Chapter

chapter 20 Some Effects of the Fund on Nonmembers

Author(s):
International Monetary Fund
Published Date:
October 1985
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Introduction

When a country enters an international organization it becomes subject to the terms of the charter, but an international organization may affect nonmembers as well as members. Writing in 1960 as the Special Rapporteur of the International Law Commission, Sir Gerald Fitzmaurice, later Judge Fitzmaurice of the International Court of Justice, noted that the literature on the “amorphous and rather protean topic” of the effects of a treaty on noncontracting parties was sparse and that both theory and doctrine were unsatisfactory.1

Sir Gerald felt that there was “only one absolutely firm and unequivocal principle,” the one sometimes expressed in the Latin maxim pacta tertiis nec nocent nec prosunt.2 He elaborated this, in Article 3 (1) of his Report, as follows:

  • … a State cannot in respect of a treaty to which it is not a party—
  • (a) Incur obligations or enjoy rights under the treaty;
  • (b) Incur any liability, or suffer any disability or detriment, or any diminution or deprivation of right, or be entitled to claim as of right any faculty, interest, benefit or advantage under the treaty.3

According to Article 34 of the Vienna Convention on the Law of Treaties, however, the “general rule regarding third States” is that “[a] treaty does not create either obligations or rights for a third State without its consent.” 4

Judge Fitzmaurice did not regard the consequences of consent by third states as true exceptions to his rule, but included them among the qualifications that constituted “a considerable gloss” on it, and to stop simply at the rule as formulated by him

would be to give a very misleading picture of the position of third States in relation to treaties to which they are not parties. In short, there are a number of ways in which treaties do have legal effects on, for, or relative to, third States, even if directly obliging or entitling the third State under the treaty itself is not amongst them, and even if the latter remains in principle one of the effects that a treaty cannot have for a third State.5

It is unlikely, however, that any unifying legal principle runs throughout the qualifications that he was referring to.

The relations of the Fund with nonmembers and the effects of the Fund’s Articles on them are considered in this and succeeding chapters in order to see in what way the experience of the Fund has put a gloss on Judge Fitzmaurice’s rule. The topics considered are the limits on the freedom of members in dealing with nonmembers, the acceptance by nonmembers of certain obligations or standards that parallel those of the Articles, the withholding of certain benefits from nonmembers, the extension of certain benefits to some nonmembers, and the consequences for nonmembers of the objective personality and activities of the Fund. In this chapter, it is unnecessary to distinguish between those nonmembers that have been members and those that have not. It has been seen, however, in an earlier chapter that ex-members may have rights against or obligations to the Fund under Schedule D or under agreements on the settlement of accounts, but these rights and obligations disappear once the settlement under Schedule D or under an agreement is performed. Although the rights and obligations arise after membership is terminated, they derive from the ex-member’s acceptance of the Articles and the obligations set forth in them with respect to withdrawal from the organization. In short, the rights and obligations are based on consent of the ex-member as a contracting party.

General Undertakings of Members Regarding Relations with Nonmembers

Article XI is the most direct and obvious attempt in the Articles to affect nonmembers. This provision does not impose obligations on nonmembers, and it differs, therefore, in approach from Article 2 (6) of the Charter of the United Nations, under which the United Nations assumes authority over nonmembers without basing it on their consent. “The Organization shall ensure that states which are not Members of the United Nations act in accordance with these Principles so far as may be necessary for the maintenance of international peace and security.” 6 The technique of Article XI is to impose obligations on members in their relations with nonmembers and therefore to affect non-members indirectly and without their consent. Article XI, Section 1, provides as follows:

  • Undertakings regarding relations with non-member countries
    • Each member undertakes:
      • (i) Not to engage in, nor to permit any of its fiscal agencies referred to in Article V, Section 1, to engage in, any transactions with a non-member or with persons in a non-member’s territories which would be contrary to the provisions of this Agreement or the purposes of the Fund;
      • (ii) Not to cooperate with a non-member or with persons in a non-member’s territories in practices which would be contrary to the provisions of this Agreement or the purposes of the Fund; and
      • (iii) To cooperate with the Fund with a view to the application in its territories of appropriate measures to prevent transactions with non-members or with persons in their territories which would be contrary to the provisions of this Agreement or the purposes of the Fund.

There are a number of obscurities in this provision. For example, is Article XI the only provision establishing the obligations of members in relation to nonmembers? If it is an exclusive provision, it is not easy to see how certain transactions with nonmembers or practices involving them could be contrary to other provisions of the Articles. If it is not exclusive, there must be other provisions that regulate the relations of members with nonmembers, and it is not clear what function Article XI performs. The explanation may be that among the provisions establishing the obligations of members, some govern their relations both with other members and with nonmembers whereas some obligations apply only to relations with other members. Therefore, the latter obligations may have been broadened by requiring members to refrain from certain actions in their relations with nonmembers that would be contrary not to specific provisions but to the purposes of the Fund. For example, Article IV, Section 2, binds members to refrain from buying gold at a price above par value plus the margin prescribed by the Fund, and no reference is made to the seller, so that a member may not buy gold at a premium price even from a nonmember.7 This provision could be transgressed by a transaction between a member and a nonmember. Exchange transactions involving a member’s and a nonmember’s currencies could not be in violation of the provisions that establish the margins for exchange transactions, because the obligations to observe these margins apply only to transactions involving the currencies of members.8 It might be possible to demonstrate, however, that the purposes of the Fund would be undermined by exchange transactions involving a member’s and a non-member’s currencies if the rate or rates of exchange in these transactions were out of line with the rates in transactions involving the nonmember’s currency and the currencies of other members. The transactions of the member could be in disregard of the purposes of the Fund that seek to promote exchange stability and to avoid competitive exchange depreciation.9

Whatever the difficulties of understanding Article XI, Section 1, it is clear from its structure and from the use of such general language as “transactions” and “practices” that it was intended to have a broad effect in regulating the relations of members with nonmembers. This intention is confirmed by the hearings on the proposed U. S. Bretton Woods legislation when it was before the Committee on Banking and Currency of the U. S. Senate. Senator Taft, in discussing Article XI, asked:

If there is some nation that is not in the fund why shouldn’t we [i.e., the United States] make any arrangements we think we want to make [i.e., with that nation]?

Mr. White explained:

We didn’t know what the nonmember countries would be, and it might be possible for member countries to make arrangements with nonmember countries which would have the effect of putting other member countries at a disadvantage. It was deemed desirable to have a broad clause in there which would protect the member countries from any undertaking or arrangement by a member country with nonmember countries. If that paragraph were not in there, if that protective clause were not there, there would be no protection that member countries would have against the dealings of a member country with nonmember countries; and since we don’t know how many nonmember countries there may be, if any, it was deemed desirable in general to have that protective clause.

Senator Taft asked for an example of an arrangement that would be caught by the provision, and Mr. E. M. Bernstein then spoke as follows:

The purpose of that first provision, as Mr. White indicates, is to prevent a country violating the purposes of the agreement by going into a nonmember country to do it. For example, members are supposed to keep their currencies stable. Suppose the exchange authorities of a country went to Switzerland and there sold its currency at way below the levels that have been established under the fund. That would have the effect of undermining the stability of the currency which the agreement is intended to facilitate. So this provision is designed to prevent the authorities of a country from going into a nonmember country and doing there what presumably the fund does not permit.

In answer to a further question, Mr. Bernstein said that if England sold sterling at a discount in Switzerland, it “would give Switzerland sterling at a low rate which would give an advantage to the British exporter to Switzerland.” Mr. White added that the provision was “a sort of a catch-all protective clause rather than aimed at any particular business transaction.” Senator Taft responded, “It is suggested to me that you are setting up this fund board as kind of a regulator of the world, people who are non-members as well as members, or of members dealing with non-members.” Mr. White replied, “Well, the intent was rather the latter, so that there would not be a loophole in the arrangements contemplated in the fund such as would be created by business dealings of nonmember countries over which the fund would have no control.” He went on to say that if countries like Germany and Japan remained outside the Fund, they might constitute serious competitors. They “might resort to all kinds of devices in a few years, and if they did that there would be no way in which the fund could have control over them, and this clause provides that. It would mean that they could do business with member countries only on the basis of the principles that apply to all member countries.” 10

The Fund has made little use of Article XI, Section 1, in its practice so far.11 The modest use of the provision can be explained to some extent by the growth in the membership of the Fund. Again, although bilateral payments agreements between members and nonmembers could fall within the purview of Article XI, the Fund has been more preoccupied so far with the elimination of them between members. It has shown some concern, however, with payments agreements between members and nonmembers,12 particularly when they have led to restrictions by members on payments and transfers for current international transactions with other members.13

Special Undertakings of Members Regarding Relations with Nonmembers

A member may enter into a special undertaking to the Fund with respect to its relations with nonmembers. In the course of the Fund’s consideration of Germany’s application for membership, the question was raised of the relationship between the Western sectors of Berlin and the Federal Republic. Until July 1, 1948, the Military Governors of the United States, the United Kingdom, France, and the U. S. S. R. constituted the Kommandatura that exercised joint authority over Greater Berlin while exercising administrative authority in their respective sectors. On July 1, 1948, the Soviet representative withdrew from the Kommandatura, and on May 14, 1949 the other three representatives issued a statement of principles governing the relationship between the Allied Kommandatura and the civil authorities of Western Berlin. In this statement, as amended on March 8, 1951, the Allied Kommandatura reserved certain powers, including the “control of foreign trade and exchange, and over trade between Berlin and the Western Zones of Germany; and control over monetary and fiscal policies insofar only as these policies seriously affect Berlin’s need for external assistance,” and the “control of banking, currency, and credit policy so that it may be fully coordinated with the banking and credit policies of larger areas of Germany under Allied supervision.” By a decree of March 20, 1949, the three Allied powers established the Central Bank of Western Berlin and directed it to develop a working relationship with the Bank Deutscher Länder in connection with foreign exchange transactions. The constitutional authority of the Federal Republic did not extend to Berlin. The staff of the Fund concluded, when examining the application of the Federal Republic, that until the legal position changed the membership of the Republic would not apply to Western Berlin, which would remain “non-member territory.” The membership committee accepted this view, but concluded that a cooperative arrangement with respect to Western Berlin might be worked out between the Fund and the Federal Republic under Article XI, Section 1 (iii), and Article IV, Section 4 (a).

The Fund thereupon asked the authorities of the Federal Republic for clarification of certain aspects of the relationship between the Federal Republic and Western Berlin in regard to foreign exchange in view of the fact that they constituted a single trade and currency area. An understanding was reached between officials of the Fund and a German negotiator that the application for membership was confined to territory under the jurisdiction of the Federal Republic, but that there was already uniformity in the measures relating to the external financial policy of the Federal Republic and Western Berlin because the monetary authorities of Western Berlin, in conformity with decrees of the Allied commanders, applied measures that were in substance the same as those of the Federal Republic. This uniformity would be observed after the occupation of Western Berlin ceased, but in order to give an assurance of continued uniformity Western Berlin would give the Federal Republic a written undertaking that its measures in the field of foreign exchange would be the same in substance as those of the Federal Republic. This undertaking would constitute an obligation to the Federal Republic and not to the Fund, but the Federal Republic would be prepared to give an undertaking of its own to the Fund. The Federal Republic would exercise its formal and informal functions in relation to Western Berlin in such a way as to ensure that the policy of Western Berlin in its external financial affairs would be conducted as far as practicable as if the obligations of the Federal Republic under the Articles extended to the territory of Western Berlin.

The effect of these arrangements would have been that the Federal Republic and Western Berlin would be a unified currency area in which the obligations of the Articles would apply uniformly even during the period in which the territorial jurisdiction of the Federal Republic did not extend to Western Berlin. It was also understood that there was no intention to adjust the quota initially accorded to the Federal Republic if and when Western Berlin was incorporated in the Federal Republic.

The Ministry of Finance of the Federal Republic confirmed the aide-mémoire in which these understandings were recorded and stated that the Federal Republic would be willing, when it entered the Fund, to give the undertaking mentioned in the aide-mémoire.

Certain legal aspects of this episode are worth noting. When the aide-mémoire was agreed, it was assumed that when the Federal Republic became a member it would not be accepting the Articles on behalf of or in respect of Western Berlin within the meaning of Article XX, Section 2 (g), unless, of course, there were to be some change in the status of Western Berlin before that date. There was no suggestion, however, that the three powers had “authority” in the sense of Article XX, Section 2 (g), through the medium of the Allied Kommandatura. Such a suggestion might have provoked the question whether the Federal Republic itself was under the “authority” of the three occupying powers. Perhaps a more powerful reason for the approach that was adopted was the special status of Western Berlin in international relations.

The proposed undertakings of Western Berlin to the Federal Republic and of the Federal Republic to the Fund would have amounted to a technique by which the provisions of the Articles would have been observed in a territory even though it was assumed to be beyond the reach of Article XX, Section 2 (g). The legal effect of the technique would have resembled the effect of a special exchange agreement, which is discussed in the next chapter, except that the undertaking of the Federal Republic would have been given to the Fund whereas the obligations under a special exchange agreement are owed to the Contracting Parties to the General Agreement on Tariffs and Trade and not to the Fund.

The technique that was worked out with respect to Western Berlin rested in part on Article XI, and it illustrates the proposition that a member can undertake commitments to the Fund that make its obligations under Article XI more specific. In the particular instance of Western Berlin, “a non-member’s territories” was given an extensive meaning, that is, “non-member territories.” There was no finding that the territory was part of a country that was not a member of the Fund. In view of the special status of Western Berlin, the meaning given to “a non-member’s territories” may have limited application to other situations. Moreover, it would have been possible to achieve a similar result by relying on Article IV, Section 4 (a), to ensure that Germany would observe the purposes of the Fund in its relations with Western Berlin, without invoking Article XI, but in 1951 there was less sympathy for recourse to Article IV, Section 4 (a), than there has been in more recent years.14 In 1951, some executive directors felt that Article IV, Section 4 (a), should not be applied in a way that seemed to them to enlarge the jurisdiction of the Fund, and the citation of a less general provision probably helped to eliminate suspicion.

Events made the technique of the aide-mémoire unnecessary because on January 4, 1952 the Bundestag, acting in agreement with the Bundesrat, passed the Law on the Status of the Land Berlin Within the Federal Financial System (Third Transference Law). Article 1 provided that, within the framework of the statute, financial relations between the Federal Government and the Land Berlin as from April 1, 1951 were subject to the same legal provisions as those governing financial relations between the Federal Government and the other Länder under the federal constitution and federal laws. A similar provision applied to the financial relations between the Land Berlin and the other Länder. The statute was to enter into force as soon as the Land Berlin decided, in accordance with the relevant provision of the Berlin Constitution, that it should be applicable.15

The memorandum submitted to the Fund in connection with the membership of Germany explained that the Law on the Accession of the Federal Republic of Germany to the Articles of Agreement of the International Monetary Fund and of the International Bank for Reconstruction and Development16 applied to the Land Berlin as well as the other Länder, as a result of the Law of January 4, 1952 and the steps taken under that Law to make it effective in the Land Berlin.

The instrument of acceptance declares that “the Government of the Federal Republic of Germany hereby declares that it accepts in accordance with the law of the Federal Republic of Germany and of the Land Berlin (West) the Articles of Agreement of the International Monetary Fund and all the terms and conditions prescribed in the aforesaid Resolution. …” This formulation refers to the acceptance of the Articles and avoids any use of the phrases “own behalf” and “in respect of” that appear in Article XX, Section 2 (g).

Undertaking of Nonmember to Member

In at least one international agreement, a nonmember assumed an undertaking to a member to “adhere to the rules” observed by a member of the Fund. The undertaking was not accompanied by any undertaking of either party to the Fund, and the agreement was not explained in terms of Article XI.

The special report of the United Nations Commission for Indonesia on the Round Table Conference held at The Hague from August 23 to November 2, 1949 was transmitted to the Security Council on November 10, 1949. The Round Table Conference was held for the purpose of settling the Indonesian dispute and reaching an agreement “concerning the ways and means to transfer real, complete and unconditional sovereignty” to Indonesia. The settlement between the Netherlands and Indonesia reached at the conference involved certain financial commitments of the latter to the former, and the delegation of the Netherlands contended that these commitments created a direct interest in the future financial policy of Indonesia and that the Netherlands was entitled to guarantees to protect its position as a creditor. The Indonesian delegation considered guarantees to be incompatible with the sovereignty of Indonesia as a state.17 The solution was a draft Financial and Economic Agreement that was set forth in Appendix XIII of the report and became effective on December 27, 1949.

Under Article 14 of the agreement, both the Netherlands and Indonesia undertook to

aim at a sound monetary system based on the principles expressed in the Bretton Woods agreements. This requires, inter alia, that in each country a single circulation bank shall operate. The monetary policy of each of the two countries shall aim at achieving and maintaining a stable internal and external value of the currency and shall aim at promoting free convertibility of exchange.18

Article 15 of the agreement reads:

As long as the Republic of the United States of Indonesia has not yet acquired membership to [sic] the International Monetary Fund, the Republic of the United States of Indonesia shall adhere to the rules to be observed by a member of the Fund.

Furthermore, consultations shall be held between the Netherlands and the Republic of the United States of Indonesia to enable the latter to become at the earliest possible date a member of the International Monetary Fund.19

Premium Gold Transactions Involving Nonmembers

At a time when the growth in gold transactions at premium prices engaged the attention of the Fund, an effort was made to affect the actions of nonmembers in connection with these transactions. Under Article IV, Section 2, members must refrain from buying gold at a premium (a price above the par value plus the prescribed margin) or selling it at a discount (a price below the par value minus the margin). The provision does not prohibit sales by members at a premium or purchases at a discount, and it does not deal with purchases or sales by private parties or nonmembers. It is a purpose of the Fund, however, to promote exchange stability, maintain orderly exchange arrangements among members, and avoid competitive exchange depreciation, and members undertake to collaborate with the Fund in order to fulfill this purpose. On June 18, 1947, the Fund communicated to members a statement of policy in which it deprecated international sales of gold at a premium and recommended that all members take effective action to prevent these transactions with “other countries or with the nationals of other countries.” The statement went on to say: “It is realized that some of these transactions are being conducted by or through non-member countries or their nationals. The Fund recommends that members make any representations which, in their judgment, are warranted by the circumstances to the governments of non-member countries to join with them in eliminating this source of exchange instability.” 20

Some transactions at premium prices violate Article IV, Section 2, i.e., those involving purchases by the monetary authorities of member countries. The Fund’s statement went beyond those transactions. The basis for the broader scope of the statement was the Fund’s finding that exchange stability might be undermined by continued and increasing external purchases and sales of gold that directly or indirectly produced exchange transactions at depreciated rates. If this practice were not discouraged, it might result in a fundamental disturbance in the exchange relationships among members.

Certain features of the statement are relevant in connection with the effects of the Fund on nonmembers. First, the Fund’s recommendation to members was intended to influence them to avoid transactions at a premium with nonmembers or their nationals. Second, the Fund also recommended that members seek to collaborate with nonmembers in the elimination of these transactions. The Fund recognized that the effectiveness of a recommendation on transactions in gold could be weakened by the actions of nonmembers, and therefore the Fund considered it important to call on members to conduct themselves in accordance with the statement in their relations with non-members. Third, these recommendations were made under the general terms of Article I (iii) and Article IV, Section 4 (a), on a finding that transactions at a premium could bring about a fundamental distortion in the exchange relationships among members by establishing cross rates for the currencies of members in nonmember countries that were different from the pattern of rates established under the Articles. Notwithstanding this finding, the statement did not mention Article XI, Section 1, in its references to nonmembers.

The legal inference to be drawn from this episode is that Article I (iii) and Article IV, Section 4 (a), are a reservoir of authority on which the Fund can draw in defense of exchange stability, orderly exchange arrangements among members, and the avoidance of competitive exchange alterations when dealing with a problem that involves the relations of members with nonmembers. Moreover, in these circumstances, the Fund is not compelled to determine whether the problem falls within the scope of Article XI, Section 1. In connection with transactions in gold at premium prices, the Fund did not attempt to go beyond making recommendations to members, but this approach may give it greater flexibility if only because of the obscurities of Article XI, Section 1.

1

Sir Gerald Fitzmaurice, Fifth Report on the Law of Treaties (Treaties and Third States), International Law Commission, 12th Sess., A/CN.4/130, March 21, 1960, Introd., pars. 2 and 5.

2

Ibid., par. 3.

3

Ibid., 2d chap., pt. II, div. A, Art. 3 (1).

4

United Nations Conference on the Law of Treaties, Vienna Convention on the Law of Treaties, UN Doc. A/CONF. 39/27, May 23, 1969. See also the authorities cited by Finn Seyersted in “Is the International Personality of Intergovernmental Organizations Valid Vis-a-Vis Non-Members?” Indian Journal of International Law, Vol. 4 (1964), p. 236, n. 254. (Hereinafter referred to as Seyersted, “International Personality.”) And see Fitzmaurice (cited above in n. 1), pars. 82 ff.

5

Fitzmaurice (cited above in n. 1), Introd., par. 3.

6

The United Nations has not explicitly invoked this provision. See Goodrich, Hambro, and Simons, Charter of UN, p. 59.

7

Rule F-4 of the Rules and Regulations establishes the margins. The subject of premium gold transactions involving nonmembers is discussed in further detail later in this chapter.

9

Article I (iii): ‘To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.” It might be argued, however, that this is not a satisfactory example of the application of Article XI, Section 1, on the basis of inconsistency with the “purposes” of the Fund as distinguished from the “provisions” of the Articles. If an action were inconsistent with the central purposes of exchange stability and the avoidance of competitive exchange depreciation in Article I (iii), it would seem that the action should be inconsistent also with the provision that formulates the Fund’s purpose as a corresponding obligation of members. Under Article IV, Section 4 (a), members undertake to collaborate with the Fund to promote exchange stability and to avoid competitive exchange alterations.

10

All the quotations are from U. S. Senate Hearings on Bretton Wood’s Agreements Act, pp. 217–18.

11

The Fund has adopted two Rules; see Rule M-1 and Rule M-2, Appendix X below.

12

See, for example, the Fund’s Decision on Discrimination for Balance of Payments Reasons (Decision No. 955-(59/45), October 23, 1959, Selected Decisions, pp. 98–99), and in particular the following paragraph:

“Notwithstanding the extensive moves toward convertibility, a substantial portion of the current receipts of some countries is still subject to limitations on convertibility, particularly in payments relations with state-trading countries. In the case of these countries the Fund will be prepared to consider whether balance of payments considerations would justify the maintenance of some degree of discrimination, although not as between countries having externally convertible currencies. In this connection the Fund wishes to reaffirm its basic policy on bilateralism as stated in its decision of June 22, 1955.”

13

See Chap. 22, pp. 446–49 below.

14

See Joseph Gold, “The Duty to Collaborate with the International Monetary Fund and the Development of Monetary Law,” in Law, Justice and Equity, R. H. Code Holland and G. Schwarzenberger, eds. (London, 1967), pp. 137–51. See also History, Vol. II, pp. 573–75.

15

Bundesgesetzblatt, Teil I, Nr. 1 (January 9, 1952), p. 1.

16

Ibid., Teil II, Nr. 13 (August 1, 1952), p. 637.

17

United Nations Commission for Indonesia: Special Report to the Security Council on the Round Table Conference, UN Doc. S/1417, November 10, 1949, Chap. VII, par. 60.

18

Draft Financial and Economic Agreement, Art. 14, 69 U. N. T. S. 240.

19

Ibid., Art. 15, 69 U. N. T. S. 240. See also paragraph 2 of a letter dated November 2, 1949 from the chairman of the Netherlands delegation (concurred in by a letter of the same date by the chairmen of the Indonesian delegations): “Should the International Monetary Fund request direct information from the Republic of the United States of Indonesia after the transfer of sovereignty but before the Republic of the United States of Indonesia has acquired membership to that Fund, or should the Fund desire to make an investigation, the Republic of the United States of Indonesia will submit the information and permit the investigation requested, if and inasfar as this is required under the rules of procedure for the consideration of applications for membership to the Fund.”—69 U. N. T. S. 354.

20

Annual Report, 1947, pp. 78–79. History, Vol. III, p. 310.

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