Other Units of Account

The SDR and the ECU are not the only units of account in treaty practice. A treaty may include a new unit of account that is unlikely to become the model for the purposes of an unrelated treaty. For example, the International Natural Rubber Agreement, 1987,¹ a buffer stock agreement, adopted the “Malaysian/Singapore cent” as the unit of account for various purposes of the treaty. The unit is defined as “the average of the Malaysian sen and the Singapore cent at the prevailing rates of exchange.”² The sen and the cent are, respectively, the fractional unit of the ringgit, the currency of Malaysia, and of the dollar, the currency of Singapore. The complexity of exchange rate relationships under the discretionary system of exchange arrangements is illustrated by the fact that the ringgit is related to a weighted basket of the currencies of Malaysia’s major trading partners and the currencies of settlement, while the external value of the Singapore dollar is permitted to float with monitoring by the monetary authorities of its value against a trade-weighted basket of currencies.

Units of account adopted before the abrogation of the par value system and the official price of gold remain in existence. For example, in the English case The Rosa S,³ decided in 1988, the court considered the effect of the unit of account in the International Convention for the Unification of Certain Rules Relating to Bills of Lading, Brussels, 25 August 1924 (the Hague Rules). Under Article IV of the Convention, a shipowner’s liability for damage to cargo is limited to 100 pounds sterling per package or unit, or the equivalent of that sum in other currency. Article IX provides that the monetary units mentioned in the Convention are to be taken to be gold value. The plaintiff argued successfully that the two provisions had to be read together, so that the limit on liability was £100 sterling gold value. Under English statutes in force in 1924, at the date of the bills of lading in this case, and at the time of the decision, it was possible to calculate the current sterling value of £100 sterling gold value (732.238 grams of fine gold), namely £6,630.50. The statutes continue to define the gold content of the pound sterling (the sovereign, which is still legal tender). The bills of lading provided that the gold content of sterling was the unit of account by which payment was to be valued and not that gold was the means of payment. This contractual provision was not illegal or contrary to public policy under English law.

The court did not refer to recent developments in the monetary role of gold, but did deal with the economics of 1924:

The defendants next sought to rely upon a historical argument. They attempted to suggest that in 1924, whilst the international community might have been concerned about the stability of other currencies, there was no concern about the stability of the pound sterling or any reason to suppose that they might be interested in referring to a gold value for the pound sterling. . . . In the 1920s a number of currencies were under very strong inflationary pressures. The question of the gold standard and of the gold backing of currencies was in the forefront of every economist’s mind. The degree to which the English paper currency was to be convertible into gold and the extent to which the United Kingdom should adhere to the gold standard or to a bullion standard were the subject of successive changes of policy until the United Kingdom finally abandoned the gold standard in 1931. The material placed before me…showed every reason why the draftsmen of the 1924 Convention should be concerned to include in it not merely a reference to the pound sterling but also a reference to the gold value of the currency.⁴

The court dealt with the defendant’s argument that the reference to gold value in Article IX of the Convention was applicable only when there was a need to translate the amount of liability into a currency other than sterling. The court held that the defendant failed on this argument even if the defendant was right, because the plaintiff was claiming Kenya pounds, which it was entitled to do under post-Miliangos legal developments.⁵ It was necessary, therefore, to translate the gold value of sterling into a nominal amount of Kenya pounds.

The court rejected the further argument that the purpose of Article IX was to guard against the devaluation of sterling between the date when the goods owner’s cause of action accrued, normally the date of delivery of the goods, and the date when he was able to obtain either a judgment or an arbitral award in his favor. This argument was that on the date of delivery of the cargo, the quantity of gold that could be bought with the nominal amount of £100 would be calculated. This amount of gold would then be the basis for assessing the carrier’s liability at the date of judgment or award:

Thus if the judgment or award was to be given in, say, Kenyan pounds one would ask what number of Kenyan pounds was necessary at that later date to purchase that quantity of gold. This argument cannot be supported. First it depends on the erroneous approach of treating the gold value provision as requiring consideration of how much gold a sterling pound would buy as opposed to what was the gold value of the pound sterling. Secondly it patently does not fit in with the scheme of the Convention. The purpose of the gold clause provision in Article IX of the Convention is clearly to provide a single and constant measure of value by reference to gold not a fluctuating value. What would result on the defendants’ submission is that that value would be constantly fluctuating up to the time of discharge. Further it is unrealistic to suppose that the parties to the Convention, or indeed the parties to this bill of lading, had in mind and were making provision for the essentially procedural problems which existed under English law prior to the decisions in Miliangos v. George Frank (Textiles) Ltd. [1976] A.C. 443 and The Despina R [1979] A.C. 685.⁶

The decision relied on the circumstance that sterling still had a gold value under English statutory law, with the consequence that this value had to be applied. In present circumstances, some countries no longer have an official gold value for their currencies. It is unlikely, therefore, that the purpose of Article IX of the Convention “to provide a single and constant measure of value by reference to gold” can be realized unless all parties establish by law a gold value for their currencies for the purpose of the Convention.

Not all the treaties in which the Poincaré franc or the Germinal franc is the unit of account have been amended so far. For some of these treaties, amendments have been negotiated but have not yet become effective. In all cases in which an amendment has not taken effect, the administrators of the treaty, or national authorities, or the courts have to decide how the gold unit of account must be applied in conditions in which there is no present official price for gold and currencies fluctuate in external value.

World Bank

It is of particular interest to note recent developments in some cases in which the U.S. dollar defined in terms of gold remains the unit of account. The developments relate to the International Bank for Reconstruction and Development (the World Bank) and two of the organizations associated with it. Article II, Section 2(a) of the World Bank’s Articles of Agreement defines the capital stock of the Bank and the par value of a share of the Bank’s capital “in terms of United States dollars of the weight and fineness in effect on July 1, 1944.” Under Article II, Section 9(a), whenever the par value of a member’s currency is reduced or the currency depreciates to a significant extent, the member is obliged to pay to the Bank an additional amount of the member’s currency to maintain the value, as of the time of initial subscription, of the amount of that currency held by the Bank and derived from the member’s currency originally paid by the member to the Bank in respect of subscription.⁷

After the Second Amendment of the IMF’s Articles became effective, the World Bank’s financial statements began to carry a note stating that the Bank was examining the implications of the change for the valuation of its capital stock. Meanwhile, the Bank was showing its capital on the basis of both the SDR as computed by the IMF and the par value of the U.S. dollar after the two devaluations of that currency before the abrogation of the par value system. For the time being, payments on account of capital stock would continue to be accepted on the latter basis, according to which the 1944 U.S. dollar equaled $1.20635 in the devalued dollar, subject to the possible need for adjustment when the issue of the standard of value was settled. Settlements for the maintenance of value would be suspended subject to the same caveat.

The financial statements carried also a note in which it was said that the General Counsel of the World Bank had rendered the legal opinion that after the Second Amendment of the IMF’s Articles the 1944 U.S. dollar should be read to refer to one SDR as determined by the IMF from time to time. The note went on to say, however, that the General Counsel had also stated that the Bank could decide, under its power of authoritative interpretation in Article IX of the Bank’s Articles, that references to the 1944 dollar would be taken to mean $1.20635 current dollars. But, declared the note, a member had raised the question whether the substitution of “a new unit of value” (the SDR, of course), insofar as it gave rise to new obligations on the payment of subscriptions and maintenance of value, could be made without amendment of the Bank’s Articles.

The present General Counsel of the World Bank has written that the dissenting member was the United States, and that all Executive Directors, other than the one appointed by the United States, had agreed with the view that the SDR was the successor of the gold dollar. On October 14, 1986, the Bank decided, under its power of authoritative interpretation, that with effect from June 30, 1987 the gold dollar should be read to mean the SDR as valued in terms of U.S. dollars “immediately before the introduction of the basket method of valuing the SDR on July 1, 1974,” until such time as the relevant provisions of the Bank’s Articles were amended.⁸ The Bank’s capital would be valued in accordance with this decision and obligations to maintain value would be resumed on the same basis. The Bank, unlike the IMF, had been able to wait so long before solving the problem of the unit of account because, notwithstanding the inconveniences of delaying a solution, the Bank had found it possible to conduct its financial activities without facing an impasse. The IMF had been forced to find a solution, in the form of the basket method of valuing the SDR, in 1974, well before the Second Amendment, because the IMF had been confronted with overwhelming difficulties in continuing its financial transactions and operations in a world of fluctuating exchange rates and no agreement on a standard of value appropriate to the circumstances.

The reference to the SDR in the World Bank’s formulation of October 14, 1986 is redundant for substantive purposes. The solution simply applies the last par value of the U.S. dollar. The SDR may have been referred to in order to give the appearance of a compromise with those who preferred the true SDR solution, or in order to give some semblance of authenticity to the solution as adopted.

The World Bank decided also that the adequacy of the Bank’s capital would be reviewed every three years, or whenever warranted, for the purpose of deciding whether to recommend appropriate measures to the Bank’s Board of Governors that would restore the value of the capital if the interpretation produced unfavorable effects on the capital because of substantial appreciation of the SDR against the dollar. The solution makes the U.S. dollar as valued in current dollars the unit of value for the payment of subscriptions and the obligation to maintain value. The SDR did appreciate against the dollar at one time, so that the Bank’s holdings of dollars were less than they would have been under the SDR solution.

Although the expression “United States dollars of the weight and fineness in effect on July 1, 1944” appears only in Article II, Section 2(a) of the World Bank’s Articles, which defines the authorized capital stock of the Bank, the concept has a pervasive effect on the financial structure and operations of the organization under its Articles. Article III, Section 3 provides that the total of the various forms of financial assistance by the Bank (“total amount outstanding of guarantees, participations in loans and direct loans”) must not exceed 100 percent of the Bank’s “unimpaired subscribed capital, reserves and surplus.”⁹ If the Bank’s capital is expressed in the U.S. dollar as interpreted and loans are expressed in other currencies, the depreciation of the dollar and the appreciation of other currencies tend to limit the capacity of the Bank to make new loans. The problem of “headroom,” as the Bank calls the leeway it has to make loans, became serious in late 1987 and early 1988.

When the World Bank’s Executive Directors recommended the 1988 increase in the capital of the Bank, they reported to the Bank’s Board of Governors that neither that increase nor further increases would necessarily solve the “headroom” problem created by adopting the U.S. dollar (or any other currency) as the standard of value. The Bank has considered once again, after the expiration of three years from the date of adoption of the interpretation, possible changes in the valuation of the Bank’s capital, as well as any other steps, that could help to diminish the Bank’s vulnerability to fluctuations in exchange rates. The problem is not simply one of “headroom,” which might be mitigated, although not solved, by lending a larger amount of dollars than might otherwise be the case or by other modifications of financial management. The United States and any other member electing to pay in U.S. dollars the domestic currency portion of paid-in subscriptions are, in effect, exempted from the obligation to maintain the value of those payments because of future depreciations of the dollar. Other members, however, must make payments in their currency to maintain the dollar value of their payments, even though uniformity of the obligations of all members of the Bank is an accepted doctrine.

In the latest examination of the issue, the majority opinion favored the SDR as the standard of value, but the United States did not resile from its earlier position. The majority held that while no standard could wholly eliminate the vulnerability of the Bank to fluctuations in exchange rates, the SDR would be a more stable standard over time and would provide greater protection than the so-called 1974 SDR, which was really the 1974 dollar. The decision was to continue efforts to find a solution by consensus and to review the situation not later than April 27, 1991.¹⁰

The authoritative interpretation of October 1986 that makes the 1974 U.S. dollar the standard of value could be revised, but it is not easy to modify such an interpretation, particularly when there is no fundamental change in conditions. For an amendment of the Bank’s Articles, it is now necessary to obtain acceptance by at least 60 percent of the members and by members having 85 percent of the total voting power. The United States acting alone has sufficient voting power to veto a proposal to change the Bank’s method of valuation either by voting against a proposal or simply by abstaining from casting its votes. So far, no change has been made in the interpretation of October 1986.

The objection of the United States to adoption of the SDR as the standard of value for the World Bank has been that it would result in an “open-ended” budgetary commitment by interpretation instead of amendment. Such a commitment in each member’s currency exists, however, for all other members of the Bank at the present time. Furthermore, each member, including the United States, had an open-ended commitment to the Bank when the par value system was in force, but, for members maintaining an effective par value, the obligation accrued then only in the rare event of a change in par value. A change in the par value of the dollar could be made only on the initiative of the United States, but it does not have similar control over fluctuations in the exchange rate of the dollar that might give rise to the duty to make payments under the obligation to maintain the value of the Bank’s holdings of dollars. Finally, the United States is bound by an obligation to maintain the value of the IMF’s holdings of dollars in the General Resources Account on the basis of the SDR as the unit of account. This obligation, however, has resulted from amendment of the IMF’s Articles.

Another difference between the position of the United States in the two organizations is the conclusion of the United States that increases in subscription payments to the IMF result in an exchange of assets in the sense that the ability of the United States to use the general resources of the IMF is increased in terms of dollars. The same argument would apply to payments in dollars under the obligation of the United States to maintain the SDR value of the IMF’s holdings of dollars in the General Resources Account. The theory of the exchange of assets does not apply to payments on account of subscription or maintenance of value in the Bank.

It is instructive to note the solution of the same sort of budgetary problem that arose in connection with the supplementary financing facility established by the IMF in 1977 after the crisis caused by the increase in the import price of petroleum.¹¹ The IMF entered into borrowing agreements to help finance transactions under this policy. The model form of agreement provided for loans to the IMF that did not exceed the equivalent of a stated number of SDRs.¹² The United States as lender resisted this formulation, even though any loans would give rise to readily repayable claims against the IMF, to which also the theory of the exchange of assets could apply.

The United States was accommodated by being allowed to formulate its obligation under its loan agreement as a commitment to lend a total amount in U.S. dollars that would exceed neither a specified amount of dollars nor the equivalent in dollars of a specified amount of SDRs. The specified amount of dollars was the equivalent of the specified amount of SDRs at the date of the U.S. Administration’s request for the necessary appropriation. In effect, the commitment of the United States was to advance the lesser of the two amounts in dollars or dollar-equivalent provided that the total did not exceed the specified amount of dollars if an excess would be the consequence of applying the SDR as the unit of account.

Negating this consequence was the major problem, because the formulation of the commitment meant that the SDR was not the unit of account to the full extent. The SDR could be beneficial to the United States as lender if the dollar appreciated against the SDR, but detrimental to the IMF as borrower if the dollar depreciated in terms of the SDR. To make the formulation acceptable to the IMF, the Secretary of the U.S. Treasury assured the IMF and other lenders under the supplementary financing facility that if it became apparent that the specified amount of dollars would not be sufficient to satisfy the specified amount of SDRs, the Administration intended to seek Congressional approval of any supplemental appropriations that might be necessary. To complete this summary, it is necessary to note that the negotiation of the borrowing to help finance the policy was conducted with all potential lenders as a multilateral enterprise and that both the total amount to be lent and the amount of each lender’s share in the total were expressed in SDRs.

The solution of the U.S. budgetary problem of an open-ended commitment on the occasion of lending to the IMF in support of the supplementary financing facility has a certain resemblance to a proposal made to solve the problem in the World Bank. The proposal was that if the SDR were the standard of value and a member faced an insurmountable budgetary problem as a consequence, the member might be allowed to limit its liability to make payments to a budgeted amount expressed in the member’s currency by selling to the Bank an amount of shares sufficient to prevent the member’s liabilities on its remaining shares from exceeding the budgetary limit. The reduction in shareholding could be reversed if subsequently the dollar appreciated against the SDR. The proposal involved complexities and disadvantages. Among the disadvantages would be the reduction of the Bank’s capital and headroom and, for the United States, lower voting power. The proposal was not accepted.

Multilateral Investment Guarantee Agency

The present General Counsel of the World Bank has provided a lively account of the negotiations on the unit of account of the newest member of the World Bank’s group of organizations, the Multilateral Investment Guarantee Agency (MIGA).¹³ Membership in MIGA is open to all members of the World Bank and the nonmember Switzerland. The objective of MIGA is to encourage the flow of investments for productive purposes among members, and in particular investments in developing countries. The objective is pursued by issuing guarantees against noncommercial risks in respect of investments in a member country that flow from other member countries. The risks relate to restrictions on the transfer of currency, expropriation and similar measures, breach of contract, and war and civil disturbance. The risk of the devaluation or depreciation of currency is excluded.¹⁴ The reason for the exclusion is undoubtedly the frequency, volatility, and size of the fluctuations in exchange rates under the discretionary system of exchange arrangements.

One proposal on the unit of account for MIGA had been simply that the capital should be expressed in U.S dollars, so as to avoid repetition of the prolonged dispute about the valuation of the World Bank’s capital stock. Once again, however, all negotiators except the Executive Director appointed by the United States favored the SDR. He made it clear that this solution might well preclude participation by the United States in MIGA. That consequence was considered unfortunate, because the United States accounts for approximately 50 percent of all foreign direct investment in developing countries. The possible units of account discussed during the negotiations were the SDR, the U.S dollar, some third unit, the SDR on a specified date expressed in any one of the currencies in the SDR basket, or the SDR expressed as an amount corresponding to the average of its dollar value over a stated period. Eventually, this last solution gathered sufficient support, but differences on the period for averaging had still to be resolved. Periods were proposed as long as 11 years or as short as six months.

Agreement was reached finally on the following text:

The authorized capital stock of the Agency shall be one billion Special Drawing Rights (SDR 1,000,000,000). The capital stock shall be divided into 100,000 shares having a par value of SDR 10,000 each, which shall be available for subscription by members. All payment obligations of members with respect to capital stock shall be settled on the basis of the average value of the SDR in terms of United States dollars for the period January 1, 1981 to June 30, 1985, such value being 1.082 United States dollars per SDR.¹⁵

January 1, 1981 was the date on which the IMF’s method of valuation of the SDR in force during the last stage of the negotiations came into force, and June 30, 1985 was a date close to the end of that stage.

It will be evident that the reference to the SDR was unnecessary for substantive reasons. The provision quoted above could have been formulated simply to refer to a unit of account equivalent to US$1,082. The solution adopted for the MIGA Convention preceded and suggested the basis for solving the problem of interpreting the unit of account in the World Bank’s Articles in current conditions.¹⁶ The legal problem of the unit of account, however, was not the same for both organizations. For MIGA, the choice was an open one, because the Convention was new and unhampered by an existing legal text. In the case of the World Bank, the problem was one of interpreting a text formulated on the assumption that the par value system was permanent.

European Bank for Reconstruction and Development

The form of averaging adopted for MIGA has been something of a precedent for the Agreement Establishing the European Bank for Reconstruction and Development (EBRD). Article 4, paragraph 1 of Chapter II of the Agreement provides that:

The original authorized capital stock shall be ten (10) thousand million ECU. It shall be divided into one million (1,000,000) shares, having a par value of ten thousand (10,000) ECU each, which shall be available for subscription only by members in accordance with the provisions of Article 5 of this Agreement.

The original capital stock is divided into paid-in shares, amounting to ECU 3,000 million, and callable shares. The ECU was chosen as the unit of account notwithstanding the expectation that non-European countries would be among the subscribers to the original authorized capital stock. The reason for the choice was the essentially European character of the EBRD. Under Article 6, payment of the paid-in shares of the amount initially subscribed to by each signatory to the Agreement that becomes a member must be made at scheduled dates in five equal installments of 20 percent each. Fifty percent of each installment may be made by a member in promissory notes or other obligations issued by the member and denominated, at the option of the member, in ECU, U.S. dollars, or yen, to be drawn down as the EBRD needs funds for disbursement. Demands upon the notes or obligations shall be made in such manner that, over reasonable periods of time, the value of the demands in ECU at the time of demand from each member is proportional to the number of paid-in shares subscribed to and held by each member depositing notes or obligations.

In the negotiation of the treaty, the United States had objected to the ECU as the unit of account because it would have imposed an open-ended commitment on the United States in dollars. The objection was overcome by the following compromise:

All payment obligations of a member in respect of subscription to shares in the initial capital stock shall be settled either in ECU, in United States dollars or in Japanese yen on the basis of the average exchange rate of the relevant currency in terms of the ECU for the period from 30 September 1989 to 31 March 1990 inclusive.¹⁷

The average dollar value of the ECU for this period is $1.16701.

It seems that a subscriber makes an initial choice among the three modes of settlement, and that the choice must be observed in the payment of all installments of, and demands or calls on, the member’s subscription to the original capital stock. For the purposes of the payment of subscriptions, payment or denomination in ECU includes payment or denomination in any fully convertible currency in an amount equivalent on the date of payment or encashment to the value of the obligation in ECU.¹⁸ The effect will be that the weight of chosen units of account will not be uniform among subscribers. Those members that choose the ECU will have an obligation that will vary with the exchange value of the ECU, whether they discharge the obligation in ECUs or in any fully convertible currency. Members that choose the dollar or the yen will have an obligation that is fixed at the average exchange rate for the currency in terms of the ECU over the prescribed period.

Payment of the amount subscribed to the callable capital stock is to be made only as and when required by the EBRD to meet its liabilities. In the event of a call, payment is to be made in ECU, dollars, or yen. The calls are to be uniform in ECU value upon each callable share calculated at the time of the call.¹⁹

International Development Association

The Articles of Agreement of the International Development Association (IDA), another organization in the World Bank group, provide that the initial subscriptions of original members as set forth in Schedule A of IDA’s Articles were expressed “[i]n terms of United States dollars of the weight and fineness in effect on January 1, 1960.” This formulation meant that the unit of account was the par value of the dollar in terms of gold prevailing on that date under the IMF’s Articles. The date was related to the negotiation of the Articles of IDA, but the legal problem of determining how to apply a gold unit of account after abrogation of the par value system was the same as for the World Bank. The Articles of IDA provide also that at intervals of approximately five years IDA shall review the adequacy of its resources and shall, if it deems the action desirable, authorize a general increase in subscriptions.²⁰ The terms and conditions for additional subscriptions (carrying voting rights) and contributions (not carrying voting rights)—usually called replenishments—are as determined by IDA.

The first three replenishments were expressed in the same unit of account as for the initial subscriptions of original members. On June 30, 1987, IDA decided that the unit of account in the Articles meant US$1.20635 per SDR, the value of the SDR immediately before the IMF introduced the basket method of valuing the SDR with effect on July 1, 1974. But the practice for replenishments began to change with the fourth replenishment and has been changed for all subsequent replenishments through the latest, the ninth in the series. For example, donor governments had the option under the eighth replenishment of denominating their obligations in any of the following units of account: the donor’s national currency, the current U.S. dollar, the SDR, or, subject to the agreement of IDA, in any “freely convertible currency.” A donor was required to advise IDA of its choice when formally undertaking its commitment. The equivalents of commitments were shown in U.S. dollars, national currency, and SDRs in the resolution on replenishment. The role of the SDR has been enhanced for the ninth replenishment. Donors are entitled to denominate the resources they will provide either in SDRs or in the national currency, except that if a donor’s economy experienced a rate of inflation in excess of 15 percent on average in the period 1986 to 1988 its subscription and contribution must be denominated in SDRs.

The result is that Bretton Woods organizations have adopted diverse units of account: the SDR proper (IMF), a unit worth US$1.20635 (World Bank and IDA), a unit worth US$1.082 (MIGA), and the SDR or currencies (IDA). The choice of a unit of account other than the SDR proper does nothing to promote the objective expressed in the IMF’s Articles of making the SDR the principal reserve asset in the international monetary system.²¹ Nevertheless, this objective may explain the references to the SDR even when the SDR proper has not become the unit of account. The choice or interpretation of a unit of account has been affected to an important extent by considerations related to obligations to maintain value notwithstanding fluctuations in exchange rates, a topic discussed in Chapter 7 of this study under the heading “Maintenance of Value and Investment.”

At no time was it suggested in any of the negotiations referred to above that because the SDR had been defined in terms of gold before the Second Amendment, the market price of gold should be the basis for translating the SDR or the U.S. gold dollar of 1944 into currencies. An interpretation of this character would have vastly increased the obligations of members under the constitutive treaties of any of the Bretton Woods organizations. Some courts have decided, however, that the market price was the appropriate basis for applying a gold unit of account in treaties limiting the liability of entrepreneurs, notably the Warsaw Convention for the Unification of Certain Rules Relating to the International Carriage by Air, October 12, 1929 (usually referred to simply as the Warsaw Convention).²²

The United States could have argued in support of its view that an amendment of the World Bank’s Articles was necessary for applying the SDR solution that this view was consistent with the decision of the Supreme Court of the United States in Trans World Airlines, Inc. v. Franklin Mint Corporation et al.²³ The court held that the SDR solution²⁴ could not be applied in interpreting the effect of the Poincare franc as the unit of account in the Warsaw Convention after abrogation of the par value system. The court decided that the appropriate solution was the last official price of gold, namely the price based on the par value of the U.S. dollar before the Second Amendment. This solution is the same as the one adopted by the World Bank, although for the purpose of applying the Warsaw Convention the court relied on U.S. statutory law that did not apply to the Articles of the Bank. The court pointed out, however, that in the circumstances of the time the solution the court was adopting for the purpose of the Convention produced results not radically different from the results the SDR solution would produce, and the court left open the possibility that the appropriate U.S. regulatory agency might adopt a different solution if a serious discrepancy between the effects of the two units of account should emerge.²⁵

Nonmembers of IMF

After the collapse of the par value system, the SDR proper has been adopted as the unit of account for numerous new treaties or for the amendment of existing treaties in which a gold unit had been the unit of account. A problem has arisen, however, in relation to nonmembers of the IMF. Some of them have protested that they could not concur in the choice of the SDR as the unit of account because their laws did not permit the acceptance of obligations expressed in the SDR. It can be assumed that political difficulties may have reinforced this legal objection. The SDR is the unit of account of an international organization, the IMF, that nonmembers have decided not to enter. Therefore, nonmembers have no voice or voting power when the IMF takes decisions on the method of valuation of the SDR. To these difficulties one can probably add the preference of at least some nonmembers for an international monetary system based on gold.

If a nonmember’s currency is not traded internationally, the technical problem would arise of translating the currency into SDRs, and if a calculation was technically feasible, the results might embarrass the nonmember. Yet, if, when currencies are fluctuating, a unit of account is necessary for calculating the obligations of members of the IMF in their currencies under a treaty to which nonmembers also are contracting parties, nonmembers cannot be exempted from this necessity. The purpose of the treaty may be either uniform value or equivalent value among contracting parties, as those terms have been used earlier in this volume.

The tendencies in relation to nonmembers of the IMF in treaties in which the SDR is the unit of account have changed over the years since the abrogation of the par value system. The common practice at all times has been to provide that members of the IMF must translate the SDR as the unit of account into the national currency in accordance with the IMF’s method of valuation. A nonmember is authorized, however, to make the calculation in a manner determined by that nonmember if its law does not permit acceptance of the SDR as the unit of account. In effect, however, the SDR is the unit of account for these nonmembers as well as for members, but not directly as will be explained.

If a nonmember alleged that its law did not permit acceptance of the SDR as the unit of account, an early model of a provision for such a nonmember was that, at the time of ratification or accession or at any time later, the nonmember could declare that for it the limit of liability was expressed in “monetary units” and not SDRs. The definition of the monetary unit in the new or amended convention referred to an amount of gold that was equivalent to the Poincare or the Germinal franc. The number of these monetary units to which liability was limited reflected the ratio between the gold franc and the SDR as defined by the Articles of the IMF before the Second Amendment.²⁶ The equivalent in the nonmember’s currency of amounts expressed in monetary units was to be determined in accordance with the nonmember’s law.

In response to the criticism that the first model, involving SDRs and so-called “monetary units,” recognized two units of account, the second model expressed limits in “units of account” and declared the unit of account to be the SDR as valued by the IMF. The SDR, therefore, was the only “unit of account,” even though there continued to be accommodation for nonmembers. The second model followed the first model in the treatment of what continued to be called “monetary units” for the nonmembers that could not accept the SDR as the unit of account. For all nonmembers, however, it was provided that the translation of SDRs or monetary units into the currency of the nonmember was to be made in such manner as would arrive as nearly as possible at the “same real value” as the amounts of currency calculated for members on the basis of the SDR as the unit of account.²⁷ This provision was intended to meet the objection that the two units of account in the first model might not ensure uniform value among contracting parties.²⁸

The third model closely resembles the second model but eliminates the reference to monetary units. Instead, it is stated that if a non-member of the IMF cannot accept the provision on the SDR as the unit of account under its law, the unit of account shall be deemed to be 15 “gold francs” as defined, which is the amount derived from the ratio between the Poincare franc and the former gold value of the SDR. According to this technique, however, the Poincare franc is neither a unit of account nor a monetary unit.²⁹

A fourth model is the draft recommended by the United Nations Commission on International Trade Law (UNCITRAL). The unit of account would be the SDR, without provision for any alternative unit of account or monetary unit. The equivalence between the currency of a nonmember of the IMF and the SDR would be calculated in a manner determined by that state. The calculation would be made in such manner as would yield to the maximum possible extent the same real value for the amounts expressed in SDRs. In its report accompanying the recommended formulations, UNCITRAL explained that it did not preclude the possibility that the negotiators of a treaty might prefer the second model as described earlier in this discussion.

Several conclusions can be drawn from this account. First, a consequence of the fluctuation of exchange rates in a world in which gold has ceased to function as the pivot of a par value system—a development sometimes described as an aspect of the “demonetization” of gold by the Second Amendment—a new unit of account is necessary for multilateral treaties that formerly included a gold unit of account or for new treaties that would include such a unit but for the “demonetization” of gold. Second, as the unit of account must ensure, in most instances, uniform value among the currencies of contracting parties, the unit of account must reflect market exchange rates of the currencies that compose a basket method of valuation. Third, for various reasons the SDR is the best unit of account for these treaties. Fourth, the SDR should be the unit of account even for nonmembers of the IMF, but if they claim difficulties under their law, they can, and must, achieve results as close as possible to application of the SDR, although they need not purport to be applying the SDR directly.

International Telecommunication Union

As late as 1988, an international conference decided to confirm the action taken in 1982 to retain reference to a gold unit of account in the proposed revision of a governing legal instrument. The World Administrative Telegraph and Telephone Conference, meeting in Melbourne in late 1988, adopted the world’s first treaty on integrated telecommunication networks and services. The treaty, the International Telecommunication Regulations, went into force on July 1, 1990 and replaced two earlier treaties, the 1973 Telephone and Telegraph Regulations, which applied only to the traditional telecommunication services, such as telephone, telegraph, telex, and data transmission. The 1973 treaties were considered inadequate because of developments in technology and new telecommunication services. The new International Telecommunication Regulations adopted in Melbourne and the Radio Regulations (on the use of the radio frequency spectrum and satellite orbits) complemented the then International Telecommunication Convention, the basic legal instrument of the International Telecommunication Union (ITU).

The International Telecommunication Regulations include unusual provisions on the monetary unit to be used in connection with the accounting rates (tariffs) between telecommunication administrations or recognized private operating agencies for international telecommunication services.

Articles 6.3.1 and 6.3.2 of the Regulations read as follows:

In the absence of special arrangements concluded between administrations, the monetary unit to be used in the composition of accounting rates for international telecommunication services and in the establishment of international accounts shall be:

• –either the monetary unit of the International Monetary Fund (IMF), currently the Special Drawing Right (SDR) as defined by that organization;

• –or the gold franc, equivalent to 1/3.061 SDR.

In accordance with relevant provisions of the International Telecommunication Convention, this provision shall not affect the possibility open to administrations of establishing bilateral arrangements for mutually acceptable coefficients between the monetary unit of the IMF and the gold franc.

In all quotations from the Regulations and in the discussion of them below references to administrations should be understood to include recognized private operating agencies as well as governmental administrations. The structure of the provisions quoted above is that administrations are free to establish a bilateral monetary unit for the accounting rates between them. If they do not exercise this privilege, they must apply one of two units. It is assumed that the administrations must agree on the choice between the two units, which are the SDR and a gold franc as defined in relation to the SDR according to a specified coefficient. The stated coefficient means that the gold franc is the Germinal franc, because it is derived from the ratio between the SDR as defined before the Second Amendment and the definition of the Germinal franc in terms of gold. The effect of the coefficient is to make the second alternative also an application, though indirect, of the SDR. The explanation of retention of the gold franc as a monetary unit is the applecart principle: why upset that conveyance by depriving administrations of the privilege of continuing to apply a unit of account with which they were familiar and which had not created operating difficulties? In addition, there was a desire to accommodate some East European nonmembers of the IMF, which in practice applied the SDR but could not give it official support.

Under Article 6.3.2, which was introduced by the United States, administrations can agree bilaterally to change the coefficient between the SDR and the gold franc. The United States may have introduced the provision because at one time some U.S. operators had negotiated accounting rates based on coefficients that departed from Article 6.3.1, choosing instead the Poincare franc. Under Article 6.3.2, the appearance of a link to the SDR would not be broken, but the link would not reflect the ratio between the former gold value of the SDR and the gold franc. This provision is logical given the authority of administrations to make special bilateral arrangements on the monetary unit they will use. But in view of the authorization of special arrangements on a monetary unit, the reference to the outmoded gold franc is superfluous. Many IMF members, however, thought that there was no likelihood of inducing at least some nonmembers to delete the reference.

Articles 3.1.1 and 3.1.2 of Appendix 1 of the Regulations provide that balances between administrations shall be settled in the currency selected by the creditor after consultation with the debtor. If the creditor selects a currency with a value fixed unilaterally or a currency pegged to a currency with a value fixed unilaterally, the selected currency must be acceptable to the debtor. The concept of a currency with a “value fixed unilaterally” may give rise to some doubt. Would it apply, for example, to the currencies of participants in the EMS? The negotiators seem to be expressing a more favorable view of independently floating currencies. If a creditor does not specify the currency of settlement, the choice rests with the debtor.

The General Secretariat of the Union circulates Operational Bulletins in which two lists are included. One list sets forth the unit for payments in terms of the national currency on the basis of the SDR as notified by the issuer of the currency and a gold franc equivalent that may be used in exceptional cases. The second list sets forth the unit in terms of the national currency simply as the gold franc equivalent. The second list does not state the coefficient on the basis of which the issuer of the currency has made its notification.

The Appendix to the Regulations contains detailed provisions on exchange rates. For example, if the balance of an account is expressed in the SDR, the amount payable is determined by the relationship between the currency of settlement and the SDR on the day before payment or by the latest value published by the IMF. If the relationship has not been published by the IMF, the settlement is made on the basis of a cross rate between the selected currency and a currency for which the relationship has been published. The value of the latter currency is the one published before the day of payment or the latest one published by the IMF. The cross rate between the two currencies is the closing rate in effect on the day before payment or the most recent rate quoted on the official or generally accepted foreign exchange market of the main financial center of the debtor.

If the balance of the account is expressed in gold francs, the balance, in the absence of special arrangements, is translated into the SDR in accordance with the provisions of Article 6.3 of the Regulations. The amount of currency payable is determined in compliance with the provisions of Appendix 1 as summarized above. The Appendix deals also with cases in which the monetary unit is neither the SDR nor the gold franc.

Article 3.4.3 of Appendix 1 also is of interest for the present purpose:

If there should be a radical change in the international monetary system which invalidates or makes inappropriate one or more of the foregoing paragraphs, administrations are free to adopt, by mutual agreement, a different monetary basis and/or different procedures for settlement of balances of accounts, pending a revision of the above provisions.

It can reasonably be held that after the collapse of the par value system, international organizations exercised a similar power, by administrative decision, interpretation, or an implied power to fill a gap in the constitutive treaty, in order to establish how a gold unit of account would be applied pending amendment of the treaty. The Articles of the IMF have always contained an express power of this kind. Articles XXIII and XXVII of the present Articles declare that in the event of an emergency or the development of unforeseen circumstances threatening the activities of the IMF, the operation of any one or more of certain specified provisions can be suspended by the IMF for prescribed maximum periods. The maximum periods have been extended by the Second Amendment, so as to provide a more ample opportunity for considering and completing amendment of the Articles. One of the specified provisions establishes the margins for exchange transactions under Schedule C, paragraph 5 if the par value system governed by the schedule was in operation. Before the Second Amendment, the IMF had a similar power of suspension with respect to the margins prescribed by the par value system, but the IMF did not exercise this power even after the collapse of the par value system.

Article XXVII, Section 1(d) of the present Articles completes this account of the similarity between the Administrative Regulations and the IMF’s law:

The Fund may adopt rules with respect to the subject matter of a provision during the period in which its operation is suspended.

The IMF held that it had an implied power of this character before the Second Amendment. The power to suspend the operation of a provision was not intended to incapacitate the IMF or compel it to tolerate disorder. To prevent either development, temporary rules were necessary and could be put into effect by the IMF.

The International Telecommunication Union held a Plenipotentiary Conference in Nice, France, from May 23 to June 30, 1989, from which there emerged Final Acts. A major decision of the Conference was to adopt two legal instruments, a Constitution and a Convention, in place of the former Convention as a single instrument.³⁰ A hierarchy of three linked and binding international instruments is now established. The basic instrument is the Constitution, which is supplemented by the Convention, the provisions of which must respect the Constitution. The Administrative Regulations, which consist of the new International Telecommunication Regulations and the Radio Regulations, complement both the Constitution and the Convention. The Regulations must be consistent with the provisions of these other two instruments. A country’s ratification of or accession to the Nice Constitution and the Convention will operate automatically as ratification or accession to the Regulations that are in force or are being applied as provisional measures.

Under Article 30 of the Convention, which deals largely with organizational and procedural matters, the settlement of accounts must be made in accordance with arrangements on the subject entered into by members of the Union, and in the absence of such arrangements, in accordance with the International Telecommunication Regulations as they stand from time to time. Article 31 of the Convention, which confirms in broad outline the approach of the Regulations as described above, provides that:

In the absence of special arrangements concluded between Members, the monetary unit to be used in the composition of accounting rates for international telecommunication services and in the establishment of international accounts shall be:

• –either the monetary unit of the International Monetary Fund

• –or the gold franc,

both as defined in the Administrative Regulations. The provisions for application are contained in Appendix 1 to the International Telecommunication Regulations.

At the Nice Conference, Kuwait proposed an amendment under which the SDR would be the sole unit of account. The justification advanced for the proposal was that the SDR is averaged in a manner that has been accepted by the international community, but there was no discussion of the proposal. An odd feature of the provisions that permit “special arrangements” between administrations is that although an integrated regulatory system of the Union has been an objective, the provisions, at least in principle, are not compatible with this aim. There is, however, no great diversity in practice. Furthermore, provisions included in the Convention and the Regulations are easier to amend than the Constitution.

Under a decision of the Union’s Plenipotentiary Conference at Nice in 1989 the unit of account of the annual budget for the period 1990 to 1994 is the Swiss franc with the value as at April 1, 1989. Each member of the Union subscribes the number of “contributory units” it chooses from the scale set forth in Article 27 of the Convention. The equivalent in Swiss francs is calculated by reference to a value for the contributory unit in that currency that will raise the amount of the budget. On the basis of a budget for 1990, the value of the contributory unit will be approximately SF 265,000.

Universal Postal Union

The experience of the Universal Postal Union (UPU) also demonstrates the difficulties for some organizations of arriving at a satisfactory amendment of the provisions of their governing instruments under which a gold unit of account is prescribed. In the case of the UPU the solution has been reached by stages. Article 7 of the UPU’s Constitution, the paramount instrument in the UPU’s hierarchy of legal instruments, provided that the monetary unit in the Acts of the UPU was a gold franc defined as having a weight and fineness that made it equivalent to the Germinal franc. A majority of two thirds of the membership is necessary for amendment of Article 7.

A proposal to delete or amend Article 7 did not succeed at the meeting of the UPU Congress at Rio de Janeiro late in 1979. A reason for the failure of the proposal was that the IMF has authority to change the definition of the SDR. It seemed desirable, therefore, to define the monetary unit in the Convention, which could be adapted more easily to changes in the international monetary system.

The monetary unit has practical and technical application among postal authorities only under the Convention and other subordinate Acts. A special majority is not necessary for amendment of the Convention. It was possible, therefore, to provide in paragraph 1 of Article 8 of the Convention that

The monetary unit used in the Convention and the Agreements as well as in their Detailed Regulations shall be the gold franc laid down in article 7 of the Constitution convertible into the International Monetary Fund (IMF) accounting unit, which is at present the Special Drawing Right (SDR).

At the Hamburg Congress in the summer of 1984 a number of members proposed to amend Article 7 of the Constitution so as to have it read that the monetary unit used as the monetary standard shall be the accounting unit of the IMF. The reasons given for the proposed amendment included, among others, the so-called demonetization of gold, the fact that the IMF’s Articles prohibited maintenance of the external value of currencies in relation to gold, the use of the SDR by the majority of postal administrations after the Rio de Janeiro Congress, and the effect of the proposed amendment in eliminating any need to amend Article 7 in the future “because of the widespread and frequent fluctuations in currencies.”

On this occasion also the proposal failed, although by only a few votes. The proposal was opposed by some nonmembers of the IMF because they favored a gold standard and professed to be embarrassed by mention of the SDR. The U.S.S.R. also favored a gold standard but thought that the Constitution should recognize reality and therefore the SDR. Some members and nonmembers of the IMF refrained from supporting the proposal because their high rates of inflation would be disadvantageous to them if the SDR were the monetary unit.

Two developments in the progress toward the SDR occurred at Hamburg. One development was the amendment of Article 8, paragraph 1 of the Convention by deleting from the text noted above the words “used in the Convention and the Agreements as well as in their Detailed Regulations shall be the gold franc.” The effect was to mute subservience to the gold franc by omitting reference to it as such, although this omission did not affect the text of Article 7 of the Constitution. The other change was to omit the reference to subordinate legal instruments, which had a similar cosmetic effect.

The second development was the adoption of resolution C 52 at the instance of China, which recited changes in international currency arrangements, the demonetization of gold, the widespread use of the SDR by the majority of postal administrations, and the need to encourage the observance of standardized provisions concerning the use of the accounting unit of the IMF. According to the resolution, amounts expressed in gold francs in the Acts of the UPU would thenceforth “be supplemented by their exchange value in SDR” calculated on the basis of the linking coefficient SDR 1 = 3.061 gold francs. This coefficient reflected the relationship derived from the definition of the gold franc and the former definition of the SDR in terms of gold. The resolution confirmed the practice that had been followed by most postal administrations since Rio de Janeiro.

The final step was taken at the Congress that met in Washington, D.C. in 1989. With effect on January 1, 1990, Article 7 of the Constitution is amended to read:

The monetary unit used in the Acts of the Union shall be the accounting unit of the International Monetary Fund (IMF).

With this change, there was no reason to refrain from restoring some words to paragraph 1 of Article 8, which now reads:

The monetary unit laid down in article 7 of the Constitution and used in the Convention and the Agreements as well as in their Detailed Regulations shall be the Special Drawing Right (SDR).

Two pre-existing paragraphs of Article 8 of the Convention were retained. They read as follows:

Union member countries shall be entitled to choose, by mutual agreement, another monetary unit or one of their national currencies for preparing and settling accounts.

Union member countries whose currency exchange rates in relation to the SDR are not calculated by the IMF or which are not members of that specialized agency shall be requested to declare unilaterally an equivalence between their currencies and the SDR.

The legal instruments, problems, and solutions of the UPU resemble those of the International Telecommunication Union. The UPU’s solutions, however, are simpler and clearer, particularly in the omission of any reference to a gold franc.

IMF and Units of Account

An inference to be drawn from the discussion of the International Telecommunication Union and the UPU is that there may be more than one unit of account in the practice of an international organization even though the adoption of all of them may be inspired by the desire to deal with the problems created for the organization by the fluctuation of exchange rates. The explanation of the use of more than one unit of account may be differences in the preferences of members or in the range of functions of the organization.

Even in the IMF more than one unit of account can be in operation. The SDR is the unit of account in which operations and transactions of the IMF are conducted through the General Resources Account and for maintaining the value of the IMF’s holdings of currency in that Account.³¹ The IMF may sell gold, however, for the currency of any member at a price based on prices in the market³² or at the former official price of gold in the currency.³³ The IMF is authorized, in accordance with the conditions specified by the Articles, to invest the currency of a member in obligations denominated in SDRs or in the currency used for the investment.³⁴ The concurrence of the member whose currency is used to make these investments is necessary.³⁵ It can be assumed that if the obligations are those of the member itself, the member will be able to insist that the obligations be denominated in its currency rather than in SDRs, so as to avoid the burden, on maturity or disinvestment, of having to pay a larger amount of its currency than was used for the investment if its currency depreciates against the SDR. A provision of this kind is a logical consequence of confining maintenance of value obligations to the IMF’s holdings of currencies in the General Resources Account.

Under Article V, Section 2(b) of the IMF’s Articles, the IMF is authorized to administer resources contributed by members for objectives consistent with the purposes of the IMF. A number of accounts of this character are administered by the IMF. Although they are outside the two Departments of the IMF (the General Department and the Special Drawing Rights Department) the unit of account according to which the accounts are administered is usually the SDR. For example, Paragraph 3 of Section I of the Instrument to establish the IMF’s Enhanced Structural Adjustment Facility Trust, which is administered under Article V, Section 2(b), provides that the SDR shall be the unit of account for commitments, loans, and all other operations and transactions of the Trust, provided that commitments of resources to the Subsidy Account may be made in currency.³⁶ The Subsidy Account is intended to ensure that the facility is a highly concessional one, and for this purpose the IMF as Trustee can accept donations as well as loans. The terms and conditions governing many of the administered accounts call for repayments and therefore considerations of uniform value or equivalent value arise. As is apparent from the example cited in this paragraph, Article V, Section 2(b) does not require that the unit of account must be the SDR.

If repayments are not involved, it may be more convenient for a member contributing resources to an administered account not to commit itself to contribute an amount denominated in SDRs. For example, the Interim Committee of the IMF’s Board of Governors has endorsed a policy for assisting members to discharge arrears in their obligations to the IMF. The Committee

welcomed the intention of the Executive Board to pursue a multi-faceted approach to this problem involving preventive measures and intensified international collaboration where members with overdue obligations are cooperating with the Fund. Intensified collaboration will need to involve coordinated assistance, provision of bilateral financing to members that undertake strong programs of economic reform and seek to regularize their relations with the Fund, and prospective support from the international financial institutions.³⁷

One member has decided to participate in the international effort referred to by the Interim Committee by contributing resources to an account administered by the IMF to be disbursed as grants. All transfers to and from the account, including all transactions and operations conducted through it, are denominated in U.S. dollars.

The same member has agreed to make contributions to an administered account to finance technical assistance to members of the IMF for the purpose, among others, of helping them to resolve or avoid difficulties related to international indebtedness. The instrument under which the account is administered provides that all transactions and operations of the account shall be denominated in U.S. dollars, and all transfers to and from the account shall be made in that currency.

The use of the U.S. dollar as the unit of account illustrates the continuing practice in international arrangements of using the current dollar as the unit of account. No census has been taken, but it might well demonstrate that in treaty practice, to take one example, the dollar is still the most common unit of account even in the era of fluctuating exchange rates.³⁸ There are no data that show what proportion of these treaties is bilateral, plurilateral, or multilateral. It would be interesting to determine also to what extent these treaties do not involve considerations of uniform or equivalent value as discussed in Chapter 3 or maintenance of value as discussed in Chapter 7.

Transcending Legal Limits

The problem of “headroom” discussed in connection with the World Bank’s lending capacity is not untypical of the difficulties that can arise because of certain legal limits when exchange rates are fluctuating. A legal limit expressed in domestic currency is imposed by national law for some purpose; the limit is observed originally, but later it is exceeded because of movements in exchange rates. Many examples can be imagined. For instance, a court has jurisdiction to entertain claims up to a certain amount expressed in the domestic currency, a plaintiff institutes proceedings to recover a debt in foreign currency the equivalent of which is less than the limit in the domestic currency, but by the time of the hearing the equivalent exceeds the limit because of movements in the exchange rate between the two currencies. Again, a limit is imposed on recoveries, a judgment expressed in a foreign currency does not transcend the limit, but by the time of enforcement of the judgment the limit is exceeded.

The English Law Commission has discussed a comparable case in its Report.³⁹ Under an English statute, a shipowner is able to limit his liability for personal injury or for loss or damage to goods. The limit is expressed in sterling, but the plaintiff’s loss is suffered in a foreign currency, and under English law as it has developed since the decision of the House of Lords in the Miliangos case discussed in Chapter 12 of this monograph, the judgment should be expressed in the foreign currency. How should the judgment be framed so that the plaintiff’s claim to foreign currency is honored but the limit in sterling is not transcended? An English judge has tentatively suggested that in such a case judgment should be given in sterling only, apparently at the rate of exchange prevailing at the date of the judgment.⁴⁰

The English Law Commission questioned the proposed solution, because of the principle that a claim to foreign currency should not be transformed by the court into a claim to sterling. The Commission was content to leave the solution to judicial evolution but favored the principle that

(i) where the damages in foreign currency, when converted into sterling as at the date of judgment, are lower than the statutory limit, judgment should (as is apparently the present law) be expressed in that currency in accordance with the general form approved in Miliangos;

(ii) where the damages in foreign currency, converted as at the date of judgment, would exceed the statutory limit (of, say, £100,000) judgment should be given in some form which, in effect, is for “£100,000 or such sum in [the foreign currency] as is at the date of payment the equivalent of £100,000.”⁴¹

Similar problems can arise when limits are expressed in foreign currencies or in a composite unit of account. English legislation on export guarantees⁴² provides examples of this kind, and, in addition, an example of exculpation if certain excesses occur. One of the limits is applied to the total of commitments (outstanding liabilities, payments, and advances) under the Act in foreign currencies. The limit is expressed in SDRs. Foreign currency is defined as any currency, other than sterling, and SDRs. If commitments are expressed in foreign currency other than the SDR, the SDR equivalent for the purpose of the limit is determined according to the appropriate rate of exchange prevailing on dates specified by the Act. A determination of the equivalent remains in force until the end of the quarter in which the commitment is made. Calculations are made at the end of each quarter and remain in force until the end of the next quarter.

The Act excuses an excess above the limit for the time being in force if the excess is attributable solely to a quarterly re-calculation that took effect as from the end of the previous quarter. An excess is permitted also when it results from a liability previously undertaken at a time when the limit would not have been exceeded if the undertaking had been performed at once. Finally, the Secretary of State is authorized, on not more than three occasions, provided he is acting with the consent of the Treasury, to increase or to increase further the limit by a specified maximum amount of SDRs. To increase a limit is always a possible option when the limit has been or may be transcended, as illustrated by this statute and by the increase in the World Bank’s capital, but it may not be easy to obtain the option or to exercise it when it exists.

An action taken by the Ministry of Finance of China is similarly accommodating when there is an involuntary excess of the kind under discussion here. Article 20 of the Accounting System for Joint Ventures Using Chinese and Foreign Investment provides that foreign currency contributed in cash by the parties to Chinese-foreign equity joint ventures in compliance with the contract shall be converted into renminbi at the exchange rate prevailing at the date payment is received. As the result of fluctuations in exchange rates, the renminbi amount resulting from this conversion may alter the parties’ capital contribution ratio provided for in the joint venture contract. The Ministry’s Notice of December 29, 1987 declares that in such a case, the applicable exchange rate may be either the exchange rate announced by the exchange control authorities for the day on which payment is received or the exchange rate provided for in the joint venture contract. If the former option is chosen, and there is a discrepancy between the amount of renminbi resulting from conversion and the capital contribution ratio, the difference shall usually be treated as a capital gain or loss. Nevertheless, if the contract contains other provisions with regard to this matter, those provisions are to be observed.⁴³

A treatment of the problem of transcending a legal limit can be found in the IMF’s Articles. The IMF can decide to transfer part of the proceeds of the sale of gold in excess of the former official price or currency held in the General Resources Account to the Investment Account for immediate investment through that Account. The total amount of these transfers must not exceed the total amount of the IMF’s general and special reserves at the date a transfer is contemplated. These reserves are denominated in SDRs, and therefore the SDR value of the transfers already made must be calculated as at the date of a decision to make a transfer. If the SDR value of the amounts of currency already invested increases after the decisions beyond the SDR value of the reserves, the IMF has no obligation to reduce the investment, but no new transfers can be made while an excess over the SDR value of the reserves exists at the date that a new transfer is considered. A similar solution applies if during the existence of an investment the SDR value of the reserves decreases with the consequence that the investment exceeds the reserves.⁴⁴