chapter 7 Terms for Membership
- International Monetary Fund
- Published Date:
- October 1985
Definition of “Terms”
At no time has there been a disposition to read Article II, Section 2, as compelling the Fund to establish the same terms for membership by all applicants. So narrow a reading would be absurd in relation to quota, and there is no reason to assume that the Fund has less discretion in formulating terms that deal with aspects of membership other than quota. Notwithstanding the Fund’s discretion to establish the terms appropriate for each applicant, the practice has been to standardize the content of membership resolutions as much as possible. The form and the topics governed by resolutions have developed over time, but the development has been gradual and for long periods the variations among resolutions have related only to the amounts of quota and gold subscription. This standardization has not prevented the adoption of a special term on some aspect of membership when it was appropriate to the circumstances of an applicant.1
The first and most obvious term that must be included in each resolution is the amount of the quota with which the applicant may become a member.2 A member’s quota is the basis on which many of its rights and duties in and its relationship with the Fund are determined. For example, the quota determines a member’s subscription to the resources held in the General Account and affects the amount of financial assistance it can get through the General Account,3 its voting power,4 and its allocation of special drawing rights.5
Article III, Section 1, provides that the quotas of the countries listed in Schedule A that become members before December 31, 1945 shall be as listed in the Schedule. “The quotas of other members shall be determined by the Fund.” The Articles provide no express criteria for the determination of quotas.
The first resolution under Article II, Section 2, gave the countries listed in Schedule A that had not yet accepted membership an opportunity, which they could exercise until December 31, 1946, to accept membership in accordance with the provisions of Article XX, which meant that they were not required to submit an application. These countries were able, therefore, to enter the Fund with the quotas set forth in Schedule A. The first resolution in response to an application was adopted, with effect on October 2, 1946, for the benefit of Lebanon. In that and later resolutions the quota was expressed in terms of U. S. dollars of the weight and fineness in effect on July 1, 1944. The practice was changed with the resolution for Bahrain, which became effective on May 3, 1972, and quotas are now expressed in special drawing rights. The change was made after the devaluation of the U. S. dollar on May 8, 1972 in order to avoid any confusion that might result from reference to a U. S. dollar that differed in value from the dollar in circulation. Another reason for the new practice was the Fund’s general policy of basing its accounts and calculations on special drawing rights as an international asset and unit of growing importance.6
The Fund is empowered to determine whatever quota it wishes to establish for an applicant. Although there is no legal necessity that the amount be established by agreement between the Fund and the applicant, the Fund has not followed a policy of “take it or leave it” but instead reaches an understanding with the applicant that the quota included in a resolution is acceptable to it. The membership committee used to arrive at a single figure but now establishes a range within which a quota is offered to the applicant, sometimes with a suggestion by the committee on what it considers the choice should be. In a number of instances, negotiations have been prolonged by the applicant’s wish to have a larger quota than the one calculated either on the basis of formulas or by comparison with the quotas of existing members. The Fund’s calculation of a quota takes the so-called Bretton Woods formula into account. The formula was unofficial but was used before and at the Bretton Woods Conference to yield figures that then became the subject of negotiations into which political as well as economic considerations entered, so that there were substantial differences between most of the quotas in Schedule A and what the quotas would have been had they been determined by the formula alone. The formula took into account national income, holdings of gold and U. S. dollars, annual imports, and the maximum variation in annual exports. Dates or periods were prescribed for these elements of the formula, and each of them was given a defined weight. The result of the calculation was then increased by the percentage ratio of average annual exports for a specified period to national income.7
The difficulties of applying the Bretton Woods formula in order to determine quotas for applicants have been discussed by the late Oscar Altman:
… each new quota must meet one primary consideration, i.e., it must fit into the existing structure of quotas. This may involve comparison with such other quotas as are considered “comparable.” For example, a quota for a new member from Southeast Asia, or the Middle East, or Central America, would first of all have to fit comfortably into the structure of quotas of other members in the same area. This suggests that the criteria used for new members, and the methods of using these criteria, are likely to be generally similar to those used for original members. As far as economic criteria are concerned, this necessarily involves using data that, as time goes on, are further and further removed in the past, disregarding later developments. In some cases, this involves calculations for countries that had no independent national status in 1944 (e.g., Republic of Korea, Indonesia), or for countries whose pertinent statistics are incomplete or unsatisfactory. These difficulties may create serious methodological and/or statistical problems. All of these questions, however, are subordinate to the principle of comparability or “fit.” It follows that, if the important quotas in any area are low, the quotas of new members from that area will also tend to be low.8
Executive directors or the representatives of an applicant have protested sometimes in committee that the principle of comparability had inequitable results, particularly when the members with which the applicant was being compared had chosen quotas lower than the maximum that had been offered to them. The principle of comparability means comparison with countries that are already members, but occasionally the effect of a quota on other countries that are in the same region as the applicant and are not yet members but might apply in the future is not overlooked. The same consideration has entered into the determination of gold subscriptions. The uncertainty of the relevant data, particularly for applicants in Africa, led to the practice by which the committee now offers not a single amount but a range from which the applicant can make a choice. On some occasions it has been impossible to make any effort to apply the Bretton Woods formula. For Burundi and Rwanda, for example, there were no foreign trade figures or other necessary data for 1934–38 and no statistics of national income for 1940. Quotas could be discussed only by comparison with certain existing members.
Mr. Altman’s article was written before the Fund had adopted its policies on broad or general increases in quotas.9 On January 19, 1956, the Executive Directors endorsed a policy under which they would give sympathetic consideration to requests for increases in small quotas. Subsequently, a formula was adopted for this purpose under which categories of quotas could be raised to maximum amounts of $7.5 million, $10 million, $15 million, and $20 million.10 On February 2, 1959, the Board of Governors adopted resolutions permitting an increase of 50 per cent in existing quotas, but for members that had not yet taken advantage of the policy with respect to small quotas, the permissible increase was 50 per cent of the quotas that were possible under that policy.11 By a resolution that became effective on March 31, 1965, the Board of Governors permitted an increase of 25 per cent in all quotas with one exception,12 and by a resolution that became effective on February 9, 1970, total quotas were increased by approximately 35 per cent.13 The resolutions that have permitted broad or general increases in quotas are taken into account in calculating a quota for an applicant. The minimum quota that an applicant was able to expect was increased, therefore, as noted in Chapter 5, to $11.25 million. With the influx of smaller countries, particularly in Africa, the minimum was lowered once again to $7.5 million by giving these countries a choice between that amount and $11.25 million. When even smaller countries applied, it was necessary to guard against the risk that they would find themselves with quotas disproportionate to their needs or to their capacity to repurchase if they were to make purchases on the basis of excessive quotas. Realistic quotas have been determined for these applicants and a fixed minimum has been abandoned.
When the data called for by the Bretton Woods formula are unavailable for a newly independent small country, the staff supplies the committee with a comparison of the exports, imports, national income (if available), and estimated population of the applicant with those of a number of members with quotas up to the normal minimum or a somewhat higher amount if it is relevant. If the normal minimum is obviously large in relation to the applicant’s resources, it is advised that other small countries have found it useful to choose a smaller quota.14
The history of initial quotas can be summarized as follows:
(1) At the end of 1973 there were 126 members, of which 37 had entered the Fund with initial quotas determined by Schedule A.
(2) In the period between 1946 and September 1958, the initial quotas of 27 members were calculated on the basis of the original Bretton Woods formula, but the quotas included in the membership resolutions often differed substantially from the quotas as calculated.
(3) In 1956, the Fund adopted its policy on small quotas.
(4) Between September 1958 and September 1965, 35 new and relatively small countries entered the Fund, and for them the Bretton Woods formula was found to be inappropriate, not only because of the absence of data but also because the formula produced undesirably small quotas. The minimum quota was raised to $11.25 million, and quotas in excess of that amount were determined by comparison with existing members, so that the original formula had some indirect effects in the Fund’s determination of the quotas of applicants in this period. Later, applicants were given the choice between a minimum quota of $7.5 million and one of $11.25 million.
(5) In the mid-1960s, some applicants were so small that the Fund decided to abandon a fixed minimum for quotas.
(6) In 1962–63 the original Bretton Woods formula was modified in a number of ways and its elements reweighted, and a number of variants were developed on the basis of the formula in order to give emphasis to particular economic factors. The Fund has used all of these formulas since the fall of 1965 in calculating the initial quotas of almost all applicants, but it has never held the view that any formula or combination of formulas can do more than indicate an order of magnitude. The use of a number of formulas produces a range of quotas within which an applicant is able to indicate its preference.
On some occasions, an applicant has preferred a quota smaller than the maximum that was being offered or even the minimum that the Fund was willing to permit. There have been a number of reasons for this attitude. The applicant may have thought it unlikely that it would have to use the Fund’s resources, and therefore saw no need for a larger quota, which would enable it to make larger purchases of exchange from the Fund. The applicant may have decided to become a member of the Fund in order to be able to join the World Bank and receive loans for development. Newly independent and inexperienced countries may have requested small quotas because they were uncertain of the obligations that would be incidental to larger quotas.
Some applicants have preferred lower quotas than were available in order to reduce the amount of gold they would be called upon to subscribe. A higher quota may entail a larger subscription in gold. Some countries, both big and little, have been unwilling to use their monetary reserves to pay a gold subscription that seemed to them substantial, and sometimes they have been reluctant to approach the issuer of their reserve currency in order to obtain the necessary amount of gold if they held little or none themselves or were anxious not to reduce their gold holdings.
Sweden is an example of an applicant that refused to accept a quota larger than the one that it wanted. The Government’s presentation to the Riksdag of the case for joining the Fund was based on the announced assumption of a quota of $100 million. When Sweden applied for membership, its representative informed the Managing Director that the Riksdag, in authorizing membership, had discussed it on the basis of a quota of approximately $100 million and a gold subscription of about $14 million. The Fund would have been willing to offer a quota in the range of $125 million to $150 million, with a gold subscription of $17 million, and there was some feeling that Sweden should accept a quota in excess of the amount it wanted. Sweden remained firm on its choice of quota, and the membership resolution provided for a quota of $100 million and a gold subscription of 17 per cent.15
In a decision of February 13, 1952 the Fund assured members that it would give them the overwhelming benefit of any doubt if they should apply for purchases that would not increase the Fund’s holdings of the purchasing member’s currency above a level equal to its quota.16 The amount that a member could purchase in this way became known as the gold tranche because at first the amount is equivalent to the member’s gold subscription. The purpose of the gold tranche policy was to overcome the difficulty that the Fund was unable, for legal reasons, to give an absolute assurance that it would not challenge the representation of a member requesting a purchase that it needed to make the purchase. Under the gold tranche policy, the Fund gave as much assurance as it could that in practice there would be no challenge. As the years went by, the Fund tried increasingly and with much success to have members regard the gold tranche as a reserve asset. Even though a gold subscription gave a member an equivalent gold tranche, some applicants might have been skeptical that gold tranche purchases were really available without challenge. This skepticism was based on the absence of legal assurance and lack of experience of the way in which the Fund operated. In time it became possible to give a legal assurance that there would be no challenge of a request to make a gold tranche purchase. The amendment of the Articles of July 28, 1969 defines the gold tranche as a “reserve position in the Fund” 17 and declares that “proposed gold tranche purchases shall not be subject to challenge.” 18
In the negotiations leading to membership, the chairman of the committee and others have often urged an applicant not to choose a quota lower than the maximum that was being offered, because the applicant would benefit from a larger “second line of reserves.” After the Fund had developed its policy on the sale of an increasing number of currencies in its transactions,19 a larger quota became advantageous for the Fund as well as the applicant. A larger quota meant that the applicant would subscribe a larger amount of its currency. If a member is in a strong balance of payments and reserve position, the Fund may wish to sell the member’s currency in transactions with other members. In encouraging applicants to accept a maximum quota for this reason, the Fund was not pursuing a policy that was detrimental to applicants. The sale of a member’s currency gives it “a reserve position in the Fund” that is recognized as a desirable asset. A reserve position in the Fund has a guaranteed gold value 20 and the Fund pays remuneration on part of it.21 The Fund’s policy on the broader use of currencies in transactions was developed originally to ensure an equitable distribution of burdens, but later the attitude of members changed and they came to regard the policy as one that ensured an equitable distribution of benefits.
One applicant, Libya, requested an increase in the quota included in its membership resolution even before it became a member, and the resolution was amended by increasing the amount from $3 million to $5 million. Some members that had insisted on quotas lower than the maximum offered to them regretted their decision and sought compensating increases in quotas on the occasion of general reviews of quotas. The allocation of special drawing rights at a rate expressed as a percentage of quotas22 is a further inducement, added by the amendment of the Articles in 1969, for an applicant to accept a quota that is as large as possible.
The Fund permitted Senegal, as an exceptional measure, to avail itself by installments of the offer of a quota of $25 million. Senegal would have had difficulty in paying the full gold subscription of $2.5 million that was called for by the Fund, and the resolution provided, therefore, for an initial quota of $7.5 million and equal annual increases over four years. A gold subscription of $750,000 was payable not later than the day on which the Articles were signed on behalf of Senegal, and annual gold subscriptions of $437,500 were payable on prescribed dates thereafter. Senegal was given the option of paying the outstanding balance of the total gold subscription at any time, or of paying on any prescribed date any of the installments of gold payable on future dates. The quota was to increase when any payments were made.23
The Fund has been sympathetic to pleas for equal quotas by applicants that had close ties and felt that their partnership might be strained by unequal quotas. The request for equal quotas by Burundi and Rwanda was not difficult to meet. They shared a common monetary system and a common currency that was issued by the Bank of Issue of Rwanda and Burundi (Banque d’Emission du Rwanda et du Burundi). There were no data on the basis of which to apply the Bretton Woods formula. The applications of the two countries were considered at the same time, a quota of $11.25 million was established for each, and they became members within two days of each other.
The applications of Tanganyika, Uganda, and Kenya were more complicated. Tanganyika became a member on September 10, 1962. Uganda did not apply for membership until September 15, 1962, but Kenya was not yet independent at that date and did not apply until July 29, 1963. The three countries constituted a common market and had a common currency. Tanganyika had a quota of $25 million, but the three countries were aware that the available statistics might lead to different quotas, one less and one more than $25 million. They therefore requested that, in view of their existing ties and their declared policy of even closer collaboration, each should have a quota of $25 million. The Fund was able to comply by giving somewhat less than the normal weight to statistics but also by relying to some extent on the inadequacy of data.
Subsequently, the three members ceased to have a common currency and each established a central bank and issued a currency of its own. The Board of Governors adopted a resolution in 1970 under which, as the result of a general review, members were permitted to increase their quotas. Kenya, Tanzania, and Uganda consented to the increases proposed for them, whereupon their quotas became $48 million, $42 million, and $40 million, respectively.
Normally, a member’s subscription is payable partly in gold and partly in the member’s currency. Only the portion payable in gold may seem burdensome to members because only that portion requires a transfer of reserves to the Fund. The payment of domestic currency produces no reduction in reserves, and it need not even create a budgetary problem because a member can substitute nonnegotiable, noninterest-bearing notes or similar obligations for that part of the currency not needed for the time being for the Fund’s operations. The obligations may be issued by the member or by its depository and must be payable on demand.24 It is not surprising, therefore, that the Fund has had to develop policies with respect to the portion of subscriptions payable in gold. Nor is it surprising that this portion has been the subject sometimes of troublesome negotiations with applicants.
The Fund has never required a gold subscription in excess of 25 per cent of quota.25 Until the membership resolution for the Bahamas, which became effective on July 3, 1973, the Fund insisted steadfastly on a gold subscription. The payment of gold has been regarded as a contribution to the Fund’s liquid resources, because the Fund is entitled to replenish its holdings of any currency with gold.26 A member’s currency may or may not be useful for the Fund under its policy on the currencies that are selected for sale in its transactions. The Fund’s policy until the resolution for the Bahamas has been that no country should be able to enjoy the benefits of membership without adding to the Fund’s resources of gold. Often, however, the contribution has been small in relation to quota or no more than symbolic. An initial gold subscription of less than 25 per cent of quota, and therefore a subscription larger than 75 per cent in the member’s currency, may give rise to repurchase obligations that reduce the Fund’s holdings of the member’s currency to 75 per cent of its quota even though the member makes no purchases of exchange from the Fund. The obligations may accrue if the member’s total monetary reserves increase, but the obligations will then have to be discharged in the types of reserve that increase, so that there is no assurance that gold will have to be paid.27 Moreover, under the original Articles an obligation could not arise unless the member’s monetary reserves increased to a level in excess of its quota, and a member was not required to discharge that part of any obligation that did accrue that would reduce its monetary reserves below this level.28
Article III, Section 3 (a), provides that the “subscription of each member shall be equal to its quota.” It might be argued, on the basis of the function of the date of September 12, 1946 in the determination of the amount payable in gold,29 that the provision applies to original members only and not to “other members” that enter the Fund under Article II, Section 2. It is inconceivable, however, that the Fund would forgo a subscription under the terms it prescribes for membership. The provisions governing the financial operations conducted through the General Account are based on the principle that members in deficit in their balances of payments will be able to purchase the currencies of members in surplus. Moreover, for various purposes a member’s position in the Fund depends on the level of the Fund’s holdings of the member’s currency in relation to its quota or on the amount of its currency that other members have purchased.30 Every membership resolution provides, therefore, that the member’s subscription shall be equal to its quota.
Article III, Section 3 (b), provides that each member shall pay a minimum amount of gold equal to the smaller of 25 per cent of its quota or 10 per cent of the net official holdings of gold and U. S. dollars it owned at the date when the Fund notified members that it would shortly be in a position to begin exchange transactions. According to Article III, Section 3 (c), each member must pay the rest of its subscription in its own currency. Once again, however, it would seem that the provision defining the amount of the gold subscription refers only to original members. The resolution that approved membership under Article II, Section 2, for all countries in Schedule A that accepted membership in accordance with the provisions of Article XX at any time after 1945 and before the end of 1946 was understood to have applied the provision of the Articles that dealt with gold subscriptions to these members as well. Article III, Section 3 (b), did not apply to them of its own force but must be taken to have been imposed as an implied term under Article II, Section 2.
Nothing specific was said about gold subscriptions in the first, third, and fourth membership resolutions that dealt with individual applicants (Lebanon, Syria, and Turkey, respectively), and it was assumed either that Article III, Section 3 (b), applied to them or that the provision was being extended to them by implication. Whatever the explanation, these applicants were required to pay gold subscriptions equal to the lesser of 25 per cent of quota or 10 per cent of the net official holdings of gold and U. S. dollars they owned on September 12, 1946.
The second individual membership resolution, for Italy, applied the formula in Article III, Section 3 (b), by providing that Section 3 (d) of that Article should apply. Under the latter provision, if the net official holdings of gold and U. S. dollars owned by a member on September 12, 1946 were not ascertainable because its territories had been occupied by the enemy, the Fund had to fix an appropriate alternative date.
The resolution applied Section 3 (d) of Article III to Italy not only for the purpose of determining the amount of Italy’s gold subscription but also in order to clarify the status of Italy in relation to that and other provisions that refer to occupation by the enemy. The enemy meant the enemy of the United and Associated Nations, of which Italy was not one, although it was occupied by the forces of a country that was an enemy of the United and Associated Nations after Italy became a co-belligerent of the United Nations in October 1943. The Fund wanted to give Italy the same beneficial treatment that countries occupied by the enemy received under certain provisions, and therefore the resolution declared that these provisions would apply to Italy. The provisions were applied as terms prescribed under Article II, Section 2, but it is not clear whether the Fund considered that Italy had been occupied by the enemy or should be treated as if it had been occupied by the enemy. The resolution shows that terms may be prescribed in order to confer benefits on members and not solely to impose obligations on them.
Whatever was the theory with respect to occupation by the enemy on which certain provisions were made to apply to Italy, the theory was not applied to Syria and Lebanon. Military operations took place in their territories in 1941 as a result of which British and Free French forces wrested control from the Vichy Government of France. The territories of these countries could not be treated as having been occupied by the enemy, and therefore they were not given the benefit of the provisions that were based on occupation by the enemy. Although the result may seem strange, it is not wholly illogical. The principle of the special provisions was that a country that had been occupied by the enemy was likely to have had a monetary regime thrust upon it without regard to its interests, and therefore it would have been too harsh to expect it to comply with all provisions of the Articles as readily as members that had not been occupied. The purpose of the special provisions was to reduce the burdens of compliance for the benefit of members that had been occupied by the enemy. It would have been inappropriate to give this relief to countries that had been subject to the control of the United and Associated Nations but had not been regarded by them as adhering to the enemy.
The fifth individual membership resolution, for Australia, declared that the subscription was to be paid in accordance with Article III, Section 3, but the next resolution, for Finland, initiated a new practice. By mid-1947 it had become apparent that it was unrealistic to use a formula under which a gold subscription was affected by a country’s holdings on September 12, 1946, and it was concluded therefore that the formula as a whole might be reconsidered in relation to each applicant. From that time on, the terms prescribing gold subscriptions ceased to be uniform and were influenced by the special circumstances of each applicant, although no applicant has ever been required to pay a gold subscription in excess of 25 per cent of quota.
When an applicant has had modest reserves as calculated by the Fund, the applicant has been required to pay a small gold subscription that was roughly equivalent to 10 per cent of its net official holdings of gold and U. S. dollars. Gold subscriptions of 2 per cent of quota under the resolution for Finland and 3½ per cent of quota under the resolutions for Pakistan and Nepal are examples of this practice. Sometimes an applicant has had modest or even no monetary reserves, as calculated by the Fund, because it belonged to currency arrangements under which a central pool of reserves was owned by the leading participant in the arrangements. For example, some sterling area countries that applied for membership before sterling became a convertible currency under the Articles had no holdings of gold or convertible currencies and were required to pay only what were referred to as token gold subscriptions. The Fund did not forgo gold subscriptions even though the gold subscription of the United Kingdom had been calculated on the basis of the total pooled resources of the sterling area without any attempt to attribute a smaller amount to the United Kingdom itself. The Fund was not rigid, however, in establishing the gold subscriptions of applicants in the sterling area. Burma and Ceylon illustrate this flexibility. Both were members of the sterling area and owned no holdings of gold or convertible currencies of their own. The resolution for Ceylon became effective on July 31, 1950 and for Burma on May 15, 1951. The quotas were the same for both, i.e., $15 million, but the gold subscription for Ceylon was 5 per cent of quota and for Burma it was 3⅓ per cent. Although there was some discussion of the difference between the two countries as a net contributor or net user of U. S. dollars under sterling area arrangements, this consideration was not the admitted reason for the difference in the gold subscriptions. The main reason for the smaller gold subscription required of Burma was the length of the negotiations and the desire finally to accelerate membership. Other so-called token gold subscriptions of 3½ per cent of quota were established for the Sudan, Ghana, and Malaya.
The proportion of 3½ per cent of quota almost became the rule for applicants with low reserves. Sometimes it was chosen because of the difficulties of determining the applicant’s reserves, although it was apparent that they would be low if the legal or other difficulties of calculation were resolved. For example, the Bank of Algeria and Tunisia (Banque de l’Algérie et de la Tunisie) held the modest monetary reserves of both Tunisia and Algeria, but as it was not possible to say what part belonged to Tunisia, a gold subscription of 3½ per cent of quota was prescribed.
In the treatment of the applications of Nigeria and Cyprus a new principle emerged. Two segments were distinguished in the quota of an applicant that held reserves largely or wholly in inconvertible currency and therefore owned low monetary reserves as calculated by the Fund. One segment was the amount that would have been the applicant’s quota under the Bretton Woods formula for the calculation of quotas, and the other segment was the amount that the applicant could have had as an increase in quota had it been a member at the time of the general increase in quotas in 1959.31 On the segment based on the formula a gold subscription equivalent to 3½ per cent of quota was established, but a gold subscription equivalent to 25 per cent was required in respect of the rest of the quota.32 The gold subscription was determined in this way because it was equivalent to the amount of gold that had been contributed by members that had paid token gold subscriptions but had paid further gold subscriptions when they had received increases in their quotas.
The determination of the gold subscription of Senegal represented another new departure in practice. Senegal owned no reserves in its own right. The Central Bank of West African States (Banque Centrale des Etats Africains de l’Ouest) held the pooled reserves of the countries of former French West Africa, and there was no agreed formula for the attribution of these reserves to the individual countries. The committee decided that the gold subscriptions of these countries should be paid in such a way that, if all the countries became members, the formula of the lesser of 25 per cent of quota or 10 per cent of net official holdings would have been applied in effect to the total holdings of the Central Bank. For this purpose, a calculation was made of the approximate quotas that would be appropriate for these countries should they wish to join the Fund, and the holdings of the Bank were attributed to the countries on the basis of these quotas. The holdings of the Bank were in French francs, but by the time of the committee’s deliberations the French franc had become convertible under the Articles.
A protocol was agreed between Senegal and the Central Bank for the payment of Senegal’s subscription and for the performance of certain activities related to Senegal’s membership in the Fund. The Bank agreed to pay the gold subscription on behalf of Senegal and for this purpose used French francs in its operations account with the French Treasury. The Bank showed this amount in its books as an asset. Senegal paid the remainder of its subscription, i.e., the currency portion, from its own funds. The loss of interest sustained by the Central Bank on the holdings in its operations account resulting from the purchase of gold with francs was set off against Senegal’s share in the distribution of the Bank’s profits. The Central Bank was designated Senegal’s fiscal agency under Article V, Section 1, and depository for the Fund’s holdings of Senegal’s currency under Article XIII, Section 2. The Bank agreed to carry out operations with the Fund on behalf of Senegal and to assist Senegal in proposing an initial par value or any change in par value. The proceeds of the resale of any exchange purchased by Senegal from the Fund would be paid into an account opened with the Central Bank in the name of Senegal in order to enable it to reacquire exchange with which to make a repurchase from the Fund at the proper time. The protocol also included provisions on the arrangements to be made between Senegal and the Central Bank if Senegal were to issue a currency of its own and establish a separate central bank.
The principle adopted for the gold subscription of Senegal was carried a step further for Chad, the Central African Republic, Congo (Brazzaville), and Gabon, countries that had constituted French Equatorial Africa before they attained independence. These four countries and Cameroon shared a common currency, the CFA franc issued by their common bank of issue, the Central Bank of Equatorial African States and Cameroon (Banque Centrale des Etats de l’Afrique Equatoriale et du Cameroun). The Bank held the foreign assets of Cameroon separately but held the assets of the other four countries jointly and indistinguishably. The four countries applied for membership at approximately the same time, so that the Fund was able to consider the applications as a group. The applicants informed the Fund that each would be content with a quota of $7.5 million, and the Fund agreed to offer them these quotas, although it would have been willing to offer larger amounts. The Fund found that the holdings of the Central Bank were less than 25 per cent of the total of the four quotas, and therefore a gold subscription was prescribed for each applicant that was equivalent to 2.5 per cent of the Bank’s holdings as of the date on which each applicant made the representation that it had taken all action necessary to sign and deposit its instrument of acceptance and sign the Articles. If by that date the holdings of the Bank had been divided among the four countries, the applicant would have to pay a gold subscription equal to 10 per cent of its net official holdings of gold and convertible currencies. The four countries were anxious to pay the same gold subscriptions, and they arranged therefore to make their representations on the same day.
The Fund was faced with similar difficulties when considering the membership resolution for Sierra Leone. The currency of that country, the West African pound, circulated in other countries as well, and the reserves that supported it were held by the West African Currency Board. Under the arrangements governing the Board, Sierra Leone would have a claim to a share of these reserves if it established a currency authority of its own. The share would be based on the ratio of the Board’s currency withdrawn from Sierra Leone to the total amount in circulation. The formula for the gold subscription as prescribed by the Fund was the lesser of two amounts, of which the first was 25 per cent of quota. The second amount was the total of two elements: $1,233,100, which was 10 per cent of the assets of the Board that it was thought might be allocated to Sierra Leone, plus 10 per cent of the net official holdings of gold and convertible currencies of Sierra Leone as of the date that it made the representation, which element was included in the formula because Sierra Leone already held independent working balances in sterling at the time of its application. It was further provided by the resolution that if, before the date of its representation, Sierra Leone had received its allocated share of the assets of the West African Currency Board, there would be no need for a complicated formula including an estimate of the Board’s assets that might be allocated to Sierra Leone, and the amount of the gold subscription was then to be 10 per cent of the net official holdings of gold and convertible currencies owned by Sierra Leone on the date of the representation.33
The Fund has prescribed gold subscriptions of a defined amount or percentage of quota even though applicants have not had low reserves. The membership resolution for Austria called for a gold subscription of not less than 10 per cent of the subscription of $50 million, but the next resolution, for Siam, prescribed a gold subscription of not less than 25 per cent of quota. The calculation of monetary reserves for Siam had shown that the alternative of 10 per cent of its net official holdings of gold and U. S. dollars would not be relevant because the amount would exceed 25 per cent of quota. The membership resolution for Cyprus introduced a practice by which a fixed amount ($1,952,500), instead of a proportion of the total quota ($11,250,000), was prescribed as the minimum gold subscription. The amount that was prescribed was calculated on the basis of two segments of quota, as explained earlier in this chapter, and was stated as a fixed amount in order to avoid a term that sets forth a formula consisting of two amounts of gold. In addition, a gold subscription of fixed amount, or of fixed proportion of quota, avoids the complicated questions of law and fact that sometimes arise because the criterion of net official holdings is included in a resolution and must therefore be applied with precision. Moreover, the prescription of a fixed amount permits the deliberate inclusion of claims in the data on which the amount is calculated, because inclusion seems equitable even though claims would not be considered holdings in the legal sense. It has become the standard practice now to prescribe a fixed amount. For a time the amount was expressed in U. S. dollars, but now it is expressed in special drawing rights.
In some recent resolutions, the amount prescribed as the gold subscription has been determined by taking into account not only the amount of the applicant’s holdings but also a forthcoming allocation of special drawing rights that it would be able to receive. The average gold subscription paid by members that had recently entered the Fund with comparable quotas has also been taken into account.
The formula of the Articles has been incorporated in a number of resolutions, with variations that were appropriate because of monetary developments. The first membership resolution for Indonesia employed the model of Article III, Section 3 (b), with the substitution of a new date for September 12, 1946. The effective date of the resolution was September 10, 1952, and the earlier date had long since become unrealistic. The date substituted for September 12, 1946 was the future and not yet ascertained date on which Indonesia would make the representation that it had taken all action necessary to sign and deposit its instrument of acceptance and sign the Articles.
The second resolution for Liberia, which became effective on September 20, 1961, also followed the model of Article III, Section 3 (b), but two modifications of past practice were made. Convertible currencies were substituted for U. S. dollars in the formula of 10 per cent of net official holdings of gold and U. S. dollars, and the resolution prescribed a fixed date, May 1, 1961, for the date as of which these holdings were to be determined, instead of the uncertain date of the representation. The former change was made because a number of members had made their currencies convertible by accepting the obligations of Article VIII, Sections 2, 3, and 4, and it was no longer reasonable to confine the calculation to holdings of gold and U. S. dollars. The latter change was made because the calculation could be made for a fixed date without postponing the calculation until after the date of the representation. The earlier calculation could enable the applicant to enter the Fund with less delay.
The Fund required a gold subscription from applicants whether or not they held gold in their reserves. The amount of the gold subscription depended on total reserves and not on holdings of gold alone. In 1972 exceptional difficulties arose for applicants in obtaining gold for the payment of subscriptions to the Fund. The suspension of the official convertibility of the U. S. dollar into gold on August 15, 1971 deprived countries of an assured source for the replenishment of their holdings of gold if they should part with any of their holdings. The growing difference between the official price and the market price meant that if a member supplied gold to an applicant at the official price, the member might suffer a loss of potential profit because at some time it might decide to sell its gold in the market. The sacrifice of this potential profit might subject the monetary authorities to public criticism. These reasons for the reluctance to supply gold to applicants were intensified by uncertainties about the future role of gold and its future official price.
In mid-1972 the Fund used its good offices with members to enable three applicants to acquire the gold they needed to pay their subscriptions, but in 1973 gold was not forthcoming to assist the Bahamas, which held no gold in its reserves. For the first time in its history, the Fund adopted a resolution under which no part of the subscription was payable in gold. Instead, terms were included in the resolution under which the Bahamas was required to pay a subscription in its currency equal to its full quota. Payment had to be made within 4 months after the Bahamas became a member, and within 60 days after payment the Bahamas had to repurchase 25 per cent of the subscription with gold, special drawing rights, or convertible currencies acceptable to the Fund. In effect, therefore, the Bahamas was permitted to pay a subscription of 25 per cent in reserve assets of its choice, including convertible currencies. The break with tradition was not easy, but was made not only because of the profound disturbances in the international monetary system but also because insistence on a gold subscription would have had the effect of withholding the benefits of membership from the Bahamas because of circumstances beyond its control.34
When the amendment of the Articles to establish special drawing rights was being drafted, one proposal was that it should be possible to pay part of a subscription with special drawing rights instead of gold. The proposal was rejected largely because of the opposition of those who thought that gold and special drawing rights should not be given equal status. The Fund is empowered, however, to receive special drawing rights from a member in repurchase of its currency. The terms of the membership resolution for the Bahamas enabled it to repurchase part of its currency subscription with special drawing rights even though it could not have used the new reserve asset to pay that part of the subscription directly.
Two other departures have been made from the model of the provisions in the Articles that deal with subscriptions. First, Article XX, Section 2 (d), provides that when the Articles are signed on behalf of a government, it shall transmit to the Government of the United States 1/100 of 1 per cent of its total subscription in gold or U. S. dollars for the purpose of meeting the administrative expenses of the Fund. The Government of the United States was required to hold these funds in a special deposit account and transmit them to the Board of Governors when the initial meeting of the Board was called. Payments were made by the original members, the five members that joined early in 1946, the five members that took advantage of the resolution permitting countries to enter the Fund before the end of 1946 on the same terms as original members, and the members that entered under the first four individual membership resolutions. The practice was abandoned at an early date because special provision for administrative purposes became unnecessary once the Fund had acquired adequate resources.
Second, under the Articles a member had to pay both the gold and the currency portions of its subscription on or before the date when the initial par value for its currency was established.35 This practice was followed until the Fund adopted the membership resolution for Siam, in which it was provided instead that the gold subscription should be paid on or before the date on which the Articles were signed on behalf of Siam.36 Although the resolution for Siam was the first in which the change was made, it had been decided earlier, in connection with the application of Liberia, to recommend the change, but the Board of Governors adopted the resolution for Siam before it acted on the proposed resolution for Liberia. The change was considered desirable in connection with Liberia because its currency was not the main currency in circulation and because it had no central bank. The Fund concluded that there might be a long delay before Liberia established a par value for its domestic currency, but Liberia would have certain advantages of membership before that date and therefore should make an early contribution to the Fund’s resources. The Executive Directors agreed, however, that the change should not be a precedent. The practice was followed for Siam because it had volunteered to make the earlier payment of its gold subscription, but even so one director recorded his view that no precedent was intended. Notwithstanding the protestations that no precedent was intended, the new practice has been followed in all subsequent resolutions.
Under a decision of the Executive Directors, the portion of a subscription payable in currency was payable not later than the date on which an initial par value for the currency was established, but it was sometimes difficult to comply with this decision, and membership resolutions, beginning with the resolution for Finland, have provided for payment not later than 30 days after the establishment of an initial par value. It will be seen in a later section of this chapter, however, that when the Fund permits an exchange transaction before the establishment of an initial par value, the currency subscription must be paid, at a provisional rate of exchange, before the transaction is completed. In addition, if a member’s quota is increased before the establishment of an initial par value, the member must pay an additional subscription equal to the increase. Both the currency and the gold portions must be paid, even though the original currency subscription has not yet become payable. The currency portion of the additional subscription is calculated on the basis of a provisional rate of exchange.
Par Value and Exchange Rates
The Articles contain lengthy provisions on the initial determination of the par values of the currencies of original members. The procedure was to begin with a notice to members that the Fund would “shortly be in a position to begin exchange transactions.” 37 Notice was given on September 12, 1946 that the Fund would begin exchange transactions on March 1, 1947.38 The Fund was required, when giving the notice, to request each member to communicate within 30 days the par value of its Currency based on the exchange rates prevailing on the sixtieth day before the entry into force of the Articles.39 The provision requiring the communication of a par value based on rates in the past was designed to prevent any member from manipulating the exchange rates for its currency in an attempt to establish an inappropriate par value. The par value communicated by a member in accordance with this procedure was to be the initial par value for the purposes of the Articles unless, within 90 days after the Fund’s request for the communication of par values, the member notified the Fund that it regarded the communicated par value for its currency as unsatisfactory or the Fund notified the member that in its opinion the par value could not be maintained without causing recourse to the Fund by the member or by other members for financial assistance on a scale prejudicial to the Fund and to members. If either notice was given, the Fund and the member had to agree on a suitable par value within some period deemed appropriate by the Fund, and if the Fund and the member did not reach agreement within this period, the member was deemed to have withdrawn from the Fund.40 Exceptional procedures were established by the Articles for a member if its metropolitan territory had been occupied by the enemy.41
The basic provisions on the initial determination of the par values of the currencies of original members were adapted with little change to other members. The first individual membership resolution provided that within 30 days after a request by the Fund, Lebanon must communicate the par value of its currency based on the rates of exchange prevailing on the date it became a member. Thereafter, the procedure was to be as prescribed by the Articles, except that the period of 90 days was to begin on the date Lebanon received the Fund’s request for the communication of the par value.42 With the resolution for Finland, the term relating to the establishment of a par value ceased to refer to the provisions of the Articles. The resolution required Finland to communicate a par value within 30 days of a request as required under the earlier resolutions, but it was prescribed that the Fund and Finland had to agree on a par value within 60 days after the Fund’s receipt of the communicated par value, or within any extension of that period by the Fund. If agreement was not reached within the prescribed or any extended period, Finland was to be regarded as having withdrawn from the Fund. A similar term has been included in all subsequent membership resolutions, except that beginning with the resolution for Afghanistan the practice has been to refer to the communication of a proposed par value without requiring that it be based on the rates of exchange prevailing on the date when the applicant became a member. The rates as of that date, which had been prescribed by analogy to the Articles and with the same objective, lost much of their rationale once resolutions began to require that a member must obtain the agreement of the Fund for any change in rates before the establishment of an initial par value. The change eliminated the difficulty in determining what were the exchange rates on which a member should base its communication if it had employed complex multiple currency practices when it entered the Fund.
The procedure for the initial determination of a par value under a resolution does not preclude initiative by a member, even though the language of the resolution refers only to initiative by the Fund. A member can suggest that the Fund request the communication of a par value, or a member can communicate a par value without a request. The procedure as described in resolutions is a safeguard enabling the Fund to accelerate the establishment of an initial par value if a member is dilatory, but it does not prevent a member from starting the process if it thinks that the time has come. In practice, the difference between the two initiatives is largely formal because the Fund has rarely, if ever, made the request for a communication before a member was ready to respond to it.
With one exception, the Articles contain no explicit provisions on a member’s obligations if it should change the exchange rates for its currency before establishing an initial par value, whether the change was contemplated before or after the communication of an initial par value in response to the Fund’s request of September 12, 1946.43 The exceptional provision deals, as usual, with members that had undergone the occupation of their metropolitan territory by the enemy. After such a member had communicated a par value, it was bound, in the period before an initial par value was established in accordance with the Articles, to get the agreement of the Fund before changing the communicated par value.44 The obligation of a member in these circumstances may seem surprising, but it was based on the assumption that there might be considerable delay before the Fund required it to establish a par value for its currency.
Apart from the resolution for Italy, the earliest membership resolutions said nothing about changes in exchange rates before the establishment of an initial par value. A new development occurred in connection with the resolution for Burma. The resolution provided that in the period between the acceptance of membership and the establishment of a par value in accordance with the resolution, Burma was required not to change the exchange rates for its currency prevailing at the time of the acceptance of membership without consulting the Fund in advance of the change and obtaining its agreement. This term has been incorporated in all subsequent resolutions. It applies not only to the first departure from the rates prevailing at the time when membership is accepted, but also to any later changes that are made in exchange rates before the initial determination of a par value. All changes are considered changes of the rates prevailing at the time when membership is accepted.
Even before the Board of Governors adopted the resolution for Burma, the Fund had informed members in a letter of December 19, 1947 that its jurisdiction over multiple currency practices applied to a currency whether or not an initial par value had been established, and no distinction was drawn between members that were subject to the provisions of the Articles and members that were subject to membership resolutions on the initial determination of a par value.45 The term first used in the resolution for Burma applies, however, even though a member has a unitary exchange system. When the new term was being considered for Burma, the question was raised whether certain provisions relating to par values should be applied by analogy. For example, should a member be allowed to change its exchange rate, after consulting the Fund, without the necessity for concurrence by the Fund if the change, with all other changes since the date of membership, was no more than 10 per cent of the rate prevailing at the time when membership was accepted? 46 The Fund, in the conviction that it would always act reasonably, decided that there should be no exceptions to the need for agreement.
At the time when the Fund was discussing the terms of a resolution for Burma, it was also considering the application of Germany, and that application may have influenced the Fund to adopt the new term. The Occupation Statute for Germany had been amended, with effect from March 7, 1951, to provide that one of the specific powers reserved by the occupation authorities was control over the exchange rate to the extent necessary to ensure the observance by the Federal Republic of the principles and practices of the Fund until such time as the Federal Republic had become a member of the Fund “and assumed satisfactory obligations thereunder with respect to its exchange rate.” 47 It is probable that the amendment of the Occupation Statute had been drafted on the assumption that the Fund’s membership resolutions contained no express term with respect to changes in exchange rates before the establishment of an initial par value. The amendment may have emphasized the undesirability of this lacuna. It had been eliminated in three resolutions by the time the Board of Governors adopted a resolution for Germany.
Although changes in exchange rates after a country accepts membership may be made only with the agreement of the Fund, the elimination or modification of an exchange practice has never been a condition of the Fund’s willingness to offer membership and has never been required as a term in a membership resolution. The Fund has practiced this restraint even though Section 21 of the By-Laws authorizes the Executive Directors to recommend to the Board of Governors “the parity of the currency, conditions regarding exchange restrictions, and such other conditions” as the Executive Directors think the Board may wish to prescribe. The Fund’s policy of working with an applicant after it becomes a member on any reform in its exchange system that may be desirable, instead of requiring reform as a term of the membership resolution, may have developed without design but it is now deliberate. For example, in the course of the committee’s consideration of one application in recent years, it was suggested that the resolution should require the applicant to eliminate a discriminatory currency arrangement, but the suggestion was rejected. The Fund’s practice is further evidence of a desire to interpose as few impediments to membership as possible in the interest of an implicit policy of universalism.
Exchange Transactions with Fund
The Articles declare that an original member would become eligible to use the Fund’s resources when it had established a par value in accordance with the Articles, or, if the member’s metropolitan territory had been occupied by the enemy, when the Fund had determined the conditions for and the amounts of transactions that a member would be permitted to enter into, even though it had not established an initial par value.48 The member had to complete the payment of its subscription not later than the date on which it became eligible to use the Fund’s resources.49
The earliest membership resolutions dealt with the establishment of par values but included no express reference to the eligibility of members to enter into exchange transactions with the Fund. With the membership resolution for Finland, the Fund initiated the practice of including an express term under which a member was unable to engage in exchange transactions before the thirtieth day after it had established an initial par value in accordance with the resolution, and under which payment of the subscription had to be completed before that thirtieth day. If the member completed payment of its subscription after the 30 days had run their course, it became eligible to engage in transactions with the Fund immediately thereafter. The delay of 30 days was prescribed because under early resolutions the member had to supply data to enable the Fund to calculate net official holdings as of the date on which the member established the initial par value of its currency, and then the member had to make arrangements for paying its subscription. These arrangements might take some time, for example because the Fund had to be satisfied that the nonnegotiable, noninterest-bearing notes or similar obligations that the member might wish to substitute for its currency were in a satisfactory form.50
In 1963, the practice was reconsidered as the result of a proposal by Afghanistan to establish a par value and its contemporaneous request for an exchange transaction. The need for a delay of 30 days had become unnecessary because under many resolutions the gold subscription was a fixed amount or a fixed proportion of the total subscription, and had to be paid not when the initial par value was established but at the earlier date when the member made its representation that it had taken all action necessary to enable it to sign and deposit its instrument of acceptance and sign the Articles. If the amount of the gold subscription did depend on a calculation of net official holdings, the holdings were those owned by the member on the date of the representation, and not on the date of the establishment of the par value.
The Executive Directors decided to recommend to the Board of Governors that the period of delay should be eliminated from the membership resolutions of members that had not yet established par values. The Board of Governors followed the recommendation of the Executive Directors and adopted a resolution, which took effect on April 12, 1963, amending 26 membership resolutions.51 Under the amended resolutions, each of these 26 members was enabled to enter into exchange transactions as soon as it had established a par value in accordance with its resolution, put the par value into operation, and paid its subscription in full. The requirement that the par value must have been put into operation had been implied under the resolutions that referred to agreement on a par value as a condition of eligibility, but some critics had made the point that there was an opportunity for misunderstanding when there was agreement on a par value that was to become effective after a brief delay. The explicit requirement that the par value must have become effective eliminated any problem that might have resulted from this delay. The modified formulation has been incorporated in all membership resolutions since the date of the amendment of the resolutions.
The resolution for Italy had permitted it to use the Fund’s resources before establishing a par value by applying to it all the provisions of the Articles that dealt with members that had undergone the occupation of their metropolitan territories by the enemy. The problem of the use of the Fund’s resources before agreement on a par value was not discussed in principle because the resolution was adopted in the early years of the Fund at a time when it seemed appropriate to apply to Italy the provisions that granted benefits because of recent occupation.
The first detailed discussion of use of the Fund’s resources by a member that had not yet established a par value for its currency was the result of an initiative on behalf of Thailand at the seventh annual meeting of the Board of Governors in 1952.52 As a result, the Board of Governors in 1953 adopted amendments of the membership resolutions for Thailand, which was already a member of the Fund, and for Indonesia, which had not yet entered the Fund.53 The amendments authorized the Fund to permit exchange transactions with either country on the same terms and conditions as those prescribed by Article XX, Section 4 (d) (ii). The rationale of the amendments was that the metropolitan territories of both countries had been occupied by the enemy, so that the amendments did no more than make available to members under Article II, Section 2, a privilege that was enjoyed by original members that had been subjected to occupation. Notwithstanding this rationale, there was a widespread impression that by 1953 the distinction between groups of countries on the basis of occupation had lost some of its force, and that to allow a member limited privileges to use the Fund’s resources before agreement on a par value would not only assist the member but might also serve the purposes of the Fund.
The amendments of the two resolutions resulted from a broader proposal that would have authorized the Fund to permit exchange transactions for the benefit of any member before it had agreed a par value for its currency whether or not it had been occupied by the enemy. The Executive Directors were advised that a term of this kind would be legal and compatible with the purposes of the Fund if transactions were permitted when they promoted those purposes. The discretion of the Board of Governors to adopt terms for membership, whether they involved benefits or burdens for members, could be exercised in whatever way it thought appropriate provided that the basic concepts of membership in the Fund were not varied and a category of members was not created with a status permanently different from that of other members. The staff concluded, therefore, that Article XX, Section 4 (d) (ii), was not the manifestation of a principle confining transactions to original members that had suffered occupation, but instead was evidence that it was not a principle to prohibit transactions before the establishment of an initial par value. It would be inconsistent with principle, however, to “entitle”54 a member to engage in exchange transactions before it established a par value, but permission on conditions and in amounts determined by the Fund would not be objectionable.
In the discussion of the proposal, some executive directors who supported it argued that it was ritualistic to deny a member any opportunity to use the Fund’s resources before it had agreed a par value while a member that had agreed a par value remained eligible to use the Fund’s resources even though it was not ensuring the effectiveness of the par value in exchange transactions. The Fund was able to declare the latter member ineligible to use the Fund’s resources if it found that the member was failing to fulfill any of its obligations,55 but it had become the practice of the Fund to avoid declarations of ineligibility.56 Another point made in the discussion of the proposal was that one original member, Uruguay, had not agreed an initial par value with the Fund and was not in the process of agreeing one. Uruguay could not be permitted to use the Fund’s resources in the absence of an initial par value because it had not undergone occupation. The Executive Directors decided in 1953 to limit their recommendation to Thailand and Indonesia, mainly because they thought that it would be a discrimination against Uruguay if other members were permitted to use the Fund’s resources before agreeing an initial par value.
The amendments adopted for the benefit of Thailand and Indonesia were not incorporated in subsequent resolutions, even though some of them were in response to applications by countries that had been occupied by the enemy. From time to time, however, an applicant or a member that had not yet established a par value for its currency raised the question of eligibility to use the Fund’s resources. By the early 1960s the number of members that were unable, for diverse reasons, to establish an effective and justifiable initial par value was growing. The Fund was unable to contribute to the solution of the problems of these members except by advice, which carried less impact because it could not be backed with resources. Many of these members had small quotas and were engaged in the production of primary commodities. There appeared to be an inconsistency between the inability of these members to use the Fund’s resources and the Fund’s adoption of policies intended to benefit them, such as its policies on special increases in quotas 57 and on the compensatory financing of shortfalls in the proceeds of exports of primary products.58 In addition, a substantial number of members were failing to give effect to established par values, or were maintaining an established par value with numerous restrictions, or were applying multiple currency practices. Among the counterarguments, the most troubling was that transactions before the establishment of an initial par value might weaken an international monetary system based on par values.
In 1964, the Board of Governors resolved to amend the membership resolutions for 29 members that had not yet established par values for their currencies.59 The amendments were uniform and took the form of a proviso to the paragraph under which exchange transactions were permitted after an initial par value was agreed and put into operation and the subscription had been paid in full. The proviso declares that the Executive Directors are authorized to permit exchange transactions with a member before these events have occurred, under such conditions and in such amounts as the Executive Directors may prescribe. The Executive Directors also decided to insert a similar proviso in all proposed membership resolutions that they would submit to the Board of Governors in the future, and this has been the standard practice.
In another decision, the Executive Directors agreed that when they prescribed the conditions and the amount of an exchange transaction before the establishment of an initial par value, the member would be required to complete the payment of its subscription, which means the portion payable in the member’s currency, on the basis of a provisional rate of exchange proposed by the member and agreed by the Fund. In deciding whether to permit exchange transactions in these circumstances, the Fund “will encourage members to follow policies leading to the establishment of realistic exchange rates and to the adoption at the earliest feasible date of effective par values, and will take into account the efforts that are being made to achieve this objective.” 60 The Executive Directors wished to guard against the danger that exchange transactions before the establishment of initial par values might undermine the standards of the Articles and the Fund’s policies. The Fund recognized that although there might be an interval before the establishment of a par value, in that interval the exchange rate for a member’s currency should be “realistic,” which may be taken to mean compatible with the member’s interests and not prejudicial to the interests of other members. The Executive Directors also decided that they would apply the Fund’s policies on gold tranche purchases and purchases under the compensatory financing facility for the benefit of members even though they had not established a par value.61
Representation and Information
A term that has appeared in resolutions since the membership resolution for Ceylon requires that an applicant, before accepting membership, (1) shall represent to the Fund that it has taken all action necessary to sign and deposit its instrument of acceptance and sign the Articles, and (2) shall furnish to the Fund such information in respect of this action as the Fund may request. This term enables the Fund to call for data connected with any calculation it must make of net official holdings of gold and convertible currencies, and for a copy of the applicant’s proposed “Bretton Woods legislation.” 62
The second membership resolution for Indonesia included a special term because of Indonesia’s unique history in the Fund. Indonesia had become a member on April 15, 1954 but had withdrawn voluntarily with effect from August 17, 1965. An agreement on the settlement of all accounts with Indonesia was adopted on February 16, 1966, but on July 5 of the same year Indonesia again applied for membership. The resolution provided for the elimination of the settlement agreement under which Indonesia was indebted to the Fund and for the substitution of financial terms appropriate for a member that had made a net use of the Fund’s resources. Therefore, the resolution provided that both the gold and the currency portions of Indonesia’s subscription were to be paid not later than the date on which it signed the Articles. Indonesia was required, when it made the representation that it had taken all action necessary to become a member and perform its obligations under the Articles and the resolution, to communicate a rate of exchange based on the rate prevailing in its territories at the time of the communication. The Fund and Indonesia were to agree on a rate at which Indonesia would pay its currency subscription before Indonesia accepted membership.63
The Fund was holding an amount of Indonesia’s currency, equivalent to a defined amount of gold, in a liquidation account that had been set up as a result of the settlement agreement. Indonesia was required to pay, not later than the date on which it again accepted membership, an amount of its currency at the agreed rate of exchange equal to the gold value of the currency in the liquidation account, and the Fund was required to return to Indonesia the currency in the account. In addition, Indonesia was required to pay in gold or convertible currencies acceptable to the Fund, not later than the date on which it resumed membership, any outstanding charges that had accrued under the settlement agreement. As a result of these arrangements, the Fund’s holdings of Indonesia’s currency would be in excess of its quota immediately on the resumption of membership. Any other member in a similar position would have assumed certain undertakings or made representations with respect to the repurchase of the Fund’s holdings of its currency. The resolution provided, therefore, for the repurchase by Indonesia, in stated installments, of an amount of the Fund’s holdings of its currency equivalent to the gold value of the currency substituted for the currency in the liquidation account.
A member pays charges on the Fund’s holdings of currency in excess of quota at rates that increase over time and in proportion to quota. Immediately on re-entry, Indonesia would be in an unprecedented position, resulting from Indonesia’s use of the Fund’s resources before withdrawal, in which the Fund’s holdings of Indonesia’s currency exceeded its quota. The choice was between a term that deemed the excess to have been acquired by the Fund on the date when Indonesia used the Fund’s resources before withdrawal or the date when Indonesia accepted its new membership. The former date would have been more logical, but the latter more generous, and the latter was chosen.