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SPRINGER BRIEFS IN LAW

Christoph Herrmann
Corinna Dornacher

International
and European
Monetary Law
An Introduction

123
SpringerBriefs in Law
More information about this series at http://www.springer.com/series/10164
Christoph Herrmann Corinna Dornacher
•

International and European

Monetary Law
An Introduction

123
Christoph Herrmann Corinna Dornacher
Faculty of Law Faculty of Law
University of Passau Ludwig Maximilian University of Munich
Passau Munich
Germany Germany

ISSN 2192-855X ISSN 2192-8568 (electronic)

SpringerBriefs in Law
ISBN 978-3-319-57641-1 ISBN 978-3-319-57642-8 (eBook)
DOI 10.1007/978-3-319-57642-8
Library of Congress Control Number: 2017938622

© The Author(s) 2017

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Preface

Monetary law has long been dealt with by a small group of specialists only. Some
legal scholars even claimed that there was no such thing as monetary law.
Obviously, this is not true. The opposite statement by Georg F. Knapp at the
beginning of the 20th century: “Money is a creature of law” comes closer to the
truth. Modern monetary systems cannot exist nor be imagined absent a legal
framework. This is particularly true when it comes to cross-border financial activity
or monetary integration within international organizations such as the European
Union. Yet, monetary law is no easily accessible field of law, nor is it treated in
course curricula at university very frequently, despite its obvious relevance in
recent times of crisis.
With the present introduction, we try offer a guide to studying monetary law,
international and European, and make the complicated interplay between eco-
nomics (and sometimes politics) on the one hand, and law on the other, more
comprehensible. It is based on our own research and teaching experience of the past
years. A somewhat longer version of the work is currently being used as the
backbone for an online course of the Virtuelle Hochschule Bayern (vhb), a virtual
university of the Free State of Bavaria, Germany (http://www.vhb.org/en/
homepage/). The vhb thankfully permitted the publication of this work to make
it more widely accessible.
We hope that expectations of our readers are met and appreciate feedback to
christoph.herrmann@uni-passau.de and corinna.dornacher@jura.uni-muenchen.de.

Passau, Germany Prof. Dr. Christoph Herrmann LL.M.

Munich, Germany Corinna Dornacher
March 2017

v
Contents

1 Interdisciplinary Introduction to Money and Currencies . . . . . . . . . 1

1.1 History of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.1 What Is Money? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.2 Historical Development of Money . . . . . . . . . . . . . . . . . 2
1.2 Monetary Policy Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2.1 Two-Tier Mixed Monetary System . . . . . . . . . . . . . . . . 5
1.2.2 Monetary Aggregates. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.2.3 Monetary Policy and Policy Instruments . . . . . . . . . . . . 6
1.2.4 Currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2.5 Monetary Policy and Fiscal Policy . . . . . . . . . . . . . . . . 7
1.3 Money and the Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2 Monetary Sovereignty and History of International
Monetary Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.1 Monetary Sovereignty under Public International Law . . . . . . . . 11
2.1.1 The General Principle of Sovereignty . . . . . . . . . . . . . . 11
2.1.2 Monetary Sovereignty . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.2 History of International Monetary Law . . . . . . . . . . . . . . . . . . . . 15
2.2.1 Gold Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.2.2 The Creation of the Bank for International Settlements
(BIS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2.3 The Establishment of the IMF . . . . . . . . . . . . . . . . . . . . 17
2.2.4 The IMF’s Development . . . . . . . . . . . . . . . . . . . . . . . . 18
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3 Fundamental Legal Problems of International Monetary
Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.1 Lack of a Universal Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.2 Convertibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

vii
viii Contents

3.3 Exchange-Rate Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

3.4 Free Movement of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.5 International Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.6 The Trilemma of Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . 28
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4 The International Monetary Constitution: The IMF Articles
of Agreement—Institutional Design and Decision-Making . . . . . . . . 31
4.1 Institutional Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
4.1.1 The IMF within the International Setting. . . . . . . . . . . . 31
4.1.2 The Legal Framework of the IMF . . . . . . . . . . . . . . . . . 32
4.1.3 Institutional Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.2 Decision-Making Procedures/Processes . . . . . . . . . . . . . . . . . . . . 37
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5 The International Monetary Constitution: The IMF Articles
of Agreement—Substantive Legal Obligations . . . . . . . . . . . . . . . . . 41
5.1 Convertibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.2 Exchange-Rate Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.3 IMF Surveillance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.4 Technical Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6 IMF Lending (Financial Assistance). . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.1 Financial Architecture and IMF Resources . . . . . . . . . . . . . . . . . 51
6.1.1 Financial Architecture . . . . . . . . . . . . . . . . . . . . . . . . . . 51
6.1.2 Financial Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
6.2 Types of IMF Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
6.2.1 Non-concessional Financing . . . . . . . . . . . . . . . . . . . . . 54
6.2.2 Concessional Financing . . . . . . . . . . . . . . . . . . . . . . . . . 55
6.3 Modalities of and Access to IMF Facilities . . . . . . . . . . . . . . . . 55
6.3.1 Access Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.3.2 Modalities of IMF Facilities . . . . . . . . . . . . . . . . . . . . . 56
6.3.3 Conditionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
6.4 Crisis Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.5 The IMF and Currency Unions . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.5.1 IMF Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.5.2 The IMF and Currency Unions in Practice . . . . . . . . . . 61
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
7 History of European Monetary Law . . . . . . . . . . . . . . . . . . . . . . . . . 63
7.1 The Historical Development of the European Monetary
Constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
7.1.1 First Initiatives of Multilateral Monetary
Cooperation in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Contents ix

7.1.2 Monetary Implications of the European

Integration Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
7.1.3 The Evolution of the European Economic
and Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
8 The Legal Framework of EMU post Lisbon—Institutional
Setup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
8.1 ESCB and ECB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
8.1.1 Institutional Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
8.1.2 Eurosystem Objectives and Tasks . . . . . . . . . . . . . . . . . 76
8.1.3 ESCB Decision-Making. . . . . . . . . . . . . . . . . . . . . . . . . 78
8.1.4 Central Bank Independence . . . . . . . . . . . . . . . . . . . . . . 79
8.2 ECOFIN Council and Eurogroup . . . . . . . . . . . . . . . . . . . . . . . . 79
8.3 Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
8.4 Economic and Financial Committee . . . . . . . . . . . . . . . . . . . . . . 80
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
9 The Substantive Legal Foundations of EMU post Lisbon . . . . .... 83
9.1 Basic Features of EMU . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 83
9.2 Membership and Territorial Scope of the Euro Area:
Ins and Outs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
9.2.1 Convergence Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
9.2.2 Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
9.2.3 The Exception: “Outs” . . . . . . . . . . . . . . . . . . . . . . . . . 86
9.2.4 Relationship Between Ins and Outs . . . . . . . . . . . . . . . . 87
9.2.5 Termination of Membership . . . . . . . . . . . . . . . . . . . . . 87
9.3 The Euro as Legal Tender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
9.3.1 Legal Tender Status and Issuance of Banknotes
and Coins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
9.3.2 Regulations Introducing the Euro . . . . . . . . . . . . . . . . . 89
9.3.3 The Euro in Third Countries . . . . . . . . . . . . . . . . . . . . . 89
9.4 Free Movement of Capital and Payments . . . . . . . . . . . . . . . . . . 90
9.4.1 Reasons for the Liberalization . . . . . . . . . . . . . . . . . . . . 90
9.4.2 Content and Scope of the Freedom . . . . . . . . . . . . . . . . 90
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
10 The Monetary Policy of EMU . . . . . . . . . . . . . . . . . . . . . . . . . . .... 93
10.1 Legal Foundations and Limits. . . . . . . . . . . . . . . . . . . . . . . .... 93
10.1.1 What is Monetary Policy and How Does
it Work? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 93
10.1.2 The Eurosystem’s Monetary Policy Mandate . . . . . .... 95
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 98
x Contents

11 Economic Policy Coordination in EMU . . . . . . . . . . . . . . . . . . . .... 101

11.1 The Case for Economic Policy Coordination in EMU . . . . .... 102
11.1.1 Primary Law Foundations of Economic Policy
Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
11.1.2 Secondary Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
11.1.3 Extra-Union Law Measures . . . . . . . . . . . . . . . . . . . . . . 109
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
12 The External Relations of EMU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
12.1 The Acting Institutions/Entities . . . . . . . . . . . . . . . . . . . . . . . . . . 111
12.1.1 The Division of Competence . . . . . . . . . . . . . . . . . . . . . 112
12.1.2 The Doctrine of Parallelism . . . . . . . . . . . . . . . . . . . . . . 113
12.1.3 Judicial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
12.2 Exchange-Rate Policy of EMU . . . . . . . . . . . . . . . . . . . . . . . . . . 113
12.2.1 Objective of Exchange-Rate Policy . . . . . . . . . . . . . . . . 114
12.2.2 Formal Exchange-Rate Arrangements
(Art. 219 (1) TFEU) . . . . . . . . . . . . . . . . . . . . . . . .... 114
12.2.3 Floating Exchange-Rates (Art. 219 (2) TFEU) . . . .... 115
12.2.4 Agreements Concerning Monetary or Foreign
Exchange Regime Matters (Art. 219 (3) TFEU) . . . . . . 116
12.2.5 Tasks of the ECB (Art. 127 (2) TFEU) . . . . . . . . . . . . . 116
12.3 International Relations of EMU . . . . . . . . . . . . . . . . . . . . . . . . . 117
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
13 EMU and the Sovereign Debt Crisis—Legal Aspects
of Financial Assistance for Member States . . . . . . . . . . . . . . . . . . . . 119
13.1 Evolution of a Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
13.2 Measures of Member States . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
13.2.1 Measures Based on Extra-Union Law . . . . . . . . . . . . . . 121
13.2.2 Measures Based on EU Law . . . . . . . . . . . . . . . . . . . . . 125
13.3 Legal Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
14 EMU and the Sovereign Debt Crisis—Legal Aspects
of Monetary Policy Responses and the Banking Union . . . . . . . . . . 129
14.1 The Monetary Policy Reactions to the Crisis . . . . . . . . . . . . . . . 129
14.2 Non-standard Monetary Policy Measures . . . . . . . . . . . . . . . . . . 130
14.2.1 Enhanced Credit Support . . . . . . . . . . . . . . . . . . . . . . . . 130
14.2.2 Qualitative Easing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
14.2.3 Structural Open Market Operations . . . . . . . . . . . . . . . . 131
14.3 Legal Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
14.4 Banking Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
Chapter 1
Interdisciplinary Introduction to Money
and Currencies

For a comprehensive understanding of the legal principles constituting European

and International Monetary Law it is necessary to focus first on the subject matter at
hand: Money. Despite the term’s universal and frequent usage, few outside the
world of economic academics have probably taken the time to ponder what money
actually is, how it evolved historically and how monetary systems and policy
function today.

1.1 History of Money

1.1.1 What Is Money?

This relatively simple question proves to be rather complicated to answer and has
been the subject of an ongoing academic debate in economic, social and legal
theory. The origins of the debate enjoy respectable antiquity and include the works
of Aristotle, as well as later the works of scholars such as Weber, Schumpeter,
Keynes and Friedman. Generally, three different approaches as to what money is
can be distinguished:
The most practical approach is probably taken by economists, briefly stating
“Money is what money does!”.1 The nature of money is thereby defined by the
functions attributed to it. Generally, three characteristic functions are recognised,
albeit it is controversial which is the predominant one: Medium of exchange, unit of
account and store of value. Therefore, all existing financial assets (cash, demand
deposits etc.) that fulfil these three functions are economically considered to be
money.
In social theory, on the other hand, the role of the general public is strongly
emphasised, assuming that any commodity which is used as a means of exchange
1
I.a. Spahn (2003, p. 1).

© The Author(s) 2017 1

C. Herrmann and C. Dornacher, International and European Monetary Law,
SpringerBriefs in Law, DOI 10.1007/978-3-319-57642-8_1
2 1 Interdisciplinary Introduction to Money and Currencies

constitutes money. This assumption links the nature of money to a recurring social
practice of giving/receiving commodities as payment/consideration.
Conversely, in legal theory, Knapp most famously stated that “money is a
creature of law”,2 meaning that only those commodities constitute money, which
are equipped with purchasing power by the State. Yet, there is no general legal
definition of money. The legal terminology used is inconsistent and the meaning of
the term money varies significantly in criminal, public and civil law.
With that in mind, it is reasonable to define the socio-economic phenomenon of
money somewhat pre-legally in order to gain an idea of what money is or could be.
Considering the monetary functions in modern economies—medium of exchange,
unit of account and store of value—such a definition could be: “A transferable unit
of account, which is universally accepted as consideration for goods or services”.3
Furthermore, the general recognition of commodities as means of payment largely
depends on the following characteristics: scarcity (actual or controlled), count-
ability, uniformity, durability, portability and broad acceptance.
Currency on the other hand is defined as the regulation (not necessarily by
sovereign power) of a monetary system based on a unit of account, which is used as
means of exchange within a certain community. The term currency is also com-
monly used to describe the unit used in an organised monetary system (cf. Art. 3 (4)
Treaty on European Union (TEU)).

1.1.2 Historical Development of Money

The history of money and monetary systems can be described and conceived as an
actual socio-economic and cultural phenomenon, tracing back as far as the origins
of mankind. The development began with the use of specific preferred barter goods
(cowry shells, cattle etc.) as common means of exchange and evolved through the
creation of metal and coin money, book money, banknotes and paper money into
nowadays widely-used electronic forms of money. It has been a constant process of
dematerialisation, incipient with real commodities transforming over time into
virtual units of account without any innate utility.
The initial development of money stems from the need of people to exchange
goods and services. Conversely, fully self-sufficient people in terms of goods and
services do not need money. But even in the early stages of mankind a division of
labour existed, creating a need for exchange with others. Initially the problem was
solved by direct barter—a burdensome practice of searching for suitable exchange
partners. These impracticalities are thought to be the reason behind the emergence
of common means of exchange. Though they differed regionally, the means of
exchange were usually coveted specific barter goods with an innate utility, e.g.

2
Knapp (1923, p. 1).
3
Herrmann (2010, p. 78).
1.1 History of Money 3

cowry shells, cattle etc. (means of exchange theory).4 This means of exchange
theory is not undisputed in academia. Other explanations of the origin of money
include religious and cultural causes for the choice of certain barter goods as means
of exchange, e.g. the sacral meaning of cattle or because of a combination of
aesthetics and human craving for recognition (so-called swank money). Ultimately,
there is no mono-causal explanation for the origin of money. It was a lengthy
process, influenced by social, religious and economic factors.
Barter goods were subsequently replaced by precious metals, which proved to be
the most popular means of exchange as they were scarce, countable, uniform,
durable and portable in bars. But although the physical characteristics of metal
predestined it as a means of exchange, it also caused problems. Before an exchange
could be executed, the metal had to be weighed and counted and its quality had to
be determined, which caused delays and disputes. In an attempt to solve this
problem, coins were invented—pre-weighed standardised portions of a specific
metal. Additionally, in order to certify the measurements, the coins were later on
minted. In the Western World the birth of the metal coin dates back to 600–800 BC
(possibly even earlier in China and India).5 This marks both the beginning of the
idea that money has its own character and functions abstract and distinct from the
commodity used for exchange, and the beginning of the State influence on money.
States quickly claimed the right of coinage as part of their sovereignty, hence taking
the first step towards a monetary system and the creation of currencies. Throughout
the span of the metal era, different metals were in use, mostly however silver and
gold which led to the era of Bimetallism. The coexistence of both metals lasted until
the end of the 19th century when gold became the single monetary standard. By this
time, gold coins were not actually circulating anymore: ever since the 13th century,
they had gradually been replaced by paper money and token coins, whose value
was not determined by their metal content anymore. Token coins were merely a
representation of silver and gold. Yet gold still played an important role as the value
of the money depended on its relation to the gold reserves of the currency.
The triumph of paper money ensued due to the difficulties in transportation of
larger amounts of metal and the occasionally insufficient availability of precious
metal, which complicated matters further. Ever since the commercial revolution of
the 13th century, merchants therefore began to issue drafts and bonds in writing,
which could be converted into certain amounts of real metal. The merchant’s metal
was stored by a changer, who would convert the bonds and drafts for them. As the
practice of cashless payment evolved, changers simultaneously assumed the role of
bankers. The stored metal was technically book money, an early form of demand
deposits. The changers additionally began to loan the metal of their deposits to
other clients, which created a significant problem inherent to every financial system
up until today: The collapse of a bank caused by its inability to issue cash, resulting

4
For an overview see Davies (2016, pp. 10 ss, 35 ss).
5
Davies (2016, pp. 57 ss).
4 1 Interdisciplinary Introduction to Money and Currencies

from a run—a sudden and simultaneous withdrawal of money by bank clients—

after a major fallout in its credit business.
The circulation of these papers increased and goldsmiths began to hand out
receipts or goldsmith notes to clients, denominating the stock of gold stored. These
notes were transferable by endorsement and also used and accepted as means of
payment. Around 1670, London goldsmiths standardized the notes, pre-
denominating smaller amounts of gold instead of the respective stock or the speci-
fic amount of gold used in a single transaction. Subsequently, goldsmith notes even
became transferable without endorsement. Meanwhile other banks and even States
started to issue such notes too. Legally, these notes were bonds payable to the bearer
and transferable without endorsement. Due to their widespread public acceptance as
direct form of payment, the notes (paper money) achieved monetary status for the
first time and were rarely returned to their issuer. Yet our modern version of paper
money only emerged and developed between the 18th and 20th century after the
issuance and authorisation of banknotes were brought under national governments’
control by securing a monopoly for public and some private central banks, granting
paper money the status of legal tender and ending the gold/silver backing as well as
the obligation to convert. Ultimately, this also marked the end of the metal era, not
however the end of the process of monetary development.6
The final stage of this process of dematerialisation was reached with the
beginning of the information age from 1950 onwards. The introduction of elec-
tronic payment transactions and electronic money (e-money) took dematerialisation
one step further and presented a purely virtual form of money without any innate
value. However, it is important to differentiate between electronic payment trans-
actions and e-money, because they differ significantly. The former is simply an
electronic and thus more effective version of the known and traditional book money
instruments. The latter is a demand deposit, which is saved on data mediums, issued
in exchange for (real) money and accepted by companies as means of payment (e.g.
prepaid cards). The legal construction is similar to bearer bonds, although e-money
naturally cannot be qualified as a certificate. Since e-money can only be used for a
single payment transaction, ceases to exist after conversion into cash or book
money and is completely dependent on national monetary systems and traditional
banking services, it cannot be considered as virtual money just yet. A different
assessment may be pertinent with regard to so-called “crypto-currencies”7 or virtual
currencies, a notable example being Bitcoins. Crypto-currencies rely on
peer-to-peer networks, are thus decentralized, globally distributed and pseudony-
mous due to the encryption transactions.8 In contrast to e-money, crypto or virtual
currencies’ funds are not expressed in traditional currency units (Euro, Dollar etc.)

6
For a detailed study of the development see Davies (2016, pp. 183 ss).
7
For further information on crypto-currencies see https://www.ecb.europa.eu/pub/pdf/other/
virtualcurrencyschemesen.pdf.
8
For information on the technological background and functioning of Bitcoins see: Simonite
(2011), The Economist (2015).
1.1 History of Money 5

but in the respective virtual accounting unit (e.g. Bitcoins).9 Within the respective
community, they fulfil monetary functions and some, Bitcoins in particular, are
convertible into traditional currencies and have a free floating (thus far very
volatile) exchange-rate. The ECB cautiously defined them as “a digital represen-
tation of value, not issued by a central bank, credit institution or e-money insti-
tution, which in some circumstances can be used as an alternative to money”.10 The
careful choice of words and rather vague formulation hint at the still highly disputed
monetary and legal status of crypto-currencies. The European Court of Justice
(ECJ) recently implied in a preliminary ruling that Bitcoins are indeed to be clas-
sified as a currency, albeit a virtual one.11 Other commentators,12 however, regard
the characterization as a virtual currency as a simplification of the technological and
economic options offered by crypto-currencies. The ECB even rejects the idea of
crypto-currencies being money or currencies in that sense altogether based on
economic and legal considerations.13 And the German Federal Financial
Supervisory Authority decided to treat them as a form of private money falling
under the general category of financial instruments, § 1 XI German Banking Act
(KWG) for regulatory purposes.14 This exemplifies that the issue of virtual money
is far from being resolved and the aforementioned judgement most likely only
marks the beginning rather than the end of the legal debate.

1.2 Monetary Policy Basics

1.2.1 Two-Tier Mixed Monetary System

With the exception of a few countries, which use a currency board system (foreign
currency backing for the domestic currency), the two-tier mixed monetary system is
universally employed. The two tiers of the system consist of central banks on the
one hand and commercial banks on the other. The system is mixed because money
is provided by central banks (monetary base or “high powered money”) and by
commercial banks (book or bank money). Both monetary forms are economically
considered as money. The issuance of cash is normally a monopoly of central
banks, which manage the supply of money. Commercial banks on the other hand
can generate money by allowing demand deposits on credit in central bank money

9
ECJ, judgement from October 22nd 2015, Skatteverket/Hedqvist, C-264/14, para. 12.
10
ECB (2015, p. 4).
11
ECJ, judgement from October 22nd 2015, Skatteverket/Hedqvist, C-264/14, para. 12 and 24.
12
See e.g. Maupin (2015), http://voelkerrechtsblog.org/the-ecjs-first-bitcoin-decision-right-
outcome-wrong-reasons/.
13
ECB (2015, pp. 23 ss).
14
BaFin (2014), https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Fachartikel/2014/fa_
bj_1401_bitcoins_en.html.
6 1 Interdisciplinary Introduction to Money and Currencies

(banknotes or central bank book money), which generally does not enjoy the status
of legal tender, but is regularly accepted as payment in commerce. Combined, the
financial institutions generate the money in any given currency area. While central
banks possess the ability of (theoretically) limitless creation of money (and also
elimination of money by reselling e.g. bonds on the market), commercial banks
often face a liquidity problem: Loans can ultimately only be repaid with central
bank money, whose supply is limited by the central bank. The problem is similar to
the one described above, resulting from the obligation to convert into gold or silver.

1.2.2 Monetary Aggregates

The amount of money in circulation is described using different monetary aggre-

gates (M0, M1, M2, M3).15 M0 describes the monetary base or high powered
money (central bank money). In reality, commercial banks have developed an
increasing number of financial products (assets), which fulfil more or less monetary
functions (depending on their characteristics) and therefore exhibit varying degrees
of “moneyness”. Monetary aggregates reflect this by differing in terms of liquidity
and included assets, from M1 (narrow) over M2 (intermediate) to M3 (broad). M3
is generally considered the best indicator for future developments in the overall
level of prices, as it includes a wide range of financial assets. Coincidently, it is also
the aggregate least affected by central bank influence.
The actual macroeconomic amount of money supplied is a product of M0 and a
multiplier, which is determined by the central banks’ minimum reserves policy and
the preferred relation between cash and commercial bank money held by
non-banks. Although this formula suggests absolute control by central banks over
the supply of money (making it a quantity determined by exogenous factors), many
argue that the activity of commercial banks has a significant influence, turning it
into a quantity determined by endogenous factors in reality. The demand of money
on the other hand is defined as the preferred cash management of non-banks. In this
regard, money competes with other forms of storing value like bonds, immobile
assets etc. whereby non-banks are assumed to have an affinity for liquidity. The
short- and long-term stability of the monetary demand is highly debated among
economists; so far, the empirical data is inconclusive in this respect.

1.2.3 Monetary Policy and Policy Instruments

Monetary policy itself is defined as the targeted exercise of influence on the supply
of money in an economy by influencing monetary aggregates and interest rates in

15
ECB (2011, p. 50).
1.2 Monetary Policy Basics 7

order to achieve specific economic goals. Such goals generally are the stability of
monetary value (as indicated by the level of prices), the pursuit of specific
exchange-rates and economic stabilization policies. The interrelations of these goals
are not free of conflict, usually prompting central banks to prioritize one or the
other. Central banks have an array of instruments at hand to control/influence
monetary processes. Among them are the creation of central bank money, deter-
mination of the central rate, minimum reserve obligations for commercial banks to
limit their ability of generating money, and open market operations. An important
task of monetary policy is to guarantee a sufficient supply of money in order to
secure the liquidity of the banking sector, while at the same time setting limits for
their refinancing options in order to prevent excessive spending activities, which
would threaten financial markets and policy goals likewise.

1.2.4 Currencies

Money has an internal value, the purchasing power, and an external value, the
exchange-rates. The exchange-rate is subject to the exchange-rate policy (techni-
cally a subchapter of monetary policy). The decisive parameters for the currency
policy are the convertibility of the currency into foreign currencies and whether the
exchange-rate is free floating or fixed. The differentiation of internal and external is
somewhat artificial as exchange-rate policy decisions can affect the internal value of
money as well. An increase of the exchange-rate, for example, reduces the
inflationary tendencies, due to cheapened imports and a decrease in demand abroad
for national products. Conversely, the purchase of the national currency by central
banks in exchange for foreign currencies expands the amount of (national) money.

1.2.5 Monetary Policy and Fiscal Policy

Monetary and fiscal policy are linked as well. This link is most obvious when the
“banknote press” is employed or when public budgets are directly financed with
central bank money (monetisation of sovereign debt) as both measures directly
expand the amount of money circulating and thus have inflationary effects.

1.3 Money and the Law

Initially, despite the works of some scholars, law was not considered to play an
important role in the monetary sphere as theories of metallism and means of
exchange dominated the conception of both the idea of money and its value. Yet,
8 1 Interdisciplinary Introduction to Money and Currencies

according to the state theory of Knapp, “money is a creature of law”. In this

absoluteness, money would only be conceivable in combination with a sovereign
authority. Legal acts would be the defining force in monetary matters. But are they?
Firstly, the State theory did help to overcome the era of metallism and the idea
that any monetary system needs to be backed by silver or gold and equipped with
an obligation to convert in order to be stable and functioning. Also the monetary
monopoly of States, which is almost invariably established by modern constitu-
tional law, is effectively recognised as part of their sovereignty by international law
(see Chap. 2). Furthermore, legal rules as well as the judiciary play an important
role in economic and commercial life. But at the same time the State theory mis-
takes a natural and practical (State) monopoly for a natural right to define and
control money. The validity of money depends largely on broad popular accep-
tance. People will only accept payment/consideration in money, because they
expect other members of the same society will behave in the same manner. The
acceptance, originally stemming from the appreciation of the substance used, is
nowadays indeed based on a legal foundation: obligation to accept as payment,
prohibition of other currencies, taxing authority of the State. The State’s influence
on acceptance, however, is ultimately limited. Legal definitions, for example, can
only ever affect concrete forms of money, but are incapable—since it is simply
impossible—of legally influencing the purchasing power of money by denomina-
tion. Moreover, even the law itself provides examples of a broader sense of the term
money, e.g. § 35 of the German Bundesbank Act,16 which clearly identifies other
means of exchange different from the legal tender as money.
Ultimately, defining money as a creature of law amounts to disregarding the
socio-economic dimension of money. Therefore, the State theory approach has
subsequently been modified, in order to be able to explain real life developments
such as non-acceptance of the legal tender. It has been argued that legal regulations
concerning money could be altered by customary law. Others claimed that the
refusal of acceptance does not merely affect the characterisation of money; rather, it
deprives the underlying norm of its legal status altogether. Hahn and Siebelt on the
other hand asserted a dual creation process for money, meaning that money depends
on both law and social acceptance. Similarly, Proctor attributed to law the ability to
abstractly define what money is, but found that the State lacks control over what is
actually used as means of payment within the economy.
Another controversially discussed question is whether the obligation to accept
the legal tender is at all a prerequisite for money. Two counterarguments should be
considered: Firstly, this would limit the State’s power to create a monetary system
without such an obligation and secondly, foreign money would then automatically
lose its monetary status, due to its lack of legal tender status abroad. However,
foreign money is clearly regarded as money in legal norms such as § 146 of the

16
An English version of the Bundesbank Act can be found at http://germanlawarchive.iuscomp.
org/?p=833#35.
1.3 Money and the Law 9

German Criminal Code.17 The obligation to accept a legal tender is therefore more
likely to have practical consequences when a competing means of exchange is
circulating and a broader acceptance of the legal tender, which it has not achieved
based on its value or quality, needs to be secured.
In summary, the State is free to define money through legal acts. This is part of
the sovereignty of each State. However, law is more commonly used to regulate
what already exists, rather than as a tool for invention. The aforementioned
socio-economic phenomenon of money thus details what legally could be regarded
as money; not what the law actually does recognise as money. This does not
automatically render the State theory meaningless nor does it mean that law has no
influence on money at all. A modern economy needs a functioning monetary
system. A collapse would have severe consequences for the economy and the
wellbeing of the population. It is therefore unlikely that a State will leave monetary
issues solely to the social and economic market forces. Monetary regulations are
necessary and play a dominant role today, for example in contract or public
international law. Maybe the role of the State is best described as that of a company
with a dominant market position, which protects the company’s standard and
market share (tax demands and public payments) with all available methods and
consistently defies any competition.

References

BaFin (2014) Bitcoins: Supervisory assessment and risks to users. https://www.bafin.de/

SharedDocs/Veroeffentlichungen/EN/Fachartikel/2014/fa_bj_1401_bitcoins_en.html
Davies G (2016) A history of money, 4th edn. University of Wales Press, Cardiff
ECB (2011) The monetary policy of the ECB 2011. https://www.ecb.europa.eu/pub/pdf/other/
monetarypolicy2011en.pdf
ECB (2015) Virtual currency schemes—a further analysis. https://www.ecb.europa.eu/pub/pdf/
other/virtualcurrencyschemesen.pdf
Herrmann C (2010) Währungshoheit, Währungsverfassung und subjektive Rechte. Mohr Siebeck,
Thübingen
Knapp G (1923) Staatliche Theorie des Geldes, 4th edn. Duncker & Humblot, München
Maupin J (2015) The ECJ’s first Bitcoin decision: right outcome, wrong reasons? http://
voelkerrechtsblog.org/the-ecjs-first-bitcoin-decision-right-outcome-wrong-reasons/
Simonite T (2011) What Bitcoin is and why it matters. MIT Technology Review. http://www.
technologyreview.com/news/424091/what-bitcoin-is-and-why-it-matters/
Spahn H-P (2003) Money as a social bookkeeping device. From mercantilism to general
equilibrium theory
The Economist (2015) The trust machine. The economist. http://www.economist.com/news/leaders/
21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine

17
An English version of the Criminal Code can be found at http://germanlawarchive.iuscomp.org/?
p=752.
Chapter 2
Monetary Sovereignty and History
of International Monetary Law

2.1 Monetary Sovereignty under Public

International Law

The aforementioned principle of monetary sovereignty plays an important role in

monetary law and is key to understanding international monetary relations
notwithstanding the much discussed potential erosion of the principle.

2.1.1 The General Principle of Sovereignty

Like the term money before the principle of sovereignty is not as easily accessible
as the widespread use of the term in legal, political and economic discussions might
suggest. The complexity stems on the one hand from the issues (legality, legitimacy
and power) involved and on the other hand from sometimes varying understandings
of the term in different academic fields.

2.1.1.1 Content of the Principle

The legal principle of sovereignty generally encompasses the supreme authority

within a territory entrusted to the State as the political institution (internal dimen-
sion or sovereignty within the State) as well as its international independence from
other States or from interference with its internal affairs (external dimension or
sovereignty of the State) except for obligations under public international law. In a
nutshell, sovereignty hence denotes a status of self-determination and indepen-
dence.1 Today, it is among the fundamental principles of public international law

1
See also M. Huber in Island of Palma Case (Netherlands vs. USA), 1928, 2 UNRIAA 829.

© The Author(s) 2017 11

C. Herrmann and C. Dornacher, International and European Monetary Law,
SpringerBriefs in Law, DOI 10.1007/978-3-319-57642-8_2
12 2 Monetary Sovereignty and History of International Monetary Law

and considered to be one of the guiding concepts of international relations (cf. Art.
2 (1) Charter of the United Nations).

2.1.1.2 Historical and Theoretical Development of the Principle

Historically, the modern concept of sovereignty is closely linked to the evolution of

the nation state in Europe. Thus, the Peace of Westphalia in 1648,2 ending the
Thirty Years’ War, is often cited as the starting point of a system of sovereign
States. Against the backdrop of medieval (often religiously motivated) struggles for
power and competence between clergy, nobility, classes and cities, a unifying
authority was regarded as the only potential safeguard to establish and preserve
peace and order.3 It is not surprising therefore that Jean Bodin4 developed the idea
of a State equipped with absolute and lasting force, which is only subject to God’s
or nature’s law, certain general legal principles and contracts the respective State
has entered into.5 Internally, the most important development in the conception of
sovereignty and its origins was the change from sovereignty of the monarch (Bodin,
Hobbes, Machiavelli) to sovereignty of the people (Locke, Montesquieu, Rousseau).
Consequently, the State was (and still is) understood as an aggregate of individuals,
who are the original sovereignty-holders, representing and exercising their collec-
tive will through its (constitutionally prescribed, elected) bodies. Externally, the
removal of the personal link between sovereignty and monarch was facilitated by
the perception of the State as a judicial entity. The judicial entity “State” could
replace the monarch, a natural person, as the bearer of sovereign rights. Thus,
sovereignty of the State and not only within the State became possible. Today,
voices in academic and popular literature predicting the steady erosion or at least a
significant alteration of the principle due to constraints caused by economic glob-
alization and increasingly integrated financial markets worldwide are becoming
louder. Specifically with regard to Greece and Argentina the issue of sovereignty
infringements has been raised. Let it suffice here to note that the exercise of
sovereignty has never been absolute but always depended on what was possible in
reality. Therefore it seems reasonable to separate legal from political sovereignty,
the latter often being more a question of power rather than legal rights and subject
to constant change.6

2
http://www.britannica.com/event/Peace-of-Westphalia.
3
See for example: Fowler and Bunck (1995, pp. 4 s), Herrmann (2010, p. 90).
4
www.constitution.org/bodin/bodin.txt.
5
Before, the adjective “sovereign” was used mainly in legal procedure terminology to signify the
non-appealability of last instance court decisions. For a more detailed overview of the philo-
sophical development see Lastra (2015, pp. 6 ss).
6
Herrmann (2010, p. 92 ss).
2.1 Monetary Sovereignty Under Public International Law 13

In summary, by its very nature as an abstract concept, sovereignty has on some

occasions shaped political reality but often also merely retraced that reality, inte-
grating it into a legal framework.

2.1.2 Monetary Sovereignty

“It is indeed a generally accepted principle that a state is entitled to regulate its own
currency.”7
Monetary sovereignty is part of a State’s sovereignty and signifies the power to
issue and regulate money within a specified territory. The above statement by the
Permanent Court of International Justice is often cited as authority for the existence
of monetary sovereignty for lack of an express recognition or definition in the
Charter of the United Nations (UN) or the IMF Articles of Agreement. Proctor even
places money among the prima facie matters of a State.8 This is particularly
interesting since monetary matters were by no means originally State matters as
outlined in Chap. 1. Rather, States have successfully taken over monetary matters
due to some practical advantages they have compared to private entities. It was only
afterwards that philosophers and jurists fortified the existing exercise of the right
with theoretical reasoning and integrated it into a coherent legal framework.9 The
wording of the judgment, in particular, suggests a customary legal nature of
monetary sovereignty, indicating that the concept is potentially dynamic as it
depends on a generally accepted practice.10

2.1.2.1 Content

Monetary sovereignty resides with the nation State and not with central banks
despite their prominent role in monetary matters. The right encompasses the power
to issue a currency (lex monetae/ius cudendae monetae), to regulate money, to
control monetary policy, to control the exchange-rate policy and to impose
exchange and capital controls.11 It follows from this that States must generally
recognize monetary legal acts of other States, which is especially important in
contract law (currency changeover).12 One particular side effect of this rule of

7
www.icj-cij.org/pcij/serie_A/A_20/62_Emprunts_Serbes_Arret.pdf, http://www.icj-cij.org/pcij/
serie_A/A_20/62_Emprunts_Bresiliens_Arret.pdf.
8
Proctor (2012, p. 526).
9
Zimmermann (2013, p. 9).
10
Similarly Lastra (2015, p. 18).
11
Lastra (2015, p. 19), Proctor (2012, pp. 500 s, 526 s).
12
For a more detailed analysis of the recognition of the exercise of specific aspects of monetary
sovereignty see Proctor (2012, pp. 526 ss).
14 2 Monetary Sovereignty and History of International Monetary Law

international law is the phenomenon known as currency war: States seeking to

secure an economic advantage by manipulating the value of their currencies. The
manipulation can occur in three ways: (1) inflexible pegs of undervalued currencies;
(2) resisting a currency appreciation in a floating exchange-rate regime and
(3) quantitative easing.13 Especially China has been accused of such tactics in past
years.14 There is no ground for impugning such measures in general international
law, since they constitute a direct exercise of sovereign rights. Yet, they may violate
certain obligations under the IMF Articles of Agreements (see Chap. 5).

2.1.2.2 Erosion of the Principle

Nevertheless, the monetary monopoly of the State has been questioned in recent
years with some arguing that it is on the verge of erosion due to voluntary surrender
but also due to limitations caused by globalization, information technology and
economic and financial developments in the past decades.15
A prominent example of a voluntary surrender is the European Monetary Union
(EMU). The transfer of specific sovereign powers to the European Union (EU) has
been understood to erode or at least limit the sovereignty of individual Member
States. In terms of competences, this assessment might be accurate; Member States
of EMU are, for example, no longer competent to set a monetary policy. Another
argument often brought forward to this end is the irrevocability of the EMU, since
no exit provision exists in the Treaties apart from Art. 50 Treaty on European Union
(TEU), which allows Member States to leave the EU altogether.16 Yet rather than
focusing on matters of competence or power it is noteworthy that a voluntary
transfer of sovereign rights in accordance with international law constitutes one
form of exercising such sovereign powers and not an infringement of them. Thus,
Zimmermann convincingly considers the EMU a “joint exercise” or “a form of
cooperative sovereignty” rather than a limitation or erosion.17 With regard to the
IMF, mainly its role during the financial crisis has been criticized, the allegation
being that it exerts too much influence by making financial assistance conditional
on ever more specific structural reforms and therefore practically determining a
variety of domestic policies.18 This again is an allegation based on factual

13
Pisani-Ferry and Darvas (2010, p. 3).
14
For a detailed analysis of China see Garcia-Herrero (2015).
15
Lastra (2015, p. 20); Considering the participation in the EMU to be a limitation of sovereignty
see also Treves (2000, p. 116).
16
It is disputed among commentators whether it is indeed impossible for a Member State to leave
the EMU but not the EU. See https://www.ecb.europa.eu/pub/pdf/scplps/ecblwp10.pdf.
Additionally, the “irrevocability” wording of the Maastricht Treaty was eliminated by the Lisbon
Treaty (see Art. 119 II TFEU) and even originally did not address the Member States as ‘masters
of the treaties’ but referred to secondary law and thus addressed EU or formerly EC institutions.
17
Zimmermann (2013, p. 143 s); see also Mabbett and Schelkle (2014).
18
See Lowenfeld (2002, p. 257).
2.1 Monetary Sovereignty Under Public International Law 15

developments or power considerations and not a de jure situation reflected in the

IMF Agreement, which actually reasserted national sovereignty with the second
Amendment in 1978. Globalization and so called “private money” are frequently
cited as threats to monetary sovereignty as well. In this context, globalization refers
to the “deterritorialization” of money which stands in contrast to the territorial link
of national sovereignty.19 Control over the currency ultimately diminishes when it
circulates globally and escapes the confinement of national borders. Private money
(substitute, parallel or virtual currency) on the other hand will start circulating if the
acceptance of the legal tender declines or vanishes completely. Both phenomena,
however, again rather exemplify a weakened effect/success of national monetary
policy or regulation not a loss of the sovereign right itself.
At the outset, monetary sovereignty was identified as a dynamic concept. Hence
the legal principle can theoretically be altered by factual changes. Time, State
practice and acceptance are the key requirements to alter a customary legal prin-
ciple. There is no evidence that any of the alleged threats indeed fulfills these
requirements, especially regarding the latest re-nationalization developments some
financial markets and institutions are experiencing in the aftermath of the financial
crisis.

2.2 History of International Monetary Law

Before 1944, there was practically no international monetary law. The gold stan-
dard, which had evolved during the 19th century, functioned without any legally
binding regulation at international level and up until the World War I monetary and
capital flight were hardly limited.

2.2.1 Gold Standard

The international gold standard was a monetary understanding amongst the major
countries to use gold as the main reserve asset. As outlined in Chap. 1, the gold
standard started with the end of bimetallism, which was brought about when most
countries gradually opted for gold instead of other precious metals as a reserve
asset. England was the first in 1717 and as others followed gold was universally
used by 1870.20 The gold standard lasted until 1914. The underlying understanding
was that each participating country would guarantee the free convertibility of its
currency into gold at a fixed price. This, of course, facilitated the free convertibility

19
See Cohen (2000, p. 1).
20
Davies (2016, p. 357).
16 2 Monetary Sovereignty and History of International Monetary Law

of each currency into all other currencies at a fixed price.21 The understanding,
however, was not based on a formal international agreement and thus did not
impose any international legal obligation upon the countries adopting the gold
standard.22 As the name indicates, gold was the system’s core. The value of cur-
rencies was fixed against gold by the countries and the central banks held gold in
their reserves to defend/back up that fixed price (so called “pure” gold standard).23
Even before World War I some countries were already on a so-called
gold-exchange standard, meaning that their central banks did not or not entirely
hold reserves in gold, but also currencies of countries whose reserves consisted
entirely of gold. At the time, the preferred (reserve) currency was Sterling, after
World War II under Bretton Woods (for details see below) it was the US Dollar.

2.2.2 The Creation of the Bank for International

Settlements (BIS)

The acrimonious atmosphere after World War I thwarted all attempts to focus on
reestablishing peace and prosperity. Instead, the Treaty of Versailles of 29 June
1919 imposed reparation payments on Germany (and its allies) and a universal
reintroduction of a system similar to the gold standard failed. Even though some
countries adopted certain features of the gold standard unilaterally between 1925
and 1931, the system was entirely abandoned in 1931. The issue of reparations was
first addressed by the Dawes Plan and later by the Young Plan.24 In the context of
the latter, the Bank for International Settlements (BIS)25 was established in 1930 to
administer German reparation payments (a task previously performed by the Agent
General for Reparations in Berlin) and to serve as a trustee for the Dawes and
Young Loans (to finance reparations). Further objectives of the BIS included the
promotion of central bank cooperation and financial assistance (cf. Art. 3 Statutes of
the BIS). At the time the relevance of the BIS was soon undermined though by the
end of reparations in 1933/34, the breakdown of the gold standard and the attitude
of most countries (see below).26 The Bretton Woods conference even called for its
liquidation in the Final Act of the conference, opting to create a new institution over
reviving the existing one. Ultimately, the liquidation plan was never put into action
and the BIS has indeed developed into a center for central bank cooperation and

21
Davies (2016, p. 357).
22
Lastra (2015, p. 409).
23
Lastra (2015, pp. 409 s).
24
Named after an American Banker O. Young, who presided over a Committee of Experts to
resolve the issue of German reparations.
25
For a detailed study of the history of the BIS see Toniolo (2005, Chap. 2 ss).
26
Lastra (2015, p. 411).
2.2 History of International Monetary Law 17

institutional home for a variety of committees dealing with international financial

standards.27

2.2.3 The Establishment of the IMF

The Articles of Agreement of the IMF were adopted on 22 July 1944 by 44 of 45

member states (the Soviet Union never became a signatory) participating in the
International Monetary and Financial Conference of the United and Associated
Nations taking place in Bretton Woods, New Hampshire (commonly referred to as
Bretton Woods).28 The narrative of Bretton Woods, which consists of three pillars:
the IMF, the International Bank for Reconstruction and Development (IBRD,29
better known as World Bank) and International Trade Organization [ITO, never
came into existence, now World Trade Organization (WTO)],30 was to win the
peace and learn from past experience.31
The inter-war period namely was marked by tensions, instability and economic
problems (the Great Depression with worldwide effects32; high reparations, onerous
war debt and high unemployment specifically in the case of Germany). It is widely
believed that the economic problems in particular were a significant contributing
factor in the breakdown of the peace.33 There were initiatives to find cooperative
solutions on an international level to tackle the effects of the depression and restore
stability (cf. the London International and Monetary Conference 193334 or the
objectives of the BIS). This aim was never achieved though as international eco-
nomic collaboration collapsed against the backdrop of severe economic and
political tensions,35 which destabilized democratic regimes not only in Germany
and heralded a phase of external policies driven purely by national considerations.
The establishment of the Bretton Woods system was a milestone in international
monetary law since it was the first international legal system governing monetary
relations. The IMF Articles of Agreement, entering into force on 27 December
1945, imposed legal obligations on member states for the first time. Despite
changes to the Agreement (see below), it continues to be the basis for international
economic governance in monetary matters. The initial purpose of the IMF was to

27
Lastra (2015, pp. 414 s).
28
Today the IMF has 189 members, http://www.imf.org/external/about.htm.
29
The task of the IBRD was meant to be the facilitation of post-war reconstruction, though in the
end the Marshall Plan proved to play the key role in that regard.
30
This reflects the three dimensions of economic relations: Money, Investment and Trade.
31
The expression goes back to Keynes (1919).
32
For a detailed study see Friedman and Schwartz (1965).
33
For a detailed outline of the inter-war period see Lastra (2015, p. 410 ss).
34
Toniolo (2005, pp. 144–149).
35
E.g. Industrial production dropped by 47% in the USA between 1929 and 1932.
18 2 Monetary Sovereignty and History of International Monetary Law

foster cooperation and reconstruction after World War II in order to avoid repetition
of the disastrous consequences resulting from economic policies adopted during the
inter-war period by establishing an open and non-discriminatory international
monetary system, a system of convertibility, exchange-rate stability and avoidance
of restrictions on current payments.36 Largely, it can be viewed as a means to
stabilize international economic relations and cooperation in order to contribute to
the preservation of peace. Other commentators argue that it also marked the
beginning of the Cold War due to the Soviet Union not signing the agreement.37

2.2.4 The IMF’s Development

The IMF, also known as the Fund, evolved significantly over the course of its
existence, trying to adapt to the challenges it faced during the 70 years it played a
part in shaping the global economy. Likewise, the legal basis, the Articles of
Agreement, was amended and changed over time. The seven decades can be
roughly divided into five periods: Cooperation and Reconstruction (1944–71); the
end of the Bretton Woods regime (1972–81); Debt and painful reforms (1982–89);
Societal Changes for Eastern Europe and Asian Upheaval (1990–2004);
Globalization and the Crisis (2004–today).38

2.2.4.1 The Collapse of the Par Value System

The first milestone marking a change in the working of international monetary

relations was the collapse of the par value system (also known as Bretton Woods
regime). Under the original Articles of Agreement, a par value system was intro-
duced, which could be described as a gold-dollar standard. The value of each
member’s currency was either defined in gold or in US Dollar, which had a fixed
gold value [see Art. IV sec. 1 (a)]. The convertibility of the Dollar into gold at the
fixed price was guaranteed by US monetary authorities. Participating members on
the other hand were obliged to convert their currency into Dollars at a fixed price
(official exchange-rate or parity rate). Theoretically, the original Articles of
Agreement offered the possibility of adjusting the par value under certain cir-
cumstances (Art. IV sec. 5 (a) and 7). Initially the system seemed to offer pre-
dictability and stability of international monetary relations while creating a clear-cut
mandate for the IMF to enforce adjustment rules and provide temporary resources
in order to deal with short-term balance of payments problems. However, the par

36
See http://www.imf.org/external/about/whatwedo.htm#key.
37
James (1996, p. 70).
38
See http://www.imf.org/external/about.htm.
2.2 History of International Monetary Law 19

value system suffered from a decisive problem, referred to as the Triffin dilemma.39
At the core of the dilemma lies the ultimately limited supply of gold. A growing
world economy implies an increase in demand for Dollar reserves. If these demands
were to be accommodated, the Dollar/gold ratio would increase too, meaning that
the fixed price will not represent the actual value of the Dollar anymore. This would
lead to a decline in confidence in the US’ ability to convert the Dollar into gold and
consequently cause a rush to convert existing Dollar reserves, ultimately forcing the
collapse of the system. If the demands were not to be accommodated, the world
economy would likely succumb to deflation.
Already in the early 1960s it became apparent that the gold reserves were
insufficient. Countermeasures by the central banks of the US, UK, Belgium, France,
Netherlands, Germany, Italy and Switzerland included the creation of a “gold pool”.
Yet the parallel existence of private gold markets rendered it extremely difficult to
keep the gold price stable. The ensuing abandonment of the gold pool project
enabled the private gold price to be determined through supply and demand, trig-
gering a rise of the gold price. The IMF tried to meet foreseeable liquidity problems
by creating a supplementary exchange reserve asset, defined and maintained by the
IMF: the Special Drawing Rights (SDR).40 As the gold price continued to rise, even
this measure proved to be insufficient. The US was forced to suspend the con-
vertibility of Dollars into gold.41 Another contributor to the collapse was that the
adjustment “tools” foreseen in the original Articles of Agreement were not used due
to political reasons. Attempts to repair the collapsed system failed. What resulted
from the collapse was a de facto adoption of free floating exchange-rates in contrast
to the fixed exchange-rates in operation before.42

2.2.4.2 Second Amendment to the IMF Articles of Agreement

The Second Amendment (1978) to the IMF Articles of Agreement introduced two
major changes. Firstly, it officially permitted what was already common practice
amongst member States: floating exchange-rates. Secondly, it transformed the role
of the IMF. In the absence of substantive legal regulations permitting the Fund to
control the exchange-rate arrangements of its members, the emphasis shifted from a
primarily monetary one to a financial one, taking on issues such as supervising
banking and capital markets, financial reform and debt restructuring in line with the
broad objectives of the IMF, Art. I of the Articles of Agreement.43 Surveillance
became the Fund’s central task. Originally this shift could probably be regarded as a

39
Triffin (1960).
40
See http://www.imf.org/external/np/exr/facts/sdr.htm.
41
President Nixon formally declared the abandonment of the commitment to convert on 15 August
1971.
42
For a detailed outline of developments after the collapse see Lastra (2015, p. 420 ss).
43
Lastra (2015, p. 432).
20 2 Monetary Sovereignty and History of International Monetary Law

decline in power for the Fund. During times of financial crisis and sovereign debt
restructuring/crisis, however, the IMF has played a key role in the past and con-
tinues to do so: 1980s sovereign debt restructuring of less developed countries
(LDC); 1990s transition to market economies of formerly communist
countries/financial crises; 2007–today global financial crisis and Euro area sover-
eign debt crisis. These situations proved that when members are dependent on
immediate financial assistance, surveillance, risk assessment and decisions of the
IMF become rather powerful (perhaps too powerful, as some argue) tools despite
the lack of substantive enforcement provisions in the Agreement.

2.2.4.3 Further Amendments

In order to enter into force, an Amendment to the IMF Articles of Agreement

requires positive acceptance by three fifths of IMF members (currently 113 of the
189 members), representing 85% of the IMF’s total voting power. Several further
Amendments have been proposed and are awaiting acceptance, others have yet to
enter into force.44 Today, the three main functions of the IMF are: surveillance,
financial and technical assistance.45 The IMF itself seems to seek a more enhanced
role in promoting global stability by expanding its mandate in particular with regard
to financial sector issues. Thereby, the IMF is of the opinion that the current legal
framework offers enough flexibility and allows for a broader interpretation which is
still in line with the Vienna Convention of the Law of Treaties, Art. 31–32. This
reasoning has to be seen within the context, however, that going through the
amendment procedure in order to expressly expand the IMF’s mandate would be a
difficult task with an incalculable outcome.

References

Cohen B (2000) Life at the top: international currencies in the twenty- first century, Princeton
University essays in international economics No. 221. Princeton University Press, Princeton
Fowler M, Bunck J (1995) Law and power and the Sovereign State. Penn State University Press,
State College
Friedman M, Schwartz A (1965) The great contraction 1929–1933. Princeton University Press,
Princeton
Garcia-Herrero A (2015) Internationalizing the currency while leveraging massively: the case of
China. Bruegel, Brussels. http://bruegel.org/wp-content/uploads/2015/10/wp-15-121.pdf
Herrmann C (2010) Währungshoheit, Währungsverfassung und subjektive Rechte. Mohr Siebeck,
Thübingen

44
Information on the current status of Amendments can be found here: https://www.imf.org/
external/np/sec/misc/consents.htm.
45
See http://www.imf.org/external/np/exr/facts/glance.htm.
Another random document with
no related content on Scribd:
 "Oh, I don't know. She isn't at all the sort I would have thought John
would have picked for a wife. Very stunning woman, worldly wise, she must
have had hundreds of men eager to marry her. John is a fine chap, we all
know, but he's not the kind to knock a beautiful woman's eye out exactly."

"She seems to love him very much. And he's crazy about her, of course.
Their marriage looks very promising to me."

Warren shrugged his broad shoulders. "Oh, well, it's as I thought. If you
do know anything more about her, you're too damned much of a gentleman
to spill it—and I'm not enough of a scoundrel to press you for it. I may add,
though, in my own justification and with his sanction, that my honored
father-in-law is the one who is slightly worried and who set me up to
questioning you. Frankly, he is a bit suspicious of the lady. And his judgment
is not to be slighted, you know; he has an uncanny faculty for fathoming
folks."

The more praise for Henry Dorning's acumen, Rodrigo had thought, and
the more pity too, for it is not pleasant to note rumblings of disaster from
afar and to be unable either to warn or to confide.

CHAPTER XIII

About a week later, Rodrigo had a business conference that resulted in an

unexpected meeting and a pleasant adventure compensating in some
measure for his ill success in thwarting the clever Elise.

He had been conferring in the studio of a mural painter named

Washburn, who was doing some highly intricate work for Dorning and Son,
when he happened to look at his watch and discovered it was after one
o'clock in the afternoon. Neither had had lunch, and Washburn invited
Rodrigo to accompany him to a luncheon gathering of the Dutch Treat Club,
an organization of the most successful artists, authors and other members of
the intelligentsia in New York, at the Hotel Martinique.
 The luncheon was already in progress when they entered the crowded
room, but they managed to find two vacant chairs at a round table of
chattering men.

"Well—it's the Count himself!" came a booming voice from the chair
beside Rodrigo and he stared into the welcoming face of Bill Terhune.

They had little opportunity to talk during the luncheon and the program
of entertainment that followed, consisting of an ex-heavyweight champion
pugilist, who offered racy reminiscences of his famous victory over John L.
Sullivan, and a very ebullient Russian soprano. But Washburn left them later,
and Rodrigo enjoyed a talk with his friend as they mingled with the crowds
on sunshiny Fifth Avenue.

"You look great, Bill," Rodrigo said sincerely.

"Haven't touched a drop since that night with Binner and her friend,"
Terhune declared solemnly. "You know, that party taught me a lesson. I got
home the next night and found my wife had been very seriously ill—an
attack of ptomaine or something that blamed near carried her off. And I had
lied to her and told her I was detained in town on business. She was feeling
rotten when I phoned the lie, but she told me of course to stay. Well, it
brought me to my senses, and I took the pledge then and there. You know, a
fellow don't know how lucky he is to have a wife like mine till he darned
near loses her. I'm the model husband from now on, old boy. Swore off my
class reunion at Princeton and everything." Bill looked at his companion, a
little abashed at his long, intense confession. He tried to pass it off by saying
more lightly, "Say, you ought to meet my wife. Why don't you?"

"Why don't you let me then?" Rodrigo grinned in reply.

"By Jove, I will," Bill resolved. "Say—I tell you. I've got a couple of
extra tickets for the Princeton-Yale commencement baseball game at
Princeton Saturday. Why don't you get somebody and come along with us?
You'll like it. You've never seen anything like it—all the Princeton grads
parading in costume, plenty of color and jazz and all that sort of thing. Have
you got a girl or somebody to take? Not Binner, of course."
 So it happened that Rodrigo drove Mary Drake over to the Terhune home
in East Orange the next Saturday bright and early in the morning. Bill's wife
proved to be a very pretty, vivacious girl of about Mary's own age. There
was a three-year-old daughter who took to Rodrigo and Mary at once and
embarrassed them by asking innocently if they were married.

They started off merrily, the girls in the back seat and the men in front,
and joined the long procession of blue and orange-and-black bannered cars
rolling along the road out of Newark and across the New Jersey flats.

Princeton was jammed with gay throngs. All the vacant lots were dotted
with reunion tents, and old and young men in Scottish Highlander costumes,
sailor suits, clown suits, and all manner of outlandish rigs mingled with the
plain citizens and pretty girls on Nassau Street. Having parked the car, they
joined the mobs. Bill had to stop every few feet, it seemed to Rodrigo, to
greet friends of his college days. Rodrigo judged that his companion must
have been the most popular man who ever went to Princeton.

Bill took them to lunch at his club down Prospect Street with its close-
cropped lawns and cool shade-trees. Afterward he left them momentarily to
parade with his class into the athletic field, Rodrigo escorting the two girls to
their seats in the crowded grandstand. It was a gorgeous panorama of color,
youth and vivacity. Never had Mary Drake seemed so happy and carefree.
Never had she smiled at him so gayly and intimately, Rodrigo told himself.

To make the afternoon's pleasure complete, Princeton won the ball game
and the Terhune party stood up on the wooden boards and watched the mad,
whirling phantasmagoria of victory-crazed undergraduates and graduates
alike gyrating in dervish fashion in the age-old snake dance down there on
the scene of the triumph.

They motored back at a snail's pace, forced to throttle their speed by the
long lines of cars ahead of them. They stopped in Newark and had dinner at
a clean little restaurant on South Broad Street. Later, Rodrigo secured his
own car from Bill's garage and, with sincere expressions of thanks and
farewell, left the happy Terhune family waving at them from the trim
suburban lawn.
 "Oh, I have loved every minute of it!" Mary exclaimed when they were
alone. "Thank you a thousand times for inviting me along."

"Its been wonderful to have you," he replied. "You've added a lot to my

pleasure. We'll have lots of nice little parties this summer, Mary—at the
beach and other places."

Later she said, as if she had been reflecting upon it for some time, "I did
not know you were acquainted with and liked quiet, homey people like the
Terhunes."

And he was very glad that Bill had changed.

The summer droned by, with the requisite number of heat waves, during
which the newspapers screamed in black headlines of prostrations and of
hundreds of thousands sleeping on Coney Island's sands; and the
compensating number of comfortable periods in between too. John Dorning
showed an ever-growing inclination to spend these hot spells away from the
office, idling under the willows at Millbank. In many weeks, he did not
appear on Fifth Avenue more than two or three days. John was making up
for the long years he had kept clerk's hours, winter and summer. For the first
time in his life, he had learned how to play. He had found in Elise an interest
even more confining than Dorning and Son. He was hardly happy away from
her.

Rodrigo rather enjoyed the added responsibility placed upon his own
shoulders. And he did not particularly mind the heat. Frequently he would
bundle himself and Mary Drake, who had taken over some of the recreant
John's duties and was working harder than ever, into his recently purchased
roadster, late in the afternoon, and dash out of the city's glare to Long Beach
for a cooling swim. They would have supper at a shore roadhouse on the
return, and he would deliver her to her Brooklyn home while it was still
early in the evening, remaining for a chat with Mary and her mother or going
back to New York for a theatre or other engagement. Rodrigo was quite sure
that Mrs. Drake, who was keen-witted in spite of her wan face and
mouselike quietness, liked him and approved of his interest in Mary.
 Late in August, a museum project upon which John Dorning had been
working for nearly a year, abruptly came up for decision and the committee
in charge requested him to come out and meet with them. Rodrigo offered
himself as a substitute, but John's conscience asserted itself at last and he
declared he must really make the trip in person. It was the first time Elise
and he had been separated, and he did not fancy it in the least, though it
would be for only three days. Nevertheless, he superintended the packing of
the models of the pieces Dorning and Son had submitted, saw them shipped
off, and followed them two days later.

The morning after he left, Rodrigo's telephone rang. Elise was on the
wire inviting him to take her to lunch. She was at Grand Central, she said,
and would meet him at twelve-thirty. Rodrigo was filled with a curious
mixture of annoyance and pleasure. She had promised frankly in the
presence of her husband to do this very thing. There could be no harm in it.
And yet he knew that there would always be danger to him in being alone
anywhere with this woman, and the danger, he had to admit, was what gave
the thing its interest. He finally issued the desired invitation and met her in
the lobby of the Biltmore.

She was the soul of cool loveliness and discretion as they chatted over
the salad and iced tea. Her friendliness lulled to sleep the resentment he now
unconsciously always erected against her.

"I called you up one afternoon lately," she offered innocently, stirring the
tall, iced glass with the long glass spoon, "and they told me at the office that
you had gone to Long Beach swimming. It's so stiflingly hot this afternoon.
Wouldn't it be jolly to be out there?"

He admitted that it would.

"You're thinking that I am frightfully bold," she admitted. "And I am.

Frightfully warm too. Won't you, for John's sake, prevent John's wife from
perishing by taking her swimming? Or did your mother once warn you not to
go near the water?"

She could have followed no surer course of goading him to comply with
her wishes. Rodrigo flushed. His dark eyes shone. No woman had ever
before told him thus bluntly that he was afraid of her. He accepted the dare.
"I keep my car in a garage near here," he said rather curtly. "If you will wait
a few moments in the lobby, I will pick you up, and we will spend the
afternoon as you suggest."

They hardly spoke as he whipped the car in and out through the closely
packed traffic of the uptown streets and the Queensboro Bridge. Once out
beyond Long Island City, he pressed upon the accelerator and conversation
became almost impossible. Long Beach was nearly as crowded as upon a
Saturday or Sunday. It was by no means an exclusive resort. The children of
the proletariat mingled with paunchy stock brokers and with actresses
looking strangely old, with the artificial coloring washed off their faces by
the relentless salt water.

Elsie and Rodrigo changed into rented bathing suits. Even in the
makeshift outfit, she looked amazingly well, and he was quick to tell her so.
She acknowledged the compliment with her slow, languid smile. "You are
quite an Adonis yourself, as you probably know," she drawled, and raced
him into the surf. They alternately swam and rested side by side upon the
sand until dusk. Elise seemed to be content to act the witty, cheerful
companion and Rodrigo dropped his guard and enjoyed himself. He had not
known she could be so impersonally charming. This was the side of her
varied personality that she had shown to John, that had enthralled him.
Rodrigo could understand the attraction which she had for his friend now.

Rodrigo clasped his hands under his head, sprawled at full length upon
the white sand and allowed thoughts of Dorning and Son and even of Mary
to slip from his mind. He was oblivious of the world as he looked idly out
into the tumbling surf, oblivious of Elise until she addressed a trivial,
bantering remark to him. He turned lazily to face her and said, "You are a
wonderful sport when you want to be, aren't you, Elise?"

"I should arise and make you a pretty courtesy if it weren't so warm," she
replied with equal unconcern. And, after an interval, she added dryly, "You
really fancy this stenographer-and-employer style of spending an afternoon
in the great open spaces?"
 He looked at her quickly, but he decided that she alluded not to Mary
Drake in particular, but to the crowd in general that shared the sand with
them, and he had to admit that there were many couples among them that
seemed to answer her description.

"My tastes are simple," he said lightly. "The proletarian ideas of

pleasures seem to appeal to me."

"I didn't know the European nobility had turned so democratic," she
jibed.

"The Prince of Wales is our mentor. When on Long Island, do as the

Prince does. But really, my title means very little, you know. And I am three-
quarters an American by this time. I took out my first citizenship papers last
week."

She protested at once, "You shouldn't have done that. It means that you
renounce your title, doesn't it? Rodrigo, you shouldn't. Now I suppose you
will marry some simple American girl, have a house in Westchester, and
raise a brood of ruddy-faced little American urchins."

"That would be great stuff," he admitted.

"Fancy the immaculately attired Count Torriani hoeing a garden," she

laughed. "But I can't fancy it—it requires too much imagination for such a
warm day. Moreover, I am hungry, kind sir. Could you possibly give me a
lobster dinner somewhere about here? I should love it."

He sprang up at once with an exclamation of assent. They dressed in

their respective bath-houses. Later they dined slowly and satisfactorily at the
Hotel Nassau and started back for New York in the sultry dusk of the
summer evening. The salt tang was heavy in the air. A slight breeze was
making fitful efforts to blow in toward them from the sea. Most of the day-
time sojourners at Long Beach had already departed for apartment house
dinners and engagements in town; the night crowd had not yet arrived. The
roads were, in consequence, comparatively deserted.

They spun along in silence for half an hour or more. Then she said
quietly, "You have not tried to make love to me at all, have you?"
 His hand trembled slightly on the wheel and he pretended not to have
heard her.

"Do you then find me less attractive than you once did, Rodrigo?" she
asked.

"You are very beautiful," he said gravely, without looking at her. "But
you happen now to be the wife of my best friend."

"In the suburban community in which we reside, it is considered quite au

fait to flirt with one's friends' wives," she offered with simulated innocence.

"Really?" he countered. "But I am just a conventional New Yorker."

She had edged closer to him and the attraction of her presence was
undeniable. But when, after several minutes, he showed no inclination to
pursue the theme, she slumped into the seat away from him and said coolly,
"You may drop me at my aunt's. I have an engagement with her to attend
some fearful concert or other. Unless you would care to drive me all the way
to Greenwich."

"I too unfortunately have an engagement," he prevaricated so quickly

that she recognized it as a prevarication.

Soon they were in the congested, sprawly, factory-studded Long Island

City and had joined the slow-moving line of cars headed across the Fifty-
ninth Street bridge for the metropolis.

He parted with her at the residence of Mrs. Porter Palmer, saying in

adieu, "I have truly enjoyed our little jaunt very much, Elise." She smiled
and left him non-committedly. He thoughtfully piloted the car back to the
garage.

After putting the car away, he walked back through the still sweltering
streets to his apartment. A telegram rested upon the center table. It was from
John Dorning and stated that unforeseen developments would keep him in
Philadelphia over the week-end. Rodrigo smiled at John's probable whole-
hearted annoyance at fate for forcing him to remain at the home of the
pompous chairman of the library committee.
 A special delivery letter, pink and delicately scented, arrived at Rodrigo's
office the next afternoon.

DEAR RODRIGO:

Please come out with us for the week-end. John and I will be
so delighted. Telephone me when to meet you.

ELISE.

He frowned and tore the note into bits. Undoubtedly she too had received
word from John that he would not be home. Why was she still trying to
involve him? He tried in vain to excuse her, to convince himself that she did
not know of her husband's intended absence. He decided to ignore the
invitation entirely.

John Dorning did not appear at his office until Tuesday morning. Yes, he
said, he had concluded his mission satisfactorily, though he would probably
have to return to Philadelphia a few weeks later to supervise the installation
of the paintings and statuary involved in the deal. He discussed the matter
lugubriously in Rodrigo's office.

"Of course you, being a confirmed old bachelor, can't appreciate what it
means being away from your home and wife," he said half-seriously, while
Rodrigo smiled indulgently. "I never was so glad to see Elise in my life." His
face sobered a bit. "But tell me, Rodrigo, there is no—er—constraint of any
kind between Elise and you, is there? You are the same old friends, aren't
you?"

Rodrigo was on his guard instantly. "Of course. Why?"

"Nothing—only she tells me she wrote you a letter, before she got my
wire that I wouldn't be home for the week-end, inviting you up, and you
never even acknowledged it."

"It was caddish of me," Rodrigo replied. "I'm sorry. I'll apologize very
humbly to Elise the first time I see her."
 John put up a deprecating hand. "Oh, that's all right, old boy. Only I'm so
anxious for you and Elise to be close friends. You don't know what a
wonderful girl she really is. You know, I'm so incredibly happy that I want to
share the cause of my happiness—Elise—with you as much as I can. I feel
you're being cheated, sort of, because you haven't found the right girl too."

Rodrigo regarded him thoughtfully. "You are happy, aren't you? I don't
believe I deserve that kind of happiness. If I did, I'd go after it. Because I
really believe that I have found the right girl. Next to you, she's been the
biggest help in the world to me."

"Rodrigo! That's great." John's eyes were wide with pleasure. "Who is
she?"

"Mary Drake," Rodrigo said with quick intensity. "But I don't deserve a
fine girl like her. I haven't the nerve to—"

John walked over, his back to the door, and put his arm upon his friend's
shoulder. "Don't you think she would be the best judge of that? Have you
told her that you love her?"

Rodrigo shook his head.

John continued. "But is that fair to her? Suppose she loves you—and—
you know, if I'm any judge, I think probably she does."

"How could she?" Rodrigo suddenly cried emotionally. "A girl like her
—all soul and sweetness. I know that love doesn't demand perfections. If I
told her I loved her, I couldn't lie to her—I would have to tell her the whole
truth about my past, about Rosa and Sophie and the rest. She might forgive
—but she might despise me too. And I couldn't stand that, John. When I first
knew I cared for her, I made up my mind to attend strictly to business and to
make myself worthy of Mary. And I have. With the exception of that
harmless little episode with Sophie Binner, I haven't taken my nose from the
grindstone a minute. And yet I'm not the man for a girl like Mary."

"That's just egotism, Rodrigo," John said sternly. "You're setting yourself
up as a sort of God over Mary's destiny as well as your own. You haven't
looked at the matter from her point of view at all. You think you could be
happy with her?"

"I know it—I dream of nothing else!"

"Then why don't you give her the chance to say whether or not she could
be happy with you? Perhaps she dreams of nothing else too. None of us are
angels. None of us are privileged to ignore any chances of happiness. It's up
to each one of us, man or woman, to accept humbly, gratefully, every bit of
real happiness and beauty that life sends our way."

"You're right, John," Rodrigo replied simply. He tried to turn the

conversation to a lighter vein, to conceal how deeply he was moved. "You're
quite a philosopher, aren't you, old man? God bless you for it. I know you
think a lot of Mary, and of me, and I'm grateful." His eyes suddenly turned
toward the door as he realized that a third person had stepped into the room.

A clerk was standing uneasily just over the threshold, and now said in
considerable agitation, "A Mr. Rosner is here to see Mr. Dorning."

"Damn!" exclaimed John. "Send him away and tell him to come back to-
morrow. I'm frightfully busy."

The clerk hesitated. "He said it was very urgent."

Dorning had turned his back toward the door and was facing Rodrigo. To
his surprise, he saw the latter suddenly stare, grow tense and excited. John
wheeled around as Rodrigo took a quick stride toward the door.

Rosner, without waiting for the clerk's answer, had slipped past him and
into the office. And what a Rosner! Putty-pale, gaunt-cheeked, unshaven,
wild-eyed!

"Thought you'd send me away, eh?" he almost screamed. "See me to-

morrow, eh? Well, you'll see me now, John Dorning!"

Rodrigo quickly slammed the door shut and, turning to Rosner, whipped
out, "Don't yell like a madman, Rosner. Sit down and tell us what it's all
about."
 "I've got nothing to do with you," Rosner cried fiercely. "It's him I got to
reckon with." He pointed at John. The man was shaking all over, his eyes
blazing with a strange light. "He knows! He sold me that black and ruby
Huin Tsin vase—five thousand dollars. He knew I had to buy it. I had to
replace it for a customer, or go out of business. He knew that."

"It was less than it was worth," John tried to explain. "And I took your
note."

"I know damned well you did, damned well!" cried the hysterical
Rosner. "And your father took a mortgage."

"Mr. Dorning's lawyer, Mr. Bates—Emerson Bates—is the man to see

about that. Mr. Dorning doesn't handle those matters at all." Rodrigo tried to
soothe the ranting Rosner. The man was ill, beside himself.

"Lawyers are paid to do as they're told!" Rosner yelled hoarsely, gasping

as if his emotions would not allow him to talk. "I've been in the hospital—
three months—out of my head most of the time. Yesterday they took me
home. Mortgage foreclosed. Everything going at auction! My wife is sick.
They—say she may die. I'm out of business, do you hear! Down and out!
That's what you big men try to do, push us little fellows out, crush us, kill
us! You big concerns with all your money. Cornering all the valuable stock,
making us pay the price for it!" A sudden look of cruel cunning crept into his
mad eyes. "But there's something your dollars can't get you now—and that's
the chance to do it again!"

With a quick clutch at the pocket of his ragged coat he brought out a
revolver and pointed it, with a snarl, at John. His hand held it unsteadily. He
groped crazily for the trigger.

John Dorning let out an exclamation of terror. He cried, "Rodrigo!"

"Shut up!" Rodrigo cut in savagely, at the same time walking quickly,
boldly up to Rosner, staring steadily into the madman's eyes.

"Stand still," cried Rosner, but his hand and his voice were wavering. He
looked almost pleadingly at Rodrigo. "If you m—move again, I'll shoot."
 "No, you won't," said Rodrigo calmly, clearly. "Rosner, if you pull that
trigger, what will become of your wife and children?" With a stealthy, quick
movement he pushed John Dorning behind him. Rosner made a half-hearted
effort to resist as Rodrigo seized his wrist in a clutch of steel and knocked
the gun out of the man's weak fingers. Rodrigo put the revolver in his own
pocket and, the tension over, stood regarding Rosner with a look of infinite
pity. Then the reaction hit the broken man with full force and, suddenly
crumpling into a chair, he covered his face with his hands and his thin body
was shaken with hacking, convulsive sobs.

John and Rodrigo stood looking at him in silence for a moment, and then
Rodrigo said quietly, "You'd better speak to him, John."

Rosner had quieted a little now, and John put his hand upon his bent
shoulder. "Don't worry, old man," he said. "I'm terribly sorry. It's a mistake
all around. Dad and I would never have let this happen for the world, had we
been told anything about it. Forget the vase and the mortgage—and I'll lend
you anything you want to see you through."

Rosner raised a haggard, tear-swollen face. "My wife," he whispered

huskily, "is sick. And they told her I—I was out of my head."

John patted Rosner's shoulder. "Well, you're all right now, aren't you?
Sure—fine."

"I'll telephone Bates, and Madison can see Rosner home and do anything
necessary for his wife," Rodrigo suggested in an undertone to John.

"No, I'll go myself," John said. He helped the broken man to his feet and
located his hat for him.

Dazed, but strangely sane again and hopeful, Rosner turned to John and
said in an awed, puzzled voice, "I meant—to shoot." And, indicating
Rodrigo, "It was him that stopped me. Oh, thank God!—thank God!"

He allowed John to lead him out of the office and stood waiting calmly
outside for a moment while John went for his own hat. Dorning darted back,
a moment later, to Rodrigo. Still flushed with excitement, he held out his
hand, his eyes expressing his full heart. "Rodrigo!"
 Rodrigo took his hand. "We think we've got our problems, but they don't
amount to a thing, do they?—not a thing," he said thoughtfully.

"It's my life—that I owe—" John began.

But Rodrigo stopped him. "Forget it," he advised. "Nobody knows what
happened, and nobody needs to. There's just one thing I want you to promise
—I want you to agree that we give Rosner a job here when he's fit to work
again."

John smiled. "I was thinking of the same thing myself. I'll tell him about
it on the way to his home."

"I DARE YOU TO KISS ME—AND LET ME GO?" ELISE BREATHED.

 CHAPTER XIV

One summery September morning, a month later, John Dorning, gloom

written on his face, walked into Rodrigo's office and laid a letter ruefully
upon his desk.

"The dread summons has come," John announced. "Ferris wants me to

be in Philadelphia in the morning. The painting and pieces are there and he
wants to see me about arranging them and having plaques made and all that
sort of thing. What a bore! That's the annoying part of this business, Rodrigo
—when you've made a sale, your troubles have just begun. Your customers
know so little about what they're buying that you have to take it home for
them and keep it dusted and—oh, it's a nuisance."

Still fussing, John left for Greenwich early that afternoon, intending to
go all the way home and return to New York to catch the midnight train for
Philadelphia, rather than miss the precious hours with Elise.

The afternoon following John's departure brought two unexpected

developments. Rodrigo received a long telegram from his partner. The
painstaking Ferris wished estimates at once upon some new specimens of
Italian sculpture. He also desired to see new models. John suggested that
Rodrigo secure both at once and meet him at his hotel in Philadelphia early
the next morning. He indicated that competitors were interested in the new
proposition and that there was consequently need for both secrecy and haste.

Rodrigo hurried out of the office. He would have to secure some of the
desired pieces from a certain private collection, which he was quite sure
could be purchased on the spot.

He was, as a result, not present when Elise appeared in the establishment

of Dorning and Son about three o'clock in the afternoon.

The wife of John Dorning occasioned frank glances of admiration from

her husband's staff as she walked gracefully through the exhibition rooms
and into John's office. She was looking marvelously well in her new, svelte
fall costume, and she was quite aware of it. John Dorning's money permitted
her to give her striking beauty an adequately luxurious setting.

She was not sorry to find Mary Drake alone in her husband's office. She
was curious to make a more intimate study of this pretty blond girl, whom
she had previously noticed and spoken to but casually. For John had
indiscreetly shared Rodrigo's love secret with his wife. Though there had
been a tacit agreement between the men that Rodrigo's regard for Mary was
to be held in confidence, John had quite innocently told Elise about it. Were
they not equally interested in seeing their friend happy? John had, of course,
not noticed Elise's face turn cloudy for an instant as he related the news to
her.

Elise now concealed her real feeling toward Mary Drake behind a voice
of almost excessive sweetness as she asked, "Is Count Torriani outside the
building?"

"Yes, Mrs. Dorning. But he will probably be back at any moment."

"I shall wait here then—if you don't mind," Elise said quietly, settling
herself down comfortably in the chair beside the desk, while Mary resumed
her work of opening John's afternoon mail.

For several minutes, Elise carefully considered the delicate-faced girl

before her. What did Rodrigo see in this pale creature? Good Lord, he
couldn't be serious. She felt a resentment against Mary, a feeling of enmity
that was really a rising jealousy. As the moments passed, she suddenly was
seized with a desire to crush her,——

"I understand from Mr. Dorning that you and Count Torriani are good
friends—something more, perhaps, than just—secretary and employer?"
Elise said suddenly, striving with an effort to keep the suavity in her voice
and make what she had resolved to say sound as casual and friendly as
possible.

Mary looked up with a start, her eyes questioning and a faint pink
suffusing her cheeks.
 "I hope you won't misunderstand what I have to say or think me
impertinent," Elise went on. "You have been associated with Mr. Dorning so
long that I feel that you are almost one of our family." Elise forced a smile,
striving to disarm the disconcerted Mary. "From several things Mr. Dorning
has told me, I gather that Count Torriani has been very attentive to you in—a
social way?"

Mary rose and faced Elise coldly. "Mrs. Dorning, I do not care——"

"I assure you I have the best intentions in the world," Elise cut in
quickly. "I understand you have not encouraged Count Torriani. In that, you
show your excellent sense. Nevertheless, I know Count Torriani so well that
I feel I must warn you further. He is not what people call—a marrying man.
And I don't believe that you are the sort of girl who would care to——"

"Mrs. Dorning, please!" Mary cried sharply. Then she relaxed a little her
tense attitude. John had so often sung the praises of his sweet, unselfish wife.
Perhaps she was misjudging Elise's motives. She faltered in a more
conciliatory tone, "You mean to be kind, of course, but——"

"I do, I do. Mr. Dorning and I have seen so much unhappiness caused by
Rodrigo's impulsiveness and thoughtlessness. And you seem so much above
the average type."

"Thank you," said Mary. Hurt, outraged, she yet managed to be calm.
"But I can assure you that you need distress yourself no further on my
account."

"I must—even at the risk of making you angry at me. Of course, John
and Rodrigo have always been close friends, almost like brothers. Even in
that dreadful Sophie Binner mess, John stood by him. Rodrigo is in many
ways a fine man, but he has the continental ideas of love, you know. He
scoffs at our American worship of faithfulness. He has been the hero of so
many affairs, known so many worldly women, that I am sure the thought of
marriage has never entered his head. He could never settle down and make a
wife happy."
 "You misjudge him—you must!" Mary said hoarsely, but her defense did
not even convince herself. Elise was but putting into brutal words the answer
Mary herself did not want to give to the questions which had been agitating
her mind and heart for months. And who could say that Elise's answer was
not the true one? The past of Rodrigo was undeniable. And what proof was
there, Mary forced herself to ask, that he had not been playing with her too?

"You are so invaluable here," Elise went on caressingly. "It would be a

shame if—that is, Rodrigo would be the first to blame himself if his
thoughtlessness compelled you to——"

But in that veiled threat, Elise went just a little too far. Amid the
confusion in Mary Drake's mind came a flash of intuition. She relaxed her
tense posture and stared at Elise quietly. She understood what the wife of
John Dorning was driving at now—what it meant to her own relations with
Rodrigo. Mary made a sudden radical decision.

She said quietly to Elise, "I understand you, Mrs. Dorning. I understand
both Count Torriani—and you. In any case I am leaving—at the end of the
week."

"Oh, I didn't know that," Elise replied sympathetically, striving to keep

the relief out of her voice. She had accomplished her purpose far more
completely and with less effort than she had anticipated. This puritanical
miss, she had realized, must be eliminated. And now, it developed, the good
angel was eliminating herself.

Both women looked up quickly as the door opened to admit Rodrigo.

Without a word Mary turned and walked out past him with such a white and
troubled countenance that, his eyes turned grave and followed her
questioningly. When he shifted them to Elise, there was a glint of accusation
in their dark depths, though he said nothing about Mary. Instead he greeted
the wife of his friend with a colorless "This is a surprise."

"Is it?" she asked in a voice of velvet, resolving to humor him. "I am
merely following John's instructions. He said you were to take me to tea,
dinner, and the concert at Aeolian Hall later."
 "That was before the old boy telegraphed me all this extra work," he said
with affected good nature. What the devil, he was asking himself, had she
said to Mary—if anything? He said to Elise pointedly, indicating the bulging
brief case he laid upon the desk, "I'll have to work here every minute on this
stuff until I catch the midnight train for Philadelphia, if I'm to have things
shipshape bright and early in the morning as John instructed."

Her face clouded with annoyance. What an evasive, exasperating man he

was. But the very fact that he was going to such lengths to avoid being alone
with her only added stimulus to the game for Elise. "You're really going to
stay in this stuffy place until midnight?" she asked casually.

"I'm afraid I'll have to," he replied. "Please don't think I'm a boor or
anything of that sort, Elise. I should like nothing better than to spend the rest
of the day and evening with you, but—some other time."

"Why didn't you answer my letter inviting you to Greenwich for the
week-end?"

"Because I received a wire from John that he wasn't returning until the
following Monday," he said sharply. "And I naturally supposed you had
received the same information and that it automatically cancelled the
invitation."

A little smile played around her lips and she said softly, "What a safe and
sane and altogether good person you have developed into, Rodrigo." She
picked up her purse from the table and rose slowly to her feet. "Well, I
suppose I can call Rita Corson or somebody. You're sure you are playing the
business slave?"

"I'm sorry," he bowed. "Some evening soon we'll make it a foursome

with John and you and Mary and me."

"How interesting," she smiled, and he saw her to the door.

He watched her wending her serene way down the deserted aisle to the
street door, then picked up his brief case and went into his own office. A few
minutes later, he heard footsteps and judged correctly that it was Mary
returning to her sanctum for her coat and hat. He unbuckled his brief case
and took out of it a slender book bound in blue and gold. He walked quickly
out through the main room and into the office marked "John Dorning." Mary
was seated at John's desk staring into space, her eyes a little moist and red.

"I've found the book we were talking about the other evening, Mary," he
said cheerfully. "'The Anonymous Sonnets.' I located it in Dobell's
collection."

She summoned an answering smile, but her voice was dull as she said.
"You have a treasure then. It's very rare."

He came closer. "It isn't for me, Mary. I intended it for your birthday to-
morrow."

"It must have cost a fortune, Rodrigo—I can't accept it," she replied in a
low voice.

He looked at her blankly. "But why not? What's wrong, Mary?"

"I hope you won't think me ungrateful. But circumstances have

developed—that make it necessary for me to leave my position here at the
end of the week—or at least as soon you can get someone to replace me."

"Nonsense," he cried impulsively. "I know—someone has been talking to

you. But I'm not going to let you go." He suddenly felt happiness sweeping
away from him, darkness closing in, all that he held dear escaping him. He
clutched at her hand and cried quickly, pleadingly, "Mary! You can't! I need
you—I love you! I want you to be my wife." She looked at him, startled,
frightened, afraid to trust herself to speak. Emotion surged from him, "Oh,
haven't you seen how much I cared?" Then, a light and a terrible forecast of
disaster dawning, "Have you been afraid of this? Is that why you're
leaving?"

"Please, Rodrigo," she almost whispered. "I'm grateful—and honored—

but——"

"Don't say that yet, Mary. I've so much to tell you. So much that you
must believe."