or is not in existence can inspire legal consequences within the Fund or outside it.

12. The countries within the international monetary system are usually thought to be those that have accepted certain common standards in relation to their balances of payments. Membership in the Fund is a working criterion for this purpose, but Switzerland, although a nonmember, probably observes these standards without having undertaken the obligations of membership.

Section III

13. Exchange rates are at the heart of the international monetary system, the activities of the Fund, and international monetary law. The original Articles represented a major departure from the principle of the past that each country was sovereign in the determination and management of the exchange rate for its currency.

14. The par value system of the original Articles was based on seven principles:

  • (i) Exchange rates were matters of international concern.

  • (ii) Exchange stability was desirable, but not exchange rigidity.

  • (iii) Competitive exchange alterations were outlawed.

  • (iv) Exchange rates were to be fixed and not allowed to float.

  • (v) Exchange systems had to be unitary; multiple currency practices were prohibited.

  • (vi) Discriminatory currency arrangements were prohibited.

  • (vii) Authority over exchange rates was apportioned between the Fund and members, but a member had ultimate authority over the exchange rate for its currency.

15. Each member was responsible for maintaining the effectiveness of the par value of its own currency. A member was required to adopt appropriate measures to ensure that exchange rates in exchange transactions in its territories involving its currency and another member’s currency did not develop outside prescribed margins around the parity between the two currencies. The parity was the ratio between the par values established in terms of gold as the common denominator of the par value system. The obligation was an application of the underlying principle that each member is responsible to the Fund for its own currency.

16. The voluntary undertaking of the United States to observe the practice of buying and selling gold freely for its own currency in transactions with the monetary authorities of other members, as that practice was described in the Articles, became the primary norm of the par value system. The U.S. dollar became the main reserve and intervention currency. As a result, the United States was passive in exchange markets.

Section IV

17. The withdrawal by the United States on August 15, 1971 of its undertaking with respect to transactions in gold led to the floating of all currencies. The view presented by the United States in the discussions on reform of the international monetary system was that its central role in the par value system had been disadvantageous to it. The passivity of the United States had been forced on it by the system as it had developed and had deprived it of means of adjustment that had been available to other members.

18. Other members, however, thought that the par value system had operated unsymmetrically by conferring benefits on the United States not available to them. In the Committee of Twenty, all agreed that a suitable par value system should be restored, but members pursued different objectives in the search for symmetry in the operation of a par value system. The United States wanted the assurance of symmetry between members in surplus and members in deficit in their balances of payments; other members wanted the assurance of symmetry between the issuers of reserve currencies, principally the United States, and the rest of the membership.

19. The objective of symmetry is inspired by the belief that an international monetary system will not be satisfactory unless it provides equitable treatment for discrete classes of countries. International monetary law, administered through international organizations, particularly an organization like the Fund that is open to universal membership, must be relied on as a principal means to ensure equitable treatment. The issue must be faced of the extent to which the law of organizations should take the form of fixed rules and how much should be left to the discretion of administering authorities.

20. The Committee of Twenty’s Outline of Reform set forth the general direction in which the Committee thought that the international monetary system could evolve in the future. A more flexible par value system could be introduced, with floating authorized in particular situations. New ideas, involving, for example, objective indicators and multicurrency intervention, were adumbrated. The Outline of Reform was affected throughout by considerations of symmetry and of the choice between fixed rules and discretionary authority.

Section V

21. The Second Amendment abandons the idea of an interim period as contemplated by the Outline of Reform. Exchange rate provisions are adopted that will apply at all times; other provisions deal with present conditions and permit evolution in exchange arrangements as conditions change; and further provisions regulate a par value system if conditions permit its introduction, but no express or implied assurance is given that it will be called into being at any time.

22. The principles of the provisions now in operation as compared with the principles in paragraph 14 above are as follows:

  • (i) Exchange rates continue to be matters of international concern, even though par values are abrogated and members are free to choose their exchange arrangements, with one exception. The exception is that members may not maintain the external value of their currencies in terms of gold. Members are free also to determine the external value of their currencies. In the exercise of their freedom, members are subject to certain general obligations that apply now and at all times.

  • (ii) Stability is a principle of the Second Amendment but not in the sense of the steadfastness of exchange rates, which became rigidity in the operation of the par value system. Stability in underlying economic conditions is to be pursued. If achieved, it will produce a stable system of exchange rates among members. If underlying economic conditions are not orderly, exchange rates should not be prevented from responding to such conditions.

  • (iii) The avoidance of competitive exchange depreciation is still a purpose of the Fund, but the obligation of members has been rewritten. They must avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.

  • (iv) The Second Amendment avoids any suggestion of the superiority of fixed over floating exchange rates. Criticisms of the way in which floating exchange rates are working have produced a number of proposals for improvements, and some possibilities under the communiqué of the Versailles summit meeting, but not support for return to a par value system.

  • (v) The desirability of unitary exchange rates continues to be a principle of the Articles, but abrogation of the par value system has affected determination of the practices that are considered multiple currency practices.

  • (vi) Discriminatory currency arrangements, including broken cross rates, are still prohibited by the Second Amendment. The determination of what constitutes discriminatory currency arrangements has been affected by abrogation of the par value system.

  • (vii) The balance between the authority of the Fund and of members over the exchange rates for their currencies has shifted radically in favor of members. It is more appropriate to speak of their primary authority instead of the ultimate authority that they had under the par value system.

Section VI

23. The abrogation of the par value system and the fluctuation of exchange rates have created many problems in the negotiation or administration of treaties. For example, measurement of the depreciation in exchange rates from a norm may be necessary under some treaties. The necessity for a unit of account for the purposes of ensuring uniformity under treaties is another problem. The Currency Pooling System of the World Bank illustrates the need for solving a problem of equity that may arise because borrowers from an international organization receive different currencies under loans made to borrowers by the organization.

24. One of the most important legal and economic consequences of the variability of exchange rates has been the creation of the European Monetary System (EMS) as a zone of monetary stability, with the ECU at its center.

Section VII

25. The Fund would be able to call a par value system into existence whenever it was satisfied that certain specified conditions were met. The provisions governing the new par value system are more flexible than the provisions of the original Articles and are designed to avoid the shortcomings of the earlier provisions that became evident in practice.

26. The principles on which the new provisions are based, when compared with the principles set forth in paragraphs 14 and 22 above, can be formulated as follows:

  • (i) Exchange rates are matters of international concern.

  • (ii) Exchange stability without rigidity is desirable, but stability must be understood in the sense that is explained in paragraph 22 (ii) above.

  • (iii) Competitive exchange depreciation is to be avoided, as explained in paragraph 22 (iii) above.

  • (iv) In contrast to the provisions of the original par value system, floating exchange rates can be valid. Exchange rates for currencies for which par values have been established can move within wider margins than were permissible under the original Articles.

  • (v) Unitary rates of exchange are desirable, and multiple currency practices are prohibited.

  • (vi) Discriminatory currency arrangements are prohibited.

  • (vii) A number of important and complex changes are made in the balance of authority between the Fund and a member over the external value of the member’s currency. One of the most striking changes is that either a member or the Fund may be able to terminate a par value for the member’s currency in certain circumstances without the establishment of a new par value.

Section VIII

27. The convertibility of currencies is a crucial element in the international monetary system, the activities of the Fund, and international monetary law. In all three, convertibility has undergone changes since 1971. Convertibility can be described as freedom to use and exchange currencies without some penalty relating to cost.

28. Least change has occurred in market convertibility. The multilateral system of payments and transfers for current international transactions is ensured by the prohibition of restrictions on these payments and transfers unless approved by the Fund or authorized by the transitional arrangements of the Articles. Market convertibility is achieved mainly through exchange markets, to which both private and public entities have access. It has been and is now the most important form of convertibility.

29. Official convertibility provides for the conversion by the monetary authorities of their currency into another currency or a reserve asset for the benefit of the monetary authorities of another country. Before the Second Amendment, the Articles recognized four main forms of official convertibility. First, the practice of freely buying and selling gold, which is referred to in paragraph 16 above, is no longer recognized by the Articles. Second, a member’s obligation to convert foreign official holdings of its currency through the mechanism of the Fund has not been eliminated from the Articles, but the obligation has been retained on the understanding that it is dormant. Third, the provision on the redemption of balances with SDRs by agreement between members has been absorbed into a broader provision that permits members to transfer SDRs by agreement whether or not redemption is the purpose. Fourth, the concept of currency convertible in fact that applied under provisions relating to the SDR has been abolished, and a new concept, the freely usable currency, has been adopted for the same and other purposes.

30. The first three forms of official convertibility before the Second Amendment referred to in paragraph 29 above involved conversion into a nonnational asset. The changes made by the Second Amendment were intended to eliminate official convertibility, particularly into nonnational assets, as part of the structure of the international monetary system. Official convertibility was seen to be a necessary element of the former par value system. The present absence of a par value system explains why asset settlement, a new form of official convertibility discussed by the Committee of Twenty, has no place in the Articles. Some form of the settlement of balances would be necessary, however, if the par value system of Schedule C were to be called into operation.

Section IX

31. Intervention to support the external value of a currency and convertibility lead to the question of the reserve assets that must be held for these purposes. Members hold reserves for other purposes as well. The floating of currencies has not put an end to these reasons for holding reserves and has not led to a reduction in reserves.

32. The Fund is interested in reserves for a number of reasons, including the effect of the volume of global reserves on the policies of members if they perceive reserves to be overabundant or inadequate. Members undertake to collaborate on policies with respect to reserve assets.

33. The main types of reserve assets at the present time are reserve currencies, SDRs, gold, ECUs, and reserve positions in the Fund.

34. The Second Amendment declares that the SDR is to become the principal reserve asset in the international monetary system. To help the SDR achieve this status, the characteristics of the SDR have been improved and its uses have been extended. A continuing short-coming of the SDR is the small proportion that SDRs represent in global reserves, even when gold is excluded from the calculation. The future proportion will depend on the interpretation to be given to the economic criteria for allocations of SDRs and the weight to be given to the objective of making the SDR the principal reserve asset in the international monetary system.

35. Gold proved to be unsatisfactory as the “primary” (or “ultimate”) reserve asset of the international monetary system. An objective of the Second Amendment is the gradual reduction in the role of gold in the system. The objective has been pursued by radical changes in the role of gold under the Articles. For example, the official price is abrogated, the Fund may not manage the price or establish a fixed price, and obligations to pay gold in transactions or operations with the Fund are abolished.

36. The fluctuating market price of gold creates legal problems that have not been settled with uniformity so far.

37. The U.S. Gold Commission that was appointed to consider the national and international role of gold reported in March 1982 with a number of recommendations, some of them for further study, but one of which is that there should be no return to a par value system based on gold or other change in present exchange arrangements.

38. Participants in the EMS contribute 20 percent of their gold and 20 percent of their gross holdings of U.S. dollar holdings under revolving swaps and receive in return ECUs, a new reserve asset. The arrangement activates gold holdings that probably would remain dormant as reserve assets but for the EMS.

39. The control of official liquidity is usually regarded as desirable because of the damaging consequences that excessive or inadequate liquidity can produce. Massive increases in global reserves have occurred in the form of currencies and as a result of the elimination of the official price of gold. The Fund does not have adequate powers to control the volume of reserves or the development of new reserve currencies. Efforts to moderate the effects of developments relating to reserve assets by means of a Substitution Account have not succeeded so far.

Supplemental Note to Chapter 1

Section I

The preamble of the General Arrangements to Borrow (GAB) has been modified as part of the widespread revision of the GAB that became effective on December 26, 1983. The reference to the international monetary system, however, has not been deleted (Selected Decisions, 10th (1983), p. 131). A further reference to the international monetary system occurs in a new provision, Paragraph 21, under which the Fund may resort to the GAB to help finance transactions with nonparticipants. A condition for this use of the GAB is that the Managing Director concludes that the Fund faces “an inadequacy of resources to meet actual and expected requests for financing that reflect the existence of an exceptional situation associated with balance of payments problems of members of a character or aggregate size that could threaten the stability of the international monetary system” (see Selected Decisions, 10th (1983), p. 142). The revision of the GAB is discussed in Chapter 6.

Section II

1. There is no need to modify the discussion of the availability of membership in the Fund to countries whether they have command or market economies as a result of the following provision in Public Law 98-181 (97 Stat. 1267) of the United States, which took effect on November 30, 1983:

instructions to the united states executive director

Sec. 804. The Bretton Woods Agreements Act (22 U.S.C. 286 et seq.) is amended by adding at the end thereof the following:

“instructions to the united states executive director

“Sec. 43. (a) The Congress hereby finds that Communist dictatorships result in severe constraints on labor and capital mobility and other highly inefficient labor and capital supply rigidities which contribute to balance of payments deficits in direct contradiction of the goals of the International Monetary Fund. Therefore, the Secretary of the Treasury shall instruct the United States Executive Director of the Fund to actively oppose any facility involving use of Fund credit by any Communist dictatorship, unless the Secretary of the Treasury certifies and documents in writing upon request and so notifies and appears, if requested, before the Foreign Relations and Banking, Housing, and Urban Affairs Committees of the Senate and the Banking, Finance and Urban Affairs Committee of the House of Representatives, at least twenty-one days in advance of any vote on such drawing that such drawing—

  • “(1) provides the basis for correcting the balance of payments difficulties and restoring a sustainable balance of payments position;

  • “(2) would reduce the severe constraints on labor and capital mobility or other highly inefficient labor and capital supply rigidities and advances market-oriented forces in that country; and

  • “(3) is in the best economic interest of the majority of the people of that country.

Should the Secretary not meet a request to appear before the aforementioned committees at least twenty-one days in advance of any vote on any facility involving use of Fund credit by any communist dictatorship and certify and document in writing that these three conditions have been met, the United States Executive Director shall vote against such program.”

This obscure provision was probably intended to refer to stand-by and extended arrangements and not to transactions under the Fund’s policies on the compensatory financing of export fluctuations, the compensatory financing of fluctuations in the cost of cereal imports, and buffer stock financing (Selected Decisions, 10th (1983), pp. 61–79).

2. The revised GAB makes provision for Switzerland to change its relationship to that legal instrument. Switzerland’s original relationship was one of association with the GAB through the medium of a separate agreement with the Fund. Under the revised GAB the Swiss National Bank can become a participating institution (Selected Decisions, 10th (1983), p. 143). The legal position of Switzerland under the GAB is discussed in Chapter 6. The new development should be read in conjunction with the discussion on pages 457–63 of the author’s Membership and Nonmembership in the International Monetary Fund (Washington, 1974).

3. Another legal aspect of interest under the GAB is that the Swiss National Bank would accept as binding a decision of the Fund on any question of interpretation raised in connection with the GAB that fell within the purview of the Fund’s power of authoritative interpretation under Article XXIX. The Swiss National Bank would be bound to the same extent as other participants in the GAB (Selected Decisions, 10th (1983), p. 143; and see the author’s Interpretation by the Fund, IMF Pamphlet Series, No. 11 (Washington, 1968), pp. 58–59).

Section V

1. More recent, and more elaborate, classifications of exchange arrangements can be found on page 8 of the Fund’s 1983 Annual Report on Exchange Arrangements and Exchange Restrictions (as of March 31, 1983) and on pages 114–16 of the Annual Report, 1983 of the Fund (as of June 30, 1983). Since 1975, there has been a marked shift in the pegging of currencies from a single currency to a composite of currencies.

The classification can have normative effect because under Article IV, Section 2(a) each member “shall notify the Fund promptly of any changes in its exchange arrangements.” A change in classification, however, is not the only kind of change to which the obligation applies.

The 1982 Annual Report declares that the normal period for the provision of information by members about changes in exchange arrangements should be no more than three days after the date of a change (p. 132).

The staff supplies the Executive Board with notices of large discrete changes in nominal exchange rates as well as cumulative changes in real effective exchange rates beyond a threshold of 10 percent since the last occasion on which the Executive Board discussed a member’s exchange rate policy.

2. The Executive Board conducts biennial reviews of the original decision on surveillance over the exchange rate policies of members and annual reviews of the conduct of surveillance. Decisions on surveillance subsequent to the two original decisions can be found in the Annual Reports for 1982, pages 129–32 and for 1983, pages 142–45 (and pages 160–63). A decision adopted on March 12, 1984 will be published in due course. On the decision of 1982, see Joseph Gold, SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, IMF Pamphlet Series, No. 40 (Washington, 1983), pages 11–16, and 100–106. The Fund has not adopted new, or amended the original three, principles for the guidance of members in the conduct of their exchange rate policies.

3. The “conclusions” of the Executive Board in a consultation under Article IV have the same legal character as decisions in the sense that the Executive Board decides to endorse the summing up of the Chairman (the Managing Director), but, as explained in Chapter 7, the conclusions purport to express the views of Executive Directors individually or by groups and not the views of the Executive Board as a whole.

4. Multiple currency practices have undesirable effects on the economy of the member adopting them, tend to become entrenched, and provoke countervailing actions by other members that are detrimental to the international economy. One response of the Fund has been to make the introduction or modification of multiple currency practices a performance criterion in stand-by and extended arrangements (Selected Decisions, 10th (1983), pp. 50 and 55). The effect is that a member’s right to make purchases under the arrangement is interrupted if the member introduces a new multiple currency practice or modifies an existing one.

5. For a more detailed account on the law relating to multiple currency practices and discriminatory currency arrangements, see Joseph Gold, SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, IMF Pamphlet Series, No. 40 (Washington, 1983), pages 17–40.

6. The communiqué issued on May 30, 1983 after the Williamsburg summit carries forward some of the intentions of the Versailles communiqué. The relevant portions of the Williamsburg communiqué are quoted in Chapter 7.

Section VI

1. The practice, still in an experimental stage, of reports by the staff to the Executive Board on changes in real effective exchange rates has been referred to earlier in this Supplemental Note. (On the meaning of the effective exchange rate, see footnote 274.) The practice introduces a new measurement of variations in exchange rates for the purpose of a treaty. Real effective exchange rates are defined as nominal effective exchange rates adjusted for movements in relative domes-tic currency prices. The calculation for this purpose focuses on a member’s international price and cost competitiveness taken as a whole. An increase in the result of the calculation indicates a loss of competitiveness, but many other factors must be taken into account in evaluating the appropriateness of an exchange rate (see Edouard B. Maciejewski, “‘Real’ Effective Exchange Rate Indices: A Re-Examination of the Major Conceptual and Methodological Issues,” International Monetary Fund, Staff Papers, Vol. 30 (Washington, September 1983), pp. 491–541). An index has been developed so far for each of three categories of members, classified on the basis, inter alia, of industrialization, production and export of manufactures, and production and export of primary commodities.

2. Public Law 98-181 of the United States contains the following provision on SDRs:

Sec. 803. Section 6 of the Special Drawing Rights Act (22 U.S.C. 286q) is amended—

  • (1) by inserting “(a)” after “Sec. 6”; and

  • (2) by adding at the end thereof the following:

  • “(b)(1) Neither the President nor any person or agency shall on behalf of the United States vote to allocate Special Drawing Rights under article XVIII, sections 2 and 3, of the Articles of Agreement of the Fund without consultations by the Secretary of the Treasury at least 90 days prior to any such vote, with the Chairman and ranking minority Members of the Committee on Foreign Relations and the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Banking, Finance and Urban Affairs of the House of Representatives, and the appropriate subcommittees thereof.

  • “(2) Such consultations shall include an explanation of the consistency of such proposal to allocate with the requirements of the Articles of Agreement of the Fund, in particular the requirement that in all its decisions with respect to allocation of Special Drawing Rights, the Fund shall ‘seek to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the attainment of its purposes and will avoid economic stagnation and defla-tion as well as excess demand and inflation in the world.’”

3. For a list, as of the date of publication, of the treaties or amendments in which the SDR was, or will be, the unit of account, see Joseph Gold, “The SDR in Treaty Practice: A Checklist,” International Legal Materials, Vol. 22 (1983), pages 209–13.

4. The position taken by the delegate of the U.S.S.R. in the Working Group of Uncitral was modified somewhat when the plenary session of the Commission was held in New York in January 1982. Representatives of the U.S.S.R. declared, apparently in deference to the attitude of another nonmember, that units of account other than the SDR might be acceptable in some instances. The Commission agreed, as a result, that the SDR would be the preferred unit of account for many conventions, particularly those of global application, but not necessarily the only unit of account (see Joseph Gold, IMF Pamphlet Series, No. 40 (Washington, 1983), pp. 8–11 and 97–99).

5. The Ministers of Economy and Finance of the European Community met on March 12, 1984 on the fifth anniversary of the creation of the EMS. They announced with satisfaction that the essential purpose of the EMS was being achieved. Variations in exchange rates had been narrowed considerably, the concertation and coordination of monetary policies had been reinforced, and the convergence of economic conditions had made notable progress. The ministers were unanimous in wishing to preserve and reinforce the EMS, and to proceed to the longer-term objectives at the appropriate time. The ministers took note of the remarkable developments involving the ECU in the markets.

Section IX

1. On January 6, 1984, the Fund adopted a decision under which the rate of remuneration will be raised by stages to 100 percent of the interest rate of the SDR by 1987. The elaborate formula for this pur-pose is set forth in an amended Rule 1-10 of the Fund’s Rules and Regulations. (See also Sec. 810 of Public Law 98–181 of the U.S. Congress:

The Bretton Woods Agreements Act (22 U.S.C. 286 et seq.) is amended by adding at the end thereof the following:

“imf interst rates

“Sec. 48. The Secretary of the Treasury shall instruct the United States Executive Director of the Fund to propose and work for the adoption of Fund policies regarding the rate of remuneration paid on use of member’s [sic] quota subscriptions and the rate of charges on Fund drawings to bring those rates in line with market rates.”

2. On the obligation of reconstitution and its abrogation, it may be noted that at the end of March 1984, 11 members held no SDRs and about half the total number of members would have had to acquire SDRs to pay forthcoming charges on the allocations of SDRs they had received.

3. Two further entities had been prescribed as other holders of SDRs, increasing the total to 14, by the end of March 1984: Asian Development Bank, Manila; East African Development Bank, Kampala.

4. Ideas have been advanced for operational links between the SDR and the so-called market SDR so as to enhance the role of the SDR as a reserve asset. Some of the ideas are discussed in the following works:

George M. von Furstenberg, ed., International Money and Credit: The Policy Roles (Washington: International Monetary Fund, 1983).

Warren L. Coats, Jr., “The SDR as a Means of Payment,” International Monetary Fund, Staff Papers, Vol. 29 (Washington, September 1982), pp. 422–36.

Comments on the article by Warren L. Coats, Jr., and reply, International Monetary Fund, Staff Papers, Vol. 30 (Washington, September 1983), pp. 650–69.

Peter B. Kenen, “Use of the SDR to Supplement or Substitute for Other Means of Finance,” Reprints in International Finance, No. 23 (Princeton, New Jersey: December 1983).

5. Notwithstanding the Report of the U.S. Gold Commission, Public Law 98–181 of the United States contains the following provisions:

reports to congress

Sec 813. The Bretton Woods Agreements Act (22 U.S.C. 286 et seq.) is amended by adding at the end thereof the following:

“Sec 50. …

  • “(c) Not later than one year after the date of the enactment of this section, the Secretary of the Treasury shall transmit a report to the Congress with respect to strengthening the role and improving the operation of the International Monetary Fund including—

  • “(2) a review and analysis of—

  • “(C) the feasibility of returning all or part of the Fund’s gold reserves to Fund members or of selling the Fund’s gold reserves in the private markets in an effort to raise capital;

  • “(D) the feasibility of establishing temporary, supplemental financing facilities at the Fund;

  • “(E) the feasibility of establishing a Gold Lending Facility whereby the Fund would lend gold to Fund members who would in turn use such gold as collateral for commercial loans;

  • “(G) the effect on (i) the market price of gold, (ii) countries whose central banks maintain reserves in the form of gold and (iii) credit markets of the United States as a result of taking any of the actions described in subparagraphs (C), (D), or (E) of this paragraph; …”

“The term non-lawyers is a peculiar one. I am unfamiliar with the inner secrets of other professions, but I confess to never hearing a person described as a ‘non-architect’ or ‘non-doctor’,” David S. Levine, “My Client Has Discussed Your Proposal to Fill the Drainage Ditch with His Partners,” The State of the Language (University of California Press, 1980), pp. 400–409, at p. 409, fn. 16. The writer who discusses writing almost invariably falls into the ditch that he digs. Mr. Levine intends to confess, not to “never hearing,” but that he has never heard of, a person described as a nonarchitect or nondoctor.

“I know I am not

A practical person; legal matters and so forth

Are Greek to me, except, of course,

That I understand Greek. …” (The Chaplain in Christopher Fry’s The Lady’s Not for Burning, Act Two).

“Law is not so different from other professions in its use of language. There is a core vocabulary of impenetrable jargon, and a collection of words in common use that are imbued with subtleties and nuances peculiar to the legal context. Viewed from outside the profession, however, lawyers appear to inflict especially cruel and unusual punishment on the mother tongue through jargon, archaic words, endless repetition, passive constructions, overkill by synonyms, and deliberate turgidity” (Levine, op. cit., p. 400).

Under the heading “Choosing your currency,” the following letter, dated September 13,1978, from Mr. John Nott, MP (Conservative), for St. Ives, Cornwall, appeared in The Times (London) of September 19, 1978:

“Sir, If our rulers wish to create a European currency zone and move towards a single European currency, why is it not possible to make it simple so that ordinary people can understand their purposes.

“The United Kingdom is already a party to a treaty requiring the freedom of capital movements within the Community. If the treaty were to be implemented the British people would be able to settle their personal transactions, save and hold bank accounts in whatever currency they chose. Eventually the strongest currency would predominate and this would have arisen by the free exercise of personal choice and not by the decisions of politicians. As it is, the whole debate is being conducted in technical gibberish and the reports are all of ‘baskets,’ ‘numeraires,’ ‘parity grids,’ ‘tunnels,’ and ‘snakes.’

“Is the purpose to keep central bankers and civil servants employed; to prevent people from exercising their freedom to save and spend in the currency of their choice; or to conceal the ultimate consequence for the British people of what is proposed?”

See Annex.

Alan Siegel, “‘Plain English’ Results,” New York Times (April 1, 1979), sec. 3, pp. 1 and 4.

Chapter 747 (1977 Regular Session), An Act to amend the general obligations law, in relation to requiring the use of understandable language and meaningful sequence in the form of consumer agreements, in which Section 1 requires that the written agreements to which the statute applies must be “[w]ritten in non-technical language and in a clear and coherent manner using words with common and every day meanings.”

Executive Order to Improve Government Regulations, signed and issued by President Carter on March 23, 1978, who announced that “it will direct that regulations be written in plain English. Government regulations are usually written by experts for experts. Your clear mandate will be to translate regulations into language a small businessman—who must be his own expert—can understand.”

“See Dick and Jane. They Are Paying Tax,” Washington Post (January 13, 1979), pp. A1, A4. The Internal Revenue Service of the United States decided to substitute comprehension by the eighth-grader for comprehension by the twelfth-grader as the criterion for drafting forms.

Ralph Blumenthal, “Plain-Language Law Facing Amendatory Relegislative Proceeding,” New York Times (February 4, 1978), pp. 21 and 24; Editorial, “In Plain English,” New York Times (February 15, 1978), p. 32; “Sponsor in Senate Seeks to Delay New York Legalese Ban for Year,” New York Times (April 19, 1978), p. 43; Albert J. Millus, “Plain Language Laws: Are They Working?” Uniform Commercial Code Law journal, Vol. 16, No. 2 (Fall 1983), pp. 147–58.

See footnote 6.

“The same person may participate in more than one speech community or be the user of more than one language. For example, a botanist may call a tomato a ‘fruit’ when talking with a colleague but a ‘vegetable’ when talking to his grocer” (Reed Dickerson, “Statutory Interpretation: The Uses and Anatomy of Context,” Case Western Law Review, Vol. 23 (1972), pp. 353–73, at p. 366.

Dickerson, op. cit., p. 366.

“Plain Language Bill Introduced in New Jersey,” Journal of Commerce (May 17, 1978).

New York Times (February 4, 1978), p. 24.

Law No. 75-1349, Journal Officiel de la République Française (January 4, 1976), p. 189.

An English author offered the examples “sauerkraut” and “zabaglione” (Alan Greenwood, “Obligatory Use of the French Language,” New Law Journal, Vol. 127, No. 5818 (September 8, 1977), p. 887). Mr. Greenwood suggests (at p. 888) that a foreign banker promoting his business in France could test his compliance with the law by translating into French: “The use of leasing and factoring will improve the timing of your cash-flows.”

The Commission of the European Community was asked whether Law No. 75-1349 was compatible with the principles of the Community.

Some of the economic and monetary terms published by the Ministry of Economics and Finance under decrees that preceded Law No. 75-1349 are “capitaux fébriles” (hot money), “cremaillère” (crawling-peg system), “crédit croisé” (swaps), “termaillage” (leads and lags), “drugstore” (drugstore) (Journal Officiel de la République Française (January 1974), p. 95).

The Introduction to the Lexique Anglais-Française de la Banque et de la Monnaie (Cahiers de l’Office de la Langue Française, No. 14), issued by the Government of Quebec in 1972, explains that in proposing the French equivalents of terms it was necessary to take account of North American circumstances notwithstanding the desire to achieve uniformity among Francophone countries. For this reason, it had been necessary to create new terms not known in Europe. The intention, however, had been to respect the tendencies of the French language. The Lexique contained no fewer than 1,907 terms. Among the expressions in the Lexique are “opérations de report” or “swap” (swap), and “termaillage” (leads and lags). The last word is described as a neologism.

See also Clifford Savren, “Language Rights and Quebec Bill 101,” Case Western Reserve Journal of International Law, Vol. 10 (1978), pp. 543–71.

Joseph Gold, Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington, 1971). See also Joseph Gold, “Special Drawing Rights: Renaming the Infant Asset,” International Monetary Fund, Staff Papers, Vol. 23 (Washington, July 1976), pp. 295–311.

Note the problem implicit in Dickerson, op. cit., p. 355: “It is highly improbable that any document, considered entirely apart from the culture that it presupposes, can convey meaning, except in another culture that shares some of the same cultural elements. Indeed, to suppose an effective communication entirely apart from its cultural environment would be almost a self-contradiction.”

See, for example, James Buchanan & Co. Ltd. v. Babco Forwarding and Shipping (U.K.) Ltd. (1977), 3 W.L.R. 907.

A second language can contribute to a compromise even when there is only one authentic language, as in the Fund. The Fund insisted in 1976 that members could not purchase gold validly at prices in excess of par until the Articles were amended. The Fund’s Invitation to Bid in its auctions of 25 million ounces of gold contained the following term: “No bid may be submitted by the governmental or monetary authorities of a member of the Fund or by an agent on behalf of these authorities at a price inconsistent with the Articles of Agreement of the Fund, but the Bank for International Settlements may submit bids.” The Fund issued press releases in English and French, with the understanding that the latter would reflect the following French version of this term:

“Aucune offre ne sera soumise par les autorités gouvernementale ou monétaires d’un membre du FMI ou par un soumissionaire agissant comme mandataire de ces autorités à un prix incompatible avec les statuts du Fond.

“Toutefois, la BRI pourra intervenir comme soumissionaire dans les adjudications.” Consider, for example, the punctuation and arrangement of the text, and the rendering of “but” as “toutefois.”

Gold, Selected Essays, pp. 30 and 40.

“Obligation to collaborate regarding policies on reserve assets.

Each member undertakes to collaborate with the Fund and with other members in order to ensure that the policies of the member with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.”

The Compact Edition of the Oxford English Dictionary cites Barclay’s Shyp of Folys (1570) as the first example of usage: “A concertation or striving between vertue and voluptuositie.” The last example is dated 1677.

See, for example, Sections 3.6 and 5.1 of the Resolution of the European Council of December 5, 1978 on the establishment of the European Monetary System (EMS) and related matters; and Article 2.2, 2.4, and 2.5 of the Agreement between the Central Banks of the Member States of the European Economic Community laying down the operating procedures for the European Monetary System, March 13, 1979.

See “E235. OR.—Banalisation progressive.—Position belge,” Revue beige de droit international, Vol. 12 (1976), pp. 598–601.

Under this provision, the Fund could accept gold from members, although obligations on the part of the Fund to deal in gold have been abrogated:

“The Fund may accept payments from a member in gold instead of special drawing rights or currency in any operations or transactions under this Agreement. Payments to the Fund under this provision shall be at a price agreed for each operation or transaction on the basis of prices in the market.” As noted in footnote 22, the Fund did not accept the contention that purchases by members at market prices were consistent with the Articles before the Second Amendment.

The Fund collaborated in, and bore part of the costs of, the publication, in two volumes, of the Proceedings and Documents of the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 1–22, 1944. The Fund has circulated within the organization Informal Minutes of Commission I of the Bretton Woods Conference. These minutes are unofficial, incomplete, and unedited. They were compiled on behalf of some members of the U.S. delegation at the Conference solely for their own use. The United States consented to the circulation of the minutes within the Fund, without taking responsibility for them. The minutes have not been made available outside the Fund, but they have been cited on occasion within the organization.

The Fund has compiled seven massive volumes of documents prepared by the staff and minutes of the Executive Board relating to the First and Second Amendments of the Articles. These volumes have not been made available to the public.

For a lively discussion of this question, see Andreas F. Lowenfeld, “Is There Law After Bretton Woods?” The University of Chicago Law Review, Vol. 50 (1983), pp. 380–401, reviewing Kenneth W. Dam’s The Rules of the Game: Reform and Evolution in the International Monetary System (Chicago: University of Chicago Press, 1982).

History, 1945–65, Vol. III, p. 19.

Note the following paragraph in the Fund’s decision of April 29, 1977 (Decision No. 5392-(77/63) on surveillance over the exchange rate policies of members:

“3. The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment” (Selected Decisions, 10th (1983), p. 13).

Bretton Woods Agreements Act, Hearings before the Committee on Banking and Currency, House of Representatives, 79th Cong., 1st Sess., on H.R. 2211, A Bill to Provide for the Participation of the United States in the International Monetary Fund and the International Bank for Reconstruction and Development, Vol. I, pp. 147–50.

As stated in the Prefatory Note, the International Monetary Fund will be referred to usually as the “Fund,” its Articles of Agreement as the “Articles,” and its member countries as “members.” In the footnotes the words “original” and “first” after a provision of the Articles refer to the original Articles and the First Amendment, respectively, while the word “second” refers to the Second Amendment. If none of these words appears, the reference is to a provision of the Second Amendment. The terms “First Amendment” and “Second Amendment” are to be understood to refer to the Articles as amended, respectively, on July 28, 1969 and April 1, 1978.

See Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington, 1979); Manuel Guitián, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Series, No. 38 (Washington, 1981).

Supplement to International Financial News Survey, Vol. 23 (Washington, 1971), pp. 257–60.

History, 1945–65, Vol. III, pp. 3–36.

Ibid., pp. 83–96.

An earlier version had only three suggestions of tentativeness: Preliminary Draft Proposal for a United Nations Stabilization Fund and a Bank for Reconstruction and Development of the United and Associated Nations (ibid., pp. 37–82).

Keynes, Collected Writings, Vol. 25, pp. 1–40.

Ibid., p. 1.

Ibid., p. 2.

Ibid., p. 14.

Ibid., p. 12.

Ibid.

It is interesting to note the ideas he rejected as a basis for planning:

“Moreover in the interval between the wars the world explored in rapid succession almost, as it were, in an intensive laboratory experiment all the alternative false approaches to the solution—

“(i) the idea that a freely fluctuating exchange would discover for itself a position of equilibrium;

“(ii) liberal credit and loan arrangements between the creditor and the debtor countries flowing from the mere fact of an unbalanced creditor-debtor position, on the false analogy of superficially similar nineteenth-century transactions between old-established and newly-developing countries where the loans were self-liquidating because they themselves created new sources of payment;

“(iii) the theory that the unlimited free flow of gold would automatically bring about adjustments of price-levels and activity in the recipient country which would reverse the pressure;

“(iv) the use of deflation, and still worse of competitive deflations, to force an adjustment of wage- and price-levels which would force or attract trade into new channels;

“(v) the use of deliberate exchange depreciation, and still worse of competitive exchange depreciations, to attain the same object;

“(vi) the erection of tariffs, preferences, subsidies et hoc genus omne to restore the balance of international commerce by restriction and discrimination” (ibid., pp. 22–23).

History, 1945–65, Vol. I, pp. 10–14.

Keynes, Collected Writings, Vol. 25, p. 157.

The subject can be studied in History, 1945–65, Vol. I; Keynes, Collected Writings, Vol. 25; Richard N. Gardner, Sterling-Dollar Diplomacy in Current Perspectives: The Origins and Prospects of Our International Economic Order, new expanded edition (New York: Columbia University Press, 1980); Roy F. Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951), pp. 525–85.

Joseph Gold, The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, IMF Occasional Paper No. 6 (Washington, 1981), and “Keynes and the Articles of the Fund,” Finance & Development, Vol. 18 (Washington, September 1981), pp. 38–42.

The index of subjects in History, 1945–65, Vols. I and II, contains no entry for “international monetary system,” but the index to History, 1966–71, Vol. I, contains a lengthy entry under the heading of “international monetary system” (p. 680).

History, 1945–65, Vol. I, pp. 466–70 and 477–82.

Joseph Gold, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington, 1971).

United States of America, United Kingdom, France, Italy, Japan, Canada, the Netherlands, and Belgium.

Deutsche Bundesbank, Sveriges Riksbank.

Decision No. 1289-(62/1), Selected Decisions, 9th (1981), pp. 105–16. See Gold, Selected Essays, pp. 223–27 and 448–60; Erin E. Jacobsson, A Life for Sound Money: Per Jacobsson, His Biography (Oxford: Clarendon Press, 1979), pp. 358–85.

Decision No. 1289-(62/1), Selected Decisions, 9th (1981), p. 105. Emphasis added. (For the text of the GAB as revised by a decision of February 24, 1983, see Decision No. 7337-(83/37), Selected Decisions, 10th (1983), pp. 131–45.)

Decision No. 1289-(62/1), Selected Decisions, 9th (1981), par. 6, pp. 107–108.

Ibid., pp. 69–77 and 188–200.

Ibid., pp. 31–39 and 133–43.

Ibid., pp. 39–43 and 143–86.

See, for example, Annual Report, 1965, pp. 15–19.

There was no reference to the international monetary system in the Outline of a Facility Based on Special Drawing Rights in the Fund, on which the First Amendment was based. There were such references, however, in the Resolution of the Fund’s Board of Governors at its Twenty-Second Annual Meeting at Rio de Janeiro in September 1967, which endorsed the Outline and requested the Executive Board to proceed with the preparation of an amendment, and in Report on First Amendment, reproduced in History, 1966–71, Vol. II, pp. 52–94.

Reform of International Monetary System, pp. 73–74.

Ibid., pp. 75–78.

Documents of Committee of Twenty, pp. 7–48.

Resolution No. 29-8, Selected Decisions, 9th (1981), pp. 306–309.

Nothing illustrates this reluctance more vividly than the treatment of the expression “promote exchange stability.” Before the Second Amendment, it occurred in Article I(iii) as a purpose of the Fund and in Article IV, Section 4(a) as an obligation of members. The expression was thought to be inconsistent with the spirit of the Second Amendment because it suggested the rigidity of exchange rates under the par value system. The expression was deleted, therefore, from the obligations of members in Article IV and other words were found as a substitute, but the expression remains untouched in Article I(iii).

The participants now (mid-1982) include all members of the Fund.

Article XII, Section 1.

Documents of Committee of Twenty, p. 218. See Gold, Selected Essays, chap. 6 (“‘Political’ Bodies in the Fund”), pp. 238–91.

Documents of Committee of Twenty, p. 18.

Under Article XVIII (original and first), acceptance by three fifths of the members, having four fifths of the total of weighted voting power, was necessary for the adoption of an amendment. For the amendment of three provisions, acceptance by all members was required. These requirements have not been changed by Article XXVIII (second), except that the proportion of total voting power has been increased from 80 to 85 percent.

Article XII, Section 3(g).

Resolution No. 29–8, Selected Decisions, 9th (1981), pp. 308–309.

Documents of Committee of Twenty, pp. 183–86.

See footnote 40.

Article XII, Section 5(d), original and first; Article XII, Section 5(c), second.

Resolution No 29-9, Selected Decisions, 9th (1981), pp. 310-14.

Ibid., pp. 310 and 313.

See Gold, Selected Esssays, chap. 8 (“Amendment and Variation of Their Charters by International Organizations”), pp. 319–51.

Subject to the caveat in Article VI, Section 3.

Article 4.

Article VIII, Section 2(a).

See, for example, Arts. 104–109 of the Treaty Establishing the European Economic Community (Treaty of Rome). The effect of such an agreement might be that restrictions of the kind covered by the agreement could not be imposed against noncontracting parties also. Such restrictions might be discriminatory currency arrangements that the Fund would not approve under Article VIII, Section 3.

EMS Texts, p. 47.

History, 1945–65, Vol. III, pp. 153–54.

The expression refers to unconditional liquidity (such as SDRs or other reserve assets) and conditional liquidity (such as the right to use the Fund’s resources under policies that impose standards that a member must meet). Sometimes the expression is intended to refer only to unconditional liquidity.

Pp. 9–14.

“Les aspects juridiques du système monétaire international,” Journal du droit international, 95e année (1968); hereinafter referred to as Focsaneanu), pp. 239–81.

For a similar approach, see Atlantic Council Working Group on the International Monetary System, The International Monetary System: Progress and Prospects (Boulder, Colorado: Westview Press, 1977), pp. 1–2.

Economic Report of the President Transmitted to the Congress, January 1973 (Washington, 1973), pp. 120–21.

Outline of Reform, par. 2, p. 8.

Ibid. See also John Parke Young, The International Economy (New York: Ronald Press, 4th ed., 1963), p. 369. For a discussion of various criteria for choosing the elements of an international monetary system, see R.N. Cooper, “Prolegomena to the Choice of an International Monetary System,” International Organization, Vol. 29 (1975), pp. 63-97.

Reform of International Monetary System, p. 74.

Documents of Committee of Twenty, p. 230.

Ibid.

“Controls of capital transfers

“Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments, except as provided in Article VII, Section 3(b) and in Article XIV, Section 2.”

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), p. 12.

Reform of International Monetary System, p. 74.

Outline of Reform, par. 3, p. 8.

Ibid., pp. 13 and 85–86. See Joseph Gold, International Capital Movements Under the Law of the International Monetary Fund, IMF Pamphlet Series, No. 21 (Washington, 1977), particularly at pp. 35–45. See also George U. Nelson, III, ‘Toward the Increased international Mobility of Capital Under the Articles of Agreement of the International Monetary Fund,” Yale Studies in World Public Order, Vol. 5 (Fall 1978), pp. 1–108.

W.M. Scammell, International Monetary Policy, Bretton Woods and After (New York: Wiley, 1975), p. 17.

Ibid. See also Gold, Selected Essays, p. 75: “The concept of an international monetary system in which due emphasis is placed on the word ‘system’ now implies a body of coherent purposes and principles, together with rights and obligations accepted by countries in order to give effect to the purposes and principles, and probably an organization to perform the duties of surveillance and administration.”

T.D. Willett, International Liquidity Issues (Washington, 1980), p. 82.

Group of Thirty-Two, Problem of Choice, p. 24.

Article V, Section 1. See also Article XlX(b), original and first.

An ambitious hope of “a world monetary order,” rather than an international monetary system, was expressed in the communiqué of the Committee of Twenty dated March 27, 1973:

“The members of the Committee reaffirmed the need for a world monetary order, based on cooperation and consultation within the framework of a strengthened International Monetary Fund, that will encourage growth of world trade and employment as well as economic development and will support the domestic efforts of monetary authorities throughout the world to counteract inflation” (Documents of Committee of Twenty, p. 214).

The concept of a “world monetary order” in this context was adopted at the suggestion of Valéry Giscard d’Estaing.

See, for example, M. Friedman, Market Mechanisms and Central Economic Planning, G. Warren Nutter Lectures in Political Economy (Washington: Thomas Jefferson Center Foundation, 1981), p. 4.

History, 1945–65, Vol. III, pp. 15 and 29–30 (Keynes), 63 and 72–73 (White); Keynes, Collected Writings, Vol. 25, pp. 40, 56, 146, 162, 171, 205–206, 216, 350, and 378; Gold, Membership and Nonmembership, pp. 129–43; Johan W. Beyen, Money in a Maelstrom (New York: Macmillan, 1949), pp. 170–71.

Article XII, Section 8, original, first, and second. See Gold, Selected Essays, pp. 206–207.

See, for example, Alan Cowell, ‘The I.M.F.’s Imbroglio in Africa,” New York Times (March 14, 1982), p. 4F.

See, for example, Article XIV.

Note the freedom of members to take actions detrimental to nonmembers under Article XL See Gold, Membership and Nonmembership, pp. 411–55.

Note, for example, the attachment to Decision No. 7088-(82/44) of the Executive Board of April 9, 1982 approving the summing up by the Managing Director that included the following statement of some elements implied in the Fund’s function of surveillance over the exchange rate policies of members:

“b. The second level of cooperation is the agreement by members to discuss with the Fund, and in the Fund, the aspects of individual policy choices that have or can have an adverse impact on other countries.

“c. Third, it is important for members to cooperate by taking seriously into account, in their national process of decision making, the views expressed and conclusions reached by the Board in the form of … ‘b’ above” (Annual Report, 1982, p. 129).

Selected Decisions, 9th (1981), pp. 123–33.

Decision No. 6484-(80/77)S, ibid., p. 245.

Annual Report, 1965, pp. 9–11.

P. 9.

Ibid.

Ibid.

Article IV, Section 4(b), original and first.

Article IV, Section 2, original and first.

Article IV, Sections 3 and 4(b), original and first.

Article VI, Section 3, original and first. (The provision is still included in the Articles.)

Gold, Selected Essays, chap. 11 (“Use of the Fund’s Resources: ‘Conditionally’ and ‘Unconditionally’ as Legal Categories”)/ pp. 410–45.

Decision No. 1289-(62/1), Selected Decisions, 9th (1981), p. 111.

Charles A. Coombs, The Arena of International Finance (New York: Wiley, 1976), pp. 69–91. Schedule B, paragraph 5, first.

Annual Report, 1965, p. 10.

Ibid.

Robert Solomon, International Monetary System, 1945–1981 (New York: Harper and Row, 1982), p. 6. See also W.M. Scammell, op. cit. (see footnote 70): “An international monetary system has four elements. These are: first, a form of international money usable for clearing residual payments balances with other countries and for holding reserves with which to meet external deficits; second, institutional arrangements in the form of interrelated banking systems, money markets, foreign-exchange markets and the like—the media through which flows of international money circulate throughout the system; third, a mechanism whereby the distribution of international money can be adjusted by action upon the balances of payments of particular countries; and finally, some central power to control the working of international monetary arrangements” (p. 18).

See, for example, Article VIII, Section 2(b).

M.R. Schuster, The Public International Law of Money (Oxford, 1973), chap.X (“Regional Monetary Arrangements”), pp. 232–306.

For a critique of meetings of ministers, see Tom de Vries, “Jamaica, or the Non-Reform of the International Monetary System,” Foreign Affairs, Vol. 54 (April 1976), pp. 588–89.

See Arthur F. Burns, Reflections of an Economic Policy Maker: Speeches and Congressional Statements, 1969–1978 (Washington: American Institute for Public Policy Research, 1978), pp. 379–85 (“The Independence of the Federal Reserve System”). For a survey of the relations between governments and central banks, see Australian Financial System: Final Report of the Committee of Inquiry, September 1981 (Canberra, 1981), pp. 35–50.

Translation. Von L. Gramlich, “Staatliche Immunität für Zentralbanken,” Rabels Zeitschrift für ausländisches und internationales Privatrecht, Annual Vol. No. 45 (1981), p. 546. See also W.N. Eskridge, Jr., “The Iranian Nationalization Cases: Toward a General Theory of Jurisdiction over Foreign States,” Harvard International Law Journal, Vol. 22 (1981), pp. 575–80 and 589.

Gold, Selected Essays, p. 458.

Margaret L. Greene, Proceedings of the 73rd Annual Meeting of the American Society of International Law (April 1979), pp. 26–27.

J.K. Gamble, Jr., “Multilateral Treaties: The Significance of the Name of the Instrument,” California Western International Law Journal, Vol. 10 (1980), pp. 1–24.

F. A. Mann, The Legal Aspect of Money (New York: Oxford University Press, 4th ed., 1982), p. 502.

Ibid., pp. 502–503.

Article XV, par. 1 (GATT).

Article XV, par. 2 (GATT).

Article XV, par. 3 (GATT); John H. Jackson, World Trade and the Law of GATT (A Legal Analysis of the General Agreement on Tariffs and Trade) (Indianapolis: Bobbs-Merrill, 1969), pp. 484–95 and 674–707. See also Gold, Membership and Nonmembership, pp. 426–45.

Joseph Gold, “The Relationship Between the International Monetary Fund and the World Bank,” Creighton Law Review, Vol. 15 (1982), pp. 499–521. See Chapter 5 of this volume.

Art. III, sec. 4(vii) (World Bank).

Joseph Gold, “The Relationship Between the International Monetary Fund and the World Bank,” Creighton Law Review, Vol. 15 (1982), p. 511. See Chapter 5 of this volume.

Ibid.

Ibid., p. 517. World Bank, Annual Report, 1980, pp. 67–68; Robert S. McNamara, President, World Bank, Address to the Board of Governors, 1980, pp. 5–16.

Organization for Economic Cooperation and Development, Art. 4 (Code of Liberalization).

EMS Texts, par. 5.3, p. 47.

Probably, the purposes of the Fund in the plural were intended.

History, 1945–65, Vol.I, pp. 288–90. On the European Payments Union, see R. Triffin, The World Money Maze: National Currencies in International Payments (New Haven: Yale University Press, 1966), chap. 11 (“European Integration”), pp. 406–77.

Joseph Gold, “The Relationship Between the International Monetary Fund and the World Bank,” Creighton Law Review, Vol. 15 (1982). See Chapter 5 of this volume.

Annual Report, 1949, pp. 75–77.

Article I (last sentence).

International Monetary Fund, Balance of Payments Manual (Washington, 4th ed., 1977), particularly the Preface, pp. xi–xv.

Joseph Gold, The Legal Character of the Fund’s Stand-By Arrangements and Why It Matters, IMF Pamphlet Series, No. 35 (Washington, 1980).

Ibid., pp. 10–11. See Stephen A. Silard, ‘The Impact of the International Monetary Fund on International Trade,” Journal of World Trade Law, Vol. 2 (1968), pp. 121–61.

Joseph Gold, “To Contribute Thereby To … Development …,’ Aspects of the Relations of the International Monetary Fund with Its Developing Members,” Columbia Journal of Transnational Law, Vol. 10 (1971), pp. 267–302.

Selected Decisions, 9th (1981), pp. 26–30. The economies are described either as “suffering serious payments imbalance relating to structural maladjustments in production and trade and … prices and cost distortions [that] have been widespread” or as “characterized by slow growth and an inherently weak balance of payments position which prevents pursuit of an active development policy” (p. 26).

Ibid., pp. 56–63. Louis M. Goreux, Compensatory Financing Facility, IMF Pamphlet Series, No. 34 (Washington, 1980).

Selected Decisions, 9th (1981), pp. 64–69.

Article VIII, Section 3, original, first, and second.

Decision No. 4241-(74/67), Selected Decisions, 9th (1981), p. 72. Documents of Committee of Twenty, p. 217.

Article VIII, Section 2(a), original, first, and second.

Decision No. 1034-(60/27), Selected Decisions, 9th (1981), pp. 209–10.

Documents of Committee of Twenty, p. 23.

Joseph Gold, “Recent International Decisions to Prevent Restrictions on Trade and Payments,” Journal of World Trade Law, Vol. 9 (1975), pp. 63–78.

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), pp. 12–13.

Subject to action by the Fund for the withdrawal of measures that fall within the Fund’s regulatory jurisdiction.

Address by Frank A. Southard, Jr., to the Jno. E. Owens Memorial Foundation, Dallas, Texas, March 27, 1964 (International Monetary Fund, International Financial News Survey, Vol. 16 (Washington, 1964), p. 113). For similar views, see Solomon, op. cit., p. 5 (see footnote 98); and Scammell, op. cit., pp. 17–18 (see footnote 70).

Group of Thirty-Two, Problem of Choice, pp. 66–67.

Focsaneanu, p. 245 (translation).

Ibid., p. 246.

See W. S. Ryrie, formerly Executive Director of the Fund appointed by the United Kingdom, “A European View: Powerful Political Impulse Spurs Monetary Integration,” Journal of Commerce (August 15, 1978), p. 4: “The international monetary system that we have now is scarcely worth the name. It is not a system, but a market in which currencies float against each other, with varying degrees of intervention by national authorities, as capital flows from one denomination to another.

“It is also quite clear that no genuinely international system is possible for the time being. …”

“The Prospects for an International Monetary System,” Bank of England Quarterly Bulletin, Vol. 19 (1979), p. 290. See also various authors in Edward M. Bernstein, et al., Reflections on Jamaica, Essays in International Finance, No. 115 (Princeton: Princeton University Press, 1976).

Otmar Emminger, however, has said that the present international monetary system “is better than its reputation. This reminds me of what Mark Twain is reported to have said about Richard Wagner’s music: ‘It’s better than it sounds’” (The International Monetary System Under Stress: What Can We Learn from the Past? American Enterprise Institute Reprint No. 112 (Washington, 1980), p. 5). For similar views, see Guillaume Guindey in Reflections on the International Monetary System, 1980 Per Jacobsson Lecture (Basle), and W. Guth in The International Monetary System in Operation, 1977 Per Jacobsson Lecture (Washington).

Bank of England Quarterly Bulletin, Vol. 19 (1979), p. 297.

Edwin H. Yeo, III, Under-Secretary for Monetary Affairs, Department of the U.S. Treasury, Amendments of the Bretton Woods Agreements Act, Hearing before the Subcommittee on International Finance of the Committee on Banking, Housing and Urban Affairs, U.S. Senate, 94th Cong., 2d Sess., on H.R. 13955 to provide for amendment of the Bretton Woods Agreements Act, and for other purposes (August 27, 1976), p. 132.

Edwin H. Yeo, III, International Monetary Fund Amendments, Hearings before the Committee on Foreign Relations, U.S. Senate, 94th Cong., 2d Sess., on S. 3454 to provide for amendment of the Bretton Woods Agreements Act, and for other purposes (June 22 and 29, 1976), p. 132.

“There is always an international monetary system in the sense of the complex of practices followed by countries in their monetary relations, but obviously if this is the sense in which the question is put, the answer follows automatically. To have meaning, the question must be taken to refer to the regulation of international monetary relations by law, and to raise the issue whether existing legal norms constitute an international monetary system. There would be no controversy that the norms, to constitute such a system, should be consistent among themselves to the maximum extent possible or that any accepted purposes should be adequately realized by means of rights and obligations. But again more seems to be involved. The further element would seem to be that the norms, both mandatory and permissive, should cover all, or at least certain important, aspects of international monetary relations. It is at once obvious that reactions to the question whether existing norms constitute a system in this sense will be based on what one wishes to see regulated,” (Joseph Gold, The Rule of Law in the International Monetary Fund, IMF Pamphlet Series, No. 32 (Washington, 1980), p. 13).

E. Ionesco, Present Past Past Present (New York, 1971), p. 46.

Article VI, Section 3 (see footnote 65).

Article VIII, Section 3, original, first, and second.

Decision No. 541-(56/39), Selected Decisions, 9th (1981), p. 104.

“The Committee has not fully examined the question whether multiple currency practices solely designed to control capital movements would require the prior approval of the Fund under Article VIII, Section 3. The question is of a somewhat complex nature as it involves the relationship between Article VIII, Section 3, and the provisions of the Fund Agreement with regard to rates. However, it was the opinion of the Committee that, in the experience of the Fund, the application of differential rates to capital movements in the form of either a fixed rate or a free market generally embraced some current transactions and that in these cases at least members must seek prior approval of the Fund.”

Article VIII, Section 2(a), original, first, and second.

Decision No. 144-(52/51), Selected Decisions, 9th (1981), pp. 203–204.

The Government of the Kingdom of Belgium, the Government of the French Republic, the Swiss Federal Council, the Government of the United Kingdom of Great Britain and Northern Ireland, the Government of the United States of America, Applicants v. the Government of the Federal Republic of Germany, Respondent, International Legal Materials, Vol. 19 (1980), pp.1357–1408; Revue générale de droit international public, Vol. 84 (1980), pp. 1157–1245.

United Nations Treaties Series, Vol. 333 (1959), pp. 4–449.

Joseph Gold, “The Fund Agreement in the Courts—XVI,” International Monetary Fund, Staff Papers, Vol. 28 (Washington, December 1981), pp. 411–36.

History, 1945–65, Vol I, pp. 6–7; Johan W. Beyen, Money in a Maelstrom (New York: Macmillan, 1949), pp. 112–13.

History, 1945–65, Vol. III, pp. 65–66.

Procs. and Docs., Vol. I, p. 867.

For a detailed account, see Gold, Selected Essays, chap. 14 (“Legal Structure of Par Value System Before Second Amendment”), pp. 520–94.

Article XX, Section 4, original and first.

Article IV, Section 5(c) (ii) and (iii), original and first.

Article IV, Section 1(a), original and first.

Article IV, Section 5(e), original and first.

Article IV, Section 5(f), original and first.

Article IV, Section 5(b), original and first.

Article XII, Section 5(d), original and first.

History, 1945–65, Vol. III, p. 66.

Article IV, Section 5(a), original and first.

Gold, Selected Essays, p. 526.

History, 1966–71, Vol. II, pp. 273–332.

Ibid., p. 308. For the full discussion, see pp. 307–11.

Selected Decisions, 8th (1976), p. 30.

Article I(iii), original and first.

Article IV, Section 4(a), original and first.

W.R. Gardner and S.C. Tsiang, “Competitive Depreciation,” International monetary Fund, Staff Papers (Washington, November 1952), pp. 399–406.

Article IV, Section 3, original and first.

Article IV, Section 4(b), original and first.

Article IV, Section 2, original and first.

Keynes, Collected Writings, Vol. 26, p. 138.

Ibid., p. 143.

France undertook to follow the practice in respect of the currency of a dependency (Gold, Membership and Nonmembership, pp. 239–40).

The cumulation of margins for exchange transactions that might transcend the 1 percent limits of the Articles was a problem that had to be faced (Gold, Selected Essays, pp. 552–54).

Article XXV, Section 5, first.

Article XXV, Section 2(b)(ii). The provision on the redemption of balances of a currency with SDRs applied to all currencies and not exclusively to the U.S. dollar, but the provision was adopted as a result of the initiative of the United States.

The importance of the practice was illustrated also by the definition of “currency convertible in fact” that a transferee of SDRs had to supply when designated by the Fund. One class of currency that fell within the definition was the currency of a member that was engaged in freely buying and selling gold in accordance with the Articles (Article XXXII(b)(1)(i), first). Currency convertible in fact is discussed in Section VIII.

Annual Report, 1951, p. 40; Annual Report, 1962, pp. 58–67.

Article VIII, Section 3, original and first.

Ibid.

For example: “Germany’s exchange rates with individual countries in the ‘reichsmark area’ were reached by a process of bilateral negotiation the outcome of which frequently varied according to the bargaining strength of each country, and were fixed and maintained at arbitrary levels at varying degees of overvaluation for the reichsmark. In consequence these rates did not form an arithmetically consistent network. Thus country A’s rate with Germany was not necessarily the same as B’s, if B’s rate were expressed in A’s currency at the rate of exchange between A and B, or if both A’s and B’s reichsmark rates were expressed in a free currency such as the dollar at the rates of the two countries on the dollar. In such cases of inconsistency, even if Germany had permitted transfers of reichsmark balances between A and B, they would have involved losses to one or the other” (League of Nations, International Currency Experience: Lessons of the Inter-War Period (1944), p. 181).

E.M. Bernstein, “Some Economic Aspects of Multiple Exchange Rates,” International Monetary Fund, Staff Papers, Vol. 1 (Washington, September 1950), pp. 224–37.

History, 1945–65, Vol. II, chap. 6 (“Multiple Exchange Rates,” by Margaret G. de Vries), pp. 122–51.

See E.M. Bernstein, op. cit. (footnote 193), p. 237.

Selected Decisions, 9th (1981), pp. 215–27.

Decision No. 237–2, ibid., p. 218.

Article VIII, Section 3, original and first.

Article VIII, Section 2(a), original and first.

Article VII, Sections 3 and 4 (original and first). Gold, Selected Essays, pp. 85, 154–56, 160–63, 175–76, and 207–12.

Keynes, Collected Writings, Vol. 26, pp. 173, 189, and 192.

Article IV, Section 5(b), original and first.

Article VII, Section 3, original and first.

Article IV, Section 7, original, amended by first.

Article IV, Section 5(c)(ii), original and first.

Decision No. 278–3, Selected Decisions, 8th (1976), p. 31.

Article XIV, Section 5, original and first.

Gold, Selected Essays, pp. 538–39.

Article IV, Section 5(c), (e), and (f), original and first.

See, for example, Article XX, Section 4(b) and (c), original and first.

Keynes, Collected Writings, Vol. 26, pp. 44–45, 62, 68, and 78.

Article IV, Section 6, original and first.

Gold, Selected Essays, pp. 29, 199, 397–402, and 407; Joseph Gold, “Unauthorized Changes of Par Value and Fluctuating Exchange Rates in the Bretton Woods System,” American Journal of International Law, Vol. 65 (1971), pp. 113–28.

He stated also that “The time has come for exchange rates to be set straight and for the major nations to compete as equals. There is no longer any need for the United States to compete with one hand tied behind her back.” On the action of August 15, 1971 and the drafting of the President’s announcement, see William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Ballantine Books, 1977), pp. 659–86.

Explanatory material issued by the White House included the following paragraphs: “These actions have been taken in view of widespread speculative activity in exchange markets, substantial conversions of dollars by other countries into gold and other reserve assets, and consequent strains on the US reserve position. Underlying these circumstances has been a long period of erosion in the basic balance of payments and trade position of the United States. …

“[T]he present combination of circumstances also points up the need for some fundamental improvements in international monetary arrangements, and it is the view of the United States that the time has come to accomplish such improvements. As part of that process, some changes in the exchange parities of the US dollar relative to other countries may be anticipated. The objective is to promptly restore strength, stability, and confidence to the position of the US balance of payments, and to the functioning of the international monetary system.”

Other members were released from the obligations to maintain the effectiveness of the parities of their currencies with the U.S. dollar, but were they released from the obligation to maintain parities among their own currencies? The answer probably is that they were not, but the next question is whether there was any practicable way of performing this obligation given the dominance of the dollar as a reserve and intervention currrency.

Selected Decisions, 8th (1976), pp. 14–21; Gold, Selected Essays, pp.556–68.

Kenneth W. Dam, The Rules of the Game: Reform and Evolution in the International Monetary System (Chicago: Chicago University Press, 1982), pp. 189–99.

Economic Report of the President Transmitted to the Congress, January 1973 (Washington, 1973), pp. 160–74. See also pp. 120–28.

Ibid. For discussions of the U.S. proposals, see Dam, op. cit., pp. 222–35; Solomon, op. cit., pp. 241–44 (see footnote 98); and, generally, J. Williamson, The Failure of World Monetary Reform, 1971–1974 (Sunbury on Thames, England: T. Nelson & Sons, 1977).

Gold, Selected Essays, chap. 4 (‘“Pressures’ and Reform of the International monetary System”), pp. 182–216.

Joseph Gold, “Symmetry as a Legal Objective of the International Monetary system,” Journal of International Law and Politics, Vol. 12 (Winter 1980), pp. 423–77. See Chapter 2 of this volume.

Documents of Committee of Twenty, pp. 11–12.

Ibid., p.12.

Ibid., pp. 30–33.

See footnote 216.

Documents of Committee of Twenty, pp. 33–37.

Ibid., p. 34.

Ibid., pp. 8–11.

Ibid., pp. 24–28.

Ibid., pp. 19–20.

Resolution No. 29-10, Selected Decisions, 9th (1981), p. 316.

Documents of Committee of Twenty, p. 22.

It may be asked why the Fund did not validate floating under the provision already in the Articles that allowed the Fund to suspend the provisions on margins for exchange rates in exchange transactions in the event of an emergency or the development of unforeseen circumstances (Article XVI, original and first). Among the reasons for the Fund’s inaction were the limited period for a suspension; the requirement of a unanimous vote by the Executive Board in the first instance and 80 percent of the total voting power in the Board of Governors for a limited prolongation of the decision of the Executive Board; and the unwillingness of some members to validate floating in this-way. The reasons for this unwillingness were the fear that a decision would impede restoration of an effective par value system and opposition to legalizing the situation of the United States.

Resolution No. 31–2, Selected Decisions, 8th (1976), pp. 222–24.

Annual Report, 1976, pp. 119–21.

International Monetary Fund, IMF Survey, Vol. 4 (Washington, November 24, 1975), pp. 345, 349, and 350.

Annual Report, 1976, pp. 122–24.

Article IV, Section 2(b).

Article IV, Section 2(c).

See footnote 217.

Article IV, Section 4.

For the position at March 31, 1981, see International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, 1981 (Washington, 1981), p. 8; and at June 30, 1981, Annual Report, 1981, p. 54.

Article IV, Section 3(a).

Article IV, Section 3(b).

Article IV, Section 2(a). The Fund’s decision of March 23, 1978 deals with what would constitute changes for the purpose of notification to the Fund (Selected Decisions, 9th (1981), pp. 8–9). Changes include adoption of a different type of arrangement by official action; changes in a peg, including changes in a composite other than one resulting from a redistribution of currency weights on the basis of new data; discrete exchange rate changes not consistent with the set of indicators; etc.

Article IV, Section 3(b).

Selected Decisions, 9th (1981), pp. 10–16. J.H. Young, “Surveillance Over Exchange Rate Policies,’ Finance & Development, Vol. 14 (Washington, 1977), pp. 17–19. (For subsequent decisions on surveillance, see Annual Report, 1982, pp. 128–32, and Annual Report, 1983, pp. 142–45.)

Selected Decisions, 9th (1981), pp. 10–16.

Article XII, Section 3(b).

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), pp. 12–13. The developments are as follows:

  • “(i) protracted large-scale intervention in one direction in the exchange market;

  • “(ii) an unsustainable level of official or quasi-official borrowing, or excessive and prolonged short-term official or quasi-official lending, for balance of payments purposes;

  • “(iii)(a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or

    • (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;

  • “(iv) the pursuit, for balance of payments purposes, of monetary and other domestic financial policies that provide abnormal encouragement or discouragement to capital flows; and

  • “(v) behavior of the exchange rate that appears to be unrelated to underlying economic and financial conditions including factors affecting competitiveness and long-term capital movements.”

The reference is to Article IV, Section 3(b).

Decision No. 6026-(79/13), Selected Decisions, 9th (1981), p. 15.

Article IV, Section 4(a), original and first.

Article IV, Section 1.

Subject to movement within narrow margins consistent with the Articles.

Report on Second Amendment, Part II, chap. C, sec. 3, p. 13.

“The Fund’s appraisal of a member’s exchange rate policies shall be based on an evaluation of the developments in the member’s balance of payments against the background of its reserve position and its external indebtedness. This appraisal shall be made within the framework of a comprehensive analysis of the general economic situation and economic policy strategy of the member, and shall recognize that domestic as well as external policies can contribute to timely adjustment of the balance of payments. The appraisal shall take into account the extent to which the policies of the member, including its exchange rate policies, serve the objectives of the continuing development of the orderly underlying conditions that are necessary for financial stability, the promotion of sustained sound economic growth, and reasonable levels of employment” (Decision No. 5392-(77/63), Selected Decisions, 9th (1981), p. 13).

Gold, Selected Essays, chap. 13 (“Uniformity as a Legal Principle of the Fund”), pp. 469–519.

Article V, Section 12(f)(ii) and (iii); Schedule B, paragraph 7(b); and Schedule D, paragraph 2(a).

Article IV, Section 3(b).

See footnote 257.

The compromises reached on the language of Article IV relied on adjectives to convey nuances. For example, surveillance was to be “firm,” the purpose was “essential,” and the objective was a “principal” one. Toward the end of his life when Henry James was rewriting his novels to insert adverbs, he “had come to believe that adverbs, not adjectives, were often the muscle of a sentence” (Edward Weeks, Writers and Friends (Boston, 1981), p. 75). According to some stylists, however, adverbs can be as debilitating as adjectives.

Decision No. 4232-(74/67), Selected Decisions, 8th (1976), pp. 21–30.

Ibid., p. 26.

Documents of Committee of Twenty, p. 12; and see also Annex 4, sec. B of Outline, pp. 34–36.

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), pp. 11–12.

See, for example, International Monetary Fund Amendments, Hearings before the Committee on Foreign Relations, U.S. Senate, 94th Cong., 2d Sess. on S. 3454, to provide for amendment of the Bretton Woods Agreements Act, and for other purposes, June 22 and 29 and August 3, 1976, p. 15.

Jacques R. Artus and Andrew D. Crockett, Floating Exchange Rates and the Need for Surveillance, Essays in International Finance, No. 127 (Princeton, New Jersey: Princeton University Press, May 1978).

Article I (iii).

Article IV, Section 4(a), original and first.

Article IV, Section 1(iii).

See Robert A. Mundell and Jacques J. Polak, eds., The New International Monetary System (New York: Columbia University Press, 1977), pp. 69–71 and 104–105.

See, for example, the following passage in the Fund’s decision of June 13, 1974 on guidelines for the management of floating exchange rates: “(iv) Where the terms ‘exchange rate’ or ‘exchange value’ are employed with respect to any currency it is assumed that these would normally be expressed in terms of effective rates, i.e., the value of the currency would be measured relative to a representative set of currencies rather than relative to its intervention currency alone. The set chosen for this purpose should, in principle, vary from country to country, and the currencies in the set should be weighted according to their importance to the country in question. The composition of the set might be based on trade and financial relationships or on trade relationships alone. If trade-weighted, it might be derived from the Multilateral Exchange Rate Model, or based on bilateral trade relationships. In some cases the basket used for the valuation of the SDR might be satisfactory for this purpose also. In some cases, finally, the rate vis-à-vis a single currency might provide a satisfactory approximation to an effective rate” (Decision No. 4232-(74/67), Selected Decisions, 8th (1976), pp. 27–28).

R.A. Mundell and J.J. Polak, op. cit., p. 71 (see footnote 273).

R.N. Cooper, op. cit. (see footnote 61).

John H. Williams proposed, before the Fund came into existence, that the currencies of major countries should be fixed and their exchange stability maintained by domestic policies, while exchange rates for other currencies should be flexible (Postwar Monetary Plans and Other Essays (New York: Alfred A. Knopf, 2nd. ed. 1945), pp. xlix, 196–97, and 222–23).

Decision No. 4232-(74/67), Selected Decisions, 8th (1976), pp. 21–30.

See, for example, J.R. Artus and J.H. Young, “Fixed and Flexible Exchange Rates: A Renewal of the Debate,” International Monetary Fund, Staff Papers, Vol. 26 (Washington, December 1979), pp. 654–98, with bibliography at pp. 694–98.

Solomon, op. cit., pp. 342–61 and 367–71 (see footnote 98).

J.S. Dreyer, Gottfried Haberler, and Thomas D. Willett, eds., Exchange Rate Flexibility (Washington: American Enterprise Institute for Public Policy Research, 1978), p. 26.

Statement by B.W. Sprinkel, Under-Secretary of the U.S. Treasury for Monetary Affairs before the Joint Economic Committee, Department of the Treasury News, R-158 (May 4, 1981).

Jacques J. Polak, Coordination of National Economic Policies, Group of Thirty, Occasional Papers, No. 7 (New York, 1981).

Statement by the Group of Thirty, The Problem of Exchange Rates (May 7, 1982).

Article VIII, Section 3. Although Article IV, Section 2(b) authorizes “other exchange arrangements of a member’s choice,” the choice must be consistent with the purposes of the Fund and the obligations of Section 1 of Article IV (Article IV, Sections 2(c) and 3(b)).

For example, if the banks’ spread of 1.5 percent between buying and selling rates for a currency widens to 2.5 percent because of an exchange tax of 1 percent, the resulting spread of 3.5 percent is not a multiple currency practice. But a tax of 2.5 percent would be a multiple currency practice. Under the par value system a spread of more than 2 percent, however it came about, was considered a multiple currency practice.

I.e., midpoint between the buying and selling exchange rates for a currency. The midpoint is the standard of reference because the spreads between buying and selling rates are not uniform in all markets.

Decision No. 6790-(81/43), Selected Decisions, 9th (1981), pp. 225–27. For a detailed discussion of the law and practice on multiple currency practices, see International Monetary Fund, IMF Survey, Vol. 10 (Washington, July 6, 1981), pp. 197 and 204–209. See also International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions, 1981 (Washington, 1981), pp. 22–24.

Article VII, Sections 3 and 4.

Article V, Section 11. Decision No 5590-(77/163), Selected Decisions, 9th (1981), pp. 100–101.

GAXT Document L/4938 (February 15, 1980).

Article V, Section 10.

See Robert C. Effros, “Unit of Account for International Conventions Is Considered by UN Commission on Trade Law,” International Monetary Fund, IMF Survey, Vol. 11 (Washington, February 8, 1982), pp. 40–41. A French court has decided that the way to apply the Poincaré franc under the Brussels Convention concerning the Limitation of Liability of Owners of Seagoing Vessels, 1957, was the relationship between the Poincaré franc and the most recent par value of the French franc, although abrogated, adjusted in accordance with the French retail price index as determined by the French National Institute for Statistics and Economic Research (P. Y. Nicolas, “La conversion du ‘franc’ des conventions internationales de droit privé maritime,” Droit maritime français 1980, Vol. 32 (1981), pp. 581–82). In a later French case, the court refused to follow this solution on the grounds that the par value had been abrogated and that the choice of any particular index would be discretionary (Société Egyptair v. Chamie, Droit maritime français 1980, Vol. 32 (1981) pp. 285–94).

Effros, op. cit., pp. 40–41; Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 41–42.

World Bank, The Currency Pooling System (Washington, August 1980).

Professor Tomaso Padoa-Schioppa, Director-General for Economic and Financial Affairs, EC Commission, at Financial Times Conference, Rome, December 10, 1981.

Article IV, Section 2(b). See also Article IV, Section 3(b).

Article IV, Section 1.

International Monetary Fund, IMF Survey, Vol. 7 (Washington, July 17, 1978), pp. 209 and 221.

For the legal instruments relating to the European Monetary System, see EMS Texts. See also H. Ungerer, “European Monetary System Has as Objectives Greater Economic Stability, Policy Convergence, International Monetary Fund, IMF Survey, Vol. 8, Supplement: The European Monetary System (Washington, March 19, 1979), pp. 97–100; Philip H. Trezise, ed., The European Monetary System: Its Promise and Prospects, Papers Prepared for a Conference Held at the Brookings Institution in April 1979 (Washington); U.S. Congress, Joint Economic Committee, The European Monetary System: Problems and Prospects, A Study prepared for the use of the Subcommittee on International Economics of the Joint Economic Committee, 96th Cong., 1st Sess., November 1979; John Williamson, Alexandre Lamfalussy, Niels Thygesen, et al., EMS: The Emerging European Monetary System, ed. R. Triffin et al. (Louvain-la-Neuve, 1979); C. de Strycker, “La coopération monétaire européene,” Revue de la Banque, No. 1 (1979), pp. 79–95; Jacques van Ypersele de Strihou, “Le nouveau système monétaire européen,” Revue de la Banque, No. 2 (1979), pp. 247–68; and “The Future of the European Monetary System,” Revue de la Banque, No. 2 (1981), pp. 179–95.

EMS Texts, p. 44.

Ibid.

Ibid.

Ibid., pp. 44–45.

The President of the Bundesbank has issued a strong warning about the dangers of competitive devaluation (Jonathan Carr, “Bundesbank hits at competitive devaluation,” Financial Times (London, March 1, 1982), p. 1).

EMS Texts, p. 45.

Bundesbank Monthly Report (March 1979), p. 13.

EMS Texts, p. 45. The intervention limits may be reached in some circumstances, however, without any currency crossing the divergence threshold. See Danmarks Nationalbank, Monetary Review (May 1979), p. 4.

EMS Texts, p. 45.

In calculating the threshold for a currency, its weight in the ECU basket is deducted in order to avoid distortions that could cause inequity in the operation of the divergence indicator. Adjustments are made to avoid other distortions. See Joseph Gold, SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, International Monetary Fund, Pamphlet Series, No. 33 (Washington, 1980), p. 52, and for a discussion of the EMS, pp. 46–64. For differences between the EMS and the “snake,” see pp. 63–64.

EMS Texts, p. 45.

Ibid.

Ibid., pp. 46–47.

On some aspects of the operation of the divergence indicator, see Joanne Salop, “The Divergence Indicator: A Technical Note,’ International Monetary Fund, Staff Papers, Vol. 28 (Washington, December 1981), pp. 682–97; Jean-Jacques Rey, “Some Comments on the Merits and Limits of the Indicator of Divergence of the European Monetary System,” Revue de la Banque, No. 1 (1982), pp. 3–15.

Article IV, Section 4.

The Fund would have the power (Article XXVII, Section 1) to suspend the provision establishing margins for exchange rates under the par value system (Schedule c, paragraph 5) in the event of an emergency or the development of unforeseen circumstances threatening the activities of the Fund. The Executive Board could decide on the suspension, by an 85 percent of the total voting power, for not more than one year. The Board of Governors could extend the period, by a similar majority, for a further two years. The Fund could adopt substitute rules during the period of suspension. See Report on Second Amendment, Part II, chap. r, and Gold, Selected Essays, chap. 9 (“‘Dispensing’ and ‘Suspending’ Powers of International Organizations”), pp. 352–89.

Article IV, Section 2(c).

Article V, Section 2(b).

Article V, Section 3(b) (ii).

Report on Second Amendment, Part II, chap. D, sec. 7.

Schedule C, paragraph 2.

Schedule C, paragraph 4.

Ibid. The qualification relating to the Articles implies that a member could establish a fixed value for its currency for other purposes.

Ibid.

Ibid.

Schedule C, paragraph 6.

Ibid.

History, 1966–71, Vol. II, p. 311.

Documents of Committee of Twenty, p. 11.

Article IV, Section 5(e), original and first.

Schedule C, paragraph 1.

Ibid.

Article XV, Section 2.

See Documents of Committee of Twenty, pp. 43–45.

Jacques J. Polak, Valuation and Rate of Interest of the SDR, IMF Pamphlet Series, No. 18 (Washington, 1974).

Documents of Committee of Twenty, p. 45.

Gold, Selected Essays, chap. 10 (“Duty to Collaborate with the Fund and Development of Monetary Law”), pp. 390–409.

Article I(iii).

Article IV, Section 1(iii).

Article XI. See Gold, Membership and Nonmembership, pp. 413–17.

Article IV, Section 3(i), original and first. The margins were broadened to a maximum of 2 percent, however, by decision of the Fund under its power to approve multiple currency practices, for exchange transactions involving the currencies of two members that used the same intervention currency. See Selected Decisions, 8th (1976), p. 13.

Schedule C, paragraph 5.

Selected Decisions, 8th (1976), pp. 14–21.

Schedule C, paragraph 5. See Gold, Selected Essays, chap. 8 (“Amendment and Variation of Their Charters by International Organizations”), pp. 319–51.

Report on Second Amendment, Part II, chap. C, sec. 8.

Article IV, Section 3(ii), original and first.

Schedule C, paragraph 2.

Schedule C, paragraph 8.

Article VIII, Section 3.

Report on Second Amendment, Part II, chap. C, sec. 8.

Ibid.

Schedule C, paragraph 3.

Ibid.

Schedule C, paragraph 2.

The member’s right to propose a par value in such circumstances is not expressed in Schedule C, but the implied right was mentioned in Report on Second Amendment, Part II, chap. C, par. 7.

Schedule C, paragraph 4.

Schedule C, paragraph 7.

Schedule C, paragraph 2.

Schedule C, paragraph 6.

Schedule C, paragraph 11.

Report on Second Amendment, Part II, chap. C, sec. 13; Documents of Committee of Twenty, p. 45; Jacques J. Polak, Valuation and Rate of Interest of the SDR, IMF Pamphlet Series, No. 18 (Washington, 1974).

Schedule C, paragraph 11.

Schedule C, paragraph 7.

Article XXVI, Section 2.

Joseph Gold, The Fund Agreement in the Courts, Vol. II (Washington, 1982), pp. 252–53.

Schedule C, paragraph 4.

Schedule C, paragraph 7.

Schedule C, paragraph 8.

Ibid.

Ibid.

Ibid.

Ibid.

Schedule C, paragraph 9.

Schedule C, paragraph 10.

Article XVII, original and first. See now Article XXVIII.

France, Journal Officiel (April 30, 1978), pp. 1942–43. For a detailed discussion, see Joseph Gold, The Fund Agreement in the Courts, Vol. II (Washington, 1982), pp. 284–94.

Joseph Gold, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington, 1971).

Article XIX(d), original and first.

Article XIV, Section 2, original, first, and second.

Article XIV, Section 3, original and first; Article XIV, Section 1, second.

Article XIX(a), original and first.

Article V, Section 7, original and first.

Schedule B, original and first.

See Joseph Gold, “Convertible Currency Clauses Under Present International Monetary Arrangements,” Journal of International Law and Economics, Vol. 13 (1979), pp. 241–69. See Chapter 13 of this volume.

Article I(iv).

Article XIX(i), original and first; Article XXX (d), second.

Of a moral character under category (4).

The multilateral system prevails among members. Members are able to impose restrictions on payments and transfers to the residents of nonmembers in accordance with Article XI, Section 2, and Rules M-1 to M-6 of the Rules and Regulations.

Decision No. 1034-(60/27), Selected Decisions, 9th (1981), pp. 209–210.

Joseph Gold, The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, IMF Occasional Paper No. 6 (Washington, 1981).

Article VI, Section 3, original, first, and second.

Decision No. 541-(56/39), Selected Decisions, 9th (1981), p. 104.

Article XIV, Section 2, original and first.

Article II, original and first.

Article XIV, Section 2. The fact that the provision had been related to the difficulties of World War II was recognized by deleting the special privilege of members whose territories had been occupied by the enemy to “introduce where necessary” restrictions on payments and transfers for current international transactions without the need for approval by the Fund.

For a full discussion of the differences between the transitional arrangements in the original Articles and the Second Amendment, see Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (Washington, 1978), pp. 7–22.

For statements of the Fund’s policies on these matters, see Selected Decisions, 9th (1981), pp. 203–27.

Article VI, Section 3.

Joseph Gold, International Capital Movements Under the Law of the International Monetary Fund, IMF Pamphlet Series, No. 21 (Washington, 1977).

Art. 67.

Martin Seidel, “Escape Clauses in European Community Law with Special Reference to Capital Movements,” Common Market Law Review, Vol. 15 (1978), pp. 283–308. Robert S. Rendell, ed., International Financial Law: Lending, Capital Transfers and Institutions (London, 1980).

The Articles recognized another form of official convertibility in addition to the four main forms. See Article XIX(g) and (h), original and first, and Joseph Gold, Use, Conversion, and Exchange of Currency Under the Law of the International Monetary Fund, IMF Pamphlet Series, No. 21 (Washington, 1977), pp. 16–19. The provisions referred to have been eliminated from the Second Amendment.

For a detailed discussion of the relationship between Sections 2(a) and 4 of Article VIII, see Joseph Gold, The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, IMF Occasional Paper No. 6 (Washington, 1981).

Article VIII, Section 4(b)(i). See also Section 4(b) (iii).

Article V, Sections 3 and 4, original and first.

See Joseph Gold, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington, 1971), pp. 12–16; Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (Washington, 1978), pp. 22–26.

Article XXV, Section 2(b)(i), first.

Article XXV, Section 5, first.

Article XXV, Section 2(b)(ii), first.

Under the First Amendment, a member was expected not to transfer SDRs unless it had a need to use reserves. To provide for the redemption of balances, the provision on the expectation of need (Article XXV, Section 3, first) described the justification for use in the alternative: “balance of payments needs” or “developments in … official holdings of gold, foreign exchange, and special drawing rights, and its reserve position in the Fund.” The latter justification was intended to cover developments in reserves attributable to conversions of a member’s currency and not to a balance of payments deficit. See Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (Washington, 1978), p. 42.

Ibid., pp. 38–45.

Article XXXII(b), first. Also ibid., pp. 45–55.

Ibid., pp. 66–67; Joseph Gold, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington, 1971), p. 41.

Article IV, Section 4(b), original and first.

The option to convert balances through the Fund was not available to the United States as a practical possibility because other members could insist on conversion with gold. If the United States had refused gold, it would not have been freely buying and selling gold. Furthermore, the United States was never willing to use the Fund’s resources in amounts that would subject it to the Fund’s conditionality.

It was possible that the United States might receive part of its surplus in reserve assets because of the activities of the Fund, instead of a reduction in its currency liabilities. The Fund might sell U.S. dollars to other members and give the United States a reserve position in the Fund, or borrow from the United States and give it a reserve claim, or designate the United States to receive SDRs from transferors of SDRs. But there was no assurance that these developments would occur.

Documents of Committee of Twenty, pp. 8, 12, and 14.

The expression does not appear in the Outline of Reform but is mentioned in Annex 5 (p. 38). The expression became popular as a result of its use in the Executive Board’s Report to the Board of Governors entitled Reform of the International Monetary System (1972).

Documents of Committee of Twenty, pp. 30–33.

Ibid., pp. 37–40. See also pp. 112–38.

Ibid., pp. 14 and 41–42 (Annex 7 on a Substitution Account). For proposals on the suspension of asset settlement under the three approaches, see Annex 6 (pp. 40–41). Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (Washington, 1978), pp. 99–110.

Article VIII, Section 2(a).

Part II, chap. C, sec. 14.

Article XIV, Section 2, original and first.

Article IV, Section 4(b), original and first.

Part II, chap. C, sees. 14–18.

Ibid., sec. 18.

Article IV, Section 4.

Article XXV, Section 2(b) (ii), first.

Article XIX, Section 2(b).

Article V, Section 3(d).

Ibid.

Article V, Section 3(b)(ii).

Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (Washington, 1978), pp. 34–38.

Article XXX(f).

Article V, Section 3(e)(i).

Article XIX, Section 4(a). For a more detailed discussion of the characteristics and uses of freely usable currencies, see Joseph Gold, Use, Conversion, and Exchange of Currency Under the Second Amendment of the Fund’s Articles, IMF Pamphlet Series, No. 23 (Washington, 1978), pp. 55–88.

Joseph Gold, “Convertible Currency Clauses Under Present International Monetary Arrangements,” Journal of International Law and Economics, Vol. 13 (1979), pp. 241–72. See Chapter 13 of this volume.

Article XIX(a), original and first. See also Article XlX(b)-(e) and (g), original and first.

Article XXXII(c), first.

Ibid.

Article V, Section 3(a)(iii), first.

Article XXI, Section 1, first; Article XXV, Section 1, first.

See, for example, Article XXV, Section 3(a), first; Schedule G, paragraph 1(b), first.

See Joseph Gold, Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington, 1971).

Joseph Gold, “Substitution in the International Monetary System,” Case Western Reserve Journal of International Law, Vol. 12 (1980), pp. 265–326. See Chapter 3 of this volume. See also Annual Report, 1977, p. 38: “Reserve assets, or ‘reserves,’ are at the disposal of the country owning them without any need for negotiation, without any conditionality as to the countries’ policies, and without any significant limitation as to the circumstances in which they can be used.”

Article XXX(c).

See, for example, International Monetary Fund, International Financial Statistics (Washington, April 1982), p. 6.

The effect of “encashment” may be to create a corresponding reserve tranche position for another member if its currency is sold by the Fund in the “encashment” transaction.

Article V, Section 3(d). See also Article V, Section 3(b)(ii).

Article V, Section 7(i). See also Article V, Section 7(b).

Article XIX, Section 5(a) (i). See also Article XIX, Section 3(a).

Article VIII, Section 7; Article XXII.

Article VIII, Section 7.

Report on Second Amendment, Part I, par. (b); Part II, chap. I, sec. 1.

Article XVIII, Section 1(a).

Article IV, Section 4.

Article XXIV, Section 1(b), first; Article XVIII, Section 1(b), second.

Annual Report, 1979, pp. 52–54.

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), p. 12.

As a result of the First Amendment, Section 10 of the By-Laws of the Board of Governors was amended to provide that the Executive Board in presenting its Annual Report “shall review … the functioning of the international monetary system, including the adequacy of global reserves.” See Report on First Amendment, Part I, sec. 1. Adequacy is considered to be a broader topic than “the sufficiency of the existing global volume of reserve assets in matching the global need for reserves.” The broader aspects “include the effects on reserve adequacy of the distribution of reserves among countries, the asset composition of a given reserve volume, the availability of public and private liquid resources other than reserves, and the adaptability of the supply of reserve assets to the existing demand” (Annual Report, 1976, p. 39).

H.R. Heller and M.S. Khan, “The Demand for International Reserves Under Fixed and Floating Exchange Rates,” International Monetary Fund, Staff Papers, Vol. 25 (Washington, December 1978), pp. 623–49; E.C. Suss, “A Note on Reserve Use Under Alternative Exchange Rate Regimes,” International Monetary Fund, Staff Papers, Vol. 23 (Washington, July 1976), pp. 387–94.

Annual Report, 1975, p. 37. For a comparison of the concept of the adequacy of reserves under the two systems, see pp. 37–40. See also Annual Report, 1976, pp. 39–42.

Christopher W. McMahon, “The United Kingdom’s Experience in Winding Down the Reserve Role of Sterling,” in Group of Thirty, Reserve Currencies in Transition (New York, 1982), pp. 42–49.

One of the risks that face a reserve currency country is that there may be disequilibrating movements of official funds into or out of the currency. The Outline of Reform proposed a principle of cooperation among countries in the management of their currency reserves so as to avoid these movements. The following provisions for achieving this objective were suggested, although agreement was not reached on them: (1) A country should respect any request from the issuer of a currency held in the country’s reserves to limit or convert into other reserve assets further increases in holdings of the currency. (2) Each country should determine from time to time the composition of its currency reserves and should undertake not to change the composition without prior consultation with the Fund. (3) A country should not add to its currency reserve placements outside the territory of the currency of issue except within limits to be agreed with the Fund (Outline of Reform, Part I, par. 23, p. 15).

Group of Thirty, How Central Banks Manage Their Reserves (New York, 1982); Group of Thirty, Reserve Currencies in Transition (New York, 1982); C. Fred Bergsten, “Multiple Exchange System Raises Questions,” Journal of Commerce (July 14, 1981), p. 4A; Karl O. Pohl, “The Multiple-Currency Reserve System,” Euromoney (October 1980), pp. 43–48, particularly at p. 48, at which the President of the Deutsche Bundesbank discusses the burdens on issuers of reserve currencies.

Annual Report, 1980, p. 64.

Selected Decisions, 9th (1981), pp. 143–86; Annual Report, 1981, pp. 91–92.

Joseph Gold, “Substitution in the International Monetary System,” Case Western Reserve Journal of International Law, Vol. 12 (1980), pp. 313–24, see Chapter 3 of this volume; Peter B. Kenen, “The Analytics of a Substitution Account,” reprinted in International Finance, No. 21 (Princeton, New Jersey, December 21, 1981).

Communiqué of Interim Committee, September 28, 1980, par. 5, Annual Report, 1981, p. 200; Henry C. Wallich, “The World Monetary System after Postponement of the Substitution Account,” Intereconomics, No. 4 (July/August 1980), pp. 163–67; David Marsh, “Towards a New Balance in World Reserve Currencies,” Financial Times (May 15, 1980), p. 18; Group of Thirty, How Central Banks Manage Their Reserves (New York, 1982), pp. 22–23.

Article VIII, Section 7; Article XXII.

Documents of Committee of Twenty, Part I, pars. 2(d) and 24, pp. 8 and 15.

Ibid., Part I, pars. 19, 20, 22, 25, and 28, pp. 14, 15, 16–17.

Ibid., Annex 3, pp. 30–33.

Ibid., Part I, pars. 26 and 27, pp. 15–16. Not all the specific proposals in these paragraphs have been followed.

Report on Second Amendment, Part II, chap. Q, sees. 2 and 3.

Article XV, Section 2.

Decision No. 6631-(80/145)G/S, Selected Decisions, 9th (1981), pp. 236–37; Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 1–14, 93–96, and 98.

Article XXVI, Section 3, first.

Article V, Section 9; Article XX, Section 3.

By-Laws, Rules and Regulations, 39th (July 1, 1982), Rule I-10.

Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 14–20, 93–94, and 96–97.

Net cumulative allocation means the SDRs allocated to a member less its share of canceled SDRs (Article XXXII (a), first; Article XXX(e), second). No cancellations have been made.

Article XXV, Section 6, first; Schedule G, first.

Article XIX, Section 6(b).

Decision No. 6832-(81/65)S, Selected Decisions, 9th (1981), p. 264; Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 20–21.

Article XXV, Sections 4 and 5, first; Article XIX, Sections 4 and 5, second.

Article XXV, Section 2(b), first.

Article XIX, Section 2(b).

Article XXV, Section 3, first.

Article XXV, Section 5(a)(ii), first. See also Article XXV, Section 3(b), first.

Article XXV, Section 3, first.

Article XIX, Section 3(a).

See, for example, Article XXV, Section 7, first; Article XXVI, Section 5, first.

Article XXX(i).

See, for example, Article III, Sections 3 and 4, first; Article III, Sections 2 and 3, second; Article V, Section 6, first and second; Article V, Section 9, first and second.

Article XIX, Section 2(c).

Selected Decisions, 9th (1981), pp. 249–59; Joseph Gold, SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, IMF Pamphlet Series, No. 33 (Washington, 1980), pp. 5–12.

Article XXIII, Section 3, first.

Article XVII, Section 3.

Decision No. 6467-(80/71)S, Selected Decisions, 9th (1981), pp.239–41.

Article XXV, Section 5(a)(i), first; Article XIX, Section 5(a)(i), second.

Article XXV, Section 4, first; Article XIX, Section 4, second.

Article XXVIII, first; Article XXII, second. See also Article XXV, Section 2(b)(ii), first; Article XVII, Section 3, second; Article XIX, Section 2(c), second.

Article XXV, Section 2(a) and (b), first.

Article XXV, Section 3(a), first.

Article XIX, Section 2(a) and (b); Article XIX, Section 3(a).

Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 79–81.

Article XXVI, Section 3, first.

Article V, Section 9, first.

Annual Report, 1981, p. 78.

Basic periods are consecutive periods of five years with respect to which the Fund must consider whether or not to allocate or cancel SDRs, but the Fund may vary the length of a basic period (Article XVIII, Section 2). The first basic period was three years (beginning of 1970 to end of 1972); the second basic period was five years (beginning of 1973 to end of 1977); the third basic period was four years (beginning of 1978 to end of 1981). The allocations in these periods were, respectively, approximately SDR 9.3 billion, zero, approximately SDR 12.1 billion.

International Monetary Fund, International Reserves: Needs and Availability (Washington, 1970); Outline of Reform, Part I, par. 25 (Documents of Committee of Twenty, p. 15—see also pp. 43 and 183–207); Robert A. Mundell and Jacques J. Polak, eds., The New International Monetary System (New York: Columbia University Press, 1977), pp. 111–81.

Article XXIV, Section 1(a), first; Article XVIII, Section 1(a), second.

See Joseph Gold, Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington, 1971), pp. 11–25.

See, for example, Article XIX, Section 3; Schedule H, paragraph 1(b).

Article XXIV, Section 1(b), first.

Article XXIV, Section 4(d), first; Article XVIII, Section 4(d), second.

Annual Report, 1979, pp. 123–28. See also Annual Report, 1981, p. 78.

Annual Report, 1979, p. 125.

The approach to the criteria for allocations continues to be controversial. See the communiqué of Intergovernmental Group of Twenty-Four on International Monetary Affairs, International Monetary Fund, IMF Survey, Vol. 10 (October 12, 1981), p. 307; Karl O. Pöhl, ‘The Multiple-Currency Reserve System,” Euromoney (October 1980), p. 45. The Managing Director was not able to make a proposal for allocations before the fourth basic period began (Annual Report, 1981, p. 77).

Article XXIV, Section 2(b).

Article XVIII, Section 2(b).

Outline of Reform, Part I, par. 29, pp. 17–18.

See, for example, North-South: A Program for Survival (Brandt Report) (Cambridge, Mass., 1980), pp. 211–12.

Measures to Strengthen the SDR, Report to the Group of Twenty-Four, Unctad/ MFD/TA/11, p. 14.

Group of Thirty, How Central Banks Manage Their Reserves (New York, 1982), p. 20. See also K.A. Chrystal, International Money and the Future of the SDR, Essays in International Finance, No. 128 (Princeton: Princeton University Press, 1978).

The report by the Group of Thirty cited here records (at p. 20) the following criticisms by central banks, but some of the criticisms seem to have been made before the Fund adopted certain decisions to extend the uses of the SDR:

“Respondents dwelt on the disadvantages of the SDR, sometimes expressing these in terms of the changes that would have to be made for the SDR to become more usable. Among these, the most frequently mentioned were its limited usability (not only acceptance and designation rules and the balance-of-payments ‘need’ requirement, but also that it is not an intervention asset and not transferable to the private sector). Other drawbacks cited were its ‘Tack of a range of maturities, relative lack of liquidity, and Tack of anonymity’; and that as an asset its yield, while ‘stable/is almost certainly lower than the average return on liquid assets held by central banks in the markets of the currencies making up the SDR ‘basket.’ For many countries its currency composition was not deemed appropriate to their patterns of trade or the composition of their external debt. For the system as a whole, it would also be necessary to control the growth of other reserve assets before the SDR could assume a dominant, or even an important, role. Several banks saw no justification for further allocations at present.”

Documents of Committee of Twenty, p. 123; Joseph Gold, SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, IMF Pamphlet Series, No. 33 (Washington, 1980), pp. 12–13.

For this reason, the Fund was authorized by the Articles before the Second Amendment to compel a member to provide its currency in return for gold (Article VII, Section 2(ii), original and first).

See footnote 528. For some provisions of the original Articles and the First Amendment under which members transferred gold to the Fund, see Article III, Sections 3(b) and 4; Article V, Sections 7 and 8(f); Schedule B.

For a detailed survey of these developments, see Joseph Gold, “Gold in International Monetary Law: Change, Uncertainty, and Ambiguity,” Journal of International Law and Economics, Vol. 15 (1980), pp. 323–70. See Chapter 11 of this volume.

Outline of Reform, Part I, par. 28, p. 16.

Ibid., pp. 16–17.

Part I, par. (a).

Part II, chap. I, sec. 1.

Article V, Section 12.

Article IV, Section 2(b).

Schedule C, paragraph 1.

Article XV, Section 2. There is no express prohibition of a return to valuation in terms of gold. That step, without doubt, would be inconsistent with the intent of the Second Amendment.

Article V, Section 11.

Article VII, Section 2(ii), original and first.

Article V, Section 12(d).

Communiqué of Interim Committee, Annual Report, 1976, pp. 120–21.

On problems of valuation, see the following publications of the author: The Fund Agreement in the Courts, Vol. II (Washington: International Monetary Fund, 1982), Appendix B (“Judicial Application of Gold Units of Account”), pp. 439–57; Floating Currencies, Gold, and SDRs: Some Recent Legal Developments, IMF Pamphlet Series, No. 19 (Washington, 1976), pp. 15–33; Floating Currencies, SDRs, and Gold: Further Legal Developments, IMF Pamphlet Series, No. 22 (Washington, 1977), pp. 49–58; SDRs, Gold, and Currencies: Third Survey of New Legal Developments, IMF Pamphlet Series, No. 26 (Washington, 1979), pp. 32–40; SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, IMF Pamphlet Series, No. 33 (Washington, 1980), pp. 87–89; and SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 81–85. See also David A. Brodsky and Gary P. Sampson, “The Value of Gold as a Reserve Asset,” World Development, Vol. 8 (February 1980), pp. 175–92.

Rule J-1(a), as amended April 1, 1978, Rules and Regulations, By-Laws, Rules and Regulations, 35th (July 1, 1978).

Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pp. 84–85.

Public Law 96–389 (94 Stat. 1555), sec. 10.

Report to the Congress of the Commission on the Role of Gold in the Domestic and International Monetary Systems (Washington, 1982), 2 vols.

Ibid., Vol. I, p. 21.

Agreement between the Central Banks of the European Economic Community laying down the operating procedures for the European Monetary System, March 13, 1979, Part III (EMS Texts, pp. 15–18).

Article XX.

Article XIX, Section 3(a).

EMS Texts, p. 43.

Resolution of European Council, Brussels, December 5, 1978, IMF Survey, Vol. 7 (December 13, 1978), par. 1.4, p. 376.

Jacques van Ypersele de Strihou, ‘The Future of the European Monetary System,” Revue de la Banque, No. 2 (1981), pp. 179–95.

Article V, Section 6.

Selected Decisions, 9th (1981), pp. 249, 250–51, 252, and 254.

Article XVII, Section 3.

Outline of Reform, Part II, p. 8.

See Article XVIII, Section 1(a).

Ibid.

Article VIII, Section 7.

Joseph Gold, “Substitution in the International Monetary System,” Case Western Reserve Journal of International Law, Vol. 12 (1980), pp. 299 and 301–302. See Chapter 3 of this volume.

Group of Thirty, Reserve Currencies in Transition (New York, 1982); How Central Banks Manage Their Reserves (New York, 1982).

Group of Thirty, How Central Banks Manage Their Reserves (New York: 1982), p. 4; Documents of Committee of Twenty, p. 87.

Outline of Reform, par. 22. See also Documents of Committee of Twenty, pp. 162–79.

Joseph Gold, “Substitution in the International Monetary System,” Case Western Reserve Journal of International Law, Vol. 12 (1980), pp. 307–309 and 313–24. See Chapter 3 of this volume.

Documents of Committee of Twenty, p. 88.

Ibid., p. 89.

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