11 Gold in International Monetary Law: Change, Uncertainty, and Ambiguity
- International Monetary Fund
- Published Date:
- December 1984
The Keeper of Coins at the Ashmolean Museum of Oxford University begins the Preface to his monograph on gold as follows: 1
The number of single substances which have held the attention of man in every age, recorded or remembered, is not large. Most of them have been the simplest and most basic necessities of life: flour to eat, clay for bricks with which to build houses, wool for warm clothing, copper and iron for implements, and timber for a thousand constructional purposes. Gold does not come into the category of simple and basic necessities.
Nevertheless, he writes, gold has been prominent in human thought for almost sixty centuries and has had a peculiar and indeed unique place in human experience. To survey the whole of its history and functions, the skills of the geologist, metallurgist, anthropologist, artist, numismatist, and economist would be necessary. He does not mention the lawyer. There would be room for the psychologist also.
Gold has a longer history in national law than in international law. International monetary law as a whole is immature compared with national monetary law and even with that portion of it within the domain of private international law. International monetary law in a sufficiently comprehensive and systematic form to justify recognition of it as a separate province of public international law came into existence on December 27, 1945. Before that date there were certain customary and conventional norms, but they were few in number and they were not part of a system in the sense of an interdependent and coherent body of rules. It is true that under the gold standard and the gold exchange standard monetary authorities observed certain “rules of the game” in seeking to adjust the balance of payments and control domestic monetary policy, but these rules were not a code of precise principles. The so-called rules were broad indications of behavior, which states did not regard as binding.
An immense leap forward occurred when the Articles of Agreement of the International Monetary Fund became effective on December 27, 1945. It will be convenient to refer to the “Articles” of the “Fund” in the rest of this Chapter. The Fund is an international organization in which the number of states (“members”) has grown from 29 when it came into being at the end of 1945 to 141 by May 31, 1981. The substantive functions of the Fund are manifold, but they all relate, in one way or another, to the stabilization of the currencies of members and the adjustment and financing of their balances of payments.
The central feature of the original Articles was the par value system. The First Amendment, which took effect on July 28, 1969, was intended principally to make provision for a new reserve asset, the SDR (special drawing right), which the Fund would be able to allocate to members. The Second Amendment, which took effect on April 1, 1978, was a thorough revision of the Articles as a whole that became necessary because of the collapse of the par value system. Gold has been the subject of provisions in all three versions of the Articles. The legal role of gold was a central one under the original Articles. The legal role of gold became even broader under the First Amendment, but declined sharply under the Second Amendment. The legal changes have not added to the decalogue the commandment that though shalt not covet gold. Although gold may not reconquer the legal ground it has lost, it cannot be dismissed as irrelevant in international monetary affairs. Its future in the international monetary system and in international monetary law, however, is uncertain. Developments in the role of gold will be examined under the headings of the three versions of the Articles.
Gold and the International Monetary System
According to a well-known theory of law, a legal system rests on the foundation of an initial norm that exists outside the system itself. An analogy can be drawn between this philosophical theory and the international monetary system created by the original Articles. It can be argued that the initial norm of that system was the acceptability of gold among members, i.e., among the Treasuries, Central Banks, Stabilization Funds, and similar fiscal agencies as the monetary authorities of members. It will be seen that an international monetary system, with a par value system at its center, could be developed on the basis of the willingness of the United States to buy and sell gold for U.S. dollars in transactions with other members and their willingness to engage in these transactions.
Notwithstanding the central position of gold, which will be described in due course, the Articles contained no obligation of members to buy or sell gold among themselves or to hold it in their reserves for the support of their currencies. During the negotiation of the Articles, it was suggested that, by implication, a member would be bound to accept gold in return for its currency if gold were offered by another member. The implication was drawn from the obligation of members to adopt appropriate measures to prevent the appreciation or depreciation of their currencies beyond the limits for exchange transactions permitted by the Articles. It was argued that a member would be bound to accept gold and provide its currency as an appropriate measure to prevent the illegal appreciation of its currency. The theory was that the member obtaining the currency for gold would intervene in the exchange market with the currency in order to prevent it from appreciating against its own currency. It was never necessary to decide the question whether a member was bound to accept gold for its currency. One reason was that another member needing the currency could obtain it from the Fund, in certain circumstances, in return for its own currency or gold.2
There was never any doubt that there was an international monetary system in the days of the par value system and the central role of gold. The par value system had its critics, particularly in its later years, but nobody denied that members of the Fund were partners in an international monetary system. At the present time, after the demise of the par value system and the former legal role of gold, the question is debated whether there exists a new international monetary system. The Governor of the Bank of England, for example, has said on a number of occasions that the world now has various monetary arrangements but that they lack the coherence of a system.3 Most critics do not wish to return to the former international monetary system and the former role of gold, but they do regret that agreement has not been reached on new legal provisions that would be sufficiently comprehensive and effective to ensure stability in international monetary conditions. It will be seen, however, that some critics are willing to resuscitate a central role for gold.
Gold as the Common Denominator
Gold was the common denominator of the par value system, or numeraire after that word became fashionable. The par value of each currency was expressed directly in terms of gold, or indirectly in terms of the U.S. dollar of the weight and fineness of gold in effect on July 1, 1944, i.e., 0.888 671 gram of fine gold.4 The expression of a par value in terms of that dollar was equivalent to expression in terms of gold because the dollar was itself defined in relation to gold. The indirect form of expression was an option because the par values of the currencies of some members were defined in terms of the U.S. dollar under their national laws. All computations for the purpose of applying the Articles were made on the basis of par values, and each member was required to maintain the value of the Fund’s holdings of its currency in accordance with the par value of the currency. If a member was failing to make the par value of its currency effective, the gold value of the currency in the market was substituted for the par value for these purposes. Gold value could be determined by the exchange rate between the currency and the U.S. dollar because of the practice followed by the United States in gold transactions, which is discussed later.
A member established an initial par value for its currency in agreement with the Fund. The member might change a par value from time to time on its initiative and in accordance with the provisions of the Articles. Prior consultation with the Fund was necessary for all changes and its concurrence for most.5 The Articles provided also for uniform proportionate changes in the par values of all currencies on the initiative of the Fund.6 Changes of this kind would amount to a change in the price of gold. The result of uniform proportionate devaluations and revaluations would be to increase or to decrease the volume of global reserves and would bring about the expansionary or contractionary economic consequences that would be the purpose of the action. Uniform proportionate changes in par values were never made, although there was some support for an increase in the price of gold, particularly from 1947 through 1951 when the Fund’s policy deprecating external sales of gold at premium prices by members or their producers was a controversial issue. In the decade of the 1960s, when the lengthy debate took place on measures to supplement global reserves, there was some support once again for an increase in the price of gold, but the agreed solution was the creation of the SDR. A major objection to uniform proportionate changes in par values was that an increase in the price of gold would be of direct benefit only to the relatively few members that had accumulated substantial amounts of gold in their reserves and to the producers of gold, among which South Africa and the U.S.S.R. were foremost.
The establishment of par values for currencies in terms of gold as the common denominator resulted in a precise relationship, called parity, between each two currencies and a consistent network of parities among all currencies. Each member was responsible for maintaining the effectiveness of the par value of its own currency. The Articles imposed on a member the obligation to see that, within its metropolitan and dependent territories, the rates for spot exchange transactions between its currency or a subordinate currency and the currency of another member did not move outside the narrow limits around parity that were stipulated by the Articles. A member could choose whatever measures were appropriate for performing this obligation, provided that they were consistent with the Articles.
Gold as the Ultimate Reserve Asset
The Articles also declared that if a member freely bought and sold gold for its currency in settlements with the monetary authorities of other members, the member was deemed to be performing the obligation with respect to exchange rates for its currency. Only gold transactions with members and not with private parties were necessary for this purpose, because only purchases and sales with monetary authorities were thought to be necessary for supporting parities. In order to conform with this practice, a member had to be willing to buy and sell gold with all other members, and not solely, as was the practice of the parties to the Tripartite Agreement of September 1936, with those countries that undertook a similar commitment. The price in transactions with members had to be in accordance with the par value of the currency for which gold was bought or sold and the narrow margins the Fund prescribed for these transactions. No member was bound to engage in this practice, but if it did decide to follow the practice, it need take no further measures with respect to exchange rates for its currency.7 A member engaging in the practice was taken to be maintaining the established value of its currency in terms of gold as the common denominator of the par value system, and no more could be asked of it under that system.
The theory of the provision on the free purchase and sale of gold by a member (Patria) was that if another member (Terra) faced the prospect of the depreciation of its currency, it could obtain Patria’s currency from Patria with gold, at a price corresponding to or close to the par value, and could use that currency in the exchange market to support the exchange rate for its own (Terra’s) currency without loss. In this way, the parity between the two currencies could be made effective. Conversely, if Terra was acquiring Patria’s currency in the exchange market, and Terra’s currency was in danger of appreciating, Terra could afford to support the exchange rate for its currency and maintain the effectiveness of the parity between the two currencies because it could obtain gold from Patria, in return for its acquisitions of Patria’s currency, at a price corresponding to or close to the par value.
Terra was not bound to engage in gold transactions with Patria if Terra preferred to perform its obligation on exchange rates by adopting other appropriate measures. If, however, Terra did not engage in gold transactions with Patria for this purpose, and exchange transactions between the currencies of the two members took place outside the limits stipulated by the Articles, Terra alone was held responsible for this breach of the Articles. It was necessary, however, that Patria should not only stand ready to buy and sell gold with other members but should also refrain from imposing restrictions on payments and transfers for current international transactions or on capital transfers. If Patria did impose restrictions, they might provoke circumvention and be responsible for exchange transactions outside the legal limits. In these circumstances, there could be no certainty that Terra’s behavior was solely responsible for the illegal exchange rates.
The way in which the par value system operated was that the United States, as was expected, undertook to engage in the practice of freely buying and selling gold as described above. The United States was in the position of Patria, and all other members were in the position of Terra. The United States owned a large proportion of the total gold stock held by the monetary authorities of members, and it did not want to have to take other appropriate measures to ensure that exchange rates between its currency and the currencies of other members were within the legal limits. The United States was the only member that undertook the commitment of the free purchase and sale of gold for its currency. The United States did not inform the Fund of its undertaking until May 20, 1949, because there were some doubts about the meaning of the provision on the free purchase and sale of gold. For this reason, and probably because of the delay, the letter of May 20, 1949 declared not only that the United States undertook the commitment in accordance with the provision, but also that the commitment did not differ from the policy the United States had followed before and since the signing and entry into force of the Articles. France undertook the commitment but only in respect of the separate currency of a small dependent territory and not in respect of the French franc.
In time, the appropriate measure that many monetary authorities applied in order to perform their exchange rate obligations was to stand ready to intervene, directly or through agents, in their exchange markets by buying and selling their currencies for U.S. dollars, usually at rates of exchange within, and not at the boundaries of, the legal limits. Other members were willing to hold U.S. dollars in their reserves for the purpose of intervention because they were confident that, if necessary, they could obtain gold from the United States for holdings of dollars in excess of working balances. Members also assumed that the U.S. dollar would remain stable in terms of gold. As long as members were confident that gold could be obtained from the United States for dollars at a stable official price, they were often content not to approach the United States for the conversion of dollars and preferred to invest them in order to earn interest that could not be earned by holding gold. The assumption that the value of the U.S. dollar would remain stable in terms of gold contributed not only to the role of the U.S. dollar as the main reserve and intervention currency in the international monetary system but also to its use as a currency of account and as a currency of payment in both official and private economic and financial transactions.
Some members found it more convenient to intervene with another currency, such as the pound sterling or the French franc. These currencies could be held and used as secondary intervention currencies because they were convertible into U.S. dollars. Members were assured that gold could be obtained for balances of these currencies by exchanging them for U.S. dollars and then presenting the dollars to the United States for conversion into gold. The Articles did not determine which currencies were to serve as intervention currencies and did not even use that expression.
No member was bound by the Articles to present dollars to the United States for conversion into gold or into other acceptable reserve assets. When the par value system was in jeopardy, some experts considered the absence of such an obligation to be a weakness of the system because members might be deterred from requesting conversion by the fear that requests would be treated as unfriendly actions. These experts argued that the reluctance to request conversion into gold of balances in excess of working requirements helped to free the United States from the pressure to adjust its balance of payments and preserve the stability of the dollar in terms of gold. The critics argued, therefore, that the system was asymmetrical because the United States was free from the burden that rested on other members. They were not able to avoid the use of reserve assets when they were in external deficit.
In the system that developed, the United States remained passive in the exchange markets. It had elected to play its part by engaging in official gold transactions, although increasingly, as its holdings of gold declined, it developed techniques that, with the unenthusiastic cooperation of other members, had the effect of reducing the volume of further conversions. The United States was passive for another reason: arrangements did not exist for preventing inconsistent policies on intervention by the United States and members using the dollar as their intervention currency. The United States complained in due course that its passivity denied it the freedom that other members had to manage the exchange rates for their currencies in relation to the dollar. This asymmetry was not the only, or even the most important, disadvantage that, in the view of the United States, had been imposed on it by the par value system.8
The discussion so far has demonstrated that under the original Articles gold served as the common denominator of the par value system, the ultimate reserve asset, and the Fund’s unit of account. The U.S. dollar was the main intervention currency because of the undertaking the United States assumed to buy and sell gold freely for dollars at approximately the official price in transactions with the monetary authorities of other members. As a reserve asset, gold could be used in support of par values either because it could be transferred in settlements between monetary authorities or because it could be sold to obtain currencies needed for intervention in exchange markets. Gold was said to be the ultimate reserve asset. This slogan could be understood in various ways, all of which implied that gold was fundamental in the structure of the par value system. The nexus between gold and the system was illustrated by the formula in the original Articles for the calculation of the monetary reserves of members,9 on which certain of their obligations to the Fund were based. A member’s monetary reserves were calculated by including the holdings by its monetary authorities of gold and the convertible currencies of other members, and by deducting the holdings of its currency by the monetary authorities of other members. Subject to certain refinements that need not be considered here, the formula meant that once all currencies became convertible, the total monetary reserves of all members would be equal to their total holdings of gold.
The fundamental role of gold under the original Articles must not be confused with its functions under the gold standard. The Articles did not provide, for example, that the volume of a nation’s currency was to be governed by the volume of gold owned by the nation’s monetary authorities. A member was not expected to retain a par value and endure deflation in order to balance its external accounts. A member was entitled to take the initiative to change the par value of its currency.
Gold as a Means of Payment in the Fund
The Articles did not bind members to deal in gold among themselves, but members had certain obligations toward the Fund that had to be discharged in gold. Part of a member’s subscription 10 and charges for the use of the Fund’s resources had to be paid with gold.11 A member using the Fund’s resources had to terminate that use within a limited period. In return for resources obtained from the Fund, a member transferred the equivalent in its own currency to the Fund, and the member had to repurchase this currency with gold or other reserve assets according to formulas in the Articles. In time, a substantial portion of the Fund’s resources was held in the form of gold.
Why were the Articles designed to channel gold into the Fund? The objective was to strengthen its capacity to provide members with the currencies they needed to deal with their balance of payments or reserve difficulties. The Articles authorized the Fund to replenish its holdings of the currency of any member that the Fund needed for conducting its transactions by requiring the member to sell its currency to the Fund for gold.12 This power illustrates once again the central role of gold under the original Articles. A power to compel a member to transfer more of its currency to the Fund was tolerable only because the member would receive in return the one asset that undoubtedly would be acceptable to it.
The Fund as the Assured Market
The Articles, it has been seen, did not establish a market in which monetary authorities were entitled and obliged to deal in gold among themselves, but was the Fund an assured market for them? A member could be compelled to purchase gold from the Fund if the Fund needed the member’s currency. The question arose whether the Fund was required to purchase gold from members. If there was such a requirement, the two obligations would make the Fund a market in which official dealings with members as buyers and sellers would be mandatory in accordance with the provisions creating the obligations. In this market, the Fund’s acquisitions of gold could go far beyond the results of subscriptions, charges, and repurchases, and its dispositions of gold among members could be correspondingly more extensive. In favor of such an assured market, it could be argued that the legal position of gold would more adequately reflect its place in the structure of the par value system.
In March 1968, the “two-tier” gold system, which is discussed in more detail later, came into being. The system consisted of dual markets. One market was confined to transactions in monetary gold among the monetary authorities of members. All other transactions in gold were conducted through the other market. South Africa wished to continue selling its newly mined gold to the monetary authorities of other members and to the Fund in order to promote a steady flow of additional gold into monetary reserves, which would protect the role of gold as a reserve asset, and in order to prevent a sharp decline in the market price, which might fall even below the official price of US$35 an ounce.
In June 1968, South Africa took steps to sell gold to the Fund for sterling and contended that the Fund was bound to buy the gold under the following provision: “Any member desiring to obtain, directly or indirectly, the currency of another member for gold shall, provided that it can do so with equal advantage, acquire it by the sale of gold to the Fund.” 13 Opinion was divided not only on the legal question but also on the question of the desirability of purchase by the Fund. Some members were sympathetic to the South African position notwithstanding the principle of the two-tier system that total official holdings of gold would not be increased. The market price of gold fell to the official price by the end of 1969, and these members feared that the price might sink even further. This development might cast doubt on the value of their holdings notwithstanding the insulation from market prices that was an objective of the two-tier system. They favored a revision of the two-tier system that would permit members to purchase gold from South Africa and would establish a level below which the market price would not be allowed to decline. Some members did not support an increase in the holdings of individual members by means of uncoordinated purchases from South Africa, but they favored an increase in total monetary gold as the result of sales by South Africa to the Fund. The United States opposed South Africa’s attempted sale to the Fund, and wished to have South Africa go on selling gold in the nonofficial market. The United States was willing, however, to consider a request by South Africa to sell gold to the Fund if the market price should fall below the official price. This willingness did not include an assurance that the price would be prevented from falling below US$35 an ounce, because that assurance could keep the price high, encourage speculation, and destabilize exchange rates.
In the legal and policy questions that were debated, the disputants saw fundamental implications for the international monetary system and for the place of gold in it. A solution was found that deliberately avoided any decision of legal questions, and concentrated exclusively on a policy that announced the circumstances in which the Fund would be willing to buy gold from South Africa or other members.14 South Africa undertook to sell its current production of newly mined gold in an orderly manner on the private market to the full extent of South Africa’s current needs. The Fund would buy newly mined gold, in amounts necessary to meet South Africa’s current needs for foreign exchange, when the market price was US$35 an ounce or less. If both these categories of sales were inadequate over semiannual periods to provide for current needs, the Fund would buy gold from South Africa whatever the market price might be. Naturally, these, like all other transactions of the Fund in gold, would be conducted at the official price of US$35 an ounce or the equivalent, on the basis of the par value of any other currency involved in the transaction, subject to such charges as the Fund levied under its Rules and Regulations on some transactions. The solution rested on the principle that the Fund would be the sole official purchaser of gold from South Africa and would be the channel through which gold would flow into the monetary reserves of other members. The gold purchased by the Fund from South Africa was sold to members according to a policy the Fund adopted for the exercise of its power of replenishment.
The original Articles might have imposed no obligations on members to buy and sell gold among themselves because of the assumption that transactions between the Fund and members were mandatory, and that gold could be channeled to the Fund and into the monetary reserves of members through the Fund. The policy on the distribution among members of the gold it purchased from South Africa might seem to reinforce this theory. Whether or not the theory was sound, it is clear that not all gold transactions by or on behalf of members had to be conducted through the Fund.
The original Articles declared that nothing in the provision that dealt with the sale of gold to the Fund was to “be deemed to preclude any member from selling in any market gold newly produced from mines located within its territories.” 15 This provision recognized that markets could exist for transactions in gold apart from those that were entered into between members or between the Fund and members. These markets have been called nonofficial earlier in this Chapter, but they are more often called private, although neither adjective is wholly satisfactory. The main private market before World War II had been the London market. It was reopened, in order to provide orderly conditions for transactions in gold, on March 22, 1954, after the Fund had facilitated this development by broadening its prescribed margins for gold transactions at the request of the British authorities.
The provision that dealt with sales of newly mined gold referred to members as sellers, but this provision, as well as other provisions, implied that private markets might be accessible not only to members, as both buyers and sellers but also to nonmembers of the Fund and private parties. In these markets, gold was traded as a commodity, but in them gold might also be sold from reserves or purchased in order to be added to reserves. If members dealt in these markets, they were subject to obligations as to price whether the gold they sold was newly mined or came from reserves and whether or not the gold they bought was to be added to reserves.
The double character of gold as a commodity and as a reserve asset has created problems for the international monetary system ever since the Articles became effective. The problems have had a direct impact on the U.S. dollar and sterling in particular, even though for many years residents were not allowed by the law of the United States and of the United Kingdom to hold gold. Nonresidents, including the central banks of other countries, held, or could obtain, substantial balances of these currencies and could use them to buy gold. Some of the problems created by the double character of gold and by the existence of private markets will be discussed in due course.
Obligations as to Price
With gold as the common denominator of the par value system, precautions had to be taken to prevent the system from being undermined by transactions in gold at prices unrelated to par values. The main provision in the original Articles that served this purpose directed that no member should buy gold at a price above par value plus the margin prescribed by the Fund or sell gold at a price below par value minus the prescribed margin. It will be convenient to refer to the forbidden transactions as premium purchases and discount sales.16
The prohibition of premium purchases and discount sales by a member was absolute. It did not depend on the character of the other party to the transaction. A member was not able to buy gold at a premium from another member, a private party, or a nonmember of the Fund, and similarly a member was not able to sell gold at a discount to another member, a private party, or a nonmember.
Among the private parties from which a member could not buy gold at a premium were its own gold producers. This aspect of the prohibition caused some difficulty because there was evidence that the negotiators of the Articles did not intend that a member should be unable to assist domestic gold producers, provided, however, that the assistance did not take the form of an increase in price. The Fund had to work out a policy under which it distinguished between permissible and impermissible subsidies that a member could pay to its producers.17
Premium sales and discount purchases by members, whether in transactions with domestic or foreign private parties or with non-members of the Fund, were not in themselves prohibited. It is possible to surmise why the prohibition did not extend to these two categories of transactions by members. The negotiators of the original Articles might have held the view that domestic premium sales or domestic discount purchases by a member might be useful in some countries, as they had been in the past, in countering inflation or deflation. Whatever the explanation may be, the absence of a prohibition of premium sales by members created difficulties for the par value system.
An effect of the provision, however, was that transactions between members had to be at the par value price (subject to the margin). This effect was achieved because even if Patria were to sell gold to Terra at a premium, which the provision did not forbid from the standpoint of Patria as the seller, Terra would be engaging in a premium purchase, which was forbidden. Similarly, even if Patria were to buy gold from Terra at a discount, which again the provision did not prohibit from the standpoint of Patria, Terra would be engaging in a discount sale, which was proscribed. The provision was intended to operate in this way because the negotiators of the original Articles had concluded that only transactions in gold between members at premium or discount prices could be a threat to the stability of currencies. Experience shows that it was a miscalculation to assume that other transactions were unlikely to have a serious effect on exchange stability in a par value system in which gold was the common denominator.
Problems Under the Original Articles
In its early years, the Fund was deeply concerned with premium sales of gold by members to nonresident purchasers. These sales, it has been seen, were not contrary to the Articles if the purchasers were not members. The problem was the reverse of the later one involving South Africa’s sales that has been discussed already. The later problem, as seen by some members at least, was that South Africa was proposing not to channel some if its newly mined gold into the private market.
On the earlier occasion, the Fund faced a dilemma as the result of a growing volume of premium sales by members or their gold producers in external private markets. The dilemma was that, on the one hand, these sales might have the effect of reducing or eliminating the premium, at least if convertible currencies were involved, and therefore they might have a less destabilizing effect on exchange rates than a smaller volume of sales would have had. On the other hand, the sales would add newly mined gold to private hoards and not to monetary reserves. Gold might even be drawn from reserves for sale in the private market. The Fund was embarrassed because some members had inquired about its attitude to these sales. If the Fund had replied that they were not in conflict with the provisions of the Articles on gold, the reply might have created the impression that the Fund favored these transactions for economic reasons. The impact of premium sales, whether by members, nonmembers, or private parties, on exchange stability was a recurrent and profound concern of the Fund and monetary authorities throughout the history of the par value system.
A major preoccupation of the Fund in trying to resolve the issues raised by external premium sales was the legal problem of reconciling the provisions of the Articles on gold that permitted freedom for certain transactions with the provisions that emphasized exchange stability. On June 18, 1947, the Fund communicated a statement to all members in which it strongly deprecated external premium transactions because of the risk that they might disturb exchange relationships among members and because the traded gold did not enter monetary reserves or was even drawn from reserves. The Fund recommended that all members should take effective action to prevent these transactions with other countries or with the nationals of those countries. The Fund further recommended that members should make representations to the governments of nonmembers to encourage them to join in eliminating this source of exchange instability.
The statement was based on the provisions of the original Articles that made the promotion of exchange stability, the maintenance of orderly exchange arrangements among members, and the avoidance of competitive exchange depreciation a purpose of the Fund and imposed an obligation on members to collaborate in advancing this purpose.18 The Fund’s statement was formulated as recommendations, although strongly worded, and not as an interpretation of the Articles or as obligations, in order to avoid further legal difficulties. The statement made no distinctions between gold in reserves and newly mined gold or between processed and nonprocessed gold, but it did distinguish between domestic and external markets. The Fund did not object at that time to premium transactions in domestic markets unless experience showed that these transactions also were producing certain harmful consequences.
A number of members took measures to give effect to the Fund’s recommendations, but the fate of the recommendations was determined by the reactions of South Africa as the main producer of gold. The position of that member was that there existed a large unsatisfied demand for semiprocessed gold for bona fide and customary industrial, professional, and artistic purposes, which could be satisfied at premium prices. The United States and the United Kingdom took the view that the demand went beyond these purposes, because they were prepared to satisfy the demand for these purposes at the official price. They held that the increase in demand was largely for hoarding, so that it had a monetary aspect. The controversy showed the difficulty of determining whether gold transactions had a monetary or nonmonetary character. South Africa stressed the same difficulty, but from its own viewpoint, by contending that the official price was a fiction and that the market price demonstrated that gold was worth more than US$35 an ounce. In both 1949 and 1950, the Fund rejected proposals in favor of a uniform proportionate devaluation of all currencies, i.e., an increase in the official price of gold.
Substantial increases in external premium sales following the outbreak of the Korean conflict led the Fund in March 1951 to express publicly its concern once again, and to declare that the arrangements and practices of several members, including South Africa, were no longer a satisfactory basis for giving effect to the Fund’s policy statement of June 1947. Efforts by the Fund to formulate measures that all members would apply for enforcement of the policy failed. In September 1951, the Fund issued a new statement, which reaffirmed the economic principles of the original statement, but announced that the attitudes of members varied so greatly that it was impractical to expect members to take uniform measures in support of the original statement. Therefore, although the Fund continued to urge members to support the economic principles that it favored, the Fund would leave the practical operating decisions for this purpose to its members, with the reservation that, whatever they might do, they were bound to observe the relevant provisions of the Articles. The new statement was really a decision by the Fund, without resiling from its belief in the principles of the policy statement of June 1947, to forgo supervision of the observance of it and to rely on each member to decide whether and to what extent it would take measures to support the statement.19
There were inherent flaws in legal arrangements under which the United States was willing to provide gold for balances of dollars held by the monetary authorities of other members, while at the same time private gold markets were permissible and were in operation. Central banks were not obviously debarred from engaging in arbitrage by buying gold from the United States and selling it at a profit in the private market. The United States was attempting to preserve order in the London gold market by helping to meet demand through the Bank of England. If central banks decided to sell gold from their reserves, the Articles left them free to sell it, except to other members, in the London market. The provision on the sale of newly mined gold to the Fund was unclear in many ways. Sales in the private market would not replenish the declining gold holdings of the United States. That decline might encourage speculators to assume that a devaluation of the U.S. dollar was likely. If the price of gold rose in the market, the risk was even greater. The ultimate fear of officials in the United States was that the convertibility of the U.S. dollar into gold would have to be suspended. Referring to a later period, a former official has written:
It is hard today to put ourselves in the shoes of officials who feared—deeply feared—that suspension of the dollar convertibility would lead to chaos in international financial relations and the danger of spreading restrictions on trade and payments. In 1967 and 1968, maintenance of the status quo regarding gold seemed imperative if an open, secure, and prosperous world economy was to be preserved.20
A similar fear existed in 1960. In October of that year, the price in the London market had broken through the limits on prices that had been maintained under the supervision of the Bank of England with the object of preserving orderly conditions. This episode led eventually to a new approach in dealing with the problem of premium prices for gold.
In late 1961, Belgium, France, the Federal Republic of Germany, Italy, the Netherlands, the United Kingdom, and Switzerland, acting through their central banks, agreed with the Federal Reserve Bank of New York to form a consortium to establish the gold pool through which they decided first to sell gold, and later to buy it, in the London market. The Bank of England managed the market on behalf of the consortium. The participants in the consortium would not buy gold individually in the London market or from such sources as South Africa or the U.S.S.R. France became an inactive partner in June 1967.
The idea with which these holders of substantial amounts of gold formed the gold pool was that the consortium would intervene in the market in order to discourage private speculation by greatly reducing fluctuations in price. The market was open to private purchasers, but it was open to central banks also. Central banks were able to buy gold without transgressing the Articles because the price was kept close to the official price. The arrangement was not negotiated within the Fund but was not inconsistent with the Articles. The objective of the Fund’s policy statement of June 1947 was to starve private markets, but the purpose of the gold pool was to satisfy their appetite. To this extent, the gold pool was not in harmony with the Fund’s earlier policy, which was never repudiated, but the gold pool was consistent with the policy in opposing premium prices.
Prior to 1966, the pool was a net purchaser of gold, but in 1967 large amounts were drained from the reserves of the active partners as the result of political crisis, the huge deficit in the balance of payments of the United States, and the devaluation of sterling. A disadvantage of the pool for the United States was that, although the partners shared profits and losses according to the proportions of their participation, no legal deterrent existed to the absorption by the United States of the total losses of gold sustained by the pool. The other partners might contribute their shares of gold for sale, but they would receive the proceeds in U.S. dollars, and there was no legal impediment to the presentation of these dollars to the United States for conversion into gold. The benefit for the United States would then be no more than the temporary relief it enjoyed because the proceeds of sales in the market were held for a time to provide resources for possible purchases instead of being tendered to the United States for immediate conversion. The strain on reserves, however, might not be borne by the United States alone. The holders of sterling balances could exchange them for U.S. dollars in order to purchase gold, with the result that the reserves of the United Kingdom also would be depleted.
In mid-October 1967, a huge flight into gold took place because of expectations that major currencies would be devalued. These expectations were intensified when the devaluation of sterling did occur on November 18, 1967. Demand for gold had increased for other reasons, such as rising industrial consumption, the prospect of monetary reform, and fear that inadequate gold holdings of central banks might reduce supply to the market. Notwithstanding the successful early operation of the gold pool, an official intimately connected with its origin has written: “The London market still represented a time bomb at the very foundation of the Bretton Woods system. …” 21 By March 1968, massive losses of gold became more than the partners in the consortium were willing to go on absorbing. From the end of September 1967 to the end of March 1968, the active partners lost about one eighth of their combined gold reserves, with the United States and the United Kingdom suffering the loss of higher proportions than the other partners. The London market was closed temporarily at the request of the United States. The next chapter in the history of gold in the international monetary system was about to be written.22
Maintenance of a market price that approximated the official price as a deterrent to speculation had become an encouragement to that activity because of the assured market price and the guarantee it gave against loss. Abundant liquidity, including resources obtained from the Euromarket, was available for speculation.
The Two-Tier System
On March 16, 1968, the central bank governors of the partners in the gold pool, accompanied by treasury officials of some of them, met in Washington. The Managing Director of the Fund and the General Manager of the Bank for International Settlements were present. The objectives of the United States in presenting its views were to preserve the official price of gold, stop the flow of gold from reserves into private hands, and elevate the status of the future SDR. The drafting of the First Amendment was nearing completion at that time. In addition, the attitude of the United States was that if members of the Fund wished to convert holdings of U.S. dollars, they should be encouraged not to request gold but to accept their own currencies purchased by the United States from the Fund as contemplated by the convertibility provisions of Article VIII, Section 4.
The result of the meeting was the termination of the gold pool and the establishment, or more properly the acceptance, of two prices for gold. The communiqué issued on March 17, 1968, noted, inter alia, that the United States would continue to buy and sell gold at the existing official price in transactions with monetary authorities. The governors declared their belief that, from then on, gold held in reserves should be used only in transactions between monetary authorities. Therefore, they had decided not to supply gold to the London or any other gold market. Moreover, as the existing stock of monetary gold was sufficient in view of the prospective creation of the SDR, they no longer thought it necessary to buy gold from the market. They agreed also that they would not sell gold to monetary authorities to replace gold that these authorities sold in private markets. The cooperation of central banks in this two-tier system was invited, and many of them did adhere to it and adopt the necessary regulations to make it effective.23
The Managing Director of the Fund issued a statement on March 17, 1968 in which he supported the agreement on the two-tier system as a means of conserving the monetary stock of gold, and in which he pointed out that the agreement involved no departure from the obligations of members to maintain the par values of their currencies in accordance with the Articles. The conservation of gold, he continued, would be an important contribution to the functioning of the international monetary system, but in the longer run conservation would not be sufficient, for which reason it was necessary to bring the SDR into existence as soon as possible.
Some Implications of Two-Tier System
Some commentators saw the agreement as implying a move toward the demonetization of gold because of the refusal to add to the total of existing official stocks. The word “demonetization” has never received a clear or universally accepted definition. Its imprecision is illustrated by the fact that it was applied to a situation in which the United States reaffirmed its intention to go on converting foreign official holdings of dollars into gold on request. The other participants in the meeting of March 16–17, 1968 insisted on affirmation by the United States of its continued willingness to observe this undertaking.
The two-tier system completed the range of techniques that had been followed to solve problems arising from the character of gold as a reserve asset with an official price at the same time that private markets existed in which prices could diverge legally from the official price and in which purchasers could obtain the gold they needed or desired for whatever purpose they had in mind. In 1947 the Fund attempted to starve the market by seeing that gold was added to official stocks and not withdrawn from them for sale in the market. By means of the gold pool, the consortium was ready to feed the market with all the gold for which there was a demand and accept any consequent reduction in official holdings, although the consortium was prepared to buy gold. The two-tier system was intended to insulate the official and the private markets on the premise that there was no need to increase the existing total stock held by monetary authorities. The first technique never gave a satisfactory answer to the argument that the technique would have destabilizing effects by raising the price of gold in the market. The objective of the second technique was to maintain a close relationship between the market price and the official price. The market price was not an admitted concern of the third technique, but the supply of newly mined gold might keep the market price close to the official price, and the United States at least would have observed the decline of the market price below the official price with equanimity.
All three techniques failed. Indeed, there were as many as three, because the first two did not achieve the objectives for which they were instituted. The third also failed. One of the objectives of this technique was abandoned by the decisions under which the Fund bought gold from South Africa and sold it to other members, although under certain safeguards designed to support the two-tier system. The agreement on the two-tier system was terminated in November 1973, and, at the request of South Africa made as a result of this termination, the Fund, in December 1973, revoked its decision on the purchase of gold from that member. The two-tier system had lost its rationale of support for the official price of gold in a period of the prolonged floating of currencies. In addition, some central banks wanted to feel free to sell gold at the high prices that had prevailed in the private market.
The communiqué of March 17, 1968 appeared on the surface to be an agreement among the governors of central banks. It is probable that the agreement was in this form because the banks had legal authority under their own central banking laws over the transactions that were the subject of the agreement. Governmental officials, however, convened and took part in the meeting from which the communiqué emerged. Obviously, so important an agreement could not have been reached without the consent of governments. Agreements such as these do not fit into the traditional definition of international agreements governed by public international law. They are not entered into by political authorities such as departments of foreign affairs and are often informal. Nevertheless, they have profound effects on international monetary relations and on the interests of nations. The agreements affect the conduct of countries because they regard them as compacts that must be observed, and sometimes countries introduce or amend existing provisions of law to give effect to the agreements. There is no alternative to international law as the law governing these agreements. International law must be defined with sufficient realism to embrace them.
The issue of the governing law has not been resolved because the existing authority of central banks to enter into the agreements makes it unnecessary to take the legislative action that is required to give effect to treaties. Furthermore, differences of opinion among central banks on the meaning or operation of their agreements are resolved amicably and with minimal reliance on legal argument.
The Articles left sufficient room for a group of members to enter into such agreements as those that established the gold pool and the two-tier system. The question that is always present is whether it serves the interests of the international monetary system to the fullest extent if agreements that have important effects on all members are negotiated outside the Fund by a small group of members. The Fund may be requested to endorse agreements reached in this way. It has been seen that the Managing Director made an announcement of this kind after agreement was reached on the two-tier system at a meeting of the group in which he participated. Moreover, the Fund itself recognized, and sought to reinforce, some aspects of the agreement in making its decision of December 30, 1969 on the purchase of gold from South Africa.24
An implication of such action by the Fund is that it may face the embarrassment of having to interpret an agreement without having been a negotiator of or a party to it. In these circumstances, the Fund might have to determine what law to invoke for the purpose. So far, the Fund has been able to solve such problems of interpretation by assuming that the text of the agreement was a complete statement of the law of the parties and that the text was sufficiently plain.
The shortcomings of gold as a reserve asset were not confined to disturbances of the international monetary system created by prices that cast doubt on par values. In the decade of the 1960s, monetary authorities became alarmed about both the inherent instability of the par value system and the possibility that they might have to face a shortage of reserves. The inherent instability, as pointed out by Professor Triffin, was that the par value system would lose credibility if the U.S. stock of gold declined progressively in proportion to the holdings of U.S. dollars in the reserves of other members, whether as the result of the addition of dollars to reserves or the conversion of some holdings of dollars with gold. The U.S. holdings of gold did decline steeply. Other members were faced with a predicament. If they proceeded with requests for conversion, they would weaken the international monetary system by reducing the stock of gold on which it rested and by diminishing global reserves. If they did not request conversion, they relieved the United States of pressure to adjust its balance of payments and strengthen the system. They became unhappy holders of U.S. dollars and dissatisfied with the international monetary system.
Gold was not being added to the reserves of the United States or other countries in quantities that gave monetary authorities the confidence that it was a reliable source of the additional liquidity that was necessary in order to support a growing world economy. From time to time gold had been added to reserves, but in modest amounts at best, and at other times it had been withdrawn from reserves for sale in the private market. A shortage of reserves might produce a sense of unease, which might induce members to apply restrictions and follow other undesirable practices in order to avoid the use of reserves or in order to extract them from other members. The only alternative to gold as a source of the necessary increases in reserves would be U.S. dollars. This alternative implied an acceptance of continued deficits in the balance of payments of the United States. The deficits, however, would be a source of instability because the dollar would not be strong and because the undertaking of the United States to convert official holdings of dollars with gold would seem less and less credible. The fear of devaluation of the U.S. dollar might provoke competition for the gold held by the United States while the gold lasted and might bring about the collapse of the international monetary system.
The solution of the dilemma was the First Amendment, which gave the Fund authority to allocate SDRs to members to meet the long-term global need, as and when it arises, for a supplement to existing reserve assets. The First Amendment preserved, and even reinforced, the role of gold under the Articles. The reference to SDRs as a supplement to existing reserve assets was intended to show that there was no intention to abolish the function of gold, or even currencies, as reserve assets, although members understood that SDRs would fill the need for global reserves that might arise because of the inadequacy of other reserve assets. It was desirable that the proportion of currencies in global reserves should decline, and it seemed inevitable that the proportion of gold would decline. It will be recalled that the governors of central banks who issued the communiqué of March 17, 1968 concluded that the existing stock of monetary gold was adequate because of the imminence of the SDR.25
The First Amendment made changes in some of the provisions of the original Articles that dealt with gold. The majority necessary for a decision on uniform proportionate changes in the par values of all currencies was changed from a simple majority of the total voting power to 85 percent. The veto over these decisions that any member could exercise if it had 10 percent or more of the total of quotas was eliminated. Under the modified provision, the United States retained, but the United Kingdom lost, its former veto. Authority to take decisions to waive the obligation of maintenance of the gold value of the Fund’s holdings of currencies on the occasion of uniform proportionate changes in par values, which would have the effect of increasing or decreasing all quotas by the same proportion as the changes, was made a reserved power of the Board of Governors.26 The majority necessary for these decisions was increased from a majority of the votes cast to 85 percent of the total voting power.27 Changes in the price of gold remained a preoccupation of the drafters of the First Amendment, but their intention was to make changes more difficult, because any global need for reserves could be met by allocations of SDRs.
The role of gold was enhanced both directly and indirectly. The most obvious direct measure of this kind was the definition of the SDR. The unit of value of the new reserve asset was defined as equivalent to 0.888 671 gram of fine gold, which was also the par value of the U.S. dollar of July 1, 1944.28 The definition made it possible for the Fund to arrive at the value of other currencies in terms of the SDR by reference to the exchange rates between those currencies and the dollar.
Another measure of the same kind was the provision that defined “a currency convertible in fact.” A member designated by the Fund to receive a transfer of SDRs had to provide the transferor with such a currency or balances that could be converted into such a currency. An element in the definition of a currency convertible in fact was that the member issuing it had undertaken to buy and sell gold freely within the meaning of the Articles or had undertaken to perform the obligations of convertibility under Article VIII, Sections 2, 3, and 4.29
A provision of the First Amendment indirectly acknowledged the role of gold by implying that the SDR was not intended to undermine the practice of the purchase and sale of gold by the United States. The SDR rested on the legal foundation of two obligations: the Fund’s obligation to designate a transferee on the request of a member that wished to transfer its SDRs, and the obligation of the designated transferee, subject to a stated limit, to accept the SDRs and provide convertible currency. Therefore, although members were not obliged to accept gold from other members, they were required to accept SDRs. (Members were not obliged to transfer gold to other members, but in this respect a similar rule was applied: members were not required to transfer SDRs to other members, except in unusual circumstances.30) The United States protested that it did not intervene in the exchange market with the currencies of other members, so that transfers of SDRs by the United States for currency would be pointless unless some special provision was adopted for its benefit. The United States was interested in the SDR as a new reserve asset, not for the purpose of obtaining currencies with which to intervene, but in order to meet requests for the conversion of balances of dollars and economize in the use of gold.
While other members saw the reasonableness of this argument, they were anxious not to lose the privilege of getting gold under the commitment of the United States to buy and sell gold freely in transactions with them for dollars. If other members were bound to accept SDRs for their holdings of dollars, they would be deprived of the privilege of getting gold. The United States would have the option to use SDRs instead of gold in conversions. A compromise was reached in the form of a provision under which the issuer of any currency could use SDRs to redeem holdings of its currency by another member, but only if the two members agreed on this form of conversion.31 The effect of the compromise was that the holder of U.S. dollar balances could refuse the offer of SDRs and insist on gold when requesting conversion.
Another example of the indirect enhancement of gold by the First Amendment is that, except in unusual circumstances, SDRs could be exchanged only for currency and not for gold.32 The absence of any right or obligation of a transferee of SDRs to provide gold in exchange for them in normal transactions was not an oversight. During the discussions from which the SDR emerged, some officials expressed the view that the objective was to create an asset that was “as good as gold” or “gold-like.” This view was not held by other officials who wished to prevent any challenge to the supremacy of gold as the ultimate reserve asset in the international monetary system. The result was another compromise in which SDRs were not normally to be transferable for gold.
Moreover, SDRs were not to be convertible into gold indirectly. A member was expected not to transfer its SDRs to another member unless it had a need to use reserves. It was expected not to use them for the sole purpose of changing the composition of its reserves as between SDRs and the total of its other reserves. If a member failed to observe this expectation it might find that its transfer of SDRs was reversed by the Fund’s designation of the member to receive them from another member wishing to use its SDRs even though the designation was not in accordance with normal economic criteria. It followed that a member was expected not to transfer SDRs in order to get U.S. dollars for the purpose of presenting them to the United States for conversion into gold.33
The compromise that prevented a member from providing gold for SDRs led to an eventual protest by South Africa, which had certainly not wanted to see a new asset that had the same aura as gold. South Africa represented that it was inconvenient, when it was designated by the Fund as a transferee of SDRs, to be unable to provide gold in exchange for the SDRs. The Fund decided that, if South Africa, or any other member, was designated and wished to use gold to obtain the currency that it would provide as the transferee of SDRs, the Fund would sell that currency to it for gold. Moreover, the Fund would not levy handling charges or collect costs when it made these purchases of gold.
Collapse of Par Value System
Difficulties in the operation of the international monetary system became agonies by 1971. The balance of payments and trade deficits of the United States mounted and early correction of them was not in sight. The weakness of the U.S. dollar had prompted requests for the conversion of foreign official holdings of the currency and had led to a huge decline in the gold reserves of the United States. The undertaking of the United States to convert foreign official holdings of dollars was the legal and philosophical foundation of the system, but that foundation was firm only if confidence in the stability of the U.S. dollar made massive conversions unnecessary. This confidence was being shaken, and members preferred to hold gold instead of dollars. The United States was convinced that a devaluation of the U.S. dollar would not provide relief, because it expected that other currencies would be devalued correspondingly. The revaluation of other currencies, which might have provided some relief, was improbable for both political and economic reasons.
On August 15, 1971, President Nixon announced that the United States was suspending temporarily the conversion of official holdings of U.S. dollars with gold or other reserve assets, with exceptions that need not be noted here. The United States informed the Fund that it withdrew the undertaking it had given in its letter of May 20, 1949 to buy and sell gold freely in accordance with the Articles. It is a legal curiosity that this blow by the United States, which resulted in the collapse of the par value system and the floating of currencies in disregard of the provisions of the Articles, was not in itself a violation of the Articles. The undertaking was voluntary and, even though given, could be withdrawn. The withdrawal, however, made it legally necessary for the United States to take other appropriate measures to ensure that transactions in its territories for the exchange of U.S. dollars in return for other currencies took place only within the limits permitted by the Articles. Nevertheless, the United States announced that it would take no such measures. Moreover, the United States was not free to repudiate its obligation under Article VIII, Section 4 to convert official holdings of U.S. dollars, in accordance with that provision, with either gold or the currency of the holder at the option of the United States. This obligation also was repudiated, which was another violation of the Articles.
In the period between August 15, 1971 and April 1, 1978, it was necessary for the Fund to find practical solutions that would preserve as much order as possible in conditions that were not in conformity with the Articles. The U.S. dollar was devalued on May 8, 1972, and again on October 18, 1973, but without any change in the determination of the United States not to buy and sell gold and not to take other appropriate measures to confine exchange rates for the dollar within any limits. Strenuous efforts were made to reform the international monetary system on the basis of stable but adjustable par values, subject to floating in particular situations, with the SDR as the common denominator of par values, and a reduced role for gold and currencies as reserve assets. The major effort at reform was conducted by the Committee of the Board of Governors of the Fund on Reform of the International Monetary System and Related Issues (the Committee of Twenty). The effort did not succeed because members had concluded that they could not safely undertake new obligations in conditions of surging inflation and radically increased prices for imports of oil. The Committee issued an Outline of Reform that showed the general direction in which the Committee thought that the system could evolve in the future. The Committee also suggested some immediate steps that could be taken for an interim period in order to begin an evolutionary process of reform.
The treatment of gold was one of the topics on which the Committee was unable to reach agreement. A paragraph of the Outline of Reform demonstrates the cacophony of voices on the subject:
Appropriate arrangements will be made for gold in the reformed system, in the light of the agreed objectives that the SDR should become the principal reserve asset and that the role of gold should be reduced. At the same time it is also generally recognized that gold reserves are an important component of global liquidity which should be usable to finance balance of payments deficits. It is not yet settled what arrangements for gold would be best in the reformed system, having due regard to the interests of all member countries. Under one approach, monetary authorities, including the Fund, would be free to sell, but not to buy, gold in the market at the market price; they would not undertake transactions with each other at a price different from the official price, which would be retained and would not be subject to a uniform increase. Under another approach, the official price of gold would be abolished and monetary authorities, including the Fund, would be free to deal in gold with one another on a voluntary basis and at mutually acceptable prices, and to sell gold in the market. A third approach would modify the preceding one by authorizing monetary authorities also to buy gold in the market. Arrangements have also been proposed whereby the Fund would be authorized to purchase gold from monetary authorities in exchange for SDRs at a price between the market and the official price, and to sell gold gradually over time in the market; if arrangements of this kind were introduced, questions would arise concerning both the Fund’s policy with respect to its sales in the market and the sharing of any profits or losses accruing to the Fund from its gold transactions.34
Interim Arrangements of Group of Ten
After the Committee of Twenty was disbanded, the Executive Board of the Fund undertook the drafting of the Second Amendment. The Executive Board began with the immediate steps for an interim period that were recommended by the Committee, but the task soon became the much broader project of revising the Articles as a whole. The revision of an important multilateral treaty inevitably raises issues on which national representatives, among whom political functionaries are foremost, must be the negotiators. For these issues, the successor of the Committee of Twenty, the Interim Committee of the Board of Governors on the International Monetary System, provided the solutions. A major problem referred to the Interim Committee was the treatment of gold. Notwithstanding the diversity of attitudes to gold as set forth in the paragraph quoted above from the Outline of Reform, the Interim Committee was able to reach a consensus on seven principles to be incorporated in the Second Amendment. They were based on the unifying theme that the demonstrated disadvantages of gold as the ultimate reserve asset justified a more humble role for it in the international monetary system. The principles will be considered in the discussion of the provisions of the Second Amendment, but a temporary development must be noted first.
This development was an agreement reached in the Group of Ten.35 It is another illustration of the tendency to record within the Fund agreements reached by a limited number of members outside it on matters affecting the international monetary system as a whole. It is also another example of important agreements on international monetary matters for which traditional international law finds no convenient place. The communiqué of the Interim Committee dated August 31, 1975 announced that the Group of Ten had agreed to observe certain arrangements, as set forth in the communiqué, in order to give effect to the understandings reached in the Committee. The arrangements provided, in part, that there would be no action to peg the price of gold, and that the total stock of gold then (at the end of August 1975) owned by the Fund and the monetary authorities of the Group of Ten would not be increased. The rationale of this agreement was that an increase might imply a reinforcement of the role of gold, and that purchases from the market might imply a new official price. The arrangements were to prevail for two years from February 1, 1976, at which time they might be continued, modified, or terminated. Other countries were to be able to adhere. Switzerland was an original party, and Portugal adhered later. The total gold holdings that were not to be increased under the arrangements were augmented by the amount of gold held by these two countries at the end of August 1975.
The arrangements were not popular with other members. One objection was that the initial period was too brief. Another was that a fixed period implied that when it came to an end members would be free of all restraint in their gold transactions and might then take steps to elevate the status of gold. Developing members objected that the arrangements would result in a large increase in the liquidity available to the developed members that held gold. The effect might be to reduce the possibility of further allocations of SDRs, detract from the status of the SDR, and retard the process of eliminating the monetary role of gold.
The arrangements were allowed to expire after two years. The reason announced by the Chairman of the Ministers and Governors of the Group of Ten was that the Second Amendment was about to become effective. The United States issued a statement of its own, which declared that the experience of the two years—including the absence of actions to peg the price of gold or to increase the monetary role of gold in other ways—showed that there was no need to extend the arrangements, but that if this situation were to change the United States would not hesitate to seek a resumption of them or the adoption of similar arrangements.36
In accordance with the Outline of Reform, two of the main objectives of the Second Amendment are a gradual reduction in the role of gold in the international monetary system and the advance of the SDR to the position of the principal reserve asset in the system. There is some ambiguity in these objectives because it is not completely clear what is meant by the international monetary system. Although the subject is too complex to pursue here, it is useful to note that the international monetary system could be understood to consist only of those practices that are regulated by international law. Alternatively, the system could be taken to include not only these practices but also practices that are in operation but are unregulated by international law. (It will be recalled, in addition, that there is a question about the scope of international law in relation to international monetary affairs.) For example, under the Articles, members are free to hold or not to hold gold in their reserves. Does the objective of a gradual reduction in the role of gold indicate an intention to discourage the holding of gold as a reserve asset? This proposition was advanced but not accepted. The question of intention remains, however, because a gradual reduction in the role of gold suggests a continuing process and not one confined to the changes made by the Second Amendment.
Only the second of the two objectives mentioned above is stated explicitly in the amended Articles.37 The second objective, however, implies the first. Similar sensitivity about the future role of gold can be detected in the fact that although the Outline of Reform referred to a reduction in the role of gold, the Commentary on the Proposed Second Amendment prepared by the Executive Board refers to a gradual reduction.38 The two differences in treatment may be evidence of a less-than-uniform degree of support for the objectives of the Second Amendment or of a lack of conviction that the objectives will succeed in solving the problem of gold.
The Second Amendment has contributed to a gradual reduction in the role of gold in the international monetary system by a draconian reduction of its role in the Fund. Limited obligations involving gold are imposed on the Fund, but, in normal circumstances, no obligations are imposed on members. Proposals to include an express provision in the Articles that would have required members to collaborate with the Fund and with each other to reduce the role of gold in their reserves and in their transactions did not receive sufficient support. What emerged instead is a provision that substitutes a weaker and more obscure obligation of collaboration. Members are required to collaborate with the Fund and with each other to ensure that their policies “with respect to reserve assets shall be consistent with the objectives of promoting better international surveillance of international liquidity and making the special drawing right the principal reserve asset in the international monetary system.” 39 The resistance to a stronger provision came not only from those who were sympathetic to a continued role for gold but also from the United States, because it seemed inevitable that an express obligation to reduce the role of gold would have to be combined with an express obligation to reduce the role of reserve currencies. The mention of reserve currencies would have seemed too blatant an affront to the dollar. The United States made much of the paradoxical argument that an express obligation on gold, even to reduce its role, would be an undesirable recognition of the importance of gold. The provision on collaboration was proposed by the United States.
The Second Amendment abolishes the former par value system and with it the function of gold as the common denominator of exchange rate relationships. Members are free to adopt any exchange arrangements they please, with one exception. A member may not maintain the external value of its currency in terms of gold as the denominator.40 The language is broad enough to prevent a member from following a policy of maintaining a value for its currency by means of gold transactions even though it does not define the value of its currency in relation to gold. The prohibition applies both to unilateral policies and to policies that result from a cooperative arrangement with other members. A member is not prevented, however, from defining its currency in terms of gold for some exclusively domestic purpose. The Fund may decide, by 85 percent of the total voting power of members, to call a modified and more flexible par value system into existence in the circumstances described in the Articles, but the common denominator of that par value system will be the SDR or such other common denominator as the Fund chooses, but it may not choose gold or a currency.41 Nowhere in the Second Amendment, including the provisions that would govern a par value system if it were called into existence, is there anything resembling the provision on the practice of freely purchasing and selling gold on which the operation of the original par value system was based.
The provision prohibiting the use of gold as a denominator for maintaining the external value of a currency is prefaced by the words “Under an international monetary system of the kind prevailing on January 1, 1976.” 42 These words were adopted in order to suggest that exchange arrangements might evolve and might be the subject of recommendations by the Fund that would accord with the development of the international monetary system. The words were not intended to suggest that gold might be used as a denominator in new conditions. The permanence of the prohibition is illustrated by the provision that would prevent the Fund from choosing gold as the common denominator of a par value system.
The SDR is no longer defined in relation to gold. The Articles authorize the Fund to determine the method of valuation of the SDR.43 Even before the Second Amendment, the Fund found, after the withdrawal by the United States of its undertaking to buy and sell gold freely, that there was no currency that had a gold value and therefore no currency that could be the medium for determining the exchange rates of currencies in relation to the SDR. To solve this dilemma, the Fund, preferring a legal fiction to an impasse, deemed the gold value of the SDR to be equivalent to a “basket” of prescribed amounts of 16 currencies. The Fund has retained the “basket” method of valuing the SDR, although the number of currencies has been reduced to 5, but it is no longer necessary or possible to hold that the “basket” has a gold value.
The abolition of the function of gold as a common denominator of the external value of currencies is accompanied by the abolition of an official price for gold. The former obligations of members that governed the price at which they might buy and sell gold and the sales and transfers of gold that they had to make to the Fund have been swept away.
The SDR has been substituted for gold as the Fund’s unit of account. Computations for applying the Articles are made on the basis of the SDR, and each member maintains the value of the Fund’s holdings of its currency in the General Resources Account in terms of the SDR.44 A number of international organizations other than the Fund have not yet eliminated units of account based on gold from their constitutive treaties. Many of them apply the SDR in accordance with the relationship between the definition of their unit of account and the former definition of the SDR in terms of gold. In this way, they are able to solve their dilemma of a gold unit of account in circumstances in which there exists no international official price for gold and no currency that has a value in terms of gold. The technique does not assume that the SDR basket has a gold value but that the former gold SDR can be translated into the basket SDR as the predecessor unit of account.
The Fund has a range of powers that enable it to deal in gold, but the Fund can exercise them only by decisions taken with an 85 percent majority of the total voting power. In exercising its powers, the Fund must be guided by the objectives of promoting better surveillance of international liquidity, making the SDR the principal reserve asset in the international monetary system, and avoiding management of the price, or the establishment of a fixed price, in the gold market.45 In its transactions, therefore, the Fund must seek to follow and not to set a direction for prices in the gold market, so as to avoid the impression of a new official price. Although there is no explicit provision that creates a similar obligation for members, they would be expected not to frustrate the objectives of the Articles as they relate to gold and the SDR. Even in periods of wildly escalating or fluctuating prices for gold in the market, members have refrained from any agreement to manage the price.
The Fund may sell gold to any purchasers, including members, at the market price.46 The proceeds in excess of the former official price may be used (1) in operations and transactions specifically authorized by the Articles, or (2) in operations and transactions not specifically authorized but consistent with the Fund’s purposes, particularly if the operations and transactions are for the special benefit of developing members in difficult circumstances, or (3) for investment in an amount not exceeding the Fund’s reserves. The Fund may also sell, at the former official price, gold held by it on April 1, 1978, the date on which the Second Amendment became effective. These sales would be made to countries that were members on August 31, 1975, the date of the communiqué of the Interim Committee in which its understandings on the future treatment of gold were set forth.47
The Second Amendment required the Fund to complete two programs for the disposition of one sixth of its gold holdings under each. These programs were initiated before the Second Amendment became effective.48 Under one program, the Fund, in May 1980, completed the sale of 25 million ounces of gold by public auction. The Fund established a Trust Fund through which it used part of the proceeds in excess of the former official price to finance loans on concessional terms to the most needy of its developing members. Under the other program, the Fund, in February 1980, completed the sale of a similar amount of gold at the former official price to countries that were members of the Fund on August 31, 1975. The sales were made in proportion to their quotas on that date.
The justification advanced for the two programs was ambiguous. The Fund’s disposition of a substantial proportion of its holdings was said to demonstrate and encourage a reduction in the role of gold. Under the second program mentioned above, the gold was acquired by members and probably has been retained by most of them in their monetary reserves, which evidences their continuing regard for it as a monetary asset and not merely their enthusiasm for a windfall profit.
Agreement was reached on the two programs as part of a broad compromise reached in the Interim Committee and recorded in its communiqué of August 31, 1975. The compromise was necessary because the drafting of provisions of the Second Amendment on gold was as controversial as the drafting of provisions on exchange rates. The controversy about gold was inspired by differences in attitude to its future role, with some negotiators anxious to diminish it as much as possible while others wished to preserve a recognized status, although not sovereign rank, for it. The first group of negotiators pressed for the sale of a portion of the Fund’s gold in the market to help achieve their objective and also to provide some resources for hard-pressed developing countries, which were disappointed by the rejection of a “link” between the allocation of SDRs and development assistance. The second group of negotiators concurred in this sale, and in the concept of provisions designed to achieve a gradual reduction in the role of gold, on condition that a third element was included in the compromise. This element was the sale of another portion of the Fund’s gold to members at the former official price. The project was referred to inappropriately, but in order to give it a patina of justification, as “restitution.”
Abolition of the official price of gold contributed to a compromise that included the objective of a gradual reduction in the role of gold even though members differed in their attitudes to gold and even though some preferred a continuing role for it. An explanation for this paradox is that abolition of the official price was expected to result in an increase in its market price. The increase would profit not only the official holders of gold, some of which in the past would have welcomed an increase in the official price as a way to augment official liquidity, but also private parties, who, in a country such as France, held substantial amounts of gold. This combination of doctrinal attitude and substantial profit was also responsible for the insistence by some members on a provision that would make it possible for the Fund to accept gold in the future and preserve some vestige of official respectability for it. This provision is discussed later.
Although the Second Amendment does not require members to cease holding gold in their reserves, the fluctuating price in the market imposes a practical curb on the use of gold as a reserve asset. The use of it in international settlements is negligible at best. A central bank that sells gold may be criticized if the price increases. Only minor sales have been made in the market in order to obtain resources in support of currencies. Gold producing countries, however, go on selling part of their production.
Obligations of the Fund to dispose of gold to members have been abrogated, except in the liquidation of the Fund and under the two programs, now completed, for the sale of some gold. Even under these programs, members were not compelled to purchase gold. Whether the Fund has implied powers to dispose of gold at its option, for example, in the repayment of debt, has not been determined. There is no express provision empowering the Fund to deposit gold as collateral, but it could be held that this authorization is implied in the power of the Fund to borrow. There is frequent reference in official and nonofficial discussions to the desirability of the Fund’s retention of its gold so that it could be used for this purpose.
On this subject, Mr. de Larosière, the Managing Director of the Fund, engaged in the following colloquy during a press conference on October 3, 1980:
Question: If you have to issue a pledge that the Fund will not sell any more gold if it wishes to increase its resources or to establish its resources for any new borrowing, would you consider that action an enhancement of the role of gold in the system?
Mr. de Larosiére: First, we are not even considering any pledge of the sort you have mentioned. We feel that we have a very large potential borrowing capacity because of our very large paid-in capital in the form of quotas. We also have something over 100 million ounces of gold, and our borrowing is so small in terms of quotas—around 10 percent—that we feel that we can very easily undertake borrowing operations, within limits of course, without having to worry about pledging our gold one way or the other. I would add that, philosophically speaking, if we were for one second to consider pledging our gold, we would in fact be giving gold a higher role in the system. But we have never for a second contemplated any such thing.49
Obligations of members to make payments to the Fund in gold are abrogated. As noted already, the Fund is authorized, nevertheless, to accept gold from members in discharge of obligations that accrue in SDRs or currency. The Fund and the member offering gold would have to reach agreement on a price for each operation or transaction on the basis of prices in the market.50 The authority of the Fund to accept gold does not go beyond the discharge of obligations owed by members to the Fund. The former power to require a member to replenish the Fund’s holdings of the member’s currency in return for gold is abrogated. In all the provisions under which formerly gold was an obligatory means of payment by a member or by the Fund, the SDR has been substituted and sometimes currency as well.
References to gold have been deleted, therefore, from provisions of the Articles that formerly created obligations to make payments in gold, with the exception of the provisions on liquidation of the Fund and on the two limited programs for the sale of gold. The provision that requires a member that has accepted the obligations of convertibility under Article VIII to convert balances of its currency when they are presented for conversion in accordance with the provision has been retained. The obligation survived during the drafting of the Second Amendment as a compromise between the United States and some European members. A compromise was necessary because the United States recoiled from any serious suggestion of a return to official convertibility, while the European members resisted deletion of the provision because it could imply that they were reconciled to the hopelessness of a return to official convertibility. Survival of the obligation may not seem to be a compromise, but its continued presence in the Articles was accompanied by a statement in the Commentary on the Proposed Second Amendment that the obligation would not be applied as long as normally the convertibility of a currency through the market was assured.51
Even so, the obligation of official convertibility in Article VIII has been amended and is now formulated in terms of an option of the member discharging the obligation to provide either SDRs or the currency of the member requesting the conversion instead of an option to provide either gold or that currency.
The Second Amendment gives explicit recognition 52 to the former implicit authority of the Fund to perform financial and technical services that are consistent with its purposes and are for the benefit of its members. The Commentary declares that the Fund is expected not to make its services available to assist members to conduct their transactions in gold.53 The Executive Board did not want the Fund to give the impression of official involvement in these transactions or the endorsement of an official price.
During the negotiation of the Second Amendment, various proposals were made for the establishment of a Substitution Account in which members or the Fund could deposit gold and receive SDRs in return. The objectives were manifold: a greater reduction, or even a complete elimination, of the role of gold in the international monetary system; promotion of the role of the SDR; an effective international control of global reserves by substituting SDRs for gold; and apportionment over time of the increase in liquidity resulting from the abolition of the official price of gold, by issuing SDRs for deposited gold in installments determined by the global need for increases in reserves. The problems associated with these proposals were numerous and intricate, but the difficulties were multiplied by proposals that holdings of reserve currency should be subject to similar substitution. The fundamental difficulty, however, was resistance by the holders of substantial amounts of gold to the idea that gold should be withdrawn from reserves. None of the proposals was accepted.
It has been seen that the present powers of the Fund to accept gold or to dispose of it, apart from certain exceptional arrangements, can be exercised only by decisions taken with a majority of 85 percent of the total voting power of members. The high majority is one of the present ambiguities of gold because the majority could be regarded either as evidence of a preference by the membership that the Fund should not fritter away its gold in routine transactions or as a safeguard against transactions that would not be routine in character because they would enhance the role of gold. The majority gives a veto to the United States, which has been in the vanguard of the movement to reduce the role of gold. Transactions designed to assist in the evolution of the international monetary system might seem more likely to enhance the role of gold than transactions more closely related to the traditional operations and transactions of the Fund. It might be difficult to make this distinction in practice, but even if it could be made, a dogmatic stand in opposition to the use of gold to assist in the evolution of the system in order to avoid the risk of resiling somewhat from the reduction in the role already achieved would not be likely to have much appeal. The evidence so far is that there would be more support for the use of gold in accordance with the Articles to assist in the evolution of the system than for less dramatic operations and transactions.
Attitudes to Reserve Assets
It will be useful to pause for a backward glance in order to bring into view certain influences that gold has had on the attitudes of monetary authorities to other reserve assets in the negotiations leading to the First and Second Amendments and since then. In an assessment of the changing role of gold, it is necessary to see what effects these changes were intended to have on other reserve assets and therefore on the international monetary system.
The United States led the movement to create the SDR because it saw an opportunity to achieve a number of its aims. The SDR could help to loosen the grip of gold on the system, because conversions with SDRs would be possible and, if made, would assist the United States to conserve its remaining holdings of gold. The United States would be able to preserve the formal convertibility of the dollar into gold. This convertibility had become largely fictitious, but it was still a feature of the law of the system. The United States was in favor of endowing the SDR with some attractive qualities in comparison with gold, and of resisting some of the proposed limitations on the characteristics and uses of the SDR, but without making the SDR too competitive with the dollar. Some other members, including France, did not share the attitude of the United States to gold, the SDR, and the dollar as reserve assets. They concentrated on safeguards to ensure that the SDR would not promote inflation or encourage the United States to take an attitude of benign neglect toward its balance of payments, because these developments would add more dollars to their reserves without the real prospect of having them converted with gold. They were in favor, therefore, of restraints on the SDR.
The difference in attitude among members led to a compromise according to which the SDR was to be a supplement to existing reserve assets, including gold, and not a substitute for any of them, was not endowed with unduly favorable characteristics or allowed to have widespread uses, and was subject to tight control by the Fund. In addition, it has been seen that members continued to be able to demand conversion of balances of U.S. dollars with gold, and that the SDR could not be exchanged for gold.
In the negotiation of the Second Amendment, the United States continued to support a reduction in the status of gold, but it no longer took the lead in pressing for improvements in the SDR. The United States had terminated the official convertibility of foreign official holdings of dollars with gold or other reserve assets and did not want to create any impression of a willingness to resume that undertaking. The United States still wanted to make sure that the SDR would not compete too strongly with the dollar and cast doubt on its desirability. Other members, however, now wanted an improved SDR, which they saw as the only legally and internationally regulated reserve asset that could possibly compete with the dollar and become the ultimate reserve asset on which a new and more effective international monetary system could be built. Once again, a compromise was reached. It was agreed that the SDR should become in time the principal reserve asset in the international monetary system and that, as steps toward that goal, some improvements in the characteristics and some extensions in the permitted uses of the SDR should be made at once. Provisions were adopted under which the Fund could make further improvements and extensions, in some cases by decisions taken with special majorities of the total voting power.
More recently, official opinion in the United States has been changing. The Carter Administration concluded that an excessive depreciation of the dollar was injurious to the U.S. economy, and the Administration was willing to intervene in the exchange market with reserve assets. The subsequent Administration returned to a much less active policy of intervention. Other currencies are becoming reserve assets on a larger scale. Officials of the Carter Administration declared that the United States foresaw the evolution of the international monetary system and did not insist on perpetuating any particular role for the dollar. They were willing to consider a Substitution Account in which dollars could be deposited as part of this evolution. Both the United States and members that had been moved by different interests during the negotiation of the First and Second Amendments saw possible advantages in a Substitution Account for them and for the international monetary system as a whole. Much preliminary work was done to fashion an attractive SDR-denominated asset that could be offered in return for deposits of U.S. dollars in a Substitution Account. Communiqués of the Fund’s Interim Committee have urged the Executive Board to continue its study of such an Account. Proposals for substitution for a variety of purposes and according to a variety of techniques have shown extraordinary vitality for almost four decades. Their persistence is evidence that members have not regarded arrangements and practices relating to reserve assets as satisfactory.54
Some New Problems
The change in the legal status of gold that has been brought about by the Second Amendment has produced a number of new legal problems.55 Some of them involve the valuation of gold now that the official price has been abrogated. A few national courts called upon to enforce gold value clauses in treaties and domestic statutes or regulations giving them the force of law have applied a market price, but this practice is not justifiable. Other courts have held that a gold unit of account must be translated into the SDR on the basis of the definition in terms of gold of the unit of account and the definition of the SDR in the First Amendment, on the theory that the SDR is the legal successor to gold as the unit of account of the central organization of the international monetary system. The amount of currency to be awarded in a judgment can then be determined in accordance with the Fund’s procedures for arriving at the exchange rates of currencies in relation to the SDR. In some countries, official regulations have been promulgated for translating gold units of account into the currency of the forum.
Many international organizations are faced with similar problems. A number of them have instituted or completed procedures for the amendment of the treaties under which they operate in order to substitute the SDR for a gold unit of account such as the Poincaré or the Germinal franc. Some organizations have taken this step by administrative decision or by interpretation on the theory already noted that the SDR is the legal successor to gold as a unit of account, and in some instances this action is regarded as a temporary expedient pending amendment of the treaty.
Some treaties provide for gold as a means of payment in discharge of obligations under the treaty. Amendment of these provisions may be undertaken at some time, but there is less urgency for this action than for resolving the problem of gold as a unit of account because the treaties usually provide for other means of payment as well.
This Chapter deals with the role of gold in international monetary law, but it is useful to note briefly that the change in the legal status of gold as a result of the Second Amendment has consequences in national law and practice as well. For example, the change has induced some countries, including the United States, to amend their laws in order to permit private parties to hold and to deal in gold and to use gold as a unit of account. It is improbable, however, that gold clauses will become common. Instead, there is a growing use of the SDR and the ECU as units of account for private as well as for official purposes.56
Present and Future Status
The general view among members is that gold continues to be a reserve asset and continues to have monetary functions. This view persists notwithstanding the change in the legal status of gold and the negligible use of gold in official settlements or in support of currencies. Gold is still a reserve asset that is desired by many members, not only because it has appreciated in value and may appreciate further, but also because it gives a sense of confidence to its owners and to others. According to unofficial reports, some monetary authorities in the Middle East, Southeast Asia, and Latin America have purchased gold in the market in order to diversify their reserves.57 The continuing attitude to gold is no surprise to the drafters of the Second Amendment, because, as realists, their objective did not go beyond a gradual reduction in the role of gold.
A growing practice of members is to couple their view that gold is still a reserve asset with valuation of it on the basis of market prices, but according to diverse procedures.58 More than thirty members have taken this step so far. Whether or not central banks owning gold have adopted this method of valuation, they may be influenced by market prices in assessing their liquidity and in pursuing certain policies on the basis of that assessment.59 The huge capital gain on the revaluation of gold may seem to create favorable conditions for a particular course of action. For example, it has been suggested that a debtor government may be, or should be, more willing to undertake obligations denominated in a creditor’s currency because any exchange losses can be offset against the capital gain. But there are many other possible uses and effects of a revaluation profit.
The valuation of gold held by members is a problem for the Fund as well as members. A member’s reserve position is relevant for a number of the Fund’s activities. The assessment of that position is relevant, for example, in connection with the criterion of a need to use the Fund’s resources; the dates at which, and the amounts by which, a member should go about terminating the use it has made of the Fund’s resources; the determination whether a member is in a strong enough position to justify the sale of its currency to other members requesting the use of the Fund’s resources; and the designation of a member to receive transfers of SDRs. The problem of valuation has been debated in the Fund, but so far the Fund has not departed from the former official price for the purposes mentioned above. For some other purposes, however, the Fund reaches understandings on valuation with members, and the statistics it publishes are based on market prices, the former official price, and the member’s own valuation. The present practice is probably transitional, and in due course the Fund may have to reach a view on the most defensible method of valuation.
The Fund is not alone in taking a view of the value of a member’s gold holdings. Even if a member has not revalued its gold, potential lenders may assess the value of that gold in estimating the resources that would be available for repaying indebtedness.
The Fund must decide how to value its own gold. The Fund values the gold it held at the date when the Second Amendment became effective at the former official price, and has not acquired gold since that date. Formulas for the valuation of gold on the basis of market prices have been adopted for the purposes of the Agreement of March 13, 1979 among the central banks of the European Community on the operating procedures of the European Monetary System (EMS).
A consequence of the huge increase in the value of official holdings of gold when measured at market prices is that gold has become an enormously larger proportion of total reserves than in the past. This development leads some observers to argue that gold is now a more important reserve asset than ever before, but it is not clear what is meant by importance. Certainly, consequences could flow from that increase if, for example, it were acknowledged as relevant to some international decision. Allocations of SDRs can be made if there is a long-term global need to supplement existing reserve assets. It is not yet clear what, if any, weight must be given to the increase in the market price of gold in calculating global reserves and in determining whether there is a need to supplement them. Developing members expressed discomfiture about the possible effects on allocations of SDRs when the compromise on the future role of gold was reached in 1975:
Many members [of delegations] from developing countries expressed concern that the proposed arrangements for gold would give rise to a highly arbitrary distribution of new liquidity, with the bulk of gains accruing to developed countries. This would greatly reduce the chances of further allocations of SDRs, thereby detracting from the agreed objective of making the SDR the principal reserve asset and phasing out the monetary role of gold. This aspect should be studied, and measures explored to avoid these distortions.60
The Proposal by the Managing Director of the Fund on the Allocation of Special Drawing Rights for the Third Basic Period, dated October 25, 1978, referred to the decline in the proportion of SDRs “in reserves excluding gold.” 61
The attitude that gold continues to be a reserve asset shows the fallacy in the contention often made in the past that it was not gold that gave value to the U.S. dollar but the reverse. Value in this sense meant not only price but also the status of gold as a reserve asset. The contention was a way of emphasizing that the par value system rested on the undertaking of the United States to buy and sell gold freely for dollars in transactions with other monetary authorities. Some U.S. experts expressed this view in order to strengthen the international bargaining position of the United States in circumstances in which that position was threatened by a declining stock of gold. The withdrawal of the undertaking of the United States in 1971 and developments since then have not terminated the function of gold as a reserve asset, but what are the consequences for the dollar? Ambiguity clouds the answer. It is easy to say that the dollar does not have its former status in the international monetary system because the present operation of the system does not depend on any undertaking of convertibility by the United States. Gold is still hoarded in reserves notwithstanding the withdrawal of the former undertaking. The U.S. dollar, however, continues to be the main reserve currency notwithstanding the emergence of other reserve currencies.
Gold has been used as collateral and in swaps in the last few years, and it has been suggested that gold can be made a more active reserve asset by an increased use in such operations. Legal difficulties that might have hindered those or other operations as a concomitant of the former official price of gold have disappeared. Collateral and swaps illustrate both the policy of not disposing of gold with finality and the confidence that ownership of it inspires in creditors and others. Even the U.S. Treasury’s sales of gold by auction, one purpose of which was to show that the United States was not dedicated to a policy of retaining gold in its reserves, was considered by some observers to be evidence of a continuing monetary role for gold because the United States was using gold in dealing with the deficit in its balance of payments. According to this view, the United States was no longer trying to demonstrate the monetary irrelevance of the price or to undermine the vertiginous rise in price but to take advantage of that price in support of the U.S. dollar.62 The permanence of traditional attitudes to gold is illustrated by the reaction of some observers when the United States decided to terminate the auctions. According to this reaction, the United States was then endorsing the desirability of holding gold in its reserves. One of the ambiguities of gold, therefore, is that both its immobilization in reserves and its disposition from reserves seem to manifest the persistence of a monetary role for gold.
The participants in the European Monetary System, which came into existence on March 13, 1979, have made a striking new use of gold. Each participant in the exchange rate and intervention arrangements of the EMS must, and a member of the European Community that does not participate may, contribute to the European Monetary Cooperation Fund (EMCF) 20 percent of its holdings of gold and 20 percent of its holdings of U.S. dollars in return for European Currency Units (ECUs). This amount of contribution is maintained by adjustments at quarterly intervals that take account of changes in a contributor’s reserves, in the market price of gold, and in exchange rates for the dollar. Contributions are made by way of swaps of gold and dollars against ECUs that are renewable every three months. In short, there is no final transfer of these assets, which possibly may be explained by the lack of legal authority in some countries but may also be the result of a reluctance to make final transfers of gold. The swaps, however, have the effect of substituting active liquidity in the form of ECUs for the inactive liquidity represented by gold. Moreover, those participants that value their gold at the former official price receive an increase in liquidity because the gold they contribute in return for ECUs is valued on the basis of market prices. If original intentions are observed, in the next stage of the development of the EMS, which was supposed to take place two years after its inception but which has been postponed, final transfers of contributed reserve assets are to be made to a central financial authority. If final transfers are made at a later date, an internationalization or centralization of a substantial amount of gold will have taken place. The gold would be comparable to the gold that remains internationalized in the Fund. It has been suggested, however, that the high price of gold is one of the reasons for delay in the negotiation of the next stage. It is said that members of the Community are unwilling to make an outright alienation of gold. Here is another ambiguity of gold because, if this observation is correct, the high price not only inhibits the development of a new monetary role for gold but also, as will be seen, inspires proposals for the promotion of such a role.63 These ambiguities are not manifestations of the apothegm that the hallmark of a cultivated mind is its ability to function while holding two inconsistent ideas.
In the first stage of the EMS, “a very short-term financial facility” is established for financing intervention in the currencies of participants by means of reciprocal and unlimited lines of credit. Settlements of debts under the facility are to be made with any balances of the creditor’s currency held by the debtor and for the rest may be made wholly or partly in ECUs. Any remaining balance is settled in reserve assets according to the composition of the debtor’s reserves. For this purpose, reserves are taken to consist not only of assets denominated in SDRs and currencies but also gold if the debtor and creditor are willing and can agree on a price. This formula means that there is no obligation to use gold in settlements, which is evidence once again of the reluctance to part with gold. The formula is also evidence of the absence of a prescribed price. If a debtor wishes to use ECUs but no longer possesses them, it must attempt to obtain them from the net accumulators of ECUs in the first instance, but possibly may obtain them from the EMCF. In the latter event, the purchase is made with gold and U.S. dollars in the proportions in which they are held in the debtor’s reserves.
Central banks may transfer ECUs among themselves in return for U.S. dollars, Community currencies, SDRs, or gold at a price agreed upon between the parties, but they may not make transfers of ECUs for the sole purpose of changing the composition of reserves. Similarly, in the final liquidation of the swaps, the net users of ECUs must reconstitute their balances of ECUs by acquiring them from the net accumulators. ECUs will be transferred for this purpose for the currency of the net accumulators held by the net users, or in accordance with arrangements agreed upon between the parties, or in default of these means of payment, against the transfer of reserves denominated in SDRs or currencies. Even in liquidation, therefore, settlements with gold are not required and can be made only by agreement between the parties.
Another possible new use of gold has been discussed. A Substitution Account in which members would be able to deposit U.S. dollars in return for claims denominated in SDRs has been mentioned earlier.64 Members would have an opportunity to diversify their reserves by holding these claims without the possibly disturbing effects that might follow if they exchanged U.S. dollars for other currencies through the markets. The broad objective of such a plan would be to promote the purposes of the Fund and, in particular, stabilization of the international monetary system and promotion of the status of the SDR so that in time it can become the principal reserve asset in the system. One of the intricate legal and practical problems that arise in connection with substitution is how the value of claims against the Account would be maintained in terms of the SDR if the dollar depreciated against the SDR during the life of the Account or at the time of its liquidation.
According to published reports,65 a possible solution might be the earmarking for, or transfer to, the Account, and the sale if necessary, of some of the Fund’s gold. This solution would put gold to work in support of an evolutionary development in the international monetary system, and would help to solve the difficulties of allocating responsibility for maintaining the value of claims on the Account. Many monetary authorities, including the U.S. Treasury, have made it clear that they do not want to restore the role of gold in the international monetary system. It can be assumed that they would want to ensure that any use of gold to support a Substitution Account would be in a form that did not strengthen the status of gold, for example, by creating the impression of a gold-backed asset or of a new official price.
The use of part of the Fund’s gold in support of a Substitution Account is only one of several suggestions that have been made for disposing of the Fund’s gold in the interest of various causes. The Fund’s remaining holdings are substantial, and they seem to burn holes in the pockets of those who do not own the gold. It is likely, however, that there would be no use of this gold for causes that would not strengthen the Fund or the international monetary system. If strengthening the Fund or the system is not unequivocally and equally beneficial to all members, a section of the membership may propose that a suggested use of gold should be accompanied by the “restitution” of another portion of the Fund’s gold to members at the former official price or the sale of it for the special benefit of developing members. The requirement of a majority of 85 percent of the total voting power of members for decisions on the use of gold, however, gives a veto to members with no more than a minor share of total voting power.
Another proposal, which has been advanced by some politicians and economists in the United States, is that gold should be restored to something like the role it performed in the past, but at a much higher official price. The huge increase in the market price, an international monetary system that seems to many observers to be less coherent than the system of the past, the disturbed condition of many domestic economies, and the official uses of gold that are still being made have helped to produce these proposals.66 They have been criticized on the ground that they imply a return to the gold standard or to the par value system with gold as its common denominator. The critics object that the results of adopting a proposal of this kind would not be the cure of current ailments but the same rigidities that existed in the past in even less hospitable conditions.67
Adoption of the proposal, it has been argued, would not be feasible without stable internal and external conditions, but in those conditions the proposal would be unnecessary.68 These differences of opinion have influenced the U.S. Congress to establish a commission to study and make recommendations on the policy of the United States on the national and international role of gold.69 To give effect to a conclusion that the external value of the dollar should be maintained in relation to gold would require an amendment of the Articles. A proposed amendment can become effective only if accepted by three fifths of the membership and members having 85 percent of the total voting power. Nevertheless, bills have been introduced in Congress already to reinstate the dollar as “a gold reserve currency” 70 and to make it redeemable in gold.71
It is more difficult to assess the extent to which the role of gold has been reduced in international monetary affairs than in international monetary law. The changes in law are obvious, although the actual contribution they will make to a reduction in the role of gold will depend on the meaning and application of some of the provisions of the Second Amendment, such as the provision that obliges members to collaborate on policies relating to reserve assets. The Second Amendment, however, is not the only source of international monetary law relating to gold. Even in the brief period since the Second Amendment was drafted, it has become clear that other legal developments can be expected. The European Monetary System is an example of further changes.
The objective of a reduction in the role of gold has been pursued by measures that can be regarded as a reduction in the role of law in the regulation of gold. The substantial extrusion of gold from the law of the Fund gives members greater freedom in the treatment of gold outside the Fund, and therefore an assessment of the extent to which a reduction in the role of gold has been achieved must not concentrate solely on what is written but must pay particular attention to what happens.
One development is that the market price of gold is no longer regarded as cogent evidence of the inappropriateness of exchange rates as it did when the par value system was in operation. The price is a weather vane that seems to respond to the breezes and gales of multitudinous national and international events, sometimes economic and sometimes political. Only rarely is it clear why the vane has changed direction. Nevertheless, changes in price are often taken to indicate a lack of confidence in the economic policies of governments.72
Even the large and violent fluctuations in price might be interpreted as evidence of some success in reducing the role of gold. The fluctuations are so large and so erratic that they cannot be correlated with changes in economic conditions, because those conditions do not change with such rapidity. Perhaps for this reason, the fluctuations, although not devoid of economic consequences, have not provoked a massive movement out of monetary assets, have not had other serious economic effects, and have not inspired extreme agitation on the part of governments or the public.
Other evidence that some reduction in the former role of gold as a reserve asset may have been achieved is the absence of any effort on the part of monetary authorities to control the price of gold even though it has fluctuated wildly and even though a number of authorities value gold on the basis of market prices.73 The widespread and increasing replacement of gold by the SDR as a unit of account is another symptom of a loss of function on the part of gold. The importance of this symptom can be gauged by recalling the dictum of Keynes in his Proposals for an International Clearing Union: “Gold also has the merit of providing in point of form (whatever the underlying realities may be) an uncontroversial standard of value for international purposes, for which it would not yet be easy to find a serviceable substitute.” 74 Ultimately, an unambiguously reduced role for gold, not only in international monetary law but in practice as well, may depend less on a direct attack on gold than on the development of a reserve asset that is considered satisfactory by monetary authorities. It seems that, to earn this cachet, a reserve asset will have to be controlled internationally and will have to be attractive because of its characteristics and uses. The development of such a reserve asset, however, may not be possible unless the international monetary system evolves in a way that will be considered satisfactory in all its aspects by all classes of the Fund’s membership.
Supplemental Note to Chapter 11
1. On the U.S. Treasury’s attitude to gold, see F. Lisle Widman, Making International Monetary Policy (Washington: The International Law Institute, Georgetown University Law Center, 1982), pages 14757. See also paragraph 1 of the Supplemental Note to Chapter 1.
2. On the various aspects of gold indicated in the title of their work, see David A. Brodsky and Gary P. Sampson, Implications of the Effective Revaluation of Reserve Asset Gold: The Case for a Gold Account for Development, and The Value of Gold as a Reserve Asset (Unctad Reprint Series, No. 24, Geneva, 1982).
3. Legal developments relating to gold are discussed in two further pamphlets in the series referred to in footnote 55: Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington, 1981), pages 78–85; SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, IMF Pamphlet Series, No. 40 (Washington, 1983), pages 75–89.
4. For a note on Article VIII, Section 7, see paragraph 4 of the Supplemental Note to Chapter 2.
5. The Gold Commission appointed by the Secretary of the U.S. Treasury on June 22, 1981 in accordance with Section 10 of Public Law 96-389 reported to Congress in March 1982. The Commission’s recommendations ranged from matters of modest domestic interest to matters of broad international impact. Some of the recommendations were as follows:
(i) The U.S. gold stock, which amounted to 264 million ounces at the time of the report, should not be reduced to zero. A minority preferred that the stock should not be reduced at all, but should be held against the possibility of a restored role for gold or other contingencies. It would be useful for the United States to hold a substantial amount of gold to influence deliberations if an international conference were convened to consider changes in the international monetary system.
(ii) The U.S. Treasury and the Federal Reserve Board should study the issues that would be involved in a move toward valuing the U.S. gold stock more realistically instead of the evaluation of $42.22 per fine ounce. A change should be subject to the legislative constraint that the proceeds of a new valuation would not be monetized or used in any way to enhance the government’s spending authority.
(iii) Unconventional uses to activate the gold stock were opposed, but continued study of the role of gold in the monetary system was favored.
(iv) The Commission concluded that, in present circumstances, restoring a gold standard did not appear to be useful for dealing with the problem of inflation. The Congress and the Federal Reserve should study ways to improve the conduct of monetary policy, including the possible adoption of a monetary rule.
(v) The Commission favored no change in present international exchange arrangements or in the use of gold in those arrangements.
(vi) The Commission opposed action by the United States to seek the restitution of the Fund’s gold to members. The Fund should retain its gold for the same reasons that motivated the recommendation that the United States should retain its gold holdings.
For a detailed examination of the Commission’s report, see Pamphlet No. 40 (see paragraph 3 above), pages 75–83. See also Section IX, paragraph 5 of the Supplemental Note to Chapter 1 for the provisions relating to gold in Public Law 98-181 of the United States, which raise again some suggestions examined by the Commission as well as some new suggestions.
6. Trans World Airlines, Inc. v. Franklin Mint Corp. et ah, decided by the Supreme Court of the United States on April 17, 1984 (52 LW 4445), is a further illustration of the principle that Article IV, Section 2(b) does not preclude the use for domestic legal purposes of a gold valuation for a currency. The court endorsed the validity of the U.S. Civil Aeronautics Board’s practice, under U.S. aviation legislation, of approving tariffs based on the last par value of the U.S. dollar as the conversion factor for applying the Poincaré franc in the Warsaw Convention, 1929 on carriage by air.
Note.—This essay was published originally in The Journal of International Law and Economics, Vol. 15, No. 2 (1981), pp. 323–70.
C. H. V. Sutherland, Gold, Its Beauty, Power and Allure (London: Thames and Hudson, 1969), p. 8.
Article V, Sections 3 and 6, original.
See, for example, Gordon Richardson, “The Prospects for an International Monetary System,” Bank of England Quarterly Bulletin, Vol. 19 (1979), p. 290. See also, Christopher W. McMahon, “Is There an International Monetary System?” Bank of England Quarterly Bulletin, Vol. 18 (1978), pp. 240–43.
Article IV, Section 1(a), original.
Article IV, Section 5, original.
Article IV, Section 7, original.
Article IV, Sections 3 and 4(b), original and first.
For a detailed account of the legal aspects of the former par value system, see Gold, Selected Essays, pp. 520–94.
Article XIX(a)–(g), original.
Article III, Sections 3 and 4, original.
Article V, Section 8(f), original.
Article VII, Section 2(ii), original.
Article V, Section 6(a), original.
History, 1966–71, Vol. I, pp. 409–20.
Article V, Section 6(b), original.
Article IV, Section 2, original.
History, 1945–65, Vol. II, pp. 203–14; Joseph Gold, The Fund Agreement in the Courts (Washington, 1962), pp. 32–36.
Article I(iii) and Article IV, Section 4(a), original. See Gold, Selected Essays, pp. 402–406.
For a detailed account of the history of the Fund’s policy in this period, see History, 1945–65, Vol. II, pp. 174–202.
Robert Solomon, The International Monetary System, 1945–1976: An Insider’s View (New York: Harper and Row, 1977), p. 115.
C.A. Coombs, The Arena of International Finance (New York: J. Wiley, 1976), p. 68.
Ibid., pp. 42–68 and 152–73.
Ibid., pp. 168–73; History, 1966–71, Vol. I, pp. 403–409; Gold, Selected Essays, pp. 218–23; Solomon, op. cit., pp. 119–24.
Decision No. 2914-(69/127), Selected Decisions, 6th (1972), pp. 57–62.
Joseph Gold, Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington, 1971), pp. 11–25.
Joseph Gold, Maintenance of the Gold Value of the Fund’s Assets, IMF Pamphlet Series, No. 6 (Washington, 2nd ed., 1971), pp. 31–42.
Joseph Gold, The Reform of the Fund, IMF Pamphlet Series, No. 12 (Washington, 1969), pp. 52–57.
Article XXI, Section 2, first.
Article XXXII (b)(1)(i), first.
Joseph Gold, Special Drawing Rights: Character and Use, IMF Pamphlet Series, No. 13 (Washington, 2nd ed., 1970), pp. 48–49.
Article XXV, Section 2(b)(i), first.
Joseph Gold, Special Drawing Rights: Character and Use, IMF Pamphlet Series, No. 13 (Washington, 2nd ed., 1970).
Article XXV, Sections 3 and 5(a)(ii), first.
Outline of Reform, pp. 16–17.
These members have adhered to the Fund’s General Arrangements to Borrow or have concurred in the adherence of their central banks. They are the United States, the Federal Republic of Germany, the United Kingdom, France, Italy, Japan, Canada, the Netherlands, Belgium, and Sweden.
Joseph Gold, SDRs, Gold, and Currencies: Third Survey of New Legal Developments, IMF Pamphlet Series, No. 26 (Washington, 1979), pp. 41–46.
Article VIII, Section 7, and Article XXII.
Report on Second Amendment, Part II, chap. I, par. 1.
Article VIII, Section 7.
Article IV, Section 2(b). In addition, members continue to be bound to avoid multiple currency practices and discriminatory currency arrangements, Article VIII, Section 3.
Schedule C, paragraph 1.
Article IV, Section 2(b).
Article XV, Section 2.
Article V, Sections 10 and 11.
Article V, Section 12(a).
Article V, Section 12(c).
Article V, Section 12(e).
Schedule B, paragraph 7.
IMF Survey, Vol. 9 (October 13, 1980), p. 323.
For the present powers of the Fund to buy and sell gold, see Article V, Section 12. See also Schedule B, paragraph 7, and Schedule K for the exceptional arrangements.
Report on Second Amendment, Part II, chap. C, pars. 14–18.
Article V, Section 2(b).
Report on Second Amendment, Part II, chap. D, par. 2.
Joseph Gold, “Substitution in the International Monetary System,” Case Western Reserve Journal of International Law, Vol. 12 (Spring 1980), pp. 265–326. See Chapter 3 of this volume.
Joseph Gold, Floating Currencies, Gold, and SDRs: Some Recent Legal Developments, IMF Pamphlet Series, No. 19 (Washington, 1976), pp. 38–48; Floating Currencies, SDRs, and Gold: Further Legal Developments, IMF Pamphlet Series, No. 22 (Washington, 1977), pp. 49–63; SDRs, Gold, and Currencies: Third Survey of New Legal Developments, IMF Pamphlet Series, No. 26 (Washington, 1979), pp. 32–51; SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, IMF Pamphlet Series, No. 33 (Washington, 1980), pp. 85–94.
Joseph Gold, SDRs, Gold, and Currencies: Third Survey of New Legal Developments, IMF Pamphlet Series, No. 26 (Washington, 1979), pp. 46–51 and 58–63. See Gerard Fernandez, Jr., “A New Look at Gold Clauses in Municipal Bonds,” New York University Law Review, Vol. 25 (1980), p. 543. But see Francis Ghiles, “First Gold-Linked Eurobond Launched,” Financial Times (London, January 28, 1981), pp. 1 and 34; “First Eurobond Issue Denominated in Gold Falls in Resale Trading,” Wall Street Journal (February 12, 1981), p. 28.
David Marsh, “Oil States Transfer £1.2 Billion in Gold from Switzerland,” Financial Times (London, September 15, 1980), p. 1. See also David Marsh, “Swiss Look at Adding to Gold Reserves,” Financial Times (London, October 29, 1980), pp. 1 and 14; and “The Third World’s Gold Rush,” Financial Times (London, January 22, 1981), p. 16.
See David A. Brodsky and Gary P. Sampson, “The Value of Gold as a Reserve Asset,” World Development, Vol. 8 (March 1980), pp. 175–92. See also David Marsh, “How to Spread the Gold Profits,” Financial Times (London, January 30, 1981), p. 18.
Joseph Gold, SDRs, Gold, and Currencies: Third Survey of New Legal Developments, IMF Pamphlet Series, No. 26 (Washington, 1979), pp. 32–35.
The Interim Committee of the Board of Governors on the International Monetary System, IMF Survey, Vol. 4 (Washington, September 15, 1975), p. 265.
Annual Report, 1979, p. 125.
See, for example, David Marsh, “A Monetary Renaissance/’ Financial Times (London, June 12, 1979), p. 14, and “Gold, A ‘Myth’ Comes Back to Life,” Financial Times (London, December 24, 1979), p. 8.
David Marsh, “Battle Looms for the Gold in Europe’s Budding Central Bank,” Financial Times (London, August 15, 1980), p. 2.
Joseph Gold, “Substitution in the International Monetary System,” Case Western Reserve Journal of International Law, Vol. 12 (Spring 1980), p. 265. See Chapter 3 of this volume.
See, for example, Barclays Review, Vol. 55 (London, August 1980), Insight-1, pp. 66–68; Group of Thirty, Towards a Less Unstable International Monetary System (New York, 1980), pp. 11–12; Caroline Atkinson, “The Main IMF Countries Go for the Gold,” The Times (London, January 25, 1980), p. 18.
See, for example, Samuel Brittan, “Gold’s Place at Venice Summit,” Financial Times (London, January 7, 1980), p. 12; Arthur M. Kreidmann, “Inflation: Quest for Solutions,” New York University Law Review, Vol. 25 (1980), p. 540.
Robert Solomon, “The Argument Against Restoring Gold Standard,” Journal of Commerce (October 14, 1980), p. 4.
Edward M. Bernstein, “Back to the Gold Standard,” Brookings Bulletin, Vol. 17 (Washington, 1980), pp. 8-12.
Bretton Woods Agreements Act Amendments of 1980, Public Law 96-389, 94 Stat. 1551.
S. 6, 97th Cong., 1st Sess. (1981).
H.R. 831, 97th Cong., 1st Sess. (1981). See Frank Vogl, “Republican Support for a New Gold Standard,” The Times (London, January 5, 1981), p. 15.
Lewis E. Lehrman, “Gold is Not a ‘Side Show,’” Wall Street Journal (February 20, 1980), p. 22.
But see the alleged proposal of the central bank governor of a nonmember. David Marsh, “The Third World’s Gold Rush,” Financial Times (London, January 22, 1981), p. 16.
Keynes, Collected Writings, Vol. 25, p. 183.