Legal and institutional Aspects of the international Monetary System

14 Keynes on Legal Problems of International Organization

International Monetary Fund
Published Date:
December 1984
  • ShareShare
Show Summary Details

Origins and Functions of Fund

The International Monetary Fund is an international organization whose membership is open to states that control their external relations and are able and willing to perform the obligations imposed by the Fund’s constitutive treaty. By mid-1981 membership had grown to 141 states.

The creation of the Fund was an extraordinary adventure in international lawmaking. States were willing to pool part of their sovereignty in matters that had been considered a fundamental component of individual sovereignty, so that they would not have to return to the disorders of the past in international monetary relations. They reached agreement for the first time on a body of norms worthy of being considered an international monetary legal system.

The functions of the Fund are diverse. They include the administration of a code of conduct designed to facilitate the expansion of international trade; promote exchange stability and orderly exchange arrangements; prevent competitive exchange depreciation; and assist in establishing the convertibility of currencies so that exchange restrictions will not hinder international trade and other current account transactions. As part of the administration of the code, the Fund promulgates principles for the guidance of the exchange rate policies of its members and exercises surveillance over the observance of these principles and the compliance of members with their obligations.

A second function of the Fund is the administration of substantial resources derived from subscriptions by its members and from borrowing. The Fund makes these resources available to its members for short- or medium-term periods to enable them to observe the code of obligations. The resources are made available, not only to reduce the risk that an adverse balance of payments or reserve position will develop and induce members to adopt measures harmful to their own prosperity or the prosperity of other members, but also to help members correct an unfavorable balance of payments or reserve position if it does develop.

A third function of the Fund is to meet a long-term global need for the reserve assets with which members support their currencies. The Fund performs this function by allocating to members the reserve asset called the SDR (special drawing right), which they can use unconditionally as a supplement to their other holdings of reserve assets.

Much has been written about the origins of the Fund, but what lawyers call travaux préparatoires, or legislative history, is sparse and fragmentary. Special interest attaches, therefore, to two volumes that were published in 1980 in the series called The Collected Writings of John Maynard Keynes. Volume 25 is entitled Activities 1940–1944, Shaping the Post-War World: The Clearing Union. Volume 26 is entitled Activities 1941–1946, Shaping the Post-War World: Bretton Woods and Reparations.1 There is much material in these volumes of profound interest to lawyers who specialize in international economic or financial problems, but lawyers in the general field of international organization will find much to interest them in the views of this extraordinary man.

As early as the end of 1940, Keynes began to think of international economic reform, including monetary reform in particular, as a sequel to World War II. His first thoughts on the subject of postwar reform were in response to a request by Harold Nicolson of the U.K. Ministry of Information for a broadcast by Keynes as counterpropaganda to German ideas. Keynes was not enthusiastic, “but, if you press me, I will take my first moments of leisure to attempt a draft. …” 2 Lord Halifax, the British Ambassador in Washington, made a similar request, and Keynes promptly produced a draft that, after revision, provided the basis for a speech by Anthony Eden in May 1941.

On September 8, 1941, Keynes completed two documents, one entitled Post-War Currency Policy and the other Proposals for an International Currency Union.3 The latter document was published in revised form in 1943.4 It is, of course, one of the most remarkable documents of the twentieth century. Even an early version reminded one eminent economist of the spirit of Burke and Adam Smith.5 After publication of the plan, Keynes received a mass of correspondence, including a letter from another economist who greeted the plan as a masterly combination of the “clarity of Mill, the ingenuity of Ricardo and the wisdom of Marshall.” 6 This plan and H.D. White’s Preliminary Draft Outline of a Proposal for an International Stabilization Fund of the United and Associated Nations, 7 issued in final form on the same date, were the main inspiration for an international effort that culminated at the Bretton Woods Conference of July 1944 in the drafting and endorsement of the Articles of Agreement of the International Monetary Fund and the International Bank for Reconstruction and Development.

In the preface to his Proposals, Keynes prescribed five conditions to be satisfied if an international economic system was to prove durable.8 In view of Keynes’s attitude on some problems of international organization that are the subject of comment below, the first of these conditions deserves quotation:

There should be the least possible interference with internal national policies, and the plan should not wander from the international terrain. Since such policies may have important repercussions on international relations, they cannot be left out of account. Nevertheless in the realm of internal policy the authority of the Governing Board of the proposed institution should be limited to recommendations, or at the most to imposing conditions for the more extended enjoyment of the facilities which the institution offers.9

The second condition was that all countries should be able to belong to the organization regardless of the type and principle of their government and economic policy. Third, the management of the organization must be genuinely international, without preponderant power of veto or enforcement resting with any country or group, and the rights of smaller countries must be safeguarded. Fourth, the rights of countries to act at pleasure must be qualified to some extent, but countries must be able to withdraw if they conclude that the obligations of mem bership have become too irksome. Lastly, a plan must operate not only to the general advantage but also the long-term advantage of each participant, and none must be called on for a special sacrifice.10

As early as the draft of September 8, 1941, Keynes was concerned about three specific and interrelated problems of the organization of the Fund. One problem was that so ambitious a plan might be criticized because it would require from members of the Currency Union a greater surrender of their sovereignty than they were ready to concede. He thought that the surrender of some sovereignty was a measure of financial disarmament that would benefit all participating countries. In any event, countries would undertake the obligations of membership voluntarily, and would be able to terminate them by giving notice.

As discussions of the plan developed into negotiations, principally between the United Kingdom and the United States, Keynes became the champion of the retention by governments of certain prerogatives of sovereignty. On disciplinary powers in general, Keynes explained to his colleagues at home that, in the negotiations with White, the United Kingdom had emphasized the rights of members against the Fund, while the United States had stressed the importance of the powers that the Fund should have over its members.

Keynes described the British attitude on exchange rates as one that supported elasticity, while the United States gave more importance to stability. Elasticity meant greater freedom of action for members, and stability meant more freedom for the Fund to inhibit action by members. Keynes objected to the greater weight that White gave to the stability of exchange rates not only because the Fund might become the bastion of rigidity, but also because the imbalance between the authority of members and of the Fund would be rejected by Parliament as an intolerable sacrifice of national sovereignty.

In pursuit of elasticity, Keynes insisted, for example, that a member country must have the ultimate right to change the par value of its currency after consulting the Fund. Notwithstanding the objection by the Fund, the member should not be considered a violator of its international obligations, although it could risk losing its right to use the Fund’s financial resources.11 In order to make an unauthorized change in par value less likely, he negotiated inclusion in the Articles of a criterion, the necessity to correct a fundamental disequilibrium, that would compel the Fund to act “judicially” when deciding whether to concur in a member’s proposal to change the par value of its currency.12

Keynes was guided by the first condition 13 for success of postwar monetary arrangements in negotiating other aspects of the par value provisions. He was the author of part of a report to Ministers, dated February 7, 1944, on discussions in Washington.14 They were informed that on the elasticity of exchange rates, in which they would be particularly interested, the American representatives had been persuaded to depart widely from their original position. As one example of the agreement that had been reached, Keynes cited the fact that the Fund would not be able to withhold its concurrence in a proposal to change a par value “on the ground that the explanation of disequilibrium should be sought rather in the domestic, social or political policies of the applicant member, in which matters the Fund may not interfere.” 15 The first comma in this formulation is invested with enormous power. It would create three categories of matters in which the Fund would not be allowed to interfere. International policies would be within the purview of the Fund under the exchange rate provisions, but domestic economic policies, however misconceived and however dedicated a member was to them, would be beyond the competence of the organization.

A draft provision submitted jointly by the British and American delegations at Bretton Woods retained the comma, but very soon it disappeared without recorded explanation. The surviving categories were domestic social and domestic political policies. The probable explanation of the change is that the opponents of interference were confident that “social” and “political” could be applied with sufficient breadth to give them the safeguard they sought. Keynes made it clear that wage policy, for example, was “a domestic political issue which it is unwise to subject to rigid outside determination.” 16 The unpunctuated formulation remains to this day in the amended provisions of the Articles on exchange rates. The principles that the Fund must adopt for the guidance of the exchange rate policies of members under present and future exchange rate arrangements “must respect the domestic social and political policies of members.” 17

Keynes’s successful efforts to retain authority for members were not confined to exchange rates. He conducted much of this activity in the conviction that in international monetary matters laissez-faire economics was dead and beyond resurrection. He recognized that restoration of the convertibility of sterling was essential at some date, but that the transitional arrangements under which convertibility could be limited were to be terminable at the will of each member when it decided that it could dispense with the arrangements. No transitional period of defined length was established. Capital controls would be permanent. He foresaw, therefore, the perpetuation of exchange controls and the widespread centralization of exchange transactions as a governmental monopoly. The jurisdiction of the Fund to approve restrictions would be confined to restrictions on the making of payments and transfers for current international transactions, and would not extend to restrictions on capital transfers or the nonfinancial aspects of trade and other current account transactions. He attached much importance to this limitation of the Fund’s regulatory jurisdiction because he preferred nondiscriminatory import restrictions rather than devaluation if the United Kingdom faced severe balance of payments difficulties.18

This brief account of Keynes’s cautious attitude on the transfer of authority to the Fund must not give the impression that he was a reactionary on international organization. The document entitled Proposals for an International Clearing Union was a plan of extraordinary skill and statesmanship but above all imagination. Keynes saw it as a plan that was “the beginning of an entirely new stage in the economic organisation of the world.” 19 This encomium appeared in a fiery letter to a senior official of the U.K. Treasury who harried him with “Critical Observations.” Keynes wrote:

You make me feel again what I felt so often in the last twenty-five years: how fearfully and dangerously rash you cautious people are! Time after time during my active years the authorities have gone bald-headed straight into (what have seemed to me) plainly evident perils, because (so they have argued) it would have been incautious to adopt constructive measures or to do anything worth mentioning until after we knew for certain what we were in for. Time after time what I wanted to see done has happened in the end, but only after great misfortunes. Must this always be so? And must you use your gifts and your influence in this direction? 20

Keynes set forth the second specific problem of organization in the third draft of his plan dated December 15, 1941.21 This problem, which he described as the most difficult question, was to determine how much of the law of the Clearing Union should take the form of rules and how much should be left to discretion. The difference between this draft and the fourth draft, dated January 24-25, 1942,22 was that the passage in the earlier draft took the position that more must be settled by rules and by general principles than by the day-to-day discretion that would be appropriate for a national central bank. This conclusion was omitted from the next draft. The problem was discussed as follows:

If rule prevails, the liabilities attaching to membership of the system are definite, whilst the responsibilities of central management are reduced to a minimum. On the other hand, liabilities which would require the surrender by legislation of too much of the discretion, normally inherent in a government, will not be readily undertaken by ourselves or by the United States. If discretion prevails, how far can the ultimate decision be left to the individual members and how far to the central management? If the individual members are too free, indiscipline may result and unwarrantable liberties be taken. But if it is to the central management that the discretions are given, too heavy a weight of responsibility may rest on it, and it may be assuming the exercise of powers which it has not the strength to implement. If rule prevails, the scheme can be made more water-tight theoretically. But if discretion prevails, it may work better in practice. All this is the typical problem of any super-national authority. An earlier draft of this proposal was criticized for leaning too much to the side of rule. In the provisions below the bias is in the other direction. For it may be better not to attempt to settle too much beforehand and to provide that the plan shall be reconsidered after an initial experimental period of (say) five years. Only by collective wisdom and discussion can the right compromise be reached between law and licence.23

This discussion was omitted from subsequent drafts, perhaps because it led to the conclusion that the agreement should be reconsidered after a brief interval. Keynes continued to think about the problem, however, and he returned to it in the report to Ministers dated February 7, 1944, on the discussions in Washington between the British and American teams.24 These discussions led to agreement on a plan that began to look like the eventual Fund.

Once again, Keynes had changed his position on the contest between rule and discretion. He wrote that if an international organization was to assume the wide responsibilities that were contemplated for the Fund, it had to be given a considerable measure of authority and influence. It was alarming, however, to entrust any wide measure of discretion to a new body that necessarily would start without traditions and would be administered by a management of whose wisdom and impartiality there was no experience. Keynes wrote that:

Our object must be, therefore, to secure as much prior certainty as possible concerning the methods of those responsible for daily management, and to limit their initiative and discretion to cases where the rules and purposes of the institution are in risk of infringement, thus keeping them as an instrument, entirely passive in all normal circumstances, the right of initiative being reserved to the central banks of the member countries.25

The Americans, Keynes reported, had a different conception of the functions of the new organization. They would give the organization wide discretionary and policing powers, so that it would exercise something of the same “grandmotherly influence and control” 26 over central banks that they exercised over their domestic banks. The Americans, he continued, were eventually persuaded that their ideas were unacceptable and that member countries should have as much certainty as possible about what they had to expect from the organization and about the amount of facilities that would be at their full disposal.27

According to Keynes, in the draft plan as it then stood, all the technical matters at issue, except one, had been settled on the expert level.28 That one outstanding matter stemmed from the initial difference in the concepts of the two plans. Under the Clearing Union plan, members would bank with the Union, in which they would have accounts in terms of bancor as a new international unit of account.29 Under White’s Stabilization Fund, the institution would bank with members, holding accounts with their central banks on which the Fund could draw in the member’s currency, so that a new international unit would be unnecessary. White continued to favor the latter alternative because it would involve simpler legislation in the United States and would not create any impression of disrespect for the American dollar.30 This alternative prevailed, but the First Amendment of the Fund’s Articles created a new international unit, the SDR, although not in substitution for the Fund’s “bag of currencies.”

A by-product of the impression that all the difficult issues had been settled by means of rules formulated by experts was the conclusion that the organs of the Fund would have to make few decisions of fundamental importance. It was unnecessary, therefore, to require special majorities of the weighted voting power of members for more than a handful of decisions. This conviction began to disappear with the First Amendment, which gave the Fund discretionary authority of a novel kind in connection with international liquidity by empowering the Fund to allocate SDRs to its members. The desire to give the Fund flexibility so as to permit the evolution of the international monetary system, and even more the failure of the membership to agree on the direction that evolution should take, were responsible for investing the Fund with a broad range of discretionary powers under the Second Amendment and an explosion in the requirement of special majorities for the exercise of those powers.31

The third of the specific problems of organization on which Keynes dwelt was the character of the organs and management of the Fund. Much has been written of the controversies over these aspects of the organization that arose at the Inaugural Meeting of the Boards of Governors of the Fund and World Bank at Savannah, Georgia, in March 1946, and of Keynes’s bitter disappointment in the decisions that were taken.32 His position on most of these matters followed logically from his views on the retention of broad authority by members and the precise definition of the authority of the Fund. He was in favor, therefore, of part-time and modestly remunerated Executive Directors who would be senior officials in their own countries and, in meeting at intervals to take decisions on the policies of the Fund, would act with intimate knowledge of the views of their countries.

Before the Bretton Woods Conference, Keynes thought that, as the operation of the Fund would be largely automatic, a large and high-powered management would be unnecessary.33 However, by the time of the Savannah meeting, his view was that the daily business of the Fund, research, and the preparation for decisions would be undertaken by a staff of international civil servants under “a well remunerated Managing Director of the highest possible qualifications.” 34 Keynes thought the decisions taken at Savannah had changed the character of the Fund as he had foreseen it, and that, at least in its early years, it was unlikely to be the nucleus of a super-central bank.

Keynes nevertheless took a new view of what happened, largely because of the establishment by the United States, in accordance with its Bretton Woods Agreements Act, of the National Advisory Council on International Monetary and Financial Problems.35 Its function was to supervise, at cabinet level, the participation of the United States in international monetary and financial activities. Keynes saw in this action an intention of the United States to participate actively in international economic organization after the war, and to do so principally through the Fund and the World Bank. He saw in the change from technical to political tasks the explanation of the insistence by the United States on Washington, in opposition to Keynes’s preference for New York, as the site of the two institutions. He concluded that the United States had been determined, for the same reason, to have full-time Executive Directors and Alternates of the highest caliber and correspondingly remunerated. He was somewhat contrite about not having grasped this strategy sooner and about his stubborn opposition to it, although he found exculpation in the failure of the Americans to dispel his apprehensions. He was able to explain this failure also: perhaps they had not been fully aware of their own intentions and perhaps they did not want to give much publicity to them.36

On Legal Interpretation

Keynes was affected by other apprehensions after the Bretton Woods Conference. The worst resulted from what he considered a mistake in the drafting of two provisions of the Articles that created a contradiction between them. Article VIII, Section 2(a), which is now considered the provision that establishes market convertibility, requires a member to refrain from imposing restrictions on the making of payments and transfers for current international transactions, unless restrictions are approved by the Fund or are authorized by the transitional provisions of the Articles or the scarce currency clause. Article VIII, Section 4, to which the label of official convertibility became attached, requires the monetary authorities of member A to convert balances of its currency held by member Z with gold 37 or the currency of member Z if the balances are the proceeds of recent current international transactions or if conversion is needed for making payments of this kind. This obligation is subject to certain qualifications, one of which is that member A is entitled to use the Fund’s resources for the conversion.

Soon after the Bretton Woods Conference, Dennis Robertson, who, in Keynes’s opinion, was the outstanding member of the British delegation and who later became Professor of Political Economy at Cambridge University, wrote to Keynes that in his, Robertson’s, view, Article VIII, Section 4 was of little benefit as a supplementary obligation on convertibility. His reason was that the master obligation was in Article VIII, Section 2(a), and it was not subject to the qualification that it was in abeyance if a member was unable to use the Fund’s resources.38 This opinion shocked Keynes. He protested that it made no sense of Article VIII, Section 4, in which the qualification had been incorporated as the result of laborious effort by Keynes. His thinking was dominated by the conviction that the United Kingdom would continue its exchange control and official monopoly of all exchange transactions. If the United Kingdom had to provide the foreign exchange to enable foreign exporters to transfer the sterling proceeds of their exports, the United Kingdom’s monetary reserves would be drained if they were not protected by a qualification similar to the one that applied to official convertibility.39 The correct reading of the provisions was that the United Kingdom must not interfere with the foreign exporter’s disposition to his monetary authorities of the sterling proceeds he had earned. If the monetary authorities wished, they could get the proceeds converted subject to the qualification that the United Kingdom was entitled to use the Fund’s resources. Robertson’s view was that the United Kingdom did not have to monopolize exchange transactions, but if it did and failed to provide the exporter with his own currency in exchange for his sterling proceeds, the United Kingdom was imposing a proscribed restriction.40

The debate between Keynes and Robertson became somewhat heated on the side of Keynes, and was prolonged for more than a year. Other members of the former British delegation intervened. Later, Keynes took up the problem with White and his colleagues and induced the Chancellor of the Exchequer to write about it to Henry Morgenthau, the American Secretary of the Treasury.41 In the course of increasingly intricate debate, Robertson persuaded Keynes that the British interest was better served by Robertson’s view, but Keynes never conceded that the provisions as written could be interpreted in accordance with that view. The U.S. Treasury, arguing that there was no inconsistency between the provisions, took the same position as Robertson. No action was ever taken as a result of the Chancellor’s approach to the Secretary.42

The Fund was never aware of the controversy. Its understanding of Article VIII, Section 2(a) and its practice have been in conformity with Robertson’s view. The provision, applied in this way, has been the lodestar for progress toward the multilateral system of payments and transfers for current transactions among members that is a purpose of the Fund, while no transaction has ever been requested under Article VIII, Section 4. That provision lingers on in desuetude. Even monetary authorities wishing to exchange accumulated balances have been content to do so through the mechanism of market convertibility.

In considering the problem as one of interpretation, Keynes found no enlightenment in the test of intention. He thought that only four or five persons at most had been involved in the problem at Bretton Woods, and he declared that the question had never been raised in a main committee. Both he and White had been unaware of the issue. In fact, there had been a discussion in a main committee. It was explained, without dissent, that if a member centralized all exchange transactions, it would be imposing a restriction unless it provided the foreign exchange that was necessary for transfers of the proceeds of recent current transactions.

In the circumstances as Keynes saw them, he thought that the legal problem was the interpretation that should prevail when two provisions seemed to contradict each other. He supposed that lawyers would give the benefit of the doubt to an interpretation that would avoid the contradiction. In a letter dated February 1, 1945, from the Chancellor to the Secretary of the Treasury, which Keynes drafted, the problem was posed as one of ambiguity and probable inconsistency. The Chancellor wrote:

I expect you will share my feeling that, in the case of a text prepared so hastily as the Final Act yet so difficult to amend, it would be a bad and dangerous precedent to seek by subtle interpretation to impose any obligation which did not appear, clearly and unambiguously, on the face of the document, or which had not been understood and accepted by all those who signed it.43

The Chancellor did not propose an amendment, but he wanted to assure Parliament that it was not being asked to accept any obligation beyond what clearly appeared on the face of the document. The problem would have to be solved satisfactorily before the United Kingdom would undertake to make sterling convertible.

The Chancellor did not present the problem to Parliament, and the United Kingdom undertook to perform the obligations of convertibility in February 1961 without mentioning the problem. The United Kingdom did not raise the issue in the Fund at any other time; nor did any other member. Earlier, Keynes had proposed an amendment to White. He recalled that the Conference Secretariat had been entrusted with the function of correcting errors in the text because everyone knew that inevitably there would be drafting errors and inconsistencies as a result of the haste in which the complicated Final Act had been drafted.44 The amendment that Keynes was proposing involved a major issue of principle, however, and it could not be reduced to the rank of a drafting error or inconsistency. The published documents of the Bretton Woods Conference do not include any authority for the Secretariat of the kind that Keynes recalled, but the documents may not be complete. The Drafting Committee, however, was given authority to make changes “in the interests of form and internal consistency.” 45 Keynes was probably recalling this committee’s terms of reference.

Two other aspects of Keynes’s thinking about the problem should be mentioned. Keynes was bothered by what he regarded as one of the implications of Robertson’s position. If Robertson was right, the Articles would create rights for nonresident private persons against the British exchange control authorities. Keynes rejected such a result as contrary to the philosophy of the Articles, which was to create rights and obligations among member states.46 This view was a misunderstanding if Keynes meant that private parties had rights that they could pursue against members. The only rights created by the Articles are those of the organization, and of members, even when the activities of private persons are affected. The Fund’s Rules and Regulations provide a procedure only for complaints by a member that another member is not complying with its obligations concerning exchange control.47

Second, Keynes saw no safeguards for a member in the provision on market convertibility as interpreted by Robertson. If a member was faced with balance of payment difficulties, it could devalue or request the Fund to approve restrictions. Keynes wanted the member to be entitled to decide which course it would follow. He had negotiated a final discretion for a member to change the par value of its currency. If the member preferred restrictions to devaluation, which Keynes thought was likely to be true for the United Kingdom, there was no assurance in the provision that the member’s preference would prevail. The provision did not even include a criterion for the exercise of the Fund’s discretion on whether to approve restrictions that could be compared to the criterion of necessity to correct a fundamental disequilibrium that the Fund had to observe when reacting to a proposal to change a par value.

Keynes had more success with another problem of interpretation. He addressed to his colleagues a critique of the bill that, with some revision, became the U.S. Bretton Woods Agreements Act.48 Section 13 of the statute directed the Governor and Executive Director appointed by the United States to obtain an official interpretation by the Fund in response to the question whether

its authority to use its resources extends beyond current monetary stabilization operations to afford temporary assistance to members in connection with seasonal, cyclical, and emergency fluctuations in the balance of payments of any member for current transactions, and whether it has authority to use its resources to provide facilities for relief, reconstruction, or armaments, or to meet a large or sustained outflow of capital on the part of any member.49

If the interpretation answered any part of this question in the affirmative, the Governor was to propose an amendment of the Articles that would negate the interpretation.50 The provision was the result of the suspicion or fear in some quarters in the United States, including the banking community, that there might be inappropriate use of the Fund’s resources, and that the sound banking principles that the World Bank was likely to follow would be circumvented by charitable administration of the Fund.

Keynes was not happy about the reference to relief and reconstruction, even though Article XIV, Section 1 declared that the Fund was not intended to provide facilities for relief or reconstruction or to deal with international indebtedness arising out of the war. In his opinion the Articles should not be interpreted to mean that a country engaged in relief or reconstruction or in repaying war indebtedness would be debarred from using the Fund’s resources unless these purposes were fully financed from other sources. It was not really possible to say which resources were being used to finance any given transaction or whether a transaction was requested because relief or reconstruction was being undertaken. Nevertheless, he would not be disturbed by an interpretation to the effect that a member must find other means of financing a substantial deficit in its balance of payments caused directly by relief or reconstruction.51

The rest of the question, however, was objectionable to him, and he could find nothing in the Articles to support it. Nobody could know beforehand whether a cyclical fluctuation had begun. Moreover, an unfavorable balance of payments might be attributable partly to this cause and partly to other causes, and there would be no way to quantify the deficit in terms of each cause. It was also unreasonable to apply the proposed criterion. A member’s difficulties might be the result of numerous factors that could not be regarded as “cyclical,” yet it was the purpose of the Fund to give the member some elbow room and some time in which to make the necessary adjustments. Keynes was not concerned about the word “seasonal,” because it would apply to demonstrably short-term needs, but the threat implicit in “cyclical” was that requests might be turned away without justification in other circumstances because a longer period of use of the Fund’s resources was foreseen. The only hope that Keynes saw for a reasonable accommodation was an extensive application of “emergency fluctuations.” 52

Keynes’s solution for placating American opinion was a declaration that the Fund’s resources were to be used not for permanent or quasi-permanent assistance, but for temporary fluctuations, without prescribing what the causes of these fluctuations might be. The Fund struggled to formulate an interpretation in response to the American request. Ultimately, on September 26, 1946, the Fund adopted the following interpretation, which accords with Keynes’s response to the extent that the interpretation emphasizes temporary assistance and avoids mention of the specific causes of a balance of payments difficulty:

The Executive Directors of the International Monetary Fund interpret the Articles of Agreement to mean that authority to use the resources of the Fund is limited to use in accordance with its purposes to give temporary assistance in financing balance of payments deficits on current account for monetary stabilization operations.53

The problems of interpretation involving market convertibility and the proper use of the Fund’s resources have been linked by history. In time, the policy of members, at least of those responsible for substantial shares of world trade and payments, was directed away from exchange control and toward free exchange markets. This development was an important reason for the dormancy of official convertibility. The policy also explains why it became apparent that the interpretation of the use of the Fund’s resources was too rigid in its exclusive emphasis on the current account. Moreover, the interpretation was largely unworkable when a member had an immediate need for resources. It might be impossible to determine whether the imbalance was on current or on capital account until well after the event. Almost 15 years after the interpretation of 1946, the Executive Board decided that it “does not preclude the use of the Fund’s resources for capital transfers in accordance with the provisions of the Articles, including Article VI.” 54 The Executive Board took this decision “by way of clarification” of the original interpretation, which made it unnecessary to repudiate it or appear to be critical of it.55 The special mention of Article VI emphasized flexibility because the provision precludes a net use of the Fund’s resources to meet an outflow of capital only if the outflow is “large or sustained” without attempting to define these movements.56 There is, of course, another link between the two interpretations offered by Keynes. Both are applications of the philosophy that favors the rights of members against the organization.

Keynes’s view prevailed on a third problem of interpretation, this time of the World Bank’s Articles. There were opponents of the Fund in the United States who nevertheless welcomed the World Bank. This attitude led to the inclusion of Section 12 in the United States Bretton Woods statute, which instructed the Governor and Executive Director of the Bank appointed by the United States to obtain promptly an official interpretation as to the Bank’s “authority to make or guarantee loans for programs of economic reconstruction and the reconstruction of monetary systems, including long-term stabilization loans.” 57 If the interpretation was negative, the Governor was to propose an amendment for the purpose of explicitly authorizing the Bank, “after consultation with the Fund,” to make or guarantee such loans.58

There is reason to believe that the U.S. Government was not enthusiastic about this authority because of possible confusion with the functions of the Fund, but there was powerful support in favor of the Bank. The American Bankers Association, for example, proposed that the Articles of the Bank should be amended to make the stabilization of currencies and the removal of exchange controls the task of the Bank. The Executive Directors of the Bank adopted an affirmative interpretation. Their main argument for it was that loans for programs of economic reconstruction and the reconstruction of monetary systems, including long-term stabilization loans, were consistent with Article III, Section 4(vii) of the Articles and the purposes of the Bank. The provision declares that “loans made or guaranteed by the Bank shall, except in special circumstances, be for the purpose of specific projects of reconstruction or development.” The crucial clause was, of course, “except in special circumstances.”

Keynes had no doubt that the interpretation should confirm the Bank’s authority. His opinion is not surprising because the provision quoted above was what remained of a much more explicit proposal by the United Kingdom delegation at Bretton Woods:

In exceptional circumstances, however, the Bank, acting in agreement with the International Monetary Fund, may make or guarantee a loan which provides the borrowing country with gold or foreign exchange for the purpose of establishing its exchanges and allowing a breathing space for the recovery of its economy and the balancing of its international payments.59

Keynes explained that the deliberately obscure language of Article III, Section 4(vii) of the Bank’s Articles had been preferred because of the advice of Representative Wolcott, a member of the U.S. delegation, that Congress would not support this kind of authority for the Bank.60 But Congress did support it when the Bretton Woods legislation was on the congressional agenda.

The spirit of the interpretation coupled with the crucial clause in the provision has been responsible for policies of the Bank that have a more obvious relationship to adjustment of the balance of payments of its members than the traditional project loans of the Bank.


Nothing need be said here about the gigantic stature of John Maynard Keynes as an economist, but his reactions to some legal problems of international organization and the interpretation of economic treaties are now revealed by Volumes 25 and 26 of his Collected Writings. There is more to discover in the volumes that is of interest to the international lawyer. There is evidence that Keynes was aware of three interrelated principles that are as fundamental today as when he was moved by them: the influence of an international organization depends not on fiat but on the confidence that its practice inspires; confidence will not flourish unless the rule of law is observed in the development of practice; and for confidence to grow, interpretation must be consistent both with legal principles and with the promotion of progressive economic objectives.

It was to be expected that the role of Keynes in affairs of state would lead him to raise issues with broader implications than the specific problems with which he was concerned. When, for example, technical aspects of the exchange rate provisions of the Fund’s Articles were negotiated, he recognized the issue of the ideal division of authority between organizations and sovereign states. Although international organization was not a new phenomenon when the Fund and Bank were created, they were among the boldest adventures in international regulation and cooperation on aspects of national economies that had been regarded as exclusively within the domestic jurisdiction of states. The charters of these two organizations were extraordinary in their ambition, but they have been extraordinary also in their influence as models for other international organizations.

This Chapter demonstrates that Keynes was cautious about conferring authority on the Fund and the Bank, whether in the form of specific powers or less defined discretions. This attitude was modified somewhat as the negotiations progressed toward agreement. What never varied from first to last was his advocacy of a more rational economic order for the world. The volumes must be read to catch the spirit, even the passion, of this advocacy and to grasp the effect it must have had on governments, colleagues, and the public. Keynes’s reputation as an economist of genius has overshadowed his role as a creator of modern international organization.

Note.—This essay was published originally in the Connecticut Law Journal, Vol. 14, No. 1 (Fall 1981), pp. 1-21.

Keynes, Collected Writings, Vols. 25 and 26. Other invaluable sources of information are Roy Harrod, The Life of John Maynard Keynes (London: Macmillan, 1951); History, 1945–65, Vols. I, II, and III; Anthony P. Thirlwall, ed., Keynes and International Monetary Relations (London: Macmillan, 1976); Procs. and Docs.

Keynes, Collected Writings, Vol. 25, p. 2.

Keynes, ‘Post-War Currency Policy” (September 8, 1941), reprinted in Keynes, Collected Writings, Vol. 25, pp. 21–33; Keynes, Proposals for an International Currency Union (September 8, 1941), ibid., pp. 33–40.

Keynes drafted several revisions of the Currency Union proposals. The first published document was issued by the British Government as a White Paper in 1943, “Preface,” Proposals for an International Clearing Union, Cmd. No. 6437 (London: H.M. Stationery Office, April 1943), excerpted in Keynes, ibid., pp. 233–35.

Letter from D.H. Robertson to J. M. Keynes (November 27, 1941), Keynes, ibid., p. 67.

Letter from G. Shove to J. M. Keynes (April 8, 1943), reprinted in Keynes, ibid., p. 236.

A copy of White’s proposal was sent to London by Sir Frederick Leith-Ross on July 9, 1942, and forwarded to Keynes by Sir Frederick Phillips. Keynes received the draft on July 22, 1942, and enclosed a discussion of the White scheme in writing to Sir Richard Hopkins and Sir Frederick Phillips, Keynes, ibid., p. 157.

Harry Dexter White joined the staff of the U.S. Treasury Department in 1934. He subsequently served as Assistant Director in the Division of Research and Statistics, Director of the Division of Monetary Research, Assistant to the Secretary, and Assistant Secretary of the Treasury.

“Preface,” Proposals for an International Clearing Union, Cmd. No. 6437 (London: H.M. Stationery Office, April 1943).

Ibid., p. 234.

Ibid., p. 235.

Joseph Gold, “Unauthorized Changes of Par Value and Fluctuating Exchange Rates in the Bretton Woods System,” American Journal of International Law, Vol. 65 (1971), pp. 113 and 116.

Article IV, Section 5(a), original.

“Preface,” Proposals for an International Clearing Union, Cmd. No. 6437 (London: H.M. Stationery Office, April 1943), p. 234.

Memorandum by the Minister of State, The Proposal For an International Monetary Fund, Washington Conversations, art. VII, Annex A, excerpted in Keynes, Collected Writings, Vol. 25, p. 403.

Ibid., p. 403.

Letter from J. M. Keynes to F. D. Graham (December 31, 1943), reprinted in Keynes, Collected Writings, Vol. 26, p. 35.

Article IV, Section 3(b). The formulation appears in the Fund’s decision of March 2, 1979 on the conditional use of its resources. See Joseph Gold, Conditionality, IMF Pamphlet Series, No. 31 (Washington, 1979), pp. 22–23. The formulation would apply also in the operation of a par value system if it should be called into existence. (See Schedule C, paragraph 4.)

Keynes, Collected Writings, Vol. 26, p. 17.

Letter from J. M. Keynes to Sir Richard Hopkins (January 22, 1942), reprinted in Keynes, Collected Writings, Vol. 25, p. 103.

Letter from J. M. Keynes to Sir Richard Hopkins (January 22, 1942), ibid., pp. 102103. He was firm but more gentle with a distinguished economist who had written a commentary on the Articles of Agreement soon after they were drafted:

“You are like the investors who refuse to buy railway shares because they do not know whether the railways are going to be nationalized or not, yet nevertheless are prepared to agree that if they are nationalized, the shares will be worth more, and that if they are not nationalized, the shares will be worth more. All the same, they will not buy until they know for certain which alternative is going to come to pass.”

Letter from J. M. Keynes to J.V. Robinson (September 9, 1944), reprinted in Keynes, Collected Writings, Vol. 26, pp. 129–32.

Proposals for an International Currency Union (December 15, 1941), reprinted in Keynes, Collected Writings, Vol. 25, pp. 68–94.

Plan for an International Currency (or Clearing) Union (January 25, 1942), reprinted in ibid., pp. 108–39.

Ibid., pp. 116–17.

Ibid., pp. 404–405.

Ibid., p. 404.


Ibid. As late as May 1944, the Governor of the Bank of England was proposing that the power and influence of the Fund should not derive from rigid rules and fixed limits, but should grow gradually from its right to control its facilities. Keynes resisted on the ground that this approach would mean a total revision of the Joint Statement by Experts on the Establishment of an International Monetary Fund of April 1944, which was to be turned into the text of a treaty at Bretton Woods, Keynes, Collected Writings, Vol. 26, pp. 46–47.

Keynes, Collected Writings, Vol. 25, p. 393. In a speech to the House of Lords, Keynes stated: “I dare to speak for the much abused so-called experts. I even venture sometimes to prefer them, without intending any disrespect, to politicians. The common love of truth, bred of a scientific habit of mind, is the closest of bonds between the representatives of divers nations.” Speech by Lord Keynes, House of Lords (May 23, 1944), excerpted in Keynes, Collected Writings, Vol. 26, pp. 20–21.

The term “bancor” was suggested by Keynes in Proposals for an International Currency Union (December 15,1941), reprinted in Keynes, Collected Writings, Vol. 25, pp. 68–94, in which he states: “The fundamental provision of the scheme is the establishment of a Currency Union based on international bankmoney, called (let us say), bancor, fixed (but not unalterable) in terms of gold and accepted as the equivalent of gold by the British Commonwealth and the United States and all members of the Union for the purpose of settling international balances,” ibid., p. 72.

History, 1945–65, Vol. III, pp. 78–82.

Joseph Gold, Voting Majorities in the Fund: Effects of the Second Amendment of the Articles, IMF Pamphlet Series, No. 20 (Washington, 1977), p. 16.

Keynes, Collected Writings, Vol. 26, pp. 217–38.

Ibid., p. 55.

Keynes, The Savannah Conference on the Bretton Woods Final Act, reprinted in ibid., p. 221.

Ibid., pp. 196–98.

Ibid., pp. 232–34.

The Second Amendment of the Articles substituted SDRs for gold.

Letter from D.H. Robertson to Lord Keynes (July 31, 1944), reprinted in Keynes, Collected Writings, Vol. 26, pp. 114–17.

Letter from Lord Keynes to D.H. Robertson (August 9, 1944), ibid., pp. 117–22.

Letter from D.H. Robertson to Lord Keynes (August 29, 1944), ibid., pp. 124–26.

Letter from Sir John Anderson, Chancellor of the Exchequer, to H. Morgenthau (February 1, 1945), ibid., pp. 175–77.

Ibid., pp. 182–96.

Ibid., p. 176.

Article 79 of the Vienna Convention on the Law of Treaties begins: “Where, after the authentication of the text of a treaty, the signatory States and the contracting States are agreed that it contains an error, the error shall, unless they decide upon some other means of correction, be corrected. …” The document is reprinted in T. Elias, The Modern Law of Treaties (Netherlands: A.W. Sijthoff, International Publishing Co., 1974), p. 67.

Procs. and Docs., p. 598.

Keynes, Collected Writings, Vol. 26, pp. 118–22.

Rule H-2, Rules and Regulations, By-Laws, Rules and Regulations, 37th (January 1, 1981).

Bretton Woods Agreements Act, Public Law 79-171, 59 Stat. 512 (1945).

Ibid., sec. 13(a).

Ibid., sec. 13(b).

J. M. Keynes, Bretton Woods, reprinted in Keynes, Collected Writings, Vol. 26, pp. 199202.


Procs. and Docs., p. 196.

Decision No. 1238-(61/43), Selected Decisions, 9th (1981), p. 17.


Article VI, Section 1(a).

Bretton Woods Agreements Act, Public Law 79-121, sec. 12, 59 Stat. 516.


Procs. and Docs., p. 196.

J. M. Keynes, Bretton Woods, reprinted in Keynes, Collected Writings, Vol. 26, p. 198.

    Other Resources Citing This Publication