Some first effects of the Second Amendment: The most important immediate changes in the Fund’s Articles of Agreement, their significance and background explained
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

There have been a number of immediate changes in the activities of the Fund as the result of the entry into force of the Second Amendment of its Articles of Agreement. They include changes in the rights and obligations of members, the functions and transactions of the Fund, and certain concepts of the Articles. The General Counsel of the Fund surveys the most important of these immediate changes and explains their significance and background.

Abstract

There have been a number of immediate changes in the activities of the Fund as the result of the entry into force of the Second Amendment of its Articles of Agreement. They include changes in the rights and obligations of members, the functions and transactions of the Fund, and certain concepts of the Articles. The General Counsel of the Fund surveys the most important of these immediate changes and explains their significance and background.

Joseph Gold

What are the immediate effects of the Second Amendment of the Articles of Agreement of the International Monetary Fund that can be considered changes in the practice of the Fund and its members? This is a frequent question, particularly because one consequence of the Second Amendment is legalization of the exchange arrangements that were already in force when the Second Amendment became effective on April 1, 1978. Some commentators might say that the effect of the Second Amendment was merely to legalize existing exchange practices, but even if this were the sole or leading effect, the obligations associated with legalization should not be ignored. Nor should one ignore the dangers of disorder that are inevitable in the absence of an agreed legal order for international monetary relations.

The Second Amendment has produced numerous new effects even at this early date. As implied by the question that introduces the preceding paragraph, a distinction can be made between changes in practice that result from the Second Amendment and incorporation in the Articles of practices that were followed before the Second Amendment. A different classification can be made of the most important first consequences of the Second Amendment. One class includes those consequences that have followed automatically from the fact that the provisions of the Second Amendment have become effective. A second class consists of those consequences that have resulted from the exercise by the Fund of new powers under the Second Amendment. A third class consists of decisions taken before the Second Amendment became effective but taken because its effectiveness was imminent. These three classes are discussed in turn under the headings New Provisions, New Decisions, and Anticipatory Decisions.

New provisions

Exchange arrangements. An immediate effect of the Second Amendment is the abrogation of all par values that had been established under the Articles of Agreement. Any par value that is retained by a member under its domestic law no longer operates as a par value for the purposes of the Articles. A member may allow its currency to float. If it wishes, it may maintain the value of its currency in terms of the special drawing right (SDR) or some other denominator, but not gold.

The Second Amendment had no immediate effect on the exchange arrangements in force, because after the collapse of the par value system members had been deciding for themselves what arrangements to apply. The Second Amendment has legalized whatever arrangements were in force. The main change in practice will be produced by the principles and procedures for surveillance that the Fund is now required to exercise. This change is discussed later in connection with surveillance.

SDRs. A principle that was regarded as fundamental when the SDR was created as a legal concept under the First Amendment of the Articles, and that helps to give it the character of a reserve asset, is that the Fund has an obligation to designate a transferee when requested by a participant because the participant wishes to use its holdings of SDRs. Another fundamental principle is that a participant designated by the Fund to receive SDRs has an obligation to accept them and to provide currency in return for them. A participant cannot be required, however, to hold more than three times the net cumulative allocation of SDRs to it (allocations minus cancellations by the Fund), although a participant may agree to hold more.

In order to increase the likelihood that participants in strong balance of payments and reserve positions would be available for designation, the First Amendment created only limited opportunities for the Fund to consent to transfers of SDRs by agreement between participants. Transfers by agreement without the consent of the Fund were authorized only when the participants agreed that the issuer of a currency would use SDRs to redeem balances of its currency held by the other participant. The provision authorizing these transfers was adopted in the negotiation of the First Amendment at the instance of the United States, which pointed out that because it did not intervene in the market to support its currency it would not expect to transfer SDRs to obtain other currencies. The United States would be able to use SDRs effectively only if it could eliminate its currency liabilities by redeeming balances of U.S. dollars held by other participants.

Provisions were included in the First Amendment that were designed to protect the SDR against the harm that might be caused to it if participants were to rid themselves of their holdings of SDRs in favor of other assets. The First Amendment provided that although a participant’s use of its SDRs was not subject to prior challenge by any other participant or by the Fund, a participant was expected not to transfer its SDRs if it had no need to use reserve assets. The Fund might determine after the event that a participant had not observed the expectation, and the participant would then be subject to designation ahead of those participants that were subject to designation for economic reasons. The importance of the principle of need was evidenced by the limited and narrow circumstances in which the Fund could waive it.

The result of the principles of the First Amendment was a system that was subject to close direction by the Fund in some ways, particularly in the emphasis given to designation and the narrow scope for transfers by agreement. An objective of the Second Amendment is to make the SDR the principal reserve asset of the international monetary system. This objective is as much an aspiration as a normative principle. The Articles do not attempt to prescribe how the aspiration is to be realized, but the drafters agreed that the characteristics of the SDR should be improved and its uses extended, including uses by a wider range of potential holders in addition to participants and the Fund itself. For these purposes, the Fund has been endowed with a range of powers on numerous aspects of the SDR. Many of these powers can be exercised only by decisions taken with a high majority of the total voting power of the Fund’s members. These majorities are testimony to a division of opinion on whether some of the possible changes in characteristics or uses would strengthen or weaken the SDR. The majorities may be testimony also to differences of opinion about whether the SDR should be so attractive, and therefore so competitive with other reserve assets, as to create a strong inducement to hold SDRs instead of other assets. The Executive Board has already begun an examination of the advisability of exercising the Fund’s new powers.

Meanwhile, two changes of major importance in the operation of SDRs have come about immediately by virtue of the adoption of the Second Amendment. The first is that there is now full freedom for a participant to transfer SDRs to another participant by agreement and without the necessity for the consent of the Fund. The redemption of balances of an issuer’s currency with SDRs is no longer the subject of a special provision, because the authority for these transfers is part of the general authorization of transfers by agreement.

The other change is that in transfers by agreement, the participant transferring SDRs is no longer subject to the expectation that it will refrain from using them if it does not need to use reserve assets. Designation and the obligations it involves remain as essential legal elements of the system of SDRs, but the two changes relating to transfers by agreement have introduced a flexibility into the system that would have seemed improbable when the First Amendment was drafted.

Gold. In the Fund’s History of its first 20 years, this author discussed the law and practice of the Fund with respect to gold during that period under the heading “The Ambiguities of Gold” (Volume II, pp. 559–64). There may be fewer ambiguities in the provisions dealing with gold in the Second Amendment, but the future of gold is unclear, notwithstanding the agreed objective of the gradual reduction in its role in the international monetary system.

There may be fewer ambiguities in the provisions dealing with gold in the Second Amendment, but the future of gold is unclear, notwithstanding the agreed objective of the gradual reduction in its role in the international monetary system.

An indisputable consequence of the Second Amendment is that members are now free from former legal restraints in connection with the prices at which they may purchase gold. The Fund is completing the sale of 25 million ounces of gold by auction for the benefit of its Trust Fund. Sales are now made directly by the Fund in its capacity as Fund under a new power in the Articles, and not according to the former procedure of sales to members for replenishment of the Fund’s holdings of currency, resale by members to the Fund as Trustee, and sales by auction by the Fund in its capacity as Trustee. The Invitation to Bid in auctions before the Second Amendment precluded bids by members, or by agents on their behalf, at prices in excess of the then official price. The Fund continues to be able to specify the bidders whose bids would be acceptable, but is no longer bound as a result of its Articles to preclude bids by members at prices above the former official price. In its first auctions after the Second Amendment the Fund has not restricted the categories of acceptable bidders.

Purchases and repurchases: selection of currencies. Before the Second Amendment, the Fund had developed policies on the currencies that were appropriate for use in purchases and repurchases by members, but there was no express basis for these policies in the Articles. Although the Fund was entitled to sell any currency or, in certain circumstances, to prescribe the currency of repurchase, the successful operation of its policies depended on the collaboration of members. In particular, the Fund’s ability in practice to sell most currencies depended on the issuers’ willingness to exchange balances of their currencies that were sold by the Fund for currencies that would help purchasing members to solve the problems for which they had made their purchases from the Fund. Not all currencies can be used to support a member’s currency or are acceptable in international transactions. Many members, but not all, were willing to collaborate in the exchanges.

The Second Amendment provides that the Fund shall have policies on the selection of currencies for use in its transactions. Moreover, the Second Amendment requires members in certain circumstances to make exchanges of their currencies when sold by the Fund under these policies, which gives the Fund the assurance that it will be able to use all its holdings of currencies in its transactions. Finally, the Second Amendment contains a new obligation that requires members to provide their currencies to other members for the purpose of repurchase by them.

The Fund is required by the Second Amendment to formulate policies on the currencies that are appropriate for use in repurchase. In principle, all currencies are now acceptable by the Fund. Before the Second Amendment the Fund could accept only the currencies of members that had undertaken to perform the obligations of convertibility under Article VIII, Sections 2, 3, and 4, or balances of other currencies that were deemed to be balances of a convertible currency. Abrogation of this legal limitation on the acceptability of currencies in repurchase broadens the range of currencies that can be used in the activities conducted through the General Resources Account and improves the liquidity of the Fund.

New decisions

Surveillance over exchange arrangements. Freedom for members to choose their exchange arrangements does not mean freedom from all regulation. All members, whatever their exchange arrangements, are subject, from the date of the Second Amendment, to a broad obligation to collaborate with the Fund and other members to ensure the existence of orderly exchange arrangements and to promote a stable system of exchange rates. In addition, members are subject to certain special obligations relating to domestic and external policies that can affect the balance of payments and the exchange rate. The Fund must oversee the international monetary system in order to ensure its effective operation. The Fund must also oversee the compliance of members with their general and special obligations. In order to fulfill these functions, the Fund must exercise firm surveillance over the exchange rate policies of members and must adopt specific principles for the guidance of all members with respect to those policies. Each member must provide the Fund with the information necessary for this surveillance, and must consult with the Fund on the member’s exchange rate policies.

On April 29, 1977, the Fund adopted a decision on surveillance over exchange rate policies that became effective on the date of the Second Amendment. As a result, the Fund’s decision of June 13, 1974 on guidelines for the management of floating exchange rates has been abrogated. These guidelines applied only to the issuer of a currency that was floating independently in the sense that the currency was not pegged, within somewhat narrow margins, to another currency or composite of currencies. The new decision applies to all members whatever their exchange arrangements and balance of payments positions may be.

The new decision sets forth three principles for the guidance of members’ exchange rate policies, and for the rest deals in some detail with principles of, and procedures for, the Fund’s surveillance over these policies. The Fund’s objective will be to hold consultations with members at annual intervals, but discussions with a member can take place whenever certain defined situations occur. These situations are taken to be indications of a need to consider whether the principles for the guidance of exchange rate policies are being observed. The discussions can be initiated informally and confidentially by the Managing Director.

The decision is a complex one, and it will not be examined in detail here. It deals primarily with procedure, and at some length, but, as Sir Henry Maine concluded in his classic Ancient Law, in some societies substantive law is secreted in the interstices of procedure. Two legal changes took place when the Second Amendment entered into force. The first relates to the obligation of members to consult with the Fund. Under the Articles before the Second Amendment, members were bound to consult with the Fund annually if they were availing themselves of the transitional arrangements of Article XIV. A member was not bound to consult with the Fund once it had undertaken to perform the obligations of Article VIII, although it could be required by the Fund to consult as a condition of the Fund’s approval of practices for which approval was necessary under the Articles. Consultations with most, but not all, “Article VIII members” developed as a voluntary practice by analogy to consultations with “Article XIV members.” The Second Amendment makes no change in the obligations to consult under Article VIII and Article XIV, but the obligation of all members to consult under Article IV is a new development. The Fund has decided that when these consultations are held they will also embrace the consultations that are conducted under the other provisions.

The second change relates to decisions. A consultation under Article VIII does not end with a decision of the Executive Board, except when the Fund is approving or ceasing to approve a practice subject to its jurisdiction, in which event the decision is confined to this exercise of jurisdiction. Article VIII members were willing to enter into consultations of broad scope but not if they resulted in decisions of the Fund, because decisions would constitute judgments and they might be critical. Under Article IV, annual consultations with all members of the Fund, and interim consultations with some of them in certain circumstances, will be wound up with “conclusions” of the Executive Board. These conclusions may take various forms, which may develop in the light of experience, but it is understood that whatever their form they will be the legal equivalent of decisions of the Executive Board. The conclusions can have the influence of decisions, therefore, on all members, whether their balances of payments are in surplus or in deficit, and on the international community as a whole.

The law and practice on surveillance is an illustration of the diminishing importance of the distinction between Article VIII and Article XIV members. It is true that the Second Amendment preserves Article XIV and even liberalizes it, in the sense that it is detached from the postwar transitional period to which the original Articles referred. The provision permits a diminishing derogation, however, from the obligations of Article VIII, and it would not have been a radical action if the provision had been abrogated. The obligation of all members to consult under Article IV and the adoption of conclusions by the Executive Board are not the only evidence of the blurring of the two categories of members. The provisions of the Second Amendment on the acceptance of all currencies in repurchase, whether issued by Article VIII or Article XIV members, is a further illustration of this assimilation of the two classes.

Freedom for members to choose their exchange arrangements does not mean freedom from all regulation. All members, whatever their exchange arrangements, are subject, from the date of the Second Amendment, to a broad obligation to collaborate with the Fund and other members to ensure the existence of orderly exchange arrangements and to promote a stable system of exchange rates.

Freely usable currencies. The Second Amendment introduces the new concept of the “freely usable currency.” The definition of a “convertible currency” disappears, although what used to be called the obligations of convertibility under Article VIII have not been abrogated. The concept of “currency convertible in fact,” which was introduced into the Articles by the First Amendment as an element in the operation of the Special Drawing Account, also disappears.

A freely usable currency is defined by the Second Amendment as a member’s currency that the Fund determines (i) is, in fact, widely used to make payments for international transactions, and (ii) is widely traded in the principal exchange markets. Freely usable currencies have special roles in both the General Resources Account of the General Department and the Special Drawing Rights Department.

In the General Resources Account, a distinction is made for the purposes of both purchases and repurchases between currencies that are freely usable and those that are not. If a member’s currency purchased from the Fund is not freely usable, the member must exchange it, at the request of the purchasing member at the time of the purchase, for a freely usable currency. The member whose currency is purchased may select the freely usable currency it will supply in the exchange. If a freely usable currency is purchased from the Fund, the issuer has no obligation to exchange its currency for any other currency. If, however, the purchasing member intends to exchange the purchased currency for another currency, the member whose currency is purchased can insist that the exchange be made with the member, and it may select the freely usable currency that it will provide in the exchange.

If the Fund specifies for use in a member’s repurchase the currency of another member that is not freely usable, the issuer of that currency must provide it, on the request of the repurchasing member at the time of the repurchase, in return for a freely usable currency, which the member whose currency has been specified for repurchase may select. If a repurchasing member wishes to obtain a freely usable currency that has been specified by the Fund for repurchase, the member issuing the specified currency may require the repurchasing member to obtain the currency from it. The issuing member may require that a freely usable currency be provided in exchange. Under the Fund’s Rules and Regulations as revised on the occasion of the Second Amendment, the two members involved in this exchange may agree on the freely usable currency to be provided by the repurchasing member, but if they fail to agree, the Fund will select the currency. The Fund will pay due regard to the circumstances of the members, which means that it will try to act equitably by taking into account such circumstances as the currencies they hold in their reserves.

If an exchange is made as the result of any of the obligations that have been described above, it must be made at an exchange rate that accords with the Fund’s principle of “equal value.” This principle requires that the value, in terms of the SDR, of currency received by the parties to an exchange must be the same whatever the freely usable currency made available in the exchange and whatever the parties to the transaction. In addition, the exchange rate at which a currency that is not freely usable is exchanged for a freely usable currency must give the purchasing member the same value that it would have received had the freely usable currency been purchased from the Fund in the first instance. If the exchange is made for the purpose of repurchase, the repurchasing member must receive value that is equal to the value of the repurchase it is making. In short, in both purchases and repurchases, the value received by the purchasing or repurchasing member must be equivalent to the amount of any use of a reserve tranche or indebtedness undertaken to the Fund, or the amount of the indebtedness to be discharged, as shown on the Fund’s books.

The issuer of a freely usable currency has no obligation to exchange it when purchased from the Fund or to provide it for the purpose of repurchase. It is assumed, on the basis of the criteria that a freely usable currency must satisfy, that the currency can be exchanged or obtained in the market and at an exchange rate that will not be seriously affected, if it is affected at all, by these transactions.

In the Special Drawing Rights Department, the main importance of the freely usable currency is that it must be provided by a transferee of SDRs designated by the Fund to receive them from a transferor. The currency must be provided at a value in terms of the SDR that accords with equal value. The issuer of the currency provided in the transfer has no obligation to exchange it for any other currency that the transferor of the SDRs might prefer. The obligation of interconvertibility associated with a currency convertible in fact under the First Amendment (the French franc, the pound sterling, and the U.S. dollar) has disappeared. This obligation required each of the three issuers to convert its currency when provided for SDRs into any of the other currencies if requested by the recipient of the currency, at exchange rates in accord with equal value. For some years before the Second Amendment, interconvertibility was not in full operation. The issuers of five currencies (the Belgian franc, the deutsche mark, the Italian lira, the Mexican peso, and the Netherlands guilder) undertook to convert balances of their currencies when provided for SDRs into one of the three interconvertible currencies at equal value, but this undertaking also has been swept away by the Second Amendment. Nothwithstanding the changes in the law, according to the revised Rules and Regulations the Fund will continue to try to help a transferor to get the freely usable currency that it prefers.

The Fund has decided that initially the freely usable currencies for the purposes described above are the French franc, the deutsche mark, the Japanese yen, the pound sterling, and the U.S. dollar. The Fund can make additions to, or deletions from, the list at any time.

Repurchase obligations. Even after the Second Amendment, the Articles seek to avoid the impression that the legal analysis of the Fund’s transaction by which it makes its resources available to members is a form of lending. The language continues to refer to “purchase” and “sale” and not “loan” or “credit,” and to “repurchase” instead of “repayment.” There were reasons of both law and policy for this approach in the original Articles. Among the reasons of law were the absence of any fixed period for repurchase of the currency transferred to the Fund by a member when it purchased the currencies of other members, and the right of the Fund to sell the purchasing member’s currency. These sales would discharge pro tanto the member’s potential repurchase obligation.

[The] monolithic structure has been eroded in favor of a series of policies, with separate provision for repurchases, and separate charges, and even separate financing for some policies.

In lieu of repurchase at a fixed date the Articles imposed obligations under formulae based on the level of, and increases in, a member’s monetary reserves and in the Fund’s holdings of the member’s currency. These formulae gave rise to a body of rules, interpretations, and conventions that created dissatisfaction not only because of their complexity but also because their rigidity could produce obligations at times that were inconvenient for economic reasons. The formulae might have the reverse effect and not produce obligations at all within a period that could be considered temporary. In order to prevent an unjustifiably prolonged use of its resources, the Fund adopted a policy that called for repurchase within three to five years after a purchase, and expected members to represent, or to undertake when there was a legal basis for a commitment, that they would repurchase within this period if they were not required to repurchase sooner by operation of the formulae. When special policies on the use of the Fund’s resources were adopted, the practice was followed of expecting representations, or imposing commitments whenever legally possible, with respect to repurchase at fixed dates, sometimes beyond the basic period of three to five years.

The parallel systems of repurchase under formulae and under policies became unduly complicated, with the formulae becoming increasingly unpopular. This attitude and the practice of regarding the use of the Fund’s resources as credit in economic terms, except where the transaction was in the gold tranche, removed any inhibition about taking the opportunity of the Second Amendment to abolish the formulae for repurchase and to substitute three to five years in the Articles as the basic period for repurchase. In addition, the Fund was given authority to change that period and also to adopt other periods for special policies on the use of its resources.

The major modification in practice is not the adoption of fixed periods and the elimination of formulae. It is the inclusion in the Second Amendment of a primary principle, which the fixed periods reinforce because they will come into play only if the primary principle does not produce earlier repurchase. The principle was implicit in the Articles before the Second Amendment but was not applied in any systematic way. This principle is now embodied in a new provision, which the Fund must apply systematically. The provision declares that normally a member will be expected to repurchase after a purchase, other than after a reserve tranche purchase, as its balance of payments and reserve position improves. The expectation that a member’s repurchase will keep pace with the improvement in its position is not an obligation, but the expectation is converted into an obligation if the Fund represents to the member that it should repurchase because of an improvement.

To achieve uniform treatment of all members, the Fund has adopted a decision setting forth initial guidelines, the observance of which will give members the assurance that they are meeting the expectation with respect to repurchase. The criterion of an improvement is that a member’s position is judged by the Fund to be sufficiently strong to justify sale of the member’s currency or designation of the member to accept transfers of SDRs, but a member will not be expected to make any repurchase before a stated period after a purchase. A formula has been adopted to determine the amount of the repurchase that is expected, but a member may exercise an option to have the expectation fulfilled by the Fund’s sale of its currency or by some combination of repurchase and sale. It will be observed that a formula has been adopted, and even a formula based on reserves and movements in them, notwithstanding the abandonment of formulae by the Second Amendment. A member is not yet able to say, as does Don Adriano de Armado in Love’s Labour’s Lost, “I am ill at reckoning; it fitteth the spirit of a tapster.” The difference, however, is that any formula established as a policy need not be as complex as the old formulae. It can be modified by further decisions of policy if experience suggests the advisability of change.

Reserve tranche; charges. Under the Articles before the Second Amendment, the Fund had only limited powers to decide that members could make purchases under certain policies without depleting any gold tranche that might have been available. The gold tranche, which for good reason is now called the reserve tranche, is an asset that members can readily mobilize, for which reason they are often eager to retain it against the time when prompt encashment may be necessary. The Fund was authorized to permit the gold tranche to be safeguarded against depletion only in respect of purchases under the compensatory financing policy. Under the Second Amendment, the Fund is empowered to “exclude” purchases under any policies on the use of its resources from depletion of the reserve tranche. The Fund has exercised this power in relation to its policies on compensatory financing and buffer stock financing and the oil facilities of 1974 and 1975.

Before the Second Amendment, the Fund could levy charges on its holdings of a member’s currency only if they were in excess of a member’s quota. The result was that if a member made a purchase under the policy on compensatory financing without increasing the Fund’s holdings of the member’s currency above quota, no charges were payable on the holdings obtained by the Fund in the transaction. This situation has been changed by the Second Amendment, under which charges must be levied separately on holdings obtained under a special policy that is “excluded” in the sense described above, even though the Fund’s total holdings are not in excess of quota. The Fund has adopted decisions imposing charges on “excluded” holdings that apply without reference to the level of the Fund’s total holdings of a member’s currency.

This practice carries further a transformation in the original concept of the Fund, which was that there would be a single policy for the use of its resources, under which repurchase obligations would accrue according to the same formulae, and charges would be levied under a single schedule on total holdings above the level of quota. This monolithic structure has been eroded in favor of a series of policies, with separate provision for repurchase, and separate charges, and even separate financing for some policies. The image of the monolith has given way to what are some times referred to in the jargon of international finance as “separate windows.”

Anticipatory decisions

Method of valuation of the SDR. The Fund took numerous decisions before the Second Amendment because of the imminence of its adoption. Most of these decisions were necessary in order to put provisions of the amended Articles into operation. One decision, which provided for both an impending change and future changes in the “basket” method of valuation of the SDR, was anticipatory in a different way. The existing method of valuation of the SDR could have continued to apply after the adoption of the Second Amendment without any legal or operational difficulty, whatever might have been the philosophical problems of maintaining that method. One reason for adopting a new decision before the Second Amendment, however, was the feeling that if there was to be a revised method of valuation it should be part of the reform of the Fund that would be initiated by the Second Amendment.

A second reason was related to the special majority of total voting power that is now required for a change in the method of valuation of the SDR. Before the Second Amendment, a change could be made by a majority of the votes cast, provided that the legal fiction was preserved that the value given by the method represented gold value for the purpose of the provision defining the SDR in terms of gold. The Second Amendment abolishes the definition in terms of gold and gives the Fund authority to determine the method of valuation as it sees fit. A distinction is made, however, between two categories of decision affecting the method. Decisions can be adopted by a majority of 70 per cent of the total voting power, but if a change is determined by a majority of the votes cast to be a change in the principle of the method in effect or a fundamental change in the application of the existing method a majority of 85 per cent of the total voting power is required.

The second reason for a pre-amendment decision was the desire to rely on the necessity for a special majority for post-amendment decisions in order to emphasize the fact that a high degree of continuity could be expected in the method of valuation. A formula was adopted for future changes that would follow automatically from the formula, and therefore would not require the exercise of new discretion. The Fund could depart from the formula, but decisions would then be necessary, and could be taken only with the appropriate high majority.

The objective of continuity was not the only one that was sought in adopting the pre-amendment decision. A reasonable degree of adaptability, which would permit changes based on developing circumstances at measured but not brief intervals, coupled with predictability were other objectives. The method of valuation affects the value of the SDR as an asset held by participants and by the Fund. In addition, it is the unit of account of the Fund and of many other entities under a constantly growing number of treaties, statutes, and contracts. The objectives that have been pursued enhance the quality of the SDR both as an asset and as a unit of account.

The decision on the method of valuation adopted on March 31, 1978 provides for a change in the currencies in the basket and in their percentage weights. The change became effective on July 1, 1978. The basket continues to consist of 16 currencies, but 2 that were in the original basket do not appear in the revised basket and 2 newcomers are included. Both of the new currencies are issued by developing countries, which was cause for some satisfaction. The list of currencies and the amounts will be revised in accordance with a stated formula, with effect on July 1, 1983 and on the first day of each subsequent period of five years unless the Fund takes a different decision on the occasion of a revision.

The formula provides that the currencies shall be those of the 16 members that have the highest exports, by value, of goods and services during a defined period of five years, but, to prevent changes in the basket for insubstantial reasons, a currency will not be included in place of another currency unless the value of the exports of the issuer of the former currency exceeds that of the issuer of the latter currency by at least 1 per cent. The amount of each currency in the basket will be related to the proportion between the value of the balances of a currency held in the reserves of other members and of the exports of goods and services of the issuer of the currency and the total sum of the same values for all 16 currencies during the relevant period.

This article has concentrated on the immediate changes in the Fund after the Second Amendment. Even greater changes may lie ahead. These possibilities are recognized by the Second Amendment itself.

“On such a full sea,” said Brutus, “are we now afloat;

And we must take the current when it serves, Or lose our ventures.”

The continued emphasis in the Second Amendment on consultation and collaboration with the Fund and among members gives assurance that the current will be taken and the ventures not lost.

Finance & Development, September 1978
Author: International Monetary Fund. External Relations Dept.