4 Continuity and Change in the International Monetary Fund
- International Monetary Fund
- Published Date:
- December 1984
The international organization known as the International Monetary Fund came into existence on December 27, 1945 in accordance with Articles of Agreement drafted in July 1944 at the Bretton Woods Conference in New Hampshire. The organization is an extraordinary one because of the combination of its regulatory and financial functions. It is extraordinary also because its concepts and functions have undergone a number of basic changes even though its purposes as stated in Article I of its Articles have remained the same.1 The history of the Fund is one of the interplay of continuity and change. By means of practice and the two Amendments of its Articles, the Fund has demonstrated unusual flexibility in its responses to the frequent and sometimes violent changes in international monetary conditions.2
The idea of change referred to above encompasses two different developments. One development is the use of existing provisions of the Articles to do something new, including the adaptation of underlying concepts. The other development is the amendment of the Articles to bring about change. The First Amendment took effect on July 28, 1969, the Second Amendment on April 1, 1978. The idea of continuity is reflected in the maintenance of the purposes of the Fund, certain provisions of the Articles, and certain underlying concepts. Some of the changes that had emerged in the practice of the Fund were incorporated, with or without modification, in the two Amendments.
The Fund’s purposes have always been to promote consultation and collaboration on international monetary matters; to facilitate the expansion and balanced growth of international trade; to promote exchange stability, maintain orderly exchange arrangements among members, and avoid competitive exchange depreciation; to assist in establishing the convertibility of currencies; to make resources temporarily available to members to help them correct maladjustments in their balances of payments; and in accordance with all these purposes to shorten the duration and lessen the degree of disequilibrium in the balances of payments of members. The purposes as stated here are a paraphrase of Article I, which necessarily omits many of the nuances of that provision. To enable the Fund to act in accordance with these purposes, it was given, and has always had, regulatory and financial powers.
Although the purposes stated in Article I demonstrate an attachment to continuity, the First Amendment in fact added to the purposes of the Fund by giving it the power to augment the reserves unconditionally available to its members if a global need for a supplement should arise. The new purpose was not included in Article I because of the complex negotiations that had preceded the drafting of that provision at Bretton Woods and the sensitive character of the subject matter. In addition, at least one government wished to present the First Amendment as less than the dramatic advance that it represented. For this reason, the new reserve asset was given the uncommunicative name of “special drawing right” (SDR) because “drawing rights” had become the vernacular expression for the traditional rights of members to use the Fund’s resources.3 Moreover, the First Amendment declared that the allocation of SDRs to members was to be made in such manner as would promote attainment of the purposes set out in Article I. This link to the purposes reduced the need to reformulate them.
The process of continuity and change will be discussed first in relation to the structure of the Fund, and then, successively, in relation to regulatory authority, financing, and reserve assets. These last three topics correspond to the three categories of powers mentioned in the two preceding paragraphs, namely, financial and regulatory powers and the power to allocate SDRs as reserve assets. The Second Amendment has brought about changes in the SDR and in other reserve assets as well.
Board of Governors, Council, and Interim Committee
The original structure of the Fund has been maintained, but this continuity has been accompanied by changes that have been produced by the great expansion in the membership of the Fund. Forty-five countries were represented at the Bretton Woods Conference; the Articles became effective when they were accepted by 28 of these countries; 146 countries had become members of the Fund by the end of 1982. The original Articles erected a structure consisting of the Board of Governors, the Executive Board (called the Executive Directors before the Second Amendment), and the Managing Director and staff. The Managing Director is both the head of the staff and the Chairman of the Executive Board.4
The Board of Governors consists of a Governor and an Alternate appointed by each member. As a result, this plenary organ is now too large to undertake any but formal functions. It cannot be expected to perform the tasks originally foreseen for it of guiding the policies of the Fund and settling disputes among members in accordance with the purposes of the Fund but with an awareness of political implications. To fill the gap and to strengthen the Fund, the Second Amendment provides for the creation of a Council composed of Governors or persons with ministerial or comparable rank. Councillors, therefore, whether Governors or not, would have prominent positions and exercise considerable influence in their own countries. The main task of the Council would be to supervise the management and adaptation of the international monetary system.
At first, in the negotiation of the Second Amendment, it was intended that the Council should come into existence immediately when the Amendment became effective. Later, developing members were able to negotiate acceptance of the proposition that the Council should begin to operate only when a decision to call it into existence was taken with a majority of 85 percent of the total voting power of members. This majority gave developing members the assurance of a veto. The developing members prevailed because their numbers and their voting power enabled them to prevent the adoption of the Second Amendment as a whole. They disliked the idea of the Council because they feared that it might take decisions that bore more heavily on them than on developed countries.
In the absence of a Council, the Interim Committee of the Board of Governors on the International Monetary System was created with a composition and terms of reference comparable to those of the Council.5 The crucial difference between the two is that the Committee is not an organ of the Fund, cannot exercise powers of the Fund, and cannot take decisions that bind members or the Fund. The Committee can do no more than make recommendations. Although the recommendations carry great weight on issues of policy considered by the Committee, the Board of Governors or the Executive Board has the legal authority to refrain from adopting the decisions that would be necessary to give the recommendations binding force. Developing members wanted the opportunity to persuade one of the organs to request the Committee to reconsider recommendations that these members regarded as unfavorable to them. Developing members would be in an even stronger position to prevent an organ from taking a decision to give effect to a recommendation that they disliked if a special majority of the total voting power was necessary for the decision. The wish of developing members to have a broad power of veto was one of the motives for the expansion in the number of decisions for which a special majority is required by the Second Amendment.6
The creation of the Interim Committee goes some way toward a belated compromise between the views on the structure of the Fund of Harry Dexter White, the principal U.S. negotiator of the original Articles, and John Maynard Keynes, the principal British negotiator.7 White had wanted an executive organ that would be in continuous session at the headquarters of the Fund to take the numerous operating decisions that would be necessary under the many discretionary powers that he foresaw for the Fund. Keynes had wanted an executive organ composed of persons who held high office in their own countries, and who would meet only from time to time. They could not be in continuous session because of the functions they performed in their own countries, but they would ensure that there was close coordination between the policies of members and the activities of the Fund. An executive organ that would be able to achieve this objective could be certain that it would have the support of member countries. The organ would be strong because of this support, even though it would not have supranational authority to enforce its will. As a corollary of Keynes’s view, the duties of a secretariat consisting of a resident management and staff would be largely mechanical because the secretariat would not exercise important discretionary powers. White’s view prevailed. It became evident in time that the growing volume and diversity of the activities of the Fund did indeed make it essential that there should be an organ in continuous session and a secretariat with some authority.
It also became apparent that the strength of the Fund depended on its responsiveness to the collective or widespread wishes of members in the formation of its policies. The desirability of this responsiveness was not absent from White’s ideas, but he sought the assurance of it through the medium of a resident Executive Board composed of persons appointed or elected by members of the Fund.
In time, it became evident that it was desirable for members to have close contact with, and control over, the activities of the Fund by officials who had a high level of responsibility in their own countries. A body of this character would increase the usefulness of the Fund to its members. It is not really a paradox that the strength and success of the Fund should depend on the dominance exercised by members over its activities. It was realized that this dominance could be promoted by an additional body in the Fund and not a substitute for the organ whose duty it was to be in continuous session. In this way, the views of Keynes were vindicated to a large extent and found expression first in the idea of a Council and then in the creation of the Interim Committee, which is a reflection of the Council in composition and in terms of reference although not in powers. One of the ironies of the history of the Fund is that the proposal for the Council was advanced by the United States in the Committee of Twenty that considered the reform of the international monetary system in 1974–76.
The Executive Board is the organ that functions in continuous session and conducts the business of the Fund. The Fund’s business is not confined to operations and transactions but extends to the formation of policy on all matters within the jurisdiction of the Fund. The powers of the Executive Board are extensive, although when acting under powers delegated to it by the Board of Governors it must act in accordance with decisions of the superior organ.
Originally, the Executive Board was composed of not fewer than 12 Executive Directors, of whom 5 were appointed by the members having the five largest quotas; 2 were elected by constituencies of the American Republics not entitled to appoint Executive Directors, which at that time meant, in effect, Latin American members; and 5 were elected by undefined constituencies of the remaining members. Two seats were reserved for the American Republics not entitled to appoint Executive Directors as a result of the initiative taken by the Mexican delegation at the Bretton Woods Conference.
Two additional Executive Directors could be appointed by the two members who, in the two years before an election of Executive Directors, had subscribed or lent to the Fund the largest amounts of resources utilized by the Fund in its outstanding transactions if these members were not entitled to appoint Executive Directors because of the size of their quotas. The objective of providing for two additional appointed Executive Directors was to ensure that there would be an adequate presence on the Executive Board of members that were financing the transactions of the Fund by means of their subscriptions and possibly loans to the Fund. The idea of additional appointed Executive Directors was advanced at Bretton Woods by Canada, which expected to have the benefit of the provision. The Canadian proposal was supported by the United States, which wished to reassure its public that the Executive Director appointed by the United States would not be the only Executive Director who spoke for a member that was providing active resources. There was foresight in this attitude because experience has shown that even though a preponderance of weighted voting power exists in favor of a proposed decision, the Executive Board may refrain from taking the decision in face of the opposition of a substantial number of Executive Directors. This reluctance may exist even though the opponents of the proposal do not occupy a majority of the seats on the Executive Board.
Additional appointed Executive Directors have been few in number. Canada appointed an additional Executive Director from 1958 to 1960 and Italy from 1968 to 1970. Saudi Arabia has appointed an Executive Director since November 1, 1978. Before the Second Amendment, a member entitled to appoint an additional Executive Director was bound to do so, but under the Second Amendment a member may forgo its privilege and participate in the election of Executive Directors, which is held at intervals of two years.
If all the countries that were represented at Bretton Woods had become members, the countries that would have been entitled to appoint Executive Directors because they had the five largest quotas would have been the United States, the United Kingdom, the U.S.S.R., China, and France. The U.S.S.R. has never become a member. The original members with the five largest quotas were the United States, the United Kingdom, China, France, and India. The Federal Republic of Germany replaced China in 1960, and Japan replaced India in 1970. The provision for appointment on the basis of quotas has remained unchanged, but a profound change has occurred in practice since the five became the United States, the United Kingdom, the Federal Republic of Germany, France, and Japan. Formerly, the five included two developing members, but since 1970 the five have all been developed members. Moreover, the five have leading roles in international monetary affairs. This fact explains not only their right to appoint but also all other manifestations of their influence in monetary matters inside and outside the Fund. The right to appoint has not produced these other manifestations although it has probably had a limited and subtle influence. The Heads of State or Government of the five countries always attend Summit Meetings, and their five currencies compose the “basket” according to which the SDR is valued, but these are not the only evidences of the prominent position the five countries occupy in international monetary affairs.
The Articles have always given the Fund authority to increase the number of elective Executive Directors. Two informal policies have guided the Fund in the exercise of this authority. They pull in opposite directions. One policy is that the Executive Board should remain small so that it can operate efficiently. The other policy can be described more precisely as a composite of policies: new seats should be created when new members have roughly the same voting power as the constituencies in existence before the entry of the new members; a desirable balance in the composition of the Executive Board should be maintained, which means a desirable geographical balance; and an undue burden should not be placed on individual Executive Directors because some constituencies would become uncomfortably large if further constituencies were not created.
Exercise of the power to increase the number of elective Executive Directors resulted in an increase of the seats to 15 by the time of the Second Amendment. Three of these seats were reserved for the American Republics not entitled to appoint Executive Directors. This group remained predominantly Latin American, although not exclusively after the entry into it of members of the British Commonwealth that were American Republics.
The basic structure of the Executive Board was modernized by the Second Amendment, which provides that the organ shall be composed of no fewer than 20, instead of the original 12, Executive Directors. Of the new minimum number, 15 are elective seats, but this number may, but need not, be reduced if additional Executive Directors are appointed. The reservation of seats for American Republics has been abrogated, without opposition by them. They did not oppose the change because they expected to be able to join in the negotiation of constituencies to which they and other members could belong without any realistic prospect that the maximum and minimum voting power for the election of Executive Directors would reduce the constituencies of predominantly Latin American members below 3.
Since the date of the Second Amendment, the Executive Board has grown to 22 Executive Directors. This increase is the result of two events. The Fund did not reduce the number of elective seats when in 1978 Saudi Arabia appointed an additional Executive Director. The Fund increased the number of elective seats to 16 after it recognized the Government of the People’s Republic of China as the government that represented the member called China in the Fund and the quota of China was increased in 1981 to an amount that enabled it to elect an Executive Director by virtue of its own voting power. China became a constituency of one member in the election of Executive Directors.
The Articles have always provided that the Executive Board is responsible for conducting the business of the Fund, and that for this purpose it exercises all the powers delegated to it by the Board of Governors. This broad statement must not obscure the fact that the powers of the Fund have changed as a result of the First and Second Amendments, and that for this reason the powers of the Executive Board have changed because the Board of Governors has always made the maximum delegation that legally could be made.8 The Second Amendment has clarified the principles on which the distribution of powers and the authority to delegate them are based. Certain specified powers are conferred directly by the Articles on the Board of Governors and others on the Executive Board or on the Managing Director. The Board of Governors cannot delegate to the Executive Board the first of these three classes of powers. The second and third of these classes are not the result of delegation by the Board of Governors, which therefore cannot withdraw them from the Executive Board or from the Managing Director. All powers of the Fund that are not specified as conferred directly on the Board of Governors, the Executive Board, or the Managing Director are vested in the Board of Governors and can be delegated by it to the Executive Board. The Board of Governors can modify any delegation that it has made, although there are practical limits to any such action because the Board of Governors could not undertake frequent business activities with the necessary or desirable dispatch. No delegated power has ever been withdrawn.
A process opposite to withdrawal has occurred. There has been a movement of powers from the Board of Governors to the Executive Board under the Second Amendment. Formerly, certain powers could not be delegated to the Executive Board either because they were conferred directly on the Board of Governors or because they were expressly declared to be reserved powers. The effect of the two legal techniques was the same. Certain powers could not be delegated because it was thought desirable, for various reasons, to have the safeguard of decision by the Board of Governors as the organ composed of personnel who had ministerial or comparable rank. Experience showed that this safeguard was unnecessary for the exercise of some of the powers that the Board of Governors was not able to delegate and that decisions under these powers should be considered part of the business of the Fund that the Executive Board should be able to conduct. Some of the powers that have become subject to delegation are powers to make arrangements for cooperation with other organizations, to determine what part of the net income of the Fund shall be placed to reserve, to determine what part, if any, of the net income shall be distributed to members, to prescribe the entities within categories specified by the Articles that may be permitted to hold and deal in SDRs, and to adopt, modify, or abrogate the rules for the reconstitution by members of their holdings of SDRs after use.
At all times the Articles have declared that the Managing Director is the head of the operating staff and that he conducts the ordinary business of the Fund under the direction of the Executive Board. The Managing Director and the staff, in the discharge of their functions, owe their duty entirely to the Fund and to no other authority. In this respect their position is in contrast to that of the Executive Directors, about whose answerability the Articles are silent. The implication of this silence is that Executive Directors can owe their duty to the members that appoint or elect them as well as to the Fund.
The Managing Director is also the Chairman of the Executive Board, but his relationship to the Executive Board in other respects is the subject of a calculated ambiguity. The Second Amendment provides that the Executive Board “shall consist of Executive Directors with the Managing Director as chairman.” 9 The clear formulation that the Executive Board consists of the Executive Directors “and” the Managing Director as chairman has been avoided. The Executive Board, when drafting the Second Amendment, did not wish to decide the question whether the Managing Director was a member of the Executive Board in the same sense as the Executive Directors. It seemed to be not wholly logical to provide that the Managing Director conducts the ordinary business of the Fund under the direction of an organ of which he is a member. The Executive Directors considered it even more important not to weaken the authority they derive as spokesmen for members by unequivocally conceding the same status for someone who does not have this function.
The fact that the issue arose at all is evidence of the emphasis placed on control of the Fund by member countries through the Executive Directors whom the members appoint or elect and who may owe their duty to these members without transgressing the Articles. This emphasis has been apparent throughout the history of the Articles. All three versions have provided not only that the Managing Director acts under the direction of the Executive Board but also that when acting he conducts the “ordinary business of the Fund.” 10 This expression is in contrast to the responsibility of the Executive Board, which has always been to conduct the business of the Fund without any adjective that qualifies “business.”
The allocation of responsibility for the business of the Fund between the Executive Board and the Managing Director has always been the same, but the law has permitted change in practice. In the earliest years of the Fund, the practical division of functions between the Executive Board, the Managing Director, and the staff was the subject of close scrutiny by the Executive Board and decisions taken by it in January 1948.11 According to these decisions, the Executive Board establishes the policies and takes decisions concerning the major problems of the Fund while the Managing Director and the staff prepare the recommendations on which the policies and decisions are based and are responsible for the execution of the policies and decisions, including the conduct of negotiations with members. The decisions of January 1948 preceded the elaboration of the Fund’s policies on the use of its resources and the invention of stand-by arrangements that began in 1952. Furthermore, the decisions of 1948 preceded the annual consultations with members availing themselves of transitional arrangements on the retention of restrictions on payments and transfers for current international transactions. These annual consultations also were initiated in 1952.
These developments in the Fund’s practice have extended not the character but the scope of the Managing Director’s functions, principally under the rubric of the conduct of negotiations. It is under his direction that the staff conducts the consultations with members on the restrictions they retain and the various other kinds of consultation that have emerged. The most recent of these other consultations are conducted in the course of the surveillance over the exchange rate policies of all members that the Second Amendment requires the Fund to undertake. The delicacy of this form of surveillance has led the Executive Board to confer broad powers of initiative on the Managing Director in relations with members, although the Executive Board insists that his answerability to it can never be impaired.
The scope of the Managing Director’s functions has broadened as the Fund’s policies on the use of its resources have become more varied and the volume of transactions under the policies has grown so enormously. Negotiations with members when they request the use of the Fund’s resources are among the negotiations conducted by the Managing Director and staff. In this activity of the Fund, the convention has developed that the Executive Board accepts the Managing Director’s recommendations. Although the understandings reached by the Managing Director and staff as the result of their negotiations with a member can be modified legally by the Executive Board when recommendations are presented to it, the Executive Board refrains from exercising this authority. If the Board is discontented with some aspect of the understandings, this discontent is made apparent and is heeded by the Managing Director and staff in subsequent negotiations with members.
Two procedures are followed to avoid an unfavorable reaction to the outcome of negotiations. First, the Executive Board establishes general policies on the use of the Fund’s resources, and the Managing Director must observe these policies. Second, the Managing Director maintains informal contact with Executive Directors whenever consultations are being conducted on matters that appear to him to warrant these contacts. Furthermore, the Executive Director appointed or elected by a member with whom consultations are being conducted is fully informed of the course they are taking and often participates in them.
The position of the Managing Director as the chief executive officer of the Fund, in which capacity he owes his duty entirely to the Fund, has been responsible for numerous ad hoc or permanent duties that in the course of time he has been requested or required to perform. The most notable of these duties is to propose allocations of SDRs to members if he satisfies himself that allocations would be consistent with the Articles. This duty was imposed on him by the First Amendment. His judgment was considered indispensable in so novel and important an activity of the Fund as the creation of reserve assets. No allocations can be made except on a proposal by him, but the Executive Board, which drafted the First Amendment, included the provision that his proposal should not go to the Board of Governors for decision unless the Executive Board concurred in the proposal. The Executive Board, therefore, has, in effect, a veto on his proposals but cannot direct him to make them and cannot make proposals of its own.12
This discussion of the role of the Managing Director must return, finally, to the recommendations on the policies and major problems of the Fund that he may make for decision by the Executive Board. Under this authority, his influence on the Fund, and on the international monetary system through the Fund, can be enormous. The exercise of this power of initiative cannot be reduced to a formula: how the power is exercised depends on the personality and skill of the individual Managing Director as well as on an international monetary environment that makes his initiatives acceptable.
Committee on Interpretation of Board of Governors
The Committee on Interpretation of the Board of Governors exists de jure but not de facto. That is to say, a decision of the Board of Governors that the Committee shall be an organ of the Fund is not necessary because the Articles provide for the Committee,13 but a decision is necessary to establish the membership, procedures, and voting majorities. The Committee differs from the Council in both respects. The Council does not exist as an organ unless the Board of Governors decides that the Council shall be called into being. If that decision were taken, a decision on the membership, procedures, and voting majorities of the Council would be unnecessary because they are regulated by the Articles.
The Committee was created by the First Amendment to hear appeals from decisions of the Executive Board taken under the Fund’s power to interpret the Articles authoritatively. Questions of interpretation may arise between the Fund and a member or between members. In either event, the Fund itself has always had exclusive jurisdiction to settle the questions.14 That power was exercised sparingly before the First Amendment; most decisions on interpretation were taken by the Executive Board without invoking the power. Some early decisions of the Executive Board taken by the formal or the less formal procedure were objected to by some members that held a minority view. These members complained that it was untraditional for the Fund to adjudicate issues if the Fund was itself a party on one side of a question and for weighted voting power to apply to adjudication. The latter complaint was motivated in part by discontent with the large proportion of the total voting power that the United States exercised and had cast in favor of the decisions that were disliked by the objectors. A further grievance was that, although the Executive Board made the adjudication, most Executive Directors were not lawyers.
A member that dissented from a decision of the Executive Board on a question of interpretation could appeal to the Board of Governors, but the critics protested that invariably the decision would be confirmed by that organ. The critics had the same complaints of principle to decisions by the Board of Governors.
The negotiation of the First Amendment gave the critics an opportunity to propose that the function of authoritative interpretation should be performed by a tribunal external to the Fund. They reinforced their proposal by arguing that interpretation of the provisions that dealt with the important new venture of the SDR might be necessary. The attempt to establish an external procedure failed, but a compromise was reached. If an appeal is taken to the Board of Governors from a decision of the Executive Board under the Fund’s power of authoritative interpretation, the appeal will be considered by the Committee, and its decision will be the decision of the Board of Governors unless it is reversed by a decision of the Board of Governors taken with 85 percent of the total voting power. In the Committee, voting power is not weighted. The decisions of the Committee are the only decisions under the Articles that would not be taken on the basis of weighted voting power.
Most members had no enthusiasm for the dispute about the procedure for interpretation because they did not think that the power of interpretation had been abused. The compromise was arranged, however, because members wanted agreement on the SDR to be reached as soon as possible as the main business of the First Amendment. The compromise was itself the subject of a compromise because most members were unwilling to devote time to the negotiation of other aspects of the Committee that had to be settled to make it capable of acting. These issues were left for decision by the Board of Governors.
The Executive Board made an attempt to reach agreement on the recommendations it would make for decision of the outstanding issues by the Board of Governors. The Executive Board has not succeeded in reaching agreement. The main problem has been the composition of the Committee. The function of the Committee suggests that it should be small to be effective. Moreover, the United States has been reluctant to see the voting strength it would have in the Committee reduced below the proportion the United States would have on the basis of weighted voting power, which implies that the Committee should be composed of no more than five or perhaps six persons. The membership of the Fund resisted the idea of so restricted a composition for the Committee.
A lesson that can be derived from the dispute about the procedure for authoritative interpretation, and also from the later dispute about the procedure for negotiating reform of the international monetary system, is that when problems affect the functions of the Fund, most members are likely to prefer that the problems be considered within the framework of the Fund. To achieve this objective, members are willing to create room for new bodies within the framework of the Fund.
A second lesson that is clear from experience is that when a Committee is to be formed in the Fund as a new body to undertake important duties, only a composition that is considered representative will have the appeal of legitimacy. The criterion of representative character means that a Committee must be composed according to the model of the constituencies that appoint or elect Executive Directors. The Committee of Twenty, the Interim Committee, and the Development Committee, all of which will be discussed later in this Chapter, have been composed according to this model.
If the model had been followed when the Executive Board was debating recommendations to be made to the Board of Governors on the composition of the Committee on Interpretation, the effect would have been a Committee of 20 persons, which seemed too cumbersome for its task. The effort was abandoned but with no inconvenient consequences. Although the Executive Board has adopted numerous interpretative decisions under the less formal procedure, no member has invoked the formal procedure, with the result that no appeal has been taken to the Committee.
The history of interpretation within the Fund is an illustration of change in the spirit with which the Fund operates as well as in its law. In its early years, the Fund was largely inactive as a financial organization. Members tended to resent assertions of regulatory jurisdiction by such an organization. This attitude bred disputes of a legal character, which were often prolonged and bitter. Growth in the financial activities of the Fund and confidence that it respects the rule of law have produced a different environment, in which questions of interpretation are much less frequent and are usually resolved expeditiously and amicably when they do arise.
Classes and Groups
The effects on the Fund of growth in its membership have not been confined to its structure. Membership is open to all states that satisfy the criteria of formal authority to conduct foreign affairs, ability to perform the obligations imposed by the Articles, and willingness to perform the obligations.15 The size of a state or the character of its economy is not a legal justification for denying membership, although there was a proposal by a few Executive Directors at one time to withhold membership from ministates or microstates.16 The proposal did not succeed. Open membership has resulted not only in a large membership but also in diversity among members. The Articles have always distinguished among members, and therefore can be said to have recognized different classes, for a limited number of purposes. Distinctions have been made, for example, between members that appoint and members that elect Executive Directors, and between members that have undertaken to perform the full obligations of the convertibility of their currencies and members that are availing themselves of transitional arrangements under which they may restrict convertibility. Apart from the few distinctions such as these, all members were treated as classless for the purposes of the Articles.
In any discussion of classes, the distinction that is likely to be thought of immediately is between developed and developing members. A strong effort was made at the Bretton Woods Conference by the delegations of India and a few other developing countries to have some reference inserted in the Articles to developing members or to development, but this effort was resisted. Developed countries feared that the various formulations that were proposed might have implied that development was among the purposes of the Fund, even though the World Bank, which was the other international organization that was to emerge from the Conference, was being created to promote development.17 The central concern of the Fund was to be the balance of payments of its members. The balance of payments as a concept did not permit distinctions according to the character of a country.
This episode in the negotiation of the original Articles contributed to recognition of the principle that the uniform treatment of members was implicit in the Articles when no express distinction was made among members. The principle has been expressed in various ways and has not always been clearly understood, but it has come to mean, first, that there is an equality among members in relation to their rights and obligations and, second, that all members that meet the conditions of a policy must have the benefit of it. It has become apparent, however, that the character of a policy may be such that only a particular class of members will meet the conditions of the policy.
Until the 1960s, little was made of the distinction between developed and developing members as a circumstance that was relevant for the policies of the Fund. Developing members did not combine systematically to advance proposals of special interest to them, and the Executive Directors they elected did not tend to cast their votes in unison. The year 1963 can be regarded as a turning point because in November of that year the consciousness by developing countries of their identity was expressed in a resolution of the General Assembly of the United Nations (UN). The resolution was the genesis of the Group of 77 and helped to create the United Nations Conference on Trade and Development (Unctad) in the following year. In February of 1963, however, the Fund had already adopted its policy on the compensatory financing of export shortfalls, after an approach to the Fund by a UN commission that was concerned with commodities.
The traditional refusal to recognize classes of members is apparent in the formulation of the Fund’s decision on compensatory financing. It was obvious that the chief, and in the view of some the only, beneficiaries of the decision would be, or should be, the countries that exported primary products. Early drafts, however, referred to members encountering payments difficulties produced by temporary export shortfalls. To ensure that the Fund would receive the approbation of developing countries, and to discourage requests under the policy by other countries, the Fund took what was then the bold step of inserting the words “particularly primary exporters” after the reference to members in the final text of the decision.
Developments outside the Fund influenced the recognition within the Fund of developing members as a class, but an event in the Fund that preceded the compensatory financing facility had helped to intensify the awareness by developing members that they had common interests in the Fund. This event was the adoption in 1962 of the decision entitled the General Arrangements to Borrow (GAB). The effect of the decision was to establish a distinction between ten of the main developed members and all other members, but among the other members developing countries constituted the overwhelming majority. They held the view that they had been unfairly treated as a class.
The welding of developing members into a class within the Fund continued under the influence of the discussions on the need for supplementary reserve assets that led eventually to the SDR. The first stage of these discussions took place in the group of ten participants in the GAB. Moreover, the ten subscribed for some time to the postulate that developing countries needed resources for development but not reserves. Therefore, allocations of supplementary reserve assets should be confined to the ten and perhaps to some other developed members. This postulate was abandoned at a later date, and the First Amendment provided that allocations of SDRs were to be made to all members and at the same rate in terms of quota. This provision has not been amended.
By the time the Committee of Twenty undertook the task of discussing reform of the international monetary system, the idea had become established that developing members were a class with interests that should be acknowledged in the Fund. The Committee’s Outline of Reform contains ample evidence of this attitude.18 Both the Second Amendment and the Fund’s practice have been influenced by the idea. The Articles now contain references to developing members, even though only limited kinds of new transactions for their benefit are recognized. The transactions conducted through the Trust Fund are an example of these new transactions.19
The provision of the Second Amendment under which the Fund may perform financial and technical services, including the administration of resources contributed by members,20 does not mention developing members, but it is understood that the Fund may administer resources for a class singled out by the contributors. Under this authority, the Fund has administered two Subsidy Accounts for the benefit of qualified developing members.21
The terms of reference of the Council, as stated in the Second Amendment,22 include the review of developments in the transfer of real resources to developing countries as an aspect of the Council’s interest in global liquidity. The Articles therefore justify similar terms of reference for the Interim Committee and the establishment of the Development Committee as a joint committee of the Boards of Governors of the World Bank and the Fund.23
The principle of uniformity has evolved against this background to mean that a distinction between developed and developing members is justified if authority for it can be found in the Articles. If there is no such justification, a policy of the Fund cannot be formulated in terms that confer rights or impose obligations on a particular class of members because they constitute a class, but a policy can be formulated in terms of a particular problem that falls within the purposes of the Fund and is not contrary to any provision of the Articles. Such a policy is not objectionable because it is likely to be particularly beneficial or particularly onerous for a class of members. The Fund’s buffer stock financing policy and the extended facility, as well as the compensatory financing facility, are three examples of policies that are particularly beneficial to developing members. The Fund’s first guidelines, adopted in 1974, on the management of floating exchange rates are an example of a policy that was directed toward members that allowed their currencies to float independently and did not apply to members that pegged their currencies in some way. The guidelines, therefore, were onerous for one class of members but not for the other. The Fund thought it appropriate to concentrate on members with floating currencies because they represented a problem at a time when the objective was still the return to a par value system.
A constraint on the Fund in establishing a policy to deal with a particular problem, if the policy will be more beneficial or more onerous for a class of members, is that the problem must not be singled out arbitrarily. The problem must be germane to the purposes of the Fund and consistent with the provisions of its Articles and, in particular, consistent with the provisions under which the policy is established. But this criterion permits the Fund to act with much flexibility in adopting policies to deal with changing problems within the Fund’s field of interest.
It has been seen already that the principle of uniformity has not prevented the adoption of policies that have been particularly beneficial to developing members even if the principle has obstructed some of their aspirations and even if developed members have cherished the principle as a bulwark against claims that they consider excessive.24 The principle has been a defense for developing members also. They have relied on it to criticize policies that were less beneficial to them than to other members. The Fund’s practice on the phased availability of resources under stand-by arrangements can be cited as an example. Phasing was a feature of stand-by arrangements except when arrangements were approved for members like the United Kingdom. The exception was said to be justified because the issuer of a reserve currency might need to mobilize the full amount of the resources made available by a stand-by arrangement to counteract a sudden flight from the currency. Developing members succeeded eventually in their argument that phasing should be a feature of all stand-by arrangements because the justification of a sudden predicament was not confined to any one class of members.
The distinction between developing and developed members is not the only one between classes that has been recognized in the activities of the Fund. Other classes have been relevant for problems that have arisen from time to time or that have been permanent. The distinctions between members with floating currencies and members with pegged currencies and between reserve centers and other members have been mentioned already. Other examples are the distinction between the United States as the issuer of the focal currency of the par value system and other members, or the distinction between members in surplus and members in deficit in their balances of payments, but these examples are not exhaustive.
The existence of classes under the Articles or in the practice of the Fund has provoked the criticism sometimes that classes were not receiving equivalent treatment. The principle of uniformity seeks equal treatment among individual members, but a second principle seeks comparable treatment between classes of members. The second principle is one of symmetry. The operation of the par value system, particularly after its breakdown, led both the United States as the issuer of the central currency in the system and other members to complain that, for different reasons, they had not received symmetrical treatment. Members in deficit in their balances of payments have made the same complaint when comparing themselves with members in surplus. The Outline of Reform of the Committee of Twenty was strongly influenced by the desire to ensure symmetrical treatment for various classes.
Dissatisfaction because of asymmetry has led to the elimination of some distinctions. The provisions of the Second Amendment on exchange arrangements are an example. All members are subject to firm surveillance by the Fund over their exchange rate policies, and the Fund must adopt specific principles for the guidance of all members with respect to those policies.25 The provisions seek to avoid the charge of asymmetry that resulted from the operation of the par value system and from the limitation of the Fund’s first guidelines for the management of exchange rates to members with floating rates.
Another consequence of diversity has been the formation of a number of groups of members, each consisting of countries that see themselves as having common interests, for the purpose of attempting to reach a joint position that the group will advocate or support in the Fund. The members of a group may be represented by their Executive Directors or by national officials. The groups can have terms of reference that are confined to the affairs of the Fund or that comprehend this interest within a broader context. The various groups of members include, among others, the countries of the Commonwealth, of the European Community, and of Latin America.
Two groups are of special interest. One is the Group of Ten, formed by participants in the General Arrangements to Borrow (GAB) for the purpose of reaching a joint position on whether to lend to the Fund in accordance with the terms of that decision. The participants were industrial countries among which short-term capital might flow in the new conditions of convertibility and freer exchange markets at the end of the 1950s. These members wished to protect the international monetary system against the destabilizing effects of these flows by supplementing the Fund’s resources if needed for financing transactions of a member of the Group of Ten with the Fund. The transactions, in effect, would recycle the capital flows. The Group of Ten soon broadened its own terms of reference to include other major issues confronting the Fund and the international monetary system. The reaction of other members has been mentioned already, but it was intensified by the fact that the Group had a substantial majority of voting power in the Fund and could act, therefore, not merely as a pressure group but as a steering group within the Fund.
The other group that deserves special mention is the Group of Twenty-Four, consisting of eight representatives from each of three areas, Africa, Asia, and Latin America, but open to the representatives of any other developing country in deliberate contrast to the exclusiveness of the Group of Ten. The Group of Twenty-Four was formed as the body through which the so-called Group of 77, consisting of many more than that number of developing countries, could organize joint positions in the negotiations on reform of the international monetary system in the Committee of Twenty. The Group of Twenty-Four was intended to be a counterpoise to the Group of Ten. The subsequent activities of the Group of Twenty-Four have been devoted to the formation of common positions to be taken by the representatives of those of its members that have seats on the Interim Committee or the Development Committee.
The Group of Ten and the Group of Twenty-Four have become established as satellite bodies of the Fund. That status is evidenced by the fact that they receive support services from the Fund. The Group of Ten, in particular, sometimes considers that it has received a kind of charter from the Fund because the GAB is not only a decision of the Fund but also an agreement between the Fund and the Group of Ten. The negative reaction of other members to the Group of Ten ebbs and flows, often in accordance with the degree of activity undertaken by the Group. On occasion, however, other members have urged the Group of Ten to take action to restore order in international monetary matters. One such occasion was the period before the Smithsonian Agreement. Some members not in the Group called on the Ten to arrange a realignment of the exchange rates for their currencies. It is another irony of history that sometimes, when the Group of Ten has been criticized as a cabal, it has replied that it was following the example of the Group of Twenty-Four.
The recognition of classes and the formation of groups of members have led, not unexpectedly, to new problems of relative voting power and the majorities necessary for decisions of the Fund. The original formula for the determination of the voting power of each member was 250 basic votes plus 1 vote for each US$100,000 of quota. Basic votes were intended to give expression to the classical doctrine of the equality of states in international law and to provide some safeguard against shares in total voting power for some members that might seem to be so absurdly small that their voices could be ignored. Quota votes were intended to express the reality of differences in economic strength. The Second Amendment substituted the SDR (special drawing right) for the U.S. dollar but did not change the numbers 250 and 100,000 in the formula.26 No proposal was made to change the numbers during the preparation of the Second Amendment, but since that date developing members have expressed dissatisfaction with the number of basic votes in the formula. These members have objected that the increases in quotas that have taken place since the Fund came into being have weakened the impact of basic votes on relative voting power. To this objection, the response has been made that the increase in the number of developing members has been a compensating factor if the total basic votes of these members are considered. This response is another recognition of the fact that the membership of the Fund is not a classless society. Any modification in the formula for voting power would require an amendment of the Articles.
Although the formula for voting power has been maintained without change, the effects of voting power have changed radically because of changes in the majorities required for decisions of the Fund. The basic majority has always been a majority of the votes cast. The original Articles required special majorities, that is to say, a larger proportion of total voting power, for no more than 9 categories of decisions. The negotiators kept the number of categories modest so as to facilitate the conduct of the Fund’s business. The necessity for a special majority might impede adoption of a decision that could be taken if no more than the basic majority was required. The higher the special majority the greater might be the impediment. The First Amendment expanded to 21 the categories of decisions for which special majorities were necessary. The decisions related mainly to aspects of the SDR and other forms of international liquidity. The control of international liquidity was considered to be so novel a development in the Fund, and if abused so disturbing, that high majorities were deemed to be essential safeguards. An even greater expansion occurred when the Second Amendment increased the categories to 53.27
The objective that members, or groups of members, are pursuing when they insist on a special majority is a veto over the decisions for which the special majority is required. The desire for a veto does not explain why a veto is wanted. The reasons why so many decisions are subject to special majorities under the Second Amendment are varied. For many categories the explanation is that the Second Amendment was not a comprehensive reform of the international monetary system, according to one version, or that the Amendment provided extensively for the evolution of the system, according to another version. Members wanted to exercise control over the evolution of the system that was comparable to the power they can exercise over amendment of the Articles. The Board of Governors can recommend amendments to members by decisions taken with a majority of the votes cast, but recommendations do not become effective unless accepted by three fifths of the total membership and 85 percent of the total voting power.28
If a member or a class of members proposes an amendment requiring a special majority for some decisions so as to protect a particular interest of their own, other members may insist on a quid pro quo for their concurrence in the proposal. They may call for a special majority for the adoption of other decisions that, in their view, would have a special impact on them. This give and take is one explanation of the number of special majorities that are necessary for decisions, but there are numerous other explanations, such as the failure of the drafters to reach agreement on the substance of some provisions during the preparation of the Second Amendment. Notwithstanding the spread of special majorities, the spirit of the original Articles has survived in maintaining the requirement of no more than the basic majority for many decisions of importance.29 Among them are the decisions establishing policies on the use of the Fund’s resources and decisions making the resources available to individual members under the policies.
If a member or a class of members wants a veto over certain decisions, the size of the special majority must give reasonable assurance that it will be adequate for the purpose of the veto. The original Articles provided for six special majorities: an absolute majority, two thirds, three fourths, and four fifths of the total voting power, and a “unanimous vote.” It is no longer clear why these proportions were selected for most of the original categories. The First Amendment created a new majority, 85 percent of the total voting power, for the decisions that have been mentioned earlier. This proportion was sufficient to give a veto to the six members that then constituted the European Community. The six sought this majority because some or all of them were not wholly in agreement with the United States on certain aspects of the SDR. They also thought that they might be required to hold amounts of the new asset that exceeded their preferences. The majority gave the members of the Community a veto that balanced the veto that the United States would have.
In the interest of simplification, the Second Amendment has reduced the number of special majorities to two: 70 percent and 85 percent of the total voting power. The choice between them for particular categories of decisions was not guided by a single criterion, but a distinction between operational decisions and decisions having a more obvious relationship to the structure of the international monetary system had some influence. The majority of 85 percent of the total voting power is required for 29 of the 53 categories of decisions for which a special majority is necessary.
As suggested already, the choice between the two special majorities was affected by the voting power of the members seeking a veto. The United States obtained a veto over decisions for which a majority of 85 percent of voting power is required. As a group, the members that belong to the European Community also have a veto over these decisions. Developing members as a class have a veto over decisions for which either the higher or the lower special majority is required.
Quotas are the main determinant of voting power. Vetoes add a reason why members attach importance to relationships among quotas. Relative amounts affect the outcome not only when voting takes place on decisions but also when Executive Directors are elected. Relative voting power has an influence, though informal, on a constituency’s choice of the candidate that it will nominate for election. Members are concerned about the absolute amounts of quotas as well, because, to cite one reason, the Fund’s policies on the use of its resources usually define the maximum available to a member under a policy by reference to a proportion or a multiple of the member’s quota. Relative amounts of quotas may be critical even though absolute amounts seem to be more important. Allocations of SDRs are made at the same rate expressed as a percentage of quotas, and therefore it might seem that only absolute amounts are critical.30 In practice, however, decisions on the rate of allocations so far have been based on a prior determination of the total amounts to be allocated, so that a larger share of total quotas will attract a larger share of the total.
At the Bretton Woods Conference, quotas were based on a formula composed of a number of economic variables, for which scientific finality was not claimed, coupled with diplomacy. Both the formula and diplomacy aimed at the establishment of a desired hierarchy of quotas. The Articles provide for the adjustment of quotas as a result of general reviews at intervals not exceeding five years, as well as for the special adjustment of individual quotas at any time.31 Special adjustments have become fewer in more recent times than in the past. Some early individual adjustments were made to meet the dissatisfaction of a few members with the quotas provided for them at Bretton Woods. Outstanding exceptions to the tendency to base adjustments on general reviews are the special increases in the quota of China in 1980 and of Saudi Arabia in 1981. A broad purpose of adjustments is to reflect the changing positions of members in the international economy.
The importance of quotas is evidenced by many features of the Articles. A decision to propose the adjustment of quotas originally required a majority of 80 percent of the total voting power and since the Second Amendment a majority of 85 percent. A member’s quota cannot be increased or decreased without its consent. A proposed amendment of the Articles that would dispense with consent cannot become effective unless the proposal is accepted by all members.32
The Fund has continued to take account of the Bretton Woods formula in its consideration of the quotas of new members and of the adjustment of quotas, but from time to time the Fund has modified the formula and has adopted supplementary formulas. The achievement of a desirable ranking of quotas continues to be an objective in the decisions on formulas and on the flexibility with which the formulas are applied. The Fund has taken into account a variety of considerations, not all of them economic, in this work. Among the considerations are the sensitivities of members about their places in the hierarchy, the desirability of a balance between the increased use that members may wish to make of the Fund’s resources and the increase in those resources as the result of enlarged quotas, and the undesirability of changes in the hierarchy that would be considered too radical.
The Fund’s work on formulas has been favorable on the whole to developing members. The Fund has had avowed objectives on occasion for the benefit of members that relied heavily on the proceeds of their exports of primary products, members with small quotas, and both oil exporting countries and oil importing countries among developing members. The net effect of the adjustment of quotas since 1945 has been substantial changes in the relative voting power of individual members and classes of members.
A leading function of the Fund has always been its administration of a code of obligations that binds members. Obligations relating to exchange rates were revolutionary in 1944. In the era before the Fund, the definition of the value of a currency in relation to other currencies was considered an essential element of national sovereignty. The external value of a currency was one of the most important prices in the national economy. The Articles reflected the radical idea that because exchange rates were matters of international interest, they should be subject to international scrutiny and normally to international agreement. The compensation for submission to international scrutiny and judgment was the voice that each country could have in determining the exchange rates for the currencies of other countries and protection against retaliation if the exchange rate for one’s own currency received international endorsement.
Both White and Keynes developed plans for an international organization with jurisdiction over exchange rates as a central feature of both plans. The United States saw itself as the country that would have dominant economic power after World War II, with a constant surplus in its balance of payments. The United States foresaw, as a consequence of its economic strength, that it might be the victim of discrimination by other countries. As a consequence, it sought the protection of obligations on exchange rates and on a liberal and nondiscriminatory system of payments and transfers for current international transactions. White was willing to go even further than Keynes and further than the eventual Articles in conceding authority to the Fund over exchange rates.
The par value system was the outcome of the negotiations initiated by White and Keynes.33 The foundation on which the par value system rested was the universal recognition of gold as a monetary asset. Each member reached agreement with the Fund on a par value for its currency, and on subsequent changes in it, expressed directly in terms of gold or indirectly through the medium of a U.S. dollar of fixed gold value. A ratio, called the parity, between each pair of currencies resulted from the establishment of par values. A member was responsible for maintaining the effectiveness of the par value for its currency by seeing that exchange transactions in its territories took place at exchange rates that did not depart from narrow limits around the parity between the member’s currency and the currency for which it was exchanged. A member could choose the measures with which to perform this obligation, provided that they were consistent with the Articles.
The United States, not wanting to be responsible in any other way for exchange rates, negotiated a provision at Bretton Woods under which a member that freely bought and sold gold for its currency at prices based on par values in transactions with the monetary authorities of other members, for the settlement of international transactions, was deemed to be performing its obligation to maintain exchange rates for its currency that were consistent with the Articles. A member adopting this practice was standing ready to keep its currency stable in terms of gold, the common denominator of the par value system, in the most obvious way. If exchange rates departed from the limits prescribed by the Articles, the fault had to be attributed to the other member whose currency was involved in the exchange transactions, unless it could be shown that the member purporting to buy and sell gold freely might be responsible for the exchange rates because of other policies it was following, such as the application of restrictions on payments and transfers.
The United States was the only member that undertook to buy and sell gold freely for its currency within the meaning of the Articles. In practice, the whole par value system operated on the foundation of this undertaking. Other members intervened in the exchange markets with dollars, or with currencies convertible into dollars. They intervened in this way with the confidence that, if they wished, they could get gold from the United States for the dollars they accumulated by intervention, or they could get dollars from the United States for gold if they needed the currency for intervention. All currencies, therefore, were tied, directly or indirectly, to gold through the medium of the dollar.
The United States, as the issuer of the central currency of the system, was passive apart form its undertaking to buy and sell gold freely. It refrained from intervention so that there would not be conflicting policies on intervention. Furthermore, it was tacitly understood that the United States would not attempt to change the par value for its currency. Other members could be confident that they could hold dollars in their reserves without fear of loss because of devaluation of the dollar. Moreover, members could earn interest on idle balances of dollars by investing them instead of requesting the United States to exchange them for gold in accordance with its undertaking.
Members other than the United States were active not only in the exchange markets but also in managing their balances of payments, by changing the par values of their currencies if necessary, so as to achieve the relationship they wanted between their currencies and the dollar. A member could change the par value of its currency, after consulting the Fund and normally obtaining its concurrence, provided that a proposed change was necessary to correct a fundamental disequilibrium. This proviso meant that the change was not proposed to deal with a temporary problem and that the correction would be sufficient to eliminate the disequilibrium without amounting to an unfairly competitive devaluation. The par value system was summarized as one that sought stability without rigidity. One consequence of the element of stability in this formulation was that a member was not entitled to float its currency even if the member found it difficult to select the precise par value it should propose as a change and wanted to float its currency in order to see what guidance the market gave. The first occasion on which the Fund had to consider the validity of floating was in 1948 when Mexico’s difficulties induced it to float the peso. The Fund refused to conclude that the Articles permitted floating in any circumstances.
Difficulties developed in the par value system, and it became more just to describe it as a system of rigidity without stability. Members were reluctant to propose devaluation or revaluation even though these actions were necessary for adjustment of the balance of payments. The Fund had no authority under the Articles to propose a change in the par value of a member’s currency. The initiative could be taken only by the member. The United States assumed that devaluation of the dollar would be met with corresponding devaluations of other currencies that would eliminate the effect of its own action. On August 15, 1971, the President of the United States, having concluded that the situation was no longer tolerable, announced the withdrawal of the undertaking to buy and sell gold freely as described earlier. He announced also that the United States would no longer maintain a fixed value for the dollar. The United States did not purport to change the par value of the dollar and left it to other members to maintain a relationship with the dollar if they wished. As a result, all currencies floated in the sense that exchange transactions were not confined to the margins around parities prescribed by the Articles. The collapse of the par value system and its consequences produced the most radical of the changes in the Fund’s regulatory jurisdiction that have occurred during its history.
An attempt was made to negotiate restoration of a more flexible par value system, which would recognize the validity of floating in particular circumstances. The negotiation was conducted in the so-called Committee of Twenty, which was formally a committee of the Board of Governors but was actually a special body composed of the representatives of members that was given the political task of renegotiating the constitutive treaty of the Fund. Supervening events, such as the shock of the increased cost of importing oil, prevented the Committee of Twenty from reaching agreement on a full reform of the international monetary system or on the restoration of a par value system however flexible it might be.
When the Committee of Twenty was disbanded, the task of proposing amendments of the Articles was allotted to the Executive Board, with such guidance as it might receive from the Interim Committee as the successor of the Committee of Twenty. In both the Interim Committee and the Executive Board, the United States was expected to take a leading role because of the size of its economy and the central functions its currency performed in international trade and payments. It has been noted earlier that the United States negotiated the original Articles in the conviction that normally it would be in surplus in its balance of payments. In the negotiation of reform in 1972–74 and in the drafting of the Second Amendment in 1974–76, the United States made the opposite assumption. It assumed that it was likely to be in deficit in its balance of payments unless pressure could be brought to bear on members in persistent surplus. Beginning in 1973, the United States attributed its chronic deficit in the past to the chronic surpluses of other members and to a system that in operation had forced passivity on the United States and benign neglect of its balance of payments.
In the period in which it seemed that some version of a par value system might be instituted, the United States proposed a system constructed on a foundation of objective economic indicators, which would be formulated by the Fund by reference to members’ reserves. The indicators would point to the members that should take the initiative to adjust their balances of payments. Such a member would take the necessary action to achieve adjustment, which might be a change in par value, or face graduated and largely automatic pressures if the member failed to act.
Once it became clear that a par value system could not be instituted, the United States changed its proposal fundamentally and sought protection by other means. It advocated freedom for members to choose their exchange arrangements and to determine the external value of their currencies. The exchange arrangement selected by a member might be the free and independent floating of its currency, which, as a policy of passivity, would be comparable to the policy followed by the United States in the days of the par value system, but with the radical difference that there would be no undertaking to convert balances of one’s currency held by other members. The Fund would be the monitor of this regime in order to discourage members from exercising their freedom by pursuing undesirable exchange rate policies.
The provisions of the Second Amendment on exchange arrangements reflect the approach of the United States.34 Each member may choose its exchange arrangement and determine the external value of its currency, with the exception that a member may not maintain the external value of its currency in terms of gold. There is no common denominator to which all members must link their currencies. The result is a complex of pegged and unpegged exchange arrangements of great diversity.
Members are bound by certain obligations that apply to all of them. Each member must collaborate with the Fund and with other members to ensure the existence of orderly exchange arrangements and to promote a stable system of exchange rates. Four specific obligations are drawn from this more general obligation. The specific obligations require efforts to foster orderly economic growth with reasonable price stability, orderly underlying economic and financial conditions, and a monetary system that tends to avoid erratic disruptions. In addition, members are required, in firmer language, to avoid manipulating exchange rates or the international monetary system in order to prevent adjustment of the balance of payments or to gain an unfair competitive advantage over other members.
The Fund must oversee the operation of the international monetary system in order to ensure its effective operation and the compliance by members with their obligations. In particular, the Fund must exercise firm surveillance over the exchange rate policies of members and must adopt specific principles for the guidance of all members with respect to those policies. Members must consult with the Fund on their exchange rate policies when requested by the Fund. The Fund’s firm surveillance is meant to be the main safeguard against the obvious hazards of the present freedom of members to choose their exchange arrangements and to determine the external value of their currencies.
The Fund can recommend general exchange arrangements to accord with the development of the international monetary system, but if recommendations were made, members would remain free to choose their exchange arrangements. If the Fund were to find that the conditions specified by the Articles were in existence, the flexible par value system defined by the Articles would begin to operate. The system borrows lavishly from the original provisions but modifies them in the light of experience in order to make the system more effective. For decisions to recommend general exchange arrangements or to call the par value system into existence, a majority of 85 percent of the total voting power is necessary.
The provisions of the Second Amendment on exchange arrangements combine a spirit of continuity with fundamental changes. Some of the concepts of the original Articles continue to exist under the Second Amendment. First, the idea persists that exchange rates are matters of international interest and, therefore, should be subject to international scrutiny. This idea is applied, however, in a different way. Under the original Articles, par values and changes in them were established by prior agreement with the Fund. Now, the Fund acts, if at all, after the event. That is to say, the Fund can only represent to a member that the exchange rate policies that are already in place, for which the prior concurrence of the Fund is unnecessary, are not in accordance with the member’s obligations or the Fund’s specific principles of guidance. The present a posteriori procedure is inherently weaker in ensuring the observance of international obligations than the a priori procedure of the par value system.
The obligation to consult with the Fund is a second surviving idea, because it resembles the obligation of members to consult the Fund before making any change of par value, but again there is no duty to consult before a change is made in exchange arrangements or in the external value of a currency. Perhaps because consultations are conducted under an a posteriori procedure, they are directed in practice more toward the collection of information, the elucidation of policies, and persuasion than the exercise of such regulatory authority as the Fund possesses.
A third idea that continues to exist is that stability is desirable, but again the original idea has undergone change. The stability of exchange rates was an objective of the original Articles. One consequence was that par values could be changed only if a member was in fundamental disequilibrium. Now, however, the stability of orderly underlying conditions that result from appropriate economic and financial policies is the objective, so that there will be “a stable system of exchange rates.” The assumption was that floating would keep the balance of payments in equilibrium, because exchange rates would be allowed to respond smoothly and promptly to changes in underlying conditions, and that in this sense the “system” would be stable. The new system would give each member freedom to concentrate on domestic policies. It is not necessary here to describe the discrepancies between this theory and the reality that has emerged.
A fourth concept that persists is the undesirability of unfairly competitive depreciation. Under the original Articles members were required to collaborate with the Fund to avoid competitive exchange alterations. All devaluations are competitive in the sense that in devaluing its currency a member seeks a benefit for itself and therefore imposes a correlative detriment on other members, but the change had to be no more than was necessary to correct the member’s fundamental disequilibrium. A change that went beyond that criterion was unfairly competitive. The Articles now refer to the obligation of a member to avoid certain actions that would give it an unfair competitive advantage. The insertion of the world “unfair” does not go beyond the idea of a competitive exchange alteration in the earlier Articles. But the test of a change in par value to eliminate a fundamental disequilibrium has been replaced by something like the test of what is necessary to achieve a sustainable balance of payments position over a reasonable period ahead without reliance on policies that are destructive of national or international prosperity.
The Articles have always provided that members must avoid restrictions on the making of payments and transfers for current international transactions,35 subject to the right of members to avail themselves, if they wish, of transitional arrangements to maintain and adapt the restrictions they are applying when they become members of the Fund.36 The obligation to avoid these restrictions is intended to promote what is sometimes called the multilateral system of payments and transfers for trade and other current account transactions of an international character.37 In more recent years, the multilateral system has been described also as market convertibility because the payments and transfers that must be unrestricted have been made increasingly through exchange markets and not through governmental channels.
Market convertibility was not the only form of convertibility to be found in the Articles. Convertibility with gold in accordance with the practice of freely purchasing and selling gold as described earlier has disappeared from the Articles. So-called official convertibility was an obligation that members had to observe if they undertook the full obligations of convertibility, which meant that they were not availing themselves of the transitional arrangements that have been mentioned. According to the obligation of official convertibility, a member was bound to convert the holdings of its currency by the monetary authorities of another member if the holdings were the result of recent current international transactions and, therefore, had not become capital, or if conversion was requested to enable the holder to make payments for such transactions. The obligation had to be performed only if the member approached for conversion was entitled to use the Fund’s resources, although the member was not bound to make the conversion with the help of the Fund. The theory of official convertibility was that exchange markets might not be adequate to deal with the volume of payments and transfers that might develop under a multilateral system, because members might centralize in their reserves all or a large proportion of the foreign exchange their residents received. Official convertibility through the Fund was intended to supplement market convertibility and ensure the effectiveness of the multilateral system of payments and transfers.38
The growth of exchange markets and the decline in exchange controls under which foreign exchange had to be surrendered to monetary authorities made official convertibility unnecessary. The holder, whether official or private, of balances of another member’s currency could transfer the balances through the exchange market.
The obligation of official convertibility must be understood as a means of supporting the par value system as well as the multilateral system of payments. It was to be expected that if a member in supporting the parities between its currency and the currencies of other members obtained balances of their currencies by intervention, the issuers of the other currencies would redeem the balances with a nonnational asset such as gold (and later SDRs) or with balances of the holder’s currency purchased from the Fund. Purchases from the Fund would give the member whose currency was purchased an equivalent right to purchase currencies from the Fund if the member encountered balance of payments difficulties of its own. The member obtained this equivalent right because a member’s total right to use the Fund’s resources at any time was measured by reference to the Fund’s holdings of the member’s currency. If the holdings were reduced, the right was increased by a corresponding amount. The equivalent right could be regarded as a nonnational asset because it was exercisable in transactions with the Fund. It should be apparent from this analysis that another assumption on which official convertibility rested was that there would be various currencies, although probably not a great number, that would be used in international payments. In practice, however, the U.S. dollar became the predominant currency of payment. This development was another reason for the desuetude of official convertibility. Members in balance of payments difficulty purchased foreign exchange from the Fund not to perform the obligation of official convertibility by settlements with monetary authorities but to support their currencies by intervention in the exchange markets.
The collapse of the par value system and the likelihood that there would be no retreat from free exchange markets to the centralization of foreign exchange would have justified the deletion of the obligation of official convertibility from the Articles. It continues to appear, however, in the Second Amendment. The explanation is that a number of members did not want deletion to imply that some procedure for official convertibility with a nonnational asset would not be restored at some future time. What that procedure might be could not be foreseen and therefore agreement could not be reached on an alternative to the existing obligation for inclusion in the Articles. The Fund made it clear, however, that although the obligation continued to exist, members were expected not to invoke it. Preservation of the obligation is a symbol not only of the preference of some members for greater international control over exchange arrangements but also of the desirability or necessity of some form of official convertibility if a par value system were restored. For the latter reason, arrangements for intervention and the treatment of imbalances are among the conditions that must be satisfied if the Fund is to call into operation the par value system set forth in the Second Amendment.
Restrictions on the making of payments and transfers for current international transactions are not the only forbidden exchange practices. Members have been required at all times to avoid multiple currency practices and discriminatory currency arrangements.39 Changing conditions, however, have given a different application to these obligations. For example, multiple currency practices in the days of the par value system involved certain departures from the margins around the parities for exchange transactions. The concept of multiple currency practices had to be largely redefined as a result of the Second Amendment because of the disappearance of the par value system. Again, discriminatory currency arrangements in the form of broken cross rates, which means in essence incompatibility among the exchange rates prevailing in the various exchange markets because of the actions of monetary authorities, become more likely when members are free from an obligation to observe margins for exchange transactions.
In effect, the categories of prohibited measures remain the same but cover somewhat different practices because of new conditions. The Fund continues to be as resolutely opposed to the prohibited categories of measures as in the past notwithstanding the changed conditions. This opposition is inspired by the conviction that multiple currency practices are equivalent to subsidies or taxes and misallocate resources and that discriminatory currency arrangements are distortions and inequities in international payments. The Fund, it is true, has always had authority to approve both of these prohibited measures, as well as restrictions on the making of payments and transfers for current international transactions, but the Fund exercises this authority in accordance with policies that emphasize the exceptional circumstances and the limited periods for which it will approve these practices.40
The Fund has always held financial resources and exercised powers to engage in certain transactions and operations involving its resources.
The Mutual Fund
The concept of the Fund as a financial organization was that through it members would assist each other when resources were needed to meet balance of payments problems. The Fund’s resources would be subscribed by members in amounts equal to their quotas. Assistance would help members to observe the code of obligations, including the obligations relating to the par value system. One of the purposes of the Fund has always been to make its resources available under adequate safeguards, so as to give confidence to members and enable them to correct maladjustments in their balances of payments without resorting to measures destructive of national or international prosperity. It should be noted that this purpose is not confined to the prosperity of the individual member but takes account of the prosperity of the whole community of members.41
Members in deficit in their balances of payments would be able to purchase the currencies of members in surplus. The purchaser would make the purchase for its own currency, and would terminate this use, as its balance of payments and reserve position improved, by repurchasing its currency from the Fund with resources that the Fund would find useful in its further transactions with members. If a member whose currency had been purchased was in deficit at a later date, it could, in its turn, purchase resources from the Fund. The refinements of this theory need not be recalled: the essential idea was that the Fund’s resources in strong currencies would revolve for the benefit of the membership at large.
The concept of the mutual Fund under the original Articles justified concessionality. Rates of charge for use of the Fund’s resources could be low, and the Fund paid no interest to members for the use made of their currencies by members that had purchased the currencies from the Fund and had not yet made repurchases.
The concept of mutuality is still a feature of the Fund, but less obviously. In present conditions, surpluses and deficits tend to be prolonged, so that the idea of taking turns in giving and receiving assistance through the Fund becomes less marked. Moreover, the maximum period of permissible outstanding use has been lengthened from five years to as much as ten years under some policies, so that the Fund’s resources tend to revolve more slowly than in the past.42
For many years, the dollar was the main currency in use. Not until the Second Amendment was there a legal mechanism that gave the Fund the assurance that it would be able to sell all the currencies it held when it was justifiable to sell them because the issuing members were in a sufficiently strong balance of payments and reserve position. The original Articles were influenced by the thought that the currencies purchased from the Fund would often be determined by the bilateral balance of payments position between the member purchasing a currency and the member that issued the currency. Therefore, it was unnecessary to require the issuing member to convert balances of its currency in the hands of a purchasing member as the result of a transaction with the Fund.
Selection of the currencies suitable for purchase from the Fund according to bilateral balances of payments became antiquated with the spread of convertibility. It was more logical to take account of the worldwide balance of payments position of members, whether in deficit or in surplus. The Fund should sell the currencies of members in surplus according to equitable formulas, for the benefit of members in deficit. The problem, however, was that only a few currencies could be used by members in support of their currencies in the exchange market, because in practice only a modest number of currencies were traded on a broad scale in the markets.
To make most currencies held by the Fund useful in its transactions when the currencies were suitable for sale, it was necessary that the issuers should exchange balances of their own currency when purchased from the Fund for one of the few currencies that were held in the issuer’s reserves and could be put into the exchange market by the purchasing member. The Articles imposed no obligation on the issuer to make this exchange because of the assumption, and indeed language of the Articles, that the purchaser would be making payments in the currency it purchased. Much was done in the spirit of collaboration, but there were difficulties with some members. These difficulties and the spread of strong balance of payments and reserve positions among members made it possible to include in the Second Amendment an obligation on members to exchange balances of their currencies purchased from the Fund for so-called freely usable currencies if the purchased currency is not itself a freely usable currency.43 Such a currency is defined as one that the Fund determines is in fact widely used to make payments for international transactions and is widely traded in the principal exchange markets.44 So far, the Fund has determined that the currencies of France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States meet these criteria.
As a result of collaboration before the Second Amendment and the change in the law under the present Articles, the number of currencies sold by the Fund has grown steadily, although they still account for no more than about 40 percent of the total. By the time of the First Amendment, however, a number of European currencies had been sold by the Fund in sufficient volume to strengthen the voices of the European members on matters involving the Fund’s financial activities. European members insisted that the Fund should pay remuneration to a member for the net outstanding use of its currency by other members as a result of their transactions with the Fund. A consideration that inspired this request was that a member exchanging its currency when purchased from the Fund for a currency held in the member’s reserves sacrificed the interest it could earn by investing the balances the member provided in the exchange.
The Articles have provided for remuneration since the date of the First Amendment.45 The effect is that the concessionality that formerly was inspired by the principle of mutuality has been modified. Remuneration is an expenditure by the Fund for which the Fund obtains recompense by levying charges on the use of its resources at rates higher than they otherwise might be. A degree of concessionality does remain, in spite of this modification, because the current rate of remuneration is 85 percent of the combined interest rate calculated by reference to a weighted basket of five securities denominated in the currencies of five members and available in their markets.46 A member providing balances of a currency from its reserves in exchange for balances of its own currency purchased from the Fund has often earned less in the form of remuneration for the use made of its currency than it would have received as interest on the investment of the balances of the reserve currency it provides.
Character of Transactions
The drafters of the original Articles adopted language that would avoid the impression that a member’s transaction with the Fund in which the member obtained temporary use of resources was a loan by the Fund. The language of lending was avoided. The transaction took the form of, and was described by the Articles as, a sale by the Fund and a purchase by the member of the currencies of other members. When the member terminated the use it was making of the Fund’s resources, the transaction was not described as repayment by the member but as repurchase by the member of its own currency. The member made the repurchase with currencies according to formulas for repurchase in the Articles. The form and language of the transactions were intended to avoid or reduce embarrassment for a government if it had to approach the Fund to obtain resources.
Other features of the transaction distinguished it from traditional loans. The Articles prescribed no fixed period for repurchase, a member making use of the Fund’s resources paid charges that were not described as interest, the charges rose according to an unusual formula, and the member’s repurchase might not be made with the currency it had purchased from the Fund. Furthermore, the Fund was entitled to sell to other members in difficulty the currency of the purchasing member that it had transferred to the Fund in exchange for the currencies it had purchased. The Fund was entitled to sell the purchasing member’s currency at any time, and the member could not veto the sale. Under the Fund’s policies, however, the Fund would not sell the purchasing member’s currency unless the member had recovered from the difficulty that had led it to make the purchase. If the Fund did sell the currency, the effect for the member was the same as if it had made an equivalent repurchase.
Some of the characteristics of the transaction as described above have disappeared. Nevertheless, the form and language of the transaction have not changed. They have been retained even though since the early 1950s the economic vernacular of the Fund has been a vocabulary of loans, credits, and repayments. This language has been more than a conventional means of expression: it has been both the product of, and an influence on, the way the Fund and its members think about its transactions.
The Fund does not think of all transactions as loans. When the Fund’s early policies on the use of its resources were established, a distinction was made between the credit tranches and the gold tranche, as they were called. The gold tranche was the amount by which a member’s quota exceeded the Fund’s holdings of the member’s currency. A member’s normal subscription was paid with an amount of gold equivalent to 25 percent of quota and an amount of the member’s currency equivalent to the rest of the quota.
A member’s gold tranche was originally equal to its gold subscription, which accounted for the terminology. But calculation of the gold tranche at any time would be affected by any net outstanding use the Fund had made up to that date of the member’s currency in the Fund’s activities or any net outstanding use the member had made of the currencies of other members. The Fund’s disposition of the member’s currency could increase the member’s gold tranche; the member’s acquisition of the currencies of other members could have the opposite effect. A member’s gold tranche at any time was equivalent to the net contribution to the Fund the member had made from the member’s reserves in the form of gold adjusted for the net effect of the transactions that have been mentioned.
The Fund did not regard a member’s transactions within the gold tranche, that is, transactions that did not raise the Fund’s holdings of the member’s currency above the level of the member’s quota, as the extension of credit by the Fund. The Fund decided, therefore, that its policy of conditionality, which is discussed later, would not be applied to these transactions. In effect, the Fund met requests for transactions in the gold tranche without challenge even though the economic conditions for transactions as stated in the Articles did not distinguish among transactions. The de facto policy of refraining from challenge was replaced by de jure immunity from challenge by the First Amendment. The Second Amendment has replaced the expression “gold tranche” with “reserve tranche,” principally because of the changed role of gold in the Fund.47 But there is further justification for the change because modifications in the Fund’s financial practice has made the reserve tranche an artificial concept for which a simple calculation such as the one that explained the original gold tranche does not exist.
Originally, the Fund propagated the view of the gold tranche as a reserve asset because the gold tranche represented the true economic contribution that a member had made to the Fund, and the Fund considered it detrimental to relations with a member if the member was compelled to show a reduction in its reserves as a result of membership. The rationale of later developments is that a member has the opportunity to retain or enlarge a reserve asset in the Fund, in the form of the reserve tranche,48 without reference to the member’s true economic contribution to the Fund and even though the member may be making a net use of the Fund’s resources.
All transactions of the Fund not in the gold tranche were subject to conditionality. Originally, all transactions subject to conditionality took place in the credit tranches. These transactions had the effect of increasing the Fund’s holdings of a member’s currency above an amount equivalent to the member’s quota. Further developments in policies on the use of the Fund’s resources are discussed under the heading of “Proliferation of Policies on Use.”
The Revolving Fund: Temporary Use
The Fund’s financial activities are intended for use in support of the balances of payments of members. By implication, therefore, use was not to be prolonged beyond a period to which the Fund has always applied the adjective “temporary.” If a member’s problem could not be solved within such a period, so that it would not be able to terminate the use it was making of the Fund’s resources during a temporary period, the member should seek financial resources elsewhere, for example from the World Bank.
The Articles, however, did not prescribe a date for repurchase and until the First Amendment did not even mention the word “temporary.” Two techniques were included in the Articles to encourage temporary use: repurchase formulas and progressive charges. By means of these techniques, the Fund’s resources in usable assets would revolve and be available for the benefit of members whenever they were in balance of payments difficulties. The Fund was often called a “revolving Fund.”
Repurchase formulas of great complexity and ingenuity were designed to produce obligations to repurchase by a member using the Fund’s resources. The formulas, though complicated, were based on two simple ideas. First, in the financial year of the Fund in which a member made a credit tranche purchase a repurchase obligation should put the member in the same position as if it had made equal use of the Fund’s resources and the member’s monetary reserves. Second, in any financial year a repurchase obligation should require the member to share with the Fund any increase in the member’s reserves. Neither form of repurchase should be carried to the point at which the member’s reserves would be reduced below an amount equivalent to its quota under the original Articles or 150 percent of quota under the First Amendment.
The trouble with the provisions of the Articles on repurchase was that they did not always produce obligations when there was economic justification for them and sometimes produced obligations when they were inconvenient for economic reasons. As early as 1952 the problem of the risk of prolonged use of the Fund’s resources was met by a declaration of the Fund that the period of use should not exceed three to five years after a purchase, which meant that a repurchase equivalent to each purchase should be completed not later than five years after the purchase. A member was expected to announce that it would repurchase in accordance with this policy to the extent that repurchase obligations did not accrue under the formulas of the Articles. The Fund gave legal force to this policy whenever provisions of the Articles made it possible to impose a supplementary obligation.
The First Amendment retained the original provisions on repurchase obligations, with certain modifications, but although the underlying ideas on which the obligations rested were retained, the Fund received authority to impose supplementary obligations in all instances. The effect was so complicated a body of law and practice that the drafters of the Second Amendment agreed to make a new start with a simpler and more comprehensible set of principles.
The Second Amendment contains no formulas for repurchase.49 The Articles express the expectation that normally a member will repurchase, in respect of all purchases except those in the reserve tranche, as the member’s balance of payments and reserve position improves. This principle is now the fundamental one. The Fund is entitled to transform the expectation into an obligation if the member does not act in accordance with the expectation. If these provisions are not effective to bring about repurchase, the member must complete repurchase within five years whatever the member’s circumstances may be. The Fund is authorized to require this repurchase obligation to be performed in installments during the period beginning three years and ending five years after a purchase. The Fund has powers, in addition, to change these periods and to establish different periods for repurchase under special policies on the use of its resources. The basic period for repurchase continues to be five years at the outside. The longest period established in practice so far is ten years. This period applies under one of the Fund’s special policies on the use of its resources that is intended to be of particular benefit to developing members with structural problems that impede adjustment of the balance of payments. In earlier years of the Fund, ten years would have been considered a lengthy period.
Charges on outstanding use of the Fund’s resources were seen by the drafters of the original Articles not only as a source of income for the Fund but also as a technique for discouraging a prolonged use of the Fund’s resources. In fact, it was fairly common at one time to refer to the charges as “deterrent charges.” The Articles included a schedule of fixed rates of charge on the Fund’s holdings of a member’s currency in excess of quota, which is to say on holdings that originated from transactions in the credit tranches. The rates of charge ascended according to the ratio between these holdings and a member’s quota and also according to the length of time during which the Fund had held balances of the currency. The Fund was authorized to modify the rates of charge.
Charges are no longer looked upon as deterrents to prolonged use of the Fund’s resources. The obligations to repurchase not later than at fixed dates make it unnecessary to view rates of charge in that way. The charges that the Fund now imposes have been simplified by eliminating the progressions based on the relationship to quota and on time, except for charges on outstanding holdings originating under certain policies no longer in effect. The burden on members is less than it might be if progressive charges were imposed in current conditions in which, because of the intensity of problems, policies permit the use of resources in larger multiples of quota, and for longer periods, than in the past. Of course, symbolic progression was an alternative, and before the change in practice the tendency was to make minuscule increases in the rates of charge.
Another change is that rates are no longer fixed and, therefore, the predictability of the past has disappeared. Rates of charge depend on the resources used to finance the transactions in which the Fund obtains the holdings of currency on which charges are levied.50 The single rate of charge on holdings resulting from transactions, or on those parts of transactions, that are financed with the Fund’s ordinary (nonborrowed) resources is determined periodically with the objective that a modest amount of net income can be added to the Fund’s reserves. These rates of charge have been concessional when compared with rates of interest prevailing in the markets. The rates of charge on holdings derived from transactions financed with resources borrowed by the Fund are determined periodically to reflect the net cost of the borrowing together with a tiny margin in excess of that cost. The Second Amendment provides that rates of charge on balances “normally” shall rise at intervals during the period in which the balances are held,51 but, as noted already, this progression is not imposed at present because of the abnormal gravity of current balance of payments problems.
The Passive Fund
Two associated ideas that were expressed in earlier years were that the Fund was a passive Fund and that the Fund provided a second line of reserves for its members. These ideas will be examined separately.
There have been at least three applications of the concept of the passive Fund. First, the Articles have declared at all times that, except as otherwise provided by the Articles, the transactions of the Fund are confined to providing a member, on its initiative, with resources in return for the member’s currency.52 The crucial phrase for the purpose of the present discussion is the one that refers to the member’s initiative. The Fund cannot compel a member to use the Fund’s resources. The practical qualifications of this principle will be noted when the concept of the Fund as a second line of reserves for members is considered.
Second, the Fund does not have authority to accept holdings of a member’s currency in repurchase by another member or in any other operation or transaction with another member if the effect would be to raise the Fund’s holdings to a level in terms of the member’s quota at which the member would have to pay charges to the Fund on the holdings. The reason for this principle is that if the Fund acted otherwise than in accordance with the principle the effect would be the same as if the Fund had initiated a transaction with the member whose currency it was accepting. Another reason is that various rights and obligations of a member, in addition to the obligation to pay charges, depend on the level of the Fund’s holdings of the member’s currency. Under a provision of the Second Amendment, the Fund may sell gold for the currency of a member, provided that the Fund’s holdings of the currency are not increased by the sale to a level at which the member must pay charges, but the member may concur in a sale that brings about an obligation to pay charges.53
A new financial structure of the Fund was established by the Second Amendment.54 The Fund’s inability to accept a member’s currency when the effect would be to require the member to pay charges is confined to the General Resources Account of the General Department. That Account is the only one in which charges are payable on a member’s currency. Throughout this Chapter, the references to resources should be understood to be references to the “general resources” held in the General Resources Account unless the context shows that a reference to other resources is intended.
The Fund may hold resources in other Accounts of the General Department, such as the Special Disbursement Account or the Investment Account, but balances in these Accounts are not aggregated with holdings in the General Resources Account for the purpose of calculating charges or for other purposes when the level of holdings affects the rights and obligations of members. The Fund may hold balances in Accounts in the General Department not mentioned in the Articles and not part of the permanent financial structure of the Fund. The Borrowed Resources Suspense Accounts are examples of these accounts. They have been established, under implied powers, in the General Department but not in the General Resources Account for the purpose of receiving currency borrowed by the Fund that the Fund cannot use immediately in transactions conducted through the General Resources Account or for the purpose of holding currency received in repurchase that the Fund has to use in repayment of loans to the Fund when repayment is to be made through the General Resources Account at a future date agreed with the lenders. The practice of the past was to receive borrowed currency for immediate use and to repay loans to the Fund immediately on repurchase by the member whose transaction was financed with currency borrowed by the Fund. In this way the level of the Fund’s holdings of a member’s currency was not affected by loans to the Fund or repayments by it. The practice of fixed dates for advances under the Fund’s borrowing agreements and for repayments has been adopted for the convenience of lenders, but as a result of the practice holdings must be segregated in Suspense Accounts.
Third, the Fund had no authority under the original Articles to exchange the currency of one member for another member’s currency. The Fund’s sale of a member’s currency in return for the purchasing member’s currency and the purchasing member’s repurchase of its own currency from the Fund in return for another member’s currency, if regarded as exchanges, were the only transactions expressly authorized by the Articles as exceptions to the prohibition of exchanges of currencies. The Fund was unable even to receive a currency that it could not accept in repurchase because of limitations in the repurchase formulas and then exchange the currency for an acceptable currency. The portion of a repurchase obligation that accrued in a currency that the Fund could not accept was canceled. The First Amendment provided that the portion of the obligation that formerly had to be canceled had to be discharged by the repurchasing member in other assets, without authorizing the Fund to receive the unacceptable currency and exchange it for an acceptable currency. Similarly, the Fund could not exchange a currency that was not appropriate for sale under its policies for a currency that the Fund could sell in its transactions.
Exchanges by the Fund were prohibited even if the members that issued the two currencies were willing to concur in the transactions. The general interest was better served by denying the Fund authority to change the composition of its holdings of currencies. Even though an exchange of the currencies of two members would have direct effects only on the rights and obligations of the two members, the membership of the Fund as a whole might have an indirect interest. There was an even more obvious objection to a power of the Fund to compel a member to make exchanges. A member would be compelled to provide reserve assets beyond the reserve assets it provided as part of its subscription. A power to make exchanges through the markets was objectionable because the Fund might influence conditions in a member’s exchange market in a way that the member considered undesirable.
The broad principle that the Fund has no power to make exchanges of currencies continues to be a feature of the Second Amendment, but the principle is now confined to the General Resources Account. If the Fund sells gold and receives a member’s currency in an amount that would require the member to pay charges if the receipts were to go into the General Resources Account, the member may require the Fund to dispose immediately of the amount on which charges would be levied by exchanging it for the currency of another member. The exchange can be made only if the other member concurs and only if that other member will not have to pay charges.
It has been seen that, under the Second Amendment, if a member’s currency that is not freely usable is sold by the Fund, the member is required to exchange its currency for a freely usable currency on the prompt request of the purchaser, but the legal form of the transaction is an exchange between the two members and not between the Fund and a member. The same analysis applies to the obligation of a member whose currency is freely usable to supply it if it is needed for repurchase by another member, in exchange for another freely usable currency provided by the repurchasing member.55
The Fund may make exchanges of currency through other Accounts because the rights and obligations of members are not affected by the levels of currency in those Accounts. The Second Amendment expressly authorizes the Fund to exchange a member’s currency held in the Investment Account to obtain other currencies that the Fund needs to meet the expenses of conducting the business of the Fund.56 Under decisions of the Fund, currency held in the Trust Fund can be exchanged by the Fund for other currency,57 and the Fund can exchange currency held in the Borrowed Resources Suspense Accounts if the exchange is necessary to enable the Fund to invest the currency received in the exchange.58 For exchanges under the decisions, the concurrence is necessary of the two members whose currency is exchanged.
The present position on exchanges can be summarized as follows. The overriding principle continues to be that the Fund is not able by means of exchanges to modify the positions of members in the General Resources Account. An exception for the proceeds of the sale of gold is made to facilitate the exercise of that power by the Fund, but the concurrence of the members whose positions in the General Resources Account would be affected by exchanges is necessary. The Fund can make specified exchanges through other Accounts with the concurrence of the members whose currencies are exchanged, except that their concurrence is not necessary for the exchanges that can be made through the Investment Account, because the Fund must have the assurance that it can obtain the currencies it needs for meeting its expenses.
Maintenance of Value and Investment
It will be convenient, before discussing the concept of the second line of reserves, to consider maintenance of value and investment. The Articles have always provided that assets of the Fund shall be maintained in value. Under the original Articles, the value of the Fund’s holdings of currencies, all of which were in a single account, were to be maintained in terms of gold value. On a devaluation or de facto depreciation of a member’s currency, the member transferred more units of its currency to the Fund; on a revaluation or de facto appreciation of a member’s currency, the Fund returned units of the currency to the member. The basic purpose of maintenance of value was that the Fund should be able to conduct transactions involving a member’s currency without profit or loss as a result of changes in the external value of the currency. This principle meant that the Fund should be able to deal in currencies at exchange rates compatible with those in the markets. If this principle had not been recognized by the Articles, members would not have wished to receive some currencies in transactions and would have been too eager to receive others. The First Amendment made no change in this principle.
The Second Amendment continues to provide for maintenance of value, but in terms of the SDR as the Fund’s present unit of account, instead of gold, and in relation only to the holdings of currency in the General Resources Account.59 The reason for maintaining the value of holdings in that Account is the same as for maintenance of value in the past.60 A change has occurred, however, because not all the Fund’s holdings of currency are maintained in value by adjustments between members and the Fund. Holdings in Accounts other than the General Resources Account are not subject to such adjustments. A reason for this limitation is that adjustments become troublesome when the external value of currencies fluctuates constantly in relation to the SDR. Another reason is that there is an overriding international interest to ensure that transactions can be conducted effectively through the General Resources Account, but it would be difficult to assert that there is a similar interest in relation to the transactions conducted through other Accounts. Obligations to maintain value might discourage members from engaging in these other transactions, instead of facilitating transactions as in the case of the business conducted through the General Resources Account.
Losses do not enhance the reputation of a financial organization, even if it is an international organization established to assist its member states. The members themselves would be troubled by losses, as is evidenced by the Fund’s policies on charges and the building of reserves, but lenders to the Fund might be even more seriously alarmed by losses. Therefore, powers of investment have been recognized that enable the Fund to maintain the value of assets, always in terms of the SDR and sometimes in terms of a currency or currencies as an alternative. Before the Second Amendment, the Articles contained no express power of investment. In the early years of the Fund, a power was recognized by interpretation for the limited purpose of counteracting an impairment of the Fund’s resources resulting from accrued or prospective excesses of expenditure over income. The Second Amendment includes an express power to invest currency up to the amount of the Fund’s reserves through the Investment Account,61 and another express power to invest the proceeds of the sale of gold that are held in the Special Disbursement Account.62 Under decisions of the Fund based once again on interpretation, the Fund may invest currency held in the Borrowed Resources Suspense Accounts and in Accounts, including the Trust Fund, administered by the Fund as a service for members, usually but not invariably with the concurrence of the member whose currency is invested.
Second Line of Reserves
It was sometimes explained that a member’s right to use the Fund’s resources was a second line of reserves for the member. Two elements were combined in this view of access to the Fund’s resources: they were a potential addition to a member’s reserves and to the resources the member could borrow. Members accepted no obligation under the Articles to approach the Fund for the use of its resources before or after obtaining or attempting to obtain resources elsewhere. It has been seen that the initiative to approach the Fund, or to refrain from approaching it, was left wholly to members. The Articles contemplated that a member might recruit resources from lenders before or after coming to the Fund, and special provisions were included in the repurchase provisions to mitigate their impact because members had received loans or were setting aside resources to repay loans. The possibility did exist, therefore, that a member in balance of payments difficulty would not go to the Fund at once and would contract loans from others before coming to the Fund if the member’s needs were not met in full. It was desirable to provide that members had the initiative not only because freedom in this respect was considered preferable to regulation but also because strain on the Fund’s resources would be less than it would be under some form of obligation requiring members to request the use of the Fund’s resources.
To reduce strain on the Fund’s resources, it was sometimes argued that if a member in balance of payments difficulty had ample reserves, or could augment them substantially by borrowing, the member should not request, or was not entitled to request, the use of the Fund’s resources, but the Fund has never affirmed such a principle. The Second Amendment clarifies that there are three separate situations in which a member may have a justifiable need to use the Fund’s resources: a balance of payments difficulty, the low level of its reserves, or unfavorable developments in its reserves (for example, because of an impending discharge of obligations). The Fund’s resources as a second line of reserves does not mean that a member must use its own reserves first if it has a need that falls into any one of these categories.
A number of practices have developed over time that have a bearing on the concept of the Fund as a second line of reserves. From time to time, the criticism has been made that the Fund’s conditionality, which is discussed later, has been too severe. The Fund urges members to come to the Fund early rather than late, because if they do, conditionality will be less burdensome. The problems of some members have been intensified because plentiful resources were available without conditionality in the international capital markets and members were able to postpone the day of adjustment. If members heed the Fund’s invitation, the Fund’s resources will not be a second line of reserves and the Fund will not be the lender of last resort as it has sometimes been called. Increasingly, private banks have advised members to turn to the Fund, or have even insisted on this action as a condition precedent to lending by the banks, so that there can be greater assurance that members will follow policies designed to solve their difficulties and increase the prospects for the repayment of debt.63
The Fund has taken action that would have the effect of limiting certain categories of external borrowing by a member. A performance criterion in some stand-by arrangements makes a member’s continued ability to engage in transactions with the Fund dependent on the member’s observance of a limit on certain kinds of external borrowing that would impose an undesirable burden on the balance of payments. The Fund has also made allocations of SDRs in the hope that the allocations, by meeting demand for reserves and by means of a superior asset, would be a substitute to some extent for borrowing.
The Fund has taken action also to enlarge external borrowing by a member. The Fund has rarely attempted to supply a member with all the resources it needs to meet its problems. In some cases, official entities have provided resources to supplement those made available by the Fund. Even if the Fund’s resources were adequate to meet the full needs of all members, it would be undesirable to discourage the inflow of capital provided by others. The maintenance or increase of capital inflow is normally an objective of a member’s program that is supported by the Fund. The Executive Board has been informed of the prospects for further resources when it is considering a proposed stand-by arrangement, so that the Executive Board can judge whether sufficient resources will be available to give reasonable assurance that a member’s program will succeed. The staff has been in contact with private banks on occasions in the past to provide factual information about a member’s economy and to learn what loans the banks were likely to make.
A new development occurred when the Fund approved an extended arrangement for Mexico at the end of 1982. The Managing Director received assurances from the banks that had outstanding loans to Mexico that they would make new loans. According to widespread press reports the amounts would be equivalent to a percentage of outstanding exposure. With these assurances, the Managing Director concluded that he could recommend approval by the Executive Board of the proposed extended arrangement with the expectation that adequate resources would be available in support of the program. This procedure, which has been followed in other cases, was a practical expression of the common interest of the Fund and the banks in the adjustment of Mexico’s balance of payments. The banks responded positively, not only because of this common interest but also because the amount of resources the Managing Director could recommend as the Fund’s contribution was much more substantial under current policies than could have been made available under former policies. This form of collaboration between the Fund and the banks reduces the risk of abrupt and disorderly action, such as defaults, or the protectionism that countries might be forced into by a lack of resources.
Proliferation of Policies on Use
The original Articles did not distinguish among different balance of payments problems. A metaphor that can serve to describe the uses that a member could make of the Fund’s resources is the tower. A member could go on purchasing resources from the Fund in return for the member’s currency, so that the Fund’s total holdings of the currency reached a higher and higher level of the tower. The highest normal level was reached when the holdings increased to 200 percent of quota. As the normal subscription of a member in its own currency was equivalent to 75 percent of quota, cumulative outstanding use could total the equivalent of 125 percent of quota. The Fund could act as a zoning authority and allow the tower to be even higher by waiving the limit of 200 percent, but the Articles foresaw that waivers would be exceptional.
In 1963, the Fund took the first step to recognize that distinctions could be made among balance of payments problems. The Fund decided to establish its compensatory financing facility (CFF) to take care of difficulties caused by shortfalls in the proceeds of a member’s exports, particularly exports of primary commodities, if the shortfall is largely attributable to circumstances beyond the member’s control. The Fund declared that it would be sympathetic to requests for waivers if they were necessary for purchases under the facility or if those purchases made waivers necessary for purchases not under the facility.
The tower remained the appropriate metaphor, however, because the currency the Fund received from the purchasing member as the quid pro quo for the resources the Fund provided under the compensatory financing facility was piled on top of all other holdings of the currency, whether obtained as subscription or as the result of purchases by the member under the Fund’s basic policies on the gold tranche and credit tranches. The effect of purchases under the facility was to push the Fund’s holdings of the currency to a higher level in terms of the member’s quota than if there had been no purchases under the CFF. The member might then find it more difficult to make subsequent purchases under the credit tranche policy, because more stringent conditionality applied at the higher levels of the tower. The Fund seemed to be taking away with one hand what it gave with the other.
In 1966 the Fund decided to treat the balances of a purchaser’s currency that the Fund received under the compensatory financing facility as if they were not included in total holdings of the currency when the Fund considered requests for transactions under the credit tranche policy. This change was fundamental. Waivers of the limit of 200 percent were now considered routine, but the more important development was that the Fund had begun to transform the structure of its policies. If balances received under one special policy could be treated as if they were separate from all other holdings, other special policies could be established and treated in this way. The Fund could recognize other categories of problems and could make resources available to meet these problems on terms appropriate to them without affecting other policies. The practice was subject to the condition that a particular kind of problem could be distinguished from other problems in accordance with bona fide criteria that were consistent with the Fund’s purposes.
The metaphor appropriate to this transformation is a row of separate windows instead of a tower. The Fund now has such a row of windows. Furthermore, the Fund is able, by the same technique of excluding certain holdings in calculations for the purpose of applying its policies, to give different treatment to the parts of a transaction that are financed with resources borrowed by the Fund and with ordinary (nonborrowed) resources.
The First Amendment recognized the exclusion of some holdings in calculations for certain limited purposes, but the Second Amendment has given the Fund wide authority for separate windows and has made it easier to open them.64 One use of this new authority that the Fund has made has enabled members, as noted already, to maintain or enlarge a reserve tranche position in the Fund, which members often consider a desirable component in their reserves. It is, for example, maintained in value in terms of the SDR and remuneration is earned on part of it.
A distinctive feature of the Fund’s financial activities is conditionality.65 The word is applied to the practice according to which, under most policies, the Fund makes its resources available only if it receives satisfactory assurances from a member that it will follow policies likely to solve its balance of payments problem within a temporary period and enable it to terminate its outstanding use of the Fund’s resources not later than a prescribed date.
Conditionality is now established as a distinctive characteristic of the Fund, but the necessity for it was not made explicit in the original Articles beyond a reference to “adequate safeguards” when the Fund made its resources available.66 At an early date in the history of the Fund, the United States urged the Fund to observe a policy of conditionality and argued that the necessity for conditionality was implicit in the Articles. The United Kingdom, probably foreseeing prolonged deficits, together with some other European members were insistent that the Articles assured members of “automaticity” in their access to the Fund’s resources in amounts that did not require waivers.
Stalemate came to an end with the Fund’s classic decision of February 13, 1952,67 which gave effect to the U.S. view and found a legal basis for it that members considered sufficiently persuasive. One of the achievements of the decision was its proposal of the stand-by arrangement, a novel legal instrument, under which a member could get an assurance that it would be able to receive a specified amount of resources, in specified installments, during a defined period in support of the member’s economic and financial program if the Fund considered it satisfactory. Until the Second Amendment, the Articles referred only to transactions and not to stand-by arrangements. The 1952 decision proposed stand-by arrangements because uncertainty about the Fund’s reactions to requests for the use of its resources had deterred members from requesting transactions, with the consequence that the Fund’s resources were becoming sterilized. The stand-by arrangement and the variant called the extended arrangement that was established in 1974 for the benefit of developing members have been adapted and improved over time to the point at which a greater volume of resources is made available under them than in other transactions.
An adaptation of stand-by arrangements that has been important in the promotion of conditionality was the inclusion of “performance criteria” in a stand-by arrangement for the first time in 1957. These criteria are concretely formulated tests that should enable both the Fund and a member to know, without further inquiry, whether the member can continue to make the purchases for which the stand-by arrangement provides. A member’s observance of performance criteria is some evidence that the member’s program of adjustment is succeeding. Performance criteria, however, are not conditions of an agreement between the Fund and members. A stand-by or extended arrangement is a decision of the Fund, to which the member’s letter of intent setting forth its program is annexed, but the arrangement and letter are not treated as a contract. Failures to observe performance criteria or other departures from the program are not breaches of contract.68
The need for conditionality was made explicit in the First Amendment. By that date, European members had provided a substantial proportion of the resources that the Fund had made available to members in difficulties. The European members, therefore, insisted that the modifications of the Articles should include provisions that require conditionality and forbid new unconditional uses of the Fund’s resources. The unconditional use of the gold tranche, and now the reserve tranche, was preserved. Although further uses of this kind are prohibited, the reserve tranche can now be enlarged in some circumstances on a member’s initiative.
Moreover, the Fund has tempered its policy of conditionality by establishing certain policies of light conditionality. They fall into three classes. The policy on the first credit tranche constitutes the first class. Transactions by a member in the first credit tranche can increase the Fund’s holdings of the member’s currency, after allowance is made for excluded holdings, by a first amount equivalent to 25 percent of quota. For transactions in this tranche, conditionality is less severe than for transactions in the three higher credit tranches, each of which is equivalent to 25 percent of quota, and for transactions beyond the credit tranches. Furthermore, performance criteria are not applied in the first credit tranche, and the full amount of the tranche is available without the phased installments that are the practice in the higher credit tranches. The first credit tranche has always been a feature of the tranche policies so that graduated conditionality will give members the confidence to request use of the Fund’s resources.
In the second class of policies with light conditionality are certain policies that deal with difficulties largely beyond a member’s control. The compensatory financing facility is a prominent example of this class.69
The third class includes temporary policies that are intended to emphasize financing the balance of payments for the time being rather than adjustment because, in the widespread conditions of the time, adjustment could take the form of restrictions and competitive devaluation. The Fund’s oil facilities of 1974 and 1975, which were introduced after the oil shock but are no longer in force, are examples of this class.
The content of conditionality has never been defined by the Articles or codified, beyond a few broad principles, by decisions of the Fund. The absence of a detailed code has enabled the Fund to develop and modify conditionality, as well as the form and content of stand-by and extended arrangements, to accord with changes in the world economy and with the special circumstances of individual members or classes of members.
Conditionality, which sometimes calls for the adoption of exchange practices and exchange rates appropriate to a member’s circumstances, has become the major influence exercised by the Fund in promoting adjustment. In this work, the Fund now relies more on its financial activities than on its regulatory jurisdiction. In earlier years, the Fund concentrated much attention on the elaboration of policies that member should follow to give effect to the obligations of conduct imposed by the Articles. The Fund adopted policies that called on members progressively to eliminate restrictions on the making of payments and transfers for current international transactions, multiple currency practices, and discriminatory currency arrangements. Most of these policies remain in force without major additions to them. Decisions to give effect to the par value system, however, have been replaced by decisions that may be the first in a sequence of decisions to give effect to the Fund’s duty of firm surveillance over the exchange rate policies of members. It is noticeable that before the breakdown of the par value system the volume of use of the Fund’s resources, in absolute terms and in relation to quotas, was much less than it is now. The reasons may be manifold, and one of them may be that quotas were a declining percentage of imports, but another reason may be that the more extensive and firmer obligations of conduct during the days of the par value system reduced the need for resources. Whatever were the full reasons, it seems clear that a large proportion of the total use of the Fund’s resources was made for the purpose of defending par values. This observation helps to explain why industrial members, and particularly the United Kingdom, made a larger use of the Fund’s resources than was made by developing members. The par value system could not have survived for as long as it did without the maintenance of effective par values by the main industrial countries, and by the issuers of reserve currencies in particular. In more recent years, most of the use of the Fund’s resources has been made by developing members.
Borrowing by Fund
Policies on the use of the Fund’s resources are usually defined by reference to members’ quotas. The original Articles required waivers if transactions would have the effect of increasing net use during any period of 12 months beyond the equivalent of 25 percent of quota or total outstanding use beyond the equivalent of 200 percent of quota. By implication, transactions not requiring waivers were considered to involve uses of the Fund’s resources that were not extraordinary. Waivers of the 25 percent limit became common in the 1950s, but waivers of the 200 percent limit were not granted until the 1960s and then only sparingly for some time after the practice began. The Second Amendment abolished the limit of 25 percent but retained the limit of 200 percent.70
Widespread and severe difficulties have led to outstanding use of the Fund’s resources on a scale beyond anything experienced in the past. Under some policies, longer periods of use are permitted, so that the Fund’s resources will revolve more slowly than in the past. The Fund’s policy on enlarged access, adopted in early 1981, is the most striking example of the change that has taken place. The policy permits transactions equivalent to 450 percent of quota, subject to cumulative outstanding use under all policies equivalent to 600 percent of quota. These amounts are exclusive of repurchases that have been scheduled by the Fund for discharge during the period and exclusive also of outstanding use under certain policies that require slight conditionality. Use even in excess of these enlarged amounts is possible in exceptional circumstances. The effect is that some members that held the view formerly that there was an imbalance between the severity of conditionality and the volume of resources the Fund could supply have lost their reluctance to come to the Fund, although other forces have helped to bring about this development.
It is not surprising that the proliferation of policies under which total outstanding use of the Fund’s resources may be many times the quota, while subscriptions are equal to quota, makes it necessary for the Fund to supplement its resources. The Fund has always had authority to borrow from members and from other lenders with the concurrence of the member whose currency is borrowed.71 It is frequently said that subscribed resources should be adequate to meet the normal needs of members and that the Fund should have to borrow only to meet abnormal needs. One reason why this belief is held so strongly is that if needs are normal, quotas should be adapted to meet them, but if needs are abnormal, and therefore not permanent, the structure of quotas and voting power should not be disturbed. The difficulty is to define exactly what is meant by normal and abnormal for this purpose. The distinction is thought sometimes to relate to the character of problems, sometimes to amounts, and sometimes to a combination of the two.
Borrowing by the Fund has increased in recent years. So far, the Fund has borrowed from a substantial number of lenders, but they have all been official entities. This practice reflects the sense of responsibility that members have for the effectiveness of the Fund and the safety of the international monetary system.
The first agreement under which the Fund could borrow if the need arose was negotiated by the Fund in the early 1960s. The form of the agreement was the decision of the Fund noted above, the General Arrangements to Borrow (GAB), to which the potential lenders adhered as the other contracting parties. The GAB, which continues to exist, is an agreement under which the Fund may call for loans and the other parties may decide whether they will comply. The parties continue to be eight of the main industrial members and the central banks of two other such members. Switzerland, a nonmember of the Fund, associated itself with the GAB by agreeing to enter into arrangements with participants in the GAB to make direct loans to them when the GAB is activated for their benefit. Agreement has been reached that Switzerland will become a contracting party to the revised GAB, so that the Group of Ten will become the Group of Eleven.
The purpose of the GAB was to enable the Fund to function more effectively in the conditions of widespread convertibility, including greater freedom for short-term capital movements, that were new in the early 1960s. Members of the Group of Ten would lend when the Fund needed supplementary resources to forestall or cope with an impairment of the international monetary system by recycling short-term capital flowing among the Ten. The Fund took the necessary step when the GAB was negotiated of clarifying that its authority to make its resources available, although subject to certain restraints, was not narrowly confined to assisting members that had deficits in the current account of their balances of payments. The clarification had the effect of correcting a decision of 1946 that gave a narrower interpretation.72
The GAB has been revised to retain the rationale of dealing with actual or possible impairment of the international monetary system, but without limiting the dangers to those created by conditions of convertibility. Furthermore, the GAB has been amended so that it will not provide solely for financing transactions of the Fund with the Ten.
The Ten have always wanted, in return for their loans, claims against the Fund of a quality sufficient to justify presentation of the claims as reserve assets, but mutuality among the Ten and the defense of the international monetary system were emphasized. In this spirit, for example, the rate of interest was equal to the lowest rate of charge levied by the Fund. The character of borrowing agreements has changed somewhat in more recent times. Since 1974, lenders have negotiated terms that have placed more emphasis on the quality of their claims. The interest rate on their loans, for example, is related to rates in the market. The cost of borrowing is passed on to members whose transactions with the Fund have been financed with borrowed resources. As a consequence, the Fund has collected modest amounts of resources and established Subsidy Accounts, through which poorer members can be compensated for part of the charges. Even the GAB has been amended to provide that interest rates on future loans to the Fund will be related to rates prevailing in the markets.
Under some other agreements by the Fund to borrow, the other terms have become more commercial in character. They include negative pledge, pari passu, cross-default, and most-favored-creditor clauses. The terms include also provision for the issue of bearer notes by the Fund, the waiver of the Fund’s immunity, and the arbitration of disputes.
SDRs (Special Drawing Rights)
Keynes proposed, as part of his plan for an International Currency or Clearing Union, that the Union should be authorized to issue a new international currency, which he called bancor, that would be transferable among members with no limit on the amounts that members in balance of payments surplus could be required to hold. White was not attracted to this proposal because he foresaw that the United States would be the main country in surplus most of the time and therefore would have an unlimited obligation to accept bancor in return for real resources. White’s preference was for a Stabilization Fund that would operate with subscribed resources and without obligations on the part of members to provide resources beyond their subscriptions. The organization should have authority to borrow, however, if it needed resources in excess of subscriptions, but no member should be bound to lend or to concur in borrowing by the Fund of the member’s currency from other lenders.
White’s view prevailed. The Fund, however, created reserve assets even before the First Amendment by giving the gold tranche and claims by lenders against the Fund under their loan agreements the qualities that would induce members to regard these rights and claims as reserve assets. Gold tranches, however, were created, on the initiative of members that used the Fund resources, when their transactions reduced the Fund’s holdings of the currencies of the members whose currencies were purchased to levels below their quotas. These reserve assets were not created on the initiative of the Fund. The Fund did have the initiative if it borrowed and undertook claims against itself with the quality of reserve assets, but it could not oblige members or others to lend. Moreover, the Fund’s need to borrow depended on the transactions initiated by members in balance of payments difficulties.
The First Amendment represented an acceptance of Keynes’s concept, not in lieu of White’s approach but in addition to it. Robert Triffin had argued persuasively that a system must collapse if it relied on persistent deficits in the balance of payments of the United States to meet the global need for increases in reserves. Increases in the dollar component in reserves might lead monetary authorities to request conversion with gold by the United States of balances regarded as excessive by the holders. The gold stock of the United States would shrink and could bring about renunciation of the undertaking to convert official holdings of dollars with gold. If countries did not request conversion, their dissatisfaction with the system would grow because symmetry would be destroyed. They had to use reserves when they were in deficit, but the United States would be free of any such compulsion when it was in deficit. If the United States eliminated the deficits in its balance of payments, the main source of additional reserves would run dry and international transactions could contract.
Since the First Amendment, the Fund is able to allocate SDRs to its members, at the same rate in proportion to quotas, to meet the long-term global need, as and when it arises, to supplement existing reserve assets in such manner as will promote the Fund’s purposes and will avoid economic stagnation and deflation, as well as excess demand and inflation in the world.73 The Fund is also empowered to cancel SDRs in amounts expressed as the same percentage of net cumulative allocations of SDRs. It will be evident that, if substantial amounts of SDRs were in existence and were a large proportion of total reserves, the Fund would be able to manage the volume of reserves in the interest of the efficient operation of the international monetary system.
Nevertheless, there were reasons why the First Amendment did not give the SDR better qualities or permit more extensive uses as a reserve asset than were written into the Articles. The United States pressed for the creation of the SDR because a new reserve asset could resolve the dilemma posed by Triffin and, in addition, could augment the reserves of the United States with an asset that could be used for the conversion of dollar balances if holders were willing to accept SDRs instead of gold. The United States, however, did not want the SDR to be so attractive that it would menace the position of the dollar as a reserve asset. Other members insisted on tight control of the SDR to prevent abuse of it, principally by the United States, which might be encouraged to persist in its deficits if the SDR were not subject to restrictive provisions. Some members wanted the SDR to resemble the traditional drawing rights that members exercised when purchasing currencies from the Fund. This attitude was responsible for the name of the SDR and for the care taken to avoid calling it a reserve asset in the drafting of the First Amendment. Some members that took this approach wished to ensure that gold would not be endangered as the primary reserve asset.
Positions changed in the negotiation of the Second Amendment. The United States no longer viewed the SDR as a needed supplement to its reserves, because it had terminated the official convertibility of the dollar and the United States was taking every opportunity to leave no doubt that it did not contemplate resumption of that form of convertibility. Other industrial countries were now anxious to improve the SDR as a nonnational competitor with the dollar as a desirable reserve asset. In the face of this support for the SDR, the United States continued to be cautious about an SDR that might challenge the dollar. A compromise was reached because the United States needed the support of other members in its campaign to reduce the status of gold as a reserve asset. The criteria for allocations of SDRs were not changed, but part of the compromise was a reference in the Articles to an obligation on the part of members to collaborate to make the SDR the principal reserve asset in the system.74 The meaning of that objective was not made clear, but in the spirit of it the Second Amendment improved the characteristics and extended the uses of SDRs. The Second Amendment gave the Fund powers to take further actions of this kind, and the Fund has already made substantial use of these powers.
A serious impediment to a greater role for the SDR in the international monetary system has been the growth in holdings of currency in reserves. This development has prevented the uninterrupted allocation of SDRs, with the result that the SDRs that have been allocated have been a declining proportion of total reserves. The only allocations so far were made in the seven years 1970–72 and 1978–81, for a total of approximately SDR 21.4 billion. The meaning of global need continues to be much debated. The allocations in 1978-81 were made on the following theory. A persistent demand for reserves was evidence of a global need notwithstanding the high level of total reserves; it was not necessary that all members should share in this demand; it was not necessary that reserves could be supplemented only by allocations of SDRs; allocations were more advantageous to members than borrowed resources; and normative effect should be given to the objective of making the SDR the principal reserve asset in the international monetary system. The meaning of global need in conditions of an assumed inelastic supply of reserves was adapted to conditions of elastic supply.75 This reasoning was not considered a sufficient justification for allocations after 1981. The growth in reserves other than SDRs has put off any expectation that the SDR can be the medium for controlling the volume of global reserves without some fundamental change in international monetary affairs.
The SDR has had much success as a denominator of amounts or as a unit of account on the basis of which obligations are settled in treaty practice, the activities of international organizations, and contracts of various kinds between private entities, between public entities, or between private and public entities. The SDR referred to here is not the SDR proper, which means the SDR allocated as a reserve asset, but a value that corresponds to the value the Fund has adopted for the SDR proper. The Fund has not purported to exercise its powers to improve the SDR in order to encourage use of the SDR as a denominator or unit of account. Nevertheless, the view is often expressed that improvements in the SDR proper and a more widespread use of it as a denominator or unit of account will have reciprocal beneficial effects. The Fund certainly has been inspired by this view in exercising the power conferred on it by the Second Amendment to determine the method of valuation of the SDR. The reduction of the original basket of determined amounts of 16 currencies to a basket of 5 currencies as the basis for the method of valuation has been the most important exercise of this power.
Until the Second Amendment, the Articles and the international monetary system rested on the principle of the universal acceptability of gold. The common denominator of the par value system was gold, members were prohibited from engaging in gold transactions among themselves at prices that departed from the par value of the currency for which gold was bought or sold, a range of obligations between the Fund and members were settled in gold, the SDR was defined by reference to gold, the Fund could compel a member to replenish the Fund’s holdings of the member’s currency with gold, and the United States undertook to maintain the exchange value of the dollar as the central currency of the international monetary system by means of gold transactions with other members. These and other aspects of the role of gold gave it the status of the primary reserve asset, or, as was sometimes said, the ultimate reserve asset.
Some members, principally the United States, held the view that gold had performed its role badly. The existence of markets in which gold was traded at prices not based on par values had had a destabilizing effect on the par value system, and various efforts by members to control the markets or neutralize the destabilizing effects had been unsuccessful. Furthermore, gold could not be relied on to provide the needed increases in global reserves. Indeed, gold had been drained from reserves sometimes to feed the markets in which it could be traded at prices not based on par values.
Dissatisfaction with gold led to a radical change in its position under the Articles in accordance with the conclusion that there should be a gradual reduction in its role. The SDR, it has been seen, is to be the principal reserve asset in the international monetary system, and members are required to collaborate with the Fund to achieve this objective. Gold is no longer the common denominator for the external value of currencies and cannot be given that function even if the par value system that is set forth in the Articles were called into operation.76 Even under present conditions, a member is forbidden to maintain the external value of its currency in terms of gold.77 The official price of gold is abrogated, and the Fund is prohibited from managing the price, or establishing a fixed price, for gold in the market. The SDR is no longer defined in terms of gold, and is substituted for gold as the Fund’s unit of account. Obligatory payments in gold between the Fund and members are abolished.
The Second Amendment is realistic in not attempting to prohibit the inclusion of gold in reserves and in aiming only at a gradual reduction in the role of gold. Fluctuations in the market price of gold create some discomfort because gold is held in reserves and because the price is considered a barometer of economic or political difficulties or other developments, but the fluctuations no longer produce a sense of crisis. The Fund has disposed of one sixth of its holdings of gold by the sale to members at the former official price (“restitution”) and by the sale to purchasers in the market of a similar quantity at market prices to finance the Fund’s Trust Fund for the benefit of eligible developing members.
Some General Reflections
Without abandoning the rule of law 78 or the principles of uniformity and symmetry in the treatment of members, the Fund has been pragmatic in responding to change in international monetary matters and the problems that change has posed. Keeping track of the development of the Fund is like film photography from a moving train, but some frames are presented here.
Change has occurred sometimes because of initiatives taken by member countries, often by the United States, and sometimes by the Managing Director and staff. The Managing Director’s leadership has become more pronounced and his authority broader as time has gone by, without any change in the description of his role in the Articles. The United States exercises great influence because of the size of its economy and its voting strength in the Fund, but economic and financial power is more diffused than it was during much of the history of the Fund. One consequence of the wider diffusion of power is that although major change without the concurrence of the United States is unlikely, the United States does not always prevail when it makes proposals and often must compromise.
Throughout the history of the Fund, the constant elements have included the practice of consultation by the Fund with its members, balance of payments financing, and some degree of regulatory authority over international monetary affairs with exchange rates at the center. The balance of payments has always been the subject matter that distinguishes the Fund’s field of competence from other international relationships. The range of matters that is accepted as bearing on the balance of payments, and therefore properly of concern to the Fund, has increased steadily, with the result that the distinction between international and domestic policies, with the exclusion of the Fund from the consideration of domestic policies, has now disappeared to a large extent. This development does not mean that the Fund has regulatory authority over all these policies. On the contrary, its regulatory authority is less than it was in the days of the par value system. The Fund’s influence on members’ policies is now greater through its financial activities than through the exercise of regulatory powers.
In the Fund’s financial activities, the special characteristics of its transactions as they existed under the original Articles have tended to disappear. The Fund becomes more like other financial institutions in many aspects of its financial activities, although conditionality distinguishes the Fund from other institutions.
Teleological application of the Articles and implied powers have always contributed to the suppleness the Fund needs in a changing world. These techniques of operation were sometimes divisive in the early years, but little objection is made to them now. One reason may be that the techniques are applied now almost wholly in the conduct of the Fund’s financial activities and not, as in earlier years, in relation to its regulatory authority. In the days of the par value system, the Articles were applied with the conviction that no matters involving exchange rates were outside the competence of the Fund, while now members have resumed much more authority over exchange arrangements and exchange rates. Another reason for the change in attitude to teleology and implied powers may be the explicit recognition by the Second Amendment that the international monetary system will evolve, with the Fund as the central though not the sole organization.
It is appropriate to end this account by noting once again the unusual phenomenon of an international organization that has accommodated itself to such fundamental developments as the collapse of the par value system, and has seen such extensions in its authority as have resulted from the creation of the SDR, the invention of conditionality, and the vast increase in the volume of transactions. All these changes in the Fund have taken place within the framework of express purposes that have not been modified in substance and scarcely in formulation since the organization came into being.
Supplemental Note to Chapter 4
1. A nicety of drafting may escape the eye of even observant readers of the provisions on the appointment of Executive Directors. Before the Second Amendment, the provisions were understood to mean that if a member was “entitled” to appoint an Executive Director, either because of the size of its quota or of its contribution of resources in outstanding use, the member was bound to appoint, because the provisions were deemed to establish an essential feature of the structure of the Fund. In the negotiation of the Second Amendment, it was decided that it should not be essential for a member to appoint an additional Executive Director because it had the right to appoint. The member might prefer to maintain the constituency to which it had belonged. The Second Amendment, therefore, continues to refer to the five members “entitled” to appoint on the basis of quotas but refers to members that “may” appoint on the basis of resources in outstanding use (Article XII, Section 3(c)).
2. The five members that appoint Executive Directors on the basis of quotas have some central functions in the international monetary system in addition to those mentioned in Chapter 4. These members are the issuers of the currencies deemed by the Fund to be “freely usable” under Article XXX(f), and of the currencies in which the instruments are denominated that constitute the basket that determines the interest rate on holdings of SDRs. Furthermore, the composition of the SDR basket has been considered a precedent of sorts in the following paragraph in the Statement on International Monetary Undertakings annexed to the Versailles communiqué of the Economic Summit Meeting:
3. We are ready to strengthen our cooperation with the IMF in its work of surveillance; and to develop this on a multilateral basis taking into account particularly the currencies constituting the SDR.
(See, for example, Summary Proceedings, 1982, pp. 50–51 and 82–84; Joseph Gold, SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, IMF Pamphlet Series, No. 40 (Washington, 1983), pp. 16–17).
3. The respective roles of the Executive Board, Executive Directors, Managing Director, and staff in consultations with members are discussed in Pamphlet No. 40 as follows (pp. 14–15) in a commentary on the decision of April 9, 1982 on surveillance (pp. 100–106):
(iv) The Managing Director responded also to the request of a number of Executive Directors for clarification of the role of Executive Directors in the consultation process and their role, and perhaps that of the Executive Board itself, in the briefing stage before a mission begins the consultative process. The Managing Director stated that the role of the Executive Board is clearly defined by the Articles, which provide that the Managing Director and the staff conduct the ordinary business of the Fund under the direction of the Executive Board. The ordinary business includes consultation missions. The Executive Board, he continued, has the power and the responsibility to adopt policies and to establish procedures for the conduct of consultations and negotiations with members, but the conduct of the consultations and negotiations themselves is the responsibility of the Managing Director and staff.
The Managing Director described the role of the individual Executive Director as follows:
The individual Executive Director plays a different but very important role in the consultation process. He is obviously responsible for presenting and explaining the views of his countries during Board discussions; but there are also many ways in which he can play a particularly useful intermediary role at an earlier stage by helping the staff mission to understand the policies and views of his countries and vice versa, …
This statement is one of the few authoritative examinations of the role of individual Executive Directors, although the subject has been raised from time to time in connection with some particular feature of the Fund’s activities. The Articles are silent on this subject, partly because of the novel position of Executive Directors as officers of the Fund appointed or elected by members, but officers who, unlike the Managing Director and staff, do not “owe their duty entirely to the Fund and to no other authority” in the discharge of their official functions. How an Executive Director achieves a balance between his relationship to the Fund and to members of his constituency is left to the Executive Director himself. [Footnotes omitted.]
4. On the mutual Fund and remuneration, see the Supplemental Note to Chapter 1, Section IX, paragraph 1.
5. According to the original structure of the Fund, the credit tranches were piled on top of the gold tranche, which meant that the credit tranches could not be reached until the member had gone through—that is, used—its gold tranche. The reserve tranche and the credit tranches are now separate windows in the sense that a member can make purchases in the credit tranches or under extended arrangements without first using the reserve tranche, and can elect to have certain reductions in the holdings of its currency by the Fund create or enlarge the member’s reserve tranche. Formerly, if the member had made full use of its gold tranche and some use in the credit tranches, a reduction of the Fund’s holdings of the member’s currency would have resulted in a reduction of holdings in the credit tranches and an enlargement of the member’s conditional rights to make purchases in the credit tranches. (Decision No. 6830-(81/65); Decision No. 6831-(81/65), amended by Decision No. 7059-(82/23), Selected Decisions, 10th (1983), pp. 58, 108, and 299.)
As a result of the new practice, it is possible to use another metaphor as well as the metaphor of separate windows. The Fund resembles a bank in which a member can increase its deposit (reserve tranche) while loans from the bank are still outstanding.
7. On the Fund as a second line of reserves and on the principle of uniformity, Section 804 of Public Law 98-181 of the United States should be noted. The Executive Director appointed by the United States must oppose a transaction by a member that practices apartheid unless the Secretary of the Treasury certifies in advance that four conditions are satisfied. The fourth condition is that the member “is suffering from a genuine balance of payments imbalance that cannot be met by recourse to private capital markets.”
The two textual changes in Article I made by the First Amendment did not modify the purposes of the Fund.
For an earlier article on the same subject, see Joseph Gold, ‘Transformations of the International Monetary Fund,” Columbia Journal of Transnational Law, Vol. 20 (1981), pp. 227–41.
See Joseph Gold, Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington, 1971).
The organization and management of the Fund have been governed by Article XII in all three versions of the Articles. See also Joseph Gold, “The Structure of the Fund,” Finance & Development, Vol. 16 (Washington, June 1979), pp. 11–15.
Joseph Gold, “The Fund’s Interim Committee—An Assessment,” Finance & Development, Vol. 16 (Washington, September 1979), pp. 32–35.
Joseph Gold, Voting Majorities in the Fund: Effects of Second Amendment of the Articles, IMF Pamphlet Series, No. 20 (Washington, 1977).
On the history of the Fund published to date, see the three volumes covering the years 1945–65, and the two volumes for the years 1966–71. See also Kenneth W. Dam, The Rules of the Game: Reform and Evolution of the International Monetary System (Chicago: University of Chicago Press, 1982).
See By-Laws, Sec. 15, By-Laws, Rules and Regulations, 40th (August 1, 1983), p. 11.
Article XII, Section 3(b).
Article XII, Section 4(b).
Gold, Voting and Decisions, pp. 249–50.
Article XVIII, Section 4.
Joseph Gold, Interpretation by the Fund, IMF Pamphlet Series, No. 11 (Washington, 1968).
Gold, Membership and Nonmembership, pp. 41–89.
On these states, see Elmer Plischke, Microstates in World Affairs: Policy Problems and Options (Washington: American Enterprise Institute for Public Policy Research, 1977).
See Joseph Gold, “To Contribute Thereby To … Development …’: Aspects of the Relations of the International Monetary Fund with Its Developing Members,” Columbia Journal of Transnational Law, Vol. 10 (1971), pp. 270–76.
Documents of the Committee of Twenty, pp. 7–77.
Decisions Nos. 5069-(76/72) and 5563-(77/150) TR, Selected Decisions, 10th (1983), pp. 302–13. See also pp. 313–20.
Article V, Section 2(b).
Decision No. 6683-(80/185) G/TR, Selected Decisions, 10th (1983), pp. 321–33.
Schedule D, paragraph 2.
Resolutions Nos. 29-8 and 29-9, Selected Decisions, 10th (1983), pp. 344–52.
Joseph Gold, “Professor Verwey, the International Monetary Fund, and Developing Countries,” Indian Journal of International Law, Vol. 21 (October–December 1981), pp. 497–512.
Article IV, Section 3(b).
Article XII, Section 5.
Article XII, Section 5(c).
Article XVIII, Section 2(b).
Article III, Section 2.
Gold, Selected Essays, pp. 520–94.
Article VIII, Section 3.
Article XIV, Section 2.
See Joseph Gold, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington, 1971); Use, Conversion, and Exchange of Currency Under the Second Amendment, IMF Pamphlet Series, No. 23 (Washington, 1978); The Multilateral System of Payments: Keynes, Convertibility, and the International Monetary Fund’s Articles of Agreement, IMF Occasional Paper, No. 6 (Washington, 1981).
Article VIII, Section 3.
Joseph Gold, SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, IMF Pamphlet Series, No. 40 (Washington, 1983), pp. 17–30; “New Guidelines on Multiple Currency Practices Establish Criteria for Implementing Fund Policy,” IMF Survey, Vol. 10 (July 6, 1981), pp. 197 and 204–209; Decisions Nos. 237-2, 649-(57/33), and 6790-(81/43), Selected Decisions, 10th (1983), pp. 247–59.
Article V, Sections 3 and 7; see, for example, Decision No. 4377-(74/114), as amended by Decisions Nos. 6339-(79/179) and 6830-(81/65), Selected Decisions, 10th (1983), p. 30.
Article V, Section 3(e).
Article V, Section 9.
Rule I-10, Rules and Regulations, By-Laws, Rules and Regulations, 40th (August 1, 1983), p. 40.
Article V, Section 3(b) (iii); Article XXX(c).
Decision No. 6831-(81/65), as amended by Decision No. 7059-(82/23), Selected Decisions, 10th (1983), pp. 108–109.
Article V, Section 7.
Rules I-1 to I-8, Rules and Regulations, By-Laws, Rules and Regulations, 40th (August 1, 1983), pp. 31-39.
Article V, Section 7(b).
Article V, Section 2(a).
Article V, Section 12(c).
Introductory Article; Joseph Gold, “Relations Between Banks’ Loan Agreements and IMF Stand-By Arrangements,” International Financial Law Review (London, September 1983), pp. 28–35, at pp. 28–29. See Chapter 12 of this volume.
Article V, Section 7(j).
Article XII, Section 6(f)(v).
Decision No. 5069-(76/72), Selected Decisions, 10th (1983), p. 310.
Ibid., pp. 218–19.
Article V, Sections 10 and 11.
Joseph Gold, Maintenance of the Gold Value of the Fund’s Assets, IMF Pamphlet Series, No. 6 (Washington, 2nd ed., 1971).
Article XII, Section 6(f).
Article V, Section 12(h).
See footnote 54.
Article V, Section 3(a).
Manuel Guitián, Fund Conditionality: Evolution of Principles and Practices, IMF Pamphlet Series, No. 38 (Washington, 1981); Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington, 1979).
Decision No. 102-(52/11), Selected Decisions, 9th (1981), pp. 18–19.
Joseph Gold, The Legal Character of the Fund’s Stand-By Arrangements and Why It Matters, IMF Pamphlet Series, No. 35 (Washington, 1980).
Louis M. Goreux, Compensatory Financing Facility, IMF Pamphlet Series, No. 34 (Washington, 1980).
Article V, Sections 3(b)(iii) and 4.
Article VII; Selected Decisions, 10th (1983), pp. 117–232.
Joseph Gold, International Capital Movements Under the Law of the International Monetary Fund, IMF Pamphlet Series, No. 21 (Washington, 1977).
Joseph Gold, Special Drawing Rights: Character and Use, IMF Pamphlet Series, No. 13 (Washington, 2nd ed., 1970); Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington, 1971).
Article VIII, Section 7; Article XXII.
Joseph Gold, “New Directions in the Financial Activities of the International Monetary Fund,” The International Lawyer, Vol. 13 (1979), pp. 449–70.
Schedule C, paragraph 1.
Article IV, Section 2(b).
Joseph Gold, The Rule of Law in the International Monetary Fund, IMF Pamphlet Series, No. 32 (Washington, 1980).