An understanding of the legal and financial structure of the Fund, as well as its practice, requires an understanding of Article IV, Section 8, under which each member is bound to maintain the gold value of the Fund’s holdings of the member’s currency notwithstanding changes in the par or foreign exchange value of the currency. This obligation applies to devaluation, depreciation, revaluation, and appreciation. It has been said that a purpose of the provision is to prevent the Fund from making profits or sustaining losses as a result of changes in the value of its currency holdings. Another purpose of the provision, however, is to enable the Fund to continue to conduct its operations in a manner consistent with its purposes, notwithstanding such changes.
One consequence of the provision is that the financial relationship of each member with the Fund, considered from the viewpoint of either a member’s privileges in the Fund or its obligations toward the Fund, remains unaffected by a change in the par or foreign exchange value of that or any other member’s currency. An aspect of this relationship is that a member’s gold tranche, which the member is likely to regard in economic terms as the net amount of resources that it has transferred to or through the Fund, will remain constant in terms of gold value. This is an important element in the attitude of those members that regard the gold tranche as a component in their international reserves.
Another consequence of the provision is that the obligations of members toward the Fund that result from their purchases of other members’ currencies from the Fund remain unaffected in terms of gold value notwithstanding changes in the par or foreign exchange value of any currencies. As a result, the Fund can undertake, without fear of loss, to repay the gold value of any amounts of currency that it borrows, because in due course the purchaser of this currency from the Fund will have to make a repurchase, with gold, special drawing rights, or other currencies, that is equal in gold value to the purchase. The Fund has undertaken to repay in terms of gold value under its General Arrangements to Borrow. This and other features of the right of repayment make that right a reserve asset comparable in many ways to the gold tranche.
The fact that the provisions for the maintenance of gold value have been interpreted to be applicable to appreciation has enabled the Fund to adopt an elaborate decision under which it can continue to operate in a fluctuating currency without producing anomalous or inequitable results.
Article IV, Section 8, has been interpreted also to apply to the U. S. Government securities in which the Fund has invested, so that these, too, are maintained in gold value notwithstanding any change that might occur in the par or foreign exchange value of the U. S. dollar.
The Articles contain special provisions for a uniform proportionate change in par values (i.e., a change in the price of gold). In the event of this change, Article IV, Section 8, could be applied in exactly the same way as if a series of individual changes had occurred. There would then be no changes in the gold value of the financial relationship of all members with the Fund. On a uniform proportionate change, however, the Fund could dispense with the adjustment of its currency holdings. It can be concluded that the effect of this would be to change the gold value of quotas in proportion to the change in par values. All financial relationships between the Fund and members would be similarly affected in terms of gold value but would remain unaffected in terms of currencies.
If a uniform proportionate devaluation were to occur and the Fund were to waive the adjustment of its currency holdings, the gold value of gold tranches would be reduced. Moreover, the Fund might suffer a loss because of outstanding repayment obligations under the General Arrangements to Borrow, because these obligations would not be reduced in terms of gold value whereas repurchase obligations to the Fund would be. A member could protect the gold value of its gold tranche by opting out of a uniform proportionate devaluation, but this action might have serious effects on the liquidity of the Fund.
The unit of special drawing rights has been fixed absolutely in terms of gold. It can be changed only by amendment of the Articles. Changes in the par values of currencies, whether made individually or as part of a uniform proportionate change, would have the same effects on the Fund’s holdings of special drawing rights as on its holdings of gold.