1 The amendment and a report describing it are printed in IMF, Proposed Second Amendment to the Articles of Agreement of the International Monetary Fund: A Report by the Executive Directors to the Board of Governors (1976). This report, hereinafter cited as Report on Proposed Second Amendment, is reprinted at 15 ILM 499 (1976).

2 In accordance with Article XVII(a) of the present Articles of Agreement, the proposed second amendment must be accepted by three-fifths of the members, having four-fifths of the total weighted voting power before it can enter into force. The proposed second amendment can be accepted only in its entirety. Report on Proposed Second Amendment, supra note 1, at 85-87. After the proposed amendment becomes effective, future amendments will require acceptance by three-fifths of the members having 85% of the total weighted voting power. New Art. XXVIII. The original Articles of Agreement of the International Monetary Fund entered into force December 27, 1945. 60 Stat. 1401, 2 UNTS 39. The Articles were first amended effective July 28, 1969, at the time the provisions respecting special drawing rights (SDR) were introduced. 20 U.S.T. 2775. The Executive Branch in the United States has not treated the Articles of Agreement and amendments to them as treaties that require the advice and consent of the Senate but, instead, as executive agreements that require congressional collaborative efforts through legislation. See the joint Department of State-Treasury Department memorandum, “Constitutionality of the Bretton Woods Agreements Act,” in Bretton Woods Agreements Act: Hearings on H.R.3314 before the Senate Comm. on Banking and Currency, 79th Cong., 1st Sess. at 529 (1945). The Bretton Woods Agreements Act in Section 5, 22 U.S.C. §286-286k-l at 286c, provides that the President is not to accept any amendment of the Fund's Articles unless Congress authorizes that action. A bill to amend the Bretton Woods Agreements Act to authorize acceptance of the second amendment and to make other conforming changes in U.S. national legislation, H.R.1355, was passed by the House of Representatives on July 27, 1976. That bill and S.3454 were pending in the Senate as this article went to press. As of August 31, 1976, Bahrain, Bangladesh, Bolivia, Chad, Japan, the Philippines, Saudi Arabia, and Senegal had accepted the amendment.

3 For the text of new Article IV and of Schedule C, see Annexes I and II to this article, infra pp. 759-62.

4 Article IV before amendment, referred to in this article as “old” Article IV. For a general discussion of the par value system of old Article IV, see Gold, , The Legal Structure of the Par Value System, 5 Law & Pol. Int'L. Bus. 155 (1973)Google Scholar. See also IMF, The Role of Exchange Rates in the Adjustment of International Payments: A Report by the Executive Directors (1970).

5 Section 3 of old Article IV provided that the maximum and minimum rates for exchange transactions between currencies of members taking place within their territories should in the case of spot transactions not differ from parity by more than one percent. The United States, under Section 4(b) of old Article IV, was deemed to fulfill this obligation so long as it in fact freely bought and sold gold within the limits prescribed by the Fund. By Executive Board Decision No. 904-(59/32) (July 24, 1959), the Fund stated that it would not object to exchange rates which were within two percent of parity for spot transactions between a member's currency and the currencies of other members when the ,rates resulted from the maintenance of margins of no more than one percent from parity for a convertible currency. IMF, Selected Decisions of the International Monetary Fund (8th Issue 1976) 13 [hereinafter cited as Selected Decisions]. The par value system of the new Schedule C to the proposed amended Articles if implemented would permit margins of up to 4-½ percent from parity in spot transactions between members’ currencies unless a different margin is adopted by 85% of the total weighted voting power of the Fund. As we shall later see, the exchange rate regime set forth in Schedule C is a system that the Fund may but is not required to apply.

6 Section 5(a) of old Article IV provided: “A member shall not propose a change in the par value of its currency except to correct a fundamental disequilibrium.” The remainder of Section 5 established procedures whereby the Fund would concur in or object to the change. The Fund could not object to a change that did not exceed 10 percent of the initial par value. “Fundamental disequilibrium” was not defined in the Articles, but the practice of the Fund gave the words meaning. See IMF, The Role of Exchange Rates in the Adjustment of International Payments, supra note 4, at 47-51. If a member could correct a disequilibrium by techniques other than a change in exchange rates, the other measures if consistent with the Articles were generally to be preferred. Id. at 49. The Fund encouraged members to adopt stabilization programs involving, for example, controls of government budget deficits, price and wage inflation, and the size of the domestic money supply.

7 The Fund in September 1949 concurred in a devaluation of a group of European currencies, most devaluations being by 30.5%. The first phase of European reconstruction after World War II financed by the Marshall Plan was then drawing to a close. The importation into Europe of American made capital goods at the lowest cost in foreign exchange was no longer the critical feature in trade relations. In 1949 there was a need to open export markets for the manufactures of a reconstructed European industry. The devaluations were carefully orchestrated within the Organisation for European Economic Co-operation (OEEC) and the IMF. See 1 The International Monetary Fund 1945-1965, at 234-42 (J. Horsefield & M. de Vries, eds. 1969) and 2 id. 96-100. France made an unauthorized change in par value in 1948. Canada floated its currency for an extended period, that is, it let rates be determined by market forces without substantial governmental intervention in the market. Some other countries floated their currencies for brief periods before establishing new par values. These countries were the exception; most countries adhered to their Article IV obligations. See Gold, , Unauthorized Changes of Par Value and Fluctuating Exchange Rates in the Bretton Woods System, 65 AJIL 113 (1971)CrossRefGoogle Scholar.

8 The following European countries accepted the convertibility obligations set forth in Sections 2, 3, and 4 of Article VIII of the IMF Agreement effective February 15, 1961: Belgium, France, Federal Republic of Germany, Ireland, Italy, Luxembourg, the Netherlands, Sweden, and the United Kingdom. As of July 1976, 43 countries had accepted the convertibility obligations of Article VIII which prohibit currency restrictions on settlements and transfers respecting current international transactions. During the 1960's members of the Organisation for Economic Co-operation and Development (OECD) and other countries also reduced restrictions on capital movements.

9 The 1967 devaluation of the pound sterling is treated in 2 A. Chayes, T. Ehrlich, & A. Lowenfeld, International Legal Process 758-86 (1969). Exchange rate changes for other currencies in the early 1960's are discussed by Margaret G. de Vries in Chapter 5 of 2 The International Monetary Fund 1945-1965, supra note 7. Strains on the par value system in the late 1960's are described by Mrs. de Vries, the IMF's historian, in a forthcoming history of the Fund during the period 1966-1971, to be published by the Fund.

10 See Anatomy of an International Monetary Crisis, in Federal Reserve Bank of Chicago, Business Conditions, May 1971, at 12. See also New York Times, May 6, 1971, at 1 and 71; and Wall Street Journal, May 6, 1971, at 1, 3, 19.The events of May 5 were preceded by actions of European states and the IMF designed to persuade the United States to devalue the dollar. In April 1971, the Council of Ministers of the European Community debated whether the Community should take a united stand favoring a higher official price for gold which was understood to mean a devaluation of the dollar. Washington Post April 28, 1971, at A-19. On May 9, 1971, the Council of the Community adopted a resolution which in substance decided that the Federal Republic of Germany, the Netherlands, and Belgium should not raise the par values of their currencies and that instead the United States should be forced to devalue. Council Res., May 9, 1971, on the monetary situation, Official Journal of the European Communities, No. C58/1 (May 10, 1971), reprinted in European Communities, Compendium of Community Monetary Texts 55 (1974). See also Norton-Taylor, Currency Crisis Strains Solidarity, European Community, No. 146, at 12 (June 1971). It is widely believed,, although not officially reported, that efforts of the Managing Director of the IMF, Pierre-Paul Schweitzer, during 1970 and 1971 to persuade the U.S. authorities to devalue the dollar led the United States to oppose his reappointment as Managing Director. He was not reappointed when his term came up for renewal in 1973.

11 The President's Radio and Television Address to the Nation Outlining a New Economic Policy for the United States, Aug. 15, 1971, 7 Weekly Comp. Presidential Docs. 1168, 1170 (1971); and press conference of John M. Connally, Secretary of the U.S. Treasury, Aug. 15, 1971, in New York Times, Aug. 17, 1971, at 16.The August crisis may have been precipitated in part by a congressional report issued August 6, 1971. That report, after reviewing the U.S. balance-of-payments position, stated that “the United States may have no choice but to take unilateral action to go off gold and establish new dollar parities.” Action now to Strengthen the U.S. Dollar: Rep. of the Subcomm. on Int'L. Exchange and Payments of the Joint Economic Comm., 92d Cong., 1st Sess. at 13-14 (1971).

12 Exchange markets were closed the week of August 16. When they reopened on August 23, Austria, Belgium, Denmark, Italy, Japan, the United Kingdom, and a number of other countries announced that they would not necessarily maintain exchange dealings within one percent of parity. The Netherlands and the Federal Republic of Germany announced that their currencies, floating since May, would continue to float. Canada continued to float its currency. France introduced a system of dual exchange markets in which capital and current transactions were separated. Many countries, particularly developing countries, continued to conduct exchange transactions on the basis of official parities. 23 Int'L. Financial News Survey 261-62, 269-70 (1971).

13 Communiqué of the Ministerial Meeting of the Group of Ten issued Dec. 18, 1971, in 23 Int'L. Financial News Survey 417 (1971). The United States agreed to devalue the dollar by 7.89% in relation to gold. Italy and Sweden agreed to establish central rates for their currencies that represented a 1% reduction in their values. The par values of the French franc and British pound would remain unchanged. Belgium, the Federal Republic of Germany, Japan, and the Netherlands agreed to establish central rates that represented upward adjustments in the values of their currencies. Switzerland, not a member of the Fund, agreed to raise the par value of its franc. Canada would continue to float its dollar. S. Rep. No. 92-678 on S.3160 [Modification in Par Value of the Dollar], 92d Cong., 2d Sess. 4 (1972).

14 E.B. Decision No. 3463-(71/126)(Dec. 18, 1971); Selected Decisions, supra note 5, at 14, stated that IMF members using central rates and/or the wider margins of fluctuation described in that decision (up to 2-?% from parity or from the central rate in relation to the intervention currency) would be “deemed” to be in compliance with Section 4(a) of old Article IV. This is the collaboration provision quoted infra, p. 735.The devaluation of the U.S. dollar and the 1971 realignment of exchange rates are described in S. Rep. No. 92-678 supra note 13. See also 24 Int'L. Financial News Survey 137 (1972). As a consequence of the realignment of exchange rates among the Group of Ten, other members of the IMF proposed changes in par values or established central rates for their currencies.

15 See 839 Parl. Deb., H.C. (5th ser.) cols. 877-87, 1700-814 (1972); IMF Press Release No. 928 #8 (June 30, 1972); and New York Times, June 29, 1972, at 60. The pound in the period since that announcement has never returned to a fixed rate.

16 The events of early 1973 and their immediate causes are described in Bank for International Settlements, 43rd Annual Report 1972/73 at 23-25 (1973).

17 Statement of George P. Schultz, Secretary of the U.S. Treasury, Feb. 12, 1973, in [1973] IMF Survey 56. See also id. at 49-53.

18 See Press Communiqué of the EEC Council of Finance Ministers, March 12, 1973, and Press Communiqué of the Ministerial Meeting of the Group of Ten and the European Economic Community, March 16, 1973, in [1973] IMF Survey 88.See also the statement of the Managing Director of the IMF id. at 82.

19 See Statement of the Council of the European Communities of March 12, 1973, [1973] IMF Survey 88; European Communities, Compendium of Community Monetary Texts 63 (1974); and Agreement of April 10, 1972, between the Central Banks of the Community on the narrowing of the margins of fluctuation between Community currencies. Id. 60. See infra, p. 749.

20 See IMF, Annual Report, 1975, at 23-33. E.B. Decision No. 4233-( 74/67 )S (June 13, 1974), as amended by Decision No. 4261-(74/78)S (July 1, 1974); IMF, Annual Report, 1974, at 116-17, defines the exchange value of the SDR in terms of a basket consisting of portions of sixteen currencies. Prior to these decisions the exchange rate of the dollar had determined the exchange value of the SDR.

21 See, e.g., the papers collected in Approaches to Greater Flexibility of Exchange Rates: the Burgenstock Papers (G. Halm ed. 1970).

22 E.B. Decision No. 4232-(74/67) (June 13, 1974); Selected Decisions, supra note 5, at 21.

23 Board of Governors Resolution 27-10. IMF, Summary Procs., 1972, at 353.

24 The quotation is from the speech of Jean-Pierre Fourcade, French Minister of Economy and Finance, to the Board of Governors of the IMF in September 1975. IMF, Summary Procs., 1975, at 92, 96.

France, throughout the negotiation of the new Article IV, favored a par value system. Much thought was given by the French Government to the “numeraire” of the future system. In a speech articulating French policy in September 1973, Valéry Giseard d'Estaing, then finance minister and subsequently President of France, suggested that the numeraire be based on both the SDR and gold. The SDR should serve as a reserve asset, standard of measurement, and means of payment. It could be valued in terms of a package of currencies in which the strongest currencies would carry greater weight than the others. He said gold is “still appreciated and sought after” but did not suggest its precise role in the future system. IMF, Summary Procs., 1973, at 71, 74-76. He emphasized that floating exchange rates should require special authorization granted only on an exceptional and temporary basis.

A year later the French finance minister, then Jean-Pierre Fourcade, stated that the SDR should be the common denominator of the new exchange system with its value “defined and maintained in such a way as to obviate any deterioration of the instrument.” He believed that gold should play an “active role” in settlements among central banks. He urged that gold be treated “like any other monetary asset” and that central banks should be free to buy and sell gold at a price derived from the market. France, although floating its own currency at the time, opposed the principle of floating rates as in its view unfavorable to the development of world trade. IMF, Summary Procs., 1974, at, 90, 96-99.

Mr. Fourcade in a speech to the IMF's Board of Governors in September 1975, after the breakdown that summer of negotiations for a new Article IV and two months before the Rambouillet conference, declared: “We favor the creation of a new trading and reserve unit whose value, issue, and use will be determined by concerted decisions of the member countries of the Fund. We agree that the special drawing right should be the center of the new order.” He stated that France did not urge a return to the gold standard system. France's primary concern was to achieve a return to stable exchange rates, which could take place by stages, but it was essential not to mistake the objective. Floating carried the risk of partitioning the world into rival, protected zones. IMF, Summary Procs., 1975, at 92, 95-101.

25 The policy options from a conceptual point of view that were open to the United States are explored in C. F. Bergsten, the Dilemmas of the Dollar: the Economics and Politics of United States International Monetary Policy, especially 491-559 (1975).

The U.S. official position appears to have shifted during the negotiation of the new Article IV. A paper prepared prior to March 1973 accepted the principle of a common denominator system.The principal concern of the paper was to assure that obligations to adjust an exchange rate would be symmetrical—that is, that states in balanceof- payments surplus would have an obligation to raise the par values of their currencies and would be subject to pressures at least as effective as pressures on states in balanceof- payments deficit to maintain economic discipline or to devalue their currencies. The United States was opposed to gold as a common denominator. A country could float its currency, but its behavior would be subject to more stringent standards than those applicable to other countries. Economic Report of the President, January 1973, at 123-31 and 160-74.See also IMF Summary Procs., 1972, at 34, 38.

After the introduction of widespread floating in March 1973, U.S. officials gave greater attention to the treatment of floating rates in the exchange system then being negotiated. In June 1973 U.S. officials still, however, assumed that the new exchange arrangements would be based upon par values. There was greater appreciation of the usefulness of floating rates to deal with currency speculation and abrupt changes in the world economy, but it was thought that floating would be transitional. Paul A. Volker, Under Secretary of the Treasury for Monetary Affairs, in testimony before a congressional committee in June 1973 said:

Present [floating] arrangements are not a substitute for agreed long-range reform. The issues involved in long-range monetary reform go far beyond the question of exchange rate practices. At the most general and fundamental level, the question is one of developing those agreed codes of conduct necessary for governing behavior in an interdependent world

…. a country floating beyond a brief transitional period should be required to observe agreed standards of behavior in other respects—including intervention—to assure the consistency of its action with the basic requirements of the adjustment process and of a cooperative order.

How Well Are Fluctuating Exchange Rates Working? Hearings before the Subcomm. on Int'l. Economics of the Joint Economic Comm., 93d Cong., 1st Sess. 147 at 151-52 (1973). See also testimony of Mr. Volker and Arthur F. Burns, Chairman of the Federal Reserve Board, in International Monetary Reform: Hearings before the Subcomm. on Int'l. Finance of the House Comm. on Banking and Currency and the Subcomm. on Int'l. Economics of the Joint Economic Comm., 93d Cong., 1st Sess. (Nov/Dec. 1973). Both officials continued to expect a return to stable exchange rates.

Pressure for a change in the U.S. position was brought to bear by Representative Henry S. Reuss and other members of Congress. In a report in January 1974, the Subcommittee on International Economics of the Joint Economic Committee recommended:

In the drafting of an agreement to reform the international monetary system, the U.S. monetary authorities should insist that each IMF member retain the option of letting its currency float in exchange markets without the need to obtain any advance authorization from Fund authorities.

The report also recommended that for the “forseeable future” the dollar should continue to float in exchange markets. Making Floating Part of a Reformed Monetary System: Rep. of the Subcomm. on int'L. Economics of the Joint Economic Comm., 93d Cong., 1st Sess. 3, 10 (1974). The position favoring an unequivocal right to float was adopted by U.S. officials in the IMF negotiations.

26 Communiqué of March 27, 1973, in International Monetary Reform: Documents of the Committee of Twenty (IMF Committee on Reform of the International Monetary System and Related Issues [Committee of Twenty]) at 214, 215 (1974). That communiqué was drafted in the immediate aftermath of the events summarized at pp. 726-27 of this article and before the significance of those events was generally appreciated. The statement that the Committee never discussed the exchange rate system in any depth was made by Tom de Vries, Alternate Executive Director of the IMF (Netherlands), in his article, Jamaica, or the Non-reform of the International Monetary System, 54 Foreign Affairs 577, at 585 (1976).

27 International Monetary Reform, supra, note 26 at 3-48, especially 4, 8, 11, 12, 33-37. Under an illustrative example in the report, a country would have to seek approval of the IMF's Executive Board in order to adopt a floating rate. The report spells out illustrative criteria to be taken into account by the Board in determining whether or not to grant approval.

28 See the Per Jacobbson Foundation lecture favoring managed floating given by Conrad J. Oort, Treasurer-General of the Netherlands, Steps to International Monetary Order: The Exchange Rate Regime of the Future (IMF, 1974), summarized in [1974] IMF Survey 342.

29 Statement by William E. Simon, Secretary of the U.S. Treasury, in International Monetary Reform and Exchange Rate Management: Hearings before the Subcomm. on Int'l. Trade, Investment and Monetary Policy of House Comm. on Banking, Currency and Housing and the Subcomm. on Int'l. Economics of Joint Economic Comm., 94th Cong., 1st Sess. 128 at 130 (1975).

30 The drafts of Article IV considered during 1975 have not been published by the Fund. Portions of drafts, including alternative language, appear in Annex II of European Communities, Seventeenth Report on the Activities of the Monetary Committee, Doc. II/44/76-E, final (March 15, 1976).

31 The Interim Committee of the Board of Governors on the International Monetary System was established by Board of Governors Resolution 29-8. IMF, Summary Procs., 1974, at 364. This committee, which succeeded the Committee on Reform of the International Monetary System (Committee of Twenty), was charged with negotiating unresolved issues and guiding the Executive Directors as they considered drafts of amendments to the Articles.

32 De Vries, supra note 26, at 588-89. See infra note 41, respecting the meaning of the phrase, “stable system of exchange rates.”.

33 11 Weekly Comp. Presidential Docs. 1292-300 (1975).

34 De Vries, supra note 26, at 589.

35 Letter of Gold Joseph to the author, Feb. 6, 1976. The reference is to 1 Boswell's Life of Johnson 463 (G. Hill ed., rev. by F. Powell; Oxford Univ. Press, 1934).

36 See the transcript of the press conference of H. Johannes Witteveen, the Managing Director, April 2, 1976, excerpted in [1976] IMF Survey 116-21. Mr. Witteveen did no more than recite the language of the new Article IV and interpretations already given to it by French and U.S. officials.

37 Report on Proposed Second Amendment, supra note 1, at 12-15. The report clarifies the phrase “with due regard to its circumstances.” See infra, p. 738. The report repeats a point publicly emphasized by U.S. officials and which is in the text: If a par value system is introduced in accordance with Schedule C, a member retains the right to choose its own exchange arrangements which need not be based on par values. See infra, p. 753.

38 While the purpose clauses in Article I of the IMF Agreement make no reference to capital movements and Article VI authorizes restrictions on capital movements, the preambular language of the new Article IV states that an “essential purpose” of the international monetary system is to provide a framework that facilitates exchanges of capital.

39 Polak, , The Fund after Jamaica, 13 Finance and Development, No. 2 at 7, 8 (June 1976)Google Scholar.

40 When the United States by letter of August 15, 1971, informed the Fund that the United States no longer freely bought and sold gold in settlement of international transactions, the U.S. authorities explicitly recognized the obligations of old Section 4(a) and stated that the United States would continue to comply with that provision. 23 Int'L. Financial News Survey 261 (1971). IMF Board of Governors Resolution No. 26-9 of October 1, 1971, adopted in an effort to maintain order in the aftermath of the U.S. announcement used the language of Section 4(a). IMF, Summary Pbocs., 1971, at 331.

A variety of decisions of the Executive Board during the period 1971-1976 made reference to old Section 4(a): E.B. Decision No. 3463-(71/126) (Dec. 18, 1971) and No. 4083-(73/104) (Nov. 7, 1973) on central rates and wider margins of fluctuation; E.B. Decision No. 4232-(74/67) (June 13, 1974) relating to floating exchange rates; and E.B. Decision No. 4134-(74/4) (Jan. 23, 1974) on consultations on members’ policies. Selected Decisions, supra note 5, at 14-30 and 144. See also Gold, , The Duty to Collaborate with the International Monetary Fund and the Development of Monetary Law, in Law, Justice, and Equity 137 (Code Holland, R. & Schwarzenberger, G. eds. 1967)Google Scholar.

41 It could be argued that during 1973-1975, when world oil prices increased dramatically, exchange system stability was maintained and orderly exchange arrangements continued, even though exchange rates changed very significantly. The rates in the floating system of the time adapted themselves to changes in the underlying conditions brought about by higher oil prices.

42 Report on Proposed Second Amendment, supra note 1, at 12.

43 E.B. Decision No. 4134-(74/4) (Jan. 23, 1974); Selected Decisions, supra note 5, at 144.

44 See e.g., the reference to the decision in the United Kingdom's letter of December 18, 1975, in support of a stand-by arrangement, infra note 59.

45 The Managing Director of the Fund on April 2, 1976, in a briefing to the press on the proposed amendment package, did not stray from the actual language of the new Article IV and the interpretative statements previously made by U.S. and French negotiators. See supra note 36. The IMF Executive Board's report on the amendments similarly does not mention any concrete applications to be given the words of subsections (i) and (ii).

46 Convention on the Organisation for Economic Co-operation and Development, 12 U.S.T. 1728.

47 Treaty Establishing the European Economic Community. Quotations are from the official English text. [1973] Gr. Brit. T. S. No. I-Pt. II (CMND. 5179-11).

48 Report on Proposed Second Amendment, supra note 1, at 12. The phrase “with due regard to its circumstances” was added to the U.S.-French draft of the new Article IV when it was considered by the IMF Executive Board in December 1975. The fact that this language was added would suggest that IMF members were of the view that subsection (i) of Section 1 did impose obligations.

49 In particular situations other provisions of the Articles may also provide authority for oversight or initiatives by the Fund (references are to the proposed amended articles): Section 3(a) of Article V relating to stand-by arrangements and Fund policies for the use of its resources; consultation practice under Articles VIII and XIV relating to currency restrictions and other governmental policies; Section 7 of Article VIII calling for collaboration on policies respecting reserve assets; Article XXII that contemplates making the SDR the principal asset of the international monetary system; Article XXIX granting the Fund broad powers to interpret the Articles of Agreement; and Section 8 of Article XII giving the Fund authority to communicate its views to members.

Articles permitting the imposition of various sanctions—such as Section 5 of Article V, Section 1 of Article VI, and paragraph 8 of Schedule C (denial of use of financial resources), Sections 2 and 3 of Article VII (scarce currency restrictions), Section 2 of Article XXIII (suspension of right to use SDR's), and Section 2 of Article XXVI (ineligibility to use resources and compulsory withdrawal)—may also provide authority in certain situations. See Gold, , “Pressures” and Reform of the International Monetary System, N.Y.U.J. Int'L L. & Pol. 423 (1974)Google Scholar.

50 See Gold, , To Contribute Thereby To … Development. . .“: Aspects of the Relations of the International Monetary Fund with its Developing Members, 10 Colum.J. Transnat'L. L. 267, 298-301 (1971)Google Scholar. See also Mr. Gold's comments in 2 The International, Monetary Fund 1945-1965, supra note 7, at 557-59; and in The Effectiveness of International Decisions at 90-94, 467-70 (S. Schwebel ed. 1971).

51 E.B. Decision No. 1034-(60/27) (June 1, 1960); Selected Decisions, supra note 5, at 139, 140-41.

52 Gold, ”… To Contribute Thereby To ….Development …” supra note 50.

53 Article XXX(b) of the proposed second amendment defines “stand-by arrangement.” The definition is in accord with the Fund's previous practice.

Section 3 of Article V of the IMF Agreement relates to the conditions governing the use by members of the Fund's general resources. The first paragraph of Section 3under the proposed amendment provides for the Fund to adopt policies on the use of its resources including policies on the use of stand-by arrangements. Stand-by arrangements have been used by the Fund since as early as 1952. Legal aspects of stand-by arrangements are discussed in J. Gold, The Stand-by Arrangements of the International Monetary Fund (1970).

54 The letter submitted by the United Kingdom in December 1975 in support of a stand-by arrangement is an example. The letter stated the government's policies for the period of the stand-by on such matters as anticipated rate of inflation and methods of controlling inflation, size of wage rate increases to be allowed, enforcement of price controls, planning and control of public expenditure, size of public sector borrowing, rate of domestic credit expansion, use of import restrictions, floating exchange rate policy, and prediction of when the current account of the balance of payments would move into surplus. Letter of Denis Healey, Chancellor of the Exchequer, to H. Johannes Witteveen, Managing Director of the IMF, December 18, 1975. A copy of the letter, released for publication January 13, 1976, is in the library of the House of Commons. The Fund on December 31, 1975, approved the United Kingdom's request for a stand-by arrangement authorizing purchases of currencies from the Fund's general resources equivalent to 700 million special drawing rights and the purchase of currencies equivalent to SDR 1 billion in the oil facility. [19761 IMF Survey 1.

55 The U.K. pound sterling closed slightly above $2.00 at the end of November 1975. This was a record low at the time. The Wall Street Journal, Dec. 1, 1975, at 7, said:

British monetary authorities, however, have made it clear that they won't jeopardize their efforts to pull Britain out of its economic slump by resisting the pound's basic decline.

On Friday, November 28, 1975, the Bank of England reduced its interest rate on loans to commercial banks. That action had the purpose of stimulating domestic demand. Did not the bank's action and official attitudes toward the decline in the pound's rate have an effect on the exchange markets?

By May of 1976 the pound had declined below $1.80. When the pound touched a new low of $1,777 on May 21, the Bank of England raised the minimum lending rate to financial institutions. The Wall Street Journal, May 24, 1976, at 7, reported that the Bank of England raised the rate to prevent the pound from declining further even though the interest rate change would raise the cost of domestic borrowing for capital investment, which was not an effect desired by U.K. authorities.

Another example: On February 25, 1976, Italian authorities announced that as of March 1 the Bank of Italy, which had previously allowed the lira to float downward, would intervene in the markets to support the lira. The return to a “controlled” float was accompanied by domestic measures to reduce bank liquidity. This was done by increasing the discount rate and increasing minimum reserves.

All of these actions, both “allowing” a currency rate to decline and taking different actions that halted or retarded a decline, involved “manipulation” of an exchange rate as that word is used in subsection (iii).

56 E.B. Decision No. 4232-(74/67) (June 13, 1974); Selected Decisions, supra note 5, at 21, 27.

57 Hearings on H.R. 13955 [To Provide for Amendment of the Bretton Woods Agreements Act] before the Subcomm. on Int'l. Trade, Investment and Monetary Policy of the House Comm. on Banking, Currency and Housing, 94th Cong., 2d Sess. 6 at 10 (1976).

C. Fred Bergsten, speaking before the same subcommittee on June 3, 1976, stated with respect to Japan's practices in the spring of 1976: Japan is likely to run the largest trade surplus in its history this year, yet has been buying dollars massively for the past five months to keep the exchange rate of the yen from rising significantly and thus hurting its competitive position… When countries intervene in the exchange market to check a strengthening of their currencies, as the Japanese are now doing so heavily, they increase their reserves. Thus reserve increases, like reserve declines, are an indicator that countries may be following inappropriate exchange rate or internal economic policies (emphasis added).

Id. 97, 104-05.

58 C. Fred Bergsten has commented on the actions of the British and Italian authorities in allowing the rates for their currencies to decline as far as they did in the spring of 1976 (recall note 55):

The British and Italian depreciations almost certainly exceed the amounts justified by their underlying competitive positions, enhancing their trade balances, and there is strong evidence that Britain deliberately pushed its rate down to achieve just such an advantage. History suggests that other countries will not be slow to emulate these moves when the effects begin to pinch, although the French have exercised admirable restraint so far. Such moves violate the obligation of countries, contained in Section l(iii) of Article IV of the proposed Amendments 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.

Supra note 57, at 104. Mr. Bergsten added with respect to the U.S. actions in the spring of 1976:

The United States has set a stellar example over the past six months by moving into temporary trade deficit while leading the recovery of the world economy,thus supporting the recoveries of others. But if U.S. trade deficits are perpetuated by unfair practices by other countries—either to push their exchange rates down (e.g., Britain) or to keep their rates from going up (e.g., Japan)—the United States will have no choice but to retaliate in kind. Id.

The factual context would need to be more fully developed before concluding that these actions of Italy, Japan, and the United Kingdom violate subsection (iii). Balanceof- payments maladjustment and unfair competition are not easy to assess. The situations described would appear to be appropriate for intensive consultations.

59 The “Guidelines for the Management of Floating Exchange Rates,” adopted in June 1974 are illustrative of such a statement. E.B. Decision No. 4232-(74/67) (June 13, 1974); Selected Decisions, supra note 5, at 21. However, to the extent that the 1974 guidelines assumed that floating would be a temporary practice and that “target areas” for exchange rates were desirable, the guidelines are inconsistent with the right of members under the new Article IV to choose their own exchange arrangements. The guidelines have not been well observed. The letter of Denis Healey, Chancellor of the Exchequer, to H. Johannes Witteveen, Managing Director of the IMF, December 18, 1975, requesting a stand-by arrangement for the United Kingdom, supra note 54, made no explicit reference to the 1974 “guidelines for floating” decision. Its only comment on management of the floating rate for the pound was:

[T]he Government intends to continue the flexible exchange rate policy which the United Kingdom has pursued since June 1972. This policy has permitted the maintenance of the competitive position of U.K. manufactures in world markets and this remains necessary to assist the achievement of the required improvement in the current account of the balance of payments. Intervention in the exchange market will continue as hitherto in order to ensure that orderly conditions are maintained. The U.K. authorities stress their support of the Executive Board Decision of January 23, 1974, on consultations on Members’ Policies under Present Circumstances, and reiterate their intention to collaborate with the Fund in accordance with the provisions of [old] Article IV, Section 4(a).

E.B. Decision No. 4134-(74/4) of January 23, 1974, mentioned in the letter, is quoted in full supra pp. 736-37.

60 Statement of William E. Simon, Secretary of the Treasury, in Hearings on H.R.139S5, supra note 57, at 11; statement of Edwin H. Yeo III, Under Secretary of the Treasury for Monetary Affairs, in Hearings on S. 34S4 before the Senate Comm. on Foreign Relations, 94th Cong., 2d Sess. (June 22, 1976) (mimeographed) at 7.

61 [1976] IMF Survey 158-59. Saudi Arabia and Qatar allow margins up to ±7.25 percent which is almost like floating.

62 E.B. Decision No. 4233-(74/67)S (June 13, 1974), as amended by Decision No. 4261-(74/78)S (July 1, 1974); IMF, Anxual Report, 1974, at 116-17.

63 Statement of William E. Simon in Hearings on H.R. 1395S, supra note 57, at 9. Statement of Edwin H. Yeo III in Hearings on S. 3454, supra note 60, at 5.

64 IMF, Annual Report, 1975, at 23-24.

65 [1976] IMF Survey 158-59.

66 Brazil, Chile, Colombia, and Uruguay adjust their pegged rates at relatively frequent intervals on the basis of selected criteria. [1976] IMF Survey 36-37.

67 The exchange restrictions of each IMF member are summarized in IMF, Annual Report on Exchange Restrictions. The author in a forthcoming book discusses legal aspects of exchange restrictions.

68 [1976] IMF Survey 35-39.

69 Resolution of March 21, 1972, of the Council of the European Communities and of the Representatives of the Governments of the Member States, Official Journal of the European Communities, No. C38/3 (April 18, 1972); and Agreement of March 10, 1972, between the Central Banks of the Member States of the Community on the narrowing of the margins of fluctuation between Community currencies. European Communities, Compendium of Community Monetary Texts 33, 60 (1974). See Wittich, & Shiratori, , The Snake in the Tunnel, 10 Finance and Development, No. 2 at 9 (June 1973)Google Scholar.

The “wider margins” decision referred to in the text is E.B. Decision No. 3463-(71/ 126) (Dec. 18, 1971), supra note 14.

70 Council of the European Communities statement of March 12, 1973, on maintaining narrow margins among participating currencies while releasing central banks from having to intervene in the fluctuation margins of the U.S. dollar. European Communities, Compendium Of Community Monetary Texts 63 (1974); 1973 IMF Survey 88.

If the exchange rates between each “snake” currency and the U.S. dollar were chartered over a time period and the charts overlaid each other, the image of a snake would appear. The exchange rates among the snake currencies would fluctuate within a narrow band (the snake's body), while that body would squirm up and down over time in relation to the dollar.

71 See How the Snake Lost its Charm, The Economist (London), March 20, 1976, at 69. Ireland's pound is pegged to the U.K. pound.

72 Guideline 1 of the June 1974 “Guidelines for the Management of Floating Exchange Rates” and its commentary stated substantially the same thoughts. E.8. Decision No. 4232-(74/67) (June 13, 1974); Selected Decisions, supra note 5, at 21.

73 These concepts find expression in Guideline 2 of E.B. Decision No. 4232. Id.

74 Guidelines 3 and 4 of E.B. Decision No. 4232 used the concept of a “target zone.” The assumption was that fixed exchange rates are desirable and the establishment of a target zone might be an intermediate step between floating and the establishment of a fixed or stable rate. The new Article IV does not contain a bias toward fixed rates. This is indeed one of the principal potential differences between the 1974 guidelines and guidelines respecting floating that the Fund may adopt in the future under Section 3 of the new Article IV. The U.S. Secretary of the Treasury has stated emphatically:

Fund surveillance of members’ policies should not be aimed at trying to calculate a zone, or target, or right rate for individual currencies… . Such an approach is, in my view, inconsistent with the new Article IV….

Statement of William E. Simon in Hearings on H.R.13955, supra note 57, at 11. See also statement of Edwin H. Yeo III in Hearings on S.34S4, supra note 60, at 7.

75 Problems with respect to the selection and use of intervention currencies are mentioned in Guideline 6 of E.B. Decision No. 4232, supra note 72.

76 The text of Schedule C appears at p. 761 infra. The exchange rate regime of that schedule is not elaborated in the text of this paper, because in the author's view that regime is unlikely to be adopted in the near future. Further, as indicated in the text, the author believes that the use of Section 2(c) provides a wiser and more flexible approach to achieving uniformity in exchange arrangements.

77 Report on Proposed Second Amendment, supra note 1, at 13.

78 “Purposes of the Fund” refers to Article I and, also it is submitted, to the “recognizing” clause at the beginning of Article IV.

79 The right to choose other exchange arrangements is explicitly recognized in paragraph 3 of Schedule C. U.S. officials in testimony before congressional committees have emphasized this right that members retain upon the introduction of a par value system. See statement of William E. Simon in Hearings on H.R.139S5, supra note 57, at 12; and statement of Edwin H. Yeo III in Hearings on S.3454, supra note 60, at 8-9.

While under paragraph 3 of Schedule C a member has a right to decline to establish a par value for its currency and instead to choose other exchange arrangements, the termination of a par value once established is subject to the conditions stated in paragraphs 8 and 9 of that schedule. The Fund can object to a termination of a par value, but only by a decision supported by an 85 percent majority of the total voting power. The Fund does not have authority to object to a member withdrawing from general exchange arrangements established under Section 2(c) of Article IV.

80 See generally J. Gold, Interpretation by the Fund, IMF Pamphlet Series No. 11 (1968); the section “interpretation” by Mr. Gold in 2 the International Monetary Fund 1945-1965, supra note 7, at 567; and Gold, , Weighted Voting Power—Some Limits and Some Problems, 68 AJIL 687, 696-99 (1974)Google Scholar.

81 The Federal Reserve Bank of New York every three months issues a report on its actions in the foreign exchange markets. These narrative and statistical reports are published under the heading “Treasury and Federal Reserve Foreign Exchange Operations” in the Federal Reserve Bulletin and in the Federal Reserve Bank of New York's Monthly Review. The IMF should adopt decisions requiring all members to provide this kind of information, only on a more frequent basis.

82 The U.S. Federal Reserve System maintains reciprocal currency arrangements with the central banks of Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Italy, Japan, Mexico, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and with the Bank for International Settlements. These are arrangements that provide ready access to large volumes of foreign currencies when needed for market intervention. In some cases these currency swap arrangements provide for mutual sharing of gains and losses when the transactions are subsequently reversed. The reports mentioned in the preceding footnote provide information on the U.S. Federal Reserve's transactions under bilateral swap arrangements with foreign central banks. The author in a forthcoming book discusses legal aspects of reciprocal currency arrangements.

83 The author understands that in the past the Fund has encountered difficulties in obtaining some of the information listed in these paragraphs. Under the new Article IV, the Fund has clear authority to obtain this information. In some countries this information is available to central banks but not readily available in finance ministries.

84 The Board of Governors may by 85% of the total weighted voting power establish a Council of Governors. New Article XII, Section 1, and Schedule D. The Council if established will be composed of the same number of councillors as there are executive directors. Councillors will be senior to executive directors. They must be governors of the Fund, ministers in their governments, or persons of comparable rank.

The idea is that these persons in senior positions in their governments will be in a position to commit their governments to joint courses of action and to assure that decisions taken by the Council that require actions by governments will in fact be carried out. A concern weighing against establishment of the Council as a permanent organ of the Fund is that it carries the danger that the Fund's activities will be affected to a greater extent than in the past by political considerations.

85 E.B. Decision No. 4076-(73/101) (October 13, 1974); IMF, Annual Report, 1974, at 102.

86 IMF, Annual Report, 1975, at 59.

87 Statement of William E. Simon in Hearings on H.R.139S5, supra note 57, at 10.