The legal structures and concepts that regulate the monetary interactions between countries and international entities are collectively referred to as international monetary law. This topic is ever-changing and dynamic. It is becoming more and more important for countries to comprehend the intricacies of international monetary law as they participate in economic globalisation. This study sheds light on the importance of international monetary law in the current global economy by examining its historical development, essential elements, and current difficulties.

When currencies were intimately correlated with gold reserves during the gold standard period, international monetary law began to take shape. Unilateral actions made by countries in the absence of a formal international legal framework defined this age. An important turning point was brought about by the 1944 establishment of the Bretton Woods system, which brought a more coordinated approach to international monetary relations. The International Monetary Fund (IMF) served as the system's anchor, and its goals were to stabilise exchange rates and advance international economic cooperation.

The paper looks at the IMF's function in upholding international monetary law as well. Basic principles are outlined in the IMF's Articles of Agreement, which forbid discriminatory currency practices, provide unlimited current account operations, and create par value. But the old legal frameworks controlling international monetary relations were put to the test when the Bretton Woods system collapsed in 1973, resulting in a move towards a more flexible exchange rate regime.

The US dollar's dominance as the world's reserve currency and the movement towards dedollarization are current concerns in international monetary law. Russia and China, for example, have argued for the creation of a new global reserve currency that would be independent of any one country, underscoring the necessity for international monetary legislation to continue developing in order to adapt to shifting global dynamics.

The Application Of International Law To The International

Monetary System

The field of Public International Law has yet to fully study and develop the subject of international monetary law. Preserving the stability of the global monetary system is the primary goal of this law. The question of what the international monetary system is and how international law relates to it now emerges.

The International Monetary System

The term "international monetary system" refers to a framework that includes multilateral organisations, internationally recognised laws, and agreements that control the balance of payments between nations.[1] The four main components of the international monetary system, according to the International Monetary Fund (IMF), are exchange rates, the international payments system, international capital movements, and monetary reserves and liquidity availability.[2] These elements are governed by agreements and regulations between nations. These fundamental components comprise each nation's balance of payments account, and the stability of these components-that is, the stability of each nation's balance of payments-is what ensures the stability of the global monetary system.[3]

When the phrase "international monetary system" was included in the wording of an international treaty, such as the Articles of Agreements[4] , it had legal significance. Article IV of the Articles specifies the exact goal and purpose of the global monetary system by stating that:

"The primary goal of the international monetary system is the ongoing development of the orderly underlying conditions that are required for financial and economic stability. The system's essential purpose is to provide a framework that facilitates the exchange of goods, services, and capital among nations and that sustains sound economic growth."[5]

International Monetary Law In Public

Public international monetary law can be considered at the core of the international monetary system, as it takes into account the international rules and conventions (i.e., bilateral or multilateral agreements) governing monetary affairs between sovereigns and their national monetary authorities. Public international monetary law is the term used to describe norms of international law, either customary or conventional, that control or have an impact on the exchange of money between nations as well as between states and international institutions such as the European Monetary System or the IMF[6].

Prior to the Articles of Agreement, very few people thought about studying international monetary law from a legal perspective. In the past, monetary affairs, such as minting, valuing, and distributing money, were seen as domestic issues and were under the state's exclusive jurisdiction.

But following World War II, it became clear that international monetary interactions needed a framework and that sound financial practices should be made legal.[7]

Only since 1945, or after the IMF's Articles of Agreement came into effect, has international monetary law been acknowledged as a distinct topic of study within the framework of public international law.[8] Regarded as the foremost expert on international monetary law, Joseph Gold served as the Legal Counsel for the International Monetary Fund (IMF) from 1960 to 1980 and authored multiple legal studies on the subject. There aren't many legal studies accessible on it because it's a very young and developing field of research. Attorneys and the legal community have not yet given this area of law much attention because it deals with intricate ideas of finance and economics and has little legal substance[9].

International Monetary Law's History

Let us now examine the evolution of the international monetary system and the role that international monetary law has played throughout this process. The historical trajectory of the international monetary system can be broken down into three phases to better understand its evolution: the Before Bretton Woods Period (1819-1931), the Bretton Woods System Period (1944-73), and the current Post-Breton Woods Period (1973-present).[10]

The Gold Standard System Existed Prior To Bretton Woods (1819-1931)

In the 19th century, the world's principal economies adopted the gold standard monetary system. It's a system where a nation's currency's value is directly correlated with gold. The nation freely convertible its currency into gold and establishes a fixed price for gold. As a result, a nation's ability to produce money is based on the amount of gold it has. In this system, the price of gold in each nation determined the exchange rate between them; since gold prices were fixed, the exchange rates between nations were referred to as fixed.[11] For example, if one ounce of gold is worth ₹30 in India and $5 in the US, then one ₹ is worth $0.167 in US dollars.

During the period of the gold standard, national statutes regulating private parties' rights to import and export gold served as the foundation for the monetary system, with little influence from international legal accords. Through the passage of the Peel Act of 1819[12], which granted anyone the ability to exchange bank notes into gold by giving them to the Bank of England, Britain became the first country to join the gold standard in 1821. In addition, the Bank Charter Act of 1844 made it legally required of the Bank of England to continue maintaining gold backing for the pound issued20.

It also expanded the right of individuals to purchase notes for gold. Following Britain, other nations adopted the gold standard in order to gain access to global money and trade, as well as to increase the supply of gold due to the discovery of new gold mines. After the United States passed an Act in 1900 to embrace the gold standard, Germany and France did the same in the 1870s.[13]

Consequently, it is evident that the adoption of the gold standard was a unilateral decision made by individual countries without the input of the international community and without reference to any international legal framework.[14] As a result, international monetary law had little bearing at the time.

One advantage of the gold standard is that it kept nations out of inflation since new money could only be issued if there was a corresponding rise in the quantity of gold in circulation. Additionally, it offered a system of fixed exchange rates for global trade.[15] One of the primary drawbacks of the gold standard, however, was that a nation's money supply was determined by the discovery or supply of gold rather than the volume of its economic activity.

Therefore, a country's price levels will continue to decline, leading to deflation and slowed economic growth, even if its output increases without a corresponding increase in the money supply because of a shortage of gold reserves. Furthermore, the gold standard's self-correcting trade imbalance can be a drawn-out, unpleasant process that leaves the deficit country with widespread deflation and unemployment. [16]

The interwar years, or 1914-1944, were characterised by the Great Depression, recession, and inflation. Trade between belligerent nations had stopped, which undermined global economic stability. Following World War I, some nations with high levels of military debt, including Russia, Germany, France, and Britain, banned gold convertibility and placed limitations on the export of gold.[17] Countries' money supply was hardly ever supported by gold, even when they claimed to be on the gold standard. The gold standard collapsed as a result of this.

Following this, there were several worldwide initiatives to restore the convertibility of gold as well as international agreements for monetary cooperation [18]; but, none of these could endure longer than a short time.

System Of Bretton Woods (1944-73)

During the 1930s Great Depression, nations tried to boost their flagging economies by enacting trade restrictions, depreciating their currencies to capture a larger portion of the export market, and prohibiting their citizens from holding foreign currencies. But this proved to be self-destructive, resulting in a precipitous drop in global trade, employment, and living standards across nations.[19] Policymakers realized throughout the interwar years that an open market economic framework and a reliable exchange rate were necessary for economic prosperity[20].

In order to escape this maze, representatives from forty-four countries convened in a conference in Bretton Woods, New Hampshire, from July 1-22, 1944, to decide on a set of new guidelines for the global monetary system. The Bretton Woods system is the name given to the monetary framework established by this conference, which resulted in the creation of the International Monetary Fund (IMF). By enforcing the four fundamental components of the international monetary system-discussed above-the IMF seeks to promote global economic cooperation on monetary matters and guarantee the stability of the system.

29 IMF members approved the Articles of Agreement 32 (Articles) on December 27, 1945, marking the official founding of the IMF and the entry of the Articles into force. It now boasts 150 members. International monetary relations were made lawful by the IMF's Articles of Agreement, which also placed monetary matters under the purview of public international law, much like maritime matters and state-to-state diplomacy. A key role for the legal framework built around the IMF is played by it in international monetary law.[21]

Articles Of Agreement & Imf's Role

The Articles include the fundamental international guidelines for monetary matters, which are applicable to each and every IMF member. The three principal international legal requirements that the IMF has imposed on its members through the Articles are: 1) to establish and maintain par value; 2) to maintain unrestricted current account transactions; and 3) to maintain a unified exchange rate system. These duties are a reflection of the lessons discovered during the interwar years.

Par value/fixed exchange rate regime: The Bretton Woods system took into account the notion that exchange rates should be subject to international agreement and examination as they are concerns of international interest36. Under its original articles, the IMF was given control over currency rates, a power that had never before been granted in international law.

The IMF established the par value system in the original Art. IV, sec. 138. Each member's currency under this regime must have a set par value expressed in US dollars or gold. The United States was the only nation to establish its currency's parity in terms of gold; all other nations fixed their parities in terms of dollars and used intervention to keep their exchange rates within 1% of the dollar[22].

Because of this, the dollar was used to measure the worth of all other currencies, and one dollar could be exchanged for one ounce of gold at a set price of $35. In order to preserve faith in future gold convertibility, the US was in charge of maintaining stable gold prices and modifying the dollar supply41. However, the Second Amendment to the Articles, which is covered at the relevant position below, eliminated this fixed-rate system in the 1970s.

IMF via Art. prohibits limits on current account operations. Members are required by VIII, art. 2(a) to refrain from placing limitations on payments and transfers for ongoing international transactions without first obtaining its consent. In order to settle transactions pertaining to the export/import of goods and services as well as all other legal transactions, member nations are therefore required to provide their citizens with access to foreign exchange[23].

Nonetheless, the IMF clearly acknowledges that its members have the right to control global capital flows. Governments have the authority to limit capital transfers because they utilise capital controls to manage the chances for foreign investors to enter or depart the economy and to adopt different fiscal and monetary policies.

Prohibit discriminatory and multicurrency currency practices: Following World War II, a third of the nations that took part in the Bretton Woods discussions engaged in multiple currency activities.

There are several different monetary systems set up. Members are obligated by law to refrain from engaging in various currency practices that result in disparate exchange rates, as stated in Article VIII section 3.

IMF was established as a fund to provide loans to nations with a balance of payments deficit in addition to overseeing the monetary system46. Due to the fact that lending activities are governed by laws similar to those governing banks and since loan terms must be spelt out in agreements, statutes and regulations of international law also apply to those agreements, the legal specifics pertaining to the operation of the IMF become more complex.[24]

The Current Framework Following Bretton Woods (1973-Present)

The Bretton Woods System's Demise

But as US President Nixon suspended the dollar's convertibility into gold and ended the par value regime on August 15, 1971, the Bretton Woods system officially came to an end. The US's ongoing, significant balance-of-payments deficits stemming from a significant rise in fiscal policy spending and military spending during the Vietnam War are the primary causes of the collapse of the Bretton Woods system[25].

The US overvalued the currency and massive foreign holdings of dollars exceeded the US gold stock to back it since the US had created considerably more dollars than its gold reserve. Nations hurried to convert the currency to gold as they began to mistrust the US's capacity to do so. The US banned the convertibility of gold because it was unable to meet the demand to exchange dollars for gold at the stated price .

But the US pushed for a new deal, the Smithsonian Agreement, which was signed by the G10 countries, to keep the system from imploding. It said that the dollar was to be devalued by 8.5% in relation to gold51 and that other nations might adjust their exchange rates to the dollar within a range of + 2.5 percent. However, this arrangement quickly fell apart when the US unilaterally devalued the dollar by 10% again in 1973. Major nations chose to respond by floating their own currencies in relation to the dollar. As a result, the multilaterally approved fixed exchange-rate regime's golden age came to an end. With just one option left, the IMF chose to use the Second Amendment to the Articles 53 to restore state sovereignty in exchange rate negotiations. [26]

The Second Article Amendment

The Second Amendment of the Articles, which took effect in 1978, effectively destroyed the Bretton Woods arrangement. It resulted in a significant overhaul of the institutional and legislative framework controlling exchange rates by removing the IMF's total control over the market and granting countries the freedom to choose their own exchange rate policies.

As a result, the focal point of activity inside the international monetary system was moved from a rule-based system to a surveillance-based one for monitoring the par value regime. It also attempted to lessen the use of gold as a reserve asset or for currency pegging in the global monetary system. Next to the Second Amendment, said that IMF policies and procedures have grown "softer" and more intricate, and there are differing views on whether the IMF actually implements laws or just acts as a consultation forum.[27]

The par value system required by the original Art is used to determine exchange rates in the current system. IV, sec. 1 was removed, and sec. 2(b)57 was added in its place. This section outlines how a member nation can calculate the value of its currency outside. It specifies that a member nation may preserve the value of its currency in accordance with one of three methods: (i) special drawing rights or another denomination, excluding gold; (ii) the value of the currency of other members; or (iii) any other arrangement.

Member countries are therefore free to select their own exchange rate system, with the exception of tying their money to gold. Ten distinct exchange rate arrangements have been identified by the IMF to date.[28] The most popular arrangements include floating and free-floating regimes, pegging exchange rates to a single currency or a basket of currencies, using the currency of another state, and taking part in a currency bloc58. The international monetary system evolved from a rule-based to a market-led system59, as a floating exchange rate is set in foreign exchange markets based on supply and demand.

IMF Code of Conduct: Art was revised in the second amendment. Now referred to as the IMF Code of Conduct61, it is found in IV, sec. 160. The following outlines members' responsibilities with regard to exchange arrangements: i) to steer financial and economic policies that support price stability and economic growth; ii) to encourage a stable monetary system that prevents disruptions; iii) to refrain from manipulating the exchange rate or monetary system in order to obtain an unfair advantage over others; and iv) to ensure that members' exchange policies adhere to the other sections.

Reserve assets: A crucial component of foreign exchange policy, which is mostly carried out by the monetary authorities, is the management of monetary reserve assets, such as gold and foreign currency reserves. A new clause, known as Art., was also introduced by the second amendment. VIII, sec. 7, which attempts to lessen the importance of gold in reserve assets by promoting Special Drawing Rights (SDR)[29] as the main reserve asset. In 1969, the IMF established the SDR as a global reserve asset.

Its value was first determined in terms of gold, but after the Bretton Woods system collapsed,[30] it was recalculated in terms of a currency basket. The US dollar, euro, Japanese yen, pound sterling, and Chinese renminbi are the five currencies that make up the basket. Unfortunately, SDR was never able to establish itself as a major reserve asset, and today, most countries hold reserve currencies, particularly the US dollar.[31]

Significance Of Gold Holdings Even After The Gold Standard Was Abandoned

Countries have kept gold reserves for ages as a representation of their riches. Central banks continue to maintain gold reserves even after the gold standard was abandoned; currently, they keep more than 35,000 metric tonnes of gold and are constantly adding to it. The main reason for this is that gold is widely considered as the safest asset with no credit or counterparty risk. Furthermore, its inherent worth is unaffected by shifting political and economic circumstances. According to theory, there is an inverse link between gold and the US dollar, another important reserve; as a result, when the dollar declines, the price of gold usually increases. The ability to protect themselves from market volatility is another reason why central banks are drawn to holding gold.[32]

US Dollar Dominance

The US dollar represented 58.88% of the global reserves by currency66 as of the first quarter of 2022. The dollar is a highly sought-after reserve currency since it is widely used in international trade payments and is one of the most frequently traded currencies on the foreign exchange market. Approximately 40% of global debt is denominated in US dollars. One of the reasons why nations still maintain sizable reserves of US dollars is the strength of the American economy. But other currencies, such as the Chinese yuan and the euro, are becoming more important as reserve currencies and in international trade.

Growth Of Settlement In Local Currency And Dedollarization

China and Russia demanded in 2009 that the US dollar be replaced by a new international/supranational reserve currency that is independent of any one country and therefore unaffected by changes in that country's economic circumstances. Countries began encouraging the use of local currencies in international trade settlements when it became apparent that there would be no more progress in the search for a new global currency.

Following the imposition of restrictions that prevent Russia from utilising the SWIFT system, China and Russia reached a bilateral agreement to stop using US dollars and settle their commerce in local currencies instead.[33] Since 2014, they have started making these kinds of agreements in an effort to dedollarize. The local currency settlement system, which permits bilateral transactions to be conducted using local currencies inside each country, has recently been implemented by numerous Asian nations.

India has also developed a unilateral structure for the settlement of foreign trade in rupees. [34]This lessens dependency on US dollars and makes it easier for Indian exporters and importers to conduct business with nations like Bangladesh, Sri Lanka, Russia, and Iran, which struggle to deal with US dollars due to currency shortages or sanctions. Local currency settlements will eventually reduce the import-dependent nations' reliance on dollar reserves, which may lessen the dollar's hegemony as a reserve currency.[35]

Conclusion
The significance and existence of international monetary law in the current international monetary system have changed significantly, as have other aspects of the system. At the beginning of the system, there was no international legal structure in place to govern the financial interactions between nations. International monetary law gained popularity in the legal system and became acknowledged as a speciality within the subject of public international law only after the establishment of the IMF.

Nonetheless, it is clear from the above evolution that politics and economics control the new monetary world order. Looking back at the development of international monetary legislation, we may conclude that most systems were created and implemented in an opportunistic manner under the control of the regime's economic superpower. Furthermore, rather than the other way around, the regulations governing the international monetary system were constructed around this framework.

The shift in the IMF's position from being an authoritative policy controller to only being a watchdog and advisor nicely illustrates the lax control of law in the monetary system. The International Monetary Law must be written more credibly and enforceable in order to have any influence on the shifting global order; else, it will remain a soft law.

End-Notes:

1. https://www.jstor.org/stable/10.1163/j.ctv2kqwz49 accessed on 21-04-2024.
2. IMF, Modernizing the Legal Framework for Surveillance - An Integrated Surveillance Decision, 7 (2012) - https://www.imf.org/external/np/pp/eng/2012/071712.pdf
3. Ibid
4. Articles of Agreement of International Monetary Fund entered into force on 27 Dec. 1945 - https://www.imf.org/external/pubs/ft/aa/pdf/aa.pdf
5. Ibid
6. Stephen Zamora, Sir Joseph Gold and the Development of International Monetary Law Sir Joseph Gold and the Development of International Monetary Law, 23 INT'L L. 1009, 1010 (1989) - https://scholar.smu.edu/til/vol23/iss4/21
7. Ibid
8. Ibid
9. Supra 4
10. https://www.researchgate.net/publication/231754996_Rosa_Maria_Lastra_The_Legal_Foundations_of_International_Monetary_Stability
11. Gold standard monetary system, Britannica - https://www.britannica.com/topic/gold-standard
12. 1819 Act for the Resumption of Cash Payments (59 Geo. III, cap. 49), Peel's Bill, Wikipedia - https://en.wikipedia.org/wiki/Peel%27s_Bill
13. Ibid
14. Gold Standard Act, 1900 enacted on 19 Mar.
15. Ibid
16. What Is the Gold Standard in Finance, Investopedia - https://www.investopedia.com/terms/g/goldstandard.asp
17. Problems with the gold standard, Britannica - https://www.britannica.com/topic/international-payment/Problems-with-the-gold-standard
18. Ibid
19. Ibid
20. The World Bank Group and the International Monetary Fund (IMF), World Bank
21. Cooperation and reconstruction (1944-71), IMF - https://www.imf.org/external/about/histcoop.htm
22. Ibid
23. Supra 7
24. Supra 10
25. Supra 17
26. The end of the Bretton Woods System (1972-81), History, About the IMF - https://www.imf.org/external/about/histend.htm
27. Ibid
28. Supra 7
29. Currency Composition of Official Foreign Exchange Reserve, IMF - https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4
30. Ibid
31. Why the US Dollar Is the Global Currency, The Balance money - https://www.thebalancemoney.com/world-currency-3305931#citation-9
32. Supra 29
33. Explained: International trade settlement in Rupees and why RBI is doing it, Business Insider India - https://www.businessinsider.in/finance/news/why-rbi-wants-international-trade-settlement-in-rupees/articleshow/92850515.cms
34. Ibid
35. Supra 26

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