The legalization of international monetary affairs

International Organization

Volumn 54, Issue 3, 2000, Pages 573-602

  Simmons, Beth A ^a  

^a NONE

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EID: 0034370862     PISSN: 00208183     EISSN: None     Source Type: Journal    
DOI: 10.1162/002081800551334     Document Type: Article

References (84)

1. Cohen 1998.
2. See Eichengreen 1992; and Simmons 1994.
3. Amended in 1921.
4. Dam 1982, 23-25.
5. See, for example, the description by the MacMillan Committee on Finance and Industry, Cmd. 3897, HMSO 1931, as reprinted in Eichengreen 1985, 185-99.
6. Dam 1982, 23.
7. Scammell 1985, 105.
8. Ford 1985.
9. Eichengreen writes extensively about the confidence that investors had in the prewar gold standard. Eichengreen 1992.
10. Simmons 1994.
11. Dam 1982, 50.
12. Simmons 1993.
13. Case of Serbian Loans, Permanent Court of International Justice, ser. A, nos. 20/21, 44, 1929, cited in Gold 1984b, 1533. Thus, researchers often speak of the "norms" of the gold standard (for example, Simmons 1994), but these were never codified in international agreements.
14. Presidential Proclamations 2039 (6 March 1933) and 2040 (9 March 1933); Executive orders 6111 (20 April 1933) and 6260 (28 August 1933). Cited in Dam 1982, 47, 55.
15. All quotations from the Tripartite Monetary Agreements of 25 September 1936 are from the version printed by the Bank for International Settlements, Monetary and Economic Department, Basle, January 1937. The sections quoted can be found nearly verbatim in all three declarations.
16. See Sauvy 1967, 224; Kindleberger 1986, 255, 257, 259; and Clarke 1977.
17. In the United States it was illegal after 1933 (Exec. order 6260) for a resident to hold gold coins or bullion. Sterilization funds in both the United States and Great Britain further severed the relationship between gold flows and international monetary policy.
18. The expression "rules of good conduct" is used by Gold 1965, passim.
19. Gold 1984a, 801. A French plan was offered at the beginning of the postwar monetary negotiations. Although it played no direct role, it did indicate the French preference for agreement among the "principal nations" somewhat analogous to the Tripartite Agreement. The French plan saw an international institution as optional, Dam 1982, 76.
20. Gold 1980, 5. Nonetheless, legal treatments of these obligations are surprisingly few. See generally Denters 1996, 16-20.
21. Art. IV, sec. 1.
22. From the White Plan. Horsefield and De Vries 1969, 3:64.
23. Art. IV, sec. 4. Furthermore, Art. IV, sec. 2 provided that "no member shall buy gold at a price above par value plus the prescribed margin, or sell gold at a price below par value minus the prescribed margin." A central bank could not enter into any gold transaction with another central bank other than at par without one or the other violating the articles.
24. Gold 1988, 48.
25. Canada's decision to float in 1950 was a violation of the Articles of Agreement, but the IMF did not want to force a showdown with Canada: instead it issued an explanation that amounted to pragmatic toleration of floating rates. No major currency followed Canada (at least for the next two decades), so the case was more of an aberration than a precedent.
26. Gold 1988, 31.
27. Executive board decision, Central Rates and Wider Margins: a Temporary Regime, 18 December 1971. See Dam 1982, 191. The board tried to reconcile the Smithsonian Agreement with the articles. The decision stated that the temporary arrangement "would enable members to observe the purposes of the IMF to the maximum extent possible during the temporary period preceding the resumption of effective par values with appropriate margins in accordance with the Articles." Gold 1979, 559.
28. The executive board decision called on members to "use their best endeavors to observe the guidelines." Decision of 13 June 1974 (IMF 1974, 112). The guidelines said that a member "should" intervene "to prevent or moderate sharp and disruptive fluctuations from day to day and from week to week, . . . should not normally act aggressively with respect to the exchange value of its currency," should adopt a "target zone of rates," and should consult with the IMF.
29. Art. VIII, sec. 2, para. (a), and sec. 3. Member states are, however, permitted to maintain or impose exchange restrictions under certain conditions: (1) if they are necessary to regulate international capital movements (art. VI, sec. 3); (2) with the approval of the IMF (art. VIII, sec. 2 (a)); (3) if the IMF has declared a currency "scarce" (art. VII, sec. 3 (b)); and(4) if the exchange restrictions were effective at the time the state became a member of the IMF (art. XIV, sec. 2).
30. The restriction applies only to payments and transfers for current international transactions. The IMF articles explicitly permit the regulation of international capital movements (Art. VI, sec. 3).
31. See Executive Board Decision 1034 (60/27), 1 June 1960, para. 1, Selected Decisions of the International Monetary Fund and Selected Documents, 11:259 (Washington, D.C.: IMF). See also Horserield and de Vries 1969, 3:260.
32. Edwards 1985, 391 (see fn. 39 for original documentary sources); and Horn 1985, 295.
33. Boehlhoff and Baumanns 1989, 108.
34. Art. VIII, sec. 3 says: "No member shall engage in, or permit any of its fiscal agencies referred to in Article V, Section 1 to engage in, discriminatory currency arrangements or multiple currency practices . . . except as authorized under this agreement or approved by the Fund."
35. See, for example, India and Article VIII, 11 July 1955, S424, Transitional Arrangements, Article VIII Country Studies (Washington, D.C.: IMF Archives).
36. See Edwards 1985, 381-82; and Gold 1988, 255.
37. Edwards 1985, 391. Surrender requirements are not prohibited, because surrender in itself is not considered to be an impediment to the making of payments. Gold 1984a, 813.
38. Edwards 1985, 382. A very comprehensive system of exchange controls might prohibit residents to transfer the state's currency to nonresidents except with the state's permission on a case-by-case basis, or prohibit residents to hold foreign currencies except with the state's permission.
39. Art. XIV, sec. 2. An Art. XIV country can also adapt its restrictions without the need for IMF approval. But an Art. XIV country cannot introduce new restrictions without approval, adapt multiple currency practices without IMF approval, nor maintain restrictions that the member cannot justify as necessary for balance-of-payments reasons. See Horsefield and De Vries 1969, 1:248-59.
40. Art. XIV, sec. 2.
41. Art. XIV, sec. 3.
42. Ideally, the IMF wants the removal of restrictions to coincide with the assumption of Art. VIII obligations, though it has recognized that this might not always be possible and that waiting for the complete removal of even last restriction would only serve to delay the making of such a commitment. See Article VIII and Article XIV, memo prepared by Irving S. Friedman, Exchange Restrictions Department, 24 May 1955, S424, Transitional Arrangements, Art. VIII and XIV, September 1954-55, (IMF Archives). In a few cases, developing countries that were not in an especially strong position to accept Art. VIII had no restrictions in place, and the IMF urged them to go ahead and commit, since they had nothing to "grandfather" under Art. XIV. See Haiti, memo from H. Merle Cochran to Irving S. Friedman, 30 October 1953, C/Haiti/424.1, Trans. Arrange., Members' Intent to Use (IMF Archives); and Letter, Ivar Rooth, M.D., to Jose Garcia Ayber, Governor of the Central Bank of the Dominican Republic, 1 August 1953, C/Dominican Republic/424.1, Trans. Arrange., Members' Intent to Use (IMF Archives). These countries often turn out to be long-term noncompliers.
43. Horsefield and De Vries 1969, 2:225. The IMF staff discussed on various occasions the imposition of time limits for the removal of restrictions and the unification of exchange rates, but rejected them as impractical. Article VIII and Article XIV, memo prepared by Irving S. Friedman, 24 May 1955, S 424, Trans. Arrange. (IMF Archives). There were also debates over the IMF's legal authority to declare an end to the transitional period. Furthermore, there were debates in the early period about exactly what "transitional" referred to, Extract, Executive Board Informal Session 54/2, 19 November 1954, S424, Trans. Arrange. (IMF Archives).
44. However, sometimes countries in fairly tenuous balance-of-payments positions who were willing to accept Art. VIII obligations were provided standby arrangements. For example, see Costa Rica (1965), Executive Board Minutes, EBM/65/7, 29 January 1965, C/Costa Rica/424.1, Trans. Arrange., Members' Intent to Use (IMF Archives).
45. In 1948, the executive board explicitly disapproved France's multiple exchange-rate practice and declared France ineligible to use IMF resources, invoking Art. IV, sec. 6 sanctions. The sanction failed to induce France to adopt a unitary rate. The use of sanctions was perceived as a failure and never invoked again. Dam 1982, 132.
46. Although the board is not barred from publishing reports that communicate the board's views, doing so requires a two-thirds majority of the total voting power to make this decision. Gold 1979, 153.
47. Art. XV, sec. 2 (a).
48. According to Gold, "All standby arrangements include a uniform term on measures that directly or indirectly affect exchange rates. Under this term a member is precluded from making purchases under an arrangement if at any time during the period of the arrangement the member: 'i. imposes [or intensifies] restrictions on payments and transfers for current international transactions, or ii. introduces [or modifies] multiple currency practices, or iii. concludes bilateral payments agreements which are inconsistent with Art. VIII, or iv. imposes [or intensifies] import restrictions for balance of payments reasons.'" Gold 1988, 466.
49. Gold 1979, 185
50. Art. VIII, sec. 2, para. (b). This provision was originally designed to support the par value system; in particular to assuage the United Kingdom that New York would not become a significant black market for discounted sterling the value of which the United Kingdom was unable to defend through gold sales. Gold 1989, 73. It was originally placed alongside the exchange-rate provisions (Art. IV). According to Gold, "If a contract is unenforceable as a result of the provision, a court may not decree performance of the contract or give damages for nonperformance. . . . The provision establishes a defense rather than a condition for the institution of proceedings." Gold 1989, 90.
51. In practice, many domestic courts have been reluctant to refuse to enforce such contracts, especially when the interests of national firms or major financial institutions are involved. Gold 1989, 6-7.
52. Archival materials thoroughly support such an interpretation. To cite two examples among many, executive board members, in discussing Argentina's acceptance, "thought that Article VIII status would add substantially to the domestic and external confidence in the intentions of the authorities." Argentina -Acceptance of Article VIII, sections 2, 3, and 4, EMB/68/122, 14 August 1968 (IMF Archives). Executive board members, in discussing Costa Rica's acceptance, noted, "The move to Article VIII status was further proof of its determination to maintain a liberal payments system." Costa Rica (1965), EBM/65/7, 29 January 1965, Trans. Arrange., Members' Intent to Use (IMF Archives).
53. Thus, "it may be assumed that it is countries with relatively strong balance of payments positions that would most likely feel able to assume Article VIII status." Article VIII and Article XIV, memo prepared by Irving S. Friedman, 24 May 1955, p. 5, S424, Trans. Arrange. (IMF Archives).
54. Downs and Rocke have used this insight to develop an endogenous explanation of treaty commitments based on uncertainty over future compliance. Downs and Rocke 1995.
55. External normative influences are important in the work of Keck and Sikkink 1998; Legro 1997; Fisher 1981; Kratochwil 1989; and Finnemore 1996. Margaret Levi, in her study of compliance with conscription efforts, combines both rational and normative elements in describing a form of "contingent consent" in which some compliance is "the result of . . . incentives, but at least some compliance expresses a confirmation in the rightness of policies." Levi 1997, 18.
56. Implementation of Article XIV and Article VIII Decision, minutes of staff visit to the United Kingdom, 22 July 1960, S424, Trans. Arrange., Move to Article VIII Mission, minutes of meetings (IMF Archives). The IMF archives contain ample evidence that no European power wanted to pay the potential costs of being the first mover, yet none wanted to lag a decision by other countries in the region. Thus, "The French policy with regards to restrictions depends on the policy followed by other European countries, especially Great Britain. It might even be said in large measure it is conditioned by that policy." F. A. G. Keesing, 1 July 1955, S424, Trans. Arrange., Art. VIII Country Studies (IMF Archives). For a similar position by the Netherlands, see Netherlands and Article VIII. 23 June 1955, S424, Trans. Arrange., Art. VIII Country Studies (IMF Archives). On the United Kingdom's unwillingness to move alone, see memo from Rooth to E. M. Bernstein, 20 May 1955, S424, Trans. Arrange., Art. VIII and XIV, Sept. 1954-55 (IMF Archives). On the incentives for a general snowball effect within Europe, see memo from F. A. G. Keesing, 13 May 1955, S424, Trans. Arrange., Art. VIII and XIV, 1954-55 (IMF Archives).
57. Argentina - Acceptance of Article VIII, sections 2, 3, and 4, p. 4, 14 August 1968, EMB/68/122 (IMF Archives).
58. Memo from Jorge del Canto to Per Jacobsson, IMF Managing Director, 23 September 1960, C/Peru/ 424.1, Trans. Arrange., Members' Intent to Use (IMF Archives), Peru was basically free from all restrictions in 1960, and IMF staff members wondered whether they should be encouraged to assume Art. VIII obligations as soon as possible or wait and go with the Europeans. In a handwritten note in the margins, Per Jacobsson wrote, "No. It would not profit Peru to move first - more advantageous to be 'drawn by movement' with others." Memo from Jorge del Canto to Per Jacobsson, 17 May 1960, C/Peru/424.1 (IMF Archives).
59. The literature linking foreign economic policymaking to domestic political demands is vast. Most of this work concentrates on demands for trade protection. See, for example, Aggarwal, Keohane, and Yoffie 1987; Alt et al. 1996; Destler and Odell 1987; Goodman, Spar, and Yoffie 1996; McKeown 1984; Milner 1988; and Rogowski 1989. For works on financial and monetary policy, see Simmons 1994; and Frieden 1991.
60. According to Horsefield and De Vries, for example. "Article VIII status had come to signify over the years either that a country had a sound international balance of payments position, or that if its payments position was threatened, it would avoid the use of exchange restrictions." Horse field and De Vries 1969, 2:285-86.
61. Gilligan 1997.
62. Relatedly, the IMF staff thought that Art. VIII obligation created the most advantages for countries whose currencies tended to be traded internationally. See the staff discussion contained in Peru - Aspects of Article VIII, C/Peru/424.1, Trans. Arrange., Members' Intent to Use (IMF Archives).
63. Indonesia and Article VIII, 14 July 1955, S424, Trans. Arrange., Art. VIII Country Studies (IMF Archives).
64. Guyana - Acceptance of Obligations of Article VIII, Sections 2, 3, and 4, Initial Par Value, and Stand-by Arrangement, 3 February 1967, EMB/67/10, C/Guyana/424.1, Trans. Arrange., Members' Intent to Use (IMF Archives).
65. James 1995, 773, 775.
66. Gold 1983, 474-75. Consultations with Art. VIII countries were established in 1960 but were completely voluntary. Horsefield and De Vries 1969, 2:246-47.
67. For example, the United Kingdom did not want the stigma of a board decision that they maintained an illegal multiple currency practice as a result of what the United Kingdom considered a legitimate way to control capital movements. Implementation of Article XIV and Article VIII Decision, minutes of staff visit to the United Kingdom, 27 July 1960, S424, Trans. Arrange., Move to Art. VIII Mission (IMF Archives). Uncertainty over board interpretation inhibited early commitment. Generally, see Policy Aspects of the Article VIII and Article XIV Problem, 21 October 1954, S424, Trans. Arrange., Art. VIII and XIV, 1954-55 (IMF Archives).
68. The literature usually terms the event of interest a "failure" and the time elapsed until its occurrence as "survival" regardless of the substantive problem modeled. Proponents of international openness and free markets would in this case view "survival" analysis as "transition" analysis, and an Art. VIII commitment as a "success"; those who favor closer government management of markets might agree that the customary appellations are in fact more apt.
69. See Young 1979; and Schachter 1991. See also Moravcsik 1997.
70. Slaughter 1995a. This captures the flavor of some of the democratic peace literature, for example, Doyle 1986; Dixon 1993; and Raymond 1994.
71. "International law is not unlike constitutional law in that it imposes legal obligations on a government that in theory the government is not tree to ignore or change." Fisher 1981, 30. Constitutional constraints most often rest on their shared normative acceptance, rather than on the certainty of their physical enforcement, providing another possible parallel to the international setting.
72. See Risse-Kappen 1995b; and Lumsdaine 1993.
73. See Knack and Keefer 1995, 225.
74. The board clearly recognized this was the case: "It was quite evident that flexible rates made it easier for a country to eliminate payment and trade restrictions. This made the fact that several European countries were now accepting the obligations of Art. VIII on the basis of a fixed parity all the more significant." Peru's currency was still fluctuating. Executive board minutes, 8 February 1961, EBM/61/4., p. 15, C/Peru/424.1, Trans. Arrange., Members' Intent to Use (IMF Archives).
75. Indeed, the date of GATT's entry into force was conditioned on the acceptance of Art. VIII, sec. 2, 3, and 4 obligations by the contracting parties to the GATT. According to a memo circulated among the staff of the IMF, "The date of entry into force of the revised [GATT] rules concerning discrimination and quantitative restrictions is linked specifically to the date at which the obligations of Article VIII, Sections 2, 3, and 4 of the Fund Agreement become applicable to such contracting parties as are members of the Fund, the combined foreign trade of which constitutes at least 50 per cent of the aggregate foreign trade of all contracting parties." Article VIII and Article XIV, memo prepared by Irving S. Friedman, 24 May 1955 (IMF Archives).
76. Beck, Katz, and Tucker 1998. A counter vector was employed using the STATA routine made available on Richard Tucker's Web site at 〈http://www.fas.harvard.edu/∼rtucker/papers/grouped/ grouped3.html〉. Three cubic splines were included in the analysis but are not reported here.
77. See the review of this literature in Keech 1995.
78. Art. VII, sec. 2 empowered the IMF to borrow from a member but also provided that no member should be obliged to lend to the IMF. Thus the General Agreement to Borrow was negotiated by the managing director and representatives of the signatory countries outside normal IMF channels. Reminiscent of the Tripartite Agreement, it was enshrined as a series of identical letters among participating countries. Swaps are also soft arrangements created by central banks and operating through the Bank of International Settlements. These were developed completely outside of the IMF framework. Dam 1982, 150. Nor are IMF standby arrangements a contract in the legal sense. Failure to carry out the performance criteria in the letter of intent is not a breach of any agreement and certainly not a breach of international law. All the "seal of approval" effects come despite the nonlegal nature of this commitment. The Executive board's decision of 20 September 1968 explicitly concerns the nonlegal status of standby arrangements. Gold 1979, 464-66.
79. On this point, compare Chayes and Chayes 1993 and 1995 and Henkin 1979 with Downs, Rocke, and Barsoom 1996.
80. These issues are discussed in Simmons 1998.
81. IMF various years, analytical appendix.
82. Ibid.
83. Ibid.
84. Ibid.