The drafting of the Second Amendment of the Articles of Agreement of the International Monetary Fund was a more prolonged and more complicated task than the preparation of the First Amendment, which was designed mainly to provide for the creation of the special drawing right (SDR) and which became effective on July 28, 1969. The invention of an international reserve asset was complicated by the difficulties of so novel an undertaking, but a unifying idea provided a framework within which the negotiators were compelled to concentrate. Moreover, the First Amendment, when agreed, could be attached to the original Articles in a form almost resembling a separate treaty, without requiring major changes in the provisions of the original Articles. The Second Amendment, even if less exciting intellectually, was more complex because it consisted of an anthology of projects without a unifying theme. Such an approach encourages the introduction of further proposals and the fragmentation of opinion. In addition, it complicates the task of drafting because the modifications that are required infiltrate the Articles as a whole and cannot be added to them in single file.

Need for Reform

The drafting of the Second Amendment of the Articles of Agreement of the International Monetary Fund was a more prolonged and more complicated task than the preparation of the First Amendment, which was designed mainly to provide for the creation of the special drawing right (SDR) and which became effective on July 28, 1969. The invention of an international reserve asset was complicated by the difficulties of so novel an undertaking, but a unifying idea provided a framework within which the negotiators were compelled to concentrate. Moreover, the First Amendment, when agreed, could be attached to the original Articles in a form almost resembling a separate treaty, without requiring major changes in the provisions of the original Articles. The Second Amendment, even if less exciting intellectually, was more complex because it consisted of an anthology of projects without a unifying theme. Such an approach encourages the introduction of further proposals and the fragmentation of opinion. In addition, it complicates the task of drafting because the modifications that are required infiltrate the Articles as a whole and cannot be added to them in single file.

In order to extract the general characteristics of the second revision of the Articles of Agreement of the Fund from the detail in which they are embedded and to understand them, it is useful to recall the events that led to international agreement on the Second Amendment. They began with the announcement by the President of the United States on August 15, 1971 that the monetary authorities of his country no longer undertook to convert foreign official holdings of U.S. dollars. Many people still regard that event as an illustration of the one-line poem by the contemporary American artist and poet, Joe Brainard: “With history piling up so fast, almost every day is the anniversary of something awful.”

The U.S. dollar had been at the center of the international monetary system created at Bretton Woods in the summer of 1944 because, when the Articles took effect, the United States had undertaken to maintain the value of its currency in terms of gold by engaging in transactions in gold for dollars with the monetary authorities of other members. These members were able to maintain the par values of their currencies in accordance with the Articles by intervening in the exchange markets with U.S. dollars or with other currencies convertible into dollars. Now, the center did not hold. The United States, which had taken the main initiative to create the par value system and which had exercised the main influence in the negotiation of it, had served notice that the system was inadequate.

As soon as the shock of August was absorbed, it was agreed that the international monetary system would have to be subjected to close scrutiny and possible revision. On October 1, 1971, the Board of Governors of the Fund adopted a resolution requesting the Executive Board to study and report on all aspects of the system, and to propose, if possible, the texts of any amendments of the Articles that the Executive Board considered necessary to give effect to its recommendations.

On December 18, 1971, the Group of Ten1 concluded the Smithsonian agreement, under which new exchange relationships were to be established for the currencies of members of the Group. On the same day, the Fund adopted a decision on central rates and wider margins for exchange transactions. The feeling at that time and for some time to come was that there would be a return to something like a par value system, although with greater flexibility than had been possible under the original Articles, and that the Fund’s decision of December 18, 1971 might be the model for the future system. Flexibility, it soon became apparent from the views expressed on behalf of many members, would have to include the validation of floating rates in particular situations and subject to the jurisdiction of the Fund, although neither the circumstances in which floating would be permissible nor the precise content of the Fund’s jurisdiction was ever clarified.

Negotiation of Reform

In August 1972, the Executive Board, responding to the resolution of October 1, 1971, transmitted to the Board of Governors a report entitled Reform of the International Monetary System. This report became, in effect, the agenda for the Committee of Twenty. The word “agenda,” however, gives little impression of the imaginative quality and range of the report, even though it avoided specific proposals and contained no texts of possible amendments.

The Board of Governors had already decided, in July 1972, to establish the Committee of Twenty, the formal name of which was the ad hoc Committee of the Board of Governors on Reform of the International Monetary System and Related Issues. The Committee of Twenty was the outcome of much discussion among members of the Fund about the best way in which to negotiate reform. It is, of course, a common phenomenon that international negotiations begin with what is sometimes referred to as the problem of the shape of the table. On this occasion, the fact that negotiations were to be conducted on a subject that would be as much political as economic was one reason that induced members to establish a new body composed of ministerial and other representatives who had political or official responsibilities in their own countries. The composition of the Committee was determined by the 20 constituencies of members of the Fund that appointed or elected Executive Directors. Each constituency appointed one member of the Committee, but behind him were ranged numerous associates and advisors, so that many more than 20 members of the Fund were present in the chamber in the person of their ministers or officials.

Although the words “ad hoc” were meant to express the insistence of some members and some Executive Directors that the Committee should not become a permanent addition to the structure of the Fund, a successor, the Interim Committee of the Board of Governors on the International Monetary System, was appointed in October 1974, when the Committee of Twenty ceased to function. Among the reasons for this development were the demonstrated usefulness of the Committee of Twenty, the conclusion that full reform of the international monetary system would be evolutionary and should be supervised by a reconstituted committee, and the desire to strengthen the Fund by creating a permanent body within its structure composed of persons with political or official responsibilities in their own countries. The Interim Committee may be replaced in its turn by the Council. The provisions that would govern the Council have been influenced by the resolutions establishing the two Committees and by the experience of those bodies. The Council would be an organ of the Fund with powers to take decisions under the Articles, in contrast to the two Committees, which could have advisory functions only. In the hierarchy of organs the Council would rank between the Board of Governors and the Executive Board, but would be closer in spirit to the Board of Governors because it would be composed of Governors, ministers, or persons of comparable rank and would supervise the management and adaptation of the international monetary system. The Council would be a surrogate for, but smaller than, the Board of Governors, which is already (August 1, 1978) composed of 134 Governors and grows with each increase in the membership of the Fund.

The Committee of Twenty and its subsidiary body, the Deputies, who were responsible for preparing the work of the Committee, engaged in discussions during the period September 1972 to June 1974. These discussions among ministers, among senior officials, and in working groups of technical experts, of members of the Fund were remarkable for the quality of the analysis of possible systems.

The Committee of Twenty wound up its work with a report to the Board of Governors and an Outline of Reform2 dated June 14, 1974. The Committee, and the assumptions on which it had proceeded, had been overtaken by events that forced the negotiators to the conclusion that agreement on a new system was impossible. Surging inflation and the impact on members’ balances of payments of higher prices for the importation of oil were among the forces that made the future too uncertain for more than an indication of the general direction in which the Committee believed that the system could evolve in the future. The language is guarded: the modal verb is “could” and not “would” or “should.” Was the effort that culminated in the Outline expended in vain? The question recalls an anecdote related by A. J. Liebling, who was crossing the Atlantic on board a convoyed merchantman during the Second World War, when, in a sudden lurch of the vessel, the master’s dentures shot into the ocean. “Don’t worry,” he reassured Liebling, “I know where they are.” We know where to find the ideas of the Outline and its Annexes.

The Outline consisted of two parts. In Part I the Committee set forth the elements of a reformed system on which it had been able to agree. Ten topics on which agreement, or full agreement, had not been reached were treated in ten Annexes prepared by the Chairman and Vice Chairmen of the Deputies. Part II of the Outline was entitled “Immediate Steps.” In it, the Committee mentioned or discussed a number of actions that should or could be taken at once in order to begin an evolutionary process of reform. Certain amendments of the Articles were among the immediate steps. Some members of the Committee who had opposed amendment because it seemed to them that limited objectives did not justify so arduous an undertaking had come to the view that the improvements in the Articles that were probably within reach would offer sufficient advantages. Neither the immediate steps as a whole nor the amendments were presented as a complete plan of an international monetary system. The Committee, as a political body, was practicing the art of politics by salvage of the possible and jettison of the rest.

Preparation of Amendments

The task of preparing amendments of the Articles was given to the Executive Board. The first paper on amendment by the staff in a new series of memoranda that bore the symbol “DAA,” which stood for draft amendments of the Articles, was issued in early July 1974 and was followed, eventually at almost daily intervals, by a deluge of drafts, redrafts, and explanatory memoranda until the end of March 1976. The Executive Board discussed and negotiated individual amendments, which were later combined in what became known as the comprehensive draft amendment and subsequently the proposed Second Amendment, during 280 hours of debate at 146 sessions.

As early as September 1974, Executive Directors began to wonder what was the approach to, or the broad principles of, or the pattern implicit in, the many draft proposals for amendment that they had received already. They wondered also whether these proposals could be related to any underlying principles in Part II of the Outline. The staff of the Fund responded with two memoranda, one of which set forth certain principles and the other an ordering of the proposals into the categories represented by these principles.

The first of the principles was the necessity or usefulness of dealing with immediate problems, particularly those that had arisen in conducting the financial activities of the Fund in an environment alien to the Articles, as well as the problems of an interim period pending reform. It will be seen that the latter part of this principle became transformed as the work progressed. Another principle was the desirability of strengthening the structure of the Fund. An associated principle was the desirability of strengthening the ability of the Fund to function effectively as a financial and supervisory or regulatory organization. The creation of more acceptable roles for gold, reserve currencies, and SDRs was yet another principle. A return to legality, particularly in connection with exchange arrangements, was a further principle, not merely because of the debasing and debilitating effects of illegality, but also because of the need to restore an international jurisdiction over exchange arrangements. All of these principles maintained their vitality throughout the protracted task of drafting.

The principle of the transfer of real resources to developing countries, which was recommended in the Outline, survived in an attenuated form in the provisions on the transfer to developing countries of the profits derived from the sale of some of the Fund’s gold. It appears also in the terms of reference of the Council insofar as they combine developments in the transfer of real resources to developing countries with the adjustment process and global liquidity as elements over which the Council is to maintain surveillance in supervising the management and adaptation of the international monetary system. In this context and elsewhere in the Second Amendment supervision is employed as a substitute for clearer and more direct jurisdictional authority. This usage does not necessarily mean that it will not be possible to give the word an effective role in practice. Indeed, one reason for choosing it was that its vagueness left room for the development of practice. The intentions, however, were not always the same, as is evident from the emphasis on “firm” surveillance in connection with exchange arrangements.

In the course of its work the Executive Board had obtained the guidance of the Interim Committee on some of the more political issues that had arisen. The Executive Board completed its task on March 24, 1976. The text of the proposed Second Amendment was sent to the Board of Governors with an elaborate Commentary, which provided a detailed explanation of most of the modifications of the Articles that were recommended by the Executive Board.3 The proposed Second Amendment was approved by the Board of Governors on April 30, 1976, after which it was submitted to members for their acceptance. The amendment became effective on April 1, 1978 after the necessary acceptances had been received.

Content of Second Amendment

The topics on which modifications of the Articles are included in the Second Amendment do not correspond to the list of possible amendments in Part II of the Outline. For example, there are no provisions authorizing the establishment of a substitution account through which members might exchange gold or reserve currencies for SDRs in order to give members a preferred asset, enhance the role of the SDR and contribute to the decline of gold, and give the Fund better control over international liquidity. Nor is there provision for a link between the allocation of SDRs and development assistance, or for an obligation of members to consult the Fund on the introduction or intensification for balance of payments reasons of restrictions on trade or other current account measures in order to enable the Fund to determine that these actions are indeed justified by the state of the balance of payments.

Topics such as these were included in the list of possible amendments not because there was widespread sentiment in favor of them in the Committee of Twenty, but, on the contrary, because there were opposing and strongly held views about them. The inclusion of them in the list was a compromise that bought time, but, as it turned out, not agreement. Draft amendments on these topics were prepared and discussed, some eagerly and others fitfully, but the proposals were abandoned when it became apparent that agreement was still impossible even after consideration of them at the ministerial level in the Interim Committee.

Agreement was reached on other topics in the list, but rarely without prolonged discussion. It was difficult to arrive at agreed amendments even on such apparently undramatic topics as “improvements in the General Account and in the characteristics and rules governing the use of the SDR.” Topics not specifically mentioned in the list were subject to an extrinsic complication. They were resisted, particularly in the earlier stages of the drafting, with the objection that there was no mandate for them, even though there was a residual category of “any other consequential amendments” and even though the Committee of Twenty requested the Executive Board to prepare amendments to give effect to Part II of the Outline “or as otherwise desired.” The limited mandate, disappointment that Part I of the Outline, or something like it, was not the terms of reference, and the difficulties of reaching agreement on a broad range of discrete proposals, often induced Executive Directors to ask what were the minimum amendments essential for the immediate period ahead. The question could not be answered with assurance because opinions would differ on what was the minimum and what were the relative weights to be allotted to the various principles that had inspired proposed amendments.

Ultimately, agreement was reached on numerous modifications of the Articles for which no specific warrant could be found in Part II of the Outline. The provisions on the composition of the Executive Board and on the authority of the Fund to invest assets up to the amount of its reserves are two examples of the many modifications of this kind. One reason for this broadening of the content of the Second Amendment was the change in attitude to the relationship of it to an interim period, which is discussed below under the heading “Amendment Ad Interim.”

Scope of Second Amendment

Although the modifications of the Articles made by the Second Amendment are pervasive and leave few provisions wholly untouched, the result is much narrower in scope than Part I of the Outline. For example, little or nothing has been incorporated in the Articles from the sections of Part I headed adjustment, controls, disequilibrating capital flows, and convertibility, consolidation, and management of currency reserves.

If one asks what are the most important aspects of the Second Amendment, few observers would fail to mention the provisions on exchange arrangements. In legalizing freedom for members to choose their exchange arrangements, including floating, the Second Amendment represents a complete departure from the central feature of the original Articles, the par value system. An objective of the new provisions, however, is “a stable system of exchange rates.” The emphasis in these provisions shifts from stable exchange rates to the orderly economic and financial conditions that will promote a stable system of exchange rates. The thought that has inspired the provisions is the well-known theory that flexible exchange rates, though free to vary, are a highly stable system unless instability in them is produced by underlying economic tensions and uncertainties.

In order to achieve a stable system, members are subject to certain obligations in relation to their external and domestic policies, and the Fund is required to maintain surveillance of the compliance of members with their obligations.

If the convoluted economic language of these provisions were translated into ethical principles, it might be said that members will be required to strive for order, stability, and fairness in conducting those domestic and external policies that can affect exchange relationships. In one provision the word “orderly” appears four times and “stability” or “stable” three times, but these numbers should not be regarded as measurements of importance because there is only one reference involving fairness, and even that one is to unfairness.4

If the exchange arrangements of the future do result in considerable stability, the new provisions on gold might then seem to be a more dramatic feature of the Second Amendment. The objective with respect to gold is a gradual reduction in its role in the international monetary system. This aim is pursued by immediate and radical changes in the role of gold in the Fund itself. Abolition of an official price for gold, prohibition of any function as a denominator in exchange arrangements, elimination of the obligations of the Fund and members to transfer or receive gold under the Articles, and disposition of part of the Fund’s holdings of gold are among the radical innovations of the Second Amendment. Whether these changes will succeed in helping to depose gold from its traditional sovereign status cannot be foreseen. Much will depend on the way in which members behave in relation to gold.

The main holders of gold entered into an agreement among themselves that was intended to avoid frustration of the objective of the Second Amendment in relation to gold. Although the agreement was considered by some members a necessary condition for concurrence in the new provisions on gold, the agreement bound the parties for an initial period of no more than two years. The Fund’s powers to ensure that members avoid actions incompatible with the objective of the Second Amendment are limited or at best unclear. The language in which these powers are expressed was affected by the determination of some members to go as far as possible in separating the Fund from gold in the hope that eventually there would be a complete divorce. Clear authority over the behavior of members in connection with gold was considered undesirable by these members because it would preserve a relationship between the Fund and gold. So strong was this conviction that it did not seem paradoxical to oppose jurisdiction even if it were expressly granted for the purpose of promoting a reduction in the role of gold. Other members could have accepted this jurisdiction provided that it was coupled with similar authority over reserve currencies. Resistance to this proposal is another reason why the provision was drafted in terms of the surveillance of international liquidity instead of jurisdiction to control the activities of members in relation to gold.

A concomitant objective of the Second Amendment, stated twice for emphasis, is to make the SDR the principal reserve asset of the international monetary system. For this purpose, numerous improvements or potential improvements have been made in the SDR that could give it more of the characteristics of legal tender among monetary authorities. One of these improvements is the right of participants in the Special Drawing Rights Department to discharge many obligations to the Fund in SDRs. Another is the right of participants to transfer SDRs between themselves by agreement, coupled with freedom for the transferor to enter into these transactions even if it has no economic need to use reserves. A third improvement that may have a similar effect is the power of the Fund to permit participants to use SDRs in operations other than those specifically authorized by the Articles.

The future of the SDR depends on many factors, which include not only the way in which the Fund exercises its new powers but also an increase in the volume of SDRs in circulation and a yield that is more competitive with the yield on other reserve assets. The Articles contain adequate powers for the Fund to achieve these results. Meanwhile, the Fund’s definition of the unit of value of the SDR in terms of a basket of currencies, which was adopted even before the Second Amendment abrogated the definition in terms of gold, has made rapid progress as a unit of account outside the Fund, particularly under other multilateral treaties. Gold is losing this monetary function to the SDR in other legal instruments as well.

Policies into Law

One characteristic of the Second Amendment is the transformation into law, by incorporation in the Articles, of policies that the Fund had adopted over the years. The provisions of the Second Amendment that deal with repurchase obligations, the selection of currencies for use in purchases and repurchases, and stand-by arrangements are among the many examples that are sometimes referred to as constituting the modernization of the Fund.

There are two dangers in the process of incorporating policies in the Articles, both of which are related to future flexibility in the operation of the Fund and the adaptation of its practice to changing needs. One danger is that this process may diminish the freedom that permitted the development of the policies in the first instance. Drafters must avoid the temptation of regarding current policies, particularly if the drafters helped to develop them, as an expression of permanent wisdom. The second danger is that the amended provisions on a particular topic may be regarded as a complete code so that the scope for implied powers is restricted. Drafters must avoid the fallacy of assuming that they have foreseen the future and have made full legal room for it in their specific prescriptions.

In the drafting of the Second Amendment, efforts were made in many ways to avoid both the danger and the fallacy, but only experience will determine how successful these efforts have been. Certain formulae in the original Articles that produced or affected obligations have been eliminated and principles substituted. Powers to vary specific prescriptions have been created. The provisions on repurchase are an example of these techniques. The logic of the original Articles prevented mention of any definite period for the temporary use of the Fund’s resources. Repurchase obligations accrued at dates not determined a priori but on the basis of complex calculations of monetary reserves as defined by the Articles. The Fund developed a policy of regarding three to five years as the basic period for the use of its resources, but it also adopted other periods for the purpose of special policies. The formulae in the Articles have been abrogated by the Second Amendment, and the basic period has been included in it, together with powers to change that period and to adopt different periods for special policies. These powers will give the Fund flexibility, but perhaps not as much flexibility as it has had in the past. Hitherto, policies have been adopted under decisions taken with a majority of the votes cast, but the exercise of the Fund’s authority under the amended Articles will require high majorities of the total voting power.

The amended provisions on repurchase illustrate changes that may result from the Second Amendment in the legal analysis of certain concepts in the Articles. The impact of the new provisions on the character of the SDR has been mentioned above under the heading “Scope of Second Amendment.” The drafters of the original Articles held the view that it was impolitic to regard the transaction involving the sale of currencies by the Fund as a loan, and this view led them to avoid a fixed date for repurchase. A fixed date is included in the Second Amendment, but the Fund may require repurchase in certain circumstances before the terminal date. Moreover, the ability of the Fund to sell a member’s currency, the effect of which would be to reverse its transactions with the Fund, has been strengthened. It may be that the Fund’s sale of currency from the General Resources Account must continue to be regarded as a transaction sui generis.

Second Amendment as a System

Whatever may be the content of the Articles as the central legal instrument of the international monetary system, there is always a system in the sense that there is interaction among currencies and balances of payments. Eppur si muove. There is, however, another sense in which the word “system” is used:

The concept of an international monetary system in which due emphasis is placed on the word “system” now implies a body of coherent purposes and principles, together with rights and obligations accepted by countries in order to give effect to the purposes and principles, and probably an organization to perform the duties of surveillance and administration.5

In considering whether there is such a system, economists tend to emphasize purposes and principles and lawyers rights and obligations, but the disciplines of the two professions cannot be isolated from each other, if only because both are practiced in the central organization that performs the duties of surveillance and administration. There is no great advantage, however, in discussing the question whether the new Articles will establish a system that accords with the definition. Responses to the question tend to become statements of the elements that the respondents would prefer to see in a system.

Official opinion in the United States has emphasized increasingly the view that the Second Amendment would give legal validity to a new system in the sense described above. This opinion has been influenced as much by the absence as by the presence of certain elements. The absent elements are those components in the system of the original Articles that, in the opinion of the United States, had denied it the choice of policies in relation to the exchange rate for its currency that had been available to other members with respect to their currencies. In addition, the United States sought to eradicate from the Second Amendment any obligation to convert foreign official holdings of a currency and to avoid any impression that the United States would be willing ever again to undertake such a commitment in relation to the dollar.

This campaign had curious legal consequences. All references but one to convertibility and conversion were eliminated from the Articles. The one exception is the provision of the original Articles requiring the issuer of what was then called a convertible currency to convert foreign official holdings of the currency to the extent that conversion could be made with the aid of the Fund’s resources. It was impossible to dislodge this provision from the Second Amendment because of the unwillingness of some members to appear to be accepting the principle that official convertibility was not a desideratum and would never be revived. The Executive Board’s Commentary on the amendment explains, however, that the provision had not been employed in the practice of the Fund, had no application in present conditions, and probably would have none in the future because, if there were to be a case for official convertibility, a revised provision would be more appropriate.

As the result of outlawing other references to convertibility and conversion, a new vocabulary was coined that includes the expressions “freely usable currency” and “exchange” of currencies. These expressions are associated with a new phenomenon that is the reverse of the treatment of official convertibility as described above. They relate to new obligations of members to facilitate the transactions of the Fund. A member will be required to exchange its currency, when it is purchased from the Fund, for a freely usable currency, and to provide its currency, when it is needed for repurchase, in exchange for a freely usable currency. These obligations, however, will not apply to the issuers of freely usable currencies as determined by the Fund. This limitation is another consequence of opposition to obligations of official convertibility.

Amendment Ad Interim

Part II of the Outline of Reform adopted by the Committee of Twenty referred to the “interim period” before “a reformed system can be finally agreed and fully implemented.” When the drafting of the Second Amendment began, some and perhaps most of those involved in the project had the impression that the task was a restricted one because the changes in the Articles would be designed for no more than a limited period. Although there was little consideration of, or even reference to, a more permanent revision of the Articles, there was a feeling that what was being undertaken was a project that might have to be completed by a third amendment.

The attitude that an amendment ad interim was being prepared affected the early stages of the drafting of the Second Amendment. On occasion, the objection was heard that a proposal went beyond the requirements of an interim period. This criticism was made, for example, of certain drafts dealing with exchange arrangements. The assumption on which some early drafts were prepared was that, for some time to come, members would continue to apply a multiplicity of exchange practices but that, at some future date, which is to say after an interim period, exchange arrangements would conform to a widely observed model. Proceeding on this assumption, the drafters had to deal in some way with the post-interim period, but it was then that the objection was heard that the drafts went beyond the interim period.

The approach of the earlier drafts was to provide in some detail for what is referred to above as a widely observed model but to suspend the operation of the provisions governing the model for a definite period, which the Fund could prolong, or alternatively for an indefinite period, which the Fund could terminate. This approach was not acceptable to those who did not wish to create the impression that the future exchange arrangements, which were, of course, based on a par value system, had some legal or moral superiority over floating, whether during or after the interim period, even though at all times floating would be valid.

As the drafting of the Second Amendment progressed, the feeling that it was destined to operate only during an interim period diminished and was replaced by the desire to have amended Articles under which the Fund and members could act effectively for an unlimited period. The outcome of the involved negotiation of the provisions on exchange arrangements illustrates this process. Members are free to choose their exchange arrangements, possibly for all time to come. If ever the Fund were to find, by a high majority of the total voting power, that conditions permitted the introduction of a widespread system of exchange arrangements based on stable but adjustable par values, the provisions of a schedule regulating such a system would begin to apply, although each member could decide for itself not to establish a par value for its currency under these provisions.

The compromise on exchange arrangements still implies the possibility, although not the inevitability, of change to a particular system of exchange arrangements at some unspecified future date. The other modifications of the Articles incorporated in the Second Amendment are not based on the assumption that they will apply only before or after some future change in the international monetary system. These modifications could be retained whatever happens, and they need not be changed even if there were to be a third or subsequent amendment.

The view that the Second Amendment is an interim or stopgap measure can have practical consequences. At one time during the negotiation of the text it was assumed that the Council would come into existence immediately on the effective date of the Second Amendment, but later it was agreed in the Interim Committee that the Council would be called into being at whatever date a decision, supported by a high majority of the total voting power, was taken for the purpose. There were a number of reasons for this change in intention, but one of them was the disinclination of some members to call a new organ into being to help administer a treaty that in its new form would apply for no more than a temporary period.

An Evolutionary Process

The point has been made already that the Fund will have powers to adapt to changing circumstances. Early in the drafting of the Second Amendment, the attention of the Executive Board was drawn to various legal techniques that could serve this purpose. Much was made of so-called enabling powers, although these powers were not absent from the original Articles. The question that these powers raise is the extent to which regulation of the international monetary system should be divided between fixed rules on the one hand and discretions exercisable by the Fund as the central organization on the other hand. The desirability of flexibility was one reason for the willingness of members to concur in the inclusion of a range of enabling powers in the Second Amendment, but another reason was the prolonged difference of opinion on some subjects. An enabling power was a technique for deferring resolution of a contentious issue once it became clear that the expenditure of further effort was unlikely to be rewarded with agreement. The willingness of members to accept enabling powers did not go to the length of dispensing with the normal procedures by which members decide on amendments. The experience of the Bretton Woods Conference was repeated in the refusal to allow organs of the institution to amend the Articles.

The new enabling powers make room for the evolution of the international monetary system, without the necessity for amendment of the Articles. Amendment will be even more difficult in the future because of a change in one of the two requirements that must be met for the adoption of amendments. Formerly, acceptances by members having 80 per cent of the total voting power sufficed, but the proportion is increased to 85 per cent as part of a compromise on increases in quotas under the sixth general review of quotas that included a reduction in the voting strength of the United States below 20 per cent of the total voting power.

The provisions of the Second Amendment on exchange arrangements are an example of the use of techniques that foresee evolution without amendment. These provisions permit the Fund to recommend general exchange arrangements that accord with the development of the system, and require the Fund to adopt specific principles, which may change over time, for the guidance of all members with respect to their exchange rate policies.

One power included in the Second Amendment deserves special mention because of the uses that could be made of it in connection with the evolution of the system. The Fund concluded that it had an implied power to perform financial and technical services for members, including the administration of resources contributed by members and others, if the services were consistent with the purposes of the Fund. The Fund’s administration of the Subsidy Account and the Trust Fund, and the services the Executive Board authorized the Managing Director to perform in connection with the Basle Agreement on sterling balances, are examples of recent exercises of this implied power. The Second Amendment makes the power explicit. By exercising it, the Fund would be able to make agreements with members that would reflect or assist the evolution of the system without the necessity for amendment, provided that there was no inconsistency with the Articles. The Second Amendment provides that the Fund must take certain circumstances into account in deciding whether the par value system for which provision is made shall be called into existence. Among these circumstances are arrangements on such matters as intervention and the treatment of imbalances. It is conceivable that the Fund could agree to administer arrangements entered into among members, and even sponsored by the Fund, on such matters. It is also possible to imagine a substitution account that the Fund would administer for the benefit of members but, of course, without involving its own assets in any obligation or liability.

Enabling powers are not the only instruments that the Fund will have at its disposal to keep pace with or to encourage evolution of the system. Enabling powers can be defined as discretionary authority for the Fund to take specific actions, such as recommending general exchange arrangements. Another kind of instrument has been drafted as obligations of the Fund and not powers, but drafted so broadly as to give the Fund much flexibility in performing its obligations. The duty of the Fund “to oversee the international monetary system in order to ensure its effective operation” is an example of this technique. A third instrument is the obligation imposed on members to collaborate with the Fund or with other members for a particular purpose, such as the obligation to collaborate regarding policies on reserve assets. The Fund will be able to invoke these obligations and call for action or behavior pursuant to them. What use will be made of these instruments cannot be foreseen. Their usefulness at this time is the confidence they give that the Fund will be able to develop the system or, in the words of Keynes at Bretton Woods, “to go on being sensible in unforeseen conditions some years hence.”

Voting Majorities

A characteristic of international organizations since the Second World War has been renunciation of the rule of unanimity in arriving at decisions and acceptance of the principle of weighted voting power, particularly in financial and economic organizations. The voting provisions of the Fund’s Articles were early examples of this new tradition. Moreover, in the Fund the original Articles made few exceptions from the rule that decisions were to be taken by a majority of the votes cast. The preference for this majority was based on a policy of ensuring that decisions could be taken and business conducted with maximum facility. The exceptions provided for varying proportions of the total voting power as special majorities for a few categories of decision that were thought to have unusual political or economic importance.

Special majorities were required for more categories under the First Amendment. The main purpose of this development was to give the then members of the European Community a veto over important decisions relating to the SDR, and a new majority was created to give effect to this intent. The Second Amendment represents a further and more extensive move away from the policy of the past. The original Articles required special majorities for 9 categories of decision, the First Amendment for 21, and the Second Amendment for 53 (or even more according to one mode of classification).

The increase in the number of categories of decision for which special majorities are required under the Second Amendment has been accompanied by a reduction in the number of special majorities. The original Articles prescribed five different special majorities. The number was increased to six by the First Amendment. The reason for adopting a particular proportion in the past, and for differentiating it from other proportions, is not always clear. Subject to the exception of an absolute majority of the total voting power for one category of decision, special majorities are reduced to two by the Second Amendment. They are 70 per cent and 85 per cent of the total voting power. The tendency was to confine the smaller majority to those categories of decision that are operational in character, but this principle was not followed steadfastly.

There were many reasons for the increase in the number of categories of decision for which special majorities are required under the Second Amendment and for the selection of particular categories. One reason was the feeling that enabling powers give the Fund authority over its members that should be exercised only with the assurance that members having a large majority of the total voting power concur in the exercise. But this explanation is too simple. Sometimes the motive was the self-regarding one of a veto for a single member or a particular group of members or the wish to make it difficult for the Fund to exercise a power that was accepted as a compromise but without enthusiasm on the part of some members. Economic and political changes in the world have made it necessary to take the interests of more members and more groups of members into account in reaching agreement on the need for special majorities.

The increase in the number of categories moderates the effect of weighted voting power and approaches closer to a rule of unanimity for these decisions. Nevertheless, the effect must not be exaggerated. Many of the decisions for which special majorities are required are not routine and will be taken infrequently or probably not at all. Most of the ordinary business of the Fund as both a financial and a regulatory organization will continue to be conducted by means of decisions taken with a majority of the votes cast.


On the basis of the present distribution of voting power, developing countries would be one of the groups that would have a veto or almost a veto under the two special majorities of the Second Amendment. The formula in the Articles for determining the voting power of a member is not changed by the Second Amendment. The distribution of voting power among members is related to quotas, which are adjusted from time to time as the result of general reviews. The drafting of the Second Amendment raised the issue not of the voting power of developing members but of special provisions for their benefit.

The Articles have included a few provisions under which certain members are singled out for special treatment. The original Articles, for example, gave the American Republics not entitled to appoint Executive Directors the assurance that they would be able to elect a certain number of Executive Directors, but this special provision disappeared from the Second Amendment. Apart from the few provisions of this kind that are retained, no distinctions are made by the Articles among members or among classes of them. Their rights and obligations are the same, and they are entitled to the same treatment under the policies of the Fund. In the language of the Fund, the Articles establish a principle of uniformity.

Since the time of Bretton Woods, the Fund has refused to adopt formal positions that would be inconsistent with the principle of uniformity. The justification for retaining the principle has been based on both law and policy. The justification of policy has been that preferences for some members could promote practices that would be detrimental over time to the interests of all members. Nevertheless, the Fund has found it possible to adopt decisions that were intended to be of special benefit to developing members without confining the benefit of the decisions to them.

The Outline of Reform departed from the past in supporting a number of special benefits for developing members, at least some of which would have had to be incorporated in the Articles to make them effective. None of these benefits found its way into the Second Amendment, in part because they were related to broader features of reform that were not the subject of amendment. When the provisions on exchange arrangements began to approach their final form, efforts were made to introduce language into the provisions that would be particularly favorable to developing members. These proposals were rejected, but they resulted in language under which the Fund would be able to take account of the special circumstances of all members. A further attempt to put a gloss on this language in favor of developing members in particular was made during the drafting of the Commentary on the proposed Second Amendment, but once again the attempt did not succeed.

For the first time, however, the Articles, after the Second Amendment, refer expressly to developing members in a few contexts and provide special benefits for them in connection with the disposition of the Fund’s gold. The exceptions are narrow but surprising, and they will probably give rise to difficulties in defining the beneficiaries.

A Résumé

This recollection in tranquillity of the preparation of the Second Amendment should have shown that the task was undertaken with considerable reluctance on the part of some members and with a determination to confine its content within narrow limits. These attitudes were related to the view, based on Part II of the Outline, that the amendment was designed for no more than an interim period. This view disappeared as the drafting progressed.

The most important modifications of the Articles deal with exchange arrangements, gold, and SDRs, but the changes leave few provisions untouched. The Articles are “modernized” by transmuting many policies into law by incorporation in the Articles.

Opinions differ on whether the amended Articles establish a new international monetary system in any refined sense. Techniques have been adopted for enabling the Fund to promote or to respond to an evolutionary process in international monetary relations. These techniques are one reason why there has been a remarkable increase in the number of categories of decision for which a special majority of the total voting power of members is necessary. Developing members will constitute one group that will have a veto over many of these decisions, but the principle of uniformity has been retained, with only minimal modification, so that the rights and obligations of all members remain substantially undifferentiated.