The Second Amendment of the Fund's Articles of Agreement

International Monetary Fund

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1978
• eBook ISBN: 9781451920857

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A General View

Need for Reform

The drafting of the Second Amendment of the Articles of Agreement of the International Monetary Fund was a more prolonged and more complicated task than the preparation of the First Amendment, which was designed mainly to provide for the creation of the special drawing right (SDR) and which became effective on July 28, 1969. The invention of an international reserve asset was complicated by the difficulties of so novel an undertaking, but a unifying idea provided a framework within which the negotiators were compelled to concentrate. Moreover, the First Amendment, when agreed, could be attached to the original Articles in a form almost resembling a separate treaty, without requiring major changes in the provisions of the original Articles. The Second Amendment, even if less exciting intellectually, was more complex because it consisted of an anthology of projects without a unifying theme. Such an approach encourages the introduction of further proposals and the fragmentation of opinion. In addition, it complicates the task of drafting because the modifications that are required infiltrate the Articles as a whole and cannot be added to them in single file.

In order to extract the general characteristics of the second revision of the Articles of Agreement of the Fund from the detail in which they are embedded and to understand them, it is useful to recall the events that led to international agreement on the Second Amendment. They began with the announcement by the President of the United States on August 15, 1971 that the monetary authorities of his country no longer undertook to convert foreign official holdings of U.S. dollars. Many people still regard that event as an illustration of the one-line poem by the contemporary American artist and poet, Joe Brainard: “With history piling up so fast, almost every day is the anniversary of something awful.”

The U.S. dollar had been at the center of the international monetary system created at Bretton Woods in the summer of 1944 because, when the Articles took effect, the United States had undertaken to maintain the value of its currency in terms of gold by engaging in transactions in gold for dollars with the monetary authorities of other members. These members were able to maintain the par values of their currencies in accordance with the Articles by intervening in the exchange markets with U.S. dollars or with other currencies convertible into dollars. Now, the center did not hold. The United States, which had taken the main initiative to create the par value system and which had exercised the main influence in the negotiation of it, had served notice that the system was inadequate.

As soon as the shock of August was absorbed, it was agreed that the international monetary system would have to be subjected to close scrutiny and possible revision. On October 1, 1971, the Board of Governors of the Fund adopted a resolution requesting the Executive Board to study and report on all aspects of the system, and to propose, if possible, the texts of any amendments of the Articles that the Executive Board considered necessary to give effect to its recommendations.

On December 18, 1971, the Group of Ten¹ concluded the Smithsonian agreement, under which new exchange relationships were to be established for the currencies of members of the Group. On the same day, the Fund adopted a decision on central rates and wider margins for exchange transactions. The feeling at that time and for some time to come was that there would be a return to something like a par value system, although with greater flexibility than had been possible under the original Articles, and that the Fund’s decision of December 18, 1971 might be the model for the future system. Flexibility, it soon became apparent from the views expressed on behalf of many members, would have to include the validation of floating rates in particular situations and subject to the jurisdiction of the Fund, although neither the circumstances in which floating would be permissible nor the precise content of the Fund’s jurisdiction was ever clarified.

Negotiation of Reform

In August 1972, the Executive Board, responding to the resolution of October 1, 1971, transmitted to the Board of Governors a report entitled Reform of the International Monetary System. This report became, in effect, the agenda for the Committee of Twenty. The word “agenda,” however, gives little impression of the imaginative quality and range of the report, even though it avoided specific proposals and contained no texts of possible amendments.

The Board of Governors had already decided, in July 1972, to establish the Committee of Twenty, the formal name of which was the ad hoc Committee of the Board of Governors on Reform of the International Monetary System and Related Issues. The Committee of Twenty was the outcome of much discussion among members of the Fund about the best way in which to negotiate reform. It is, of course, a common phenomenon that international negotiations begin with what is sometimes referred to as the problem of the shape of the table. On this occasion, the fact that negotiations were to be conducted on a subject that would be as much political as economic was one reason that induced members to establish a new body composed of ministerial and other representatives who had political or official responsibilities in their own countries. The composition of the Committee was determined by the 20 constituencies of members of the Fund that appointed or elected Executive Directors. Each constituency appointed one member of the Committee, but behind him were ranged numerous associates and advisors, so that many more than 20 members of the Fund were present in the chamber in the person of their ministers or officials.

Although the words “ad hoc” were meant to express the insistence of some members and some Executive Directors that the Committee should not become a permanent addition to the structure of the Fund, a successor, the Interim Committee of the Board of Governors on the International Monetary System, was appointed in October 1974, when the Committee of Twenty ceased to function. Among the reasons for this development were the demonstrated usefulness of the Committee of Twenty, the conclusion that full reform of the international monetary system would be evolutionary and should be supervised by a reconstituted committee, and the desire to strengthen the Fund by creating a permanent body within its structure composed of persons with political or official responsibilities in their own countries. The Interim Committee may be replaced in its turn by the Council. The provisions that would govern the Council have been influenced by the resolutions establishing the two Committees and by the experience of those bodies. The Council would be an organ of the Fund with powers to take decisions under the Articles, in contrast to the two Committees, which could have advisory functions only. In the hierarchy of organs the Council would rank between the Board of Governors and the Executive Board, but would be closer in spirit to the Board of Governors because it would be composed of Governors, ministers, or persons of comparable rank and would supervise the management and adaptation of the international monetary system. The Council would be a surrogate for, but smaller than, the Board of Governors, which is already (August 1, 1978) composed of 134 Governors and grows with each increase in the membership of the Fund.

The Committee of Twenty and its subsidiary body, the Deputies, who were responsible for preparing the work of the Committee, engaged in discussions during the period September 1972 to June 1974. These discussions among ministers, among senior officials, and in working groups of technical experts, of members of the Fund were remarkable for the quality of the analysis of possible systems.

The Committee of Twenty wound up its work with a report to the Board of Governors and an Outline of Reform² dated June 14, 1974. The Committee, and the assumptions on which it had proceeded, had been overtaken by events that forced the negotiators to the conclusion that agreement on a new system was impossible. Surging inflation and the impact on members’ balances of payments of higher prices for the importation of oil were among the forces that made the future too uncertain for more than an indication of the general direction in which the Committee believed that the system could evolve in the future. The language is guarded: the modal verb is “could” and not “would” or “should.” Was the effort that culminated in the Outline expended in vain? The question recalls an anecdote related by A. J. Liebling, who was crossing the Atlantic on board a convoyed merchantman during the Second World War, when, in a sudden lurch of the vessel, the master’s dentures shot into the ocean. “Don’t worry,” he reassured Liebling, “I know where they are.” We know where to find the ideas of the Outline and its Annexes.

The Outline consisted of two parts. In Part I the Committee set forth the elements of a reformed system on which it had been able to agree. T...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Prefatory Note
• A General View
• Some First Effects of the Second Amendment
• Footnotes