Abstract

Maintenance of value as discussed in this chapter must be distinguished from the adjustments made to take account of changes in exchange rates that have been discussed in Chapter 6. Maintenance of value is obligatory, in contrast to adjustments that are discretionary. All the adjustments discussed in Chapter 6 result in modifications of the instruments under which the adjustments are made or of the practice the instruments prescribe. Maintenance of value, however, takes place under provisions or practices that are not modified as the result of actions taken because of changes in exchange rates.

Maintenance of Value

Maintenance of value as discussed in this chapter must be distinguished from the adjustments made to take account of changes in exchange rates that have been discussed in Chapter 6. Maintenance of value is obligatory, in contrast to adjustments that are discretionary. All the adjustments discussed in Chapter 6 result in modifications of the instruments under which the adjustments are made or of the practice the instruments prescribe. Maintenance of value, however, takes place under provisions or practices that are not modified as the result of actions taken because of changes in exchange rates.

Neither customary nor conventional public international law includes any general principle that Patria must compensate other states for declines in the external value of their holdings of Patria’s currency measured by some established standard of value. Similarly, there is no principle that Patria has any claim to reduction in the nominal amount of its currency liabilities, represented by the holdings of Patria’s currency by other states, because of increases in the external value of the currency. The legal situation is the same with respect to the obligations of Patria expressed in Patria’s currency but not related to holdings of Patria’s currency. No liability exists whether the changes are the result of depreciation or appreciation in the market or devaluation or revaluation by fiat of the issuer of the currency (Patria in the examples cited here). Nothing in the IMF’s Articles in any of its three versions has imposed this form of liability.

The absence of liability is probably related to the principle of nominalism and the principle that “[c]ontrol of the national currency and of foreign exchange is a necessary attribute of sovereignty.”1 There is nothing in the Articles to suggest that liability would arise even if the IMF were to decide that a member was violating its obligations with respect to exchange rates under the present Articles, such as the obligation to “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.”2

As the absence of liability is probably related to nominalism and sovereignty, it follows that a state can agree to accept responsibility. For example, a state can undertake liability to another state that is expressed in a unit of account other than the obligor’s currency but is to be discharged in that currency. Similarly, Patria can agree to compensate Terra for declines in the exchange value of Terra’s holdings of Patria’s currency. The purpose of such an agreement might be to induce Terra to refrain from converting these holdings either through the exchange market or by a direct approach to the authorities of Patria under some obligation of conversion assumed by Patria. Examples can be cited of exchange guarantees as part of a collaborative effort. To cite one example, an agreement took effect on January 1, 1973 among 18 countries that belonged to the Organization for Economic Cooperation and Development (OECD), under which each country guaranteed for a period of three years the exchange value of working balances in its currency held by the central banks of the other parties. The agreement was considered necessary in the new circumstances of fluctuating exchange rates. States have been reluctant, however, to undertake obligations to other states to maintain value. If the issuer of a reserve currency were to undertake such an obligation, the benefit it hoped to enjoy as the result of devaluation or depreciation could be negated to a substantial extent.

Nevertheless, there have been examples of such obligations. For example, under some swap arrangements negotiated by the United States with other countries, or more often between their central banks, a drawing of one currency is accompanied by the deposit of an equivalent amount of the partner’s currency, and it is agreed by the parties that when the swap is reversed the transaction will be carried out at the same spot rate that applied when the drawing was initiated. The effect of the arrangement is that the holder of the deposited currency is protected against any decline in its external value, thus benefiting from a guarantee of value, while the drawing partner is protected against any increase in external value of the currency drawn and to be returned.3

If there was no agreement with a holder of U.S. dollars on maintaining the value of the holdings, the holder was not entitled to claim adjustment of the value of the holdings simply because in the days of the par value system the United States had given the IMF an undertaking that it would buy and sell gold freely with other members in exchange for dollars for the settlement of international transactions.’4 This undertaking did not guarantee the holder of dollars against devaluation of the dollar. If the dollar was devalued, whether consistently or inconsistently with the Articles, other states were compelled to accept the reduction in the external value of their holdings of the currency without any remedy against the United States.

Notwithstanding the reluctance of states to guarantee the value of holdings of their currencies by other states, there has been a greater readiness to give such guarantees to international financial organizations in respect of the balances they hold. There has been a change, however, in the willingness to undertake such obligations, because of the fluctuation of exchange rates.

Maintenance of value obligations are not to be found in the more recent charters of MIGA and the EBRD. However, to the extent that a treaty does not provide for immediate payments to the organization that is established, a measure of protection against fluctuations in exchange rates can be accorded to the organization by adopting a composite unit of account, such as the SDR or the ECU. The payments when made would be based on current exchange rates. This form of protection is illusory, however, if, as in the cases of MIGA and the EBRD, the valuation of the composite unit of account is frozen by defining it as the average of exchange rates for the unit over a prescribed period. Even the proximity of the period offers little protection if the period becomes increasingly remote and payments are made over a long or open-ended period.

The fundamental justification for obligations to maintain the external value of an international organization’s holdings of a currency is complex. The organization is protected against any impairment of its capital and therefore of its ability to perform its functions. The converse is true: the organization is not entitled to retain an enhanced value for its capital as the result of revaluation or appreciation, because that development is seen to go beyond a member’s commitment to the organization. The obligation to maintain value rests, therefore, on each member state in respect of its currency and on the organization. Maintenance of value makes it possible for the organization to go on conducting its financial activities smoothly without the tensions and impediments that would arise if there were to be an incompatibility between exchange rates in the markets and those at which the organization conducts its transactions and operations.

The IMF is a primary example of an international financial organization in which each member and the organization have the reciprocal obligations mentioned above. The obligation relates to a member’s own currency because the member manages the external value of its currency in accordance with the provisions of the Articles. While the par value system was in force, a member had to pay more units of its currency to the IMF on a devaluation of the currency in order to bring the IMF’s holdings up to the gold value they had immediately before the devaluation. If a member’s currency was revalued, the IMF returned units of the currency to the member so that the gold value of the IMF’s holdings immediately before the change in par value was restored. The obligation to maintain value did not attach to any holdings of the currency drawn from the IMF and still in the hands of the purchasing member. The obligation did not run between members.

The obligation to maintain value applied to depreciation by market forces as well as devaluation by governmental action. A member might be failing to make the par value of its currency effective by allowing the exchange rate for the currency to float in violation of the member’s obligations. It was possible also that the IMF had not called on a member to establish an initial par value for its currency and that the currency was floating, because the IMF did not think that the member was able to make a par value effective. Such a member was not in violation of its obligations under the Articles. Maintenance of value was not a sanction. Whether or not a member was violating its exchange rate obligations, it was not difficult to arrive at the value of the currency in relation to gold. The gold value of a floating currency could be determined indirectly, through the medium of the U.S. dollar. All that was necessary was to apply the exchange rate between the floating currency and the U.S. dollar, because the undertaking of the United States to buy and sell gold freely with other members enabled the IMF to assume that the external value of the dollar was being maintained in relation to gold.

It is odd that the original Articles said nothing about the adjustment of holdings on the appreciation of a member’s currency in violation of the Articles because a par value was not being made effective.5 The IMF resisted the temptation to hold that this omission in the Articles was intended to increase the IMF’s resources in relation to gold as the common denominator of the par value system. Instead, the IMF interpreted the Articles to require it to return units of the appreciated currency to the member so that the IMF’s holdings were maintained at the gold value they had immediately before the appreciation.

The upshot of the system of maintenance of value was that the IMF could conduct its operations and transactions in currencies at exchange rates that corresponded to the exchange value at which the IMF was holding those currencies, without suffering any loss or gaining any profit. Furthermore, in principle the IMF would be able to use all currencies in its activities without complications, because the exchange rates at which the IMF dealt in them were in a sense neutral. For members dealing with the IMF, there was no exchange profit or loss to be enjoyed or suffered in members’ relations with the IMF because one currency rather than another was sold or purchased by the IMF in these dealings.

Another way of looking at maintenance of value is that the IMF’s resources are protected as revolving funds that are available for use by members needing resources for purposes consistent with the Articles and the policies of the IMF. In particular, the value of the IMF’s resources could not decline in terms of gold and now in terms of the SDR as the IMF’s unit of account because of changes in exchange rates. A decline in value could be brought about only if the decision were taken to reduce the quotas of members. The decline would occur because subscriptions to the IMF have always been equal to quotas.

Financial Structure of IMF

After the par value system was abrogated, it became necessary to decide whether obligations to maintain value should be retained in the IMF’s amended Articles, and if retained what the unit of account should be. To understand what changes have been made by the Second Amendment, it is necessary to sketch the present financial structure of the IMF. Under the original Articles, the structure was simple: all transactions and operations were conducted through the same window. The First Amendment created a General Account, through which were conducted the transactions and operations originally authorized by the Articles, and a Special Drawing Account, through which transactions and operations in the newly created SDR were carried out. The two Accounts were really separate departments, and that term would have been used had it not been applied already to the organizational compartments of the staff.

The financial structure of the IMF became more complicated as a result of the Second Amendment. The General Account became the General Department and the Special Drawing Account became the Special Drawing Rights Department. (The former objection to the use of “Departments” for the financial structure of the organization was swept aside because it became necessary to distinguish between Departments and component Accounts.) The General Department is now composed of three separate Accounts: the General Resources Account, the Special Disbursement Account, and the Investment Account. In addition, it was made explicit that the IMF could perform financial (and technical) services, including the administration of resources contributed by members, for purposes that were beneficial to members and consistent with the purposes of the IMF.6 Accounts administered under this power are outside the two Departments. Transactions and operations conducted through administered accounts cannot give rise to recourse against assets held by the IMF in its two Departments.

The transactions and operations carried out through the General Resources Account are in essence the same as those that were authorized by the original Articles, although there have been substantial modifications in these activities as a result of the two Amendments. If the IMF were to sell gold held by it in the General Resources Account on the effective date of the Second Amendment (April 1, 1978), an amount of the proceeds equivalent at the time of sale to 1 SDR per 0.888671 gram of fine gold would be held in that Account, and any excess would be held separately in the Special Disbursement Account.7 The IMF may make transfers from this excess to the General Resources Account for immediate use in accordance with other provisions of the Articles as transactions and operations of that Account.8 Under an unusual power of the IMF, the assets held in the Special Disbursement Account may be used at any time

for operations and transactions that are not authorized by other provisions of this Agreement but are consistent with the purposes of the Fund. Under this subsection (f)(ii) balance of payments assistance may be made available on special terms to developing members in difficult circumstances, and for this purpose the Fund shall take into account the level of per capita income.9

The assets in the Investment Account also are held separately from all other assets of the IMF. The assets in this Account are the result of decisions by the IMF to make transfers to the Account from the excess proceeds of the sale of any of the IMF’s gold.10 In addition, however, the IMF may decide to transfer to the Account, for immediate investment, holdings of currencies from the General Resources Account.11 The combined amount of transfers to the Investment Account must not exceed the total amount of the IMF’s reserves at the time of the decision to make a transfer.12 The Investment Account may hold the obligations in which the IMF invests, the income of investment, and the proceeds of matured or liquidated investments.

Limitation of Maintenance of Value

Obligations to maintain the value of the IMF’s holdings of members’ currencies in the General Resources Account have been retained. The unit of account for this purpose is the SDR. The IMF may hold currencies in the Special Disbursement Account, the Investment Account, and administered accounts, but obligations to maintain value do not attach to these holdings.

Why does the traditional obligation to maintain value not apply to holdings in these other Accounts? One reason is that the financial activities conducted through them need not take the form of the main transactions conducted through the General Resources Account. These transactions are in the form of the IMF’s sale of currencies (or SDRs) to members and the IMF’s purchase of an equivalent amount of the purchasing member’s currency. In due course, the purchasing member repurchases its own currency from the IMF with SDRs or the currencies of other members, or the IMF sells that purchasing member’s currency to another member in need. The sales have the same effect pro tanto as a member’s repurchase of its currency. Purchases and repurchases are carried out in a way that results in no exchange profits or losses for the IMF or members. To achieve this result, the transactions are carried out at current exchange rates for the SDR as the unit of account, and the IMF’s holdings in the General Resources Account of the currencies involved are adjusted to reflect these exchange rates. The assets in the General Resources Account continue to be revolving resources that are preserved in value at all times for the benefit of members. Value now means value in terms of the SDR and not gold.

Transactions of this character, resembling exchanges of currencies, are not the normal business of the Investment Account. The form of transactions carried out through the Special Disbursement Account and administered accounts are not specified by the Articles. Assets held in these accounts are not part of the IMF’s permanent revolving resources held in the General Resources Account. Transactions performed through the Special Disbursement Account or the administered accounts can be in the same form as those conducted through the General Resources Account, but they need not be. Instead, they can take the legal form, for example, of a loan, that is, an advance to the borrower not accompanied by a quid pro quo in the form of the immediate transfer to the IMF of the equivalent in the borrower’s currency, or they can take the form of a grant.13

A second reason why the obligation to maintain value does not apply to the IMF’s holdings of currencies in the Special Disbursement Account and administered accounts is that the IMF would be unlikely to sell these holdings even if the transactions in which the resources were made available to members were to be in the form of those conducted through the General Resources Account. The currencies the IMF would purchase in exchange for currencies sold would probably be those of poorer developing countries. The IMF does not sell the currencies of members if they are not in a strong balance of payments and reserve position, because if the IMF did not observe this direction14 it would intensify the problems of such countries.

It follows, therefore, that for the IMF to purchase such currencies in transactions through the Special Disbursement Account and administered accounts would be unnecessary and also inconvenient for both the IMF and members in a world in which exchange rates fluctuate. A glance at the IMF’s practice on maintenance of value in relation to currencies held in the General Resources Account will demonstrate the cumbersomeness of obligations to maintain value and suggest the desirability of avoiding them if there are no compensating benefits. The IMF adjusts its holdings of a member’s currency in the General Resources Account:

  • (a) whenever the member’s currency is involved in a transaction or an operation between the IMF and another member;

  • (b) at the end of the IMF’s financial year;

  • (c) whenever a member requests the IMF to adjust its holdings of the member’s currency;

  • (d) with respect to holdings of the U.S. dollar, on the last business day of each month, because most of the IMF’s administrative expenditures are in that currency; and

  • (e) on such other occasions as the IMF may choose.

Whenever the IMF adjusts its holdings of a member’s currency in the General Resources Account, the IMF establishes either an account receivable or an account payable. Adjustments are calculated by reference to the balance of the member’s currency in the General Resources Account plus the balance in the account receivable or minus the balance in the account payable in the currency.

Settlements of accounts receivable or payable are likely to be less frequent than adjustments, at least for some currencies. Settlements must be made at the end of each financial year of the IMF and at any other times requested by the IMF.

Finally, a note that used to appear in the Financial Statements of the World Bank helps to explain the resistance of the United States to an extension of maintenance of value obligations. Under Article II, Section 9 of the World Bank’s Articles, a member’s obligation applies to the paid-in portion (originally 18 percent) of subscription held by the Bank in the member’s currency. As discussed in Chapter 5, the problem as seen by the United States is that an obligation to maintain value on the basis of the SDR proper as the unit of account would be a new and open-ended obligation to make payments of dollars to the Bank. New in this context means an obligation to make payments to the World Bank beyond those that would be due on the basis of the former par value of the dollar as the unit of account. Furthermore, an obligation to maintain the value of dollars in terms of the SDR might mean that the United States would have to make payments as the result of fluctuations in the exchange rates of the currencies of other members for which their policies were responsible. The position of the United States, it has been seen, is that an obligation of increased weight resulting from the use of the SDR as the unit of account can be imposed only by amendment of the World Bank’s Articles. It is no secret that the United States has been intent on avoiding budgetary difficulties or other financial problems with Congress.

A by-product of the practice by which transactions through the Special Disbursement Account do not involve counterpart funds or maintenance of value obligations is that the legal technique for conducting these transactions differs from the technique for conducting transactions through the General Resources Account. The latter transactions are most often carried out under the legal instrument of the IMF called the stand-by arrangement or the variant of it called the extended arrangement. The IMF and its members do not regard these arrangements as treaties or contracts.15 The IMF’s approval of an arrangement for the benefit of a member is a decision by the IMF in the exercise of its regulatory and financial powers under the Articles. The member’s letter of intent in support of which the IMF approves an arrangement is a member’s statement of the policies, including policies on exchange rates, it intends to follow during the period of the arrangement, but without undertaking a legal commitment to abide by the stated policies. The IMF’s decision, however, may make observance of certain specified policies a condition for a member’s access to further resources under the arrangement. The preference of the IMF and its members for this legal practice avoids the embarrassment of holding that a member is guilty of international wrongdoing in not pursuing the economic policies included in its letter of intent. To hold that a member behaving in this way violates international obligations would deter members from formulating adjustment programs and seeking to use the IMF’s general resources.

Furthermore, if the stand-by arrangement were considered a treaty or contract, the IMF would have to designate the defenses it would recognize against charges of breach and would have to examine a member’s circumstances to determine whether it could substantiate a defense. The IMF’s analysis that departures from economic programs are not international wrongs is in the legal tradition of the Articles in treating transactions conducted through the General Resources Account or its predecessor as exchanges of currencies and not the extension of credits.16

The instruments under which a member can use resources held in the Special Disbursement Account or in administered accounts have been loan agreements. Perhaps because these transactions are outside the normal scope of the IMF’s financial activities the niceties formerly observed have been abandoned. In addition, the IMF may regard the use of the SDR as the unit of account for repayment of a loan an assurance of adequate repayment that justifies forgoing counterpart funds and maintenance of value. If there were counterpart funds, the SDR would be the unit of account for the repurchase of them.

Maintenance of Value and IDA

Article IV, Section 2 of the Articles of Agreement of the International Development Association (IDA) provides for maintenance of value in terms of the 1960 U.S. gold dollar. The obligation applies to that amount of the 90 percent portion of the initial subscription of each member of a particular class as is paid in by the member in its own currency, and as long as and to the extent that such currency has not been initially disbursed or exchanged for the currency of another member. IDA establishes the terms and conditions for replenishment of its resources. Under the first three replenishments, it was decided as a matter of policy to apply the maintenance of value provisions of IDA’s Articles to the subscriptions (carrying voting rights) and contributions (not carrying voting rights) made under each of these replenishments. On the occasion of the fourth replenishment, on which the decision was taken in 1974, the class of members referred to above expressed the view that as a matter of general principle maintenance of value provisions should continue to be made applicable to replenishments. They decided, however, that in view of the unsettled international monetary conditions at the time, their proposed subscriptions and contributions would not be subject to any obligation to maintain value. Each such member would agree to make its payments in a stated amount of its own currency, if “freely convertible” as defined by the Articles of IDA, without any obligation to maintain the value of these amounts if there should be a subsequent change in the exchange value of the currency. A member would not have the right to make these payments in a currency other than its own, except with the approval of IDA.

The fifth replenishment, on which the decision was taken in 1977, followed the same pattern as its immediate predecessor. Nothing was said, however, about the general principle of maintenance of value, and no reference was made to unsettled monetary conditions.

It had been recognized in connection with the fourth replenishment that difficulties might arise for IDA as a result of not applying the obligation to maintain value. IDA made loan commitments of resources in current U.S. dollars, but its resources, held or payable to it, might decline in exchange value against the dollar. The result might be a discrepancy between resources and total credit commitments, particularly in view of the fact that commitments would be made over a period of three years but would be disbursed over a much longer period. This discrepancy did occur and commitments already made by IDA had to be adjusted downward. For the fifth replenishment, it was decided to adjust commitments from time to time in the light of exchange losses or gains during the commitment period. If fourth replenishment resources proved to be inadequate to meet fourth replenishment commitments, it was agreed that the shortfall could be met with fifth replenishment resources. The practice is another example of discretionary adjustments as discussed in Chapter 6 of this monograph.

IDA’s report on the sixth replenishment (under a decision of 1980) stated that the original system of IDA’s Articles and the first three replenishments had provided IDA with a high degree of financial security in the conduct of its operations: subscriptions and contributions were expressed in 1960 U.S. dollars, subscribers and contributors maintained the value of these resources until they were disbursed under credit commitments or exchanged for other currencies; credits for borrowers were expressed in current dollars; and repayment obligations by borrowers were expressed in 1960 dollars. Ongoing reform of the international monetary system had made it necessary to depart from these arrangements. The frequency of changes in exchange rates and unsettled conditions from time to time on foreign exchange markets justified review of the question whether members making subscriptions and contributions could undertake obligations to maintain the value of these resources in terms of the U.S. dollar or the SDR.

The report went on to say that the question had been discussed whether some form of maintenance of value obligation, in terms for example of the SDR, should be reintroduced for the sixth replenishment. It had become clear that such a proposal would create budgetary complications for many members. It had been agreed, therefore, that once again obligations could be expressed in stated amounts of a member’s national currency, as in the fourth and fifth replenishments. At the same time, it had been agreed, in line with the growing use of the SDR as a unit of account in the international monetary system, that individual members should have the option to define their obligations in terms of the SDR as valued by the IMF from time to time. Germany had decided to exercise this option. Some other members wished to use the U.S. dollar for expressing their obligations, and they had been permitted to do so.

The report stated that a further review of IDA’s practice on commitments had taken place because of the effect of changes in exchange rates. An analysis had shown that IDA’s financial position would be largely stabilized if IDA shifted to the SDR instead of the U.S. dollar as the unit of account for its credit commitments. In addition, it was agreed as a measure of protection for IDA that commitments would be made on an ascending scale over the three years of a commitment period, while the basic rule for replenishments remained that they were to be made in equal annual installments.

The 1980 Annual Report of the World Bank announced that in June of that year IDA had authorized the expression in SDRs of both commitments and repayment obligations, beginning with the sixth replenishment. The report states17 that the action was taken so as to reduce the impact of fluctuations in exchange rates on IDA’s commitment authority, to allow for more accurate planning of the timing of proposed credits, and to reduce the possibility of a shortfall in the resources needed to meet disbursements under commitments.

The report noted that under previous replenishments some members had made resources available to IDA in currencies that could be invested pending disbursement instead of notes under which calls for encashment could be made. IDA welcomed these cash payments because they added flexibility to the management of resources and enabled IDA to derive some income from investment. To encourage such cash payments, members making them had been authorized, beginning with the third replenishment, to pay in amounts and on dates that would not otherwise be mandatory, provided that, in the judgment of IDA, the terms of the payments would be no less favorable to IDA than if notes were deposited instead of cash.

IDA’s practice has been changed in another way that deserves notice. IDA drew down subscriptions or contributions to a replenishment in equal proportions from all members to meet disbursements under the replenishment. The practice followed the model of a provision of IDA’s Articles, which had been made applicable by resolution to replenishments. The calls had been made on a quarterly basis. IDA’s cash requirements had been subject to fairly frequent changes, however, for such reasons as revisions of the forecasts of disbursements and fluctuations in exchange rates. Consequently, the calls had been subject to frequent and substantial revisions, and had caused difficulty for some members in accommodating the revised calls for cash within the members’ budgetary procedures. Agreement was reached, therefore, that, within specified limits, IDA should administer the arrangements for pro rata encashment with more flexibility at the request of a member.

The report on the seventh replenishment, agreed in 1984, declared that in view of the serious difficulties that contingent budgetary obligations would pose for many members, it was not considered practical to adopt an obligation requiring them to maintain value. It was recognized that introduction of the use of the SDR as a unit of account for the commitment of credits by IDA during the sixth replenishment period had helped to stabilize IDA’s financial position, and it was agreed, therefore, that this practice should be continued for the seventh replenishment. The eighth replenishment (1987) followed, with minor modifications, the model developed in the more recent of the predecessor replenishments on the matters discussed above.

As demonstrated by the practice of the IMF in connection with transactions through the Special Disbursement Account and administered accounts, protection against exchange risk in these transactions can be obtained if disbursements and repayments are made on the basis of the SDR. An organization engaging in such transactions, however, is not free from exchange risk with respect to the stock of resources that finance its transactions unless subscribers or contributors of the resources undertake obligations to maintain the value of their subscriptions and contributions. For IDA’s ninth replenishment (1990),18 no change was made to reintroduce maintenance of value.

It was noted, therefore, that as most donors denominated in their national currencies the resources they made available, while IDA committed and disbursed these resources in terms of the SDR, IDA’s stock of resources was exposed to an exchange risk because exchange rates for currencies at the time they are pledged may differ from their SDR value at the time of disbursement. Donors insisted, however, on retaining the option of denominating their pledges in either the SDR or the national currency. The risk had been less in the case of major currencies, but substantial in the case of some other currencies. The depreciation of some currencies might result in a realized SDR value of all resources less than the total SDR value sought by the negotiation on replenishment. It was decided, therefore, as has been seen, that donors suffering from high inflation, and therefore the rapid depreciation of their currencies in recent years, would not have the option and would denominate their subscriptions and contributions in SDRs.

Investment

Limitation of the maintenance of value obligations in the IMF to the resources held in the General Resources Account does not mean that the membership has been reconciled to the prospect of reduction in the value of other assets of the IMF as the result of fluctuating exchange rates. Investment can compensate, at least to some extent, for the limited role of maintenance of value obligations under the Second Amendment. Explicit powers of investment are a departure from tradition. Before the Second Amendment, the IMF’s Articles contained no express power of investment. In 1956, after nine years of intermittent discussion, the IMF interpreted its Articles to permit investment to counteract the impairment of the IMF’s resources caused by a prolonged excess of administrative expenditure over income. The interpretation declared that the member that issued the securities denominated in the currency in which the IMF invested was required to maintain the value of the securities if the currency was devalued. The purpose of the investment was to raise income to eliminate the deficit and not to safeguard assets against changes in exchange rates, but the issue of maintenance of value had to be resolved because of the possibility, even though regarded at that time as theoretical, that there might be a change in the par value of the U.S. dollar. The investment was to be made in U.S. Government securities denominated in the dollar, because the IMF’s administrative expenditures were overwhelmingly in dollars.

The interpretation had to be steered through a maze of legal and policy complexities. One of the difficulties was the suspicion on the part of some members that such an investment might be a precedent for financial activities designed to benefit members by means of transactions not authorized expressly by the Articles and incompatible with the spirit of the treaty.19 Another problem was that a member was not required to pay interest to the IMF on its holdings of the member’s currency, for which reason a member was, and still is, entitled to substitute non-interest-bearing demand notes for its currency held in, or payable to the credit of, the General Resources Account.20 The IMF would receive income from a member, however, by investing its currency in securities issued by the member.

The amended Articles sweep away the earlier problems.21 The attitude to investment, however, continues to be cautious. For example, it has been seen that total transfers of currency from the General Resources Account and the Special Disbursement Account for investment must not exceed the amount of the IMF’s reserves at the time of a transfer. The income of investment through the Investment Account may be used for meeting the expenses of conducting the business of the IMF, but the assets of the Account cannot be used in any other transactions or operations of the IMF.22 An investment with the currency of a member held in the Investment Account may be made only with the concurrence of the member, because a proposed investment might be incompatible with the member’s monetary policy or objectionable to the member for some other reason.

Investment may be made only in marketable obligations of the member whose currency is used for investment or in marketable obligations of international financial organizations, but the obligations must be denominated in SDRs or in the currency used for investment. The latter option may be surprising, because in contrast to denomination in SDRs, denomination in a member’s currency would subject the IMF to exchange risk. It will be recalled that the member has no obligation to maintain the exchange value of its currency or the securities denominated in the currency the IMF holds in the Investment Account. The explanation of the currency option is that a member might be unwilling to accept a commitment to provide more of its currency on the basis of the SDR as the unit of account and might refuse, therefore, to concur in a proposed investment. The United States might be such a member.

If a member’s currency is invested in securities denominated in that currency, on disinvestment the status quo will be restored to some extent. This result was considered an acceptable compromise if a member refused to agree to denomination in the SDR of the securities of investment. It is not completely true that the status quo would be restored, however, because the invested currency may have been transferred from the General Resources Account,23 in which the value of the balance or balances would have been protected by the obligation to maintain value if the currency had remained in that Account. It is possible, of course, to transfer back to the General Resources Account the proceeds of a reduction in the amount of investment,24 after which the retransferred currency will enjoy maintenance of value in terms of the SDR, but there will be no compensation for any loss of value already suffered.

It may be asked why the United States was willing to concur in a provision of the Second Amendment that authorized the IMF to invest in securities denominated in the SDR when the United States was unwilling to accept a maintenance of value obligation in terms of the SDR for assets held in Accounts other than the General Resources Account. One reason is obvious: the United States could refuse to issue SDR-denominated securities for investment by the IMF. The United States could prevent any investment with U.S. dollars. The Articles provide that no investment can be made through the Investment Account without the concurrence of the member whose currency is used to make the investment.25 But suppose that the United States were to issue to the IMF securities denominated in the SDR. The United States would not face the problem of having to go to Congress for the appropriation of dollars under a so-called open-ended commitment because of fluctuations in the exchange value of the dollar against the SDR. The investment would be encompassed within the general borrowing authority already approved by Congress.

The Special Disbursement Account, its functions, and assets have been mentioned already. Pending use of the assets in this Account, the IMF can invest them in income-producing marketable obligations of members or of international financial organizations.26 Once again, no investment can be made without the concurrence of the member whose currency is to be used for this purpose. Investments must be denominated in the SDR or the currency used for investment, but nothing is said about the denomination of loans made by the IMF to members through the Special Disbursement Account. All loans made so far through that Account or through administered accounts have been denominated in SDRs.

1

Naamloze Vennootschap Suiker-Fabrick “Wono-Aseh” v. Chase National Bank of City of New York et al, 111 F. Supp. 833, at p. 845 (U.S. Dist. Ct., S.D.N.Y., 1953).

2

Article IV, Section 1(iii).

3

Richard W. Edwards, Jr., International Monetary Collaboration (Dobbs Ferry, New York: Transnational Publishers, 1985), pp. 135–66.

4

Article IV, Section 4(b) (original Articles).

5

Article IV, Section 8 (original Articles).

6

Article V, Section 2(b).

7

Except, as noted below, to the extent that the IMF decides to make transfers to the Investment Account (Article V, Section 12(g)) or to the General Resources Account (Article V, Section 12(f)(i)).

8

Decisions to make this use require a majority of 70 percent of the total voting power of members. For decisions to make other uses through the Special Disbursement Account, the majority of 85 percent of the total voting power is necessary. The powers under Article V, Section 12(f) are part of the effort to reduce the role of gold in the international monetary system, but the high majorities are evidence of a certain caution, at least in the use of the proceeds.

9

Article V, Section 12(f)(ii). But the share of assets used in this way that is attributable to developing countries that were members on August 31, 1975 may be distributed directly to them. (Article V, Section 12(f)(iii).) The idea was that the IMF should be able to transfer to all these developing countries assets obtained by sale of the gold they contributed to the IMF instead of using the assets for the assistance of particular developing countries.

10

Article V, Section 12(g).

11

Article XII, Section 6(f)(ii).

12

Ibid.

13

Article V, Section 12(f)(ii).

14

Article V, Section 3(d).

15

Joseph Gold, The Legal Character of the Fund’s Stand-By Arrangements and Why it Matters, IMF Pamphlet Series, No. 35 (Washington: International Monetary Fund, 1980).

16

The text refers to the legal form. The IMF uses the expression credits to describe the transactions conducted through the General Resources Account that do not involve resort to a member’s reserve tranche. This usage is economic and not legal in character.

17

P. 11, footnote 3, and p. 177.

18

See Ernest Stern, “Mobilizing Resources for IDA: The Ninth Replenishment,” Finance Development (Washington), Vol. 27, No. 2 (June 1990), pp. 20–23.

19

Compare Robert Triffin, Gold and the Dollar Crisis (New Haven, Connecticut: Yale University Press, 1960), pp. 117-18.

20

Article III, Section 5 (original Articles); Article III, Section 4 (present Articles).

21

Report on Second Amendment, Part II, Chapter L, sections 9–18,

22

The IMF may reduce the amount of investment, however, and then assets are to be transferred from the Investment Account to the Special Disbursement Account and the General Resources Account in accordance with the formula in Article XII, Section 6(f)(ix).

23

Article XII, Section 6(f)(ii).

24

Article XII, Section 6(f)(ix). On a retransfer, an apportionment of the proceeds, according to the formula in this provision, must be made between the General Resources Account and the Special Disbursement Account if resources had been transferred from both these Accounts to finance investment through the Investment Account.

25

Article XII, Section 6(f)(iii).

26

Article V, Section 12(h).