The International Monetary Fund announced yesterday that rules governing a totally revamped international monetary system will go into effect tomorrow, when ratification of an amendment overhauling the IMI charter will be completed.
It marks the legal end of the Bretton Woods system that tied the dollar to gold and was based on rigid fixed-exchange-rate relationships.
Instead, there will be legalization of a new system of flexible exchange rates, and the allocation to the IMF of considerable new power for "surveillance" of exchange rate fluctuations.
Essentials of the new international monetary system were agreed upon by the IMF's Interim Committee at Jamaica in January 1976, and the rules governing surveillance were announced last year.
IMF General Counsel Joseph Gold said at a press conference yesterday that the IMF now enters "a new game," in which the international agency may bring pressure on a member country not following agreed-upon exchange rate principles.
The amendment, only the second in the IMF's 34-year history, does not provide the complete reform that some hoped to accomplish when the Bretton Woods system began to collapse on Aug. 15, 1971.
On that date, President Nixon abandoned the convertibility of the U.S. dollar into gold, triggering two dollar devaluations and, ultimately, the end of the fixed-exchange-rate system by early 1973.
The amendment, now ratified by the required 60 per cent of members with 80 per cent of voting power, is based on legal acceptance of the floating rates that have developed since then.
Members can set up any exchange system they choose. But because the role of gold in the new system is diminished considerably, members may not maintain a value for their currencies in terms of gold.
Among other significant potential developments are a possible expansion in the use of special Drawing rights (SDRs), now the principal, reserve asset of the international monetary system. Members now can exchange or transfer SDRs freely, and the fund may authorize other international institutions, such as the World Bank, to use them.
The amended charter also contemplates formation of a new governing council if a substantial majority agrees to it. The council would resemble the advisory Interim Committee in composition, but it would have powers of decision.
The fund now also gains the power to invest surplus funds in interest-bearing securities such as U.S. Treasury notes or bills. IMF officials said that resources amounting to 700 million SDRs were being held in non-interest-earning accounts.
Officials said yesterday that the increased quotas established by the Sixth General Review would go into effect within 30 days, enlarging the IMF's resources from 29.2 billion SDRs to 39 billion.
The surveillance power in Article IV of the new amendment could turn out to be the crucial element if exchange markets continue to be erratic and disorderly. Officials said the essence of the system is that the amended charter gives member countries "freedom of choice, but not freedom of behavior, in the sense that all members are bound by certain obligations and subject to surveillance by the fund."
The broad principles rule out manipulation of rates, but allow intervention to adjust disorderly conditions. Members are supposed to take into account "the interests of other members."
The ultimate sanction is the power of the managin director, on his own initiative, to raise the question of a given member's exchange rate policy "informally and confidentially," reporting back the results to the Executive Board.
White it is true that the matter can not become an agenda item before the Executive Board unless the member country so agrees, the framers of the amendment are counting on moral suasion.