Legal and institutional Aspects of the international Monetary System

2 Symmetry as a Legal Objective of the International Monetary System

International Monetary Fund
Published Date:
December 1984
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Symmetry and Uniformity

Symmetry is an objective of the international monetary system in the sense that countries want to ensure that all enjoy equivalent rights and observe equivalent obligations. The Articles of Agreement of the International Monetary Fund are the main legal instrument of the system. Symmetry will be examined in relation to the three versions of the Articles: the original Articles, the First Amendment, and the Second Amendment, which became effective, respectively, on December 27, 1945, July 28, 1969, and April 1, 1978.1

Symmetry can be contrasted with the principle of uniformity that has been embodied in the Articles and that has been the subject of earlier examination.2 According to that principle, the rights and obligations of member states that belong to the Fund (“members”) are the same and the policies of the Fund apply to members in the same way. The principle, in short, is one that renounces discrimination against or in favor of particular members. One qualification, however, is that the uniformity of rights and obligations and the uniform application of the policies of the Fund require members to be treated alike if they are in what the law regards as the same circumstances. The relevant circumstances for this purpose depend on the subject matter of the right, obligation, or policy. There may be nothing in the substance of a right, obligation, or policy that would justify the view that members are in different circumstances in relation to it. For example, each member must maintain the value of the Fund’s holdings of its currency. Nothing in the substance of that obligation would justify the conclusion that it does not bind all members or that it should be applied to them in different ways. The obligations that constitute what used to be called convertibility provide a contrasting example. All members have the right to decide when to give notice that they will make their currencies convertible in accordance with the provisions of Article VIII, Sections 2, 3, and 4. Some members have considered their economic condition strong enough to enable them to take this step. Other members are not yet satisfied that their condition is sufficiently strong and are still availing themselves of certain transitional arrangements under Article XIV that permit some derogations from convertibility. Uniformity means that all members in the first group have the same rights and obligations with respect to the convertibility of their currencies, and that all members in the second group have the same rights and obligations with respect to derogations from the convertibility of their currencies. The rights and obligations with respect to convertibility of the two groups, however, are not the same.

The two examples that have been cited are drawn directly from the Articles, so that whether or not they are consistent with the principle of uniformity, there can be no question concerning their validity. Problems can arise, however, in connection with the treatment of members under policies. If different classes of members are recognized, the classification must be justified by a direct and bona fide relationship to the substance of the policy. This criterion, which resembles the constitutional principle of the equal protection of the laws, embodies the notion that distinctions between classes must not be arbitrary or capricious. For example, all members are entitled to use the Fund’s resources when they have a balance of payments need as defined by the Articles. Some policies on the use of the Fund’s resources do not distinguish among the circumstances that give rise to the need, and all members must be able to use the resources on the same terms however their need may have arisen. Other policies are directed toward a need that has a particular origin. The policy on compensatory financing provides assistance for temporary balance of payments difficulties caused by shortfalls in export proceeds. The Fund determined that these are circumstances that justify a distinction in relation to the balance of payments and the need for resources, and the Fund has defined the criteria that must be satisfied for assistance under the policy. All members that meet the criteria are entitled to use the Fund’s resources in accordance with the policy, but members that do not meet the criteria are not able to enjoy the benefit of the policy even though they have balance of payments difficulties.

Unlike uniformity, the objective of symmetry does not aim at ensuring equal treatment among all members in the same circumstances, but instead focuses on the treatment of members in different circumstances. Symmetry can mean exact correspondence on different sides of a dividing line. It can also mean balance without this mirror-image effect. Symmetry in this latter sense connotes comparability, and therefore involves a subjective judgment.

Illustrations may help once again to clarify the distinction. There is a symmetrical treatment, in the sense of correspondence, between the participants in the Special Drawing Rights Department of the Fund on different sides of the dividing line of net cumulative allocation of SDRs to them by the Fund.3 Participants pay charges on net cumulative allocations and receive interest on holdings of SDRs. The rates for charges and interest must be the same, so that the participant holding fewer SDRs than its net cumulative allocation pays net charges at the same rate as the net interest received by the participant holding more SDRs than its net cumulative allocation.

The discharge of certain obligations to the Fund provides an example of symmetry as comparability. Participants in the Special Drawing Rights Department must discharge these obligations with SDRs. Non-participants 4 cannot be compelled to discharge obligations with SDRs, because they cannot be compelled to acquire SDRs, but they are not released from the obligations. A comparable method of discharging the obligations is prescribed by the Articles by requiring nonparticipants to pay in other reserve assets, namely, the currencies of other members.

Symmetry in the sense of comparability, particularly in relation to obligations, has preoccupied the negotiators of an effective international monetary system. This preoccupation has been a dominant one in the negotiations during the 1970s of an improved system. Symmetry has been sought in relation to two classifications of members. One classification consists of members, especially the United States, that issue reserve currencies and members that issue other currencies. The other classification consists of members in surplus and members in deficit in their balances of payments. (For convenience, these two groups will be referred to, inelegantly, as surplus and deficit members.) The two classifications are associated with fundamental problems that have emerged in the system.

Symmetry as comparability implies that there are no objective principles by which to measure symmetry. One problem, therefore, in constructing or reforming an international monetary system has always been to satisfy members that symmetrical treatment for them has been achieved. Normally, they have aspired to an absolute and have not been willing to apply to symmetry Bacon’s view of beauty that “there is no excellent beauty that hath not some strangeness in the proportion.” Nevertheless, it has been recognized that the state of the world may prevent the full realization of the objective and may even make that achievement undesirable.

An important objective … in relation to both intervention and settlement is the achievement of greater symmetry among member countries of the Fund. While accepting this objective, the Group has at the same time recognized that arrangements in these areas must above all be workable. There are practical limits to how far and how fast asymmetries in the system can be eliminated. The Group’s aim in relation to this objective has therefore been to suggest arrangements offering the greatest reduction in asymmetry which is practicable in the coming period. The Group has also been mindful of two other points: that the special functions hitherto performed by the U.S. dollar (and to a lesser degree by the pound sterling) should be spread sufficiently widely to avoid simply putting a few other currencies in a similar position and thereby encouraging the formation of blocs; and that in this process there should not be established rigid demarcations between groups of countries which would be inconsistent with a one-world system.5

A third classification that has been prominent in international negotiations is the distinction between developed and developing members. The latter countries have pursued certain aims but they are less readily classifiable as aims of symmetry. Sometimes the objective has been uniformity, as in the discussions and negotiations that led eventually to agreement on the SDR. For some time, there was a view in the group of developed members discussing the deliberate creation of international liquidity that developing members should not share in any distribution of new reserve assets but instead should receive comparable benefits that could be regarded as more suitable to their circumstances. The final agreement, as incorporated in the First Amendment, is that allocations of SDRs are made to all members at the same rate in relation to their quotas in the Fund.

Sometimes, however, the aims of developing members have been to receive treatment that went beyond uniformity or symmetry. One example is the “link,” according to which the deliberate creation of international liquidity would be made to serve as development assistance as well. Developing members have wanted SDRs to be allocated to them in higher proportions than to developed members, or to be allocated to international financial organizations whose function is the promotion of development. In this objective and in other claims to more favorable treatment, developing members have not succeeded, with the exception of a few minor concessions in the Second Amendment.

Prenatal Plans

The two great plans that influenced the creation of the Fund, Keynes’s Proposals for an International Clearing Union 6 and H.D. White’s plan for an International Stabilization Fund,7 emphasized the new role that surplus (creditor) countries would be required to undertake. Reserve currency countries as such were not the subject of equal emphasis. The reason may have been that the United States was expected to be the dominant surplus country, and it was thought ultimately that a satisfactory safeguard had been created to ensure that full responsibility for the adjustment of balances of payments would not fall on other countries.

Under both plans, the participation of surplus countries would enable deficit (debtor) countries to obtain the balance of payments financing they needed from the new international organization. The prenatal plans were concerned, however, with more than financing. They recognized the need for adjustment by surplus countries and noted the novelty of imposing obligations on them for this purpose. Both plans contemplated pressures that would be applied to these countries. According to Keynes’s Proposals:

The provisions suggested differ in one important respect from the prewar system because they aim at putting some part of the responsibility for adjustment on the creditor country as well as on the debtor. … The object is that the creditor should not be allowed to remain entirely passive. For if he is, an intolerably heavy task may be laid on the debtor country, which is already for that very reason in the weaker position.8

Keynes made it explicit that the obligations imposed on surplus countries would be within a symmetrical system:

We need a system possessed of an internal stabilising mechanism, by which pressure is exercised on any country whose balance of payments with the rest of the world is departing from equilibrium in either direction, so as to prevent movements which must create for its neighbours an equal but opposite want of balance.9

Of the pressures proposed in the two plans, it is useful, in view of the development of the Fund, to single out the provisions of the White Plan that were to some extent forerunners of the “scarce currency clause” of the Articles. The pressure as foreseen by White was the issuance of reports about a surplus country to members and possibly the public, but the pressure stopped there.10

Reserve and Nonreserve Currency Countries

Original Articles

The participants in the Bretton Woods Conference in July 1944, at which the original Articles were drafted, agreed that each member would be required to take appropriate measures to ensure that the exchange rates in exchange transactions in its territories involving its own currency and the currencies of other members would not differ from the parity between the two currencies by more than the prescribed margins.11 The parity was the ratio between the two currencies that was derived from the par values established for them directly or indirectly in terms of gold. The margins for spot exchange transactions were 1 percent of parity above or below parity. This obligation imposed responsibility on each member for making the par value of its own currency effective.

The United States and the United Kingdom introduced a proposal at the Conference that seems to have been accepted with little discussion. A member that freely engaged in buying and selling gold for its currency at a price corresponding to its par value, plus or minus a margin established by the Fund, in transactions with the monetary authorities of other members for the settlement of international transactions, was deemed to be fulfilling the obligation with respect to exchange rates.12 The theory of the provision was that a member that undertook to buy and sell gold in accordance with the provision was maintaining the par value of its currency in relation to gold as the common denominator of the par value system. Another member could obtain that currency for gold and use it to support the parity between the currency and its own currency, and if it obtained the currency as a result of supporting the parity it could obtain gold for the balances that it had acquired. If that other member did not maintain the parity by engaging in these gold transactions, the responsibility for exchange transactions that took place outside the margins around parity had to be attributed to it.

The provision dealing with the free purchase and sale of gold was written in general terms under which any member could have given the Fund notice of its undertaking to follow the practice and to withdraw the notice if it was given. The Articles did not require any member to engage in the practice. The generality of the provision was typical of other provisions, so that subsequent complaints by members, including the United States, were provoked more by the way in which the system developed than by the legal regulation of it. If, however, the provisions of the Articles did not require the asymmetrical operation of the system, they did not prevent it, according to the critics. In 1944, the United States was thought to be the only country that could give the undertaking for some considerable time to come. It had a strong economy and substantial holdings of gold, so that it was unlikely to be in deficit and unlikely to have to use much gold for the settlement of international transactions. Other countries held little gold and faced difficult economic problems. The United States was indeed the only member that ever gave the undertaking in respect of its currency.13 The undertaking was withdrawn on August 15, 1971.14

The provision on the free purchase and sale of gold became the foundation for the operation of the par value system, in which, because of the strength and size of the U.S. economy and the undertaking to maintain the value of the dollar in terms of gold, the dollar was predominant as a reserve and intervention currency for governments as well as a currency of account and settlement. The United States remained passive most of the time, while other members maintained the parities of their currencies by intervening in the exchange markets by buying and selling, or being ready to buy and sell, their currencies for U.S. dollars at rates of exchange within margins that were consistent with the Articles. Intervention was the appropriate measure, to use the language of the Articles, by which most members other than the United States performed their obligations with respect to exchange rates. Although the U.S. dollar was the primary intervention currency, some members used a secondary intervention currency, such as sterling or the French franc, that was convertible into U.S. dollars. The passivity of the United States was considered to be a necessary feature of exchange arrangements because, if the United States also had intervened, inconsistent intervention policies might have developed among members. The result, however, was that other members held the initiative in determining the exchange rates for their currencies against the U.S. dollar This result was equally apparent in the changes made in the par values of currencies before the Smithsonian Agreement. The changes were made on the initiative of members other than the United States and usually were determined by the relationship they sought between their currencies and the U.S. dollar. In later years of the par value period, however, other members regarded the system as unsymmetrical on the ground that it gave the United States a privileged position. It will be seen that the United States came to regard its alleged privilege as a burden.

If members accumulated U.S. dollars by intervention, they were able to exchange them for gold in transactions with the United States. In this way, much of the gold held by the United States was redistributed when, in the 1950s, the United States was in deficit and European members and Japan in surplus. Toward the end of the decade, the prospect that these conditions might persist began to trouble monetary authorities, for a number of reasons, including the inherent fragility of a system in which the United States held a diminishing stock of gold for the settlement of international transactions. Other members had accumulated reserves, including U.S. dollars, in comfortable amounts, but they feared that the continuing acquisition of dollars, as the result of surpluses in their balances of payments with either the United States or with other members, could lead to a devaluation of the U.S. dollar or a cessation of its convertibility into gold if the dollars were presented for settlement.

It will be obvious that the system was based on the stability of the U.S. dollar as the central currency and on confidence that its stability would be preserved. The Articles did not make this assumption explicit in relation to the U.S. dollar alone. A uniform obligation was created according to which “Each member undertakes to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations.”15

Swap Arrangements

The United States took a number of measures in the early 1960s to relieve the pressure on the U.S. gold stock. These measures appeared to some members at least as efforts to insulate the United States from the need to use reserve assets or to apply to the Fund for financial assistance, which was the normal course for members when they were in deficit. Even the issuer of a secondary reserve currency could not count on a similar insulation, because it and others in its currency area might be in deficit at the same time. Here, in their view, was further asymmetry.

One measure, which has become an established feature of international monetary arrangements, was the reciprocal credit (“swap”) arrangement with the central banks of certain other countries and with the Bank for International Settlements. The arrangements with other countries provided them with more resources with which to intervene in the exchange markets. The United States, which did not hold reserves in other currencies because it did not intervene, received currencies with which it could redeem the dollars held by other central banks that they might have presented to the United States for the purchase of gold. The effect of drawing the currency of a contracting partner was that the United States substituted an obligation in the partner’s currency for the obligation represented by the partner’s holding of dollars, and relieved the partner of the fear that it would suffer loss if the dollar were devalued.

Although other members cooperated in measures such as these, they regarded the measures as placebos and obviously not remedies. The critics recognized that the deficits of the United States had made an enormous contribution to the recovery and prosperity of the rest of the world. Moreover, the critics recoiled from certain steps that might have been taken to eliminate these deficits. The prospect of surpluses for the United States could not be viewed without the accompanying specter of deficits elsewhere. Nevertheless, other members concentrated on the injustice of a dollar standard that they had had to accept as it became increasingly clear that de facto their holdings of dollars were inconvertible. U.S. corporations could buy assets throughout the world with their dollar resources. Central banks were obliged to exchange dollars for their own currencies. U.S. monetary policy, determined by domestic policies, affected the monetary policies of other countries. Monetary expansion in the United States meant monetary expansion abroad unless other countries found it possible to adopt countermeasures. Neither politics nor economics accepts the past as compensation for the present.

General Arrangements to Borrow

On February 6, 1961, President Kennedy sent to Congress a special message on the balance of payments of the United States in the course of which he stated that the United States might use the resources of the Fund.16 This statement encouraged the Fund to place itself in a position to meet a request by the United States under its large quota without reducing the Fund’s ability to meet the requests of other members for balance of payments financing. The Fund negotiated an agreement with ten of its main industrial members under which they would consider supplementing the Fund’s resources if further resources were necessary in order to finance the transactions of any one of these members with the Fund. The agreement took the form of a decision of the Fund called the General Arrangements to Borrow (GAB), to which all ten prospective lenders adhered.17 The GAB has influenced legal, institutional, and political aspects of international monetary relations.

Not all participants entered the negotiations with enthusiasm. Although the GAB would be available to reinforce the Fund’s resources for the benefit of any of them, it was viewed by other participants as one that was designed to assist the United States. Some participants had already concluded that, for the reasons already mentioned, the international monetary system was asymmetrical and favored the United States. Moreover, the will of the United States to adjust its balance of payments was questioned. Later, this suspicion took the form of a charge that the United States practiced “benign neglect” of the balance of payments.

Whatever views the other nine participants in the GAB held on the working of the system, they concluded that the opportunity had arisen to introduce more symmetry into it because the United States was contemplating the use of the Fund’s resources. The nine would ensure that if the United States requested this use, the United States would have to observe the same standards that were applied to other members. If a member resorts to the Fund for resources that go beyond its unchallengeable entitlement, i.e., beyond what used to be called the “gold tranche” and since the Second Amendment is called the “reserve tranche,” it must meet the criteria of the Fund’s “conditionality.” The member must convince the Fund that it is following or will follow policies designed to adjust its balance of payments within a short to medium period. The United States had never approached the Fund for a transaction of any kind before the GAB was negotiated.

The desire of the participants in the GAB to prevent asymmetrical benefits for the United States is evident in various provisions of the GAB. The participants commit themselves to consider, but not necessarily comply with, proposals by the Managing Director of the Fund to call for loans. The procedures leading to proposals require consultation by the Managing Director with participants in the course of which they can satisfy themselves by independent examination that the participant seeking a transaction will follow appropriate policies of adjustment. Another paragraph declares enigmatically that the Fund’s policies and practices on the use of its resources shall apply to transactions financed with resources borrowed under the GAB. Moreover, the participants agreed among themselves to follow procedures by which to determine how to respond to proposals for calls. They established a system of voting for this purpose that differed from the Fund’s not only in voting power but also in preventing the participant seeking a transaction with the Fund from voting on a proposal for calls to finance its transaction. The votes allotted to a member that requests a transaction with the Fund can be cast in the Executive Board if a decision on the request is taken by a vote. Some participants in the GAB held the view that the voting strength of the United States in the Fund gave it an inordinate influence in the affairs of the Fund.

The United States has purchased substantial amounts of currencies from the Fund, but has never requested a transaction involving conditionality. Before November 1978, the Fund had borrowed under the GAB to help it finance transactions with France, Italy, and the United Kingdom. In that month, the Fund borrowed for the first time to help it finance a transaction with the United States, but the transaction was in the reserve tranche and therefore did not involve conditionality. The apparent unwillingness of the United States to engage in transactions involving conditionality is not an isolated phenomenon. Many deficit members have been reluctant to request a use of the Fund’s resources involving conditionality if other forms of financing were available to them.

First Amendment

In the 1960s, members of the Fund faced the dilemma that if the United States achieved a better balance of payments performance, the main source of additions to their reserves could diminish to a trickle or become dammed. They wished to be assured of increases in their reserves because they expected a secular increase in their international transactions. By 1967 agreement was reached in principle on the SDR as a new reserve asset that could be allocated to participants in the SDR arrangements in order to seek to meet the long-term global need for a supplement to existing reserve assets.18 The project was conceived not only as a contingency plan to deal with the consequences of adjustment of the balance of payments of the United States but also as an inducement to adjustment. Indeed, the First Amendment of the Fund’s Articles, which gave effect to the agreement, provided that the first decision to allocate SDRs should await a collective judgment that there was a global need to supplement reserves, the attainment of a better balance of payments equilibrium, and the likelihood of a better working of the adjustment process in the future.19

The negotiation of the SDR raised a question of symmetry in relation to the United States. The SDR could be transferred by a participant in return for “currency convertible in fact” provided by the transferee, with which currency the transferor could make international payments. The United States pointed out that the currencies of other participants were not useful to it because it did not intervene in the exchange markets, and therefore the scheme would operate unsymmetrically by giving the United States no comparable benefit.

It was agreed that the issuer of a currency should be able to cancel its currency liabilities by transferring SDRs in exchange for balances of its own currency held by another participant. Other members, however, did not wish to reduce the constraint on the United States exerted by its undertaking to buy and sell gold freely. The provision of the First Amendment that authorized the redemption by a participant of balances of its currency with SDRs did not give the participant the right to insist on this use of SDRs, but permitted redemption only with the agreement of the participant holding the balances.20 Once again, the provision was written in terms that could apply to any participant whose currency was to be redeemed, and was not confined to the United States. Transfers of SDRs under the provision have been made by a number of participants. The United States made transfers before the latter part of August 1971. In November 1978, the United States transferred SDRs for deutsche mark and yen under the provision of the Second Amendment that has broadened the authority of participants to agree on transfers of SDRs to other participants, and that permits these transfers whether or not they are made to redeem balances of the transferor’s currency.21

Breakdown of Par Value System

By August 1971 the United States had concluded that it could not redress its worsening balance of payments without resorting to drastic measures. On August 15, President Nixon announced measures that included the refusal thereafter to convert official holdings of U.S. dollars into gold or other reserve assets, “except in amounts and conditions determined to be in the interest of monetary stability and the best interests of the United States,” and the imposition of a 10 percent surcharge on goods imported into the United States.22

The announcement was followed by a withdrawal of the undertaking of the United States to observe the practice of freely buying and selling gold within the meaning of the Articles. The legal effect of this action was that the United States was in the same position as all other members. It became bound to apply appropriate measures to ensure observance of the margins around parities in exchange transactions in the United States involving the U.S. dollar and the currencies of other members, but the United States had decided to let the U.S. dollar float without regard to the obligation to which it had become subject.

The announcement also amounted to a refusal to convert foreign official holdings of U.S. dollars into gold or the currency of the member seeking conversion according to the limited obligation of an issuer to convert official holdings of its currency under Article VIII, Section 4. This provision is part of the obligations of convertibility that members can undertake, but whereas a member that had undertaken to buy and sell gold freely was entitled to withdraw that undertaking, a member that has notified the Fund of its willingness to perform the obligations of Article VIII, Sections 2, 3, and 4 cannot withdraw its notice.

The President’s announcement contained many references to what he regarded as the unsymmetrical and unfair way in which the system had worked to the disadvantage of the United States by denying it control over the exchange rate of its currency. He said, for example, 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. …

… In full cooperation with the International Monetary Fund and those who trade with us, we will press for the necessary reforms to set up an urgently needed new international monetary system. Stability and equal treatment is in everybody’s best interest.23

The United States wanted a better system but had no proposal to make until November 1972.

For some years after the par value system had broken down, it was assumed that there would be a return to a substantially similar system, but one with more flexibility and with symmetrical rights and obligations for all members. Much effort was devoted to designing such a system. The emphasis placed on the restoration of convertibility in this effort was largely a reference to the convertibility of official holdings of U.S. dollars and implied that this development was essential for the future system.

A resolution adopted by the Board of Governors on October 1, 1971, requested the Executive Board to report on the measures that were “necessary or desirable” for “the improvement or reform” of the system.24 The language suggested the hope that perhaps radical departures were not necessary, even though the studies to be made for the purpose of the report were to deal with all aspects of the system, including the role of reserve currencies, gold, and SDRs, convertibility, the provisions of the Articles dealing with exchange rates, and destabilizing capital movements.

On December 18, 1971, the ten members participating in the GAB reached an agreement on a pattern of exchange rates among their currencies as the result of the first multilateral negotiation of the kind ever attempted.25 This was the Smithsonian Agreement, of which one element was that the United States undertook to propose to Congress and then to the Fund a devaluation of the U.S. dollar, and another element was that the United States would suppress the 10 percent surcharge. Other members had insisted that they would not join in an agreement without an initiative by the United States to devalue the U.S. dollar and that they were not prepared to revalue their currencies in order to relieve the United States of the need to make this “contribution.”

The agreement on the pattern of exchange rates was reached without any commitment by the United States to resume the convertibility of official holdings of U.S. dollars by means of gold transactions or under Article VIII, Section 4. The communiqué in which the Smithsonian Agreement was announced referred to the necessity for discussion of reform of the system, and listed, among other items, “the appropriate monetary means and division of responsibilities for defending stable exchange rates and for insuring a proper degree of convertibility of the system” and the proper role of gold, reserve currencies, and SDRs.26

The absence of any undertaking in the Smithsonian Agreement or in later agreements to resume official convertibility has not meant that the U.S. dollar has ceased to perform any of its former functions. In particular, it continues to be the main reserve and intervention currency. The difference from the past is that intervention with U.S. dollars is not now conducted for the purpose of maintaining internationally approved par values for currencies.

The Smithsonian Agreement was an attempt to re-establish fixed relationships among all currencies, comparable to those of a par value system, but with wider margins for exchange transactions than those permitted by the Articles and with the substitution of more informal “central rates” for par values if members wished to adopt these devices for greater flexibility. Wider margins and central rates were regulated by a decision of the Fund adopted on the same day as the Smithsonian Agreement.27 These devices were extra-legal but designed to limit the dangers of exchange arrangements that at the time could not be brought into consistency with the Articles.

By March 1973 the attempt instituted by the Smithsonian Agreement was beaten by the onslaught of speculative movements of funds notwithstanding a second devaluation of the U.S. dollar. On March 12, 1973 the Council of Finance Ministers of the European Economic Community announced the agreement on common exchange rate margins (the “snake”),28 under which certain members of the Community and other countries would maintain narrow margins for exchange transactions involving their own currencies, but would not maintain margins for transactions involving their currencies and the U.S. dollar. Other members of the Community would allow their currencies to float. The Ministerial Meeting of the Group of Ten and the Community issued a communiqué on March 16, 1973 in which the Ministers and Central Bank Governors “reiterated their determination to ensure jointly an orderly exchange rate system.” On intervention, this determination was expressed in qualified terms, as follows:

They agreed in principle that official intervention in exchange markets may be useful at appropriate times to facilitate the maintenance of orderly conditions, keeping in mind also the desirability of encouraging reflows of speculative movements of funds. Each nation stated that it will be prepared to intervene at its initiative in its own market, when necessary and desirable, acting in a flexible manner in the light of market conditions and in close consultation with the authorities of the nation whose currency may be bought and sold.29

Even this mild undertaking was taken to constitute an advance toward a more symmetrical assumption of the burden of intervention.

Attempted Reform: U.S. Proposals

On July 26, 1972 the Board of Governors of the Fund established its Committee on Reform of the International Monetary System and Related Issues (the Committee of Twenty) to consider all aspects of the reform of the system. In the period culminating in the presentation of the Committee’s Outline of Reform30 on June 14, 1974, there took place one of the most intensive official inquiries that have ever been made into the international monetary system and the ways in which it could be reformed.

It has been noted that many members held the view that a major asymmetry in the system had been the privileged position of the United States, because it had been able to be indifferent about its balance of payments. In the discussion of reform, the United States made it clear that it too regarded the system as unsymmetrical, not because it had enjoyed a privileged position but because the system had imposed disadvantages on it and because of the onerous role of the main reserve center that the United States had undertaken. It had been widely assumed, for example, that the United States could not devalue the dollar, and it was even thought by some observers that the Articles denied this opportunity to the United States. These misunderstandings might have derived from the conviction that morally the United States could not devalue the dollar because that action would undermine the system or because the United States would not have been allowed by others to improve its balance of payments by devaluation. Other members regarded the exchange rate of their currencies in relation to the U.S. dollar rather than the effective exchange rate against a range of currencies or currencies in general as the dominant factor in the competitiveness of a member’s international position. It was expected that other members would devalue their currencies by amounts corresponding to any devaluation of the dollar, so that use of the exchange rate as an instrument of adjustment was not available to the United States. U.S. representatives pointed out that even when the dollar had been devalued as part of the Smithsonian Agreement, the devaluation had been inadequate because of the resistance of other members to a larger one, with the result that the first devaluation had to be followed by a second installment.

On the subject of adjustment, the United States contended that its persistent deficits had been the counterpart of the persistent surpluses of others, and that these other members had contributed to the general maladjustment. There had been inadequate responsibilities for adjustment and inadequate means to enforce it. The system had been particularly deficient in exerting influence on surplus members. Nor had there been any mechanism by which the balance of payments objectives of members could be reconciled, so that the surpluses some members had wanted could be made consistent with the planned deficits of others. The system had developed in such a way that the adjustment of exchange relationships between the United States and other members had rested with them, but even if that asymmetry were accepted, it had worked poorly because the Articles had provided no effective machinery for bringing about adequate or prompt changes. The Articles gave each member a monopoly of the right to initiate a change in the par value of its currency. The result had been inappropriate exchange relationships and incurable deterioration in the competitive position of the United States.

Moreover, the exchange rate flexibility that had existed in the relationship between the U.S. dollar and another member’s currency because of the possibility of fluctuation within the margins permitted by the Articles had been available only to the other member. It had intervened in the exchange market and the United States had not. Even the effective margins of fluctuation were less in transactions involving the U.S. dollar than in transactions between other currencies. Although under the Articles the margins were the same for all currencies, in practice the margins in transactions between the currencies of two members that intervened with U.S. dollars were the cumulation of the margins in transactions involving each of the two currencies and the U.S. dollar. The margins for transactions involving the currencies of members that intervened with a secondary intervention currency were even broader than the cumulated margins for transactions between the currencies of members that intervened with U.S. dollars. The Smithsonian Agreement had broadened the margins but had maintained the same arrangement by which narrower margins were recognized for exchange transactions involving the U.S. dollar than for transactions involving any two other currencies.

Another asymmetry that the United States pointed out was that it had been the only member that had undertaken to buy and sell gold freely for its currency in international settlements. When other members had been in surplus, they had acquired gold or other reserve assets, whereas usually the United States, when in surplus, had received not an increase in its reserves but a decrease in its currency liabilities because settlements were made with dollars.

The attitude of the United States to reform can be summed up broadly as an insistence that there should be more symmetrical responsibilities on all members for adjustment and more symmetrical privileges for all members in relation to the exchange rates for their currencies. A return to official convertibility and the use of acceptable assets for this purpose could be contemplated only in support of such a system, but convertibility alone could not ensure adequate or equitable adjustment. Convertibility was an unsymmetrical instrument because it operated only on deficit members. Others, however, did see convertibility as a means of bringing about a more symmetrical system. No clearer statement of this latter view can be found than in the speech of Mr. Giscard d’Estaing delivered as Governor of the Fund for France during the meeting of the Board of Governors of the Fund in 1973:

The touchstone of reform is to be found in the area of convertibility. This question outweighs all others, particularly that of adjustment. It raises the fundamental problem of equality in the way rights and obligations are shared within the international community. We all seem to be agreed that in the future no national currency should be assigned the role of a reserve asset. I welcome this consensus. But we cannot remain at the stage of an agreement in principle. A good resolution has been made. We now have to ensure that its consequences are reflected in the texts we draft and the action we take. We shall not really have broken any new ground in this field until governments observe among themselves the rules that ordinarily apply under common law. It will be recalled that this law requires one to pay one’s debts out of one’s assets. Convertibility, as we understand it, is meaningless unless it provides for a mandatory, multilateral, and symmetrical mechanism.31

The United States submitted proposals to the Committee of Twenty based on the idea that increases or decreases in reserves should be employed as objective indicators of the need for surplus and deficit members to adopt measures to adjust their balances of payments. Certain “pressures,” regarded by the United States as sanctions, would be applied if a member failed to adjust, unless the Fund decided that the pressures should not be applied. Convertibility was tied into these proposals in what was considered a symmetrical way. If reserves fell to a certain point below a basic level, credits or allocations of SDRs might be withheld. If a member’s reserves rose to a certain point above the basic level, it would not be able to acquire more reserves in the form of “primary assets,” i.e., SDRs, unconditional drawing rights in the Fund, or gold. This prohibition might be made effective in various ways: by withholding allocations of SDRs, taxing excess reserves, or denying the conversion of holdings of reserve currency. The system would be made to ensure that sufficient reserve assets were available in relation to the total of basic levels to make the scheme work. Under the proposals, official holdings of foreign exchange would not be banned or encouraged, but it was assumed that they would probably be below former levels. The issuer of each currency would be entitled to place limits on the further accumulation of its currency by other members or by a group of them.

The United States described its plan in broad terms as follows:

The United States proposal neither gives special rights to nor imposes special obligations on any country or group of countries. It assumes a monetary system in which all countries are treated equally. All would have the same freedom to use the full exchange rate margins permitted in the system. All would have the same rights to allow their currencies to float, transitionally or indefinitely, under the same internationally agreed rules of behavior and surveillance. All maintaining established values for their currencies would have the same obligation to assure convertibility of their currencies—meaning that officially held balances of foreign currencies could be freely presented to the issuing country for conversion into primary reserve assets, with the choice among SDR’s, reserve positions in the IMF and gold to be made by the issuing country.32

Outline of Reform

The Outline of Reform,33 attached to the Report of the Committee of Twenty to the Board of Governors dated June 14, 1974, was not a complete plan for reform because the Committee concluded that events had made it impossible to put such a plan into immediate operation. One participant in the discussions from which the Outline emerged has written, however, that even if circumstances had been more propitious, such proposals as those that dealt with a Substitution Account, multicurrency intervention and strict rules for adjustment were too ambitious from the start.34 The Committee nevertheless believed that the Outline indicated the general direction in which the international monetary system could evolve in the future.

A more symmetrical operation of the system was a leading concern of the Committee. The Outline expressed this concern in relation to an improved adjustment process, including a better functioning of the exchange rate mechanism, and an appropriate form of convertibility, with symmetrical obligations for all members, whether surplus or deficit, and whether reserve centers or not. The United States in particular would have a more symmetrical position in the system in connection with both adjustment and convertibility. The Committee drafted the Outline in the expectation that the system would be based on stable but adjustable par values with floating exchange rates recognized as a useful technique in particular situations. This expectation has not been realized so far, and no legal commitment has been made that it shall be realized at some future time.

The Outline declared that among the main features of international monetary reform would be “the introduction of an appropriate form of convertibility for the settlement of imbalances, with symmetrical obligations on all countries” and “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.”35 Elsewhere, the Outline made it clear that “all countries” included “those whose currencies are held in official reserves.”36 All members maintaining par values would settle in reserve assets balances of their currencies held in the reserves of other members and presented by them for conversion. The Fund would establish arrangements to control the aggregate volume of currencies held in reserves.

The Outline sought to protect reserve centers in various ways, but also to impose certain obligations on them. For example, the Outline accepted the idea that on the restoration of official convertibility, a reserve center would be protected against the net conversion of balances held in reserves at that time (“the overhang”), but there was no agreement on how this effect would be achieved. Furthermore, a reserve center would receive reserve assets when in surplus, instead of a reduction in its currency liabilities, and would not lose reserve assets beyond the amount of any deficit in its own balance of payments on the basis of official settlements. The concept of “asset settlement,” rather than “convertibility,” was employed to describe this arrangement. For these and other purposes, the Fund would establish a Substitution Account through which reserve currencies could be exchanged for SDRs by the holders of balances of a reserve currency or by the reserve center, in accordance with the development of balances of payments.

The subject of adjustment can be deferred to the discussion of the symmetrical treatment of surplus and deficit members. It may be useful, however, to note here that in connection with an improved functioning of the exchange rate mechanism, it was agreed that the system of exchange margins and intervention should be more symmetrical than had been the practice under the par value system.

A number of annexes to the Outline, prepared by the Chairman and Vice-Chairmen of the Deputies of the Committee of Twenty, recorded the state of the discussion reached and provided illustrative material on certain topics on which there had not been full agreement in the Committee. Annex 5 dealt with control by the Fund over the aggregate volume of currency held in the reserves of members.37 One approach was that the Fund would establish in advance the aggregate amount of each reserve currency that could be held in reserves, and if the total were exceeded the issuer of the reserve currency would redeem the excess with reserve assets. The balances to be redeemed could be those deposited by other members in a Substitution Account, or held by members that volunteered to have their balances redeemed, or in the last resort held by members designated by the Fund. A second approach was that a member whose currency was held in the reserves of other members would have the right to request them to limit further accumulations, and they would be bound to respect these requests. A third approach preferred periodic agreements by the Fund on the appropriate aggregate volume of foreign official holdings of a currency, and determinations by the Fund on whether any excess up to a certain level should be redeemed. Beyond that level there would be an obligation to redeem unless the Fund decided otherwise. The balances to be redeemed could be selected according to any one of the three techniques mentioned in connection with the first approach.

Asset settlement according to any one of the three approaches was intended to bring about more symmetrical treatment of a reserve center by compelling it to meet its deficit by using reserve assets to redeem excess balances of its currency held by other members instead of allowing it to finance deficits with balances of its own currency. Other members would settle their deficits by intervention. The discussions of asset settlement and of a Substitution Account were complicated by the wish of some members, particularly developing members, to retain the right to hold U.S. dollars in their reserves so that they could invest them to maximum advantage.

The Technical Group on Intervention and Settlement set up by the Deputies of the Committee of Twenty interpreted a more symmetrical system on intervention to mean greater equivalence of margins for transactions involving all currencies, the use of a greater number of currencies in intervention, and a more active role for the United States in intervention.38 Some experts, however, did not want the increase in flexibility for the United States to decrease the room for maneuver by their countries.

Annex 3 described a system of more symmetrical exchange margins for intervention.39 Each member of a group participating in special arrangements for “multicurrency intervention” would intervene with the currencies of all other participants according to reciprocal agreements on the intervention they would be prepared to undertake within or at the limits of uniform maximum margins around parities. The currencies involved in these arrangements would be those that were widely traded in world exchange markets. Provision was made for margins and intervention, usually in a single currency, by members not joining in the arrangements for multicurrency intervention. The plan called for a high degree of consultation and agreement on the practices to be followed, particularly on intervention at exchange rates that were not at the limits of margins. A purpose of collaboration was protection of the interests of a member whose currency was used in intervention. Balances obtained by intervention would be presented promptly to the issuing member for settlement in reserve assets. Another scheme for the maintenance of margins was based on intervention with SDRs, but it is not necessary to describe it in more detail. It will be apparent that the objective of these schemes was to provide greater symmetry for reserve centers by imposing on them the same obligations that were imposed on other members, particularly those whose currencies were traded most widely in world exchange markets, and at the same time to relieve the United States of the disadvantages it argued that it had endured as the issuer of the main reserve currency.

Second Amendment

Exchange Arrangements

The Second Amendment of the Fund’s Articles reflects few of the ideas on which the Outline was based.40 The drafters of the Second Amendment faced a predicament. On the one hand, there was general agreement that widespread disequilibrium in balances of payments, resulting from inflation and the increased price of oil, made a commitment to par values in the foreseeable future unacceptable. On the other hand, some members were unwilling to forgo legal recognition of the possibility of return to a par value system at some time in the future. The Second Amendment does not provide for the immediate establishment of a regime of stable but adjustable par values with floating rates in particular situations. The United States succeeded in its efforts to give all members freedom to choose their own exchange arrangements, except that a member may not maintain the external value of its currency in terms of gold, with no suggestion of legal, moral, or economic superiority of fixed exchange rates over floating. Once it became clear that the world would not accept the highly deterministic system that the United States had advocated, the United States insisted on a flexibility that it thought would increase the freedom of each member to preserve domestic objectives and would decrease the constraints of the balance of payments and the policies of other members.

Article IV of the Second Amendment expresses the principle that a stable system of exchange rates will be ensured, not by the observance of obligations to maintain fixed values for currencies, but by the development of the orderly underlying conditions that are necessary for financial and economic stability. Members are not free of obligations, however, in the operation of the exchange arrangements of their choice, although the obligations that relate to domestic policies are expressed more as exhortations than commands. Examples of the latter kind are obligations to “endeavor to direct” economic and financial policies toward certain ends and to “seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions.” An obligation expressed in more mandatory terms is 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.” A crucial difference from the past is that now it cannot be ascertained whether a member is failing to observe any of these obligations, however they are formulated, without a judgment by the Fund. Under the par value system, however, it was obvious to the world if a member failed to make its par value effective.

In the choice of exchange arrangements and in subjection to obligations of behavior there is full formal acceptance of the principle of symmetry for all members, because the provisions of Article IV make no exception for any member. The former provision on the option to maintain the value of a currency by means of transactions in gold, which became the mainstay of the par value system because the United States chose this option, has been abrogated.

The technique of seeking order by imposing on members obligations to maintain par values has been replaced by functions of the Fund to oversee the international monetary system in order to ensure its effective operation and to oversee the compliance of members with their exchange rate obligations. In order to fulfill these functions, the Fund is required to “exercise firm surveillance over the exchange rate policies of members, and … adopt specific principles for the guidance of all members with respect to those policies.” Members must provide the Fund with the information necessary for surveillance and must consult with the Fund on their exchange rate policies when requested by the Fund.

Once again, these provisions are formulated so as to apply to all members without distinction. Furthermore, the principles that the Fund is to adopt for the guidance of members are not confined to currencies that are floating independently, but apply also to those that are pegged to another currency or group of currencies, to the SDR, or to some other composite of currencies. The guidelines that the Fund adopted before the Second Amendment by a decision of June 13, 1974,41 were confined to currencies that were floating independently. Those guidelines, therefore, did not apply to most currencies, although one of the small number of currencies to which they did apply was the U.S. dollar. The guidelines came to be regarded as too narrow in their application, as unsymmetrical and unfair in stressing the distinction between floating and pegged currencies, and as implying some superiority of pegging over floating. Nevertheless, the guidelines provided some lessons for the formulation of the Fund’s decision on surveillance over exchange rate policies, which was adopted on April 29, 1977, in order to ensure that it would come into operation as soon as the Second Amendment took effect.42 Much of this later decision deals with procedures. An important element in it is the definition of some of the developments that might indicate the need for special discussions by the Fund with a member. No formal distinctions are made among members for the purpose of these procedures, even though one of the developments relates to intervention.

To date, only three principles for the guidance of members’ exchange rate policies have been adopted. These are fewer than the earlier guidelines. The more modest number and the concentration on procedure are attributable in part to the ineffectiveness of the earlier guidelines. All three principles deal, at least in part, with intervention or the desirability of it. The first principle is mandatory, while the other two are hortatory.

The first principle is drawn directly from Article IV and declares that members shall avoid manipulating exchange rates or the international monetary system in order to prevent effective adjustment of the balance of payments. According to the second principle, a member should intervene in the exchange market if necessary to counter disorderly conditions, which may be evidenced by disruptive short-term movements in the exchange value of its currency. The impact of these two principles on the United States will depend, among other things, on the extent to which it follows a policy of intervention.

The third principle states that, in their intervention policies, members should take into account the interests of other members, including the issuers of the currencies in which members intervene. This principle is designed to protect the United States and members whose currencies are used by other members in intervention. The principle implies that a member should be aware of the need of the issuer of its intervention currency for reasonable freedom to move the exchange rate of its currency, the absence or limitation of which was a cause for complaint by the United States in the days of the par value system. The principle is implied recognition of the desirability of consultation and cooperation among members on their strategy of intervention. But the principle also implies that a member should not be precluded from intervening when this action is appropriate in accordance with the principles.


It has been seen that the convertibility into gold of balances of U.S. dollars held by other members was a fundamental feature of the operation of the par value system, and that as the U.S. stock of gold declined the United States felt compelled to negotiate or adopt various measures to conserve its holdings. On August 15, 1971 the United States withdrew the undertaking to convert official holdings of dollars into gold or other reserve assets.43 The refusal to convert balances extended to official conversion under Article VIII, Section 4. A “convertible currency” was defined by the Articles as one in respect of which the issuer gave the Fund notice of acceptance of the obligations of Article VIII, Sections 2, 3, and 4. Under Article VIII, Section 2, members are prohibited from imposing restrictions on payments and transfers for current international transactions. The obligation means that for these purposes convertibility must be available to official or private parties through exchange markets, for which reason this form of convertibility is often referred to as “market convertibility.”

Official convertibility under Article VIII, Section 4 also was designed to facilitate payments and transfers for current international transactions, because the obligation was confined to balances recently acquired as a result of these transactions or to balances that were to be converted in order to enable members to make payments for these transactions. The issuer of the balances to be converted had the option of converting the balances into gold or into the currency of the member presenting the balances for conversion. The issuer was required to convert only if it was entitled to purchase the other member’s currency from the Fund. The provision implied that this form of convertibility could be conducted through the Fund, although the issuer was not required to use the Fund’s resources for this purpose.

In the drafting of the Second Amendment, the United States strenuously and successfully advocated the idea that the Articles should give no impression that the United States would be bound to resume the official convertibility of the dollar. The provision on the free purchase and sale of gold was eliminated, because it had been a fundamental part of the par value system that is now abrogated. Moreover, such a provision had no place in the Second Amendment because one of its objectives is a gradual reduction in the role of gold in the international monetary system. The definition of a convertible currency was deleted from the Articles, although the obligations constituting what was formerly called convertibility, including the obligation under Article VIII, Section 4, remained substantially unchanged. Other language that referred to convertibility was proscribed, except in the context of Article VIII, Section 4, and new terminology was coined.

The United States would have preferred to eliminate Article VIII, Section 4 from the Articles but was unable to negotiate this amendment. Other members, particularly certain European countries, were adamant in their desire to have some provision in the Articles that kept alive the prospect of official convertibility, even if the only purpose of such a provision was to have a possible means of exerting future influence on the United States. The differences that complicated this negotiation reflected attitudes that had become clear at an earlier stage in the Committee of Twenty: some members held the view that official convertibility could help to ensure balance of payments adjustment because of the pressure it would exert on members, while the United States insisted that official convertibility would be no solution in the absence of an effective and symmetrical adjustment process. The contending parties, however, could not reach agreement on a revised provision. They agreed, therefore, to retain Article VIII, Section 4, with the substitution of SDRs for gold as a reserve asset to be used in conversions. The retention of Article VIII, Section 4 was accepted as a compromise because of the willingness of other members to concur in the U.S. proposal that an explanation of the provision should be included in the Commentary prepared by the Executive Board as part of its report on the proposed Second Amendment.44 The Commentary explains that the provision had not been invoked by members in the past and that market convertibility had sufficed in practice. The explanation implies that although the provision remains alive, it is dormant, and that it would be bad faith to rely on it. The solution is a strange one in the law of treaties.

General Exchange Arrangements and Par Value System

Article IV foresees change in the international monetary system and enables the Fund, by an 85 percent majority of the total voting power of members to “make provision for general exchange arrangements.” The language does not mean that the Fund can impose these arrangements on members, because it is made explicit that members will retain full freedom to choose the exchange arrangements they will apply. It is reasonable to assume, however, that if the necessary majority of voting power were to support some form of general exchange arrangement, a large number of members would be willing to apply it.

Article IV also provides for the possible restoration of a par value system, although in a modified and more flexible form. This aspect of Article IV was a compromise that enabled the United States to gain sufficient support for the freedom of members to choose their exchange arrangements, which meant, in effect, the indefinite floating of the currencies of members that chose this option. The United States was the leading advocate of floating because of the advantages it saw in this arrangement and the disadvantages it considered that the original par value system had imposed on it. Other members, led by France, were less convinced of the benefits of floating and wished to have at least the legal assurance of a possible return to a par value system. They held the opinion that the reduction of external constraints might reduce domestic discipline and lead to international economic instability.

Schedule C of the Second Amendment regulates a par value system that can be instituted, once again by an 85 percent majority of the total voting power. The economic conditions and international monetary developments that are to be taken into account in making the determination that circumstances permit the introduction of a “widespread system of exchange arrangements based on stable but adjustable par values” are spelled out in detail. Among the factors to be considered “in order to ensure the effective operation of a system of par values” are “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 … arrangements for intervention and the treatment of imbalances.” 45 Intervention need not be undertaken with one dominant currency, but could take the form of multicurrency intervention. The “treatment of imbalances” would include the settlement of balances resulting from intervention. The arrangements referred to could be the result of an agreement negotiated among members, but they could be “general exchange arrangements” recommended by the Fund, or they could be both. In any event, the arrangements could be administered by the Fund.

The differences between the original par value system and the one regulated by Schedule C are numerous and only some need be noted here. While the original Articles allowed no exceptions to the par value system, Schedule C does not require a member to establish a par value for its currency. Under Schedule C, any member may abandon a par value and not establish a new one, unless the Fund decides by an 85 percent majority of the total voting power to prevent an abandonment. Under the original Articles, there was authority to change, but not to abandon, a par value. One provision that seeks to prevent the emergence of a special position for any single currency is the provision that forbids the choice of a currency as the common denominator of the par value system.46

It will be observed that for certain critical decisions involving exchange arrangements an 85 percent majority of the total voting power is necessary. The only member that would have sufficient voting strength of its own to prevent the adoption of these decisions would be the United States. The National Advisory Council has described the position of the United States with candor:

These new exchange rate provisions are of critical importance both for the system as a whole and for the United States. They focus on the essential need to achieve underlying stability in economic affairs if exchange stability is to be achieved. They provide a flexible framework for the evolution of exchange arrangements consistent with this broad focus. And they help to ensure that the United States is not again forced into the position of maintaining a value for its currency that is out of line with underlying competitive realities and that costs the United States jobs and growth due to loss of exports, increased imports and a shift of production facilities overseas. Under the new provisions, the United States will have a controlling voice in the future adoption of general exchange arrangements for the system as a whole; and will have full freedom in the selection of exchange arrangements to be applied by the United States, regardless of the general arrangements adopted, so long as it meets its general IMF obligations.47

The 85 percent majority has been criticized because it gives the United States a veto, and because a veto is an element of asymmetry. This special majority, however, was introduced in the First Amendment to give the members of the European Community a veto over certain decisions involving the SDR. The majority gives the enlarged Community even greater assurance of a veto, and of course gives any established or ad hoc group similar power if it can assemble more than 15 percent of the total voting power.

SDRs and Reserve Currencies

The objectives of the Outline included a reduction in the role of reserve currencies in the interests of the better management of global liquidity and a more symmetrical system. The SDR was to become the principal reserve asset. It would be the common denominator of the par value system, an asset into which balances of currency would be converted on the resumption of official convertibility, and the asset that would be substituted for any overhang of reserve currencies that might exist when that event occurred.

The Second Amendment imposed no direct obligation to reduce the role of reserve currencies, although a proposal of this kind was made during the drafting of the Second Amendment. Instead, an obligation of collaboration has been adopted in the following form:

Obligation to collaborate regarding policies on reserve assets

Each member undertakes to collaborate with the Fund and with other members 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.48

This provision was inspired by widespread dissatisfaction with certain aspects of the role of reserve currencies (and gold) in the past and hope for improvement in the future, but it is not made clear how the objectives in the provision are to be pursued or precisely what they mean. The intention was to create sufficient room for evolution without formulating unacceptable obligations or implying criticism of reserve centers.

If the meaning of making the SDR the principal reserve asset lacks precision, certain opportunities created by the Second Amendment for enhancing the status of the SDR are clear. For example, Schedule C implies that the SDR would be the common denominator of the par value system. Even more obvious are the new powers to improve the characteristics and extend the uses of the SDR, and the increased ease with which former powers of this kind can be exercised. Powers in both of these categories have been exercised already. During the negotiation of the First Amendment many of the differences among negotiators revolved around a comparison of the SDR with gold, whereas in the negotiation of the Second Amendment the U.S. dollar became the standard of comparison. As a consequence, those who on the first occasion had been conservative in their views of the characteristics the SDR should have and the uses that should be possible became liberal, while the United States went through an opposite change of attitude. Under the First Amendment, the SDR could be offered by the United States in official conversions of balances of U.S. dollars, but by the time of the Second Amendment official conversion had been terminated and was not going to be restored by the Second Amendment.

No changes were made by the Second Amendment in the provisions relating to the allocation of SDRs. The volume of SDRs in existence and the proportion of total reserves they represent have a bearing on whether the SDR can achieve the role of the principal reserve asset. This factor was taken into account in the decision to allocate SDR 4 billion at the beginning of each of the years 1979 to 1981, the effect of which would be to increase total SDRs to over SDR 21 billion. The Under Secretary for Monetary Affairs of the U.S. Treasury discussed the future of the SDR in a speech in London on January 12, 1979:

Let me make clear that the United States has no interest in artificially perpetuating a particular international role for the dollar. The dollar’s present role is itself the product of an evolutionary process. We would expect the dollar’s role to continue to evolve with economic and financial developments in the world economy, and a relative reduction in that role in the future could be a natural consequence.

At this juncture, it is difficult to predict just what evolutionary changes may take place in the years ahead, though we can foresee certain possibilities. Certainly we would expect the SDR to take on a growing role in the system. The world has recently taken important steps to increase the role of this internationally created asset, by widening the scope of operations in which it can be used, by strengthening its financial characteristics, and by the decision to resume allocations of SDR after a period of seven years in which no allocations were made. We in the United States have great hope for the progress of the SDR. As experience with the asset accumulates, as allocations continue over a period of time, and as the usability of the instrument increases, we believe it will fulfill the promise which its creators foresaw and play an increasingly more valuable role.49

Recent Developments

The freedom of all members to choose their exchange arrangements and the imposition on all members of the same obligations under Article IV in the application of the arrangements of their choice have not eliminated all criticism that the international monetary system is unsymmetrical in its operation. The United States continues to have a central position in the system because of such factors as the strength and size of its economy, the volume of U.S. dollars in the reserves of other members, the continuing function of the dollar as an intervention currency in the managed floating that is a widespread characteristic of the exchange rate practice of members, and the volume of dollars in the international capital markets. The monetary authorities of other countries continue to intervene with U.S. dollars and to accumulate them by intervention.

The United States has averred that it is committed to orderly underlying conditions and an exchange rate for the dollar compatible with those conditions, but there is no particular exchange rate that it strives for, although it will act to counter disorderly market conditions or erratic fluctuation in exchange rates. The United States has based its policy on the Rambouillet Declaration, issued on November 17, 1975 by the Heads of State and Government of France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States,50 and on Article IV, the drafting of which was heavily influenced by the declaration. The delicate balance among the elements of stability, underlying conditions, and market conditions in the relevant sentences of the Rambouillet Declaration is worthy of note:

With regard to monetary problems, we affirm our intention to work for greater stability. This involves efforts to restore greater stability in underlying economic and financial conditions in the world economy.

At the same time, our monetary authorities will act to counter disorderly market conditions or erratic fluctuations in exchange rates.51

In connection with the language of such pronouncements on exchange rate policy as the Rambouillet Declaration, it must be noted that the concepts of underlying conditions, disorderly market conditions, and erratic fluctuations are not self-executing and no legal definitions of them have been adopted. But the risk that the monetary authorities of members may take different views of them is perhaps reduced by the contacts some members maintain among themselves.

Volatile fluctuations in the exchange rate of the U.S. dollar and its depreciation against other major currencies in 1978 produced criticisms that the policies of the United States were not conducive to orderly underlying conditions, and that the United States was not acting to counter disorder in the exchange markets or erratic fluctuations. Allegations of “benign neglect” were heard again. The basic attitude of the United States has been that exchange rates should change to conform with domestic economic conditions. Although other members would not contest this principle, some of them emphasize the usefulness of a stable rate as a basis for their economic policies. They have been more inclined, therefore, to manage the rate in order to avoid instability. These differences in approach are related to differences in emphasis on freedom to determine domestic economic policies and the need for balance of payments discipline. The differences in approach are also the result of dissimilar economies and political structures. The Under Secretary of the U.S. Treasury said, however, in his speech of January 12, 1979:

We need, in effect, a new attitude—a recognition that if nations want the benefits of an interdependent world with freedom of trade and payments, they must be prepared to give up some of the freedom they have enjoyed to manage their domestic economies without full consideration of the international environment. As part of an interdependent world economy, each country must accept greater responsibilities to exercise its economic management to coordinate better its policies and performance with those of other countries. Whatever the institutional arrangements, unless nations are prepared to accept these responsibilities of interdependence, they cannot expect to continue to receive its full benefits.52

Three important developments in international monetary arrangements have occurred in the last two years (1978–80). First, the United States has embarked on a more intensive policy of intervention, notwithstanding the view once expressed that the Rambouillet Declaration implied a minor role for intervention. On January 4, 1978, the United States declared that the Treasury’s Exchange Stabilization Fund would be utilized actively together with the swap network in joint intervention with foreign central banks in order to check speculation and re-establish order in the foreign exchange markets.53 A parallel statement was issued by the Bundesbank.54 On March 13, 1978 United States and German authorities declared that exchange markets recently had been marked on occasion by disorder, including excessively rapid movements in exchange rates that went beyond what was justified by underlying economic conditions.55 Both sides affirmed that continuing forceful action would be taken to counter disorderly market conditions and close cooperation would be maintained for this purpose. The statement also referred to the availability and use of certain resources.

These announcements were a prologue to the more dramatic announcement by the United States on November 1, 1978 of various policy measures to strengthen the dollar, and to mobilize for use by the United States international resources amounting to $30 billion.56 This action was taken because recent movements in the exchange rate of the dollar had exceeded any decline related to fundamental factors. The United States declared that, in cooperation with the Federal Republic of Germany, Japan, and Switzerland, it would “intervene in a forceful and coordinated manner in the amounts required to correct the situation.” 57 The mobilized resources, which would be utilized to finance that portion of the intervention undertaken by the United States, included the U.S. reserve tranche in the Fund, U.S. holdings of SDRs, currencies drawn under increased swap agreements of the Federal Reserve with the Bundesbank, Bank of Japan, and Swiss National Bank, and foreign currencies obtained by the issuance of securities denominated in those currencies.

The Secretary of the U.S. Treasury made a statement before the Subcommittee on International Economics of the Joint Economic Committee of Congress on December 14, 1978, in which he described the objective of this new intervention policy as follows:

The shift in intervention practices announced on November 1 was aimed at correcting a particular situation. Our objective is to restore order and a climate in the exchange markets in which rates can respond to the economic fundamentals, in this case to the improved outlook for the fundamentals that underpin the dollar’s value. We are not attempting to peg exchange rates or establish targets or push the dollar beyond levels which reflect the fundamental economic and financial realities.58

The Under Secretary subsequently expressed the thought that “large scale intervention can be useful and effective under circumstances of serious disorder, when the basic requirements for greater stability have been met.” 59

Although U.S. exchange rate policy was explained in these and other statements in the same terms as in the past, the announcement of November 1, 1978 seemed to mean that the policy was being pursued with greater vigor and greater resources, and by means of new as well as established techniques. A further and more striking implication of various statements by U.S. monetary authorities was that although they had no view of the right rate of exchange for the dollar, or range of rates, they might have a view of the wrong rate. That rate was one that did not conform to “economic fundamentals,” and policies would be directed toward bringing about conformity. The Federal Reserve Board’s announcement of October 7, 1979 on curbing inflation referred to the restoration of “a stable base for financial, foreign exchange and commodity pricing.”

Second, in the Bremen communiqué of July 7, 1978, the European Council declared its support for the creation of a European Monetary System (EMS) that would involve closer monetary cooperation and lead to a “zone of monetary stability” in Europe.60 Closer monetary cooperation would be successful only if participants, whether in surplus or in deficit, pursued policies conducive to greater stability at home and abroad. The plan was elaborated, primarily for an initial period of two years, in a resolution of the Council of December 5, 1978, and became effective on March 13, 1979.61 An essential element of the EMS is a grid of stable but adjustable exchange relationships among the currencies of participating members based on central rates expressed in terms of a European Currency Unit (ECU), with exchange transactions taking place within defined margins around these relationships. Intervention is compulsory when the intervention points as defined by these margins are reached. The resolution states that “[i]n principle, interventions will be made in participating currencies.” 62 The purpose of the opening phrase of this sentence is to suggest that intervention may involve the U.S. dollar, but the main emphasis is on intervention in the currencies of all participants. The communiqué declares that the durability of the EMS requires coordination of exchange rate policies in relation to the currencies of nonparticipants and, as far as possible, concerted action with the monetary authorities of those countries. Another element in the EMS is a “divergence indicator,” which measures the divergence of the value of a currency from its central ECU rate. When the divergence goes beyond a certain point, a presumption arises that the issuer of the currency should adopt measures of adjustment. The “divergence indicator” is reminiscent of the idea of objective indicators recommended by the United States in the Committee of Twenty. It is a contribution toward symmetry among participants in the EMS because the indicator may point to a surplus or a deficit country.

Third, there has been a revival of interest in a “Substitution Account,” although not for the purposes for which earlier plans were conceived. In December 1978, the Chairman of the Subcommittee on International Economics of the Joint Economic Committee of the U.S. Congress raised the question whether an account of this kind should be established to bring about a gradual reduction of the reserve function of the U.S. dollar.63 He regretted that the ideas on this subject in the 1972 report of the Executive Board on reform of the international monetary system and in the Outline had been abandoned. The Secretary of the U.S. Treasury responded as follows:

Let me make two points. First, any such fundamental change in the international monetary system would have far-reaching effects on other parts of the system and could not be considered in isolation. … I stress this point not because we are unwilling to consider change but because the full implications of such change need to be recognized and assessed.

Second, the U.S. is going to be in difficulty if it continues to run an inflationary economy, regardless of the reserve role of the dollar, and no reform of the system can obviate the need for us to pursue policies of restraint to counter inflation, or to maintain a reasonably strong external position.

As international economic and financial relationships evolve, the role of the dollar can be expected to evolve to reflect changes in underlying economic realities. There is widespread agreement on progressive development of the SDR’s role in the system, and other currencies may also take on a larger role. But such changes will come about gradually over an extended period of time and they must come about in an orderly manner.

As a practical matter, the dollar will continue to play an important role in international monetary relationships for the foreseeable future if the world is to continue to achieve growth and progress. Accordingly, it is our duty to manage the dollar in a manner which befits its central role in the system.64

The Under Secretary commented as follows on possible developments in connection with the role of the U.S. dollar in the system:

Another possibility is that certain national currencies will play an increasing role. Indeed an expansion of the reserve roles of the Deutsche mark and Japanese yen has occurred over the past decade in both absolute and relative terms. I would note that the authorities of other countries have generally tended to discourage use of their currencies as reserves, largely because of concern about the implications for domestic money supply and a fear that domestic financial management will be made more difficult. Whether such attitudes persist will presumably have an important bearing on future developments, as will questions of size and accessibility of non-dollar capital markets.65

By August 27, 1979 the Under Secretary no longer approved of the prospect of a greater range of reserve currencies, apart from the intervention arrangements of the EMS. In a speech delivered in Vienna he commented on the dangers of a system in which there could be substantial shifts of holdings among a number of reserve currencies.66 He stated that the evolution of the international monetary system should progress in the direction of making the SDR the principal reserve asset. Progress of this kind might be made by transferring official holdings of U.S. dollars to a Substitution Account administered by the Fund in return for claims denominated in SDRs. He elaborated the conditions on which the United States might support such a plan. One of the conditions was an equitable division of any costs arising from the operations of a Substitution Account. This refusal to accept the full burden of the costs meant that the United States was unwilling to assume a unilateral undertaking that suggests an obligation of official convertibility through the medium of a Substitution Account. The Interim Committee of the Fund, in its communiqué of October 1, 1979,67 concluded that a Substitution Account, if properly designed, could enhance the status of the SDR, and mentioned certain features that should be incorporated in a plan. These features echoed the conditions that the Under Secretary had included in his speech in Vienna.

Surplus and Deficit Countries

Original Articles

Scarce Currency Clause

For many years it has been protested that a major asymmetry in the operation of the Fund has been that while it can influence deficit members to adjust their balances of payments, it has little power to exert similar influence on surplus members. In recent years, it has also been pointed out that there is asymmetry among deficit members because some are able to finance their deficits without the need to request the use of the Fund’s resources. It has been suggested that other lenders can assist the cause of adjustment by urging countries that are seeking credit because of their balance of payments position to obtain the Fund’s endorsement of an economic program on the basis of which other lenders could agree to make their loans. The influence that the Fund can exert on deficit members that seek to use its resources is by applying its policy of conditionality, according to which a member is expected to demonstrate that it is pursuing, or will pursue, an adequate program of adjustment. Surplus members, of course, have no need to seek financing for balance of payments reasons.

As early as the White Plan of July 10, 1943 it was foreseen that the treaty creating the Fund would contain provisions to deal with a surplus member whose currency was in such demand that the Fund’s holdings of it became too depleted to meet the needs of all deficit members for that currency.68 The proposals of the White Plan were the origins of Article VII of the Articles, which became known as the scarce currency clause, but the provision went well beyond White’s proposals in empowering the Fund to deal with members in persistent surplus.

Article VII, which has remained substantially unchanged through the two Amendments of the Articles, deals with two forms of scarcity. One is the general scarcity of a member’s currency outside the Fund. If the Fund finds that such a scarcity is developing, it can inform its members of this fact and can issue a report setting forth the causes of the scarcity and containing recommendations designed to bring it to an end. It is not necessary to find that the Fund’s holdings of the currency have been depleted. Nor is it necessary to find that the scarcity is attributable to the policies of the surplus member. The scarcity can be produced by the extravagant policies of deficit members. The Fund’s recommendations are not given binding force, and no consequences are prescribed if the recommendations are not followed. The moral force of the Fund and the impact of its report were relied upon as sufficient means of influence.

The second kind of scarcity under Article VII is an actual or threatened scarcity of the Fund’s holdings of a member’s currency. The action the Fund is authorized to take in these circumstances need not be preceded by a report on general scarcity, although general scarcity outside the Fund might lead to demands on the Fund for the scarce currency that seriously threatened the Fund’s ability to supply it. It is also possible, however, that a general scarcity of a currency would not produce a scarcity in the Fund, at least for some time, because of the Fund’s original power to replenish its holdings of the currency by requiring the member to sell its currency to the Fund for gold. The Fund can now compel replenishment for SDRs instead of gold. The Fund may also replenish its holdings by borrowing the currency by agreement with the lender and with the concurrence of the issuer if it is not itself the lender.

If the Fund concludes that there is a serious threat of the scarcity of a currency within the Fund, it has to make a formal declaration of scarcity and apportion its existing and accruing supply of the currency with due regard to the relative needs of members, the general international economic situation, and other pertinent considerations. The Fund is required also to issue a report concerning its action. A formal declaration operates as an authorization to any member, after consultation with the Fund, to discriminate against the issuer of the scarce currency by limiting exchange transactions in the currency, but members are not compelled to discriminate. The limitations have to be relaxed and removed as soon as conditions permit, and the authorization to impose limitations expires whenever the Fund declares that the currency is no longer scarce.

The authorization of discrimination was not included in the White Plan. The scarce currency clause was adopted, largely in response to fears of the United Kingdom that after World War II the U.S. dollar would be in persistent short supply because of illiberal policies of the United States, such as the discouragement of imports, the refusal to lend, or the limitation of capital exports. The willingness of the United States to accept discrimination as an element of the scarce currency clause was regarded by Keynes and others as an act of extraordinary generosity, because of the expectation that, if the clause were ever invoked, it would almost certainly be against the United States. If the clause could be invoked against some other member, it would be because it was a great trading and investing country and because its surplus was of sufficient magnitude to put major strains on the resources and policies of other members. The serious view that the United States took of a declaration of scarcity as an indictment is illustrated by the provision in the Bretton Woods Agreements Act of the United States that denies authority to the Governor or Executive Director for the United States to vote for a declaration of the scarcity of the U.S. dollar without the prior approval of the U.S. National Advisory Council on International Monetary and Financial Problems.

The Fund discussed the possibility of declaring the U.S dollar scarce in 1947, but decided that the action would be inappropriate because the difference between the demand for and supply of dollars was not attributable to deficiencies in U.S. policies. At that time other countries were producing insufficient goods for export. It must be said, however, that there was no need to deliver an adverse judgment against the United States in order to authorize other members to discriminate against it, because most of them were able to do that, without a declaration of scarcity, under the transitional arrangements of the Articles.

The Fund has not considered the application of the scarce currency clause to the United States or to any other member at any time since 1947. In recent years, the Fund has been able to replenish its holdings of the currencies of surplus members in considerable amounts, mostly by borrowing. There are other explanations of the unwillingness to invoke the clause. One reason has been the Fund’s strong distaste for taking measures against members that appear punitive or censorious, whether the members are large or small.69 Members have concurred in this policy of restraint because they have not wanted to be called on to support unfriendly action against one of their number, because of fear of possible retaliation if it is powerful, and whether it is powerful or not, because precedents might be established for similar action against themselves at a later date. Finally, if the Fund had encouraged discrimination, even as a deterrent to persistent surpluses that had widespread disequilibrating effects, it might have been less successful in discouraging discrimination by members when there was no such justification.

In later years, when the United States was in persistent deficit, there was a certain amount of criticism in that country because the scarce currency clause had not been relied on in the face of persistent surpluses by the Federal Republic of Germany and Japan. The view was widespread that the failure of the clause was to be regretted, and it will be seen that the United States proposed to revive the clause and even to extend it.

Changes in Par Values

Problems of symmetry arose in connection with changes in the par values of the currencies of surplus and deficit members. The original Articles described the conditions in which changes could be made after consultation with the Fund and normally with its concurrence. No member was entitled to propose a change in the par value of its currency except to correct a “fundamental disequilibrium.” This language applied both to deficit members that needed to devalue and surplus members that needed to revalue their currencies. Widespread equilibrium in balances of payments could be achieved without measures destructive of national or international prosperity only if prompt and adequate changes were made in par values. Some language in the Articles seemed to focus more particularly on the discouragement of persistent surpluses. One of the purposes of the Fund was to avoid “competitive exchange depreciation” 70 or “competitive exchange alterations,” 71 because members might resort to these practices in order to achieve and remain in surplus.

Two kinds of problems arose: delay by both surplus and deficit members in proposing changes in par values, and uncertainty about whether surplus or deficit members had the responsibility for changing the par values of their currencies when there were fundamental disequilibria in balances of payments. No provisions were to be found in the Articles that dealt directly and specifically with these problems. The Articles were formulated in terms that applied without distinction to all members. A provision cited by members when they thought there was a risk that their freedom of action or inaction was being endangered was that only the issuer, and not the Fund or another member, was entitled to propose a change in the par value of the issuer’s currency.72 The defensive claims based on this provision did not prevent the Managing Director and staff from advising a member informally that it should propose a change in the par value of its currency. The influence that could be exercised in this way was greater if the member to which the advice was offered was in deficit, because such a member needed, or might need, to make a request to use the Fund’s resources. It is no accident that revaluations were rare in the history of the par value system, and that they did not occur until the 1960s, although devaluations, even if often delayed, were more frequent throughout the life of the par value system. Surpluses were more comfortable than deficits, and were often the objective that members pursued in an expanding world economy. The avoidance or postponement of revaluation in many instances gave rise in time to the concept of competitive undervaluation in the Fund’s practice. It is worth recalling a perceptive article by a British politician in July 1971, in which he wrote that “[i]t is only the persistence of an unwholesome compound of 16th-century morality and 18th-century economics which continues to pin responsibility for the remedying of deficits exclusively on the country in deficit.” 73

In periods of widespread disequilibrium in balances of payments, there was disagreement among members about which of them should undertake changes in par values and about the size of the changes that should be made. A Report on The Balance of Payments Adjustment Process by Working Party No. 3 of the Economic Policy Committee of the Organization for Economic Cooperation and Development (OECD) in August 1966 contained the following observation:

It may … often be difficult to identify the causes of a particular imbalance with any certainty, and to assess the country or group of countries which should be regarded as out of line. In practice, the broad allocation of responsibilities for adjustment, and choice of strategies, can only be arrived at on the basis of timely consultation and a spirit of cooperation between the governments concerned.74

Institutional arrangements for the discussion of exchange rates and the orderly exposition of differences of opinion about them proved to be inadequate. The Fund was the most obvious place in which discussions might have taken place, but this procedure was considered impractical because of the dangers of publicity. The provisions of the Articles, moreover, seemed to dwell on relations between the Fund and members individually. The Managing Director, however, would sometimes approach a number of members individually to induce them not to change the par values of their currencies, or not to change them by more than the amounts he considered proper, in order to prevent neutralizing the effect of a change of par value that a member was undertaking.

On two occasions multilateral negotiations on par values took place outside the Fund, although the Fund was represented on both occasions and made an active contribution to the second of them. The first occasion was the emergency meeting of the Group of Ten on November 20–22, 1968 in Bonn, at which the possible revaluation of the deutsche mark and possible devaluation of the French franc were discussed. The meeting produced no agreement. The second occasion was the Smithsonian meeting of the Group of Ten that led to the agreement of December 18, 1971 on certain changes in the relationships among the currencies of participants.75

The absence of clear authority by which to resolve the two problems of changes in par values led to criticism that the par value system was asymmetrical in operation and favored devaluations rather than revaluations. The further criticism was made that over time a predominance of changes in one direction tended to increase the number of changes that had to be made, because members originally in a balanced payments position would be driven to make changes in the same direction that would not have been necessary had movements in par values in both directions been reasonably balanced.

Attempted Reform

A major topic during the discussions of reform of the international monetary system was speedier and more effective adjustment by both surplus and deficit members of their balance of payments disequilibria, including adjustment by means of changes in the exchange rates of their currencies. The equilibrium that was the objective of a better adjustment process was defined by the United States as “a situation in which external payments are in reasonable balance at normal levels of employment and economic activity, and without inappropriate utilization of controls.” 76 The United States placed special stress on the relative tolerance of surpluses under the par value system and the absence of adequate methods to ensure compatibility among the balance of payments objectives of members. The United States considered that it had been in the least flexible position in the system and that the persistent deficit in its balance of payments had been the counterpart of the persistent preference of other members for surpluses. In its view, therefore, there was a basic bias in the system. For this reason, the United States proposed objective indicators involving reserves that would show which members, whether in surplus or in deficit, needed to take action to adjust.

A process of timely, effective, and symmetrical adjustment, including a better functioning of the exchange rate mechanism, was one of the main purposes of the reform described by the Outline.77 Some use of reserve indicators established in agreement with the Fund was foreseen, although no automatic consequences were attached to their use. Consultation and surveillance on adjustment would be conducted not only by the Executive Board but also by a new organ of the Fund, the Council, that would be composed of persons who were political functionaries in their own countries and who might therefore strengthen the Fund. A special feature of the procedures would be the examination of the consistency among members of their reserve and current account aims and policies. If the assessments made in the adjustment procedures did not lead to appropriate action to achieve adjustment, the Fund was to have at its disposition graduated “pressures” that it could apply to dilatory members. The character of these pressures depended on whether they were to be applied to surplus or to deficit members. According to Annex 2 of the Outline, the most serious pressure that could be applied to surplus members would be an authorization for other members to adopt discriminatory trade and other current account restrictions. This pressure would go beyond the scarce currency clause of the Articles because it encompassed more than exchange measures. The Committee of Twenty and its Deputies supported the idea of pressures without investigating why the Fund had made such little use in the past of the remedies that had been available to it under the Articles.78

Second Amendment

The Second Amendment includes no new forms of pressure and only formal changes have been made in the scarce currency clause. With respect to the Council, the Articles provide only that it can be called into existence by the Board of Governors by an 85 percent majority of the total voting power. This step has not yet been taken for reasons that have been examined elsewhere.79 The Board of Governors, however, has established its Interim Committee on the International Monetary System. It is composed of functionaries of the same character as those that would compose the Council and has terms of reference similar to those of the Council. The major difference between the Council and the Committee flows from the principle that only organs can exercise powers of the Fund and take decisions under them. The Committee, unlike the Council, is not an organ and can do no more than give advice or make recommendations to the organs of the Fund, although its advice or recommendations carry weight.

The amended Articles resemble the pre-amendment Articles in making no explicit distinctions between surplus and deficit members. No change has been made in the reference to competitive exchange depreciation in Article I, but the reference to competitive exchange alterations has disappeared. A new formulation, “an unfair competitive advantage over other members,” appears in the obligation of each member 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.” 80 This and other new expressions are as applicable to surplus as to deficit members. The Fund’s decision setting forth the principles for the guidance of member’s exchange rate policies and the procedures for surveillance over the observance of them makes it clear that principles and procedures apply to both classes of members.81

An implicit shift of emphasis may be detected in the “firm surveillance” that the Fund must exercise over the exchange rate policies of members. The change of emphasis is from the Fund’s function of concurrence or objection on the occasion of changes in par values to surveillance over the exchange rate policies of all members at all times. An inspiration for this change undoubtedly was the desire to have a more uniform influence on surplus as well as on deficit members, which was and continues to be of active concern to the United States and in principle to other members also.

Another shift in emphasis is in the direction of the Fund’s surveillance over the international monetary system and therefore toward the convergence of balance of payments policies among members, including the achievement of better adjustment by both surplus and deficit members. The Managing Director of the Fund has declared that symmetry in the adjustment process is an important objective of surveillance.82 The Fund’s periodic and ad hoc consultations with individual members under Article IV, which are completed with conclusions of the Executive Board, are one procedure that is designed to influence the policies of individual members. The importance and effect of a judgment of peers in the field of international organization have been discussed elsewhere.83 Recent evidence of the weight that these judgments can carry can be found in the 1978 speech of the Secretary of the U.S. Treasury that has been mentioned earlier.84 Another procedure for influencing the policies of members collectively is the Executive Board’s periodic debates on the world economic outlook. A third procedure, held at ministerial level in the Interim Committee, is the debate it conducts, whenever it meets, on the world economic situation and the contribution to its betterment that can be made by members in different situations. Adjustment that will eliminate large deficits and surpluses has been a particular concern of the Committee. The views of the Committee are expressed in its communiqués, which therefore may affect public opinion as well as the actions of monetary authorities.

A Concluding Comment

In a world of diverse economic and political power, as well as diverse economies, governments place a high value on uniform rights and obligations. They are reluctant to join a legal order and obey its prescriptions if those prescriptions appear to discriminate in favor of or against a particular class of countries. The drafters of multilateral treaties such as the Articles of Agreement of the Fund tend, therefore, to draft provisions that apply to members in general. The world, however, is composed of different classes of countries that are formed by circumstances and not by design. In this sense, the aphorism that Mr. Giscard d’Estaing applied to the breakdown of the par value system has a broader relevance: “We are not living in a world of constitutions now, but in a world of events, … so what will matter is what happens, not what is written.” 85 The Second Amendment represents a return to a world of constitutions, but it is also an accommodation to events and to future events.

Because, in the world of events, circumstances create different classes of countries, members of an organization like the Fund place an equally high value on the symmetrical effects of rights and obligations on the different classes. The classes of reserve centers and non-reserve centers, on the one hand, and of surplus and deficit countries, on the other, are among the classes formed by circumstances and not by prescriptions of the Articles in any of their three versions. Governments have been particularly anxious about symmetry in the treatment of these classes, and the asymmetries that governments detect have been an irritation to them. Much of the concern has been directed toward the position of the United States because it is the main reserve center and because it has had repeated deficits in its balance of payments. The problems of symmetry have not been resolved, and may never be wholly resolved, but the effort to achieve a system that members will consider satisfactory continues.

The Second Amendment may have created a paradox. Is freedom for all members to choose their exchange arrangements compatible with the idea of interdependence that is an idée reçue of many multilateral international organizations? The par value system was based on the idea that exchange rates must be coordinated. The freedom granted to members by the Second Amendment implies the necessity of a strong central authority to avoid abuse. The success of the Fund in achieving the symmetrical treatment of members will depend on the skill and determination with which it performs the functions that are described by the Second Amendment, not simply as surveillance, but as “firm surveillance.”

The Secretary of the U.S. Treasury as the Governor of the Fund for the United States called for a strengthening of surveillance in the following remarks in his speech at the 1979 meeting of the Board of Governors:

… Under the amended articles, Fund surveillance—surveillance over members’ general economic policies as well as exchange rate policies—is the centerpiece of international monetary cooperation. Without effective surveillance, there is no system. The Fund has moved cautiously and prudently in implementing its surveillance procedures. Bolder action is now required.

One possibility would be for the Fund to assess the performance of individual countries against an agreed global strategy for growth, adjustment, and price stability.

Another possibility would be to provide that any nation with an exceptionally large payments imbalance—deficit or surplus—must submit for IMF review an analysis showing how it proposes to deal with that imbalance. Now, only those countries borrowing from the Fund have their adjustment programs subjected to such IMF scrutiny. Greater symmetry is needed.

We should also consider inviting the Managing Director to take the initiative more often in consulting members directly when he has concerns about the appropriateness of policy. Any such approaches must, of course, be fully in accordance with the fundamental principle of uniform treatment for all members. For its part, the United States welcomes and values the Fund’s views and advice, and would see merit in a more active role on the part of the Managing Director in initiating consultations with members.86

Greater symmetry might by achieved if it were possible for the Fund to formulate comprehensive principles or guidelines for adjustment or for the management of exchange rate policies. The effectiveness of these principles or guidelines might be enhanced if the observance or nonobservance of them were self-evident. The Fund has formulated three principles for the guidance of members’ exchange rate policies. Economists are skeptical about the feasibility or desirability of formulating further principles or guidelines, whether or not they were of such a character that the observance or nonobservance of them would be obvious. Moreover, it has been seen that in the discussions of the Outline of Reform and in the negotiation of the EMS countries were unwilling to attribute automatic consequences to the application of objective indicators. The same reluctance was apparent in the drafting of that part of the Fund’s decision on surveillance that deals with the developments that the Fund might consider to be indications of the need for special discussion with a member of its observance of the principles for the guidance of exchange rate policies. The unlikelihood of agreement on further principles or guidelines or on objective indicators means that the pursuit of symmetry must indeed depend on the boldness of firm surveillance by the Fund.

Supplemental Note to Chapter 2

1. The issue of symmetry has been raised in relation to developed and developing members. More often, however, the treatment of developing members has been considered an issue of uniformity because, before the Second Amendment, the Articles did not make an express or implied distinction between these two classes of members and because recognition of developing members as a category that was relevant for the purposes of the Fund was resisted at the Bretton Woods Conference. The distinctions between reserve centers and other members and between surplus and deficit members are implicit in the Articles in both the financial and regulatory aspects of the Fund. Chapter 2 does not discuss the distinction between developed and developing members because the subject was discussed in Chapter 13 of the first volume of Selected Essays (“Uniformity as a Legal Principle of the Fund”).

Developing members had become the only members using the Fund’s resources by March 1984 and, therefore, the only members to which the Fund’s conditionality applied, although the Fund’s resources are available to all members. The economic difficulties that have made it necessary for developing members to satisfy the requirements of conditionality have led them to complain that the Fund, or the international monetary system, does not work symmetrically, and to propose an international monetary conference to reform the system and eliminate the asymmetries (see, for example, IMF Survey, Vol. 12 (May 9, 1983), pp. 134–35; Vol. 12 (October 10, 1983), pp. 298–99).

The General Arrangements to Borrow was criticized from the earliest days of that decision as failing to observe the principle of uniformity rather than the principle of symmetry. A major reason for invoking the one principle and not the other was that the GAB was a decision that related to the use of the Fund’s resources, and the Articles gave no evidence of differential treatment in the availability of the Fund’s resources. Another reason was that although the GAB provided for loans to the Fund only to finance its transactions with ten developed members, the other members of the Fund included the rest of the developed members as well as all developing members. It was possible to argue that the exclusiveness of the GAB did not prevent the Fund from giving uniform treatment to all members in the use of the Fund’s resources. It was even argued that the supplementary resources the Fund could borrow under the GAB made it possible for the Fund to conserve subscribed resources and give uniform treatment to all members whether they were participants or nonparticipants in the GAB.

Against the background of the crisis of external debt, the GAB was revised, with effect on December 26, 1983, and now enables the Fund to borrow for financing the transactions of nonparticipants as well as participants. The revision does not refer to developing members as such. The criteria for borrowing for financing the transactions of non-participants are more severe than the criteria applicable to participants, which have not been revised. For a discussion of these aspects of the GAB, see Chapter 6 of this volume.

The three distinctions between classes of members that have been discussed so far are not the only distinctions that have raised questions of symmetry. The division of members into those that allow their currencies to float and those that peg their currencies is another distinction that has raised the question of symmetry.

2. The policy of intervention followed by the United States in 1978 has not been the policy of the subsequent U.S. Administration, which has kept intervention to a minimum. It is probably not true, as suggested in Chapter 2, that contacts among members have reduced disagreement on what constitutes disorderly conditions in the exchange markets. Nevertheless, there appears to be less controversy among members about intervention in general since the publication in March 1983 of the Report of the Working Group on Exchange Market Intervention established as a result of the communiqué of the Versailles Summit meeting of June 4–6, 1982. (See also the Statement on the Intervention Study issued on April 29, 1983 by the Summit Finance Ministers, Central Bank Governors, and representatives of the European Community.)

3. The most recent proposal for a Substitution Account has failed and there is no present official suggestion that the proposal should be revived, although the communiqué of the Interim Committee dated September 29, 1980 declared that “[t]he Committee reiterated its intention to continue the study of the subject of the Substitution Account.” Substitution is discussed in Chapter 3 of this volume.

4. The difficulty of reaching agreement on a provision giving the Fund authority over the policies of members on reserve assets led to proposals that the Articles should contain no provision of any kind on this topic. A principal difficulty was the resistance to mention of reserve currencies as well as gold. Article VIII, Section 7 was rescued as a survivor of the conflict, in which some of the numerous other proposed versions were those set forth 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 management of international liquidity,] the gradual reduction of the role of [gold] [gold and reserve currencies] in the international monetary system, and making the special drawing right the principal reserve asset in the international monetary system.

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

Note.—This essay was published originally in George Washington University Journal of International Law and Politics, Vol. 12 (Winter 1980), pp. 423–77.

Articles of Agreement, original, first, and second.

Gold, Selected Essays, “Uniformity as a Legal Principle of the International Monetary Fund,” p. 469.

For the provisions regarding SDRs, see Articles XXI–XXXI and Schedules F–I, first; Articles XV–XXV and Schedules F–I, second.

By January 1, 1979, the number of nonparticipants was reduced to only one of the Fund’s 138 members at that time.

Documents of the Committee of Twenty, pp. 112–13.

History, 1945–65, Vol. III, p. 19.

Ibid., p. 83.

Ibid., par. 17, p. 28.

Ibid., Sec. I(d), p. 20.

Ibid., Sec. V(2)(c)-(d), (3)-(4), pp. 89–90.

Article IV, Section 3, original; Article IV, Section 3, first. See also Gold, Selected Essays, p. 520.

Article IV, Sections 2 and 4(b), original and first.

France gave the undertaking with respect to the currency of one of its dependencies.

See text accompanying footnotes 22 and 23, below.

Article IV, Section 4(a), original and first.

Special Message to the Congress on Gold and the Balance of Payments Deficit, Published Papers (1961), pp. 57, 59–60, and 61.

Decision No. 1289-(62/1), Selected Decisions, 8th (1978), p. 98; History, 1945–65, Vol. III, p. 246. The ten adherents to the General Arrangements to Borrow are the United States, the Deutsche Bundesbank, the United Kingdom, France, Italy, Japan, Canada, the Netherlands, Belgium, and the Sveriges Riksbank.

Summary Proceedings, 1967, p. 271.

Article XXIV, Section 1(b), first; Article XVIII, Section 1(b), second.

Article XXV, Section 2(b)(i), first.

Article XIX, Section 2(b).

Weekly Compilation of Presidential Documents, No. 7 (1971), pp. 1168 and 1170–71.

Ibid., p. 1171.

Summary Proceedings, 1971, p. 331.

International Monetary Fund, Communiqué of the Group of Ten Ministerial Meeting, December 18, 1971 (Smithsonian Agreement), International Financial News Survey, Vol. 23 (December 22–30, 1971), p. 417.

Ibid., par. 7, p. 418.

Decision No. 3463-(71/126), Selected Decisions, 8th (1976), p. 17; Annual Report, 1972, p. 85; and History, 1966–71, Vol. II, p. 195. See also Gold, Selected Essays, “Legal Structure of Par Value System Before Second Amendment,’ p. 520.

Press Communiqué of EEC Council of Finance Ministers, Brussels, March 12, 1973, International Monetary Fund, IMF Survey, Vol. 2 (March 26, 1973), p. 88.

Press Communiqué of Ministerial Meeting of Group of Ten and the European Economic Community, Paris, March 16, 1973, International Monetary Fund, IMF Survey, Vol. 2 (March 26, 1973), par. 4, p. 89.

Documents of Committee of Twenty, p. 7.

Statement by the Governor of the Fund and Bank for France, Valéry Giscard d’Estaing, Summary Proceedings, 1973, pp. 74–75.

U.S. Council of Economic Advisors, “The U.S Proposals for Using Reserves as an Indicator of the Need for Balance-of-Payments Adjustment,” par. 29, Economic Report of the President: Transmitted to the Congress together with the Annual Report of the Council of Economic Advisors, January 1973 (Washington, 1973), pp. 160 and 171.

Documents of Committee of Twenty, p. 7.

Otmar Emminger, On the Way to a New International Monetary Order (Washington: American Enterprise Institute for Public Policy Research, 1976), p. 2.

Outline of Reform, par. 2(c)-(d), p. 8.

Ibid., par. 18, p. 13.

Ibid., Annex 5, pp. 37–40.

Documents of Committee of Twenty, p. 114.

Outline of Reform, Annex 3, pp. 30–33.

Compare Second Amendment with Outline of Reform.

Decision No. 4232-(74/67)S, Selected Decisions, 8th (1978), p. 21; Annual Report, 1974, p. 112.

Decision No. 5392-(77/63), Selected Decisions, 8th Supp. (1978), p. 5; Annual Report, 1977, p. 107; and Joseph Gold, Floating Currencies, SDRs, and Gold: Further Legal Developments, IMF Pamphlet Series, No. 22 (Washington, 1977), p. 78.

Weekly Compilation of Presidential Documents, No. 7 (1971), pp. 1168 and 1170–71; see text accompanying footnotes 22 and 23 above.

Report on Second Amendment, p. 7.

Article IV, Section 4.

The use of gold as a common denominator is similarly proscribed. The common denominator may be the SDR or such other denominator as the Fund selects. Schedule C, paragraph 1.

Amendment of the Articles of Agreement and Increase in Quotas of the International Monetary Fund, House Doc. No. 94–447, 94th Cong., 2d Sess. (Washington: Government Printing Office, 1976), at p. 23.

Article VIII, Section 7.

Remarks of Anthony M. Solomon, January 12, 1979, “The Evolving International Monetary System,” U.S. Department of the Treasury News, No. B-1342 (January 12, 1979), pp. 6–7.

Joint Declaration, issued at the close of the six-power economic summit meeting in the Chateau de Rambouillet, November 17, 1975, IMF Survey, Vol. 4 (Washington, November 24, 1975), p. 350.

Ibid., par. 11, p. 350.

Anthony M. Solomon, op. cit. (footnote 49), p. 9.

U.S. Department of the Treasury News, No. B-624 (January 4, 1978), p. 1.

IMF Survey, Vol. 7 (January 9, 1978), p. 1.

U.S. Department of the Treasury News, No. B-773 (March 13, 1978), pp. 86–87.

Joint Statement by U.S. Secretary of the Treasury, W. Michael Blumenthal, and Federal Reserve Board Chairman, G. William Miller, Joint Press Release, November 1, 1978, Federal Reserve Bulletin, Vol. 64 (November 1978), p. 917.


The Dollar Rescue Operations and Their Domestic Implications: Hearings Before the Subcommittee on International Economics of the joint Economic Committee (Blumenthal statement), 95th Cong., 2d Sess. (1978), p. 13.

Anthony M. Solomon, op. cit. (footnote 49), p. 5.

IMF Survey, Vol. 7 (July 17, 1978), p. 209.

Council Resolution, December 5, 1978, European Community News, No. 32/1978 (December 8, 1978), p. 2, and EMS Texts, p. 40.


U.S. Department of the Treasury News, No. B-1307, Blumenthal statement, see footnote 58 above (December 14, 1978), p. 7.

Ibid., pp. 7–8.

Anthony M. Solomon, op. cit. (footnote 49), p. 7.

Address by Anthony M. Solomon, Alpbach European Forum, Alpbach, Austria, August 27, 1979, U.S. Department of the Treasury News, No. M-28 (August 27, 1979), p. 4.

IMF Survey, Vol. 8 (October 15, 1979), p. 313.

History, 1945–65, Vol. III, p. 83.

See Gold, Selected Essays, p. 148.

Article I(iii), original and first.

Article IV, Section 4(a), original and first.

Article IV, Section 5(b), original and first. See also, Gold, Selected Essays, p. 520.

Lever, “The Dollar Standard,” New Statesman, Vol. 82 (1971), p. 36.

Organization for Economic Cooperation and Development, Working Party No. 3 of the Economic Policy Committee, The Balance of Payments Adjustment Process, par. 64 (1966).

Smithsonian Agreement, see footnote 25 above.

U.S. Council of Economic Advisors, par. 3, see footnote 32 above.

Documents of Committee of Twenty, p. 7.

Gold, Selected Essays, p. 182.

Ibid., p. 238.

Article IV, Section 1(iii).

Decision No. 5392-(77/63), Selected Decisions, 8th Supp. (1978), p. 5.

Address by Jacques de Larosière, Chicago, November 14, 1978, IMF Survey, Vol. 7 (November 20, 1978), pp. 357–60.

See Gold, Selected Essays, pp. 148, and 182.

The Dollar Rescue Operations and Their Domestic Implications: Hearings Before the Subcommittee on International Economics of the Joint Economic Committee (statement by W. Michael Blumenthal), 95th Cong., 2d Sess. (1978).

James B. Reston, “Giscard’s Hope for France: A New Age of Reform,” New York Times (September 1, 1974), pp. 1 and 20.

Address by G. William Miller, before the Annual Meetings of the International Monetary Fund and World Bank, October 3, 1979, International Monetary Fund, Summary Proceedings, 1979, p. 116.

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