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IMF History (1972-1978) Volume 3
Chapter

Drafting a New Article IV of the Articles of Agreement

Author(s):
International Monetary Fund
Published Date:
February 1996
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As the Second Amendment of the Articles of Agreement was being prepared and discussed by the Executive Directors from July 1974 to March 1976, there was considerable controversy over the provisions governing exchange rates and exchange arrangements. In brief, officials of France argued that floating rates should not be “legalized” and that a par value system should be reinstituted in the Fund, while officials of the United States argued that it was premature to provide for a par value system and that floating rates should be acceptable in the Fund’s amended Articles.

In the course of the debates by the Executive Directors concerning the provisions of Article IV, the Executive Director appointed by France, Jacques Wahl, and the Executive Director appointed by the United States, Sam Y. Cross, disagreed with the paper that the staff of the Legal Department had prepared and had circulated to the Executive Directors setting forth proposed provisions for Article IV dealing with the exchange rate obligations of members. They each circulated alternative versions.

The staff draft of and commentary on a proposed Article IV are published as (A) below. The drafts circulated by Messrs. Wahl and Cross appear below as (B) and (C), respectively.

(A) Staff Draft of and Commentary on Amendment of Article IV

(March 14, 1975)

Article IV Obligations Regarding Exchange Stability and Par Values of Currencies

Section 1. Expression of par values

(a) The par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on Juy 1, 1944.

(b) All computations relating to currencies of members for the purpose of applying the provisions of this Agreement shall be on the basis of their par values.

Section 4 1. Obligations regarding exchange stability

(a) Each member undertakes to collaborate with the Fund and with other members to promote exchange stability, to maintain orderly exchange arrangements with-other-members, and to avoid competitive exchange alterations policies.

(b) Each member undertakes, through appropriate measures consistent with this Agreement, to permit within its territories exchange transactions between its currency and the currencies of other members only within the limits prescribed under Section 3 of this Article. A member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold within the limits prescribed by the Fund under Section 2 of this Article shall be deemed to be fulfilling this undertaking.

Section 2. Gold purchases based on par values

The Fund shall prescribe a margin above and below par value for transactions in gold by members, and no member shall buy gold at a price above par value plus the prescribed margin, or sell gold at a price below par value minus the prescribed margin.

Section 2. Par values

(a)Each member shall establish a par value for its currency and shall maintain it in accordance with Section 3 of this Article unless it is availing itself of Section 4 of this Article.

(b)A member shall inform the Fund whether it maintains rates for exchange transactions in accordance with Section 3 or avails itself of Section 4 of this Article.

(c)The par value of a member’s currency shall be expressed in terms of a common denominator which shall be determined by the Fund.

Section 3. Foreign exchange dealings based on parity

The maximum and the minimum rates for exchange transactions between the currencies of members taking place within their territories shall not differ from parity

  • (i) in the case of spot exchange transactions, by more than one percent; and

  • (ii) in the case of other exchange transactions, by a margin which exceeds the margin for spot exchange transactions by more than the Fund considers reasonable.

(a)Each member that has a par value for its currency undertakes to apply appropriate measures consistent with this Agreement in order to ensure that exchange transactions between its currency and the currencies of other members having par values for their currencies and applying such measures will take place within its territories only at rates consistent with(b)below. Each member that has a par value for its currency shall inform the Fund of the measures it applies for this purpose in order to enable the Fund to ascertain whether the member is fulfilling its undertaking under this provision.

(b)The maximum and the minimum rates for exchange transactions taking place within the territories of a member that has a par value for its currency between that currency and the currencies of other members that have par values for their currencies shall not differ from parity

  • (i) in the case of spot exchange transactions, by more than [four and one-half] percent or by such other margin or margins as the Fund may adopt [by an eighty-five percent majority of the total voting power], and

  • (ii) in the case of other exchange transactions, by a margin which exceeds the margin or margins for spot exchange transactions by more than the Fund considers reasonable.

The Fund may prescribe conditions to be observed by members in connection with the maintenance of margins under this provision.

Section 4. Obligations regarding exchange stability

(a) Each member undertakes to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations.

(b) Each member undertakes, through appropriate measures consistent with this Agreement, to permit within its territories exchange transactions between its currency and the currencies of other members only within the limits prescribed under Section 3 of this Article. A member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold within the limits prescribed by the Fund under Section 2 of this Article shall be deemed to be Fulfilling this undertaking.

Section 4. Foreign exchange dealings not based on parity

Alternative 1

[A member may permit within its territories exchange transactions at rates not based on a par value for its currency in such [exceptional] [particular] situations, for such periods, and subject to such conditions as the Fund may determine.]

Alternative 2

[In particular situations specified by the Fund, a member may permit within its territories exchange transactions at rates not based on a par value for its currency. The member shall act consistently with policies established by the Fund for the management of exchange rates under this provision.]

Section 5. Changes in par values

(a)The Fund and each member that has a par value for its currency shall consult from time to time on the par value of the currency.

(b)(a) A member shall not propose a change in the par value of its currency except to maintain fundamental equilibrium or to correct, or prevent the emergence of, a fundamental disequilibrium.

(c)(b) A change in the par value of a member’s currency may be made only on the proposal of the member and only after consultation with the Fund.

  • (c) When a change is proposed, the Fund shall first take into account the changes, if any, which have already taken place in the initial par value of the member’s currency as determined under Article XX, Section 4. If the proposed change, together with all previous changes, whether increases or decreases.

    • (i)does not exceed ten percent of the initial par value, the Fund shall raise no objection,

    • (ii) does not exceed a further ten percent of the initial par value, the Fund may either concur or object, but shall declare its attitude within seventy two hours if the member so request,

    • (iii)is not within (i) or (ii) above, the Fund may either concur or object, but shall be entitled to a longer period in which to declare its attitude.

  • [(d)A member may change the par value of its currency without the concurrence of the Fund if the change does not exceed (i) [two] percent of its par value and (ii) [five] percent of its par value in any period of twelve months.]

  • [(e)(d) Uniform changes in par values made under Section 79 of this Article shall not be taken into account in determining whether a proposed change falls within (i), (ii), (iii) of (e)(d) above.]

  • (f)(e) A member may change the par value of its currency without the concurrence of the Fund if the change does not affect the international transactions of members of the Fund.

  • (g)(f) The Fund shall concur in a proposed change [which is not within the terms of (e) (ii) or (e)(iii) (d) above] if it is satisfied that the change is necessary to maintain fundamental equilibrium, or to correct, or prevent the emergence of, a fundamental disequilibrium. In particular, provided it is so satisfied, it shall not object to a proposed change because of the domestic social or political policies of the member proposing the change.

Section 6. Effect of unauthorized changes

If a member changes the par value of its currency despite the objection of the- Fund, in cases where the Fund is entitled to object, the member shall be ineligible to use the resources of the Fund unless the Fund otherwise determines; and if, after the expiration of a reasonable period, the difference between the member and the Fund continues, the matter shall be subject to the provisions of Article XV, Section 2(b).

Section 6. Cessation and subsequent establishment of par value

(a)The par value of a member’s currency shall cease to exist for the purposes of this Agreement if the member informs the Fund that it avails itself of Section 4 of this Article.

(b)The Fund may decide that the par value of the currency of a member that has not availed itself of Section 4 of this Article shall cease to exist for the purpose of this Agreement because the member does not maintain rates for exchange transactions in accordance with Section 3 of this Article. The member shall act consistently with policies established by the Fund for the management of exchange rates.

(c) A proposal to establish a par value for a currency after it has ceased to exist under(a)or(b)above shall be deemed to be a proposal to change a par value within the meaning of Section 5 of this Article.

Section 7. Foreign exchange dealings during interim period

Sections 2, 3, 4, 5, 6, 8, 9, and 10 of this Article shall not apply until the Fund, by an eighty-five percent majority of the total voting power, decides that these provisions shall begin to apply because it finds that a large number of members, having a substantial share of the volume of international transactions, are able and willing to establish and maintain par values in accordance with these provisions. A member shall act consistently with policies established by the Fund for the management of exchange rates during the period in which these provisions do not apply, and thereafter until the member establishes a par value. The par values of currencies in effect on the date of the second amendment of this Agreement shall cease to exist for the purposes of this Agreement as of that date.

Section 8. Establishment of initial par values after end of interim period

(a) Within a reasonable period after Sections 2, 3, 4, 5, 6, 8, 9, and 10 of this Article have begun to apply, each member that does not avail itself of Section 4 of this Article shall propose an initial par value for its currency. An initial par value proposed at any time shall be the par value of the member’s currency for the purposes of this Agreement unless, within [thirty] days after receipt of the proposal, the Fund notifies the member that in its opinion the proposed initial par value would not enable the member to maintain fundamental equilibrium.

(b) Amember proposing to the Fund an initial par value for the currency of its metropolitan territory shall simultaneously communicate a value for each separate currency, where such exists, in the territories in respect of which it has accepted this Agreement under Article XXXI, Section 2(g).

Section 79. Uniform changes in par values

Notwithstanding the provisions of Section 5(b)(c) of this Article, the Fund [by an eighty-five percent majority of the total voting power] may make uniform proportionate changes in the par values of the currencies of all members. [The par value of a member’s currency shall, however, not be changed under this provision if, within seventy-two hours of the Fund’s action, the member informs the Fund that it does not wish the par value of its currency to be changed by such action.]

Section 8. Maintenance of gold value of the Fund’s assets

(a) The gold value of the Fund’s assets shall be maintained notwithstanding changes in the par or foreign exchange value of the currency of any member.

(b) Whenever (i) the par value of a member’s currency is reduced, or (ii) the foreign exchange value of a member’s currency has, in the opinion of the Fund, depreciated to a significant extent within that member’s territories, the member shall pay to the Fund within a reasonable time an amount of its own currency equal to the reduction in the gold value of its currency held by the Fund.

(c) Whenever the par value of a member’s currency is increased, the Fund shall return to such member within a reasonable time an amount in its currency equal to the increase in the gold value of its currency held by the Fund.

(d) The provisions of this Section shall apply to a uniform proportionate change in the par values of the currencies of all members, unless at the time when such a change is made the Fund decides otherwise by an eighty-five percent majority of the total voting power.

Section 910. Separate currencies within a member’s territories

A member proposing a change in the par value of its currency under Sections 5 or 6(c) of this Article or availing itself of Section 4 of this Article shall be deemed, unless it declares otherwise, to be proposing a corresponding change in the par value of, or to be availing itself of Section 4 of this Article with respect to, the separate currencies of all territories in respect of which it has accepted this Agreement under Article XX XXXI, Section 2(g). It shall, however, be open to a member to declare that its proposal or action relates either to the metropolitan currency alone, or only to one or more specified separate currencies, or to the metropolitan currency and one or more specified separate currencies.

Exchange Stability, Par Values, and Exchange Margins

Exchange Stability

The provisions of draft Article IV reflect the general recognition that in the reformed system exchange rates should continue to be a matter of international concern and consultation, that the exchange rate mechanism should be based on stable but adjustable par values, that the maximum margins for exchange transactions should be wider than those of the present Articles, and that, in particular situations and under adequate safeguards, floating rates could be an alternative technique to the maintenance of par values. At the same time, the draft provisions reflect the recognition that the present situation of widespread floating may continue for an indeterminate period and that an international exchange system based on par values may not be applied until some time after the date on which the proposed amendment becomes effective.

The provisions of Sections 3 and 4 of Article IV of the present Articles have been rearranged in order to emphasize the central function in the code of conduct contained in the Articles of the obligation of members under the present Article IV, Section 4(a), which corresponds to one of the purposes of the Fund. Moreover, the rearrangement is intended to make the point that members could act consistently with the objective of exchange stability either through the maintenance of effective par values or through the adoption of floating rates in particular situations and subject to the observance of adequate safeguards, such as policies established by the Fund.

Article IV, Section 4(a) of the present Articles would become Article IV, Section 1 of the draft and would differ from the present provision only in two respects: (a) The words “and with other members” would be added to make the obligation to cooperate applicable among members as well as with the Fund. The obligation would then resemble the similar undertaking of participants under the present Article XXVIII. (b) The word “policies” would be substituted for the word “alterations.” This change is intended to make the obligation apply to all exchange policies and not simply to changes in exchange rates. As a result of the modified language, the Fund would be able to decide that a member was failing to observe its obligations with respect to competitive practices even though that failure took the form of inaction. Under the present text of Article IV, Section 4(a), the Fund would be able to decide that a member that does not change the rate of exchange for its currency was failing to perform its obligations under the provision only if the Fund concluded that the member was failing “to promote exchange stability” or “to maintain orderly exchange arrangements.”

The substance of the present Section 4(b) is incorporated in the first sentence of draft Section 3(a), which deals with the obligations of members that are maintaining par values. This provision is explained below.

Par Values

Under draft Article IV, Section 7, the par values in existence at the time the proposed amendment goes into effect will cease to exist for the purposes of the Articles, although their status under the domestic law of members will be governed by their laws. Cessation of the par values for the purposes of the Articles will be consistent with the facts that have prevailed for some time. The draft provisions on par values would not become operative until such time after the effective date of the proposed amendment as a large majority of the membership of the Fund, both in terms of numbers and in terms of their share in the volume of international transactions, were confident that they could operate their exchange systems on the basis of par values. Until that happened, members would have no par values under the Articles and would not be bound by the draft provisions relating to par values and exchange margins but would, nevertheless, be bound by the undertaking in draft Article IV, Section 1 and the obligation under draft Article IV, Section 7 to act consistently with policies established by the Fund for the management of exchange rates of currencies in the absence of par values. This obligation, which would be similar to the obligation of members with a floating currency after the par value provisions had been put into effect (draft Article IV, Section 4), would have to be observed also by members that had not yet established an initial par value after the par value provisions had been put into effect and the interim period had thus come to an end.

In the period before the provisions on par values became operative, the Fund’s policies on exchange rates would be expressed in decisions that could deal with rates (including central rates), margins, and the management of exchange rates. The Fund would be able, therefore, to recognize the official character of rates and practices and to endorse them even though the concept of par value as it prevailed in the past would be in abeyance until revived.

When the interim period is ended by the Fund’s decision to put the provisions on par values and exchange margins into effect, each member would have to establish and maintain a par value for its currency in accordance with Sections 2, 3, and 8 of draft Article IV, unless it chose to adopt a regime of floating rates in accordance with draft Section 4 of the same Article.

Under draft Article IV, Section 3(a) the obligation to take appropriate measures to ensure that transactions within a member’s territories take place only at rates based on parity would apply only to members that maintain par values. Furthermore, the obligation would apply only in respect of transactions between the currency of such a member and the currencies of other members that for their part were taking appropriate measures to maintain rates based on parity. Draft Article IV, Section 3 does not prescribe how the responsibility of members to maintain exchange rates based on parity is to be carried out or how this responsibility is to be shared among the members whose currencies are traded in each other’s markets. In the absence of agreement on the system and methods of intervention and on new convertibility arrangements that could be incorporated in the amended Articles, it is not feasible to specify now the various types of measures that a member could take in order to perform its obligation to maintain the effectiveness of its par value. To enable the Fund to ascertain how members were carrying out their responsibilities, the draft provision requires members to inform the Fund of the measures that they are taking for this purpose.

Under draft Article IV, Section 5 a member would be able to propose a change in its par value not only to correct a fundamental disequilibrium but also to prevent the emergence of a fundamental disequilibrium or to maintain an equilibrium already attained. This change is in conformity with the practice of the Fund as it had developed in the par value regime of the present provisions. There are two other changes in draft Section 5 as compared with the corresponding provision in the present Articles. The first is the introduction of draft subsection (a) under which members would be required to consult with the Fund on their par values, and the other is draft subsection (d), which would replace the present subsection (c), and would provide for certain small changes in par values without the necessity to obtain the concurrence of the Fund. If it were found preferable not to permit this exception to the requirement of the concurrence of the Fund for changes in par value, draft subsection (d) would be omitted.

Under the provisions of draft Article IV it would be possible for a member to terminate the par value of its currency without establishing a new one, an action that is not legally possible under the present Articles. Under draft Article IV, Section 6 the par value of a member that notified the Fund of its intention to avail itself of the draft provision on floating (draft Article IV, Section 4) would cease to exist for the purposes of the Articles. A par value that had ceased to exist in this way could not be reinstated without its establishment as a new par value. In addition, even though the member had not given notice, the Fund would be able to find that the par value of the member’s currency had ceased to exist if the Fund were to determine that the member did not ensure that exchange transactions took place on the basis of parity. The Fund would not be required to make this determination if it was satisfied that the failure to observe the margins would be of brief duration and that the member wished to resume observance of the margins after a short interval. Whether a member’s par value had ceased to exist because the member notified the Fund that it was availing itself of draft Article IV, Section 4 or because the Fund found that the member’s currency was floating, the member would be required to act consistently with the policies of the Fund with regard to the management of exchange rates not based on a par value. As noted, the first case would be covered by draft Section 4; the second would be covered by draft Section 6(b). Under draft Article IV, Section 7, the requirement that members act consistently with the Fund’s policies on rates would apply with regard to all currencies during the period before the provisions on par values were made effective and after that date with regard to the currencies of those members for which initial par values had not been established.

A proposal to establish a new par value for the currency of a member after the cessation of a former par value would be treated as if it were a proposal for a change in par value, and the provisions of draft Article IV, Section 5 would apply to it. The establishment of initial par values by members for their currencies and the separate currencies of their dependencies after the provisions on par values had become applicable would be governed by draft Article IV, Section 8 (a) and (b).

In conformity with the consensus that gold should cease to be the common denominator in the new system, par values would no longer be expressed in gold. When the provisions on par values are put into effect, it would be necessary to establish a common denominator. The Fund could then decide to operate the par value system on the basis of an abstract unit. If, however, the conditions then prevailing warranted the action, the Fund could operate the system on the basis of the special drawing right as the common denominator.

Under draft Article V, Section 11, computations for the purpose of applying the provisions of the Articles other than those relating to par values and exchange margins, such as computations involving quotas, subscriptions, exchange transactions of the Fund with members, maintenance of value of the Fund’s assets, etc., would be made in terms of the special drawing right. The function of an abstract unit would be limited to the determination of the parity relationships among the currencies of members maintaining par values and the margins within which exchange rates for transactions between any two of these currencies would have to be confined.

The question has been considered whether under the amended Articles the special drawing right should become the common denominator automatically when the Fund decided to make the par value provisions effective. In view of the uncertainties as to the conditions that might prevail at that time and as to the preferences of members regarding the role of the common denominator and the system of valuation of the special drawing right at that time, all possible courses of action regarding the choice of a common denominator should remain available.

Uniform Changes in Par Values

The provisions of draft Article IV envisage a system that might be based on the widespread observance of par values at some later date and that would employ the special drawing right not only for valuation in exchange transactions but possibly also as the common denominator. It seems advisable, therefore, to retain the provision of the present Articles with regard to uniform changes in par values. If, after the par value provisions were put into effect, the Fund were to decide to make the special drawing right the common denominator, the Fund might find it desirable to make an initial, and perhaps also subsequent, equiproportional adjustment in the par values of all currencies in order to bring par values into line with the values of the currencies in terms of the special drawing right as determined by the Fund for the purpose of its operations and transactions. The adjustments, which would be uniform for all currencies among which parity rates were maintained, could be made under draft Article IV, Section 9.

Draft Article IV, Section 9 would enable the Fund to change the value of the special drawing right uniformly in terms of currencies. The occasions when the Fund might use this provision have been mentioned in the paragraph above. The function of a provision on uniform changes in terms of the special drawing right is different from the function of Article IV, Section 7 in the present Articles. A provision on uniform proportionate changes in the par values of all currencies in terms of gold was adopted in the Articles for the purpose of making it possible to change the value of the stock of gold and the profitability of gold production, and in this way to bring about changes in international liquidity. Under the provisions dealing with special drawing rights, the volume of international liquidity can be affected by the allocation or cancellation of special drawing rights. Under the latter system, uniform proportionate changes in par values would serve the purpose of bringing par values into line with the values of currencies in terms of special drawing rights in operations and transactions when the former diverged substantially from the latter because of the method of valuation, such as the standard basket or the asymmetrical basket, employed for determining values for the purpose of operations and transactions.

On the occasion of the transition from the initial method of valuation of the special drawing right to the standard basket, the Fund decided to avoid abrupt changes in the value of the special drawing right as a result of the change in the method of valuation. It was held that abrupt changes should be avoided because they would be detrimental to the status of the special drawing right as the central reserve asset of the system.

In the light of the preceding discussion of uniform proportionate changes in par values, three questions should be considered in relation to draft Article IV, Section 9. The first question is whether a special majority should be necessary for a decision to make uniform proportionate changes. The second question is whether the required majority should differ from the majority required for a decision to change the method of calculation of the special drawing right. The third question is whether a member should be allowed to opt out of a uniform proportionate change. Opting out would be equivalent to a devaluation or revaluation but would be made without observance of the procedures necessary for a change in the par value of a currency under the draft provisions on par values.

(B) Provisions Regarding Par Values and Exchange Stability Under Article IV by the Executive Director for France, Jacques Wahl

(April 9, 1975)

Section 1. General obligations regarding par values and exchange stability

Each member undertakes to collaborate with the Fund and with other members to promote exchange stability, to maintain orderly exchange arrangements, and to avoid competitive exchange policies.

Section 2. Par values

(a) Each member shall establish a par value for its currency.

(b) The par value of a member’s currency shall be expressed in terms of a common denominator which shall be determined by the Fund and shall not be the currency of any member or nonmember country.

(c) Each member shall maintain rates for exchange transactions based on the parity of its currency in accordance with Section 3 of this Article, subject to the provisions of Section 4 of this Article.

Section 3. Foreign exchange dealings based on parity

(a) Each member undertakes to apply appropriate measures consistent with this agreement in order to ensure that exchange transactions between its currency and the currencies of other members applying such measures will take place within its territories only at rates consistent with (b) below. Each member shall inform the Fund of the measures it applies for this purpose in order to enable the Fund to ascertain whether the member is fulfilling its undertaking under this provision.

(b) The maximum and the minimum rates for exchange transactions between the currencies of members taking place within their territories shall not differ from parity:

  • (i) in the case of spot exchange transactions, by more than 4.5 per cent or by such other margin or margins as the Fund may adopt by an 85 per cent majority of the total voting power, and

  • (ii) in the case of other exchange transactions, by a margin which exceeds the margin or margins for spot exchange transactions by more than the Fund considers reasonable.

The Fund may define under Section 1 of this Article more specific conditions to be observed by members in connection with the maintenance of rates for exchange transactions based on parity.

Section 4. Deviation from parity

In exceptional situations and at the request of a member, the Fund may authorize this member, for such periods and subject to such conditions as the Fund shall determine, to permit within its territories exchange transactions at rates not based on the parity of its currency as defined under Section 3 of this Article.

Section 5. Changes in par value

(a) A change in the par value of a member’s currency may be made only on the proposal of the member and only after consultation with the Fund. When a change is proposed, the Fund may either concur or object but shall declare its attitude within a reasonable period.

(b) A member shall not propose a change in the par value of its currency except to correct, or prevent the emergence of, a fundamental disequilibrium.

(c) A member may change the par value of its currency without the concurrence of the Fund if the change does not affect the international transactions of members of the Fund.

(d) The Fund shall concur in a proposed change if it is satisfied that the change is necessary to correct, or prevent the emergence of, a fundamental disequilibrium. In particular, provided it is so satisfied, it shall not object to a proposed change because of the domestic social or political policies of the member proposing the change.

Section 6. Effect of unauthorized changes in par value or undue deviations from parity

If a member changes the par value of its currency without the concurrence of the Fund, or fails to fulfill any of its obligations under Section 4 of this Article, the member shall be ineligible to use the resources of the Fund unless the Fund otherwise determines. And if, after the expiration of a reasonable period, the difference between the member and the Fund continues, or the member persists in its failure to fulfill any of its obligations under Section 4 of this Article, the matter shall be subject to the provisions of Article XV, Section 2(b).

Section 7. Uniform changes in par value

Notwithstanding the provisions of Section 5(a) of this Article the Fund by an 85 per cent majority of the total voting power may make uniform proportionate changes in the par values of the currencies of all members. The par value of a member’s currency shall, however, not be changed under this provision if, within seventy-two hours of the Fund’s action, the member informs the Fund that it does not wish the par value of its currency to be changed by such action.

Section 8. Separate currencies within a member’s territories

A member proposing a change in the par value of its currency shall be deemed, unless it declares otherwise, to be proposing a corresponding change in the par value of the separate currencies of all territories in respect of which it has accepted this agreement under Article XXXI, Section 2(g). It shall, however, be open to a member to declare that its proposal relates either to the metropolitan currency alone, or only to one or more specified separate currencies, or to the metropolitan currency and one or more specified separate currencies.

(C) Commentary on Alternative Approach to Article IV on Exchange Rate Arrangements by the Executive Director for the United States, Sam Y. Cross

(May 1, 1975)

The alternative approach to Article IV proposed informally by the U.S. Executive Director attempts to focus the Fund’s attention more on the policies nations follow and less on procedures they employ—to concentrate on what they are doing rather than on exactly how they are doing it. It reflects the view that the question of whether a nation is pursuing inappropriate or harmful policies is of greater concern to the world community than the question of whether one exchange rate technique or another is utilized in the application of such policies. It should be evident that a country’s policies should not be judged appropriate from an international point of view simply because it has a par value for its currency—obviously a country could be pursuing inappropriate policies even though it was maintaining a par value. Accordingly, the approach suggested shifts attention away from the essentially procedural issue of par values vs. no par values—and toward the more substantive issues of whether a nation’s policies promote exchange stability, whether it maintains orderly exchange arrangements, and whether its policies affecting exchange rates are consistent with the broad purposes of the Fund.

These substantive issues address the question of whether a member is observing central and fundamental obligation to the Fund regarding exchange rates. It is possible for a nation to fulfill that fundamental obligation with any of a variety of exchange rate systems, and acceptance of the obligation should not imply the adoption of any specific set of procedures or exchange rate arrangements. The obligation to collaborate with the Fund and with other members to promote “exchange stability” is an obligation to promote orderly and equable market conditions, to seek to avoid disruption. “Exchange rate stability” does not necessarily lead to “exchange stability”—indeed, too firm a dedication to maintaining a particular exchange rate structure can bring heavy speculation and instability. Policies which are destabilizing or inconsistent with the Fund’s purposes are possible whether the member applying such actions is regarded as having a par value or is considered to be floating, and the attention of the international community should be focused on the avoidance of such policies rather than on the exchange rate system maintained by an offending member.

During the two years of Committee of Twenty negotiations, debate on exchange rates centered largely on the question of par values vs. floating—two somewhat idealized concepts, neither of which is at present being applied in pure form by any Fund member. The approach we have proposed for Article IV does not aim at reopening that debate but rather at redirecting the dialogue into more meaningful channels. The language we have offered does not mention either “par value” or “floating,” but looks beyond the procedural framework to the more substantive aspect of nations’ obligations and policy actions. The approach would permit a widespread return to par values by nations which preferred that, but would not force it on those which did not. It would provide the procedural tolerance under which a nation could pursue the technical path of its choosing so long as it acted responsibly toward other members of the world community. The formula used in the Committee of Twenty discussions—stable but adjustable par values, with floating in particular situations—never in our view meant that, if a country chose not to maintain a par value, that would be a matter of international approbation, or would be subject to a time limit, or would require individual authorization or specific permission of the Fund. Thus, we believe that the alternative approach we have suggested for Article IV is compatible with that formula.

Our approach calls for a declaration of the basic international undertakings of members with respect to exchange arrangements in its essentials, as follows:

First, an undertaking by each member to collaborate to promote exchange stability and to avoid policies affecting exchange rates that are inconsistent with the purposes of the Fund—respecting the right of each member to meet that undertaking through whatever exchange regime or arrangements it chooses.

Second, an undertaking by each member to keep the Fund informed of its policies and to be prepared to consult with the Fund about them. Willingness to provide such information would not imply that members would have to notify the Fund of such operational actions as day-to-day data or tactics on exchange market intervention. It does mean that each member would provide full information on its economic policies and strategy, and developments in its economy, to facilitate surveillance by the Fund of members’ policies.

Third, an undertaking that the Fund would adopt a set of principles for the guidance of members with respect to their policies affecting exchange.

This proposal does not presume that establishment of a set of principles will be easy. The Fund has had some experience in formulating guidelines, in its work on the Guidelines for Floating. It would be a matter of negotiation among members to reach agreement on the principles called for in this approach. But in our view the principles would not be limited in coverage to a few countries as the Guidelines for Floating. We think that such principles as may be agreed by the Fund membership should be applied generally and should not be based on a country’s exchange rate system.

The Guidelines for Floating provide an illustration of how the same principles should apply irrespective of a country’s exchange rate system. One can argue that the dangers which the Guidelines for Floating are designed to guard against could occur whether a member was floating—individually, jointly, or otherwise—or maintaining a par value, or following some other exchange rate practice. Thus, (as in Guideline 1) sharp and disruptive day-to-day and week-to-week fluctuation should be a matter of concern with respect to a country maintaining 4½ percent margins as well as one nominally floating. The same is true for “temporary factors” and the possibility of offsetting them (Guideline 2). Equally, the concerns dealt with in the other Guidelines, aggressive intervention, excessive reserves, restrictions, conflicting intervention, etc., may apply irrespective of a country’s exchange rate regime. Thus, in the limited area of intervention practices, as well as in broader questions of economic policy, we think the same principles or guidelines should cover all nations, and our approach is based firmly on that concept. All Fund members would be guided uniformly by the same principles and code of behavior, though the application of those principles in individual cases would take account of the special circumstances of members—for example, the kind of data supplied, and the frequency with which it would be supplied, would reflect a nation’s ability to comply.

These principles would be manifested in Fund procedures and utilized in Fund operations. They would be taken into account in the Fund’s consultations with members—the periodic reviews of economic developments in member countries would include consideration of the members’ economic policies and performances against the backdrop of the agreed principles. In addition, Fund policies on transactions would reflect the observance by members of these principles. For example, the principles might be helpful as one of the various factors to be used in assessing a country’s need to draw from the Fund, or, alternatively, a country’s ability to provide credit through the Fund.

At the present time, no member is maintaining a par value in the sense provided for in the Fund’s Articles. The Fund staff has, for the purposes of the Guidelines for Floating, classified member countries into five different categories: (1) floating individually; (2) floating jointly; (3) pegging to a floating currency (individually or jointly); (4) pegging to the (floating) SDR; and (5) pegging to an individual basket of the pegger’s own creation. Even this taxonomy is incomplete: The fifth category (pegging to an individual basket) covers a variety of alternatives, and we have already seen cases of members whose exchange rate policies are guided by trade-weighted baskets, export-weighted baskets, current account baskets, and profitability of the export sector, as well as the unrevealed basket whose makeup is known only to the particular government using it.

This multiplicity of exchange rate techniques is not ipso facto harmful to the world economy or destructive of international trade and prosperity. When several countries shifted from the third above-listed category to the fifth, the move was not of particular international significance—and indeed the moves may have facilitated rather than damaged international equilibrium by relating currency relationships more closely to individual countries’ trade and payments patterns. Any exchange rate mechanism, like any mechanism, is simply a tool, which can be used for good or ill.

We seek an international monetary system which discourages nations from maintaining exchange rates that are “wrong”—in the sense of being contrary to what is needed for sustainable international payments relationships. The possibility of having the “wrong” exchange rate and the “wrong” exchange rate policies can occur whether a country is technically floating or technically maintaining a par value. Thus, it is not meaningful or theoretically sound to proceed as though there were two separate “systems” of par values and floating, each of which should be subject to its own rules, conventions, and procedures, and one of which should be regarded as morally superior.

We have suggested an alternative approach to Article IV in light of the difficulties we see in the staff draft of Article IV. Specifically, the staff draft, despite some redrafting toward a more evenhanded approach as between par values and floating, nonetheless still seems to us an inappropriate framework for Fund consideration of exchange rates for several reasons:

  • —the draft holds up a purified par value system as the implicit objective, the ideal toward which the world should aim after some interim period, but does not propose other amendments, for example, dealing with balance of payments adjustment, to make such a system viable;

  • —it gives an impression that there is a critical distinction between par value and floating which is operationally significant, calling for different principles and codes of behavior;

  • —it perpetuates—and reaffirms—the idea that the guiding principle for exchange rate changes should be “fundamental disequilibrium,” even though that concept has proved both indefinable and indeterminate except as a truism; and

  • —it calls on the world to rededicate itself to a procedural approach which may or may not prove appropriate to future conditions, and passes up an opportunity to shift the Fund’s attention from matters of procedure to matters of principle and policy.

The sections crossed through with solid lines are proposed deletions to the provisions of the original Articles of Agreement; words underscored indicate proposed insertions; words crossed through with dashed lines indicate deletions after discussion by the Executive Directors of an earlier draft.

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