Chapter

1 The International Legal Environment of Exchange Rates

Author(s):
Joseph Gold
Published Date:
March 1990
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Original Articles of IMF and Amendments

The Articles of Agreement (Articles) of the International Monetary Fund (IMF) and the practices of the IMF under that treaty are the principal sources of public international law on the exchange rates of the currencies of member states (members) of the IMF. By the end of September 1990, there were 154 members, among which a great variety of political and economic systems were represented. The most notable nonmembers were the Union of Soviet Socialist Republics and Switzerland, but the latter country and a number of other countries have applied for membership.

The Articles became effective, and the IMF came into existence, on December 27, 1945. The First Amendment took effect on July 28, 1969. Its main purpose was to provide for the creation of a new monetary reserve asset, the special drawing right (SDR), to supplement the monetary reserve assets of members if the IMF finds that a long-term global need for supplementation exists.1 The Second Amendment came into force on April 1, 1978. It was a thorough revision of the Articles to adapt them to a world in which the par value system of the original Articles had broken down and could not be restored, at least in the circumstances that were likely to prevail for the indefinite future, and also to bring the treaty up to date in the light of experience. A Third Amendment has been proposed that will increase the sanctions available to the IMF for breaches of obligation by members.

The par value system was the outstanding feature of the original Articles. It was unprecedented as a system for regulating the exchange rates of currencies under a multilateral treaty administered by an international organization. The treaty was designed to give legal form to two basic principles on which international agreement had been reached: exchange rates were properly matters of international concern, and exchange rates should be stable although not rigid. To give expression to these principles, one of the purposes of the IMF was formulated as follows:

To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.2

A corresponding obligation was imposed on members in the following form:

Each member undertakes to collaborate with the Fund to promote exchange stability, to maintain orderly exchange arrangements with other members, and to avoid competitive exchange alterations.3

It will be seen that a new concept has been substituted for “exchange stability” by the Second Amendment, as a consequence of which the obligation of members quoted above no longer appears in that form in the Articles. It may seem odd though that the purpose of the IMF quoted earlier in the preceding paragraph has not been modified. The explanation is the desire of members to avoid the controversy that would be provoked by proposals to amend any of the purposes of the IMF. Some members might suspect that the role of the IMF would be changed too radically, or at least changed in ways that could not be foreseen, if the original purposes were amended. In the result, changes, except for a few of a purely presentational character, have not been made in the purposes. Members have regarded the language as tolerable notwithstanding the changes in the rest of the Articles. But this attitude should not create the impression that the changes in the Articles made by the First and Second Amendments have been less than fundamental. Indeed, it may be that normally members will consider that only fundamental changes justify the arduous task of negotiating amendments and getting them accepted by governments in accordance with whatever constitutional processes must be followed.

Par Value System Under Original Articles

The par value system of the original Articles provided for only one form of exchange arrangement. Each member had to propose a par value for its currency in terms of gold or the United States dollar of the weight and fineness in effect on July 1, 1944. A relationship to the U.S. dollar of that date was permissible as an indirect way of defining the par value in terms of gold, because the par value of the U.S. dollar of July 1, 1944 was itself expressed in terms of gold. The indirect expression was authorized because under the laws of some countries the external value of the national currency was defined in relation to the U.S. dollar.

The initial par value of a currency under the original Articles had to be based on rates of exchange prevailing on the sixtieth day before the Articles entered into force, so as to avoid any manipulation of the exchange rates in order to establish an unfairly competitive par value. Either a member or the IMF could inform the other that a par value for the member’s currency based on the rates prevailing at the specified date was open to question, and then the two had to try to agree on a suitable par value within a limited period.4

Stability without rigidity required that par values should be adjustable, although not for insubstantial reasons. The Articles provided, therefore, that a member, but only a member and not the IMF, could propose at any time a change in the existing par value of the member’s currency. A member was not to propose a change unless the proposal was made to correct a fundamental disequilibrium. This basic criterion was not defined by the Articles and was not explicated by the IMF for almost a quarter of a century, and even then not with authoritative legal effect, which gave the IMF much flexibility in reacting to members’ proposals. The member was required to consult the IMF on a proposed change, and was not to put the proposed new value into operation without such consultation.

The IMF had to respond to a proposal either by concurring in or objecting to it, but the IMF was bound to concur if it was satisfied that the proposed change was necessary to correct a fundamental disequilibrium. This language was understood to mean that the proposed change must be neither insufficient nor more than enough to correct the fundamental disequilibrium. If the proposed change was insufficient, the consequence was likely to be a further change or changes, which would conduce to exchange instability. A change that was more than sufficient to correct a fundamental disequilibrium was objectionable because it would constitute a competitive alteration, against which the Articles were strongly opposed, as is apparent from the provisions of the original Articles that have been quoted earlier in this discussion. Finally, the Articles forbade a member from putting a proposed change in par value into effect without the concurrence of the IMF.5

An objective of the original Articles, therefore, was to preclude changes in par values that would undermine stability either because the changes were likely to be frequent or because they were unfair and therefore likely to provoke compensating changes by other members.

To prevent the instability of exchange rates, it was necessary to do more than regulate initial par values and changes in par values. Exchange rates might fluctuate unacceptably unless the regulation of them was related to parities. A parity between any two currencies was the ratio between them derived from the par value of each in terms of gold as the common denominator of the par value system. Each member was obliged to ensure that exchange rates in spot exchange transactions involving its currency and taking place within its territories were not more than 1 percent of the parity above or below the parity with the currency for which the member’s currency was exchanged. In other exchange transactions (such as forward exchange transactions or transactions in coins and notes), the permissible margins were to be no more in excess of the margins for spot exchange transactions than the IMF considered reasonable.6 The idea was that the par value should not be undermined by a member’s direction that what would otherwise be spot exchange transactions were to be carried out in some other way at rates unrelated to the spot rate.

To ensure that the margins were respected, each member had to adopt “appropriate measures.”7 They were not specified, but they had to be consistent with the Articles. The most obvious appropriate measure was intervention by a member’s monetary authorities in its exchange market by buying or selling the member’s currency in exchange for a foreign currency or foreign currencies at or within the limits of the margins. Most often, a member’s intervention currency was the U.S. dollar, but some members intervened with currencies, like sterling or the French franc, that were convertible into the U.S. dollar.

The original Articles did mention one practice that would be “deemed” to be an appropriate measure for performance of the obligation to employ appropriate measures. The practice was described as one according to which a member “whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold.” An undertaking by a member to engage in the practice was voluntary on the member’s part. To comply with the practice, a member needed to buy and sell gold only with the monetary authorities of other members, when approached by them for this purpose. The currency for which gold was bought and sold was the currency of the member that undertook to follow the practice, and the price of the gold had to respect the narrow limits prescribed by the IMF above and below the official (namely, the par value) price of gold in the member’s currency.8

The theory of the provision was that a member engaging in the practice was maintaining the value of its currency in a proper relationship to gold as the common denominator of the par value system. Furthermore, the member was enabling other members that intervened with the member’s currency to perform their exchange rate obligations. If a member intervened in the exchange market because its currency was appreciating, the monetary authorities might obtain more of the intervention currency than they wished to hold in their monetary reserves. They could exchange the excess for gold in transactions with the member that had undertaken to follow the practice as its appropriate measure. If a member needed its intervention currency for the purpose of intervention because its currency was depreciating, the member could obtain it by selling gold to the member that had given the undertaking.

As noted above, the prices in both purchases and sales by the member following the practice of engaging in gold transactions were closely tied to the official price of gold for the member’s currency. Therefore, another member could intervene in the exchange market to purchase the currency as its intervention currency at exchange rates consistent with the margins for exchange transactions, safe in the knowledge that the member could sell the currency for gold at a price approximately equivalent to the exchange rate. Similarly, a member that sold gold to the member undertaking the practice on gold transactions knew that the currency obtained in this way could be used in intervention at exchange rates approximately equivalent to the price the member had received in selling its gold.

The theory of this arrangement was that the exchange rates between the intervention currency and other currencies would be in accord with the Articles. The members issuing these other currencies would observe the proper margins for exchange rates in their intervention activities. In this way, the exchange rates for the intervention currency, as well as the exchange rates for the currencies of intervening members, would be consistent with the Articles. Similarly, in exchange transactions between currencies supported by use of the same intervention currency the exchange rates would be compatible with the obligations of members under the Articles.9

The arrangement described above was deemed to be fair even though the member that issued the intervention currency was released from any need to intervene directly in the exchange market. Indeed, it was desirable that the member should not intervene in the market, because if it did its intervention policies might be inconsistent with the policies of members using the currency for intervention. The result might be instability. Nevertheless, the arrangement was defended as fair because both the member that issued the intervention currency and the members that intervened with the currency used their monetary reserves for the purpose of maintaining stable exchange rates in accordance with the Articles. The intervening members used the intervention currency they held in their reserves and if necessary sold gold to obtain it. The member that issued the intervention currency used the gold it held in its reserves if another member presented, for purchase with gold, balances of the currency obtained in intervention.

The member that had proposed this arrangement for inclusion in the original Articles was the United States. It wished to go on following the practice of not intervening in the exchange market but of standing ready on request by other monetary authorities to redeem their balances of U.S. dollars with gold. If exchange rates for its currency in its market crossed the limits of permissible margins, the United States could not be held accountable, because in principle it was undertaking to maintain the value of its currency in relation to gold by being ready to engage in gold transactions for its currency with other members. If exchange rates between the dollar and another member’s currency were not consistent with the permissible margins, responsibility had to be attributed not to the United States but to the other member. That member was not engaging in gold transactions with the United States, or not in sufficient volume, to enable the member to prevent transgression of the margins. If a member failed to ensure that the margins for exchange transactions involving its currency were observed—that is to say, did not maintain the proper fixed rates and allowed its currency to float—that member, and not the United States, had to be regarded as violating its obligations under the Articles.

As had been widely expected, the United States was the only member that undertook the practice of freely buying and selling gold for its currency with the monetary authorities of other members for the settlement of international transactions. This undertaking became the de facto primary norm of the par value system. Confidence in the stable gold value of the dollar and in the strength of the U.S. economy induced other members to seek a suitable relationship to the U.S. dollar as the guiding principle for their external monetary policies and as the way to maintain the stability of their domestic economies.

For many years, the stability of exchange rates, at least for most currencies, including the currencies of the major industrialized countries, was assured. Eventually, however, stability became rigidity. The strains on the par value system and the persistent disequilibrium in the balance of payments of the United States led that country to give notice on August 15, 1971 that its undertaking to engage in gold transactions with the monetary authorities of other members of the IMF was terminated. The United States did not adopt other “appropriate measures” to ensure that exchange rates between the dollar and other currencies would respect the permitted margins above and below parities.

The Second Amendment

A period of confusion and disorder followed. An attempt was made to institute fixed exchange rates once again, although not without de facto modifications of the original par value system to take account of the practices that were being followed, most of which were not in accordance with the provisions of the Articles. This effort failed, and negotiations were then conducted to amend the Articles. At first, the objective of the negotiations was agreement on a more flexible par value system, often described as a regime of stable but adjustable par values. When it became clear that economic conditions would prevent the immediate introduction of such a system, or the assured establishment of it after an interim period, agreement was reached on the radically different provisions of the Second Amendment. These provisions can be deemed to be the most important consequence in international law of the fluctuation of exchange rates that followed the U.S. action of August 15, 1971 and the abandonment in 1973 of the attempt to substitute a de facto regime of fixed rates.

The United States was the leading advocate of the exchange rate provisions of the Second Amendment, and the leading opponent of any language that might imply a commitment to the restoration of a par value system in some form at a future date. Such a system would require the United States and other members to contemplate arrangements for the official settlement of balances of their currencies held by the monetary authorities of other members. The United States, having shed this responsibility, was unwilling to accept once again any legal or moral commitment of this character.

Nevertheless, the Second Amendment does contain, in Schedule C, provisions on a par value system that would be more flexible than the system of the original Articles. Furthermore, the conditions that would have to be satisfied before the par value system of Schedule C could be called into operation include “arrangements for intervention and the treatment of imbalances.” The latter clause is a soft reference to settlement. The full conditions that must be satisfied appear in Article IV, Section 4 of the present Articles. This provision, as well as the full provisions of Article IV, which is entitled “Obligations Regarding Exchange Arrangements,” are reproduced in this chapter as Appendix A. It should be noted that the IMF can determine that the conditions are satisfied for calling the par value system of Schedule C into operation only if a decision to that effect is supported by 85 percent of the total voting power of the membership of the IMF. The United States is the only member with sufficient voting power of its own to prevent the IMF from taking the decision, which the United States can do either by casting a negative vote or by abstaining from a vote.

Present Provisions on Exchange Arrangements

In contrast to the original Articles, which authorized members to install and maintain only one kind of exchange arrangement, a par value in terms of gold as the common denominator, the present Articles permit members to choose whatever exchange arrangement they prefer, subject to one exception, and to change the choice at any time. The arrangement that a member may not adopt is maintenance of an external value for its currency in relation to gold. The exception is one manifestation, of which there are many in the Articles, of the determination of members to reduce the role of gold in the international monetary system.

The Articles mention four specific categories of exchange arrangements that members may select.10 The first two are maintenance by a member of an external value for its currency in terms of the SDR or in terms of another denominator of the member’s choice. An arrangement that falls into the latter category is pegging a currency to another member’s currency. The third and fourth specified categories consist of cooperative arrangements by which members maintain the external value of their currencies in relation to the value of either the currency of another member or the currencies of other members. The arrangements between France and certain members of the French franc zone and the European Monetary System (EMS) are examples of arrangements that fall into the third and fourth categories, respectively.

The Articles then go on to refer to a portmanteau concept: “other exchange arrangements of a member’s choice.” If the word “other” had been deleted, it would have been redundant to mention any of the four specific categories. They have been mentioned primarily to put beyond doubt, which could scarcely have been raised, that European members could continue to adhere to the European narrow margins arrangement (the “snake”).11 It was replaced later by the EMS.

For the choice of an exchange arrangement, a member does not need the prior or subsequent concurrence of the IMF. Whatever the choice may be, a member must observe the obligations set forth in Article IV, Section 1. The fundamental obligation of a member under Article IV, Section 1 is to collaborate with the IMF and with other members to ensure the existence of orderly exchange arrangements and to promote a stable system of exchange rates. The IMF would be able to decide that a member was failing to fulfill any of its obligations under Article IV, Section 1 and then apply such measures against the member as are available for the violation of obligations imposed on members by the Articles.12

The text that sets forth this obligation is followed, as can be seen from Appendix A, by the words “In particular” before certain obligations that are then specified. These words create an ambiguity, because though the four particular obligations that are listed spell out the obligation of collaboration in some detail, it is not clear whether they exhaust that obligation or whether it remains a reservoir from which more can be drawn. The latter of these alternative interpretations is preferable.

The four specific obligations include two that have a direct effect on exchange rates and two that relate to the domestic policies of members that have an indirect effect. Therefore, the latter two obligations mentioned here are expressed in “soft” language, because of the delicacy of an international obligation that affects the freedom of members to choose their domestic policies. No such delicacy is observed with respect to the first two obligations, because exchange rates have a direct impact on international relations and they are, therefore, at the heart of the IMF’s regulatory authority as an international monetary organization. These two obligations are formulated in mandatory and not hortatory language.

Of the two firmer obligations, the one that is more specific, and was conceived to be the most fundamental of the new provisions on exchange rates, provides that each member shall

(iii) 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.

The provision recognizes two forms of manipulation: of exchange rates and of the international monetary system. In addition, two separate objectives of manipulation are recognized: preventing adjustment of the balance of payments and gaining an unfair competitive advantage. Two forms of manipulation are recognized because it was thought to be unlikely that smaller countries would be powerful enough to manipulate the international monetary system, but they would not need to have such power to manipulate the exchange rates for their currencies in order to impose unfair disadvantage on other countries. But both forms of manipulation are prohibited for all members, whether powerful or not, and whether they are motivated by one or the other of the two objectives.

A Stable System

As this monograph deals with some legal consequences of fluctuating exchange rates, it is important to emphasize a critical difference between the present and the earlier Articles. Before the Second Amendment, the Articles referred to “exchange stability.”13 This expression was considered unsatisfactory when the Second Amendment was being negotiated because exchange rates had become too rigid in the later years of the par value system, and this resistance to change had impeded the adjustment of balances of payments and the achievement of sustainable equilibrium. The expression “a stable system of exchange rates”14 was substituted for the earlier expression, except in the statement of purposes in Article I for the reason already explained.

The aim of the present Articles is not the persistence of exchange rates at approximately the same level for a currency, which became a characteristic of the par value system in operation. Even in concept, the par value system, with its emphasis on fundamental disequilibrium as the criterion for changes in par values, assumed that changes would be desirable and justifiable only when other policies and measures consistent with the Articles would fail to eliminate maladjustment in the balance of payments and fail to promote the other purposes of the IMF. The drafters of the Second Amendment were fearful of the immobility of exchange rates. They chose instead to refer to the stability of a “system” of exchange rates as the desirable objective.

The rationale of the new approach is evident from other aspects of Article IV, Section 1.15 The thought expressed in the provision is that orderly underlying conditions are necessary for attaining and preserving financial and economic stability. Therefore, members should pursue the policies, which are mainly domestic, that will bring about the orderly underlying conditions necessary for financial and economic stability. It was assumed that in an environment of such stability, the exchange rates of all currencies will be what they should be, and they in their turn will contribute to the maintenance of orderly underlying conditions. Exchange rates will constitute “a stable system” of rates in this sense.

A stable system of exchange rates does not preclude the fluctuation of exchange rates. If orderly underlying conditions change, exchange rates should be allowed to reflect the change. If underlying conditions are disorderly, the consequences are likely to be erratic fluctuations of exchange rates in disorderly exchange markets. The observed tendency of exchange rates to change, even in the right direction, is to move too far.

Categories of Exchange Arrangements

Table 1 in Appendix B to this chapter sets forth the categories of exchange arrangements that were in force on June 30, 1990 as a result of the choices made by members. There was nothing extraordinary about the situation on that date. The categories were not ordained by the Articles, so that new categories can emerge at any time without legal impediment. Furthermore, a member is able, without legal restraint, to change its choice at any time, so that the member’s exchange arrangement then falls into another category. A member is similarly free to adapt its exchange arrangement within the same category.

Table 1.Exchange Arrangements as of June 30, 19901
PeggedFlexibility Limited vis-à-vis a Single

Currency or Group of Currencies
More Flexible
Single currencyCurrency compositeAdjusted

according to a

set of

indicators
Other managed

floating
Independently

floating
U.S. dollarFrench francOtherSDROtherSingle currency2Cooperative

arrangements3
Afghanistan4

Angola

Antigua and Barbuda

The Bahamas4

Barbados

Belize

Djibouti

Dominica

Dominican Rep.

Ethiopia

Grenada

Guyana4

Haiti

Iraq

Jamaica

Liberia4

Nicaragua4

Oman

Panama

Peru4

St. Kitts and Nevis

St. Lucia

St. Vincent and The Grenadines

Sudan4

Suriname

Syrian Arab Rep.4

Trinidad and Tobago

Yemen
Benin

Burkina Faso

Cameroon

Central African Rep.

Chad

Comoros

Congo

Côte d’Ivoire

Equatorial Guinea

Gabon

Mali

Niger

Senegal

Togo
Bhutan (Indian rupee)

Kiribati (Australian dollar)

Lesotho4 (South African rand)

Swaziland (South African rand)

Tonga (Australian dollar)
Burundi

Iran, Islamic Rep, of4

Libya6

Myanmar

Rwanda

Seychelles

Zambia4
Algeria

Austria

Bangladesh4

Botswana

Cape Verde

Cyprus

Fiji

Finland7

Hungary Iceland8

Israel9

Jordan

Kenya

Kuwait

Malawi

Malaysia8

Malta

Mauritius

Morocco7

Mozambique

Nepal

Norway8

Papua New Guinea

Poland4

Romania

Sao Tome and Principe

Solomon Islands

Somalia

Sweden12

Tanzania

Thailand

Uganda

Vanuatu

Western Samoa

Zimbabwe
Bahrain5

Qatar5

Saudi Arabia5

United Arab Emirates5
Belgium

Denmark

France

Germany

Ireland

Italy

Luxembourg

Netherlands

Spain
Chile4,10

Colombia

Madagascar

Portugal
China4

Costa Rica4

Ecuador4

Egypt4

Greece

Guinea

Guinea Bissau

Honduras4

India10

Indonesia

Korea

Lao People’s Dem. Rep.

Mauritania

Mexico4

Pakistan

Singapore

Sri Lanka

Tunisia

Turkey

Yugoslavia11
Argentina

Australia

Bolivia

Brazil

Canada

El Salvador4

The Gambia

Ghana4

Guatemala

Japan

Lebanon

Maldives

New Zealand

Nigeria4

Paraguay

Philippines

Sierra Leone

South Africa4

United Kingdom

United States

Uruguay

Venezuela

Zaïre

Current information relating to Democratic Kampuchea is unavailable.

In all cases listed in this column, the U.S. dollar was the currency against which exchange rates showed limited flexibility.

This category consists of countries participating in the exchange rate mechanism of the European Monetary System. In each case, the exchange rate is maintained within a margin of 2.25 percent around the bilateral central rates against other participating currencies, with the exception of Spain in which case the exchange rate is maintained within a margin of 6 percent.

Member maintains exchange arrangements involving more than one exchange market. The arrangement shown is that maintained in the major market.

Exchange rates are determined on the basis of a fixed relationship to the SDR, within margins of up to ± 7.25 percent. However, because of the maintenance of a relatively stable relationship with the U.S. dollar, these margins are not always observed.

The exchange rate is maintained within margins of ± 7.5 percent.

The exchange rate is maintained within margins of ± 3 percent.

The exchange rate is maintained within margins of ± 2.25 percent.

The exchange rate is maintained within margins of ± 5 percent.

The exchange rate is maintained within margins of ± 5 percent on either side of a weighted composite of the currencies of the main trading partners.

Member maintains a fixed relationship of Din 7 = DM 1.

The exchange rate is maintained within margins of ± 1.5 percent.

Current information relating to Democratic Kampuchea is unavailable.

In all cases listed in this column, the U.S. dollar was the currency against which exchange rates showed limited flexibility.

This category consists of countries participating in the exchange rate mechanism of the European Monetary System. In each case, the exchange rate is maintained within a margin of 2.25 percent around the bilateral central rates against other participating currencies, with the exception of Spain in which case the exchange rate is maintained within a margin of 6 percent.

Member maintains exchange arrangements involving more than one exchange market. The arrangement shown is that maintained in the major market.

Exchange rates are determined on the basis of a fixed relationship to the SDR, within margins of up to ± 7.25 percent. However, because of the maintenance of a relatively stable relationship with the U.S. dollar, these margins are not always observed.

The exchange rate is maintained within margins of ± 7.5 percent.

The exchange rate is maintained within margins of ± 3 percent.

The exchange rate is maintained within margins of ± 2.25 percent.

The exchange rate is maintained within margins of ± 5 percent.

The exchange rate is maintained within margins of ± 5 percent on either side of a weighted composite of the currencies of the main trading partners.

Member maintains a fixed relationship of Din 7 = DM 1.

The exchange rate is maintained within margins of ± 1.5 percent.

Table 1 includes ten categories of exchange arrangements, with numerous variations within most categories, not all of which are mentioned in the footnotes. In three categories, members pegged their currencies to a single currency: U.S. dollar, French franc, Indian rupee, Australian dollar, or South African rand. By far the largest group of countries that pegged their currencies to a single currency chose the U.S. dollar for this purpose. In two categories, currencies were pegged to the SDR or to another composite of currencies. In two further categories, the peg was to a single currency or to a group of currencies, but the peg was accompanied by limited flexibility that allowed exchange rates to fluctuate to some extent in relation to the currency or currencies of the peg. The category of limited flexibility in relation to a group of currencies carries the subtitle “Cooperative arrangements.” The countries that chose this kind of arrangement were the partners in the EMS. Finally, three categories were gathered together under a single heading, because the currencies were subject to more flexible exchange arrangements. These categories carry the subtitles “Adjusted according to a set of indicators,” “Other managed floating,” and “Independently floating.”

Two features of the tabulation deserve special notice. First, the currencies of the leading industrialized members were either floating independently16 or linked to each other in the cooperative arrangement of the EMS and floating jointly against all other currencies. Second, most developing countries had pegged or managed exchange rates, and relatively few allowed their currencies to float freely. The exchange rates of numerous currencies were fixed in relation to another currency or to a composite of currencies. The results of pegging are that if currencies A and B are pegged to currency C, the exchange rates between currencies A and C, B and C, and A and B will fluctuate only within the narrow margins that are typical of fixed exchange rates in uncontrolled exchange markets. But the exchange rates between currency A or currency B and currencies not pegged to currency C will float jointly with currency C against all such other currencies.

The countries that peg their currencies to a single currency—most often the U.S. dollar or the French franc—adjust the parity from time to time, although not often, by ad hoc decisions of the authorities. The ratios are not one-to-one and are changed from time to time because of differences in the rates of inflation. The exchange rates of other currencies pegged to a single currency are adapted from time to time in response to movements in selected indicators, but the adaptations are more or less automatic and not altogether the result of ad hoc decisions. Some currencies are pegged to a composite of currencies, often constructed according to some average of the currencies of major trading partners. A few countries have adopted a peg to the SDR, but some observe the peg only loosely so as to allow the exchange rate to move with the U.S. dollar to some extent. Some countries exercise maximum freedom to determine the exchange rate by avoiding a peg or a formal use of indicators. The authorities manage the exchange rate according to their judgment. Both forms of exchange arrangement can be called floating, the one managed floating and the other independent floating.

A conclusion to be drawn from this analysis is that as long as there are different exchange arrangements, a currency can be fixed in relation to some currencies and floating in relation to others. The tabulation of exchange arrangements must not obscure this fact by suggesting that allocation of a member’s exchange arrangement to one category reflects the relationship of the member’s currency to all other currencies. Take the obvious example of classifying the U.S. dollar as independently floating. The United States is entitled, if it wishes, to choose an exchange arrangement not involving a peg to another currency or currencies, but other members are equally free, if they wish, to peg their currencies to the U.S. dollar. If all other members were to do so, the result would be that, without the exercise of choice by the United States, the exchange rates between the dollar and all other currencies would be fixed. Therefore, to understand the exchange relationship between any two currencies, at least two categories in the tabulation must be considered.17 To put the matter in another way, it is necessary to take account of the exchange arrangements of both members whose currencies are involved in an exchange transaction, and sometimes the exchange arrangements of other members as well.

Frequently, the exchange arrangements of all members are said to constitute a floating system or some equivalent expression. Language such as this is misleading because of the substantial pegging of exchange rates. For this reason, and because it is undeniable that legally each member can choose its exchange arrangement, I have preferred to describe the present regime as the discretionary system of exchange arrangements. It will be referred to in that way or simply as the discretionary system.

Safeguards in the Discretionary System

The dangers of a discretionary system were apparent to the negotiators of the Second Amendment, particularly because a high degree of deregulation was to be substituted for the close control of exchange rates that the IMF was required to exercise under the legal provisions of the par value system. Various safeguards have been included in the amended Articles, therefore, to reduce the risk that chaos in exchange rates would develop in the permissive system now in existence.

Foremost among the safeguards is the requirement that the IMF must oversee the international monetary system to ensure that it will operate effectively. In addition, the IMF must oversee the conduct of members in order to determine whether they are complying with their obligations under Article IV, Section 1. To fulfill these functions, the IMF must perform two tasks under Article IV, Section 3. First, it must exercise “firm surveillance” over the exchange rate policies of members. Second, the IMF must adopt “specific principles” for the guidance of all members with respect to their exchange rate policies. To enable the IMF to perform these tasks, each member must provide the IMF with the information necessary for surveillance, and must consult with the IMF on the member’s exchange rate policies.

So far, the IMF has adopted only three specific principles for the guidance of members with respect to their exchange rate policies.18 The principles have been concentrated on intervention by members in the exchange markets, and one principle simply repeats the obligation included in the Articles that prohibits the manipulation of exchange rates or the international monetary system for either of the two improper motives mentioned in the Articles. The reason for concentration on intervention is the assumption when the Second Amendment was negotiated that the forbidden kinds of manipulation were the chief dangers of the discretionary system of exchange arrangements. The United States was particularly interested in the prohibition of manipulation of the international monetary system. An earlier version of the provision, advocated jointly by the United States and France, was confined to this form of manipulation. The United States had argued, in defense of its action of August 15, 1971, that the action was at least as much the result of persistent surpluses in the balances of payments engineered by other countries as the unsought deficit in its own balance of payments. Other countries had tenaciously preserved their surpluses by refusing to revalue their currencies or to take other measures to adjust their balances of payments. The emphasis in the original Articles was on competitive devaluation, but the problem had not been devaluation but reluctance to resort to revaluation.19

The safeguards in the Articles have not succeeded in preventing the volatility of changes in exchange rates or misalignment in the exchange rate relationships between currencies when judged by economic criteria. An explanation of the inefficacy of the legal provisions has been the misjudgment that manipulation would be the major impediment to achieving orderly exchange arrangements and a stable system of exchange rates. Members have not practiced manipulation or have not done so on a scale that has subverted the aims of the Articles. The unsatisfactory behavior of exchange rates can be attributed largely to the incompatibility of domestic policies among members, and in particular among the leading industrialized countries. Furthermore, specific principles that seek the orderliness of exchange rates by regulating intervention face enormous difficulties because of the size and the internationalization of exchange and financial markets. But to broaden or revise the specific principles in order to regulate domestic policies would be a task of daunting complexity.

Governments have tended to regard the choice of domestic policies as a privilege inherent in sovereignty and a privilege that is not to be lightly limited or yielded. It is true that two of the particular obligations of members included in Article IV, Section 1 relate to domestic policies, but the obligations are formulated as law of so soft a character as to defy objective judgment about the observance of them. Indeed, for some members, particularly the United States, the main virtue of Article IV, Section 1 was that it would leave as much freedom as possible for the national determination of domestic policies. It was assumed that members would pursue policies that would be internationally as well as nationally beneficial, so there would be no need for active exchange rate policies. Exchange markets would produce a stable system of exchange rates, but if it should happen that domestic policies were not appropriate, the exchange markets would bring about changes in exchange rates that would be internationally desirable because of the pressure the markets would exert on governments. The distance that the Congress of the United States has moved from this rationalization is demonstrated by Title III of the Omnibus Trade and Competitiveness Act 1988, which is reproduced in this chapter as Appendix C.

Reactions to the Discretionary System

The unilateralist aims of the Second Amendment appear now to have been a prescription that would lead inevitably to the undesirable behavior of exchange rates. Paul Volcker, one of the most distinguished of former U.S. officials, has commented as follows on the effects of the discretionary system on international trade in particular:

At the time the regime of floating exchange rates was adopted in 1973, it was seen by most as, among other things, providing strong support for free trade. The point was that flexible changes in exchange rates in response to market forces would maintain a better equilibrium in national trade and current account positions, thereby removing one protectionist argument. A corollary was usually explicitly stated as well—real exchange rates, at least, ought to be pretty steady in practice, even if permitted to float in principle, since the underlying conditions affecting trade or the relative productivity of capital would change only gradually. If countries could manage to achieve a convergence of inflation rates at a low level, the argument ran, then nominal exchange rates would stabilize as well.

Now, 15 years later, that kind of optimism looks pretty naive. Instead of exchange markets moving along a learning curve toward greater stability as time has passed, various measures of exchange-rate volatility—daily, monthly and cyclically—have plainly increased.20

Much the same judgment has been reached in a report issued by a private study group in August 1987:

The weaknesses of the fluctuating rates system are now well recognized and documented and need not be explained at length here. Suffice it to say that they comprise first, marked volatility of exchange rates, second, large misalignments of real and nominal exchange rates and, finally, a virtual lack of the external discipline on policy-making associated with fixed exchange rates.21

It is not surprising that, as a result of the inadequacies of the discretionary system, governments have decided to recapture some of the authority over exchange rates they have conceded to the markets. Nor is it surprising that the countries following this course are the leading industrialized countries, which have chosen the exchange arrangement of an independently floating currency or of a currency floating against all except their partners in a cooperative arrangement. The EMS is a prominent symptom of this new movement. So too are the understandings recorded in communiqués of the summit meetings of the heads of state or government and of the Group of Five or the Group of Seven meeting at other official levels.

The communiqués deal in large part with coordination of the domestic policies of these countries and to some extent with concerted policies of intervention in the exchange markets.22 The resumption of more active governmental management of exchange rates, as promised in communiqués of the Group of Five or the Group of Seven,23 is taken by some observers to presage greater stability of exchange rates. Some commentators recommend that fluctuations should be kept within so-called target or reference zones, and these experts see support for their recommendations in the communiqués and in the practices followed pursuant to them.

The expressions of governmental intentions in the communiqués, though presented in the form of shared or reciprocal understandings, do not constitute legal obligations in any traditional sense. Perhaps the understandings constitute soft law, but whether or not they can be regarded in that way depends on one’s definition of that concept. It cannot be doubted that the participants in the meetings from which the communiqués emanate see the informality of the deliberations and of the understandings reached in them as advantages, and that the participants would reject any suggestion that the understandings be given undeniable binding force. Nevertheless, the understandings are designed to compensate to some extent for the soft law clearly incorporated in the provisions on exchange rates in the Second Amendment.

The understandings reached by the principal industrialized countries and the actions they have taken to make their understandings effective have not eliminated the often distressing fluctuation of exchange rates. It can be inferred, however, that these countries have accepted a moral responsibility to improve the exchange rate behavior of their currencies because of the impact these currencies have on the economies of other countries. It does not follow, however, that a country’s interest is served by resistance to the fluctuation of the exchange rate for its currency. The pegging of a developing country’s currency to a major currency can subject the developing country to vicissitudes because a desirable flexibility in exchange rate is precluded. The IMF, in conducting surveillance over exchange rate policies or in negotiating terms for the use of its resources, often encourages a developing country to choose an exchange arrangement that will permit greater flexibility in the exchange rate for the member’s currency than has been the member’s policy. The main objective has been to encourage the member to improve its international competitiveness.

There are two views of the present legal and institutional situation. The U.S. Treasury in a report to Congress dated October 15, 1988 defended the present situation with some warmth, noting that it involved “no ceding of sovereignty.”24 The report concluded a summary of the process for coordinating the policies of members with the following statement:

Finally, the process is credible. In today’s era of global economic integration and instant communications, credibility is critical. An attempt to make an abrupt or major change in the structure of the system by imposing a detailed set of formal constraints might well be viewed by the markets as overly ambitious and unsustainable. In addition, such an approach might not give adequate regard to political realities or to the force and speed with which financial flows now move.25

The U.S. Congress, in the 1988 statute reproduced in Appendix C, is skeptical about the virtues of the discretionary system, but does not propose the negotiation of formal constraints.

An Italian critic has described the outcome of efforts to create a reformed international monetary system with these hard words:

By the end of the 1970s the international community had replaced clear and binding commitments with vague and non-binding understandings, while the traditional institutional fora for monitoring the operation of the world monetary and financial system had been replaced by a multitude of non-institutional meetings where the only procedural constraint was the adoption of a final press communiqué.26

The same author recognizes the promise of the ad hoc and noninstitutional cooperation that has emerged in the 1980s.27 He argues, however, that this form of cooperation can deal only with situations of crisis, and not with the deep causes of disequilibria, for which reason the stability of exchange rates has not been attained.

Effective policy coordination cannot be achieved in a non-institutional context, since countries are not willing to relinquish, even in part, their economic sovereignty unless they know exactly which are the commitments undertaken by the other countries participating in the coordination exercise.28

He believes that only the IMF can provide an adequate institutional process.29

APPENDIX A

Article IV [of the IMF’s present Articles of Agreement]

Obligations Regarding Exchange Arrangements

Section 1. General obligations of members

Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:

  • (i) endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
  • (ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
  • (iii) 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; and
  • (iv) follow exchange policies compatible with the undertakings under this Section.
Section 2. General exchange arrangements

(a) Each member shall notify the Fund, within thirty days after the date of the second amendment of this Agreement, of the exchange arrangements it intends to apply in fulfillment of its obligations under Section 1 of this Article, and shall notify the Fund promptly of any changes in its exchange arrangements.

(b) Under an international monetary system of the kind prevailing on January 1, 1976, exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice.

(c) To accord with the development of the international monetary system, the Fund, by an eighty-five percent majority of the total voting power, may make provision for general exchange arrangements without limiting the right of members to have exchange arrangements of their choice consistent with the purposes of the Fund and the obligations under Section 1 of this Article.

Section 3. Surveillance over exchange arrangements

(a) The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.

(b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.

Section 4. Par values

The Fund may determine, by an eighty-five percent majority of the total voting power, that international economic conditions permit the introduction of a widespread system of exchange arrangements based on stable but adjustable par values. The Fund shall make the determination on the basis of the underlying stability of the world economy, and for this purpose shall take into account price movements and rates of expansion in the economies of members. The determination shall be made in light of the evolution of the international monetary system, with particular reference to sources of liquidity, and, in order to ensure the effective operation of a system of par values, to arrangements under which both members in surplus and members in deficit in their balances of payments take prompt, effective, and symmetrical action to achieve adjustment, as well as to arrangements for intervention and the treatment of imbalances. Upon making such determination, the Fund shall notify members that the provisions of Schedule C apply.

Section 5. Separate currencies within a member’s territories

(a) Action by a member with respect to its currency under this Article shall be deemed to apply to the separate currencies of all territories in respect of which the member has accepted this Agreement under Article XXXI, Section 2(g) unless the member declares that its action relates either to the metropolitan currency alone, or only to one or more specified separate currencies, or to the metropolitan currency and one or more specified separate currencies.

(b) Action by the Fund under this Article shall be deemed to relate to all currencies of a member referred to in (a) above unless the Fund declares otherwise.

APPENDIX B

There has not been volatility in the choice of exchange arrangments, as is shown by a comparison between exchange arrangments in force on June 30, 1985 and on June 30, 1990:

Table 2.Comparison of Exchange Arrangements as of June 30, 1985 and June 30, 19901
Exchange

Arrangement
Number on

June 30, 1985
Number on

June 30, 1990
Pegged to:
U.S. dollar3228
French franc1414
Other currency55
SDR127
Other composite3135
Flexibility limited vis-à-vis a single currency4
Cooperative arrangements89
Adjusted according to a set of indicators64
Managed floating2021
Independently floating1423
147150

Current information relating to Democratic Kampuchea is unavailable.

Current information relating to Democratic Kampuchea is unavailable.

APPENDIX C

Omnibus Trade and Competitiveness Act 1988 of the United States (P.L. 100–418)

Title III—International Financial Policy (102 Stat. 1372)

Subtitle A—Exchange Rates and International Economic Policy Coordination

Sec. 3001. Short Title

This subtitle may be cited as the “Exchange Rates and International Economic Policy Coordination Act of 1988.”

Sec. 3002. Findings

The Congress finds that—

  • (1)the macroeconomic policies, including the exchange rate policies, of the leading industrialized nations require improved coordination and are not consistent with long-term economic growth and financial stability;
  • (2) currency values have a major role in determining the patterns of production and trade in the world economy;
  • (3) the rise in the value of the dollar in the early 1980’s contributed substantially to our current trade deficit;
  • (4) exchange rates among major trading nations have become increasingly volatile and a pattern of exchange rates has at times developed which contribute to substantial and persistent imbalances in the flow of goods and services between nations, imposing serious strains on the world trading system and frustrating both business and government planning;
  • (5) capital flows between nations have become very large compared to trade flows, respond at times quickly and dramatically to policy and economic changes, and, for these reasons, contribute significantly to uncertainty in financial markets, the volatility of exchange rates, and the development of exchange rates which produce imbalances in the flow of goods and services between nations;
  • (6) policy initiatives by some major trading nations that manipulate the value of their currencies in relation to the United States dollar to gain competitive advantage continue to create serious competitive problems for United States industries;
  • (7) a more stable exchange rate for the dollar at a level consistent with a more appropriate and sustainable balance in the United States current account should be a major focus of national economic policy;
  • (8) procedures for improving the coordination of macroeconomic policy need to be strengthened considerably; and
  • (9) under appropriate circumstances, intervention by the United States in foreign exchange markets as part of a coordinated international strategic intervention effort could produce more orderly adjustment of foreign exchange markets and, in combination with necessary macroeconomic policy changes, assist adjustment toward a more appropriate and sustainable balance in current accounts.

Sec. 3003. Statement of Policy

It is the policy of the United States that—

  • (1) the United States and the other major industrialized countries should take steps to continue the process of coordinating monetary, fiscal, and structural policies initiated in the Plaza Agreement of September 1985;
  • (2) the goal of the United States in international economic negotiations should be to achieve macroeconomic policies and exchange rates consistent with more appropriate and sustainable balances in trade and capital flows and to foster price stability in conjunction with economic growth;
  • (3) the United States, in close coordination with the other major industrialized countries should, where appropriate, participate in international currency markets with the objective of producing more orderly adjustment of foreign exchange markets and, in combination with necessary macroeconomic policy changes, assisting adjustment toward a more appropriate and sustainable balance in current accounts; and
  • (4) the accountability of the President for the impact of economic policies and exchange rates on trade competitiveness should be increased.

Sec. 3004. International Negotiations on Exchange Rate and Economic Policies

  • (a) Multilateral Negotiations.—The President shall seek to confer and negotiate with other countries—
    • (1) to achieve—
      • (A) better coordination of macroeconomic policies of the major industrialized nations; and
      • (B) more appropriate and sustainable levels of trade and current account balances, and exchange rates of the dollar and other currencies consistent with such balances; and
    • (2) to develop a program for improving existing mechanisms for coordination and improving the functioning of the exchange rate system to provide for long-term exchange rate stability consistent with more appropriate and sustainable current account balances.
  • (b) Bilateral Negotiations.—The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage. The Secretary shall not be required to initiate negotiations in cases where such negotiations “would have a serious detrimental impact on vital national economic and security interests; in such cases, the Secretary shall inform the chairman and the ranking minority member of the Committee on Banking, Housing, and Urban Affairs of the Senate and of the Committee on Banking, Finance and Urban Affairs of the House of Representatives of his determination.

Sec. 3005. Reporting Requirements

(a) Reports Required.—In furtherance of the purpose of this title, the Secretary, after consultation with the Chairman of the Board, shall submit to the Committee on Banking, Finance and Urban Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate, on or before October 15 of each year, a written report on international economic policy, including exchange rate policy. The Secretary shall provide a written update of developments six months after the initial report. In addition, the Secretary shall appear, if requested, before both committees to provide testimony on these reports.

(b) Contents of Report.—Each report submitted under subsection (a) shall contain—

  • (1) an analysis of currency market developments and the relationship between the United States dollar and the currencies of our major trade competitors;
  • (2) an evaluation of the factors in the United States and other economies that underlie conditions in the currency markets, including developments in bilateral trade and capital flows;
  • (3) a description of currency intervention or other actions undertaken to adjust the actual exchange rate of the dollar;
  • (4) an assessment of the impact of the exchange rate of the United States dollar on—
    • (A) the ability of the United States to maintain a more appropriate and sustainable balance in its current account and merchandise trade account;
    • (B) production, employment, and noninflationary growth in the United States;
    • (C) the international competitive performance of United States industries and the external indebtedness of the United States;
  • (5) recommendations for any changes necessary in United States economic policy to attain a more appropriate and sustainable balance in the current account;
  • (6) the results of negotiations conducted pursuant to section 3004;
  • (7) key issues in United States policies arising from the most recent consultation requested by the International Monetary Fund under article IV of the Fund’s Articles of Agreement; and
  • (8) a report on the size and composition of international capital flows, and the factors contributing to such flows, including, where possible, an assessment of the impact of such flows on exchange rates and trade flows.

(c) Report by Board of Governors.—Section 2A(1) of the Federal Reserve Act (12 U.S.C. 225a(1)) is amended by inserting after “the Nation” the following; “, including an analysis of the impact of the exchange rate of the dollar on those trends.”

Sec. 3006. Definitions

As used in this subtitle:

  • (1) Secretary.—The term “Secretary” means the Secretary of the Treasury.
  • (2) Board.—The term “Board” means the Board of Governors of the Federal Reserve System.
1See Articles XV and XVIII of the Articles.
2Article I (iii).
3Article IV, Section 4(a) (original Articles).
4Article XX, Section 4(b) (original Articles).
5For the provisions on changes in par values, see Article IV, Section 5 (original Articles).
6Article IV, Section 3 (original Articles).
7Article IV, Section 4(b) (original Articles).
8Ibid.
9This conclusion assumes that the margins from parity in spot exchange transactions between the intervention currency and an intervening member’s currency were the same, and that they would be no more than ½ of 1 percent. If the margins were wider, though within the permitted 1 percent, exchange rates in transactions between the currencies of two members using the same intervention currency and observing the same margins would exceed the maximum margins of 1 percent. In these transactions, the margins from parity would be the cumulation of the margins of each currency of an intervening member against the intervention currency. To give members greater flexibility and to enable them to conserve their monetary reserves, the IMF exercised its authority to approve multiple currency practices by approving margins of up to 2 percent in the transactions referred to, as discussed in Chapter 2 under the heading “Differences Between EMS and Par Value Systems.”
10Article IV, Section 2(b).
11The same excess of caution, for the same reason, is visible in Article IV, Section 3(b), under which the IMF must adopt specific principles for the guidance of members with respect to their exchange rate policies. These principles, it is provided, must be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice. The cooperative arrangements are expressly mentioned even though the caveat applies to all exchange arrangements chosen by members.
12Article XXIII, Section 2.
13Article I(iii); Article IV, Section 4(a) (original Articles).
14Article IV, Section 1.
15Particularly the introductory language of Article IV, Section 1, that is to say, the language before the undertaking of members to collaborate.
16Independent floating can be understood to mean the residual category in the tabulation in the sense that it is a form of exchange arrangement that does not fall into any of the other exchange arrangements.
17National laws may take account of the extent to which exchange rates between the national currency and the currency of another country fluctuate whatever the exchange arrangements of the two countries may be. For example, the regulations of the U.S. Internal Revenue Service make distinctions for certain tax purposes between currencies that do and that do not fluctuate substantially against the U.S. dollar during the period deemed relevant. Whether there is substantial fluctuation is a question of fact. “In general, however, the degree of fluctuation will be considered substantial if the closing rate for any calendar month ending with or within the translation period varies by more than 10 percent from the closing rate for any preceding calendar month ending within that period.” (Reg. §1.964-1(d)(2)(i).)
18See “Surveillance over Exchange Rate Policies,” Executive Board Decision No. 6026-(79/13), January 22, 1979, Selected Decisions, Fifteenth Issue, p. 11:
  • “A. A member shall 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.
  • B. A member should intervene in the exchange market if necessary to counter disorderly conditions which may be characterized inter alia by disruptive short-term movements in the exchange value of its currency.
  • C. Members should take into account in their intervention policies the interests of other members, including those of the countries in whose currencies they intervene.”
For a more detailed discussion of most aspects of the international law of exchange rates mentioned in this monograph, see Joseph Gold, Exchange Rates in International Law and Organization (Washington: American Bar Association, 1988).
19See United States, Economic Report of the President Transmitted to the Congress January 1973 (Washington: U.S. Government Printing Office, 1973), p. 122.
20“Don’t Count on Floating Exchange Rates,” Wall Street Journal (New York), November 28, 1988, p. A12. Note also paragraph 2.3 of the United Kingdom Board of Inland Revenue’s Consultative Document entitled Tax Treatment of Foreign Exchange Gains and Losses (London, 1989):

“Although in extreme cases the probable trend of a weak currency against a strong currency might be predicted with some confidence, forecasting the exchange rate is a notoriously fallible exercise. There are several reasons for this. First, there are a number of economic factors that can have a fundamental influence on exchange rates. The relative importance of these factors may be difficult to establish. Second, the behaviour of ‘players’ in the exchange markets in the light of expectations they hold about the future can lead exchange rates away from fundamentals, especially in the short term. Third, central banks may intervene in an attempt to smooth exchange rate fluctuations.”

21Paving the Way: Next Steps for Monetary Co-operation in Europe and the World, Report of a Federal Trust Study Group, ECU Newsletter, Supplement to No. 21 (September 1987), p. 12.
22United States, Department of the Treasury, Report to the Congress on International Economic and Exchange Rate Policy (Washington, October 15, 1988), p. 2:

“Major structural changes in the world economy have intensified the need for more consistent and compatible policies and performance among the major industrial countries. In particular, the globalization of financial markets has reduced substantially the independence that domestic policy-makers had anticipated they would enjoy under flexible exchange rates as wide currency swings involved un-acceptable economic and social costs. The liberalization of international trade and investment and the development of global integrated production facilities have increased substantially the importance of the external sector for all countries. Also, the greater balance in economic size among the major countries requires that effective external adjustment be a shared responsibility of a number of countries. No single nation, whether it be in surplus or deficit, can be expected to undertake a disproportionate share of the adjustment role.

Against this background, the major industrial countries have developed a process for coordinating economic policies for the purpose of achieving sustained global growth with low inflation, reduced external imbalances, and greater stability of exchange rates. This process, which reflects a major U.S. initiative, has been developed gradually over the last few years.”

23Such as the communiqués announcing the so-called Plaza and Louvre Accords.
24See p. 5 of the report referred to in footnote 22 above.
25Ibid., p. 6.
26Fabrizio Saccomanni, “On Multilateral Surveillance,” in The Political Economy of International Co-operation, ed. by Paolo Guerrieri and Pier Carlo Padoan (London, New York, Sydney: Croom Helm, 1988), at p. 68.
27Ibid., p. 71.
28Ibid., p. 77.
29Ibid., p. 78.

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