Chapter 7: Amending the Articles (1967–68)
- International Monetary Fund
- Published Date:
- February 1996
The Most Difficult Discussions and negotiations still lay ahead. The Outline had intentionally been couched in general terms. Now agreement was needed on the precise language that would be needed in the amendments to the Articles of Agreement and to the By-Laws and the Rules and Regulations as well, to make the new facility part of the machinery of the Fund and to put into effect the various modifications in the rules and practices of the Fund. Many of the issues involved were in the province of international law. The General Counsel has described elsewhere some of the legal problems presented.1
The Deputies of the Group of Ten (under the chairmanship of Mr. Ossola, whom they had elected in September 1967 to succeed Mr. Emminger) continued to meet during the winter of 1967 and the spring of 1968. But they acknowledged that the Board of Governors had entrusted the Executive Directors with the task of drafting amendments on the basis of the Outline, and that their role was to help the Executive Directors to reach agreement in the event of conflicting opinions. At the request of the eec countries, the Finance Ministers and Central Bank Governors of the Group of Ten met in Stockholm at the end of March 1968 to discuss a number of continuing differences. These differences were resolved at that meeting. The Executive Directors then combined the various draft amendments into a final draft, called the “proposed amendment,” for submission to the Board of Governors.
The Fund’s Task
A comparative glance at the Outline and at the Articles as they were amended suggests what was involved.2 The relatively short Outline was translated into 13 new Articles (Articles XXI through XXXII to follow the original Articles I to XX and an Introductory Article to precede Article I); Schedules F through I were added to the original Schedules A through E; and substantial changes were made in several of the original Articles. In order to make the new facility for special drawing rights3 operative, provisions had to be drafted for many topics that had not been specified in the Outline. Provision had to be made, among other things, for a Special Drawing Account separate from the Fund’s traditional mechanism, now to be called the General Account; for specifying the technique by which members could become participants in the Special Drawing Account; and for administering the two Accounts and indicating the connection between them. Details also had to be supplied specifying how the Fund would apply the suggested criteria of balance of payments positions and reserve holdings when it designated participants to encash SDRs, and how reconstitution of SDRs would be achieved. Terms like currency convertible in fact, which had been used in the Outline to refer to what a participant would receive for its SDRs, had to be defined. The exchange rates that would apply to transactions involving SDRs had to be determined.
All these provisions were meticulously drafted in four to five months, beginning late in 1967. The staff prepared a number of drafts of a proposed amendment, as well as many papers on individual topics to explain how the suggested provisions would operate, and worked very closely with the Executive Directors in their ensuing consideration of the draft amendments. The General Counsel and the Economic Counsellor and other staff of the Legal and Research Departments carried out these staff functions, assisted by members of the staff of other departments.
The Executive Directors began to consider the text of a proposed amendment on December 1, 1967. Before the discussions were finished, on April 16, 1968, they had devoted 74 sessions and nearly 170 hours to a section-by-section, even word-by-word, deliberation of each provision. As in the drafting of the Outline, the Executive Directors and Alternate Executive Directors, individually and collectively, played an extremely active role. They devoted themselves to clarifying the implications of possible alternative features, to examining the nuances of different terms and expressions, to agreeing on compromise provisions, and to suggesting specific language. Mr. Saad continued to express his disapproval of an 85 per cent voting majority, and he reserved his position on the role of the Executive Directors and the Managing Director in the decision-making process to be set up for the new facility. Some of the provisions proposed as amendments to the Articles were based on practices and policies that had evolved in the Fund’s regular transactions. Others were based on the original Articles. Still other provisions deliberately departed from the original Articles.4 An even finer net than had been used in drafting the Outline was used to filter out language that could prejudice the compromise reached among the disagreeing parties. For instance, where the Outline had referred to “special drawing rights and other reserves,” such expressions as “gross reserves” or “reserves” were, for the most part, avoided in the Articles when those concepts included special drawing rights.
Defining Currency Convertible in Fact
Illustrative of the care taken in drafting the amendments is the attention given to the term currency convertible in fact. When the Outline was drafted, this term was taken from the provisions in the General Arrangements to Borrow. There it had been used in the provisions governing repayment by the Fund of any loans made to it by participants in the Arrangements. The aim had been to set standards of convertibility for the currencies used by the Fund in repayments under the Arrangements that were stricter than those for the currencies of members that had assumed the obligations of Article VIII. In the late 1950s and early 1960s the Fund had formulated standards for determining which exchange restrictions it would approve when a member wished to assume the obligations of Article VIII.5 Once a member had met these standards, its currency was considered “convertible.” However, even a currency that was convertible in the sense that the member was fulfilling the obligations of Article VIII might be subject to certain restrictions, for instance, restrictions on current transactions that had been approved by the Fund or restrictions on capital transfers that did not require the Fund’s approval.
Under the General Arrangements to Borrow, it was intended that the Fund should not be able to repay loans in a currency so restricted. Hence, the term currency convertible in fact was coined as the Fund was, in effect, gradually evolving different concepts of currency convertibility.6 The term had not been defined in the decision setting forth the General Arrangements in the belief that it would be easy to recognize such a currency without a definition.
Sharpening the Definition
The phrase currency convertible in fact was adopted for the Outline and for the amendments for the same reason that it was used in the General Arrangements—because of the conviction that a transferor of SDRs should receive a currency that met certain standards of convertibility not necessarily attained by a currency that was convertible under Article VIII. As the drafting of the amendments progressed, it became obvious that the concept would have to be sharply defined. A transferor of SDRs had to be assured that it could obtain, directly or indirectly, the currency it needed; therefore, some procedure had to exist for converting promptly, and with a minimum of inconvenience, the currency received into the currency wanted. At the same time, the transferee had to have some option as to which currency it would provide to the transferor. Thus it was important to make sure that the transferor would receive “equal value” for the SDRs it surrendered regardless of which currency was provided to it. This “principle of equal value” required that, in the determination of the quantity of convertible currency to be provided against SDRs, account had to be taken of the exchange rate at which this quantity of currency could be sold. This is why the concept of currency convertible in fact as eventually defined in Article XXXII (b) was intertwined with the provisions for determining appropriate exchange rates as eventually specified in Article XXV, Section 8.
Initially, the staff had in mind that there would normally be only one central currency (under Article XXXII (b) (1)), probably the U.S. dollar, and a number of currencies (under Article XXXII (b) (2)) that would be convertible into that currency. But after several days of discussion and the preparation of separate technical papers on possible procedures for obtaining specific currencies against SDRs and on exchange rates for transactions in SDRs, it was decided to widen the definition of currency convertible in fact so as to include more than one central currency. Some members of the Executive Board, especially Mr. Mentré, were eager to allow for the possibility that at least a few currencies—those that were readily obtainable and usable in international financial transactions—would serve as basic reference currencies. In the view of the French authorities there was what they termed an “asymmetry” in the present international monetary system, where the dollar was the “fixed star,” an asymmetry that they believed should not be cemented into the SDR scheme.
A system of interconvertible currencies, later currencies identified in Article XXXII (b) (1), was eventually agreed. In the amended Articles, Article XXXII (b) thus defined currency convertible in fact as follows:
(1) a participant’s currency for which a procedure exists for the conversion of balances of the currency obtained in transactions involving special drawing rights into each other currency for which such procedure exists, at rates of exchange prescribed under Article XXV, Section 8, and which is the currency of a participant that
(i) has accepted the obligations of Article VIII, Sections 2, 3, and 4, or
(ii) for the settlement of international transactions in fact freely buys and sells gold within the limits prescribed by the Fund under Section 2 of Article IV; or
(2) currency convertible into a currency described in paragraph (1) above at rates of exchange prescribed under Article XXV, Section 8.
A transferee of SDRs might determine which currency within this definition it would provide to the transferor. But the amended Articles stated the principle that the transferor must receive the same value whatever currency was provided and whichever participant provided it. Thus, Article XXV, Section 8, on exchange rates read:
(a) The exchange rates for operations or transactions between participants shall be such that a participant using special drawing rights shall receive the same value whatever currencies might be provided and whichever participants provide those currencies, and the Fund shall adopt regulations to give effect to this principle.
(b) The Fund shall consult a participant on the procedure for determining rates of exchange for its currency.
(c) For the purpose of this provision the term participant includes a terminating participant.
Accordingly, if two currencies had the same par value but one was at a discount and the other at a premium in the market, the transferee of SDRs would have to provide more units of the former currency and fewer of the latter than it would have to provide on the basis of par values.
The word interconvertible was used in the Executive Directors’ report to the Board of Governors on the proposed amendment but was not incorporated into the Articles. The word meant that balances in a currency of the first category (Article XXXII (b) (1)) obtained in a transaction involving SDRs had to be convertible, at rates of exchange prescribed under Article XXV, Section 8, into any other currency of the first category that the transferor of SDRs wanted. The obligation to ensure conversion fell on the participant that issued the currency concerned; it was not satisfied by directing the transferor to the exchange market. In other words, if country A wanted to transfer SDRs for U.S. dollars and country B, the transferee, provided sterling, the United Kingdom would have to convert the sterling into U.S. dollars; or if country B provided French francs, France would have to convert them into U.S. dollars.
Other currencies could qualify as convertible in fact of the second category, under Article XXXII (b) (2). These currencies had to be convertible by the issuer into at least one currency of the first category at rates of exchange prescribed under Article XXV, Section 8. The difference between currencies of the two categories was that every currency of the first category had to be interconvertible with all other currencies of the first category. Currencies of the second category might be convertible into various currencies of the first category, but convertibility into a single currency of the first category sufficed. Inter-convertibility was not necessary.
Stockholm Meeting of the Group of Ten
Early in March 1968 the monetary officials of the countries of the eec requested that the Finance Ministers and Central Bank Governors of the Group of Ten meet again. The French authorities, in particular, were distressed because the draft amendments seemed to be going beyond the dictates of the Outline. Special drawing rights, in the opinion of Mr. Debré (France), were not being made the supplementary credit that the French had thought would be useful but were being made into a “money.”
What especially alarmed the French authorities, however, was the sharp deterioration that had occurred in the international monetary situation. The external payments deficits of the United Kingdom and the United States had grown larger than ever in 1967, and the payments surplus of continental Europe had remained sizable. Not only had the U.K. current account position worsened in 1967, but short-term capital had moved out of sterling in mammoth amounts, and sterling had had to be devalued in November 1967. Even after devaluation, the U.K. balance of payments had not begun to show much, if any, improvement, and sterling was still in trouble.
It was the serious worsening in the U.S. position, however, that was most worrisome. With an upsurge of imports into the United States late in 1967 and early in 1968, the U.S. payments deficit had become unusually large, and in the aftermath of the devaluation of sterling, speculative pressures had shifted to the dollar. On January 1, 1968, the U.S. authorities had announced stricter and broader measures of financial restraint, but, although these measures had had some effect, the deficit in the first quarter of 1968, at an annual rate of about $2 billion, remained unsatisfactory in light of the requirements of the international monetary situation and of the U.S. goal to bring the balance of payments to equilibrium, or close to equilibrium, in 1968.7 Less than two weeks before the ministerial meeting of the Group of Ten was to take place, the situation became acute. Renewed movements of funds out of dollars and into continental currencies and gold brought about the end of the Gold Pool on March 18, 1968—thereby cutting off the official supply of gold to private buyers—and the establishment of a two-price system for gold.8
The heavy strains to which the international monetary system was subjected during these months had put international monetary cooperation to its severest test in a long time.
Such were the circumstances in which the Finance Ministers and Central Bank Governors of the Group of Ten met in Stockholm on March 29 and 30, 1968, under the chairmanship of Mr. Krister Wickman, Minister of Economic Affairs of Sweden. The Managing Director took part in the meeting, and most of the Executive Directors for the countries of the Group of Ten were present.
Mr. Debré pointed out that the strains in the international monetary system, especially pressures on the two reserve currencies, which the French authorities had been fearing for some time were now materializing. He urged once more that gold, rather than national currencies, be the basis of the monetary system and that gold be immediately revalued.
Mr. Debré also protested several features of the SDRs as they were developing in the discussions of the draft amendments, features which, he said, contradicted the understandings reached by the Group of Ten in London in July and August 1967 and which had been written into the Outline. The SDRs were becoming more of a replacement for gold and less of a supplementary credit. Being considered, for instance, were suggestions that holders other than participants might deal in SDRs; that participants that had voted against or opted out of an allocation might still be obliged to take a minimum amount of SDRs; and, most troublesome of all, that the Fund would be empowered to accept SDRs in its General Account in payment of gold subscriptions and in repurchases, which, Mr. Debré thought, was directly contrary to what had been agreed at Bretton Woods. SDRs should be held in the General Account only to defray the costs of operating the new facility.
Most of the other Ministers, while sympathetic with Mr. Debré’s concerns about the seriousness of the international monetary situation, were not responsive to his suggestion to raise the price of gold. Several Ministers were willing to accept features for SDRs that would make them readily acceptable in international financial transactions even though these features might be a little beyond the prescription of the Outline. However, they were even more anxious that the SDR facility, so close to fruition, should not be jeopardized at this point. They insisted that the Stockholm meeting produce clear-cut and workable decisions. This attitude, plus reassurance by Mr. Fowler (United States) that his authorities were giving the U.S. balance of payments deficit top priority and his noting that the United States would receive only one fourth of SDR allocations, helped to get agreement on a compromise. In these negotiations, the eec countries other than France labored to win acceptance of features for the SDR facility that might enable France to agree to the facility later.
The situation that would have to exist before the SDR facility was activated was made very specific. It was decided to add as the first special consideration a requirement that a collective judgment must be obtained that there was a global need to supplement reserves. The other two special considerations, which had already been agreed, were the attainment of a better balance of payments equilibrium and the likelihood of a better working of the adjustment process in the future.9
A clear agreement was also reached, as proposed by the French authorities, that provision be made for a participant to opt out of any proposed allocation, in which event a participant so electing would not be obliged to receive any part of that allocation of SDRs. Opting back in, however, would be at the discretion of the Fund and not a right of a participant. It was further agreed that SDRs would not be used to pay gold subscriptions to the Fund, but, as a concession on the other side, it was agreed that the Fund could accept SDRs in repurchases and in payment of charges.
There were still other compromises. Provision would be made for the possibility of holders of SDRs other than participants in the Special Drawing Account; but the categories of possible other holders would be limited to nonmembers of the Fund, members that had chosen not to become participants, and institutions that performed central banking functions for more than one member. The last category could include the bis and regional organizations in which members or their central banks pooled some of their reserves; other international organizations and private parties were not to be among the possible other holders. The Board of Governors would determine the terms and conditions on which any of the prescribed other holders might use SDRs in operations and transactions with participants. Decisions prescribing other holders and establishing these terms and conditions were to be taken by a majority of 85 per cent of the total voting power.
It was also accepted that, when the Executive Board voted on issues concerning SDRs, Directors would cast the votes they held as a bloc, rather than split their votes according to the wishes of the individual members that had elected them. The Managing Director made a strong case at the Stockholm meeting for bloc voting by the Executive Directors, as any other technique would be difficult for Directors who were elected by a number of members.
Even with these compromises, Mr. Debré reserved the position of the French authorities on the proposed amendment, pending a final text.
Connection Between SDR Facility and Changes in Rules and Practices of Fund
A matter of particular interest at Stockholm was whether changes in certain of the existing rules and practices of the Fund should go into effect at the same time as the SDR facility. The resolution adopted by the Board of Governors at the Annual Meeting in Rio de Janeiro several months earlier specified that the Executive Board should study and report on both subjects at the same time. The Governors for the eec countries had insisted that the establishment of the SDR facility and the changes in rules and practices of the Fund must be regarded as contemporaneous projects. At the Annual Meeting, however, the Governors for the United Kingdom and the United States took the position that the changes in rules and practices ought not to be regarded as a precondition to taking action on the SDR facility, especially if they turned out to be complicated or controversial.10
Some Executive Directors, especially those for developing members, were also disturbed about the interconnection between the introduction of the SDR facility and the other amendments. On March 26, 1968, at a meeting of the Executive Board on the eve of the Stockholm meeting, Mr. Madan made an impassioned plea on behalf of Messrs. Kafka, Yaméogo, Diz, González del Valle, Leonard A. Williams (Trinidad and Tobago, Alternate to Mr. Faber), and Nikoi. Recognizing that the Stockholm meeting would be a meeting of the Group of Ten, they nonetheless asked the Managing Director to bring their views to the attention of the participants of that meeting. Mr. Madan stressed that, while the question of a mechanism for creating new reserves had been under consideration for a long time, the question of the proposed alterations in the rules and practices of the Fund had come on the scene only recently. Nevertheless, it had been considered logical and desirable to proceed with both at the same time. Now there was much discussion of activating the SDR facility—as distinct from the creation or institution of a facility. These Executive Directors did not want the changes in rules and practices being suggested to cause an undue delay in this possible activation. Mr. Madan stated that he was not sure that the developing members, as they undertook to pass enabling legislation to accept the amendments, would understand why there had to be changes that seemed to make it more difficult for members to draw on the Fund’s regular resources, in exchange for some “nonactivated or unactivated” scheme. Changes in the Fund’s rules and practices were bound to be interpreted as tightening the previous policies of the Fund regarding its resources. Consequently, these changes should be made simultaneously with activation of the new facility, not just with its incorporation into the Articles. Mr. Madan emphasized that, if some authorities believed that at least some of the changes in the rules and practices of the Fund should be put into force immediately, even in advance of activation of the SDR facility, some other of the provisions—such as those that barred further quasi-automaticity in the credit tranches, the new repurchase provisions, and the 85 per cent voting majority for general quota increases—should not be brought into effect before the first allocation of SDRs.
It was agreed at the Stockholm meeting that the proposed amendments would be presented in a single document. Thus, the changes in the Fund’s rules and practices would become effective when the amendments relating to the new reserve facility took effect, whatever might be the lapse of time before activation of the facility. Nevertheless, Mr. Madan’s statement on behalf of the developing members was favorably received at the Stockholm meeting by some Ministers and Governors. Mr. Dale, in assuring Mr. Madan of this at a meeting of the Executive Board shortly after the Stockholm meeting, said he believed that the somewhat obscure sentence about the interconnection in the ministerial communiqué should be read in terms more of its spirit than of its precise legal meaning. It had been included as an attempt to assure those who were concerned about the appearance of greater restriction following the changes that at least some Ministers and Governors in the Group of Ten had tried, and would continue to try, to ensure that any such changes would be applied in a spirit that was in accordance with that expressed in Mr. Madan’s statement.
Since the Executive Directors had devoted many sessions to considering changes in the Fund’s rules and practices, these draft amendments were ready for submission to the Board of Governors along with the draft amendments to establish special drawing rights.
Decision Taken and Resolution Adopted
A draft, and a redraft, of the report of the Executive Directors to the Board of Governors covering the new facility and the changes in the Fund’s rules and practices were considered at several sessions of the Executive Board.11 The deadline of March 31, 1968 specified in the Board of Governors’ resolution was not quite met. But on April 16, 1968 the Executive Board took a decision to adopt the report and to recommend the adoption by the Board of Governors of a resolution approving the proposed amendment.12 The report, to which was annexed the recommendations of the Executive Board as well as the Outline on which the proposed amendment was based, was submitted to the Governors on the following day and was made public on April 22, 1968.13
The Governors approved the proposed amendment, without meeting, effective May 31, 1968.14 France was the only large member of the Fund that did not vote in favor of it. The proposed amendment was then submitted to all members for their acceptance. Before the proposed amendment could enter into force, it had to be accepted by three fifths of the members having four fifths of the total voting power. For most members this acceptance involved legislative action. In addition, members having 75 per cent of the total of quotas had to deposit instruments of participation in the Special Drawing Account before the Account could become operational. At the Twenty-Third Annual Meeting, held in Washington from September 30 to October 4, 1968, Mr. Schweitzer urged all members, small and large, to take the necessary steps as soon as possible. Agreement on the SDR facility had shaped the course for a rational response in the event of a future need to supplement reserves, but such a response required that the facility be established with minimum delay.15
In addition to the articles by Joseph Gold referred to in the preceding chapter, see also the following by him: History, 1945–65, Vol. II, pp. 595–99; The Reform of the Fund, IMF Pamphlet Series, No. 12 (Washington, 1969); and Special Drawing Rights: Character and Use, IMF Pamphlet Series, No. 13, 2nd ed. (Washington, 1970).
Both the Outline and the amended Articles of Agreement are reproduced in Vol. II below, pp.47–51 and 97–157.
Hereinafter referred to, for the most part, as SDRs.
For a discussion of which of the provisions dealing with the SDR facility were in each of these categories, see History, 1945–65, Vol. II, pp. 597–99.
See History, 1945–65, Vol. I, pp. 477–81, and Vol. II, pp. 283–88.
These concepts have been described in Joseph Gold, The Fund’s Concepts of Convertibility, IMF Pamphlet Series, No. 14 (Washington, 1971); the concept of currency convertible in fact is discussed on pp. 30–33 and 37–53.
See Chap. 20 below.
The second and third special considerations were agreed by the Ministers and Governors of the Group of Ten at their meeting in The Hague in July 1966; see Chap. 4 above, p. 98.
Statements by the Governor of the Fund for the United Kingdom and the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1967, pp. 59 and 84–85.
The changes in the rules and practices of the Fund are dealt with in Chap. 13 below.
E.B. Decision No. 2493-(68/74), April 16, 1968; Vol. II below, p. 216.
Establishment of a Facility Based on Special Drawing Rights in the International Monetary Fund and Modifications in the Rules and Practices of the Fund: A Report by the Executive Directors to the Board of Governors Proposing Amendment of the Articles of Agreement (Washington, April 1968), 80 pp. Also published in Vol. II below, pp. 52–94.
Resolution No. 23–5, Summary Proceedings, 1968, pp. 293–94.
Opening Address by the Managing Director, Summary Proceedings, 1968, pp. 24–25.