Stand-By Arrangements

In some stand-by arrangements, the Fund includes the following

paragraph:
The rate of exchange at which [the member] will purchase currencies from
the Fund in exchange for the currency of [the member] and at which the Fund
will return the currency of [the member] in repurchase operations and make all
other computations involving the currency of [the member] will be such rate
as the Fund may from time to time determine under Article IV, Section 8, of
the Fund Agreement.

This paragraph appears in a stand-by arrangement when the member

for which it is approved does not have an effective par value, because
the member has either a unitary fluctuating rate, which the Fund has
no power to approve, or multiple currency practices, including a
fluctuating rate, which the Fund can approve.26
If the member has not yet established an initial par value under the
Articles, the paragraph reads as follows:
The rate of exchange at which [the member] will purchase currencies from
the Fund and at which the Fund will return the currency of [the member] in
repurchase operations and make all other computations involving [the mem-
ber's] currency will be the provisional rate of exchange for [the member's]
currency proposed by [the member] and agreed by the Fund, and thereafter
the par value agreed with the Fund, or such rate as the Fund may ftom time to
time determine under Article IV, Section 8, of the Fund Agreement.

There is no legal necessity for the inclusion of either type of para-

graph in stand-by arrangements in order to enable the Fund to call
on the member to adjust the Fund's holdings of the member's cur-
rency. That power stems from Article IV, Section 8, and the Fund
can exercise it even in the absence of express reference to it in stand-
by arrangements. The main purpose of the paragraph is to give the
member notice that adjustment of the Fund's holdings may become
necessary during the existence of the stand-by arrangement. The
Fund's power remains exercisable after the termination of the
stand-by arrangement.

"Assets"
The Fund has concluded that it has implied powers to sell a portion
of its gold in order to invest the proceeds, on certain conditions, in
26
Article VIII, Section 3.

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order to earn income for certain limited purposes.27 The proceeds
have been invested in U. S. Government securities ranging from
Treasury bills having not more than 93 days to run to 15-month
Treasury securities. One of the problems that had to be resolved
before the investment program was undertaken was whether the
gold value of the securities would be maintained under Article IV,
Section 8. Subsections (b), (c), and (d) all refer to the Fund's currency
holdings. However, subsection (a) refers to the Fund's "assets." It
had already been decided in connection with the application of
Article IV, Section 8, to fluctuating currencies that subsection (a) had
independent substantive effect and was not merely a preamble adding
nothing to the rest of Section 8. It had also been decided in connec-
tion with the same issue that "assets" included currency holdings.
Therefore, the further problem was whether the word went beyond
currency holdings and would embrace the securities in which the
Fund would invest. It was of no assistance in solving this problem
that the gold value of the non-negotiable, non-interest bearing securi-
ties that members may substitute for currency under Article III,
Section 5,28 must be maintained in gold value, because Article XIX(/)29
provides expressly that these securities are to be regarded as currency
holdings.
The Fund decided that the securities would be "assets" under
Article IV, Section 8(0). The normal meaning of the word went be-
yond currency, and there was internal evidence in the Articles to
support this. For example, Article XIII, Section 2(fl),30 prescribed
"Executive Directors' Decisions Nos. 488-(56/5), 708-(57/57), 905-(59/32),
1107-(60/50), and 1272-(61/53), Selected Decisions, pp. 138-42, and Appendices,
infra,
28
p. 53.
Article III, Section 5: "The Fund shall accept from any member in place of
any part of the member's currency which in the judgment of the Fund is not
needed for its operations, notes or similar obligations issued by the member or
the depository designated by the member under Article XIII, Section 2, which
shall be non-negotiable, non-interest bearing and payable at their par value on
demand by crediting the account of the Fund in the designated depository. This
Section shall apply not only to currency subscribed by members but also to any
currency
29
otherwise due to, or acquired by, the Fund."
Article XIX (/): "The Fund's holdings of the currency of a member shall
include
30
any securities accepted by the Fund under Article III, Section 5."
Article XIII, Section 2(a): "Each member country shall designate its central
bank as a depository for all the Fund's holdings of its currency, or if it has no
central bank it shall designate such other institution as may be acceptable to the
Fund."

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the depositories for the Fund's currency holdings. Section 2(6)31
dealt with the depositories for "other assets, including gold." It was
clear from this and other provisions that in the minds of the drafters
the word "assets" included currency, gold, and other (unspecified)
holdings. It was concluded that there was no case for attributing an
artificially narrow meaning to the word "assets" in Section 8(#)
which would exclude the securities in which the Fund invested. It
was not part of the legal reasoning that in this case the securities
would be acquired in effect for gold, i.e., by the sale of gold to the
United States and investment of the proceeds in U. S. obligations.
Another question that had to be decided was the party or parties on
which the duty to maintain the gold value of the securities rested
under Section 8(a). That provision declares that "the gold value of
the Fund's assets shall be maintained" but does not state which
entity must discharge this obligation. The Fund itself can call for
performance of the obligation and can apply sanctions for non-
performance, although it can do nothing beyond this to maintain
gold value. It is conceivable that all members would bear the burden
proportionately; but this could mean that the member devaluing or
depreciating its currency would place most of the burden on other
members, and for them this would be a foreign exchange loss. It was
decided that in view of the nature of the obligation, namely to main-
tain gold value notwithstanding changes in the par or foreign ex-
change value of a currency, the implication, particularly in the light
of the other subsections, was that the obligation had to be discharged
by the member that made or permitted the change in the value of its
currency.
The Fund's decisions on investment also deal with the procedure
by which the gold value of the securities is to be maintained. It was
decided that if there is a change in the par or foreign exchange value
of the U. S. dollar while the Fund is holding the securities, the obli-
gation of the United States is to be discharged on the sale or maturity
of the securities. That is to say, the adjustment is made between the
Fund and the United States when the securities are next turned into

31
Article XIII, Section 2(b): "The Fund may hold other assets, including gold,
in the depositories designated by the five members having the largest quotas and
in such other designated depositories as the Fund may select."

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dollar proceeds after the change of par or foreign exchange value. The
income yielded by the securities, however, is not included in the pro-
ceeds that are adjusted, on the theory that the income was not part
of the Fund's holdings at the time of the change in par or foreign
exchange value. It has been seen that the obligation under subsections
(b) and (c) to maintain gold value relates to currency held by the
Fund at the date of the change in par or foreign exchange value. The
same principle applies to the maintenance of the gold value of
"assets" under subsection (a).
As income not yet realized or due at the date of the change was
not part of the Fund's currency holdings at that date, it is not re-
garded as part of the value of the securities at that date. Two points
must be made in this connection. First, the adjustment of the pro-
ceeds of the securities (less income) does not imply any departure
from the principle that the duty to maintain gold value applies only
to existing currency holdings or assets. It is still the gold value of the
securities held at the date of the change in par or foreign exchange
value that is being maintained, but as a practical procedure this is
done by adjusting the proceeds when next realized after the change.
Second, it must not be assumed that income from the investment
is excluded by its nature from Article IV, Section 8. It is excluded
in the circumstances described only because it was not realized or
due at the date of the change in par or foreign exchange value. Once
received, however, the income goes into the Fund's fungible holdings
of U. S. dollars, and the gold value of all of them will be maintained
if there is any subsequent change in par or foreign exchange value.
Before the investment was undertaken, the question of the effect
of a loss was discussed on the assumption that the Fund invested in
securities that could be sold before maturity at a loss in relation to
the purchase price. It was established that maintenance of the gold
value of the securities as assets of the Fund protects the Fund against
only one possible reduction in their value, i.e., the reduction that
would follow from diminution in the par or foreign exchange value
of the U. S. dollar. There is no general guarantee of the value of the
securities. Therefore, if it is assumed that the Fund invests in securi-
ties that can be sold at a loss before maturity, and that a loss does
occur, the decisions do not require that the Fund be compensated for

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this loss. If there is a change in the par or foreign exchange value of
the U. S. dollar, only the dollars realized on sale before maturity
will be maintained in gold value, and there will be no adjustment for
any loss attributable to the fact that fewer dollars are realized before
maturity than the purchase price of the securities. If that risk of loss
were to exist, the Fund would have to assume it because nothing in
Article IV, Section 8, protects the Fund against losses that do not
result from reductions in the gold or foreign exchange value of a
currency.

Borrowing

Under Article VII, Section 2,32 the Fund can borrow the currencies
of members in order to replenish its holdings of them. The Fund has
entered into General Arrangements to Borrow with eight of its mem-
bers and the central banks of two other members. Each of these ten
"participants" has assumed a stand-by commitment to lend up to a
stated maximum amount in its own currency in certain circumstances
and on certain terms and conditions.33
The commitment of each participant is expressed as an amount of
units of its currency. There is no obligation on the part of participants
to maintain the gold value of these commitments. Therefore, if a
participant's currency were devalued, its commitment would remain
the same nominal amount in its currency, but the gold value of the
commitment would be reduced. It is true that before Canada ad-
hered to the General Arrangements, it agreed to an increase in its
commitment on the establishment of a par value that represented a
devaluation compared with the rate of exchange for the Canadian
32
Article VII, Section 2: "The Fund may, if it deems such action appropriate
to replenish its holdings of any member's currency, take either or both of the
following steps: (i) Propose to the member that, on terms and conditions agreed
between the Fund and the member, the latter lend its currency to the Fund or
that, with the approval of the member, the Fund borrow such currency from
some other source either within or outside the territories of the member, but no
member shall be under any obligation to make such loans to the Fund or to
approve the borrowing of its currency by the Fund from any other source,
(ii)33Require the member to sell its currency to the Fund for gold."
Executive Directors' Decision No. 1289-(62/l), as amended by Decisions
Nos. 1362-(62/32) and 1415-(62/47), Selected Decisions, pp. 68-81 (p. 79, foot-
note). See Selected Decisions, pp. 81-82, for renewals.

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