My Theme is the legal impact of the Articles of Agreement of the International Monetary Fund on the business transactions of private persons and corporations. This is a vast subject because the legal effects are manifold, and not all of them are obvious. I will confine myself to two specific topics: The first is the major obligations of good conduct that are binding on member states. These are obligations which in the main have been made explicit in the Articles. The second topic is the legal rules of so-called public policy or ordre public. These are not explicit but can nevertheless be drawn from the Articles.

My Theme is the legal impact of the Articles of Agreement of the International Monetary Fund on the business transactions of private persons and corporations. This is a vast subject because the legal effects are manifold, and not all of them are obvious. I will confine myself to two specific topics: The first is the major obligations of good conduct that are binding on member states. These are obligations which in the main have been made explicit in the Articles. The second topic is the legal rules of so-called public policy or ordre public. These are not explicit but can nevertheless be drawn from the Articles.

You might ask what these topics have to do with the transactions of private parties. It is true that the Articles are an international treaty among states and that, insofar as they establish rights and obligations, those rights and obligations are vested in or binding on the states. In other words, the Articles are part of the structure of public international law. Nevertheless, I shall hope to show that the legal effects of the Articles on the everyday transactions of private parties are considerable indeed, even though these transactions are not themselves directly governed by public international law.

The Obligations of Good Conduct

At the heart of the Articles is the simple idea that the member states of the Fund should observe certain rules of good conduct in monetary policy, and that when it becomes difficult to observe these rules the strain could be reduced by assistance made available from the financial resources of the Fund. The rules of good conduct are legal obligations that bind member states, and as such they represent a remarkable advance of international law into a field in which, before the Articles, there was very little law indeed. Even now the rules are not many and are hedged about with important qualifications. However, the rules that the drafters wrote into the Articles as maximum legal obligations were not the sum of their hopes and expectations. The rules of good conduct have helped to produce an international environment in which it has been possible to do more to attain prosperity and freedom than the Articles require by way of legal obligation. I shall deal with a few of the express rules of good conduct; but if they sometimes seem circumscribed as rules of law, remember that current practice is often far more liberal than the prescriptions of the Articles.

The International Control of Rates of Exchange

Looking backward, one of the astonishing features of international relations before the Articles took effect is the fact that the value that a state could attribute to its currency directly or indirectly in terms of other currencies was legally within its sole discretion. This is astonishing, if only because a rate of exchange necessarily involves a relationship between currencies. Nevertheless, the unqualified right to determine the value of one’s own currency was regarded as an essential feature of sovereignty. How revealing it is to see that in some countries, even constitutional democracies, the right is part of the royal prerogative. We are all aware of the chaotic effects of the unilateral determination by each state of the value of its own currency. The lesson of experience has been that rates of exchange are matters of international concern and that therefore they had better be made the subject of international regulation. This has been done in a set of elaborate provisions in the Articles and in the policies of the Fund based on those provisions.

Initial Par Values

Under the system of the Articles each member is expected, as soon as this is appropriate, to establish an initial par value for its currency in terms of gold, either directly or in relation to a U.S. dollar of fixed gold content. This has the effect of producing an orderly pattern of relationships among all member currencies. An initial par value cannot be established under the Articles except with the assent of the Fund. It cannot be imposed by a member’s unilateral action and without international scrutiny. Once a par value is established, a member is bound to see that it is respected in the exchange transactions taking place in its territories that involve its own and another member’s currency. Its obligation, in short, is to maintain in its exchange market the agreed exchange value for its own currency in relation to all other member currencies. It can do this by adopting whatever measures are appropriate, provided that they are consistent with the Articles. With the spread of convertibility and the reappearance of exchange markets, the measure that is increasingly resorted to is the intervention of the member’s monetary authorities in the exchange markets, in lieu of the prescription of rates by legal fiat or exchange control. Whatever the measures that are adopted to ensure performance of the obligation, the rates of exchange must be kept within 1 per cent of the par value for spot exchange transactions and within such margins beyond 1 per cent for other exchange transactions as the Fund considers reasonable, having regard to the nature of those transactions. The member’s obligation to see that exchange transactions in its territories are kept within these margins applies to the exchange transactions of all parties, including those of private persons or corporations, and the margins are not confined to the exchange transactions of the monetary authorities or other agencies of the member.

Changes in Exchange Rates

An initial par value should be one that a member can maintain without causing balance of payments difficulties for itself or other members. In an uncertain world a par value, though meeting this test when established, can cease to be appropriate, and therefore the Articles permit the adoption of a new par value. The test for the legality of a change is that the member is suffering from a disequilibrium that can be regarded as fundamental. It must be fundamental, because one of the purposes of the drafters of the Articles was that members should no longer make hasty changes of par value in circumstances where difficulties could prove to be transitory, particularly where reasonable stoicism or corrective policies could be supported with financial assistance by the Fund. A member cannot validly change the par value for its currency without consulting the Fund and, apart from a few cases that do not go to the heart of the matter, without obtaining its concurrence. You will observe that a change of par value, like an initial par value, is the subject of international scrutiny and action. In deciding whether to set its seal of approval on a proposed new par value, the Fund must be satisfied, on the one hand, that the change is adequate to correct the disequilibrium which afflicts the member but, on the other hand, that the change does not go beyond this to the point where it would be a competitive depreciation that would give the member an unfair advantage over fellow members. Of course, once a new par value is established, the rules with respect to the margins within which exchange transactions may take place apply to the new par value.

When a member concludes that its balance of payments is in fundamental disequilibrium and that its par value is no longer tenable, it does not have the privilege under the Articles of resorting to a fluctuating rate of exchange. The member’s only option when it can no longer observe its obligations on the basis of an established par value is to propose to the Fund that the member move to a new par value; it is not entitled to adopt a fluctuating rate of exchange even as a temporary expedient for determining a tenable rate of exchange by experiment.

The par value system which I have described in very broad outline is sometimes said to be a system of stability without rigidity. There is no need to emphasize the importance of the element of stability for private transactions. Private parties can enter into contractual obligations, not, it is true, in the assurance that their calculations will never be falsified by changes in the par values of currencies, but with the confidence that states have agreed to submit changes to an international procedure. They can be confident, therefore, that law-abiding states will not make changes capriciously, by the adoption of either a new fixed rate or a fluctuating rate, and that changes will therefore be less likely to occur. They can also feel that if there is a change of par value it will not be one which will create an unfair advantage for the residents of the member country making the change. It is not necessary to elaborate these points further, but it is useful to recall that their importance is enhanced by the principle of many legal systems that a yen is a yen or a dollar a dollar, that contractual engagements of a pecuniary character can be validly discharged in the same number of units as the contract prescribes notwithstanding changes in the value of currencies, and that protection cannot validly be found in clauses that would modify the number of units on the basis of such changes.

Unitary Exchange Rates

The par value system assumes not only a fixed rate of exchange, but also a unitary rate. The Articles are based on the principle that differential rates of exchange for a single currency, whatever the basis for the difference, are, undesirable. There are many reasons for this, including the obvious tendency of differential rates to undermine confidence in the value of a currency. Nevertheless, it was realized that not all members would be able to attain the ideal exchange rate system of the Articles at once. The members that have currencies that play anything like an important role in international trade and payments, and many others, have reached that stage, but others have felt it necessary to persist with multiple rates of exchange notwithstanding the undesirable consequences of them for private and other parties. The Articles enable these members to engage in multiple rates as temporary deviations from the par value system, but with certain safeguards. For example, although there are provisions under which a member may maintain the multiple rates that it has when it assumes membership, the Fund may represent or require that those rates be reduced or removed when it considers that the multiplicity of rates is no longer necessary; and of course the Fund does regard these practices as temporary expedients. Moreover, any introduction of new multiple rates, or any change in multiple rates, must be submitted to the Fund for its prior approval. If any of these rates are not approved by the Fund, they are inconsistent with the Articles, and the member will be in violation of its obligations if it retains them.

It will be seen, therefore, that the idea that rates of exchange are matters of international concern is an active one not only in connection with the system of par values but also in connection with multiple rates, which are temporary deviations from that system. In fact, the Fund has operated on the assumption that the supervision of rates of exchange is an essential and central part of its activities, and on no occasion on which the question has arisen has it concluded that a problem affecting rates for exchange transactions was beyond its competence.

In exercising its jurisdiction to approve or withhold the approval of rates, the Fund has taken a realistic view of what constitutes a rate. It has worked with the concept of the “effective” rate of exchange. That is to say, the Fund regards the rate as determined by the full cost of acquiring one currency in return for another. For example, if a purchaser of exchange pays a certain amount for acquiring a foreign currency but also pays an exchange tax on top of that, the Fund regards the “effective” rate as the one involved in the payment of both the quid pro quo and the tax. On the other hand, it must be stressed that the Fund’s jurisdiction to approve rates of exchange relates to exchange transactions. This means that there must be the exchange of one currency for another. If parties to a contract merely provide that one currency shall be deemed to be worth so many units of another currency for the purposes of their contract, but no exchange of currencies is involved, this is usually regarded as not within the Fund’s jurisdiction to approve rates of exchange, although it may be of concern to the Fund in other respects. Many refinements of this statement would have to be made in developing this topic further. Indeed, this would be true of most of the topics that I am mentioning.

The Avoidance of Exchange Restrictions

A second rule of good conduct binding on member states under the Articles is that they are obliged to avoid restrictions on the making of payments and transfers for current international transactions unless these restrictions are authorized by the Articles or approved by the Fund. Almost every one of the words in that rule, except perhaps the prepositions, trails with it a large body of Fund law and practice, and I shall say something about each of them in turn. However, I have wondered how I could avoid technical complexities and convey the basic objective of this rule in just a few words. Perhaps it can be done as follows. The objective is to make considerations of the choice of currency in which to make settlements largely irrelevant in current international transactions. If a man in Kyushu decides to do business with a man in Hokkaido instead of a man in Honshu, he decides this on the basis that this is the way in which he can buy most economically or sell most profitably, and his decision is not affected by the currency in which the pecuniary consideration will be paid. The Articles seek this same objective in international transactions, so that a merchant in Tokyo who is thinking of dealing with merchants in New York, London, or Rome can be guided in the main by the same market considerations.

“Restrictions” and Controls

As I have indicated, the effect of the obligation that we are now discussing depends on the meaning attributed to the words that make up the rule. The word “restriction” need not delay us long. It refers to the governmental prohibition of, limitation on, or hindrance to the availability or use of exchange in connection with current international transactions. If the government interferes with the ability of its residents to make payments abroad in the domestic currency for current international transactions or to acquire or use foreign currency for this purpose, or if it interferes with the freedom of nonresidents to take out the proceeds of these transactions, the government is engaging in a “restriction.”

The word “restriction” must, however, be distinguished from “control.” The former means a real interference with payments and transfers for current international transactions, and therefore something more than imposing on parties the nuisance of having to go through some procedure that is not unreasonable as a condition precedent to a payment or transfer. If a member insists on a procedure of this kind because it wants to assemble statistics or because it wants to prevent the illicit transfer of capital, this will be a “control” and not inconsistent with the obligation to avoid “restrictions.” But one must be careful in looking at the facts. I said that the procedure must not be “unreasonable.” Thus, although a licensing or similar procedure is not in itself a restriction, it would be regarded as one if it unduly delayed the making of payments or transfers. There would be no doubt that it was a restriction if it went beyond delay in its effect and involved the actual prevention of payments or transfers.

Special mention must be made of one kind of “control.” This is the exchange surrender requirement. If a member requires its residents to surrender the foreign exchange proceeds of current international transactions, this is not a restriction or in any other way inconsistent with the member’s obligations under the Articles. However, the member must permit its residents to get the foreign exchange that they need to make payments for current international transactions, and there will be a restriction if the member places limits on this. The duty to permit residents to get foreign exchange for making these payments is quite general and not confined to the amount of foreign exchange that they may have had to surrender under an exchange surrender requirement.

The obligation to refrain from restrictions on payments and transfers for current international transactions is one of the components of the duty of members to make their currencies “convertible” within the meaning of the Articles. The particular aspect of this obligation which I referred to a moment ago—that is to say, the duty to permit residents to get foreign exchange for making payments for current international transactions—shows that the statement one sometimes hears, that the convertibility of the Articles is external convertibility or convertibility for the benefit of nonresidents, is a misleading one. Of course, there must be at least seven types of ambiguity in the use of the word “convertibility,” but it is quite clear that the obligation of convertibility in the Articles is a compound one and embraces duties in connection with the payments of one’s own residents as well as duties in connection with nonresidents.

So much for “restrictions”; now let us consider “making.” The word was chosen to indicate that the obligation deals with the payment of currency by a member’s residents in contrast to the receipt of currency by them. To be more precise, a member may not hamper out-payments, but it may regulate in-payments by prescribing the currency that its residents must receive. The thought behind the provision was that not all currencies are used in international trade, and in fact the bulk of international trade is financed with relatively few of them. It was not intended to interfere with this traditional way of doing business. If, in accordance with this practice, a member requires its residents to receive the relatively few currencies that I have mentioned, this will not interfere with a free payments system if the member whose traders are making payments does not limit their ability to make payments in the currencies that the payees must receive. You can look at the provision in another way. The multilateral system of payments, or what I have called the free system, envisaged by the Articles is ensured by binding members not to interfere with the ability of their residents to make payments. It is not ensured by permitting this interference and allowing a member to prescribe the currency in which its residents may make payments, and then binding other members to permit or require the receipt of this currency by their residents.

“Payments and Transfers”

The word “payments” has a central role in marking out the scope of the obligation, if any one word can be regarded as more central than any other. There were at least three approaches that had to be considered in determining what were “restrictions” on “payments.” One was that any interference with payments, no matter how indirect, was a restriction of this kind. For example, the prohibition of imports, even for reasons of health, indirectly prevents payments because payments cannot be made for the prohibited imports, and therefore the prohibition would have been a restriction on payments under this approach. A second approach was that any interference with payments, whether direct or indirect, was a restriction on payments provided that it was imposed for balance of payments reasons. The third approach was of a more technical or formal nature. It concentrated on the character of the interference. It would be regarded as a restriction on payments only if it was, in form, a direct governmental limitation on the use or availability of currency as such. It was this third approach to the understanding of the obligation that was adopted. Let me take just one example. If the restriction is drafted as a limitation on imports and requires that a license for the importation of goods be sought, but exchange is unreservedly available to the importer after the grant of an import license, the restriction is not one on payments. In contrast to this, if the restriction is drafted as a limitation on the payments that may be made for imports, requiring that an exchange license but not an import license be sought, the restriction is one on payments and within the prohibition of the obligation in the Articles. It must not be assumed, however, that a restriction must be one or the other and cannot be drafted and operated in such a way that it is on both trade and payments at the same time.

I will not go into the legal reasoning which led the Fund to conclude that the third approach was the one intended by the drafters, except to remark that if either of the other two approaches had been adopted as the correct legal analysis the obligation would have applied to trade practices as such. This was a result which could not have been reconciled with the intention before, during, and after the Bretton Woods Conference to establish an international trade organization with a jurisdiction over trade practices that would complement the jurisdiction of the Fund over exchange practices.

A further comparison of the three approaches may help to explain a little more the scope of the obligation of members to avoid restrictions on payments as understood by the Fund, and hence the extent of its effect on private transactions. If the first approach had prevailed—i.e., any direct or indirect interference with payments is a restriction in the sense of the Articles—the obligation would have been considerably wider than the obligation as interpreted by the Fund. If the second approach—i.e., the balance of payments test—had prevailed, the obligation would have been at once broader and narrower than the obligation as it is now understood. On the one hand, it would have been broader, because it would have applied to any indirect interference with payments—for example, through direct trade controls—that was motivated by balance of payments considerations. On the other hand, it would have been narrower, because even a direct control of payments would have been excluded if it was imposed with some objective that was not related to the balance of payments.

Members must avoid restrictions not only on the making of payments but also on “transfers.” There would be little point in an obligation which insisted that a member should permit its residents to make payments to nonresidents for current international transactions if, at the same time, the member were able to prevent the nonresidents from freely enjoying their proceeds. It would not promote a regime of freedom for payments for current international transactions if a member could block the balances of its currency that were the proceeds of these transactions. The conversion by a nonresident of these proceeds is called a “transfer,” and it is this act that a member may not restrict. In addition, under the prohibition of restrictions on payments, the member may not prevent the nonresident from using his proceeds for another current international transaction. However, if a nonresident does not convert the proceeds in a member’s currency of a current international transaction or use them in settlement of another such transaction within a reasonable period, he may find that the proceeds have become capital in the view of the monetary authorities of that member. He may find, therefore, that his proceeds have become subject to capital controls. Nevertheless, I repeat that he must be given a reasonable period to transfer his proceeds or to make payments for current transactions with them before any such result can be accepted. I need not emphasize to an audience of this Institute the importance of freedom for transfers to parties engaged in business transactions of a current nature.

Let me pause at this point and summarize some of the main effects on private parties of the obligation to avoid restrictions. A private party must be permitted to make payments for current international transactions as defined by the Articles, and he must be allowed to get the foreign exchange that he may need for this purpose. If he receives foreign exchange in a transaction of this kind, he must be allowed to convert these proceeds within a reasonable period. He may be told by his monetary authorities what currency he is to receive, and he may be required by those authorities to surrender his proceeds to them in return for his own domestic currency.

“Current International Transactions”

This brings me to “current … transactions.” I cannot do better than quote in full the provisions of the Articles in which these are defined. This provision is Article XIX (i):

Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:

  • (1) All payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;

  • (2) Payments due as interest on loans and as net income from other investments;

  • (3) Payments of moderate amount for amortization of loans or for depreciation of direct investments;

  • (4) Moderate remittances for family living expenses.

The Fund may, after consultation with the members concerned, determine whether certain specific transactions are to be considered current transactions or capital transactions.

It will be obvious that “current transactions” has a special—even arbitrary—meaning for the purposes of the Articles because the definition includes some categories of payments that would be regarded by economists as being of a capital character. It will also be noted that there is considerable emphasis on the encouragement or protection of foreign investment. Among the payments that are deemed to be of a current account nature, and are therefore among those payments that members may not restrict, are (a) payments due as interest on loans, (b) net income from other investments, (c) payments of moderate amount for the amortization of loans, and (d) payments of moderate amount for the depreciation of direct investments.

It has not been necessary for the Fund so far to adopt detailed interpretations of all of the items in Article XIX (i). Clearly, fine questions could arise in connection with such concepts as “depreciation,” “direct investments,” and so on. I should perhaps draw attention to the use of the word “moderate” in relation to the amortization of loans and the depreciation of other investments. This must be taken, coupled with other language in the provision, to indicate that reasonable installments are intended and not the lump sum repatriation of capital. Another feature of Article XIX (i) that is worth special mention is the last sentence of that provision. This is intended to make the Fund the arbitrator in any dispute between members as to the classification of an actual transaction as current or capital. This is quite distinct from another interesting feature of the provision. Under the words “without limitation,” it would be possible for the Fund to decide that certain general categories of payments beyond those specifically mentioned are to be treated as payments for current transactions and thus within the regime of freedom for them that the Articles prescribe. The Fund has not yet exercised this authority.

In concentrating on the regime of freedom that the Articles establish, one must not ignore the other side of the picture. The Articles provide that payments and transfers for current international transactions are to be unrestricted, but they also provide that members are free to restrict capital transfers. In the words of Article VI, Section 3, “members may exercise such controls as are necessary to regulate international capital movements.” This recognition of the right of members to limit or prevent capital transfers does not apply to those categories of transactions that would be considered capital but for the fact that the Articles declare them to be current. And even those transactions that are of a capital nature for the purposes of the Articles cannot be controlled in such a way as to produce undue delay in the settlement of current international transactions. In other words, if a member wishes to establish machinery for segregating capital and current payments so as to limit the former, it must be careful to see that the machinery does not unduly slow down the settlement of commitments in respect of the latter. Finally, although members are clearly entitled to limit capital transfers, there is a good deal more that could be said on this subject, such as the possibility of the use of the Fund’s resources by a member to help cope with an outflow of capital that is not excessive in order to enable it to avoid capital controls. I mention this in passing, without further elaboration, as one example of the thesis, which I have already mentioned, that the drafters hoped for greater freedom in the sphere of international payments than they have provided for by way of obligation. A full understanding of the Fund must take all of this into account.

The last element in the formulation of the obligation to which I will refer is the word “international” in the clause “current international transactions.” This must not be understood to limit the obligation to transactions between governments or monetary authorities. It does apply to these, but it also applies to the transactions of all residents within a member state and the territories under its authority with the residents of other member states and their territories. It does not apply to transactions between a member and a nonmember or between their residents. It is expressly provided in Article XI that nothing in the Articles affects the right of any member to impose restrictions on transactions with non-members or with persons in their territories unless the Fund finds that particular restrictions of this kind prejudice the interests of members and are contrary to the purposes of the Fund.

The Avoidance of Discriminatory Currency Arrangements

Another rule in the code of good conduct is that members must avoid discriminatory currency arrangements. This is one of the three categories of exchange practices that are expressly prohibited. The other two have already been discussed briefly: multiple currency practices, and restrictions on payments and transfers for current international transactions. It is clear, therefore, that conceptually and legally these are three distinct categories. Nevertheless, in practice it has been found difficult to isolate discriminatory currency arrangements. By this I mean that a practice that is a discriminatory currency arrangement is usually a restriction or a multiple currency practice as well, and on occasion all three, although the reverse is not true and there are many restrictions and multiple currency practices of a nondiscriminatory character. The result has been that much less legal analysis has been devoted to the concept of discriminatory currency arrangements than to the other two concepts. However, although there may have been fewer problems of the interpretation of discriminatory currency arrangements, this does not mean that they have been an unimportant feature of Fund policy. On the contrary, the Fund has understood it to be a major objective of the Articles to eliminate discrimination, and it has used its influence to eradicate this practice from exchange arrangements.

One or two other points about discriminatory currency arrangements should be mentioned. The word “currency” must be noted. It serves a function somewhat similar to the word “payments” in connection with restrictions; that is to say, the arrangements that are prohibited by the obligation must have a direct relation to currency. Discriminatory arrangements that are not of this character but relate directly to trade fall within the competence of other international bodies to the extent that they are the subject of international regulation at all.

The rule that prohibits “discriminatory currency arrangements” does not refer to current international transactions, and indeed the word “currency” could conceivably have had a wider significance. On the other hand, Article VI, Section 3, gives a member the right to regulate capital transfers without making any express exception for discriminatory currency arrangements. The Fund has solved the dilemma by regarding the right of members to control capital transfers as paramount to the duty to avoid discriminatory currency arrangements. In other words, the right to control capital transfers is not subject to an exception that would eliminate discrimination in the exercise of that right. The effect, therefore, is that members may discriminate by permitting capital transfers to or from some members but not others.

The word “arrangements” must not be understood as confined to bilateral agreements between members. It is true that these are an outstanding example of the kind of practice that has done much damage to international trade and payments, and to the extent that they are payments agreements they undoubtedly fall within one or more of the prohibitions in the code of good conduct in the Articles. However, the concept of discriminatory currency arrangements is a broad one, and it applies to both bilateral agreements and purely unilateral practices.

I have been tempted to give you an example of a “pure” discriminatory currency arrangement, that is to say, a practice directly related to currency that is neither a restriction on payments nor a multiple currency practice. Perhaps one example would be the prescription by a member of the currencies of payment to be received by its residents under which they must receive convertible currencies from some members but might receive inconvertible currencies from others. You will recall that the prescription of the currency of receipt is not a restriction on the making of payments.

The broad effect on private parties of the rules of conduct that bind members can be summarized as follows. Those rules seek to give reasonable assurance that private parties can deal among themselves on the basis of fixed, unitary, and stable rates; that they will be able to make payments freely for current international transactions as defined extensively by the Articles; that they will be able to enjoy freely the proceeds of such transactions; and that they will not be subjected to discriminatory currency treatment in connection with those transactions.

Article VIII and Article XIV

In describing some of the basic obligations in the code of good conduct, I have given them an absolute formulation. I must now make some qualifications and even qualifications of qualifications.

Of the obligations that have been mentioned, there need be no further discussion of the par value system. The obligations that make up that system are binding on all members. However, a distinction must be made in connection with the rules that prohibit multiple currency practices, restrictions on the making of payments and transfers for current international transactions, and discriminatory currency arrangements. Two groups of members must be distinguished: those that have given notice under Article XIV, Section 3, that they are prepared to accept the obligations of Article VIII, Sections 2, 3, and 4, and those that have not yet done this but are still availing themselves of the transitional arrangements of Article XIV. The former group is still an exclusive one consisting of no more than 26 members of the 102 that belong to the Fund.

Permit me to call the two groups of members the Article VIII and the Article XIV groups. The rules prohibiting the three types of practice are clearly among those obligations that bind the Article VIII group. However, the Fund has the legal authority to approve these practices even in the case of a member in the Article VIII group. At the same time, it must not be assumed that the Fund would do this readily or lightheartedly. The Fund has made it clear in its policy statements that it regards Article VIII status as one from which retrogression should be avoided except for very good reason. By retrogression I mean the adoption of any of the prohibited practices and not return to the Article XIV group. Resumption of membership in that group is legally impossible. The transition to Article VIII is a one-way thoroughfare, and a member cannot retrace its steps to Article XIV.

Effects of Article VIII on Article XIV Countries

For countries that have opted in favor of the transitional arrangements of Article XIV, the impact of the Articles is somewhat different. These countries have broad privileges with respect to exchange restrictions without the need for Fund approval. They are entitled to maintain those restrictions that they had when they joined the Fund, and they are entitled to adapt them to changing circumstances. However, the privileges of Article XIV are no more than exceptions to Article VIII. Article VIII applies to all members, whether they belong to the Article VIII or the Article XIV group; and if a member in the Article XIV group contemplates an action that it is not entitled to take under Article XIV, the action will be governed by the provisions of Article VIII. This is an important point, and it means that although a member may have the legal standing of Article XIV, in the sense that its currency has not been made “convertible” under Article VIII by the member’s formal notice of its preparedness to perform the obligations of Article VIII, the member may nevertheless be bound to a very large extent by the obligations of that Article.

The point can be brought into sharper focus as follows. Article XIV permits a member to maintain and adapt to changing circumstances restrictions on payments and transfers for current international transactions. Except in circumstances that are no longer relevant, a member does not have the privilege of introducing these restrictions under Article XIV. If it seeks to introduce restrictions, it must request the prior approval of the Fund under Article VIII. To the extent that it wishes to introduce a restriction, it is in the same legal position as a member that belongs to the Article VIII group. However, there may be an important difference in policy. It is possible that in deciding whether to grant its approval the Fund may feel less reluctance in the case of an “Article XIV member” than in the case of an “Article VIII member.”

It will be obvious that the meaning attributed to the “introduction” of restrictions will often decide the course that a member must follow. If a member’s action is deemed not to be an introduction, but only an adaptation, the member may proceed unilaterally under Article XIV; but if the action is deemed to be an introduction, the prior approval of the Fund must be applied for under Article VIII. Often, it will be clear in which category—adaptation or introduction—an action falls, but sometimes the determination will not be an easy one. In each instance, the determination will depend on the specific facts of the case.

One important conclusion that must be drawn from this account of the two provisions is that legally they merge into each other as far as the jurisdiction of the Fund over restrictions is concerned. To put it another way, the assurance that members will not interfere with the making of payments and transfers for current international transactions is not confined to the Article VIII group of members. Legally, this assurance may exist with respect to Article XIV members as well. The extent to which this will be true for any Article XIV member will depend on the extent to which it has ceased to maintain restrictions. The more it eliminates them, the less it can do unilaterally under Article XIV. In fact, a member can reach the anomalous position in which it has eliminated all restrictions under the transitional arrangements of Article XIV without, however, having given formal notice that it is prepared to accept the obligations of Article VIII, Sections 2, 3, and 4. Although the currency of that member will not be regarded as formally “convertible” under the Articles, the member will be unable to take any action whatsoever under Article XIV. Having ceased to maintain restrictions, it has none that it can adapt under Article XIV. Any action to reintroduce restrictions that it might contemplate would be governed by Article VIII. With the attrition of restrictions over time as a result of the efforts of members and the policies of the Fund, there are many Article XIV members that are largely, or even wholly, subject to the legal discipline of Article VIII.

There are two further legal points which show that it is not safe to think of Article VIII and Article XIV as exclusive systems, the one jurisdictionally severe and the other relaxed, or the one a regimen of freedom for private parties and the other a regimen of regulation. First, although Article XIV gives members that have opted for it the privilege of the unilateral adaptation of restrictions in the light of changing circumstances, this does not apply to changes in multiple rates. This is true even if the multiple rates are also restrictions, as they frequently but not invariably will be. The Fund has interpreted the Articles to mean that any change in multiple rates, whatever the scope or character of the change, must be submitted to the Fund for prior approval. Even the shift of a commodity from one existing multiple rate to another can be made only with the Fund’s approval. Secondly, even though an Article XIV member is entitled to maintain restrictions under Article XIV, it may do this only if it maintains the restrictions for balance of payments reasons. Once it is satisfied that it no longer has this justification, it must eliminate them or seek approval under Article VIII. On top of this, the Fund has the authority to make representations to an Article XIV member at any time that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions on the making of payments and transfers for current international transactions.

This discussion of the Articles leads to the following conclusion: There are provisions in the Articles from which private parties can draw certain reasonable assurances with respect to the freedom and equality with which they will be able to conduct the financial aspects of their international business. Moreover, this sense of assurance need not be confined to dealings with the residents of Article VIII members. However, none of this must obscure the fact that complete freedom and equality may not be characteristics of the payments system of a particular member, and that this may be true whether the member belongs to the Article VIII or the Article XIV group. At any particular date, a member may be applying restrictions. This brings me to my next topic. What happens if private parties unwittingly ignore these restrictions or deliberately seek to evade them when making their contracts? The Articles have something to say about this.

The Unenforceability of Certain Exchange Contracts

One of the provisions of the Articles that has an obvious impact on the business transactions of private parties is Article VIII, Section 2(b), which reads as follows:

Exchange contracts which involve the currency of any member and which are contrary to the exchange control regulations of that member maintained or imposed consistently with this Agreement shall be unenforceable in the territories of any member. In addition, members may, by mutual accord, cooperate in measures for the purpose of making the exchange control regulations of either member more effective, provided that such measures and regulations are consistent with this Agreement.

This provision is the leading example of “lawyers’ law” in the Articles. It is most closely connected with a specialized branch of private law, and it has evoked interest not only because of the change it has brought about in that branch of law but also because of the many complexities that are packed into the few words of the provision. For these reasons, Article VIII, Section 2(b), has been the subject of more cases throughout the world and more discussion in the legal profession at large than anything else in the Articles. These cases, as well as other jurisprudence involving the Articles, are discussed in detail in a book of mine entitled The Fund Agreement in the Courts,1 which the Fund has published.

It will not be possible here to do much more than mention some of the fundamental features of Article VIII, Section 2(b). It will be useful to begin by explaining why the provision was incorporated in the Articles. Before the Articles took effect, there was much resistance to the recognition by one country of the exchange controls of another country. Many legal techniques were resorted to for this purpose. Sometimes, courts found that the law which governed a contract or its performance according to the private international law of the forum was not the law of which certain exchange controls formed part; and not infrequently one wondered whether courts had been led to this result in order to avoid recognizing that the exchange controls had an effect on the case. Sometimes, courts simply held that the recognition of the exchange controls of another country, even where they were part of the governing law according to the private international law of the forum, was against the public policy of the forum. And sometimes, foreign exchange controls were labeled “revenue,” “penal,” “confiscatory,” “public,” or “territorial” laws, and were held not entitled to recognition for that reason. With the prospect of the adoption of an international charter like the Articles, it was felt that the old attitude would become illogical. It was one thing to turn a basilisk stare on foreign exchange controls where they were not regulated by international compact and might be inspired by motives that other countries could not be expected to condone. It was a very different thing when a community of countries was created in monetary matters, within which they were agreed on the circumstances in which countries might maintain or impose exchange controls, and within which they were committed to assist each other. If members had obstinately persisted in the attitude of the past, this would have meant that they were undertaking to collaborate in the international regulation of exchange controls but were reserving full freedom to limit the effectiveness of that collaboration. It must be said at once that some early criticisms of Article VIII, Section 2(b), were misconceived. Some commentators attacked it on the ground that it encouraged or perpetuated exchange controls with all the frustrating effects that they have on the transactions of private parties. This was not the purpose or effect of the provision. As set forth in Article I, it has always been the objective of the Articles to rid the world of exchange restrictions among members; but the Articles also recognized that for a time after members joined the Fund, and even from time to time thereafter, there might be a good case for the retention or imposition of exchange controls in the interests of the individual member having them and the community of members at large. By not neutralizing the relief that the member sought in these circumstances, other members were not acting inconsistently with the basic objective of the elimination of exchange restrictions wherever and whenever this was possible. This point seems to have been realized as the years have gone by and exchange restrictions have been progressively reduced.


The drafters of Article VIII, Section 2(b), examined a number of proposals for expressing the new attitude to the exchange controls of other members that would become a logical consequence of the Articles. More radical proposals were rejected in favor of the relatively mild sanction of unenforceability. However, this does not mean that all courts and legal scholars have felt that unenforceability is so simple a concept that debate is unnecessary. The Fund’s view, as expressed in an authoritative interpretation circulated to members on June 14, 1949,2 is that basically what is meant by unenforceability is that the judicial or administrative authorities of one member will not assist a party to get the performance of an exchange contract that is contrary to the exchange control regulations of another member when those regulations are maintained or imposed consistently with the Articles. Consistency with the Articles is an express and obviously necessary condition, in view of the rationale of the provision. In view of what I have said about Articles VIII and XIV, and their interrelation, it will usually be necessary to ask the Fund whether a particular exchange control regulation is consistent with the Articles. If the regulations in issue are consistent with the Articles and all other conditions in the provision are satisfied, the judicial or administrative authorities of another member will not give a party assistance, for example, by decreeing performance or by awarding damages for nonperformance of his contract. However, the sanction of unenforceability does not mean invalidity, and a member is not required to treat these exchange contracts as void. If it were to do so, this might go beyond the sanction imposed by the member whose exchange control regulations were transgressed by the contract. It hardly seems necessary for other members to be as zealous as that.

Effect on Private International Law

The other main principle in the Fund’s interpretation clarifies the way in which the private international law of many members has been affected by the provision. If a party seeks to enforce a contract to which the provision applies in the court of a member, that court must not enforce the contract on the ground that the exchange control regulations of the other member are against the public policy (ordre public) of the forum and must therefore be ignored. On the contrary, where the provision applies, it has now become part of the public policy of members to recognize exchange control regulations for the purpose of withholding judicial or administrative assistance in the performance of exchange contracts that have not observed the regulations. Another change that has been brought about in private international law is that, if the conditions of the provision are satisfied, a court in a member country cannot refuse to recognize the exchange control regulations of another member and grant enforcement of an exchange contract on the ground that the law of which the exchange control regulations are part is not the law governing the contract or its performance under the private international law of the forum. The contact with the law of the foreign exchange control regulations that makes it necessary to recognize that law and refuse enforcement of the contract is that the currency of the member having the regulations is “involved.” I shall say more about this, but you will already appreciate that the provision has made notable changes in the traditional private international law of many countries.

The duty to treat certain contracts as unenforceable is not confined to contracts that are contrary to exchange control regulations which deal with current international transactions; it applies equally to regulations that control capital transfers. Again, the duty binds all members and not merely the Article VIII group, even though the duty is to be found in Article VIII. It has already been explained that the obligations of Article VIII are binding on all members except to the extent that they are modified for the time being by Article XIV (or some other provision). Neither Article XIV nor any other provision modifies Article VIII, Section 2(b), and therefore even those members that are availing themselves of the transitional arrangements of Article XIV are bound by the provision.

“Exchange Contracts” and Currency “Involved”

I must now say something on two further issues: the meaning of “exchange contracts” and the currency that is “involved.” Here again there has been much international debate in an effort to clarify these elements in the provision. It will have to suffice on this occasion if I state what I now take to be the dominant views, and I should like to say that they are views in which I concur. “Exchange contracts” are not limited to contracts for the exchange of currencies or other means of payment. They are any contracts that affect the exchange resources of a country. Thus, to take only one example, they include contracts under which residents undertake to pay currency in return for goods. Secondly, the currency of a member is “involved” if the exchange resources of that member would be affected by performance of the contract. It is not necessary that the quid pro quo for which the contract provides should be expressed in the currency of that country. If a resident in a member country undertakes to pay foreign currency to a nonresident, it is obvious that the country’s exchange resources are affected. If the resident undertakes to pay his domestic currency, the nonresident or his country will have a claim against the payor’s country and again, therefore, its exchange resources will be affected. These are some of the economic ideas that moved the Bretton Woods Conference to adopt Article VIII, Section 2(b). These ideas must guide the interpretation of the compressed language of the provision and, although the courts have not always understood them, these ideas are undoubtedly making headway.

The sanction that Article VIII, Section 2(b), establishes for the nonobservance of exchange control regulations is confined to the exchange control regulations of members of the Fund. The sanction is not intended to provide protection for nonmembers. Whether this will mean a hardening in the attitude of members on the question of the recognition of the exchange controls of nonmembers is an interesting example of the problems raised in the field of public policy about which I will say something later.

Finally, what does the provision mean, in the broadest terms, for private parties? It means that, if they enter into contracts in deliberate violation of the exchange control regulations of a member, or even in unwitting disregard of them, they may find that they cannot get performance of those contracts or satisfaction for nonperformance if their partners default. They will be unable to find a remedy in the courts of a member if the conditions of the provision are satisfied. Moreover, a party who cannot get a remedy for breach of contract is not likely to be better off by framing his claim in quasi-contract or in unjust enrichment to recover what he has paid, or even in tort to get damages for nonperformance. The courts have shown care in withholding remedies where the substance of the case is really a claim in contract that falls within the provision. The moral is not only that private parties should respect applicable exchange control regulations of which they are aware, but also that they should be vigilant in inquiring whether there are any such regulations. This is undoubtedly good advice, but it must not be understood to suggest that a contract cannot become unenforceable because of exchange control regulations adopted after the contract was made. Although this is an unfortunate result for private parties, it would seem that the welfare of national economies is the paramount interest that Article VIII, Section 2(b), seeks to protect. It would also follow on this view that a contract that was unenforceable when made becomes enforceable if the exchange control regulations that were transgressed are repealed before performance.

Public Policy

The second main topic which I wish to discuss covers those principles of law which flow from the Articles without being expressed in them and which can be called principles of public policy or ordre public. These principles are expressions of the objects of the law, and they promote those objects. They must not be confused with the policies of governments for the time being. The Articles are a major advance in international law and organization, and it would be extraordinary if they had not shaken old legal conceptions and introduced new ones in both international and domestic law. It would be interesting to attempt a detailed discussion of the new rules of public policy that the Articles have produced and of the old rules that have been changed. I will limit myself to three cases which have been considered by the courts of the United States. These cases illustrate the range of problems that can arise, and there is a further interest in seeing to what extent the courts of a single country have been able to weave the strands of public policy into a single legal pattern.

The first of these cases is the well-known case of Perutz v. Bohemian Discount Bank in Liquidation (304 N.Y. 533, 110 N.E. (2d) 6 (1953)). In this case the plaintiff was the administratrix of the estate of her deceased husband, who had at one time been employed by a bank in Czechoslovakia, the predecessor of the defendant bank. He had been a citizen and resident of that country when he entered into a contract in Prague with the bank under which he was entitled to a pension payable monthly at the bank’s Prague office. He left Czechoslovakia in November 1940 and became a citizen and resident of the United States, where he died in June 1949. This was an action to recover the dollar equivalent of the pension payable after October 1942 and until the decedent’s death. At all relevant dates, Czechoslovakia’s exchange control regulations prohibited payments to nonresidents, in domestic or foreign currency, without the license of the exchange control authorities. Czechoslovak currency had been deposited by the bank in a blocked account in the name of the plaintiff’s husband, but no license had been given for withdrawals from the account or for payment in any other form.

In the New York action, the plaintiff argued in part that the Czechoslovak exchange control regulations were penal and confiscatory, and contrary to the public policy of the United States, which owed no duty to protect the Czechoslovak economy. It was also argued that the case did not fall under Article VIII, Section 2(b), because the pension contract was not an exchange contract within the meaning of that provision. The defendant did not rely upon the provision but argued that the contract was governed by Czechoslovak law under the private international law of New York, and the bank had performed the contract in accordance with Czechoslovak law. The New York action was for breach of contract, and it must fail because there had been no breach.

The New York Court of Appeals decided, in a brief judgment, that the contract was governed by the law of Czechoslovakia, the place where it had been made and where it was to be performed, and that the bank had performed the contract as permitted by that law. New York courts could not refuse on the ground of public policy to recognize the effect of Czechoslovak exchange control regulations, because both the United States and Czechoslovakia were members of the Fund. The Court did not mention Article VIII, Section 2(b), or any other provision of the Articles as a basis for this conclusion.

There has been a good deal of debate about the precise meaning of the decision. It is likely that the case was not decided under Article VIII, Section 2(b). One view of the ratio decidendi of the case has been that the courts of one member of the Fund will not refuse on the basis of their public policy to recognize performance of a contract in accordance with the exchange control regulations of another member of the Fund where the law of the latter governs performance of the contract under the private international law of the forum. If this version, or anything like it, is the correct analysis of the case, the principle it establishes will apply whenever the law of which the exchange control regulations are part is the law governing the contract or its performance according to the private international law of the forum, whether the contract is an “exchange contract” within the meaning of Article VIII, Section 2(b), or not. In discussing the Perutz case some years ago, I put forward the thought that the rule of the recognition of the exchange control regulations of other members that was the essence of the principle in the Perutz case could also apply even though no contract at all was involved. Why should it not extend to any situation in which the law of another member was applicable under the private international law of the forum and the foreign law included exchange control regulations that affected the issue in the case? I cited as an illustration the case in which foreign law governs the distribution of a decedent’s estate.

This brings us to the second case, the decision of the Supreme Court of the United States in Kolovrat v. Oregon (81 S.Ct. 922 (1961)), a case which involved a problem of inheritance and the effect of foreign law under which there were exchange control regulations. A decedent left property in Oregon and heirs who were resident in Yugoslavia. The State of Oregon claimed the estate by escheat on the ground that the heirs were ineligible to inherit under Oregon law. Under an Oregon statute, for foreign heirs to inherit Oregon property there had to be a reciprocal and unqualified right under the foreign (i.e., Yugoslav) law of U.S. residents to receive in the United States foreign (Yugoslav) inheritances. Oregon argued that there was not an unqualified right because the Yugoslav exchange control authorities could prevent the transfer of Yugoslav inheritances to the United States. The Supreme Court held that under a treaty of 1881 the Yugoslav heirs were entitled to inherit the Oregon property and that Oregon was not entitled to rely on its public policy to interfere with this right. The Supreme Court based the latter part of this proposition on the Articles of the Fund, to which both the United States and Yugoslavia belonged. The Court concluded that this was the effect of the Articles because the Yugoslav exchange control regulations met the standards of the Articles, although it is not completely clear what the Court considered decisive in reaching that conclusion.

The case is an interesting one and gives rise to many inquiries. The only point I wish to make here is that the broad sense of the Supreme Court’s opinion was that the adherence of the United States to the Fund Agreement had established, in the circumstances of this case, a national public policy in the field of inheritance which an individual State had to respect and against which it could not set up its own public policy.

The third case is Banco do Brasil, S. A. v. A. C. Israel Commodity Co. Inc., (12 N.Y. (2d) 371, 190 N.E. (2d) 235, 239 N.Y.S. (2d) 872 (1963); 84 S.Ct. 657 (1964)). The defendant was a Delaware corporation which imported Brazilian coffee into the United States, and the plaintiff was a Brazilian banking corporation and quasi-governmental agency which supervised the operation of Brazilian foreign exchange laws. The plaintiff’s complaint was that the defendant had conspired with a Brazilian coffee exporter to pay the exporter dollars which the exporter could sell in the Brazilian free market for 220 cruzeiros per dollar, instead of surrendering those dollars to the plaintiff at 90 cruzeiros per dollar in accordance with Brazilian exchange control regulations. It was alleged that the benefit received by the defendant was that it paid a lower price for the coffee than the minimum established by Brazilian law. The plaintiff claimed damages for conspiracy equivalent to the dollars that should have been surrendered under Brazilian exchange control. The New York Court of Appeals, by the narrow margin of four to three, rejected the plaintiff’s claim. It did so mainly because the contract had been executed, so that the case did not fall under Article VIII, Section 2(b), which prescribed a sanction of unenforceability in the case of executory contracts. It found no other express provision under which the claim could be established. The Court also held that the principle of public policy in Anglo-American law that the courts of one country will not enforce the revenue laws of another country precluded recovery in this action, and found nothing in the Articles that led to a different result. The minority in the New York Court of Appeals was willing to permit the claim to succeed on the ground that New York public policy had been changed since the coming into force of the Articles of Agreement. The minority judges relied upon the Perutz case for the proposition that membership of the United States in the Fund made it impossible to say that the exchange control laws of other members were offensive to New York public policy.

In petitioning the Supreme Court for a writ of certiorari, the Banco do Brasil emphasized that the case was not based on Article VIII, Section 2(b), but on the principle that had been applied in the Kolovrat case. New York should not be able, by relying on its rule of public policy with respect to revenue laws, to cut off the right to sue for damages for conspiracy to violate exchange controls maintained by Brazil as a member of the Fund. Elaborate arguments were advanced to show that the old rule of public policy as applied by the New York court was inconsistent with the national policy of the United States as evidenced by the enormous financial and economic assistance that the United States was giving to Brazil through the Fund and outside it.

The Supreme Court invited the Solicitor General of the United States to express the views of the United States and, after consultation with the Departments of State and Treasury, he submitted a memorandum in which he stated the view of all three that the case did not present a problem requiring review by the Supreme Court. He argued that neither Article VIII, Section 2(b), nor any other provision in the Articles required State courts to give a remedy in tort based on violations of the exchange control regulations of other members. The adherence of the United States to the Articles did not in itself manifest a national policy that required State courts to entertain such actions. The Supreme Court refused to issue a writ of certiorari, and, in the usual way, no reasons were given.

Conclusions on U. S. Cases

What are the conclusions that one can draw from these three cases? They show that it is not only the express provisions of the Articles that can have an impact on private parties. The transactions of such parties can be quite seriously affected by principles of public policy that are deduced from the general effect of the Articles. The consequences can be felt on contracts even though the case is not one that would fall within the scope of Article VIII, Section 2(b). Moreover, the effects may penetrate into areas of private international law in which contracts are in no way involved. However, the disposition to interpret public policy liberally for the benefit of other Fund members is not unlimited. The U. S. courts have refused to upset the traditional principle that foreign revenue laws are not enforced. They have refused to reach the conclusion that they must, in effect, enforce foreign exchange control regulations by awarding damages for the violation of surrender requirements that are part of those regulations. It is not easy at the moment to draw the line and say at what point the argument of the silence of the Articles as advanced by the Solicitor General in the Banco do Brasil case will be treated by the courts as decisive. But all of this is an interim report. We can be sure that the courts in the United States and elsewhere will be faced again and again with questions of the effect of the Articles on the transactions of private parties, and that this body of law is a growing one.