Legal and institutional Aspects of the international Monetary System

7 Strengthening the Soft International Law of Exchange Arrangements

International Monetary Fund
Published Date:
December 1984
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The Concept of Soft Economic Law

The concept of “soft law” in international law has been familiar for some years, although its precise meaning is still debated. A distinguished international lawyer, Professor Ignaz Seidl-Hohenveldern, delivered a series of lectures on International Economic “Soft Law” at The Hague Academy of International Law in 1979.1 The concept as applied to economic affairs is of particular interest in relation to the subject matter of this article.

In Seidl-Hohenveldern’s discussion, the distinctive characteristic of soft law, at least in relation to economic matters, appears to be the intended vagueness of the obligations that it imposes or the weakness of its commands. This kind of law can be contained in treaties or in other instruments, whether or not adopted under the authority of treaties, that show the softness of their content by such titles as “guidelines” or “declaration of principles.” For the purpose of this Chapter, the essential ingredient of soft law is an expectation that the states accepting these instruments will take their content seriously and will give them some measure of respect.2 Certain other elements are postulated. First, a common intent is implicit in the soft law as formulated, and it is this common intent, when elucidated, that is to be respected. Second, the legitimacy of the soft law as promulgated is not challenged. Third, soft law is not deprived of its quality as law because failure to observe it is not in itself a breach of obligation. Fourth, conduct that respects soft law cannot be deemed invalid.3

It is easy to be too condescending toward soft law, even if firm law would be preferable. Soft law can overcome deadlocks in the relations of states that result from economic or political differences among them when efforts at firmer solutions have been unavailing. A substantial amount of soft law can be attributed to differences in the economic structures and economic interests of developed, compared with many developing, countries. Much soft law, therefore, is to be found in the law of universal international organizations, including the decisions of their organs, because the membership of these organizations is so diverse. The soft law of these organizations is the result not of a failure of will or technical skill on their part, but of the deep divisions among members. An organization, to succeed, cannot be too far in advance of the common will of its member states. The influence of states is obvious in the negotiation of constitutive treaties, but that influence exists also when broad powers of administration are vested in organs composed of persons appointed or elected by members of the organization. This control can be considered both a strength and a weakness of international organizations.

The usefulness of soft law as a contribution to the growth of international law is that the application of soft law can produce over time an accretion of firm law. It must be acknowledged, however, that circumstances can force a retreat from firm law, and then soft law may be the only alternative to anarchy. The law relating to exchange arrangements is an example of this development.

What is particularly valuable for the purpose of this Chapter is that a concept of soft law in economic matters can be helpful in understanding the present international monetary system. Seidl-Hohenveldern is aware that soft law governs at least some of the interstate relationships that constitute the international monetary system, but most of the material he cites relates to other international economic relationships. The present Chapter examines in more detail the soft law that applies to exchange arrangements and exchange rates in the international monetary system and some of the consequences of the softness of that law. It is not a purpose of this Chapter to discuss whether or not the present law establishes an international monetary system. Nor is it a purpose to assess the relative merits of the former par value system and present exchange arrangements, except insofar as the law contains safeguards that dispose states to observe their obligations. The topic discussed in this Chapter may be of general interest because it deals with the present balance that has been reached in an important sector of international relations between national sovereignty and international legal regulation. The exchange rate for a country’s currency is one of the most important prices in the economy of the country, but at the same time the exchange rate is a relationship with the economies of other countries. The article is concluded with some modest suggestions for strengthening the administration of the present law in the hope that these innovations would strengthen the law itself.

The main legal instrument to be examined is the Articles of Agreement of the International Monetary Fund. It is not the only legal instrument of the system, but the functions of the Fund, the size of its membership, and the volume of its financial resources justify recognition of the Articles as the central instrument of the system. The original Articles were negotiated at the Bretton Woods Conference in July 1944 and took effect on December 27, 1945. The Articles have been modified by two amendments. The First Amendment, which was designed primarily to create the reserve asset called the SDR (special drawing right), became effective on July 28, 1969. The Second Amendment, which took effect on April 1, 1978, was a fundamental rewriting of the Articles after the breakdown of the par value system.

Law of Original Articles

Under the original Articles,4 an initial par value for each currency was established in agreement with the Fund, which took into account whether the prospective par value could be maintained without undesirable exchange practices and without reliance on an unduly large use of the Fund’s resources. Par values were expressed, directly or indirectly, in terms of gold as the common denominator of the system. A member of the Fund could change the par value of its currency after consulting the Fund, and normally only if the Fund concurred in the member’s proposed change. In order to concur, the Fund had to be satisfied that a change was “necessary” to “correct” a “fundamental disequilibrium.” These quoted words were intended to discourage any tendency to propose changes as responses to transitory conditions or changes that would be inadequate or excessive. The provisions were inspired by the desire to promote the stability of exchange rates, but without imposing rigidity. The Articles did not permit the abandonment of a par value, even if a member wished to float its currency to facilitate transition to a new and sustainable par value. Only an immediate change to a new par value was permissible.

Each member was obliged to ensure that the exchange rates for spot exchange transactions in its territories involving its currency and the currency of another member were not above or below the parity (ratio) between the two currencies by more than the narrow margins specified by the Articles. If any transactions occurred at exchange rates inconsistent with the Articles, the member was accountable to the Fund for a violation whatever the circumstances might be that produced the exchange rates. The Fund could approve multiple currency practices if a member proposed to apply a multiplicity of exchange rates as a temporary strategy for dealing with its balance of payments difficulty. A unitary floating exchange rate for a currency was not a multiple currency practice, however, and the Fund had no power to approve and thereby validate it.

The United States was deemed to perform its obligations on exchange rates by voluntarily undertaking to settle international transactions by freely buying and selling gold for dollars, when requested by the monetary authorities of other members, at a price that did not depart from the par value of the dollar by more than the margin prescribed by the Fund for dealing in gold. The United States had negotiated a provision at the Bretton Woods Conference that deemed this practice to be equivalent to performance of the exchange rate obligations imposed on members by the Articles. Members had a choice of measures by which to perform their obligations, provided that the measures they chose were consistent with the Articles. Many members performed their obligations by intervening in the exchange markets by buying and selling dollars, or other currencies convertible into dollars, for their own currencies at exchange rates that were in conformity with the Articles.

The United States was the only member that undertook the free purchase and sale of gold for its own currency as outlined above. The United States came to occupy a central position in the par value system. Other members, when needing to change the par values of their currencies, were motivated, in effect, to establish a new relationship to the U.S. dollar as the central currency of the system. The United States played a passive role by not intervening in the markets on its own behalf to manage exchange rates for the dollar and by creating confidence that the United States would not attempt to devalue its currency. Other members needed this reassurance, not only because of the fear that devaluation of the dollar would have made the United States more competitive, but also because they would have suffered a reduction in the value of the dollars they held in their reserves as the currency with which they intervened in the exchange markets.

It would be disingenuous to claim that there were no fissures in the firm law of the par value system. For example, only a member was authorized to propose a change in the par value of its currency. The Fund could not make a proposal, and could not compel a member to make one, even though the member was in fundamental disequilibrium. That concept was never defined with legal precision. Members were often reluctant for political reasons to announce that they were in fundamental disequilibrium even when, but for that reluctance, they would have been reconciled to a change of par value. The Fund concluded, in interpreting various aspects of the provisions of the Articles on exchange rates, that members were entitled to the benefit of the doubt in the application of the provisions.5 It is possible that, even when this conclusion was not reached as a matter of interpretation, the Fund was too complaisant in concurring in members’ policies on exchange rates, but closer study than has been given to this charge would be required to sustain it. It is undeniable, however, that the number of critics grew who held that the law had contributed to the rigidity of the par value system that the founders had wished to avoid. It was no paradox that stability was not achieved by this rigidity.

Stability was to be achieved by a system in which par values, though changeable, would ensure the maintenance of fixed exchange rates that had been subjected to international scrutiny and had received international endorsement. The most effective safeguard of this system was that the floating of a currency outside the margins around parities was considered the most disturbing breach of the system. Floating was not only serious. It was also obvious to the whole world as a breach. The Fund did not have to exercise judgment or invoke subjective criteria in order to decide that a member, in floating its currency, was in violation of its obligations. The Fund did not have to consider a charge that was controversial and arrive at a judgment that might be politically difficult for that reason. The international shame that followed the obvious breach of the firm obligation to maintain fixed exchange rates on the basis of parities was the chief practical deterrent to breach. Moreover, a government that considered floating knew that it might have to face castigation by the political opposition in its own country for incurring international odium. Even if a government came to the reluctant conclusion that nothing but the floating of its currency was feasible, the government accepted the burden of proving to the Fund that the rigors of the situation compelled this breach as a temporary expedient. The Fund had a substantial armory of “sanctions” but found it almost completely unnecessary to employ them because of the anxiety of most governments to resume compliance with so fundamental an obligation as the duty to maintain an effective par value endorsed by the Fund.6

U.S. Action of August 15, 1971

On August 15, 1971, the President of the United States announced that the United States would no longer convert foreign official holdings of dollars with gold or other reserve assets, with exceptions that need not be recalled. Furthermore, the United States would not take steps to confine exchange transactions involving dollars within defined margins. The center of the system did not hold.

The U.S. President’s announcement meant that the United States had decided to take an action that could not be reconciled with the Articles. What was the breach involved in this action? It may seem strange that the violation was not the withdrawal by the United States of its declared willingness to buy and sell gold freely for dollars with the monetary authorities of other members for the settlement of international transactions, even though the undertaking had become the real foundation of the system. The undertaking was voluntary. The violation was the refusal to take other appropriate measures to confine transactions in U.S. territories involving exchanges of dollars and the currencies of other members within margins that were consistent with the Articles. Another violation was the refusal of the United States to convert official holdings of dollars in accordance with the complex, but limited, obligation of official convertibility under Article VIII, Section 4 that all members had to observe once they undertook to perform the obligations of convertibility under Article VIII, Sections 2, 3, and 4. If a member gives notice that it will perform these obligations, it cannot shed them at a later date.

Why did the deterrence discussed in the second Section of this Chapter fail to prevent the violation of the obligations? The United States is not weaker in its respect for law than other states. The United States was among the first and most insistent in urging, after the breakdown of the par value system, that the Articles should be revised and that members should return to legality. Some other major countries that at first had little or no enthusiasm for engaging in the arduous task of negotiating amendment of the Articles, because a coherent and complete reform was not feasible, had to be persuaded that nevertheless a more modest undertaking would be rewarding.

The United States made known the economic, political, and even the military considerations that had impelled it to decide on the action of August 15, 1971.7 There is no need to recall these considerations. It is the attitude of the United States to the repudiation of international obligations that is of interest here. Unfortunately, little is known so far of thinking in the U.S. administration on this aspect of the action.

Some information has been provided by a Japanese scholar who has received a number of relevant documents under the U.S. Freedom of Information Act, a statute that he regards with admiration and astonishment.8 It appears that U.S. Treasury officials began to think as early as January 1971, and probably earlier, of forceful action to devalue the U.S. dollar. The documents disclose that at least one official was concentrating on actions that, though abnormal and dramatic, would be, to the maximum extent, consistent with the Articles. At the heart of the actions that he contemplated was suspension by the United States of the convertibility of foreign official holdings of dollars and closure of the exchange markets in the United States and in certain other countries for a period of two weeks beginning one week before the Annual Meeting of the Fund’s Board of Governors. The United States would initiate within the Fund a uniform proportionate revaluation of all currencies in accordance with the provisions of the Articles before the Second Amendment.9 This step would be followed by a devaluation of the U.S. dollar to bring it back to the equivalent of $35 an ounce of fine gold.10 Other ideas were coupled with these measures as possible reforms of the international monetary system, one of which was phasing out the role of the dollar as a reserve currency without affecting its function as a vehicle currency, but it was recognized that these ideas, in contrast to the action on par values, would have to await amendment of the Articles.

It is not known what weight was given to the central proposal described above. A further document, dated May 1971 and written by another U.S. official, is not animated by any obvious wish to work within the Articles in describing a program to achieve a lasting improvement in the balance of payments of the United States, a more equitable sharing of international responsibilities, and reform of the international monetary system. The proposals on monetary and trade matters in this memorandum are close to the measures that were taken on August 15, 1971. A conclusion that can be drawn from these documents is that the kind of action that was taken on that date was not an improvisation at Camp David. A difference of opinion exists among commentators on the question whether the timing of the action was affected by a request of the U.K. authorities on August 12, 1971 that the Federal Reserve draw under swap arrangements in the amount of $750 million. The drawing, which was made on August 13, 1971, had the effect of giving the Bank of England a degree of protection against devaluation of the U.S. dollar by substituting a claim denominated in sterling against the Federal Reserve for dollar holdings redeemed by the Federal Reserve with the sterling it obtained under the swap. It is equally unclear whether the U.K. authorities had contemplated a drawing of the full amount of existing swap arrangements, which amounted to $2 billion, or a request for conversion with gold of the total holdings of dollars by the Bank of England, which exceeded that amount.11

The most detailed, as well as the liveliest, account of how U.S. officials arrived at the final decision at Camp David has been provided by William Safire, who was present at the meeting.12 A feature of the discussion at Camp David, much of which he purports to reproduce verbatim, is that nothing was said about the breach of international obligations, although numerous objections of a political or economic character are reported. Safire does describe what he thinks were the reactions of one participant:

Even as we kidded around, the men in the room knew that Volcker was undergoing an especially searing experience. He was schooled in the international monetary system, almost bred to defend it; the Breton [sic] Woods Agreement was sacrosanct to him; all the men he grew up with and dealt with throughout the world trusted each other in crisis to respect the rules and cling to the few constants like the convertibility of gold. Yet here he was participating in the overthrow of all he held permanent; it was not a happy weekend for him.13

The little that is known of the decision taken at Camp David does not dispose of the conclusion that the odium attached to floating was the main deterrent to the breach of obligation under the par value system even if it was not a complete deterrent. If no evidence is available of the discussion of violation of the Articles at Camp David, there is evidence that participants in the decision were impressed with the seriousness of the decision for the international monetary system. It is also safe to assume that at lower levels of the administration there was consideration of the legal character and effects of the decision, although it seems that a high degree of secrecy about the ultimate intentions was maintained even within the administration itself. The decision differs perhaps from earlier decisions by some other members to depart from their obligations under the Articles because the United States appears to have concluded that it had been treated inequitably in the operation of the par value system. Furthermore, the United States seems to have concluded that it could not escape from a predicament that in large part was the result of the policies of other major countries.14 Certainly, this thesis was the one advanced at a later date when reform was being negotiated.15 Perhaps also the U.S. administration had concluded that the situation was one that would justify something akin to the defense of rebus sic stantibus, although this defense was not put forward in these terms in the Fund or elsewhere. The United States might have found it difficult to reconcile the defense with its resistance to the contention of some members that the U.S. action on the dollar had thrown into desuetude the obligation of members to avoid transactions in gold between themselves at market prices. The tacit assumption by the United States of prolonged or even permanent surplus in its balance of payments on the basis of which the United States had negotiated the original Articles was no longer tenable. The United States had fallen into a condition of persistent deficit and the administration saw no escape from the predicament that, in U.S. opinion, other members were likely to accept.16

Origins of Present Provisions

The provisions of the Second Amendment on exchange arrangements now in operation largely reflect the approach advocated by the United States in the negotiation and drafting of these provisions. The United States argued that the soundness of domestic economic policies should be the primary concern of governments. These policies influence the international position of a country, which in turn affects the exchange rate for its currency. Exchange rates should be allowed to change freely to accord with changes in the international position of a country. Floating exchange rates would bring about smooth and prompt adjustments to fundamental economic conditions, keep the balance of payments in equilibrium, and give each country autonomy in conducting domestic monetary policies. It would be unfair to describe this view as benign neglect by each country of the interests of other countries. The position of the United States was that the interests of the international community as a whole are best served by the freedom of each country to pursue sound domestic policies without the constraint of attempting to maintain a particular rate of exchange.

The view of European and other countries was that domestic conditions and the exchange rate react on each other because the exchange rate affects domestic developments. Fluctuations in the exchange rate and uncertainty about it can have detrimental effects on domestic economic activity. These countries held that governments should undertake to maintain as much stability in the exchange rate as they can.

The divergence between the views of the United States and other countries was the result of differences in economic circumstances. The economies of other countries are more dependent than the economy of the United States on international trade, and changes in exchange rates affect their economies more sharply.17 This difference is one of degree, and it does not mean that international trade is of negligible importance for the United States or that its international trade is not a growing proportion of its total economy. Nevertheless, for the United States it was important that its external position should not interfere with the pursuit of domestic economic policy. U.S. officials thought that floating exchange rates would give them this freedom.

While there was still hope that a system of stable, but adjustable, par values could be restored, although with greater legal flexibility than had been possible under the original Articles, the United States favored firmer law in some respects than had prevailed in the past. The United States saw itself as a country that might have a chronic deficit in its balance of payments unless more pressure was applied to other countries to induce them to modify their policies. Therefore, in its presentation to the Committee of the Fund’s Board of Governors on Reform of the International Monetary System and Related Matters (the Committee of Twenty), the United States proposed “objective indicators,” defined in terms of reserves, that would put the onus on countries in balance of payments surplus (or deficit) to adjust their balances of payments. Adjustment might take the form of changes in the exchange rates for their currencies. This system would be made to work by graduated pressures on the member to which the indicators pointed. The pressures would apply without the necessity for decisions by the Fund. The U.S. representatives argued that public and congressional opinion in the United States, and in other countries as well, would prefer such a mechanistic system to a system that depended on the exercise of discretionary powers by the Fund.18 The United States was wrong about the preferences of other members, and it received little support for such firm law.

By the time the drafting of the Second Amendment was undertaken, it had become clear that no par value system of any kind would be acceptable for immediate introduction. The United States had to devise other proposals for the protection of its interests as it saw them. In these circumstances, its proposals moved to the opposite extreme. But now, other members demurred because the U.S. position seemed to advocate law that was too soft and to offer no hope for firmness in the future. Negotiations on the drafting of exchange rate provisions reached a deadlock in the Fund.

The Interim Committee of the Board of Governors on the International Monetary System,19 which succeeded the Committee of Twenty, requested the United States and France, as the most dedicated advocates of opposing positions on future rate provisions, to collaborate on a proposal that all members could accept. The two countries undertook the task of trying to reach agreement on a solution. They worked in “relative secrecy” 20 until their agreement was made known at the summit conference held at Rambouillet in November 1975. The conference was attended by the Heads of State and Government of France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States.21

Article IV of Second Amendment

Article IV22 of the Second Amendment of the Articles has been drafted substantially in accordance with the spirit and letter of the agreement reached by the United States and France. Article IV allows each member to choose its exchange arrangements and to determine the external value of its currency under those arrangements. This freedom is made subject to obligations relating to a member’s behavior, but these obligations, it will be seen, are soft law and softer than the provisions of the original Articles.

The opening language of Article IV, Section 1 sounds like the preamble to a resolution of the General Assembly of the United Nations and is out of harmony with the rest of the language of the Articles:

Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability. …

The drafting of this language was an exercise in softening the provision in which it appears. The original version as drafted by U.S. and French officials was as follows: “Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among nations, and that a principal continuing objective is to develop orderly underlying conditions which are a prerequisite for financial stability. …”

After a working group, consisting of officials of the two members and the General Counsel of the Fund, was formed, the original language and structure of the provision was transformed for a time to read:

(a) Each member recognizes that the essential function of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that a principal objective of the system at all times should be to develop the orderly underlying conditions that are a prerequisite for financial stability.

(b) In order to contribute to the effective functioning of the international monetary system. …

This language was then amended by deleting the introductory language of subparagraph (b) shown above in order to eliminate too firm a relationship between subparagraph (a) and the obligations of members set forth in subparagraph (b) after the introductory language.

Finally, the working group ran subparagraphs (a) and (b) together again, and the language returned to a structure that began with the word “Recognizing.” The purpose of restoring this structure is obvious: it was to avoid the impression that recognition of the function of the international monetary system was an independent obligation or the source of independent obligations. The participial clause was intended to do no more than introduce or justify the obligations that follow the clause.23 “Purpose” was substituted for the more normative “function.” 24 The final draft of the working group took the following form: “Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that a principal objective is the continuing development of orderly underlying conditions, which are a prerequisite for financial stability. …”

This draft was modified by the Executive Board and, as modified, has been incorporated in the Articles. The obligations as stated in Article IV, Section 1 after the language that begins with the word “Recognizing” are formulated as follows:

… each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:

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

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

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

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

The original language as proposed by U.S. and French officials was dense and attempted to compensate for the softness of obligations with emphatic language and a multiplicity of verbs:

… each member pledges to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. To this end each member in particular (a) undertakes to direct its economic and financial policies toward the objective of fostering orderly economic growth within the context of relative price stability; (b) accepts without reservation the desirability of stability which results from meeting the criteria of orderly underlying economic and financial conditions and of a monetary system that does not tend to produce erratic disruptions; (c) pledges to disavow practices that serve to manipulate the system in order to gain unfair competitive advantage relative to another member or members and (d) agrees to follow financial and exchange policies compatible with these objectives.

Some Soft Provisions of Second Amendment

No attempt will be made to define soft law as a genus of law, but some examples of soft law will be drawn from Article IV of the Second Amendment. The classification and illustrations that follow are not meant to be exhaustive.

(1) The Fund can make recommendations to its members but without the power to insist that the recommendations are binding. Under one provision:

To accord with the development of the international monetary system, the Fund by an eighty-five percent majority of the total voting power, may make provision for general exchange arrangements without limiting the right of members to have exchange arrangements of their choice consistent with the purposes of the Fund and the obligations under Section I of this Article.25

The representatives of the United States and France who produced the draft on which the final provisions on exchange arrangements are based had proposed the following text: “The Fund may by an 85 percent majority of the total voting power modify as appropriate the general exchange arrangements established under this article.”

The general exchange arrangements “established” under Article IV, Section 2 in the same draft, and therefore subject to the Fund’s power to “modify” them, appeared in the following provision:

Under the present functioning of the system such arrangements may include maintenance by a member of a value for its currency in terms of the special drawing right or other denominator, other than gold, selected by the member; may include maintenance by a group of members of mechanisms under which each member of such group maintains the value of its currency in relation to other members of such group; and may include other exchange arrangements of a member’s choice.

The language that would have created the power to modify exchange arrangements was abandoned when it was pointed out that it could be read to permit amendment of the Articles without observance of the procedure for amendment. The text read in that way would have dispensed with the necessity for approval by legislatures.26 Moreover, the Fund would have been able to compel members to adopt any general exchange arrangements that it favored.

The provision on the choice of exchange arrangements in the Second Amendment is not substantially different from the draft quoted above:

Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice.27

The substantive differences appear in the final provision on general exchange arrangements. The Fund’s power to “modify” them has disappeared, and it has been made clear that the Fund’s power to “make provision for them” is without prejudice to the privilege of members to have exchange arrangements of their own choice.

(2) The Fund is authorized to adopt “specific principles for the guidance of all members” with respect to their exchange rate policies.28 The clue to the softness of this provision is the word “guidance,” the implication of which is that a member’s neglect of a principle is not automatically a breach of obligation.29 The principles adopted under this authority can be contrasted, for example, with the Fund’s authority under another provision to adopt supplementary general principles for the designation of members to receive SDRs when the Fund is asked by an intending transferor of SDRs to designate a transferee.30 A designated member’s refusal to accept a transfer in accordance with a supplementary general principle would be an automatic breach of obligation.31 Although a refusal to follow a recommendation is not in itself a breach of obligation, the Fund could decide that, in the circumstances, the neglect of a specific principle of guidance did amount to a breach of the member’s obligations under some provision of the Articles on exchange arrangements.

(3) The conduct required of a member is expressed not as an obligation to achieve a specified objective but as an obligation to make an effort to achieve an objective.32 For example, “each member shall … (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions.” 33 Even an obligation to make an effort may be subject to broad qualification, as is illustrated by the elements italicized in the following provision: “each member shall … (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances.”34

The two obligations in subparagraphs (i) and (ii) are drafted in a style that is in contrast to the other two obligations in the chain of subparagraphs: “(iii) avoid manipulating exchange rates or the international monetary system in order to prevent balance of payments adjustment or to gain an unfair competitive advantage over other members; and (iv) follow exchange policies compatible with the undertakings under this Section.” In these provisions, however uncertain their application may be, the verbs (“avoid,” “follow”) are firm, compared with the verbs in subparagraphs (i) and (ii). The explanation of the softness of subparagraphs (i) and (ii) is that they can have a direct effect on domestic policies. Subparagraphs (iii) and (iv), however, deal directly with exchange policies. It was more difficult to argue in relation to these policies that members’ obligations or the Fund’s authority should be softened.

(4) The character of an obligation may make it impossible to recognize by means of objective criteria that a breach of the obligation is occurring. A judgment of the Fund is always necessary before it can be determined whether or not a member is performing the obligation. The two obligations in subparagraphs (i) and (ii) quoted in (3) above are obvious examples of this category, but even the other two obligations, in subparagraphs (iii) and (iv), and the general obligation of collaboration in the text that precedes the subparagraphs, although not formulated in terms of effort, depend on similar subjective judgments by the Fund before it can be determined that a member is or is not observing its obligations.

Decisions to Develop Substantive Law

The Fund has authority to develop the present substantive law of exchange arrangements in various ways, even though some of the developments would continue to be soft law. It has been seen already that the Fund can adopt specific principles for the guidance of members’ exchange rate policies and can recommend general exchange arrangements. Decisions of either kind would give greater precision to the Fund’s function of surveillance, although the legal character of these decisions would not differ from the analysis that has been advanced earlier. The Fund can decide to specify the conduct it expects of members under their obligation to collaborate with it and with other members. The experience of the past shows that decisions of this kind under general obligations of collaboration can have great weight. Even when the decisions are not formulated as obligations, members tend to consider themselves bound to comply with the decisions.35 In addition to these powers, the Fund can decide to call into existence 36 the par value system that is codified in Schedule C.

The Second Amendment has increased to a remarkable extent the number of decisions for which a special majority is necessary. A special majority is a specified proportion of the total voting power in contrast to the majority of the votes cast, which is the basic majority. The original Articles required special majorities for 9 categories of decisions. The First Amendment increased the number to 21 and the Second Amendment to more than 50, although not all these decisions regulate the conduct of members.37

The two special majorities now are 70 percent and 85 percent of the total voting power.38 The motives for the choice of these two majorities and for their application to categories of decisions were varied and complex, but among the motives was the desire on the part of the United States, the European Community, developing members as a class, and perhaps less visible groupings to have the strength to veto proposed decisions.

The United States is the only single member that can veto proposals to take decisions for which 85 percent of the total voting power is necessary. From time to time, other members have been critical of a power of veto that can be exercised by a single member, and they have negotiated successfully for the requirement of a high majority that would give their group a power to block proposals. The United States has been outspoken in explaining the importance it attaches to the majority of 85 percent for decisions on exchange arrangements:

These new exchange rate provisions are of critical importance both for the system as a whole and for the United States. They focus on the essential need to achieve underlying stability in economic affairs if exchange stability is to be achieved. They provide a flexible framework for the evolution of exchange arrangements consistent with this broad focus. And they help to ensure that the United States is not again forced into the position of maintaining a value for its currency that is out of line with underlying competitive realities and that costs the United States jobs and growth due to loss of exports, increased imports and a shift of production facilities overseas. Under the new provisions, the United States will have a controlling voice in the future adoption of general exchange arrangements for the system as a whole; and will have full freedom in the selection of exchange arrangements to be applied by the United States, regardless of the general arrangements adopted, so long as it meets its general IMF obligations.39

A “controlling voice” can prevent, but cannot ensure, the adoption of decisions. The majority of 85 percent of total voting power is necessary for decisions by the Fund to recommend general exchange arrangements and to call into operation the par value system of Schedule C. The other two categories of decision that have been mentioned above can be taken with a majority of the votes cast. These categories are decisions to adopt specific principles for the guidance of members with respect to their exchange rate policies and decisions that make concrete the obligation to collaborate with the Fund and other members to ensure the existence of orderly exchange arrangements and the promotion of a stable system of exchange rates.

The difference between the majorities for decisions to recommend exchange arrangements and to establish specific principles for the guidance of members with respect to their exchange rate policies is striking. The explanation is that the 85 percent majority of total voting power for the former decisions is a survival from the original draft prepared by the American and French officials and quoted in the Section of this Chapter entitled “Some Soft Provisions of Second Amendment.” That draft may have been inspired by the intention to impose a firmer obligation on members than the eventual obligation.

A special majority was never proposed for the adoption of specific principles, perhaps because “firm surveillance” without principles was not credible, and the need for a special majority could result in the veto of all proposed principles. The use that the Fund could make of the obligation to collaborate was not discussed at any time in the drafting of Article IV.

U.S. Views of Article IV of Second Amendment

The present Article IV is predominantly in accord with the position taken by the United States in the negotiation of the exchange rate provisions of the Second Amendment. U.S. officials and congressional committees 40 have expressed their reactions to Article IV in numerous statements. They have stressed the substitution of the influence of markets on exchange rates for the determination of exchange rates by governments. At the same time, they have explained that governments remain responsible for their international behavior in monetary affairs and that the Fund retains a central position as arbiter or monitor of the international monetary system.

To questions about the effectiveness of the new provisions, spokesmen for the U.S. administration responded that they did not want “supranational government” by an international organization empowered to run the U.S. economy. There should be no substantial limitation on the sovereign right of nations to determine their policies. Nevertheless, these spokesmen drew metaphors from the law to explain the character of the new provisions. Detailed codes of behavior were not included in the Articles because the Articles were a constitution and not a contract. General principles could emerge by a common law approach to individual cases. U.S. officials insisted that the new provisions, although not comparable to the grand design of the original Articles, did constitute an international monetary system. They explained that the critics who rejected this view did so for reasons of nostalgia.41 “Say not thou, What is the cause that the former days were better than these? for thou dost not inquire wisely concerning this.” 42

The metaphors of constitution and common law imply firm rules of law. For the soft law of Article IV to generate firm rules of law, fundamental changes would have to occur in the attitudes that fashioned Article IV. One author, who later became a senior U.S. official with responsibilities in international economic affairs, has explained his opposition to attempts to write (or rewrite) a constitution to govern international monetary matters. His view is more compatible with the rejection of limitations on the exercise of sovereignty than with the vision of a constitution or common law.

[T]he world economy is very asymmetric in its functioning. For technical reasons, it is both likely and desirable that one or a few currencies will emerge with special status in market transactions. Even when this fact is fully known and acceptable, it cannot always be formally acknowledged and sanctified in treaties, in part for reasons of status touched on earlier in the essay. There thus emerges a discrepancy between what governments say in formal negotiations and what they do, or are willing happily to accept, in day-to-day operations—a discrepancy between their stated preferences and their revealed preferences. In the monetary arena this discrepancy can be observed in attitudes toward the U.S. dollar, both as an intervention currency and as a reserve currency, in attitudes toward the flexibility of exchange rates, and (within Europe) in attitudes toward European monetary unification.

Formal arrangements induce sovereign states to insist on formal symmetry in status, partly to cater to nationalist sentiment at home. Informal arrangements carry no such compulsion. To the extent that asymmetries of treatment are important for efficient functioning, informal arrangements are therefore likely to be superior to formal arrangements that emerge from a negotiating process. In the international monetary sphere, an English-style constitution, built up through a series of acceptable practices, may be both easier to attain and even superior in content to a fully negotiated American-style constitution. Indeed, precisely such informal arrangements seem to mark the current monetary regime of managed flexibility of exchange rates, which few (if any) countries are willing to accept formally but which most (if not all) accept in practice.43

Skepticism about the usefulness of a negotiated solution in the days when proposed amendments were first put forward did not prevail against the desire for legality, which motivated the United States and some other countries. Even the passage quoted in the preceding paragraph does not abandon legal metaphor. A constitution might evolve, but it should be largely unwritten. A return to legality made a negotiated solution unavoidable, but soft law offered a compromise with skepticism.

A different explanation for the soft law of Article IV can be advanced with some assurance. The Second Amendment was clearly a less comprehensive reform than the one that the Committee of Twenty had sketched in its Outline of Reform.44 At first, the drafters of the Second Amendment assumed that an amendment of the Articles would apply during an interim period only. In the course of this period, a definitive amendment would be negotiated and would become effective after the period ended. Whether the period was predetermined or indefinite, it would be subject to termination by the Fund. These assumptions were abandoned in favor of the negotiation of an amendment that could be permanent because it would permit the evolution of the international monetary system without further amendment. The effect of this change in attitude was to impart a less than peremptory character to the formulation of provisions that would regulate exchange arrangements in the immediate situation. This approach to the provisions was preferred by members whether or not they expected that radical changes would be made in the future. Proposals for evolutionary changes in the regulation of exchange arrangements could be vetoed unless they commanded widespread support among all interests, because of the necessity for high majorities.

Deterrence of Breach Under Article IV

The original Articles were a greater deterrent to a breach of obligation because floating was an obvious violation of a fundamental principle of the par value system, while a breach of obligation under the Second Amendment is not recognizable without a decision of the Fund. This difference is not the only distinction that can be made in comparing the deterrent effect of the two versions of the Articles.

Nothing in the present Article IV requires a member to obtain the advance approval of the Fund for the member’s choice of its exchange arrangements or for the member’s determination of the external value of its currency.45 The contrast between the par value system and the current Article IV is obvious. Under the par value system, a member was required to reach agreement with the Fund on an initial par value, to consult the Fund before changing a par value, and normally to obtain the Fund’s concurrence in a proposed change.

A decision of the Fund that a member is not observing its obligations under the present Article IV would have to be based on policies and practices for which the member had not been required to get the Fund’s approval. A requirement of prior approval by an international organization puts greater pressure on members to respect international standards than the possibility that the organization might investigate the consistency with international standards of policies or practices after they have been instituted.

This contrast between what may be called the a priori and the a posteriori approaches has been noted often in comparisons of the procedures of the Fund and the Contracting Parties to the General Agreement on Tariffs and Trade (GATT). The firmer effect of the a priori approach explains why the Committee of Twenty recommended that members of the Fund should undertake voluntarily not to introduce or intensify trade or other current account measures for balance of payments purposes without a finding by the Fund that the balance of payments justified the measures. A member would request such a finding in advance of the introduction or intensification of the measures whenever possible. The Fund’s jurisdiction to approve or disapprove restrictions was, and still is, confined to restrictions that are applied directly to payments and transfers for current international transactions. The voluntary pledge would have covered restrictions applied directly to trade and other current account transactions. The pledge never became effective. An undoubted reason for this failure was the firmer character of the a priori principle.46 This reason explains even more obviously the rejection of a proposal to write into the Second Amendment a provision resembling the pledge. If a member did not request approval under such a provision, or if the member introduced or intensified restrictions notwithstanding the Fund’s disapproval of them, the member would be in violation of its obligations under the Articles. This conduct would not have had the quality of invalidity under the voluntary pledge.

The a priori approach is firmer in operation because it enables an international organization to refuse the required approval of a proposed action without the necessity for a finding that the member is in default. Under the a posteriori system, however, the organization must make such a finding or at least a finding that will be censorious. An international organization is often reluctant to take decisions of this character. Such a decision faces the organization with a dilemma. It must decide what to do next if the member persists in the practice to which the organization has objected or the organization must reconcile itself to a reputation for ineptitude if it does nothing. The Fund has been reluctant in the extreme to adopt censorious decisions.47 Members might conclude, in the knowledge that such decisions would not be adopted, that they were safe from censure in following practices that were incompatible with the policies of the organization.

Some Safeguards Against Softness of Article IV

The Second Amendment includes provisions that were intended to be safeguards against the disorders that might develop because of the freedom of members to choose their exchange arrangements and to determine the exchange value of their currencies. These provisions were proposed by the United States in order to get the assurance that it would not be forced again into its former predicament. It had come to analyze that situation as one in which it had been the victim of the freedom that other members had been able to exercise.

The Council

A new organ, the Council, was proposed by the United States in order to give political muscle to the Fund. The Council can be called into existence by a decision of the Board of Governors taken with an 85 percent majority of the total voting power.48 This organ would occupy a position in the hierarchy of organs below the Board of Governors and above the Executive Board. The Council would be composed on the model of the Executive Board: the number of Councillors would be equal to the number of Executive Directors on the Executive Board and would be appointed by the same constituencies of members that appoint or elect Executive Directors. The Council, composed in this way, would be better fitted to debate and decide issues than the much larger Board of Governors, to which each member appoints a Governor and an Alternate.49 The Fund would be strengthened because each Councillor would be a Governor, minister in the government of a member, or a person of comparable rank. Persons in these positions, it was assumed, would bring additional strength to the Fund because they would be bolder in their judgments than Executive Directors, but this assumption has been challenged. The opponents have argued that Governors might be more respectful of their colleagues and more tolerant of each other’s policies because of their insight into political difficulties.

The terms of reference of the Council would be to supervise the management and adaptation of the international monetary system, including the continuing operation of the adjustment process and developments in global liquidity, and in this connection the Council would review developments in the transfer of real resources to developing countries. The Council would exercise such powers within these terms of reference as were delegated to it by the Board of Governors. In addition, the Council would consider proposals to amend the Articles.

Originally, it was proposed that the Council would come into existence immediately when the Second Amendment took effect.50 Developing members disliked the idea of the Council because, as an organ, it would be able to take decisions of the Fund in the exercise of powers.51 Many of these members feared that, as less powerful countries, they would be subjected to adverse decisions by the Council, while more powerful countries would escape this treatment. Developing members were successful in proposing that the Council should begin to function only when a decision was taken to call it into existence, and that the majority required for that decision should be 85 percent of the total voting power. That majority would assure developing members of a veto if a decision were to be proposed.

The Interim Committee of the Board of Governors on the International Monetary System has been appointed by the Board of Governors to function until the Council is activated. The Committee’s terms of reference 52 are similar to those of the Council, but the Committee is not an organ of the Fund. The Committee cannot take decisions or bind members, because it has no authority under the Articles to exercise powers of the Fund. The Committee’s authority is confined to recommendations. The organs of the Fund treat these recommendations with respect because of the rank of the persons who compose the Committee, but the conclusion is inescapable that numerous members prefer the Committee to the Council because the Committee cannot take decisions. It is legally possible for an organ, when considering a proposed decision, to modify a recommendation or to propose reconsideration of it by the Committee. There may be no great likelihood that the Executive Board would react to a recommendation in this way, but developing members have preferred not to surrender this legal possibility.


One of the main safeguards against the potential dangers of the soft law on exchange arrangements was intended to be the function that the Fund must perform as an invigilator. Under Section 3 of Article IV, the Fund must oversee the international monetary system in order to ensure its effective operation. In addition, the Fund must oversee the compliance of each member with its obligations under Article IV, Section 1. In order to fulfill these functions, the Fund must exercise “firm surveillance” over the exchange rate policies of members, and it must adopt specific principles for the guidance of all members with respect to those policies. The adjective “firm” was retained even though it might suggest uneasiness about the forcefulness of Article IV and even though it might seem to reduce the seriousness of all other functions of the Fund because a similar adjective was not attached to them.

The Fund has adopted detailed decisions on the procedures for surveillance,53 but repeated appeals are made for firmer surveillance. Almost invariably, these appeals are coupled with warnings about the need for caution. Persuasion, it is said, should be the aim and not prescription. Members have defended the discordance between their appeals and their caveats with explanations that the powers of the Fund are limited.54

A consequence of these attitudes is to place major and increasing emphasis on the activities of the Managing Director.55 His functions in surveillance are indispensable. He exercises influence, not only because of his position and personality but also because in his approaches to members, however discreet, they understand that he is expressing the views of the Executive Board on exchange rate policies that he has distilled from its debates on general policies and individual consultations. Nevertheless, surveillance, to be firm in its insistence on promoting both the national and the international interest, must involve an adequate role for the Executive Board and a willingness by it to take decisions on the situation of each member. What international lawyers have called the judgment of peers and the mobilization of shame are necessary pressures.56 Governments can be influenced if they know that the Fund is willing to exercise these pressures. Only an organ composed of persons appointed or elected by members can apply the pressures, because governments assume that these persons are stating the views of other governments. At the present time, the only organ that could find it practicable to take decisions to apply pressures is the Executive Board. The Board of Governors is too large and meets only annually; the Council does not exist; the Interim Committee is not an organ and cannot take decisions.

Even when the debate of the Executive Board is reached as the last stage in consultations under Article IV, the Executive Board completes its debate with “conclusions,” in contrast to the “decisions” it takes on other items placed on its agenda.57 The word “conclusions” was chosen because it sounded less like an assertion of authority than “decisions.” Furthermore, the Executive Board does not adopt conclusions that it purports to have formulated itself. It implicitly endorses as the conclusions of its debate the summing up by the Managing Director as Chairman of the Executive Board.

The conclusions in an actual consultation with a member under Article IV were published as a recent example in December 1981, with deletion of the name of the member.58 The conclusions are reproduced in Annex B to this Chapter. Nowhere in these conclusions is there a statement of the views of the Executive Board as such. “Many” or “most” Executive Directors are mentioned as holding a particular view. Other references are made to “Executive Directors,” followed it is true in one instance by “the Directors,” but never is it stated that all Executive Directors, or Executive Directors with a necessary majority of the voting power, have agreed on any one of the conclusions.59 A member might regard conclusions formulated in this way as a compendium of views on the member’s position but not as the collective judgment of an organ of the Fund.60

Mr. Jacques de Larostère, the Managing Director of the Fund, has said that consultations have succeeded in dissuading members from resort to abusive practices:

The question of exchange rates is of central concern for the Fund and its surveillance activities. When a member’s exchange rate is at a level which may cause problems, the Fund initiates consultations with that member. While these consultations are discreet, they can be effective. The sanctions available to the Fund are, of course, limited; but the dissuasive effect on a member of an open conflict with the Fund over its exchange rate should not be underestimated. Deliberate manipulation of rates to gain unfair competitive advantage has not become a feature of the system.61

The effectiveness of the present law, and of practice under it, does not depend on the Fund’s so-called sanctions, which are not limited,62 because the Fund has rarely invoked them. If obligations cannot be formulated in language that will make breach obvious when it occurs, effectiveness will depend on the explicit expression of censorious judgments by peers whenever censure is justified.63

Principles for Guidance of Members

The Fund must adopt “specific principles for the guidance of all members with respect” to their exchange rate policies,64 but although firm guidance could compensate to some extent for soft law, the forces that produce soft law may be responsible for soft guidance also. A U.S. spokesman has made this tendency apparent in contesting the argument that precise guidelines should have been included in the Second Amendment. The Articles were a constitution and should have the elasticity necessary for adapting practice to changing conditions, but precision was to be avoided in rules of practice as well:

[M]ore importantly, irrespective of where they might be embodied, I do not agree that the IMF should delineate hard and detailed rules by which each member’s performance with respect to exchange policies should be judged. It is in my view neither appropriate nor possible that this important Fund surveillance work through the application of detailed rules and precise formulas. We do not have the capability, the experience or the knowledge, to develop such a set of rules to be applied across a broad spectrum of individual national situations.

It is particularly difficult to apply rigid formulas equitably to economies that differ as profoundly as in the IMF membership where the gross national product of the largest member is 60,000 times as large as that of the smallest member; where some members have no capital markets while others have highly developed and sophisticated markets; where economic structure and elasticities of price and income can vary widely; and where the relative importance of international transactions to domestic economies differs greatly. Rigid rules and formulas simply won’t work in such situations.65

In some respects, the present guidelines are softer, because they are less detailed and less precise, than the guidelines for the management of floating exchange rates that the Fund adopted on June 13, 1974,66 before the Second Amendment was drafted. That decision was adopted at a time when exchange arrangements and exchange rates were inconsistent with the Articles, and when the Fund’s efforts to minimize disorder were based on the general obligation of members “to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations.” 67 The guidelines of 1974 were influenced by the expectation that it would be desirable and possible to establish a system of stable, but adjustable, par values, with legalized floating in some circumstances. The limitation of the 1974 guidelines to currencies that were not pegged in some way was inspired by this expectation.

The Fund, acting under Article IV of the present Articles, has announced three principles for the guidance of all members with respect to their exchange rate policies. These original principles have not been amended or augmented:

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

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

C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.68

In this short list, guideline A is drafted to conform with subparagraph (iii) of Article IV, Section 1 and adds nothing to it. Only this guideline contains a peremptory verb (“shall avoid”). Economists have shown that the issues raised by Article IV, Section 1 are numerous and complex, so that the absence of agreement should occasion no surprise.69 The verbs of the other guidelines are hortatory (“should intervene,” “should take into account”). The guidelines, whether peremptory or hortatory, are not self-executing. The Fund, which has the ultimate power of interpretation, has not clarified them. Two manifestations of softness become apparent: the concept of guidance is inherently soft, and it can give rise to specific principles that also are soft. It is not surprising that members resist the derivation of firm principles from soft provisions.

Guideline B. Intervention. Of the three guidelines, the practice that is the subject of guideline B has provoked most debate and least agreement. This principle is an echo of the statement in the Rambouillet Declaration that “our monetary authorities will act to counter disorderly market conditions or erratic fluctuations in exchange rates.” 70 The language can be traced back at least as far as the joint statement by the Chairman of the U.S. Federal Reserve Board and the Secretary of the U.S. Treasury on July 18, 1973 that the United States would undertake active intervention at whatever times and in whatever amounts that were considered appropriate for maintaining orderly market conditions.71

Guideline B is formulated so as to avoid any implication that there is a “right” exchange rate or an obligation to defend a particular exchange rate. The guideline does not mention the “target zones” for exchange rates that were the subject of one of the guidelines of June 13, 1974. The earlier decision noted that medium-term norms or target zones for exchange rates might be advantageous. The decision recognized that in some circumstances a member might wish to consult the Fund about a target zone and its adaptation to changing circumstances. The Fund had a role in defining the target zone. If the Fund considered the target zone to be within the range of reasonable estimates of the medium-term norm for the exchange rate, the member was to be free to move toward the target zone even though the other guidelines would not justify measures for this purpose. Moreover, if the exchange rate of a member’s currency moved outside what the Fund considered to be the range of reasonable estimates of the medium-term norm to an extent that, in the view of the Fund, was likely to be harmful to other members, the Fund would consult with the member, and, in the light of the consultation, might encourage the member to modify its policies.

The U.S. spokesman who has been quoted above on the subject of guidelines went on to discuss target zones as follows:

Nor would I agree with those who would call on the Fund to attempt to determine a set of “target” exchange rates toward which each nation’s policies should be directed. There are those who believe that a comparison of statistical data on prices or costs in individual countries can reveal appropriate exchange rates. That approach is subject to insurmountable difficulties, both theoretical and practical. While it may indicate that some rates are inappropriate, it cannot be depended on to indicate what rates are proper. It is tantamount to continuous renegotiation of a par value system, based on statistics which are of necessity both partial in coverage and backward-looking in approach. In practice, it may prove to be nothing more than a veiled approach to a return to fixed rates.72

Notwithstanding the forcefulness of this statement, some economists continue to be, or have become, attracted to the idea of target zones. These economists seek a stability that is not being achieved by the freedom now exercised by members, but without recommending a par value system.

No authoritative definition exists of the expression “disorderly conditions” in guideline B, or “erratic disruptions” in Article IV, or “erratic fluctuations” in the Rambouillet Declaration. The imprecision of these concepts has enabled the United States to make changes in its policy on exchange rates while purporting always to be making no change because it was adhering to the same policy of readiness to intervene, if necessary, to counter disorderly conditions.

The Carter Administration took a series of steps in 1978 that amounted, in effect, to an active policy on the exchange rate for the U.S. dollar.73 Each step was explained as a move to counteract disorderly conditions in the exchange markets. The United States took the most dramatic step on November 1, 1978. It announced various measures that it was taking to strengthen the U.S. dollar, including mobilization of the equivalent of US$30 billion in international resources. According to the announcement, recent movements in the exchange rate of the dollar had exceeded any decline related to fundamental factors. The United States, in cooperation with the Federal Republic of Germany, Japan, and Switzerland, would “intervene in a forceful and coordinated manner in the amounts required to correct the situation.” 74

The Secretary of the U.S. Treasury described the action as “a shift in intervention practices,” but one that was aimed at correcting a particular situation. The United States was not “attempting to peg exchange rates or establish targets or push the dollar beyond levels which reflect the fundamental economic and financial realities.” 75

In these and other statements, the U.S. monetary authorities were explaining that there was no change in their policy on the exchange rate for the dollar, but some observers noted that there was at least a greater determination to apply that policy, and that, even if the authorities had no predetermined view of the right exchange rate for the dollar, they might be taking a view on the development of a wrong rate.

After the Reagan Administration assumed office, the Treasury announced, in mid-April 1981, that the U.S. authorities had adopted an approach of minimal intervention and that they would intervene only when necessary to counter conditions of disorder in the exchange market.76 Once again, the same concept of countering disorder was cited, but it was clear that a change in policy had occurred. The Under Secretary of the Treasury for Monetary Affairs, on May 4, 1981, interpreted the policy of the United States of intervening only when necessary to counter conditions of disorder in the market as a return to the pre-1978 concept of intervention.77 He was skeptical about a more active intervention policy because it would have to rest on the assumption that a few officials were more expert in determining what the exchange rate for the dollar should or should not be than the myriad parties who were dealing in the markets. Furthermore, intervention in the past might have had a destabilizing effect by preventing the dollar from attaining its equilibrium level and by contributing to the steepness of a later decline. U.S. officials have opposed intervention even if official intervention could produce more orderly conditions in exchange markets, because intervention could not change fundamental economic trends. Reports of the Federal Reserve Bank of New York confirm that since the spring of 1981 there has been minimal intervention in the exchange markets on behalf of the U.S. monetary authorities, although in the quarter ended October 31, 1982, intervention on four occasions amounted to a total of slightly more than $100 million.78

The intervention policy of the United States demonstrates that members adopt their own understanding of disorderly conditions and that the concept is sufficiently imprecise to permit sharp changes in policy. One U.S. official has written:

Disorder, to be sure, is mainly in the eye of the beholder. Rapid rate changes, widening bid and ask spreads, lengthening price gaps from one transaction to the next, a fading away of bids or offers, the degeneration of trading into a one-way market have all been cited as instances of disorder. None need necessarily and inevitably be so regarded.79

The refusal of successive U.S. administrations to explain their understanding assures them of flexibility. The Fund’s guideline B also avoids a definition, but gives one tentative example of disorderly conditions. They “may” be characterized “inter alia” by disruptive short-term movements in the exchange value of a currency. The example is tautological because of the word “disruptive.” A fundamental problem is whether a line can be drawn between the uncertainty that monetary authorities wish to maintain about their intentions in order to make intervention effective and a clarification of guideline B that prevents it from lapsing into inanition.

In some countries a broader view is taken of disorderly conditions than the undefined, but narrow, view taken by the United States, which seems to be confined to conditions provoked by incontrovertible emergencies. The volatility of exchange rates and its consequences are criticized in these other countries.80 Support is expressed for a more active policy on intervention and for more extensive international understandings on such a policy.81

One economist, who has written that Article IV, Section 2(b) may be described as “codified anarchy,” has discussed possible dangers for the United States under the Second Amendment. If all countries other than the United States intervene to manage the exchange rates for their currencies, the effect will be management of the exchange rate for the U.S. dollar whatever the wishes of the United States may be. The situation of the United States would then be the one that ultimately it found objectionable under the par value system.82 It may be that the U.S. administration does take the view that the U.S. dollar is still the central currency in international monetary arrangements and that it is not the dollar that fluctuates in exchange value but other currencies that fluctuate in relation to the dollar.83

Differences of opinion among members of the Fund on whether there should be a more active policy of intervention and what that policy might be induce officials who do not regard the present situation as satisfactory to hope that understandings can be negotiated among monetary authorities, and in particular among central banks, outside the Fund.84 These officials emphasize that understandings, to be useful, cannot be confined to intervention but must extend as broadly as possible to other economic and monetary problems of common interest to the United States and other major countries.

Increasingly strong discontent about the development of exchange rates and the differences of opinion between the United States and other countries on intervention led to a number of understandings at the summit meeting at Versailles on June 4–6, 1982, attended by the Heads of Government and State of Canada, France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States. A Joint Statement on Monetary Undertakings was attached to the communiqué issued at the conclusion of the meeting. Paragraph 1 recognizes that greater stability of the world monetary system rests primarily on the convergence of policies designed to achieve common goals. Paragraph 2 announces that the parties attach major importance to the Fund as a monetary institution. The next three paragraphs are formulated as follows:

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

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

5. We are ready, if necessary, to use intervention in exchange markets to counter disorderly conditions, as provided for under Article IV of the IMF Articles of Agreement.85

Paragraph 4 is drawn from Article IV, Section 1(iii) of the Fund’s Articles. Paragraph 5 repeats the substance of the Fund’s guideline B. Paragraph 3 is an addition to the Fund’s pre-existing law and practice. In accordance with this paragraph 3, joint discussions are to be held by representatives of the United States, the United Kingdom, Japan, the Federal Republic of Germany, and France, in cooperation with the Fund. The Fund has not announced any decision so far that relates these discussions to new or existing procedures on surveillance.

Another understanding reached at the Versailles meeting, although not recorded in the joint statement, is that experts of the seven countries represented at Versailles would undertake a study, with the help of the Fund’s staff, to determine whether intervention had been efficacious in the past.

On December 6, 1982, the Secretary of the U.S. Treasury startled the economic and financial world with an announcement that went beyond the view that stable conditions could be achieved if countries took individual responsibility for pursuing correct policies and reducing inflation. A more collective and more systematic approach to economic problems was necessary, for which purpose a new international conference should be convened in the coming years. In relation to exchange rates, his objective would be greater “viscosity,” but he was not advocating a return to fixed exchange rates or a policy of intervention.86

Obligation to Collaborate

Article IV, Section 1 contains a general obligation of members that is formulated in firm language: “each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.” This obligation was intended to have a role similar to the obligation that had been set forth in Article IV, Section 4(a) before the Second Amendment: “Each member undertakes to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations.” That provision had been a reservoir of jurisdiction on which the Fund had drawn in order to exercise authority over exchange rates in the days of the par value system.87

Certain features of the new obligation have a special relevance to the subject of the coordination by members of their policies, which is discussed in the Section below entitled “Some Further Safeguards.” The new obligation dispels any misconception that the four subparagraphs that follow and set forth specific obligations call for policies by each member that are wholly self-regarding. Each member should set its own house in order, but not by policies that create distress in other houses. This concern for others explains why the new obligation requires collaboration with “other members” as well as with the Fund, in contrast to the former general obligation of collaboration, which was formulated as collaboration with the Fund only. Moreover, an objective of collaboration is a stable “system” of exchange rates. The word “system” indicates that the stability to be sought must be world wide. A similar function is performed by the reference to “the international monetary system” in subparagraph (iii).

The obligation of collaboration can be observed by members without prescriptions by the Fund, but the Fund can give vigor to the obligation by decisions that define how members should behave. The Fund can make clear that it will consider members to be acting in accordance with their obligation if they behave in a particular way. The Fund adopted such decisions under the former Article IV, Section 4(a). Decisions of this kind can be taken with a majority of the votes cast. So far, no decisions have been taken under the new obligation.


One of the main objectives of the original Articles was that members should make their currencies convertible by giving notice to the Fund of willingness to perform the obligations of convertibility set forth in Article VIII, Sections 2, 3, and 4. Members were given the privilege, however, of availing themselves of transitional arrangements under Article XIV, which permitted members to maintain and adapt the restrictions existing when they joined the Fund on payments and transfers for current international transactions without the need for approval by the Fund. If a member decided to avail itself of the transitional arrangements, it was required to consult the Fund annually on the further retention of restrictions that were inconsistent with the obligations of convertibility. The Fund was authorized to encourage a member to withdraw particular restrictions or to abandon them altogether, and if the Fund found that a member persisted in maintaining restrictions without economic justification, the member could be declared ineligible to use the Fund’s resources. In practice, the consultations were not limited narrowly to restrictions but covered all aspects of a member’s situation that affected its balance of payments, and were completed with decisions of the Executive Board that recorded its views on the member’s situation.

Once a member had given notice that its currency was convertible in accordance with Article VIII, the member was no longer required by the Articles to engage in annual consultations.88 Members were persuaded by the Fund that periodic consultations with it continued to be useful even in these circumstances. A procedure was established for this purpose,89 but on the understandings that the consultations were voluntary and that they would not be completed with decisions of the Executive Board. The latter understanding illustrates the importance attached by members to possible criticism by their peers in the form of decisions of the Executive Board. Various attempts were made over the years to rescind the understanding and to get agreement on a practice of concluding these consultations with decisions, but the efforts did not succeed. The object of the proposal was to increase the influence of the Fund, for which reason it was not acceptable to members.

When the Second Amendment was being drafted, it seemed unprofitable to resume these efforts in relation to Article VIII. The legal position with respect to consultations under the present Article VIII and Article XIV remains unchanged, but the difference between them has little, if any, practical effect now. The new provisions of Article IV apply to all members. An obligation of consultation without distinction among members was considered a desirable safeguard. Article IV, Section 3(b) provides, therefore, that all members must consult with the Fund on their exchange rate policies. The Fund has taken three general decisions so far that regulate these consultations.90 The first sets forth the principles for the guidance of members’ exchange rate policies, the procedures for the Fund’s surveillance over these policies, and the circumstances that might be disturbing and might indicate the need for special discussions with a member. The second decision provides for special discussions because of the importance of developments even though they are not disturbing. The third decision clarifies aspects of the earlier decisions and summarizes experience under them.

Some Further Safeguards

Attempts have been made to erect bulwarks against the dangers that present exchange arrangements may create and that the law may not be adequate to prevent. These defenses add to the safeguards discussed in the previous Section of this Chapter. Some further defenses are considered in this Section.

European Monetary System

It has become apparent that developments can occur in exchange rates that are not justified by underlying economic conditions. The monetary authorities of a country may conclude that they must counteract these developments. Floating exchange rates may give less independence to determine domestic policies than was expected. Limited de facto independence has convinced most members of the European Community that they sacrifice little and gain more by joining the European Monetary System (EMS), which limits their independence de jure.91 The exchange rate and intervention arrangements of the EMS impose obligations on participants in the interest of creating a zone of monetary stability.92

Coordination of Policies

The softening of obligations with respect to exchange arrangements has led, not surprisingly, to more emphatic and more repeated exhortations to members to coordinate their policies or to aim at a convergence of them. Sometimes, coordination among all members is urged, and sometimes among participants in the EMS, or the issuers of the expanded number of reserve currencies, or the issuers of the currencies in the basket that determines the exchange value of the SDR, or some other group of countries.

A study that has been made of coordination distinguishes among three categories of national economic policies,93 although these categories are not necessarily exhaustive or always mutually exclusive: (1) policies aimed at a goal that is common for countries, (2) policies that are inherently competitive, and (3) policies that have their main impact within the country applying them. The most obvious example of category (2) for the present purpose is the policy of a change in exchange rate. In contrast to category (1), in which pursuit of common national policies increases the common good, the benefits derived by a country from a change in the exchange rate for its currency are matched by costs borne by other countries. For this reason, international agreements have been made, beginning with the Fund’s Articles, to regulate or monitor inappropriate national policies on exchange rates. In the days of the par value system, the world relied on a set of international rules administered by an international organization empowered to take decisions and did not rely on appeals for coordination. The study declares that since 1971,

the conditions for central decision-making no longer apply for the major currencies. It is true that the exchange rate policies of all countries, whatever their exchange rate regime, are subject to “firm surveillance” by the Fund; but surveillance of floating rates is inherently difficult. With the disappearance of the rule of the par value system, the avoidance of inappropriate rates for the main currencies has come to rely to a considerable extent on the coordination of exchange rate policies by the main industrial countries. …

Fund surveillance of these major currencies constitutes part of the cooperative mechanism about these rates. As a minimum, it can function as a backstop to ensure that these rates do not move outside a reasonable range; with greater exercise of its authority, one could imagine the Fund to garner a much more substantial proportion of the coordination function.94

The Fund attempts to garner some proportion of the coordination function by its periodic World Economic Surveys and by the discussion of prospects for coordination in the light of the surveys as the first item on the agenda of meetings of the Fund’s Interim Committee. The study referred to concludes that “‘[c]oordination’ is seen here as a relatively weak form of international influence on national policies. It is a halfway house between, on the one hand, purely national policy formation and, on the other hand, policy-making that is constrained by international rules and surveillance exercised by an international organization.” 95

This conclusion can be accepted if international rules are indeed constraining. If the rules are soft law, they are not at one extremity of the range of possibilities. The rules are then somewhere between the halfway house and the true extremity of firm law. It is difficult to assess the influence of statements by organs or other bodies within the Fund or within other international entities that urge policies on governments. The statements are often formulated in the language of compromise that is typical of committee prose. The statements may have a sharper focus in the first draft prepared by international civil servants, but the text is then blurred by the ministers or officials who compose the body issuing the statement. The motive for this blurring may be the absence of a true accord 96 or the wish by governments to avoid firm commitments. Even when a clear text does survive in the drafting of a communiqué, an instrument of that character has no binding legal force. Governments are not subject to the reproach that they are neglecting obligations if they give decisive effect to national, rather than to international, interests.

The extent to which consultations under Article IV can influence the adjustment of individual balances of payments or the international coordination of policies is affected by the function of these consultations as seen by members. As is discussed in the following Section of this Chapter, the attitude of members to that function is affected by their perception of the degree of uniformity and symmetry achieved by the Fund in the administration of Article IV.

The treatment accepted by the United States is almost always a major influence on the perceptions of members. For example, the policy of consultations with members that had undertaken to perform the obligations of convertibility under Article VIII, which was discussed in the Section above entitled “Some Safeguards Against Softness of Article IV,” was acceptable to members only when the United States came to the conclusion that it would participate in such consultations. The United States has provided an authoritative exposition of its view of the functions that consultations under Article IV should perform in achieving the international coordination of policies:

IMF Article IV consultations contribute to international stability in a number of ways. First, such consultations provide information to member governments regarding the national economic policies of other member governments. Such information may be helpful in shaping each member’s domestic policies as well as useful in avoiding conflicts because of misunderstandings. Second, Article IV consultations provide a valuable base of information for Fund staff assessments of global economic and exchange-rate developments which in turn provide useful information for national economic authorities. Third, Article IV consultations provide a framework for frank critiques among the representatives of member governments. Fourth, Article IV consultations provide a base from which all nations can develop a better understanding of the economic linkages among nations. And finally, these consultations can help a country to identify and address emerging payments problems at an early stage.97

The usefulness of consultations as described in this passage cannot be denied, but the functions that are described are considered useful because they provide information and cultivate understanding. No mention is made of the Fund’s surveillance of the international monetary system in order to ensure its effective operation or of the compliance of members with their exchange rate obligations. Nor is there any mention of the obligation of members to collaborate with the Fund and with other members to create a stable system of exchange rates. There is no reference, therefore, to the opportunity that consultations can give the Fund to induce members to coordinate their policies.

An observer, who was at one time senior vice president of the Federal Reserve Bank of New York and manager of foreign operations of the Federal Reserve System Open Market Account, has made a pessimistic assessment of the extent to which efforts to develop joint policies have been successful when the policies compete with national preoccupations:

The institutional framework is still intact. Officials consult regularly at the economic summits, the IMF, the OECD, and the BIS. But their willingness to work together to solve international monetary questions has virtually disappeared. Officials have increasingly used international meetings as platforms to defend or justify their policies at home rather than as opportunities to develop joint strategies to deal with common international and monetary and financial problems. Relations have not deteriorated to blatant policies of beggar-thy-neighbor but the environment has surely become one of every man for himself.98

This former official provides a political explanation of the tendency that he has observed. Former governments in a number of industrial countries did not succeed in their economic policies. Electorates then turned to other political parties because they promised new approaches, even if in the past these approaches were considered “offbeat, or even extreme.” The successor governments seek as much freedom as possible from international constraints that might hinder the new approaches.

If this analysis is correct, why do governments embarrass themselves by calling for coordination? The declarations are often made by ministers and officials with economic responsibilities. They tend to share a willingness to cooperate within the scope of their responsibilities that outruns the political possibilities for harmonized policies. Even when an objective of political integration through economic cooperation has been avowed by a limited group of countries, performance falls short of aspiration.99

The dependence of economic aims on political will and the difficulties of developing that will might dispose governments to consider the problem at the highest political level. There has indeed been some disposition to place monetary matters, including exchange arrangements and the coordination of economic policies, on the agenda of summit meetings. The first summit meeting, at Rambouillet, endorsed the solution on exchange arrangements that was incorporated, with no great modification, in the Second Amendment. Later summit meetings have not considered many monetary issues and have not dealt with them in detail when they were on the agenda, until the meeting at Versailles.100

The Heads of State and Government attending summit meetings have dealt with monetary matters infrequently and sometimes cursorily because these matters are within the responsibilities of the Fund and particularly its Interim Committee. The limited number of states represented at summit meetings provokes resentment among other states, including some whose support for an agreement reached at a meeting is necessary for success. The composition of the Interim Committee according to the model of the Executive Board as established by law protects the Committee against the charge that it is unrepresentative. If the Interim Committee becomes the final arbiter of policy on international monetary matters, the opportunity for promoting political consensus by appeal to the highest political authority attending summit meetings will be unavailable.

Paradox of Present Articles

Since 1971, differential rates of inflation, the shock of increases in the cost of energy, and social and political developments in individual countries have been among the forces that have produced frequent changes in exchange rates. The prospect that conditions such as these would persist was the major reason why members agreed that a par value system could not be restored.101 Not all the consequences of present exchange arrangements were foreseen. The volatility of exchange rates and their tendency to go too far even in the right direction have surprised many economists who favored floating rates in principle and not under the compulsion of economic force majeure. The paradox is that the soft law that cannot prevent the undesirable behavior of exchange rates increases the need for firm administration if damage to the purposes of the Fund is to be avoided. But soft law does not predispose members to accept firm administration.

The Section of this Chapter entitled “Some Safeguards Against Softness of Article IV” has shown that the Articles provide safeguards against the dangers of soft law. Administration will be firm if these safeguards are applied with vigor. In the previous Section, the importance of certain perceptions by members was noted in the discussion of the effectiveness of consultations.

The policies and procedures of the Fund must be acceptable to its members acting through the Executive Directors they appoint or elect or through the ministers or others they appoint to the Interim Committee. Members will not support policies or procedures unless they perceive a net advantage notwithstanding the international constraints they are called on to observe. Uniformity and symmetry in the application of the safeguards would contribute to this perception not simply because of the aesthetic appeal of evenhandedness but also because the surrender of some degree of freedom by each member is a concession of authority to other members. Uniformity is a characteristic of the treatment of the members that are deemed to constitute a class; symmetry is a characteristic of the treatment of classes. Uniform treatment can be said to be the same treatment; symmetrical treatment can be said to be comparable treatment.102 The treatment of industrial countries is of particular importance when members decide whether they will accept firm administration. Will the classes of industrial members and developing members receive symmetrical treatment? Within the class of industrial members, will the United States and other members receive uniform treatment? 103

Differences of opinion among members on the character and operation of the present international monetary system may be another impediment to agreement on policies and procedures for administering the system. Some European observers have criticized the Second Amendment as a legalization of disorder and not a reform.104 They recommend greater official activism, particularly in the management of exchange rates, in order to achieve greater discipline.

American officials have been more sanguine about the existence of an international monetary system and its soundness in concept. They have not favored official activism in the management of exchange rates:

The United States believes that exchange rates must be allowed to adjust to changing economic and financial conditions. We are not, however, pleased with the degree of exchange rate instability experienced during the past decade. In our judgment, such exchange rate instability reflects unstable economic and financial conditions within countries. The remedy is not a change in institutional arrangements.

Rather, these conditions should be viewed, as recognized in the IMF’s surveillance provisions, as evidence of the need for restoration of stable economic and financial conditions.105

The statement by the Secretary of the U.S. Treasury of December 6, 1982 manifests concern about the operation of the international monetary system, but not discontent with the concept of present exchange arrangements.

The Managing Director of the Fund has explained that in current conditions it was inevitable that some countries would insist on the advantages of stabilizing exchange rates in the short run while others would emphasize the greater desirability of underlying policies that would produce a stable exchange rate system in the longer run. These different attitudes—to which can be added differences about the role of exchange rates in the adjustment process 106—have placed limits on the firmness with which surveillance can be conducted:

II est done vrai qu’il y a une situation de fluctuations excessive dans le système international; et il peut paraître que la surveillance exercée par le Fonds Monétaire International, est très modeste, je n’en disconviendrai pas.

Mais pourquoi est-elle modeste, cette action? Je crois quelle est modeste parce que, en fin de compte, les pays membres qui constituent cette collectivité de 145 états sont encore très divisés sur ce que devrait être la gestion harmonisée d’un système international de changes.107

Some Modest Proposals

The international lawyer is predisposed by training to support the transformation of soft law into firm law because he sees that process as the growth of international law. He sees the need for law to avoid collision when the conduct of international relations affects important interests, and he believes that the need can be met more effectively by firm law than by soft law. The economist may consider the process of strengthening the law as undesirable if applied to exchange arrangements in present circumstances.108 He may doubt that firmer rules of law can be formulated, with the present state of knowledge of the economic forces at work, that would be observed in current conditions. Firmer rules of law would be undesirable because they would reduce the choice of policies available to governments. This view may explain why the Fund’s guidelines B and C concentrate on intervention and refrain from the mention of other policies or practices that affect exchange rates, and why guideline A is cast in terms of subjective intent rather than objective effect.

Some economists may favor restraint in the establishment of guiding principles because they expect that principles would be directed toward the stability of exchange rates as an end in itself. The promotion of international welfare would be more desirable as the primary objective, and stability should not be sought if it would inhibit welfare.

An assessment of the effectiveness of the present law in achieving the objectives that appear in Article IV, Section 1 must recognize the normal disposition of members to act in accordance with the law. No member has announced that it is resiling from the provisions of the Articles on exchange arrangements, and no member has that option. Nor should an assessment neglect the Fund’s policies on the use of its resources by members. The policies of a member that directly or indirectly affect its choice of exchange arrangements or the exchange rate for its currency can be influenced by the conditionality the Fund applies under some of its policies when a member in difficulty in its balance of payments seeks to use the Fund’s resources under those policies. Conditionality is a portmanteau word that encompasses all the policies that the Fund wishes a member to follow so that it can resolve its problem consistently with the Articles.109 Conditionality cannot ensure the firm administration of law in relation to all members, however, because numerous members, including major industrial countries, are not making use, or seeking to make use, of the Fund’s resources.

Whatever assessments are made of the present law cannot dispose of the fact that there is widespread dissatisfaction with the conditions that the law has not prevented.110 At least one achievement of the present law is obvious. The feverish, and often unsuccessful, efforts of the past to defend a par value, and the sense of crisis that was created, no longer disturb the international monetary scene. Miss Prism’s instructions to Cecily on the rupee are now unnecessary.111

If agreement were reached on developing the substantive law of exchange arrangements, much room could be found in the present Articles for accommodating development. It is safe to assume that the par value system that is the subject of detailed provisions in the present Articles 112 would not be called into operation. The Fund could act under other provisions, however, to develop substantive rules. It has been seen that the Fund could specify the behavior that it would consider consistent with the obligation of members to collaborate. The Fund could adopt further specific principles for the guidance of all members with respect to their exchange rate policies, and principles could be drafted with greater precision than the three now in existence. The Fund could give greater precision, by interpretation or by decisions on policy, to the four subparagraphs of Article IV, Section 1. The Fund could recommend general exchange arrangements to accord with the development of the international monetary system. The first three of these four categories of decisions could be taken with a majority of the votes cast, the fourth with an 85 percent majority of the total voting power.

Opportunities exist for strengthening procedures in combination with the development of substantive rules, but procedures could be strengthened even if new substantive rules are not developed. In primitive societies, it should be recalled, law was secreted in the interstices of procedure. If procedures can be strengthened, the firmer administration of existing rules of law might result in the secretion of new rules. The following developments in procedure are suggested. They have been called modest in the title of this Section because they are confined to procedure.

(1) Consultations under Article IV should be completed by the Executive Board with the adoption of avowed decisions instead of “conclusions.” The decisions should be formulated as the expression of the collective view of the Executive Board and not as its endorsement of the Chairman’s summing up of the views expressed by various Executive Directors. With this change, it would be clearer that the Fund was expressing the judgment of peers.

(2) The basic decision on the procedures for surveillance under Article IV emphasizes extremes of informality and confidentiality.113 Delay is possible before the Executive Board has an opportunity to examine a member’s exchange rate policies. If the Executive Board’s eventual response were to be adverse, its criticism would have less impact than if the response had been prompt. The knowledge that the Executive Board might examine exchange rate policies soon after they were introduced might encourage caution on the part of a member that had reason to expect a challenge by its peers. The deterrent effect would be less than is exerted by an a priori approach, but it might be more than is exerted by an a posteriori approach that permits delay.

The solution might be an understanding by the Executive Board that although the detailed procedures of the basic decision on surveillance were to be followed in most instances, the decision did not prevent an Executive Director from invoking Rule C-6 of the Fund’s Rules and Regulations if he considered that an unusual situation had arisen: “The agenda for each meeting shall be prepared by the Chairman. The agenda shall include any item requested by an Executive Director.”

Whatever understanding might be reached of the circumstances that constituted an unusual situation, uniformity and symmetry would have to be observed. For example, members that pegged their currencies in some way and members that did not would be treated symmetrically. Symmetry implies that the procedure of Rule C-6 would not be confined to members that took action to change a peg, and that the procedure would apply also to the issuers of currencies that were not pegged if changes in exchange rate, whether saltatory or the result of a crawl, were disturbing.

(3) The Council should be called into existence. The decisions of the Council, taken at the level of Ministers of Finance acting as Councillors, would strengthen the Fund. The Council would take decisions, and members that were not acting in accordance with the decisions would have the burden of explaining their failures.

The Council would probably confine its activities to the consideration of general policies. An organ like the Council would be less likely to examine the situation of individual members, although it would not be prevented from doing so in cases of sufficient importance for the international monetary system. The terms of reference of the Council are formulated by the Articles: “The Council shall supervise the management and adaptation of the international monetary system, including the continuing operation of the adjustment process and developments in global liquidity, and in this connection shall review developments in the transfer of real resources to developing countries.” 114

If the Council limited its activities to decisions on general policies, the task of completing consultations under Article IV would continue to be performed by the Executive Board as at present. The role of the Executive Board would be strengthened, however, because it would have the function of calling on members to account for failures to observe the Council’s decisions. The undertaking of each member to collaborate with the Fund and other members on orderly exchange arrangements and a stable system of exchange rates 115 would be a powerful instrument in the hands of the Executive Board for influencing members to act in accordance with decisions of the Council on general policies.

(4) In the absence of the Council, the Interim Committee’s procedures could be modified. The Committee’s terms of reference 116 are substantially similar to those of the Council, although the Committee has no power to take decisions. Supervision of the management and adaptation of the international monetary system could be put on the agenda of the Committee in addition to, or in place of, its consideration of the world economic outlook. The new item would be more pointed in recalling that the Committee must concern itself with supervising the evolution of the international monetary system (“adaptation”). The Committee must not concentrate exclusively on the analysis of current economic conditions and short-run prospects. That activity can be subsumed under supervision of the “management” of the system but without exhausting even that concept.

(5) The consultations held among the representatives of the five members whose currencies compose the SDR basket, in which the Fund is to have a role, should be linked in some way to procedures of the Executive Board. Understandings reached among the five members affect the whole community of members. They should have an opportunity, therefore, to comment on those understandings. The most obvious locus of such a discussion would be the Board Room of the Fund.

(6) The documents of the Fund and the “conclusions” reached in consultations under Article IV are confidential and not for public use. Little is known, therefore, of results of the Fund’s surveillance. There is, for example, no indication in the Annual Reports of the Fund or in its Annual Reports on Exchange Arrangements and Exchange Restrictions of the outcome of any action that has been taken under the special procedure for consultations with a member in the interval between periodic Article IV consultations.117 This procedure could make an effective contribution to surveillance because it is initiated if the Managing Director, “taking into account any views that may have been expressed by other members, considers that a member’s exchange rate policies may not be in accord with the exchange rate principles.” 118

The secrecy that envelops surveillance could be pierced in one kind of case without detriment to the confidentiality that members cherish. If a member wished to publish the staff report on a consultation with the member or the “conclusions” reached in the consultation, the Fund should give its consent. A government is likely to request permission to publish only if the document or the “conclusions” are favorable to the government and support its existing or contemplated policies. Nevertheless, it is appropriate for the Fund to give whatever support it can to policies that are consistent with its purposes. Moreover, the member might find it difficult to resist publicity when the reports or “conclusions” in a later consultation were not favorable to the government.

(7) The Monetary Committee of the European Community discusses and recommends actions on monetary matters that affect countries outside the Community as well as within the Community. Actions taken by the Community in these matters must be consistent with the obligations of members of the Community as members of the Fund. Liaison between the Community and the Fund is particularly important now that exchange rate and intervention arrangements and other monetary matters are regulated by an evolving EMS. Furthermore, the experience of the EMS could assist in the evolution of the law relating to exchange arrangements under the Fund’s Articles. An official of the Commission of the Community was an observer in meetings of the Committee of Twenty and is an observer in meetings of the Interim Committee. An official of the Fund should participate in meetings of the Community’s Monetary Committee.

There should be no illusion that it would be easy to negotiate acceptance of any of these developments because they relate to procedure. The world has retreated a long way toward the pre-Bretton Woods principle that exchange arrangements and exchange rates are sensitive aspects of sovereignty. There is no evidence yet of willingness to go forward again if any proposal involves, or might involve, a surrender of sovereignty in these matters beyond the modest transfer that has been made at present. Nations are unwilling to take such a step unless they are persuaded that it will result in a net advantage to them. That attitude is reasonable, but, unfortunately, nations often conclude that there is advantage only as a last resort after they have reached a condition of crisis.119


Since this article was written, two developments have occurred that are relevant to it. The report of the working group on exchange market intervention commissioned at the Versailles summit became available and was the subject of a statement, issued on April 29, 1983, by the summit finance ministers and central bank governors, and representatives of the European Community. The final paragraph of the statement is as follows:

Under present circumstances, the role of intervention can only be limited. Intervention can be useful to counter disorderly market conditions and to reduce short-term volatility. Intervention may also on occasion express an attitude toward exchange markets. Intervention will normally be useful only when complementing and supporting other policies. We are agreed on the need for closer consultations on policies and market conditions and, while retaining our freedom to operate independently, are willing to undertake coordinated intervention in instances where it is agreed that such intervention would be helpful.120

The Declaration on Economic Recovery issued on May 30, 1983 at the Williamsburg summit contains the following paragraphs:

2. The consultation process initiated at Versailles will be enhanced to promote convergence of economic performance in our economies and greater stability of exchange rates, on the lines indicated in an annex to this Declaration. We agree to pursue closer consultations on policies affecting exchange markets and on market conditions. While retaining our freedom to operate independently, we are willing to undertake coordinated intervention in exchange markets in instances where it is agreed that such intervention would be helpful.

5. We have invited Ministers of Finance, in consultation with the Managing Director of the International Monetary Fund, to define the conditions for improving the international monetary system and to consider the part which might, in due course, be played in this process by a high-level international monetary conference.121

The Annex to the Declaration contains this paragraph: “3. Exchange Rate Policy. We will improve consultations, policy convergence and international cooperation to help stabilize exchange markets, bearing in mind our conclusions on the Exchange Market Intervention Study.” 122

These statements do not change the law on exchange arrangements or the need to strengthen it as discussed in this article, but the Declaration gives some hope that a strengthening of the law or of practice under it may be undertaken in the future.

Annex A

Article IV: Obligations Regarding Exchange Arrangements

Section 1. General obligations of members

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

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

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

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

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

Section 2. General exchange arrangements

(a) Each member shall notify the Fund, within thirty days after the date of the second amendment of this Agreement, of the exchange arrangements it intends to apply in fulfillment of its obligations under Section 1 of this Article, and shall notify the Fund promptly of any changes in its exchange arrangements.

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

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

Section 3. Surveillance over exchange arrangements

(a) The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.

(b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.

Section 4. Par values

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

Section 5. Separate currencies within a member’s territories

(a) Action by a member with respect to its currency under this Article shall be deemed to apply to the separate currencies of all territories in respect of which the member has accepted this agreement under Article XXXI, Section 2(g) unless the member declares that its action relates either to the metropolitan currency alone, or only to one or more specified separate currencies, or to the metropolitan currency and one or more specified separate currencies.

(b) Action by the Fund under this Article shall be deemed to relate to all currencies of a member referred to in (a) above unless the Fund declares otherwise.

Annex B

Actual conclusions (omitting the name of the member) of a recent Article IV consultation:

Executive Directors have congratulated the … authorities on the success of their stabilization efforts, which in the past two years have led to a marked improvement in the balance of payments and to a lowering of the underlying rate of inflation, while allowing a level of economic growth higher than the average for [similarly placed] countries. This remarkable success was seen as largely reflecting the adoption of exchange rate and interest rate policies directed at improving competitiveness and restoring the relative attractiveness of domestic financial assets. The moderation of wage increases and a strong increase in the private savings ratio were seen as important and successful contributing forces.

The Directors were gratified that the stabilization effort has laid the basis for a more sustained rate of growth, and they encouraged the authorities in their efforts to promote a further recovery of investment. Taking into account the recent deterioration in the external current account and in the overall balance of payments, it was important, in the view of Directors, that the exchange rate remain competitive and that interest rates be maintained at levels adequate to attract continued inflows of workers remittances and foreign capital and to mobilize an increasing volume of domestic savings.

Many Directors observed that the situation of public finances, including the unsustainably high public sector deficit as a ratio of GNP, continued to be a cause of concern. They welcomed the efforts currently being made by the authorities to bring about a more equitable distribution of the tax burden, to reduce tax evasion, and to improve productivity in the public enterprise sector. They also stressed the importance of tightening controls over expenditures, especially by the social security system, and the local authorities, and of pursuing appropriate pricing policies, particularly in the public enterprise sector and in the energy field, in order to contain the growth of subsidies. Furthermore they emphasized the importance of increasing the nonmonetary financing of the budget deficit.

Most Executive Directors felt that the authorities’ goal of reducing inflation would require a somewhat tighter stance of financial policies. In this respect, concern was expressed about the rapid growth of domestic bank credit in recent months, which was regarded as excessive, and Directors welcomed the authorities’ intentions to keep under close scrutiny policies in this area.

Directors expressed satisfaction with the recent measures to liberalize the trade and payments system and the hope that further steps in that direction would be taken.

Finally, Executive Directors expressed their gratification concerning the very positive and fruitful relationship between … and the Fund and their confidence that this collaboration will continue to strengthen in view of the medium-term aspects of … economic strategy.

Supplemental Note to Chapter 7

1. For a discussion of the different attitudes to intervention policy as they influenced the language of the Rambouillet declaration, which in due course affected the language of Article IV of the Second Amendment, see F. Lisle Widman, Making International Monetary Policy (Washington: International Law Institute, Georgetown University Law Center, 1982), pages 176–78.

2. The book by Widman is a valuable insight into the formation of international monetary policy within the U.S. Treasury, on the staff of which the author served for many years. One of the few topics on which the book provides no information is the attitude to the legal aspects of the President’s action of August 15, 1971. Widman discusses that action on pages 119–20, as follows:

7.3 Acting with Less Than Usual Coordination

The moves in August 1971 to suspend the convertibility of the dollar into gold and the series of policy measures which accompanied that action were not coordinated through the Volcker Group in the normal way. However, there had been many discussions about the need to find ways to give the United States the same degree of control over its effective exchange rate as other countries were in position to exercise.

Concern about the August 1971 actions was widespread, not only in many foreign capitals but also in Foggy Bottom (home of the Department of State). The State Department had not been represented at the Camp David session with President Nixon where the decisions were made. Even though senior officials of the State Department were told a few hours before the announcements were made, Nixon had already signed the order and the only changes they could make were those the Treasury was prepared to accept.

After extensive conversations with the key officials of foreign nations, Connally and Volcker reached a conclusion: as long as the United States maintained its announced policy of selling gold to foreign monetary authorities at $35 per ounce, it would be impossible to achieve the change in the U.S. exchange rate which would be necessary to restore a sustainable position in our balance of payments without totally unacceptable restraints on our domestic economy. Too many important countries simply could not envisage an appreciation of their own currencies against the U.S. dollar. The conviction was based upon the prevailing tendency to see the rates of their individual currencies against the dollar as the rates of their currencies against the world. Moreover, there seemed no prospect that the other major countries could be persuaded to accept the necessary exchange rate changes in a multilateral negotiation. The United States would have to act unilaterally to gain leverage which could be used to bargain for agreement later. A unilaterally imposed import surcharge would serve that purpose.

The Department of State had long preached cooperation and opposed the idea of unilateral action by any country. It feared emulation by affected nations and progressive disintegration of the open trade and payments system.

There is little doubt that most State Department officials, had they been consulted, would have objected violently to the import surcharge. They would have suggested more consultations in a further effort to negotiate, in some large international forum, a change in prevailing par values. Those familiar with financial markets knew the utter impracticality of such an approach. Any change in par value, to avoid financial disaster, had to be undertaken abruptly and without warning. Connally concluded that there was no other way. To have sought reaction from the various geographic bureaus of the State Department in an effort to mollify foreign nations was to court chaos.

The State Department did obtain one highly significant change, however. The announcement approved by the President for release included termination of the auto agreement with Canada. A State Department official was summoned to the Treasury to assist in the task of notifying foreign governments of the action being taken by arranging to transmit the texts of the announcement to them simultaneously with the public release. When he read the proposed announcement, he was horrified by the breach of diplomatic courtesy in announcing an intent to terminate the auto agreement without notice to the Canadian government and without affording the Canadians any opportunity to renegotiate the arrangement. After an impassioned plea to Volcker, who no doubt had a word with Connally, the statement was dropped. As far as I know, the Treasury made no further attempt to terminate the agreement.

3. Closing the Gold Window: Domestic Politics and the End of Bretton Woods, by Joanne Gowa (Ithaca: Cornell University Press, 1983) is a detailed account of the road to the Camp David meeting and of the meeting itself. The author has interviewed 23 officials of President Nixon’s first administration, but no officials who held office as lawyers. The author deals with her subject primarily from the standpoint of political science. Although the monograph provides information on the attitudes of officials and the government departments they represented, as well as others, to the problems that confronted the United States, reactions to the legal aspects of the action taken on August 15, 1971 are implied in some contexts (for example, p. 156) but not discussed. The author’s analysis in terms of political science makes much of the contest between what she calls “regime maintenance” and the national interest as it was seen by the decision makers. The analysis does deal, therefore, with the motives for departing from the rule of law.

The President was informed in mid-1969 by a group of his advisers of the legal difficulties of a devaluation of the dollar (pp. 128–29). Moreover, according to the author, Mr. Arthur Burns “argued strenuously [at Camp David] that the national interest lay to a greater extent in the observation of the rules of the international monetary regime than in the pursuit of freedom of decision making” (p. 154).

The absence of a State Department representative at Camp David is explained on pages 159–60.

U.S. International Monetary Policy: Markets, Power, and Ideas as Sources of Change, by John S. Odell (Princeton, New Jersey: Princeton University Press, 1982), is another work by a political scientist that examines “Going Off Gold and Forcing Dollar Depreciation” (Chap. 4, pp. 165–291). Much material in this book also is based on interviews with former officials. The most detailed account of the Camp David meeting is still William Satire’s Before the Fall.

4. On surveillance over the exchange rate policies of members, see Section V, paragraph 2 of the Supplemental Note to Chapter 1. On intervention, see paragraph 2 of the Supplemental Note to Chapter 2.

5. The practice referred to in Section V, paragraph 1 and Section VI, paragraph 1 of the Supplemental Note to Chapter 1 is an approach to the second procedural suggestion made in the Section of this Chapter entitled “Some Modest Proposals.” Decision No. 7374-(83/55) of March 28, 1983 approved procedures for surveillance set forth in a memorandum of the staff, “in the light of the Managing Director’s summing up” (Annual Report, 1983, p. 142, Selected Decisions, 10th (1983), p. 17). The summing up noted the willingness of Executive Directors to rely on the Managing Director’s judgment whether particular cases should be discussed by the Executive Board (p. 145).

The following paragraph on pages 62–63 of the Annual Report, 1983 describes one consideration that is taken into account in reaching a judgment on changes in exchange rates:

The Fund must also consider whether members may have used exchange rate policies to gain a competitive advantage. Any depreciation of a country’s real exchange rate will at least temporarily improve that country’s competitive position. A surveillance issue arises only if a particular devaluation appears to lead to an unwarranted change in competitiveness, namely, one that seems excessive in view of the loss of competitiveness experienced in the past and the size of the current and prospective external imbalances. However, the difficulty of determining appropriate exchange rate adjustments has been particularly acute during the past few years, as the smaller industrial countries have responded to the policies of monetary restraint adopted by the major industrial countries. In these circumstances, with the volume of world trade declining, countries that needed to adjust their balance of payments have had to try to increase their share of total trade. In general, therefore, many of the smaller industrial countries have had to bring about a depreciation of their exchange rates in both nominal and real terms.

6. The practice mentioned in the fifth procedural suggestion was referred to as follows in the Managing Director’s address at the 1983 Annual Meeting:

The exercise of multilateral surveillance, introduced about a year ago among a limited number of the industrial countries in collaboration with the Fund, constitutes a discreet but important and positive step toward improved understanding of the current problems and toward a consensus as to the policies that are needed to tackle them. Beyond that, and for this exercise to be fully effective, it is essential that member countries agree to take due account in their policy actions of the indications arising out of these consultations (Summary Proceedings, 1983, p. 28).

For a suggestion on multilateral surveillance in the Group of Ten (or in other bodies) by the Governor of a member not in the limited group of countries referred to above, see Summary Proceedings, 1983, page 116.

Note.—This essay was published originally in American Journal of International Law, Vol. 77, No. 3 (July 1983), pp. 443–89.

Recueil des Cours, Vol. 163 (The Hague, 1979 II), p. 169. See also Prosper Weil, “Vers une normativité relative en droit international?” Revue Générale de Droit International Public, Vol. 86 (1982), p. 5, translated, modified, and expanded in American Journal of International Law, Vol. 77, No. 3 (July 1983), pp. 413–42; and Oscar Schachter, “Alf Ross Memorial Lecture: The Crisis of Legitimation in the United Nations,” Nordisk Tidsskrift International Ret: Acta Scandinavica Juris Gentium, Vol. 50 (1981), p. 3.

One author distinguishes between legal norms and ethical values or political principles and goals, and thinks that the term “soft law” has been applied to the last of these three categories, with the result that confusion has been created. The term can be, and has been, applied, however, to legal norms that, for various reasons, are not absolute in their firmness. Norbert Horn, “Normative Problems of a New International Economic Order,” Journal of World Trade Law, Vol. 16 (1982), pp. 338 and 347–48.

Hans W. Baade, “The Legal Effects of Codes of Conduct for Multinational Enterprises,” German Yearbook of International Law, Vol. 22 (Berlin, 1979), pp. 11 and 39–40.

The First Amendment did not modify the par value system of the original Articles. For detailed examination of the legal aspects of the par value system, see Gold, Selected Essays, pp. 520–73.

Ibid., pp. 538–39.

Ibid., pp. 148–80.

Some of the U.S. criticisms of the way the par value system had worked are set forth in a memorandum the United States submitted to the Deputies of the Committee of Twenty in November 1972, entitled “The U.S. Proposals for Using Reserves as an Indicator of the Need for Balance-of-Payments Adjustment,” Economic Report of the President, Transmitted to the Congress January 1973 (Washington, 1973), pp. 160–74. See also ibid., pp. 120–31.

Hiroshi Ando, “United States Foreign Economic Strategy as Seen in ‘Classified’ Documents,” The World (Tokyo, August 9, 1981).

Article IV, Section 7, original and first.

An objective of this plan might have been to avoid the need for congressional action because of the delay and publicity that would have been involved in a devaluation of the dollar. It is doubtful, however, that congressional action could have been avoided even though the net effect of the plan would have been no change in the par value of the U.S. dollar in terms of gold. Under Section 5 of the Bretton Woods Agreements Act (Public Law 79–171, 59 Stat. (1945), p. 512), the authorization of Congress was necessary not only for a proposal to change the par value of the dollar but also for U.S. approval of any uniform proportionate change in the par values of all currencies. Article IV, Section 7 of the Articles before the Second Amendment required a majority of total voting power for such a decision under that provision, but in addition the approval was necessary of every member that had 10 percent or more of the total of quotas. Under that caveat, the approval of the United States and the United Kingdom would have been necessary. The desire to avoid the need for congressional action is an explanation of the character of the action taken on August 15, 1971. See Kenneth W. Dam (who was present at Camp David), The Rules of the Game: Reform and Evolution of the International Monetary System (Chicago: Chicago University Press, 1982), pp. 188–89.

Kenneth W. Dam, op. cit., p. 187. He states that “[t]o the top U.S. decisionmakers the British request was the beginning of a run on the U.S. gold bank. The British move led directly to the decision, that weekend at Camp David. …” He notes the contest among authors on the facts relating to this incident. Ibid., p. 187, footnote 58. An authoritative account has not yet been published.

William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Ballantine Books, 1977), pp. 659–86. Safire quotes a statement by the President that he and John Connally, the Secretary of the Treasury, had agreed on the plan 60 days earlier. Ibid., p. 684.

Ibid., pp. 672–73. For the doubts of Arthur F. Burns, see p. 673. An article based in part on interviews with “insiders” makes no mention of concern about legal aspects of the action taken on August 15, 1971. John S. Odell, “The U.S. and the Emergence of Flexible Exchange Rates: An Analysis of Foreign Policy Change,” International Organizations, Vol. 33 (Winter 1979), pp. 57–81.

Breaking what the United States considered deadlock may help to explain the sense of exhilaration that the decision induced in most participants. William Safire, op. cit., pp. 677 (“It was also more fun than any of the men there had ever had in their lifetimes”) and 680.

See footnote 7 above.

See Louis Henkin, How Nations Behave: Law and Foreign Policy (New York: Columbia University Press, 2nd ed., 1979), passim, and particularly pp. 62 and 64–66. Professor Henkin does not discuss the action of August 15, 1971. No representative of the State Department attended the Camp David meeting, although the Department knew about the meeting, William Safire, op. cit., p. 671. Kenneth W. Dam has advanced some “quasi-legal” points and some points of “considerably broader significance” in support of the U.S. action of August 15, 1971, but they do not rebut the conclusion of illegality, Kenneth W. Dam., op. cit. (footnote 10), pp. 187–88.

Tom de Vries, “The Inconstant Dollar,” Foreign Policy, No. 32 (Fall 1978), pp. 161–83.

Economic Report of the President, Transmitted to the Congress January 1973 (Washington, 1973), pp. 120–31 and 160–74. See also Documents of Committee of Twenty, pp. 26–27 and 51–52, and Gold, Selected Essays, pp. 182–216.

Resolution No. 29-8, Selected Decisions, 9th (1981), pp. 306–309; Joseph Gold, ‘The Fund’s Interim Committee—An Assessment,” Finance & Development, Vol. 16 (September 1979), pp. 32–35.

U.S. Senate, Amendments of Bretton Woods Agreements Act, p. 13.

IMF Survey, Vol. 4 (November 24, 1975), p. 350.

The text of Article IV is reproduced in Annex A, pp. 572–74.

The clause could serve, however, to elucidate the obligations if problems of interpretation arose.

The object was also to create an affinity with the “purposes” of Article I even though they are the purposes of the Fund, while the “purpose” in Article IV is that of the international monetary system.

Gold, Selected Essays, pp. 319–51.

This statement is subject to the caveat that there will be an automatic breach of obligation if the principle repeats an obligation in Article IV. It will be seen that the Fund’s guideline A repeats an obligation.

Article XIX, Sections 4 and 5.

Article XIX, Section 4; Article XXIII, Section 2(a).

A distinction is made sometimes between obligations of result and obligations of conduct. See, for example, Derrick Wyatt, “New Legal Order or Old,” European Law Review, Vol. 7 (1982), pp. 147 and 152–54.

Ibid. Richard W. Edwards, Jr., has concluded from public statements of U.S. and French officials and from private inquiries that, in their preparatory work and in later negotiations, the officials did not develop examples of conduct that would be considered violations of subparagraphs (i) and (ii), Richard W. Edwards, Jr., “The Currency Exchange Rate Provisions of the Proposed Amended Articles of Agreement of the International Monetary Fund,” American Journal of International Law, Vol. 70 (1976), pp. 722 and 737.

Gold, Selected Essays, pp. 34–41, 65, 96, 115, 390–409, and 558.

On the whole subject, see Joseph Gold, Voting Majorities in the Fund: Effects of Second Amendment of the Articles, IMF Pamphlet Series, No. 20 (Washington, 1977).

Ibid., pp. 30–33.

U.S. National Advisory Council on International Monetary and Financial Policies, Special Report to the President and to the Congress on Amendment of the Articles of Agreement of the International Monetary Fund and on an Increase in Quotas in the International Monetary Fund (April 1976), p. 23.

U.S. Senate, Amendments of Bretton Woods Agreements Act, pp. 2–5 and 19–20.

Ibid., pp. 132–33, 135, and 137. See also To Provide for Amendment of the Bretton Woods Agreements Act: Hearings Before the Subcommittee on International Trade, Investment and Monetary Policy of the Committee on Banking, Currency and Housing, 94th Cong., 2d Sess. (June 1 and 3,1976), pp. 10–12 and 37; International Monetary Fund Amendments: Hearings Before the Senate Committee on Foreign Relations, 94th Cong., 2d Sess. (June 22 and 29 and August 3, 1976), pp. 15–16 and 41; Briefing on the International Monetary Fund: Hearing Before the Subcommittee on International Trade, Investment and Monetary Policy of the House Committee on Banking, Currency and Housing, 94th Cong., 2d Sess. (March 4, 1976). A similar note is heard within the European Monetary System:

“The institutional framework required for the functioning of the EMS as an exchange arrangement is perfectly adequate for the time being, inclusive of the virtually unlimited credit facilities. Any further institutional steps would amount to transferring certain powers of the participating central banks to a supranational institution, in effect to the nucleus of a European central bank. But essential preconditions for any such shift of powers are lacking, especially in the political field, where the unresolved question of the responsibilities and competence of such an institution and its relations with national and Community bodies is involved,” Karl Otto Pohl, President of the Bundesbank, speech to European Management Forum, Davos (February 3, 1982).

Ecclesiastes, 7:10.

R. N. Cooper, “Prolegomena to the Choice of an International Monetary System,” International Organization, Vol. 63 (1975), pp. 63 and 95–96.

Report on Second Amendment, p. 1.

This comment applies only to Article IV, Section 1, and not to restrictions, multiple currency practices, or discriminatory currency arrangements under Section 2 or Section 3 of Article VIII.

Joseph Gold, “Recent International Decisions to Prevent Restrictions on Trade and Payments,” Journal of World Trade Law, Vol. 9 (1975), p. 63.

Gold, Selected Essays, pp. 148–216.

Article XII, Section 1.

Article XII, Section 2(a).

Gold, Selected Essays, pp. 238–91.

Schedule D, see footnote 30 above.

Resolution No. 29-8, Selected Decisions, 9th (1981), pp. 308–309.

Ibid., pp. 10–15; Annual Report, 1982, pp. 128–32.

See Summary Proceedings, 1980, pp. 39–40 and 94–97. See also Annual Report, 1981, p. 62.

Selected Decisions, 9th (1981), pp. 14–15; Annual Report, 1981, p. 62; Annual Report, 1982, p. 130.

Gold, Selected Essays, pp. 151–53. The Effectiveness of International Decisions, ed. Stephen M. Schwebel (Leyden: A.W. Sijthoff, 1971).

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), p. 14.

Edward Brau, “The Consultation Process of the Fund,” Finance & Development, Vol. 18 (Washington, December 1981), pp. 13 and 16.

It will be apparent also that these conclusions are approbatory.

The Managing Director’s views on why the surveillance exercised by the Fund is not stronger are reported in some detail on pages 21–22 of Chambre Nationale des Conseillers Financiers, l’ajustement économiaue international (Paris, 1982).

Remarks by Jacques de Larosière at the Annual Conference of the Association of Reserve City Bankers, IMF Survey, Vol. 10 (April 6, 1981), par. 3, p. 104.

Gold, Selected Essays, pp. 148–81.

The Executive Board, in a decision of April 9, 1982, approved the continuation of surveillance procedures in the light of the Managing Director’s summing up of the Executive Board’s debate (Selected Decisions, 10th (1983), p. 17). The summing up is an illuminating account of numerous aspects of surveillance. In the course of it, the Managing Director said “[I]t is important for members to cooperate by taking seriously into account, in their national process of decision making, the views expressed and conclusions reached by the Board …,” Annual Report, 1982, p. 129.

Guidelines for Exchange Market Intervention: Hearing Before the Subcommittee on International Economics of the Joint Economic Commission, 94th Cong., 2d Sess. (1976), p. 38 (Statement of Edwin H. Yeo, III, Under Secretary for Monetary Affairs, U.S. Dept. of Treasury).

Decision No. 4232-(74/67), Selected Decisions, 8th (1976), pp. 21–30.

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

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), pp. 11–12.

Richard N. Cooper, “IMF Surveillance Over Exchange Rates,” in Robert A. Mundell and J.J. Polak, eds., The New International Monetary System (New York: Columbia University Press, 1977), pp. 69–71, and generally pp. 53–108.

IMF Survey, Vol. 4 (November 24, 1975), par. 11, p. 350.

U.S. Department of the Treasury News, No. S 253 (Washington, 1978).

See footnote 65 above.

On January 4, 1978, the United States declared that the Treasury’s Exchange Stabilization Fund and the swap network would be employed actively in joint intervention with foreign central banks in order to check speculation and re-establish order in the exchange markets, U.S. Department of the Treasury News, No. S 253 (Washington, 1978). The Bundesbank issued a parallel statement, IMF Survey, Vol. 7 (January 9, 1978), p. 1. On March 13, the monetary authorities of the United States and the Federal Republic of Germany announced that on occasion in the recent past disorder had occurred in the exchange markets, including excessively rapid movements in exchange rates that went beyond what was justified by underlying economic conditions. Both authorities asserted that they would continue to take forceful and cooperative action to counter disorderly conditions in the exchange markets, for which purpose resources were available and would be used. On April 19, 1978, the U.S. Treasury Department announced a series of monthly public auctions of gold, and declared that it planned to study the sale of gold against deutsche mark as a means of obtaining that currency for use in countering disorderly conditions in foreign exchange markets. U.S. Department of the Treasury, Annual Report of the Treasury on the State of the Finances, 1978, p. 465.

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

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

Wall Street Journal (September 4, 1981), p. 6.

Statement Before the Joint Economic Committee, U. S. Department of the Treasury News, No. R 158 (May 4, 1981), p. 18.

Once again, U.S. officials denied that there was any change of policy, although it was explained that the policy had been misunderstood as one of intervention only at times of “extreme market disorder,” while “the actual definition of the guidelines has always been much looser.” The United States seemed, however, to be expanding its holdings of foreign currencies, “The U.S. Widens Currency-Trading Role,” New York Times (December 13, 1982), pp. D1 and D10.

Henry C. Wallich (member, Board of Governors of the Federal Reserve System), “Exchange Market Intervention: Issues and Views,” Journal of Commerce (August 12 and 13, 1982), p. 4A.

“When the world first moved over to floating exchange rates, firms engaged in international trade seemed to manage surprisingly well with the additional uncertainty. More recently, with the increased volatility of exchange markets, complaints from industry have multiplied. The present degree of volatility inevitably creates great difficulty for firms in planning their sales strategy in foreign markets and complicates investment decisions. It is difficult or impossible for firms to hedge against such uncertainty; and even when they can, it no doubt entails significant expense. Exchange rate volatility must therefore represent a barrier to international trade, with effects not altogether dissimilar to the protectionist barriers which we are accustomed to deplore,” Gordon Richardson, Governor of the Bank of England, at the Annual Banquet of the Overseas Bankers Club (London, February 1, 1982).

Fritz Leutwiler, President of the Swiss National Bank and now President of the Bank for International Settlements, in a speech to the Swiss Forex Club in Zurich on October 24, 1981, did not question the U.S. policy of intervening only in situations of crisis, but he noted that the concept was undefined. It probably had to remain undefined because of the difficulty of foreseeing the character and timing of a critical situation. He urged, however, that the monetary authorities of the United States, the Federal Republic of Germany, Japan, and Switzerland “should continue in greater depth their talks on the organization of joint intervention. This may seem modest compared with more ambitious plans, but it has the advantage that it is capable of being put into effect.” Dr. Leutwiler in a later speech (February 5, 1982) also noted that, although the export element in the U.S. economy was relatively small, the United States should cooperate in preventing the sharpest fluctuations in exchange rates, and that the United States should heed the experience of the European Monetary System in stabilizing exchange rates, notwithstanding the different rates of inflation among members. Intervention by the United States would have an important psychological effect on the markets.

Peter B. Kenen, in Robert A. Mundell and J.J. Polak, eds., The New International Monetary System (New York: Columbia University Press, 1977), pp. 202 and 208. Professor Kenen adds the following footnote on page 208:

“The U.S. Government seems to be worried about this problem, and not without justification. The managed float toward which we are drifting contains the seeds of grave international disorder. Large numbers of countries would appear to hold strong views about exchange rates. Many have chosen to peg their currencies; others are intervening actively to prevent or attenuate movements in floating rates. It is not too wrong to say that we have devised a system of gliding parities in which the parities and rates of glide do not have to be announced and are thus hidden from the scrutiny required to guarantee overall consistency. There is, then, the danger that the dollar will become again the nth currency in the system—that practice, if not law, will come to resemble in this respect the par value system we have just supplanted. Should this occur, the United States may seek someday to free itself from the constraints imposed by others, by acting as it did in 1971, with convulsive consequences for international financial, economic, and political relationships. Were I to advise the U.S. Treasury, however, I would counsel a response different from the one it appears to have adopted. I would urge the rapid, complete articulation of explicit rules to regulate intervention, rules proscribing any intervention designed to drive exchange rates away from target rates or zones that the IMF, acting on its own initiative, would promulgate from time to time. I leave open a number of complicated questions—whether the IMF should publish the targets and how it should obtain them, to what extent it should rely on its own research, including its own econometric models, and to what extent it should proceed by consultation with the governments concerned. I do believe, however, that we need to move in this direction. Proposals to impose rules for floating that do not include well-defined procedures for setting and altering target rates or zones miss the basic point at issue. The nth country problem will not go away. It is sure to arise from the verbiage of Article IV, to plague us when we are most vulnerable to its implications.” See also Otmar Emminger, Exchange Rate Policy Reconsidered (Group of Thirty Occasional Papers No. 10, 1982), pp. 18–20.

There is evidence that this view does prevail to some extent in the domestic law of the United States. See John F. Chown, “The Tax Treatment of Foreign Exchange Fluctuations in the United States and the United Kingdom,” George Washington Journal of International Law and Economics, Vol. 16 (1982), p. 201.

“I continue to believe that the way to deal with actual or potential instability of exchange rates is through close co-operation between central banks. The emergence of a multi-currency reserve system over the past decade or so makes such co-operation ever more necessary, especially between the central banks that are responsible for the so-called reserve currencies. Central bank co-operation has helped us to overcome crises in the past, and we have reason to be confident that it will enable us to deal with any emerging situation. A return to a global system of fixed exchange rates is not on the cards as far as one can see ahead, and effective surveillance of exchange rate policies by the IMF on a worldwide scale is likely to run up against a number of conceptual and practical difficulties, though it may have to play an increasingly greater role over time. Hence the central role of central banks in this area, which after all is an area of special competence for them,” Karl Otto Pöhl, President of the Bundesbank, Speech to the Conference Board of Europe (London, October 20, 1981).

IMF Survey, Vol. 11 (June 21, 1982), p. 189.

New York Times (December 7, 1982), pp. A1 and D8; Journal of Commerce (December 7, 1982), p. 6A. Later, the Secretary explained that he had in mind some mechanism for more prompt balance of payments assistance (New York Times (December 13, 1982), pp. D1 and D11).

Gold, Selected Essays, pp. 390–409.

A member could be required by the Fund to consult if it was applying measures that required the Fund’s approval (Selected Decisions, 9th, pp. 210–11).

Ibid., pp. 209–11. The justification avoided an authoritarian tone: “… the Fund is able to provide technical facilities and advice, and to this end, or as a means of exchanging views on monetary and financial developments. …” (ibid., pp. 210–11).

Ibid., pp. 10–15; Annual Report, 1982, pp. 128–32.

John Kirbyshire, “Floating: A Burden for Trade,” Journal of Commerce (September 16, 1981), p. 4A.

EMS Texts.

Jacques J. Polak, Coordination of National Economic Policies (Group of Thirty Occasional Papers No. 7, 1981).

Ibid., pp. 6 and 7.

Ibid., p. 3.

Chambre Nationale des Conseillers Financiers, l’adjustement économique internationale (Paris, 1982), see footnote 60 above.

Economic Report of the President, Transmitted to the Congress February 1982 (Washington, 1982), pp. 187–88. See also Washington Post (May 30, 1982), p. A16, in discussing the forthcoming summit meeting at Versailles: “‘Perhaps if we can get more guidance [on economic policy] from the IMF—not to make it an international superagency, but it does have a body of knowledge—we could get a greater converging of policy, and there would be less need or cause for intervention/Regan said. Regan said he believed that ‘the dollar and franc might move together’ through such coordination.

“It was learned that when British Prime Minister Thatcher heard of the Regan plan, she exploded: ‘No one is going to tell me how to run economic policy.’ But Britain and other nations have been assured that there is no such intention. ‘We wouldn’t want to have the IMF order us around, in that sense, either/an administration official said.”

Scott E. Pardee, “International Monetary System is Adrift,” Journal of Commerce (September 15, 1981), p. 4A. For his proposals, see “U.S. Urged to Take Initiative,” Journal of Commerce (September 16, 1981), p. 4A.

See also the following answer by President François Mitterand:

“Q. Is this week’s devaluation of the franc symptomatic of a greater disorder within the international monetary system?

“A. It is one of the consequences, but not a cause of monetary disorder. There is a currency war, an economic war, and this is one of the most disquieting points for the future of Western relations. Today, it is every man for himself. The U.S., so it says, needs a very high interest rate. That’s its business. But it cannot ignore the fact that this measure exacerbates already dangerous movements of capital. Likewise for the fluctuations in the dollar exchange rate. This disorganizes the Western economic system. Since each nation is undergoing a crisis, they all tend toward egotism. Each country first wants to rescue itself, whereas they will only be rescued together,” Time (October 19, 1981), p. 57.

“EC Asks Members to Practice Better Economic Cooperation,” Journal of Commerce (July 23, 1981), p. 23B.

The usefulness of these meetings is sometimes challenged. “The financial commitment [at the Bonn summit] to continue to intervene ‘to counter disorderly conditions in the exchange market’ was interpreted in financial markets as continuation of the status quo and therefore an inability to agree on more concrete guidelines. In particular, it was interpreted as unwillingness on the part of the U.S. to act to stabilize market expectations. It could even be argued that the weak wording of the Bonn summit declaration on this point helped push the U.S. dollar lower in subsequent months,” Atlantic Council Working Group on Political Affairs, Summit Meetings and Collective Leadership in the 1980s (1980), p. 25. This policy paper is a detailed examination of the subject of summit meetings. See also, Group of Thirty, Annual Report, 1982 (New York, 1982), p. 5; and Henry Owen, “Don’t Let This Summit Be the Last,” New York Times (July 19, 1981), p. F4.

“The Committee [i.e., the Committee of Twenty] recognizes that, in view of present uncertainties related to inflation, the energy situation, and other unsettled conditions, it is not appropriate to attempt to determine the full details of all aspects of the future international monetary system, many of which can better be decided in the light of future developments,” Outline of Reform, p. 7.

Gold, Selected Essays, pp. 469–519; Joseph Gold, “Symmetry as a Legal Objective of the International Monetary System,” New York University Journal of International Law and Politics, Vol. 12 (Winter 1980), pp. 423–77. See Chapter 2 of this volume.

Other classifications are recognized in the law or practice of the Fund. For example, for some purposes the United States and issuers of other reserve currencies are perceived to constitute a class. Other perceived classes are members in deficit and members in surplus in their balances of payments; developed and developing members; among developing countries, oil exporting and non-oil exporting countries; members with pegged and unpegged currencies.

See, for example, “The Prospects for an International Monetary System,” Bank of England Quarterly Bulletin (September 1979), p. 280 (The Henry Thornton Lecture, delivered by Gordon Richardson—now Lord Richardson—Governor of the Bank of England, on June 14, 1979, at the City University, London); Tom de Vries, “Jamaica, or the Non-Reform of the International Monetary System,” Foreign Affairs, Vol. 54 (1976), p. 577; Jean-François Deniau, “Discipline of Stable Monetary Structure Urged,” Journal of Commerce (December 17, 1981), p. 4A.

Donald T. Regan, Secretary of the Treasury and Governor of the Fund for the United States, Summary Proceedings, 1981, pp. 108–109.

Annual Report, 1982, p. 129.

Chambre Nationale des Conseillers Financiers, l’ajustement économique internationale (Paris, 1982), see footnote 60 above.

For the view that surveillance would be hampered by more specific guidelines, and that a case-by-case approach under satisfactory procedures will be most effective, see Jacques Artus and Andrew Crockett, “Floating Exchange Rates and the Need for Surveillance,” in Essays in International Finance, No. 127 (Princeton: University Dept. of Economics, 1978). But see Jacques Artus, “Toward a More Orderly Exchange Rate System,” Finance & Development, Vol. 20 (March 1983), pp. 10–13.

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), particularly at pp. 30–31 and 34.

See, for example, “The Problem of Exchange Rates,” in Group of Thirty, Annual Report, 1982 (New York, 1982), pp. 27–32; Jacques Artus and Andrew Crockett, op. cit.

“… Cecily, you will read your Political Economy in my absence. The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational. Even these metallic problems have their melodramatic side,” Oscar Wilde, The Importance of Being Earnest.

Decision No. 5392-(77/63), Selected Decisions, 9th (1981), pp. 10–14.

Schedule D, paragraph 2(a).

Resolution No. 29-8, Selected Decisions, 9th (1981), p. 308.

Ibid., pp. 12–13 and 14.

Ibid., p. 14.

See M. Brenner, The Politics of International Monetary Reform—The Exchange Crisis (Cambridge, Mass.: Ballinger Publishing Co., 1976).

IMF Survey, Vol. 12 (May 9, 1983), p. 138.

Ibid., pp. 171 and 172.

Ibid., p. 171.

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