Abstract

The particular interest of the SDR and the ECU for the present study is the use that can be made of them as units of account. The SDR and the ECU are each defined in terms of a basket of certain amounts of specified currencies. Both the SDR and the ECU were created as assets to be held by monetary authorities or by other official institutions that may be prescribed in accordance with the instruments under which the SDR and the ECU have their legal existence. The two assets, however, have a value that can be translated into currency if necessary and can be used by both official and private parties as units of account.

Composite Units of Account

The particular interest of the SDR and the ECU for the present study is the use that can be made of them as units of account. The SDR and the ECU are each defined in terms of a basket of certain amounts of specified currencies. Both the SDR and the ECU were created as assets to be held by monetary authorities or by other official institutions that may be prescribed in accordance with the instruments under which the SDR and the ECU have their legal existence. The two assets, however, have a value that can be translated into currency if necessary and can be used by both official and private parties as units of account.

The term “unit of account” does not imply that the SDR or the ECU in private use cannot become, or has not already become, more than a mode of expressing value or a means of indexation. To what extent private SDRs or ECUs constitute monetary assets of the holders is not the subject of inquiry in this chapter. In other words, the discussion here does not proceed much beyond the function of the SDR and the ECU as units of account and does not attempt to say to what extent they have become or might become stores of value and means of payment. That topic is touched upon in Chapter 16.

Private SDRs and ECUs are distinct from official SDRs and ECUs. There should be no doubt that, whether sui generis or not in characteristics and uses, the official SDR and the official ECU are monetary assets of the holders. The only link between the official SDR and the private SDR, or between the official ECU and the private ECU, is that the private unit of account follows the official unit of account in the matter of valuation. Sometimes, however, private uses employ a method of valuation that antedates the one in current official use or that catches up with the current method only after an interval. In all respects other than the method of valuation—such as the way in which the official and private SDR and ECU are created, the issuing entities, yields, and uses—the private units are not bound by the rules that apply to the official units.

The origin and growth of the uses of the private SDR, and more particularly the ECU, have been largely “spontaneous” phenomena in the sense that they can be attributed to official action only in a limited sense. The private SDR and ECU are products of the market, although there has been some official encouragement, especially in the case of the ECU. The official SDR and the official ECU were created by governments to perform exclusively governmental or central banking functions. The private holding of the official SDR or ECU was unanimously and vigorously rejected by their creators. In the case of the ECU, however, the official world is now an enthusiastic supporter of the private ECU, without, however, forging legal links between the official and the private ECU so far. Furthermore, although private entities cannot hold official SDRs or ECUs, official entities are able to hold claims or undertake obligations denominated in the private SDR or ECU.

The virtue of the SDR and the ECU as units of account is that, because of their composition, they may be more desirable than any one currency as a unit of account.1 The exchange rates of currencies fluctuate, and there is no confidence in any one of them as a stable unit over time. If a currency is chosen as the unit of account, it may depreciate or appreciate against other currencies, and an obligor or obligee may consider this result disadvantageous for him and advantageous for the other party in the relationship. For example, an exporter, on the one hand, may want to shield himself against fluctuating exchange rates by insisting on payment in his own currency. The importer would then bear the risk of fluctuation and would have to protect himself. On the other hand, an importer may prefer to have his obligation to pay denominated in his own currency, but the exporter may object because he would bear the risk of fluctuation. If, however, an appropriate basket of currencies is chosen as the means for defining the value of the SDR or the ECU, the depreciation or appreciation of a currency may be matched to some extent by the compensating appreciation or depreciation of another currency or other currencies in the basket. The unit of account may seem to be a reasonable compromise between the parties, with the additional appeal that this compromise would exercise if the currencies of both parties were in the basket.

Origin of the SDR

In the negotiations that led to the First Amendment of the IMF’s Articles on July 28, 1969, by which the IMF was empowered to create official liquidity in the form of allocations of SDRs to members for international use, the potential function of the SDR as a widespread unit of account for private use, or even for official use, was not an issue. At that time, it was assumed that the par value system would be maintained and that gold would continue to be the common denominator of the system. There was no need to consider whether a unit of account, such as the U.S. dollar, or some other currency that was fixed in value by reference to gold and was convertible into the dollar in the market, would be more desirable than gold.

The expression “unit of account” is a loose one, because it is used to denote a number of different concepts. The expression may apply, for example, to a mode of presenting monetary aggregates in a unified manner when the elements that compose the aggregates originate in different currencies. The word “denominator” would be a better expression if a convenient and unified presentation is the assigned function of the so-called unit of account. The purpose of the unit of account, however, may be broader: it may be the basis on which obligations are undertaken, imposed, or performed. The expression “unit of account” in this monograph is a general reference to all these uses.

The original impetus for the creation of the SDR was the realization that the par value system could be imperiled by either of two related developments. One of them was that the United States might fail to deal effectively with the deficit in its balance of payments. Members might lose confidence in the U.S. dollar and might then present their dollar holdings in excess of working balances to the United States for conversion with gold in accordance with the undertaking of the United States to engage in gold transactions with the monetary authorities of other members. These conversions would reduce the gold holdings of the United States, erode confidence further in the dollar because of the suspicion that at some time the United States might not be able to honor its undertaking, and finally might lead the United States to withdraw the undertaking. It would then be necessary to reform the international monetary system in some radical way.

The other possible development was that the United States would solve its problems and eliminate the deficit in its balance of payments, as a result of which the growth of official liquidity would be insufficient. Adequate growth had been ensured in the form of U.S. dollars by the persistent deficit in the U.S. balance of payments. New gold production would not be sufficient to fill the gap. In any event, much of the newly produced gold was going into private hoards and industrial uses and not into official holdings. The consequence would be inadequate growth in the world economy and the pursuit by members of policies that would be severely injurious to the international monetary system, because members would scramble to accumulate an unfair proportion of global reserves.

The United States was in the vanguard in proposing creation of the SDR. One of the chief motives of the United States was to preserve the official convertibility of the U.S. dollar as the de facto primary norm of the par value system. The norm derived its force from the undertaking of the United States to engage in gold transactions for dollars with the monetary authorities of other members for the settlement of international transactions, in accordance with an option recognized by the Articles. The United States saw the SDR as a supplement to its holdings of gold. As SDRs were to be allocated to members at the same rate in proportion to their quotas in the IMF, the United States would receive a substantial part of every allocation that would be made.2 The United States would have wished to have the right to provide SDRs instead of gold if approached by other members for the conversion of dollar balances, because the United States was concerned about the further reduction in its gold holdings as the result of official conversions and the possible impact of this decline on the par value system. In the discussions of the Group of Ten in which negotiations on the SDR were conducted, some prominent industrialized members refused to concur in such a right for the United States. They did not want to undermine the status of gold, and they wished to retain the privilege of receiving gold rather than the novel and untried SDR. The best compromise that the United States could negotiate was a provision under which any member—and not specifically the United States—would be able to use SDRs to redeem holdings of its currency by another member, but only by agreement between the member issuing the currency and the member holding and seeking redemption of its balances of that currency.3

As the negotiators were intent on preserving the par value system and, necessarily therefore, not undermining the role of gold, the negotiators became less motivated by the desire to reform the international monetary system and escape the dilemma posed by deficits in the balance of payments of the United States. The negotiators became more concerned with the challenging but relatively limited objective of ensuring an adequate supply of official liquidity.

Much of the debate on creation of the SDR was concentrated on the provisions for allocating and canceling SDRs, so that they would constitute a sufficient but not an excessive supplement to global reserves in other forms,4 and on the provisions defining the characteristics and uses of the SDR. The asset should be desirable, but not so desirable that it would be hoarded instead of being used, and, at least according to the aim of the United States, not so desirable that it would be more attractive than the U.S. dollar. For some negotiators, the objective was that the SDR should be “as good as gold” or “gold-like,” but others resisted this approach because they wished to preserve the status of gold as the fundamental reserve asset of an international monetary system in which the par value system was an essential element. The outcome was a compromise, in which the SDR was defined in relation to gold:

Unit of value

The unit of value of special drawing rights shall be equivalent to 0.888 671 gram of fine gold.5

This amount of gold was equivalent to the par value of the U.S. dollar. There was, therefore, no reason why anyone contemplating the use of gold or the U.S. dollar as the unit of account in any legal instrument, official or private, should prefer the SDR in this role.

The function of the SDR as a unit of account began to change once members ceased to observe their obligations on exchange rates under the Articles after August 15, 1971. The process was accelerated in 1973 when some European members with leading currencies ceased to enforce fixed rates of exchange between their currencies and the U.S. dollar under stopgap arrangements. Under the First Amendment, the value of the SDR was at par with the U.S. dollar, but as a result of the devaluation of the dollar in December 1971 and again in February 1973, one SDR became equal to 1.20635 current dollars under the Articles. In a transfer of SDRs for currency, the rule of equal value under the Articles had to be observed.6 The rule was applied on the basis of par values, so that the effect on transfers of SDRs for currencies other than the dollar was that the transferor of SDRs received an amount of currency based in effect on the parity between the dollar and the currency received.7

Currencies were being traded in the exchange markets, however, at fluctuating rates of exchange and not on the basis of parities. The discrepancy between parities under the Articles and market exchange rates was a substantial hindrance to the conduct of transactions and operations through the Special Drawing Account as well as through the General Account of the IMF. (Article XXX of the present Articles defines transactions as the exchange of one monetary asset for another, and operations as other uses or receipts of monetary assets.) For the IMF to have gone on insisting that the principle of equal value had to be based on parities with the dollar would have implied that the United States was maintaining the effectiveness of the par value for the dollar in accordance with the Articles, but the IMF had concluded that after August 15, 1971 the United States was not acting in conformity with the exchange rate provisions of the Articles.8 If, for example, it had been assumed that the United States was still maintaining the par value of the dollar, a weakening of the dollar against another currency in the market would have had the effect in transactions involving SDRs not of a depreciation of the dollar but of an appreciation of the other currency. The member issuing the other currency would regard its holdings of SDRs as having declined in terms of its currency. Furthermore, the wide fluctuations in exchange rates that were occurring would appear to be wide fluctuations in the value of the SDR in terms of currencies other than the dollar.

It became a matter of paramount importance for the IMF to find a better unit of account without awaiting amendment of the Articles. The difficulty was that the Articles defined the SDR by reference to gold and there was no currency that could be assumed to be stable in relation to gold so that the currency could be used as the standard by which the gold value of other currencies could be determined.

The task was to find a solution by which the value of the SDR could be related to currencies in general and not exclusively to a single currency, and which might yield results that would fluctuate less than if a single currency were the standard. It would be necessary to subscribe to the legal fiction that, in the prevailing circumstances, the chosen solution yielded a value for the SDR in terms of gold, because of the definition of the SDR in terms of gold under the Articles. In fact, the solution would yield a value for gold by reference to the SDR rather than the reverse. Logic then required that as the value of gold had been found for the purposes of transactions and operations in SDRs through the Special Drawing Account, the solution must apply to the transactions and operations conducted through the General Account also.9

Valuation of the SDR

It was inevitable that as the value of the SDR was not to be tied to a single currency, the value had to be tied to a specified composite (or “basket”) of currencies.10 Under a decision of June 13, 1974, which was amended and became effective on July 1, 1974,11 the value of the SDR was deemed to be equal to the total of fixed amounts of 16 specified currencies.12

Fixed amounts of the component currencies can be derived originally from determined percentages of the currencies in the basket. But these percentages are not maintained by reference to the fluctuating exchange rates of the currencies. If the latter technique were followed, the basket would be composed of fixed weights and not fixed amounts of currencies. Fixed weights would imply variable amounts of currencies: the numbers of units of the currencies in the basket would be constantly adjusted. A unit of account composed of fixed amounts of currencies is practicable for use in the markets, because exchange risks resulting from adoption of the unit of account can be hedged against in known amounts of currencies. Both the SDR and the ECU are composed of fixed amounts of currencies, although the negotiation of the amounts begins with determination of the original proportions of the currencies in the total basket.

The exchange rate for the SDR in terms of a specific currency in the basket is calculated as the sum of the equivalents in the specific currency of all the components of the basket. For currency X not in the basket, the calculation involves the SDR value of currency Y in the basket—which is likely to be the U.S. dollar—and the exchange rate between X and Y. The calculations are made on the basis of exchange rates in the market. As noted already, although the basket consists of fixed amounts of the component currencies, the value of the SDR in terms of currencies fluctuates from day to day in response to the fluctuation of exchange rates. A change in the exchange rate of a currency in the basket affects the value of the SDR according to the weight of the currency in the basket, but the justification for this effect is that the weight represents approximately the measure of the currency in international transactions and, more broadly, in the international monetary system itself.

From the outset, the IMF has published the daily exchange rates for the SDR in terms of a wide range of currencies. Some observers thought that publication of this information might induce numerous parties to use the SDR as the unit of account in their own activities. It is clear, however, that the IMF adopted the new method of valuation of the SDR simply in order to have a unit of account that would enable the IMF to conduct its transactions and operations effectively through the two Accounts of the IMF under the First Amendment. The new method of valuation was an extraordinary development that occurred under the pressure of exchange rates13 fluctuating in violation of the provisions of the Articles.14 The action can be seen as one of self-defense by the IMF, in its own interest and for the benefit of its membership as well. Some members and some courts have shown similar boldness in directing or deciding how gold units of account in treaties are to be applied after the par value system broke down and in the absence of amendment of the treaties. One solution has been to determine the SDR equivalent of the gold unit of account on the basis of the ratio between the definition of the gold unit of account and the definition of the SDR before the Second Amendment, and then to apply the value of the SDR in terms of the appropriate currency (“the SDR solution”).

Two years after the adoption of the original basket, the Executive Board considered the method of valuation again but decided to make no change. The Executive Board had already become aware of the fact that the SDR was beginning to be considered a desirable unit of account outside the IMF, and the Board concluded that a change after so brief an interval might hinder this process. At the same time, it was thought that future adaptation of the method of valuation might encourage a broader use of the SDR as a unit of account, and that in turn this development might enhance the status of the SDR in the international monetary system.

On July 1, 1978, the first revision of the basket took effect,15 in accordance with a decision of March 31, 1978. The composition of the first revised basket was determined by much the same criteria as had been applied in assembling the original basket. The decision of March 31, 1978 set forth in addition the criteria for future changes, so that these changes would be infrequent, reasonable, and as predictable as possible.

The principles for future revisions were amended by a decision of September 17, 1980.16 The second revision of the basket became effective on January 1, 1981 in accordance with the revised principles. If the timing of the second revision had been determined by the decision of March 31, 1978, the change would not have become effective until July 1, 1983. The most striking aspect of the accelerated change was that the basket was reduced to five currencies, as follows:

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This impressive change in composition was the result of a staunch effort, the latest in a series of unsuccessful attempts,17 to establish a Substitution Account in which members could deposit U.S. dollars in exchange for SDR-denominated claims. It was desirable that a claim should be comparable in characteristics and uses to the SDR. If the claim was more attractive than the SDR, the effect would be to hinder the cause of making the SDR “the principal reserve asset in the international monetary system.”18 If the claim was less attractive, members would not be encouraged to hold it instead of other reserve assets. Members would not want to show that they were holding less attractive assets in their reserves as the result of substitution.

The assignability of the claim was an important consideration in the debate about a Substitution Account. Although it was intended that originally claims against the Account should be assignable only to official holders, the prospect was foreseen that at some future date the claims might be made assignable to nonofficial holders also. A member depositing dollars in the Substitution Account would be surrendering a fully assignable reserve asset that was readily available in support of the member’s currency. The wider the range of possible assignees, the greater would be the confidence of depositors and other holders, whether public or private, that the claim was competitive with other assets.

The motive for reducing the number of currencies that composed the basket was not related solely to the project of a Substitution Account. Making the SDR the principal reserve asset in the international monetary system was another motive. Progress toward this end probably must be the aim of any change in the method of valuation of the SDR, but much importance was given to changes in the method that would encourage public and private parties to use the SDR as a unit of account in expressing rights and obligations and as a denominator for other purposes. Once again, it was thought that the status of the SDR in the international monetary system would be enhanced if those practices were to spread. The IMF’s Interim Committee, in its communique of September 29, 1980, commented on the reduction of the SDR basket to five currencies in this way:

In the view of the Committee, this important action, which gives practical effect to the Committee’s recommendation at its meeting in Hamburg, will further enhance the attractiveness of the SDR and promote its use by private as well as public holders.19

The basket of 16 currencies included many currencies that members would not think of holding in their reserves. Holding SDRs or SDR-denominated claims valued according to such a basket might seem to be equivalent to holding the currencies themselves. The IMF concluded that the basket should be composed of only a few currencies for which forward as well as spot exchange rates in active exchange markets and domestic interest rates were available at all normal times. Baskets composed according to this criterion would make it easier for parties subject to obligations expressed in SDRs to hedge against the exchange risks to which parties were subject, and, in addition, would make hedging less expensive for them. These considerations were particularly important because meager facilities for hedging operations denominated in SDRs meant that the obligors would have to hedge in the currencies themselves, in proportions corresponding to the weights of the currencies in the SDR basket. Simplification of the basket might help banks and other entities to offer instruments denominated in SDRs that public and private obligors and investors would be willing to hold as a hedge, or as an investment, in lieu of the individual currencies composing the basket.

It has been noted above that the IMF’s decision of September 17, 1980 simplifying the SDR basket to five currencies also modified the principles for future revisions.20 The decision calls for revisions at intervals of five years unless the IMF decides otherwise as the result of a quinquennial examination. The basket is to contain the currencies of the five members whose exports of goods and services during the specified five-year period exceed in value the exports of other members. In the interest of stability in the method of valuation, however, a member’s currency will not replace another member’s currency already in the basket unless the value of the former member’s exports exceeds the value of the latter member’s exports by a certain minimum. The reduction of the number of currencies to 5 was inspired by the further objective of fewer changes in component currencies than might occur with a basket of 16 currencies.

The percentage weights of currencies in the basket must reflect broadly the value of exports of goods and services over the five-year period and the value of the balances of a currency held by other members at the end of each year of the period.21 These criteria, however, do not obviate a certain amount of political negotiation on the percentage weights, particularly among the members that issue the five currencies in the basket. To accelerate decisions, the Executive Board may consider it advisable to abide by any agreement negotiated among the five members, provided that it does not depart too far from the criteria.

A difference between the first and second decisions can be detected in the attitude to application of the criteria that govern the weights of currencies in future modifications of the composition of the SDR basket. The first decision required a fastidious observance of the criteria, subject to minor rounding. The amounts of the 16 currencies in the basket were to be determined on the last working day preceding the effective date of a revision in a manner designed to ensure that, at the average exchange rates for the three months ending on the last working day, the shares in the basket would correspond to percentage weights for each currency. These percentages were to be established “in the proportion” that the value of the exports of goods and services of each member having a currency in the basket, plus the value of other members’ holdings of the member’s currency, bore to the total sum of the exports and holdings of all 16 members, with rounding to the nearest ½ of 1 percent.

Under the second decision on future changes, the amounts of the 5 currencies are again to be determined in the manner prescribed by the first decision, but strict proportionality is not necessarily the outcome. The percentage weights are to “reflect” the factors of exports and holdings mentioned above “in a manner that would maintain broadly the relevant significance of the factors that underlie the percentage weights.” Rounding is to be made to the nearest 1 percent “or as may be convenient.”22

The less rigid features of the second decision suggest that, although the review preceding a possible revision will begin with the mathematical results of applying the two factors, the IMF may depart from those results, although not radically. The IMF may wish to take account of both economic developments not foreseeable by the decision on future changes and the quality of available statistical data. The IMF may wish to depart to a modest extent from the mathematical results in order to reduce the need for future changes and therefore in the interest of maintaining continuity.

The third revision of the basket took effect on January 1, 198623 in accordance with the decision of September 17, 1980. The composition is as shown in the following table:

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On October 9, 1990, the IMF announced the fourth revision of the basket.24 With effect from January 1, 1991, the list of currencies remains the same, but the percentage weight of each on the basis of which the amounts are to be calculated will be as follows.

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This revision has been made in accordance with the IMF’s decision of September 17, 1980. The amount of each currency in the basket will be calculated on December 31, 1990. The calculation will be made on the basis of the average exchange rates for the currencies over the three months ending on that date, once again in such manner as ensures that the value of the SDR in terms of the currencies will be the same on December 31, 1990 under both the third and the fourth revision.

The use of the SDR as a private unit of account increased somewhat as a result of the reduction of the basket to five currencies, but private use has now become negligible.25 The explanation of this mediocre performance is not altogether clear. Certainly, the IMF’s efforts to encourage use of the SDR as a private unit of account have been less than vigorous, possibly because most of the debate within recent years has been devoted, without success so far, to the desirability of, and the justification for, further allocations of SDRs as a technique for improving the international monetary system. The asset has become a progressively smaller proportion of global reserves, while disagreement persists on an appropriate function for it in the international monetary system. It may be, however, that this problem would not have to be resolved, to enable the SDR to function as a popular unit of account in private use.

An outstanding reason for the failure of the SDR to become a unit of account in widespread use may be the large percentage of the U.S. dollar in the basket that determines both the valuation of the SDR and the interest rate on holdings of SDRs (40 percent). In view of this weight, private parties may think that there is not enough inducement to abandon their traditional use of the U.S. dollar as their unit of account. The geographical breadth of the currencies that compose the SDR may be considered inappropriate by some parties because the composition is broader than the activities they engage in or because the currencies in the SDR basket fluctuate too much against each other to produce a desirable weighted average. If private parties do engage in worldwide activities, they may find that their needs are so large or so diverse that they cannot readily be accommodated by using the SDR as the unit of account. These parties may find it more convenient to establish their own model for hedging in currencies. The power of the IMF to change the method of valuation of the SDR may be a deterrent to use of it as a private unit of account. Contracting parties may provide that the method in force before a change shall continue to apply,26 but this technique would mean that the IMF’s judgment about the appropriate definition of the unit of account, which originally might have been a major inducement for the parties to adopt the SDR as their unit of account, would cease to be observed.

It has been suggested that if the IMF were to supplement its general resources by exercising its power to borrow from nonofficial lenders and by borrowing in this way on the basis of the SDR as the unit of account, a broader private use of the SDR as a unit of account would be encouraged.27 A report by the Treasury of the United States to Congress on March 15, 198528 pointed out that certain questions of compliance with state and federal laws in the United States by the IMF or lenders to the IMF would arise if the IMF entered domestic capital markets either by public placement or by contracting loans from commercial bankers. It is not clear to what extent, if at all, questions of compliance would be affected by use of the SDR as the unit of account in such operations in the United States. The report makes the following broad statement about other countries:

Legal restrictions on the SDR-denomination of obligations payable in national currency continue to be in effect in several countries that are IMF members and whose national currency the IMF might wish to borrow.29

The IMF has a more closely defined authority to hold SDR-denominated claims against private parties than to subject itself to SDR-denominated claims against it by private parties. For example, the Articles expressly prevent the IMF from creating claims against private parties with resources of the Special Disbursement Account or the Investment Account.30 No limits are placed on the lenders from which the IMF can borrow and to which it can undertake to repay claims against it on the basis of the SDR as the unit of account.31

There would be irony in an effort by the IMF to improve the status of the SDR by entering into SDR-denominated transactions or operations with private parties. The policy would be ironic because the creators of the SDR as an official asset resolved that private parties should not be allowed to hold it. The negotiators of the ECU have followed this precedent. There is no evidence so far of an official inclination to remove the barrier in the case of either asset, but some academic economists press for a breach in the obstacle.

SDR in Treaty Law

If the use of the SDR as a unit of account in private activities has been negligible, in treaty law the SDR has been employed extensively, and the process continues. The SDR appears as the unit of account in a long list of new treaties and amendments of earlier treaties still in force.32 Some treaties have created new international or regional organizations. In some organizations in which the constitutive treaty has not been amended, the SDR serves as the unit of account as the result of interpretation or administrative decision by the managers of the organization.

The international tendency is to adopt the SDR as the unit of account in groups of treaties dealing with related or comparable activities. Conventions dealing with the limitation of liability incurred in international maritime activities, or in the course of, or related to, international transportation by air, road, or rail, or in multimodal movement, are two examples of groups of treaties. Another example consists of conventions dealing with international communications, such as postal services and telecommunications. The financial activities of international organizations constitute another field in which the SDR operates as the unit of account under a number of treaties or in the practice of international or regional organizations. These categories do not exhaust the uses of the SDR already made in international law.33 In addition, the example of treaty law can influence national statutes that are not dictated by the necessity to implement obligations under treaties.34

The United Nations Commission on International Trade Law (UNCITRAL) adopted a decision in July 198235 that dealt with two main topics: the choice of a unit of value for international transport and liability conventions, whether global or regional in character, and provisions to facilitate adjustment of the limit of liability to reflect changes in purchasing power. UNCITRAL recommended the SDR as the unit of account. On the maintenance of purchasing power, UNCITRAL made alternative recommendations. One approach was that the number of SDRs to which liability was limited by a convention should be linked to a price index considered appropriate for the activity regulated by the convention. The other approach was a provision under which a simplified procedure would be adopted both for convening the contracting states and for enabling them to increase or decrease the limits of liability.

Motivations vary for the choice of a unit of account in treaties as a reaction to fluctuations in exchange rates. For example, the motive may be to make sure that at any particular time it will not be more advantageous for a claimant to pursue his claim in the courts of one country rather than another or to obtain payment in one currency rather than another. That is to say, the object may be to eliminate “forum shopping.” This motive can be said to be concerned with uniform value at one moment of time. Another motive, however, may be related to the exchange value of the rights and obligations of the parties over time. The parties may want to be satisfied, first, that the exchange value transferred at one date will be kept intact (maintained) at all times, or, second, that the exchange value transferred at one date will be no more and no less than the exchange value transferred at another date. An example of the first class would be the case in which a subscription must be adapted in the light of changes in exchange rates. Examples of the second class would be advances under a loan agreement and repayments of equivalent value at later dates, or the payment of subscriptions by a number of parties at different dates but at equivalent value whenever paid. The common element in all such examples of the second class can be said to be concern with equivalent value in contrast to the concept of uniform value that has been cited, but the parties to a treaty can have both motives in mind. The Articles of the IMF are a treaty in which examples can be found of both kinds of provisions.

Diverse views of what constitutes equivalent value over time may help to explain why the negotiators of some treaties, particularly treaties that deal with financial activities, have sometimes adopted provisions that the negotiators hoped would be safeguards against changes in the IMF’s method of valuation of the SDR. The negotiators have authorized the administrators of the treaty to decide not to apply the IMF’s new method of valuing the SDR after the IMF has changed the method. The administrators may be authorized to abide by the IMF’s earlier method of valuation, or to modify the IMF’s method, or to abandon the SDR altogether in favor of a different unit of account. If the negotiators of a treaty are influenced by the concept of uniform value, they are likely to be less concerned about safeguards against changes by the IMF in its method of valuing the SDR.

The reasons for the spreading use of the SDR as the unit of account in treaties are manifold. The SDR has the cachet of being the unit of account of the central organization in the international monetary system. The IMF publishes the daily rates of the SDR in terms of currencies, the rates are readily available to all who need them, and it is unnecessary for others to establish procedures of their own to determine exchange rates. Procedures can be complex and costly. Another reason may be that the currencies now composing the SDR basket are the chief currencies in international trade and payments and are not confined to a single geographical area.

The IMF’s basket of 16 currencies might have seemed even more satisfactory for parties considering a unit of account for their treaty or organization. The 16 currencies were issued by members that accounted for more than 75 percent of the exports of goods and services by all members, while the proportion was reduced to less than 50 percent for the basket of 5 currencies, but to a slightly larger proportion if the exports of members that peg their currencies to the SDR were included in this calculation. The difference between the two baskets was much less when compared on the basis of the holdings by members of currencies in the basket. The 5-currency basket, though less representative of all currencies, is likely to have the advantage noted earlier of a more stable composition than the 16-currency basket.

It has been seen that under some treaties the SDR performs the function of unit of account when uniform value is the objective, and that the negotiators of these treaties may be less concerned with the stability of the IMF’s method of valuation. If equivalent value is the objective, it is usually because the contracting parties are called on to make payments, and there is greater concern that there should be no advantages or disadvantages for some payors compared with others because of the passage of time. Changes in the method of valuation of the SDR may seem to create this risk. It is a risk not arising from the fluctuation of exchange rates, which after all affects the way the SDR operates when the method of valuation remains unchanged. The concern is that revisions of the method by the fiat of the IMF change the way in which fluctuations in exchange rates affect the behavior of the SDR. Revisions may create risk that contracting parties considering a unit of account are unwilling to accept.

To reduce this concern, the Articles require high majorities of the total voting power of members for decisions to change the method of valuation of the SDR. The majorities may deter changes that are not thoroughly justifiable, and therefore may enhance the stability of the method already in effect. The majorities, in short, may be regarded by the negotiators of other treaties as an argument in favor of adopting the SDR as their unit of account.

The Articles provide that decisions on the method of valuation require a majority of 70 percent of the total voting power of the membership, provided that 85 percent is necessary for decisions to make a change in the principle of valuation or a fundamental change in the application of the principle in effect.36 The criteria for determining how proposed changes are to be classified are not spelled out. There seems to be a presumption that can be drawn from the structure of the provision governing the method of valuation that a proposal will not require the higher majority, although the presumption can be rebutted. The evidence for this presumption is strengthened by the decision taken when the basket was reduced from 16 currencies to 5. The IMF held that the lower majority sufficed. A majority of the votes cast is sufficient, however, for a decision on the classification of a proposed change that will determine the majority necessary for adoption of the change. The majority of the votes cast is the lowest of the various majorities required for decisions by the Articles. It has been chosen for the purpose of classifying a proposed change in the method of valuation of the SDR so as to make it highly unlikely that a position of stalemate would be reached before the merits of a proposal could be considered.

1

The legal problems that may arise because of the private use of a composite unit of account, and the safeguards adopted by parties, are discussed in Daniel Lefort, “Problèmes juridiques soulevés par l’utilisation privée des monnaies composites,” Journal du Droit International (Paris), No. 2 (1988), pp. 369–412

2

Article XXIV, Section 2(b) (First Amendment). The provision is now Article XVIII, Section 2(b).

3

Article XXV, Section 2(b)(i) (First Amendment). As one of the improved characteristics of SDRs under the Second Amendment, this provision of the First Amendment has been deleted from the Articles because of its narrowness. Instead, Article XIX, Section 2(b) now provides that any two members may agree on a transaction by which SDRs are exchanged for an equivalent amount of currency.

The original aim of the United States to strengthen its ability to go on offering the conversion of other members’ holdings of dollar balances is no longer a matter of interest to the United States, because the official convertibility of the dollar with gold (or with other reserve assets) has been abandoned by the United States. This change may be a reason why the United States has been one of the few members that have refused to concur in a decision to allocate SDRs beyond the approximately 21.4 billion allocated by the end of 1981. Decisions to allocate SDRs require a majority of 85 percent of the total voting power of the membership (Article XVIII; Section 4(d)), which gives the United States a veto over a proposed decision.

4

For the original view of this concept, see Joseph Gold, Special Drawing Rights: The Role of Language, IMF Pamphlet Series, No. 15 (Washington: International Monetary Fund, 1971), pp. 11–25.

5

Article XXI, Section 2 (First Amendment).

6

“The exchange rates for operations or transactions between participants [in the then Special Drawing Account] shall be such that a participant using special drawing rights shall receive the same value whatever currencies might be provided and whichever participants provide those currencies, and the Fund shall adopt regulations to give effect to this principle.”—Article XXV, Section 8(a) (First Amendment). The principle is preserved by the Second Amendment (Article XIX, Section 7(a), but subject to Section 7(b)).

7

The exchange rate for a currency other than the U.S. dollar in terms of SDRs was taken to correspond to the representative rate in the exchange market for spot delivery of the U.S. dollar in exchange for the other currency. The exchange rate between the two currencies in the market would not be inconsistent with the margins above and below parity that members were bound by the Articles to respect and to see respected in exchange transactions.

8

The United States was not required to go on observing the practice of engaging in gold transactions to make the par value of the U.S. dollar effective, but if the United States ceased to observe the practice, it was bound to take other appropriate measures relating to exchange rates for the dollar. The United States did not observe this obligation.

9

The references to these Accounts reflect the terminology of the First Amendment, which was then in effect.

10

The choices for this purpose are described in International Monetary Reform, pp. 43–45.

11

International Monetary Fund, Annual Report, 1974 (Washington, 1974), pp. 116–17.

12

The basket was composed as follows:

article image

13

The decision taken in the absence of amendment of the Articles was no more objectionable than to go on attempting to apply the gold unit of account on the basis of the fiction that the United States was still performing its undertaking to buy and sell gold in transactions with other members at the official price.

14

In the circumstances of the breakdown of the par value system, the IMF could have invoked its authority under Article XXIX, Section 1 of the First Amendment:

“In the event of an emergency or the development of unforeseen circumstances threatening the operations of the Fund with respect to the Special Drawing Account, the Executive Directors by unanimous vote may suspend for a period of not more than one hundred twenty days the operation of any of the provisions relating to special drawing rights, and the provisions of Article XVI, Section 1(b), (c), and (d), shall then apply.”

Suspension of the operation of provisions would have been difficult procedurally and temporary only, and the action in itself would have contributed nothing to the effectiveness of transactions and operations under the Articles.

15

The revised basket was as follows:

article image

The Saudi Arabian riyal and the Iranian rial replaced the Danish krone and the South African rand in the first basket.

16

Executive Board Decision No. 6631-(80/145) G/S, September 17, 1980, Selected Decisions, Fifteenth Issue, pp. 351–52.

17

Joseph Gold, Legal and Institutional Aspects of the International Monetary System, Selected Essays: Volume II (Washington: International Monetary Fund, 1984), pp. 308–78; F. Lisle Widman, Making International Monetary Policy (Washington: International Law Institute, Georgetown University Law Center, 1982), pp. 157–61.

18

Article VIII, Section 7; Article XXII.

19

Paragraph 5 of the communiqué (International Monetary Fund, Summary Proceedings of the Thirty-Fifth Annual Meeting of the Board of Governors (Washington, 1980), p. 325).

20

For a detailed account of the principles for future revisions, see Joseph Gold, SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, IMF Pamphlet Series, No. 36 (Washington: International Monetary Fund, 1981), pp. 1–14, 85–86, 93–98.

21

See Joseph Gold, SDRs, Currencies, and Gold: Seventh Survey of New Legal Developments, IMF Pamphlet Series, No. 44 (Washington: International Monetary Fund, 1987), pp. 1–5, 99–100.

22

Executive Board Decision No. 6631-(80/145) G/S, September 17, 1980, Selected Decisions, Fifteenth Issue, p. 352.

23

Joseph Gold, SDRs, Currencies, and Gold: Seventh Survey of New Legal Developments, IMF Pamphlet Series, No. 44 (Washington: International Monetary Fund, 1987), pp. 2–5.

24

International Monetary Fund, Press Release No. 90/55 (Washington, October 9, 1990).

25

The types of private use are discussed in detail in a paper prepared by the staff of the IMF (“Evolution of the SDR Outside the Fund”) and included in International Money and Credit: The Policy Roles, ed. by George M. von Furstenberg (Washington: International Monetary Fund, 1983), pp. 561–86. The subject is discussed also in The Role of the SDR in the International Monetary System: Studies by the Research and Treasurer’s Departments of the International Monetary Fund, IMF Occasional Paper, No. 51 (Washington: International Monetary Fund, 1987), pp. 36–41.

26

Joseph Gold, “Development of the SDR as Reserve Asset, Unit of Account, and Denominator: A Survey,” George Washington University Journal of International Law and Economics (Washington), Vol. 16, No. 1 (1981), at pp. 7–10.

27

The IMF has the power to replenish its holdings of any member’s currency in the General Resources Account by agreeing with a member that it shall lend its currency to the IMF, or by agreeing, with the concurrence of a member, to borrow the member’s currency from some other source either within or without the member’s territories (Article VII, Section 1). The IMF has made extensive use of both parts of this power, but hitherto all borrowings have been from official lenders.

28

United States, Department of the Treasury, Report to the Congress on the Functioning of the International Monetary and Financial System and the Role and Operation of the International Monetary Fund (Washington, March 15, 1985).

29

Ibid., p. 45. See Joseph Gold, “Borrowing by the International Monetary Fund from Nonofficial Lenders,” The International Lawyer (Chicago), Vol. 20, No. 2 (Spring 1986), pp. 455–83, particularly at pp. 471–73.

30

Article V, Section 12(h); Article XII, Section 6(f)(iii).

31

Article VII, Section 1.

32

The unit of account may be other than the SDR but is defined as equal to the SDR. See, for example, Umesh Kumar, “Trade Liberalization and Payments Arrangements under the PTA Treaty: An Experiment in Collective Self-Reliance,” Journal of World Trade (Geneva), Vol. 23, No. 5 (1989), pp. 93–121, at pp. 107–12.

33

It is possible to add, for example, such categories as economic integration, trade, and products liability. See “The SDR in Treaty Practice: A Checklist,” International Legal Materials (Washington), Vol. 22 (1983), pp. 209–13.

In the IMF’s Pamphlet Series, see the following publications by Joseph Gold: SDRs, Currencies, and Gold: Seventh Survey of New Legal Developments, Pamphlet No. 44 (1987), pp. 11–19; SDRs, Currencies, and Gold: Sixth Survey of New Legal Developments, Pamphlet No. 40 (1983), pp. 2–10; SDRs, Currencies, and Gold: Fifth Survey of New Legal Developments, Pamphlet No. 36 (1981), pp. 40–43; SDRs, Currencies, and Gold: Fourth Survey of New Legal Developments, Pamphlet No. 33 (1980), pp. 20–39; SDRs, Gold, and Currencies: Third Survey of New Legal Developments, Pamphlet No. 26 (1979), pp. 19–28; Floating Currencies, SDRs, and Gold: Further Legal Developments, Pamphlet No. 22 (1977), pp. 24–49; Floating Currencies, Gold, and SDRs: Some Recent Legal Developments, Pamphlet No. 19 (1976), pp. 40–51.

34

See, for example, Riyadh A.M. Al-Kabban, “Limitation of the Carrier’s Liability under the Iraqi Transport Law,” Journal of Maritime Law and Commerce (Cincinnati, Ohio), Vol. 19, No. 3 (July 1988), pp. 409–32.

35

Report of the United Nations Commission on International Trade Law on the work of its fifteenth session, Official Records of the General Assembly, Thirty-Seventh Session, Supplement No. 17(A/37/17) (New York: United Nations, 1982), pp. 14–17.

36

Article XV, Section 2.