TOWARD THE INCREASED INTERNATIONAL MOBILITY OF CAPITAL UNDER THE ARTICLES OF AGREEMENT OF THE INTERNATIONAL MONETARY FUND George U. Nelson, III* Introduction 1 I. Institutional Background 4 II. The Distinction between Payments for Current International Transactions and Inter- national Capital Movements 7 A. The Articles 7 B, Interpretation by the Fund 14 C, Summary 19 III. Judicial Interpretation 19 A. On the Meaning of "Exchange Contract" and "Involve the Currency of any Member," in Article VIII, Section 2(b) 21 B. Regulations Affecting Exchanges of Currencies 25 C. Regulations on the Payment and Transfer of Proceeds from Insurance Contracts 27 D. Regulation of the Transfer of Investment Proceeds 35 E. Regulations Affecting the International Transfer or Assignment of Equity Interests 37 F. Regulations upon the Enforcement of a Letter of Credit 39 G. Regulations Affecting Personal Service Contracts 41 H. Limitations on the Transferability of Benefits Accrued under Pension Agree- ments 43 I. Legal Tender Laws and Exchange Surrender Requirements 46 J. Summary 49 IV. An Historical Background to the Distinction between Payments and Transfers for Current and Capital Transactions 52 *B.A. 1975, Middlebury College; J.D. 1979, Yale Law-School; attorney with Foley & Lardner, Milwaukee, Wisconsin. 2 YALE STUDIES IN WORLD PUBLIC ORDER [VOL.- 5 V. An Economic Analysis of Capital Mobility under Fixed and Flexible Exchange Rates: The Major Issues 63 A, The Impact of the International Mobility of Capital on Domestic Economic Policies under Fixed and Flexible Exchange Rates 64 1. The Exchange Rate Systems and the Model 64 2. The Role of Capital Mobility in Domestic Monetary Policy 67 3. The Role of Capital Mobility in Domestic Fiscal Policy 73 4. The Monetary Model 76 5. Summary 81 B. The Foreign Impact of Domestic Policies Affected by Capital Mobility 82 C. The Welfare Argument for the Free Mobility of Capital 84 D. Capital Mobility and the Transmission and Generation of Inflation 96 Conclusion 102 Introduction The Articles of Agreement of the International Monetary Fund (IMF) distinguish between payments for current international transactions and capital move- ments; the Articles generally prohibit members of the IMF from restricting or delaying the former, while permitting members to restrict or control the latter. This distinction seems to have been a product of the members' concern that, under fixed exchange rates, they must retain the capacity to control capital movements in order to preserve the autonomy of their domestic monetary policies, to insure that the exchange rates established by the IMF would not be undermined by speculative movements of capital, and to preserve a tool by which payment imbalances in the capital account might be remedied, should the established exchange rates appear to be (temporarily) inappropriate. The recent change from "fixed" to flexible exchange rates eliminates, in theory at least, some of these historic bases for the distinction between pay- ments for current and capital transactions. For example, capital movements enhance the effectiveness of domestic monetary policy under flexible rates (although the 19791 IMF AND CAPITAL MOBILITY effectiveness of fiscal policy may be impaired) and exchange speculation may work to stabilize rather than to destabilize the international monetary system. Further, the need to remedy payment imbalances would not exist under a system of freely floating exchange rates, for the exchange rate would adjust to maintain external transactions in equilibrium. However, the un- stated political motives for controlling the movement of capital may still exist. And its usefulness to remedy payment imbalances may continue where, as is currently the case, the exchange rates do not float freely, but are subject to occasional and heavy govern- ment intervention. In addition to the present weakness of the his- torical bases for capital control, there is to be con- sidered a ,welfare" theory which holds that the factors of production must move unrestrictedly if their most efficient distribution is to be realized. The case for incz eased capital mobility is strong: greater mobility of capital renders monetary policy more effective and contributes to world economic growth as well. It is therefore somewhat surprising that the Second Amendment to the Articles, while legitimating post hoc the flexible exchange-rate system, continues to preserve the distinction between payments for cur- rent and capital transactions. Flexible exchange rates eliminate the economic need for such a distinction. Yet, this continued distinction suggests that individual countries are unwilling to surrender power to control capital movements. Any proposal to amend further the Articles to withhold from members the power to control capital movements and, thereby, to increase the mobi- lity of capital, must be analyzed carefully. The potentially deleterious effects, as well as the bene- fits, that are likely to attend such increased mobility of capital require consideration. This paper will examine the distinction between payments for current and capital transactions from the several perspectives. Part I provides an institutional background to the textual definition of the distinction. Part I is a discussion of the various interpretations of the relevant provisions of the Articles. In part III, an analysis of judicial interpretations is under- taken in an effort to determine whether, in fact, the courts look to the character of the underlying transac- tion in passing upon the legality of restrictions on YALE STUDIES IN WORLD PUBLIC ORDER VOL. 5 related payments. In part IV, the historical back- ground of the Bretton Woods Conference is examined to elucidate the concerns of the drafters of the Second Amendment, which formed the basis of their decision to reserve to member governments the power to control capital movements. Finally, in part V, the role of capital mobility is scrutinized from an economic per- spective; analysis of flexible exchange rates reveals that the drafters' concerns for potentially adverse effects from capital movements no longer apply and the corresponding provisions of the Articles are inappro- priate to the IMF's purpose of economic growth and development. The potential which increased capital mobility has to enhance the effectiveness of monetary policy and to contribute to greater world welfare also involves costs. Thus, a conclusion as to whether the distinc- tion between payments for current and capital transac- tions ought to be maintained depends upon the relative weight assigned to the various costs and benefits that are likely to accrue to either alternative. This weighing is performed in part VI. I. Institutional Background The Articles of Agreement of the International Monetary Fund were drafted at the United Nations Monetary and Financial Conference, which met at Bretton Woods, New Hampshire, in July of 1944.1 From their entry into force on December 27, 1945, the Articles have been the legal foundation of the IMF and the world monetary 2 system. The First Amendment became effective in 1969, and the recently proposed Second Amendment was accepted by the United States on October 19, 1976, and became 1. For a text of the Final Act and related documents of the Conference, see UNITED NATIONS MONETARY AND FINANCIAL CONFERENCE, BRETTON WOODS, NEW HAMPSHIRE, JULY 1, TO JULY 22, 19-44 (Department of State Publication 2187, Conference Series 55, 1944). The Interna- tional Monetary Fund [hereinafter referred to as the "IMF"] has also published the original and amended Articles in pamphlet form. 2. See IMF, PROPOSED AMENDMENT OF THE ARTICLES OF AGREEMENT (1968). 1979] IMF AND CAPITAL MOBILITY 5 effective on April 1, 1978. 3 The Second Amendment formally acknowledges the change from the familiar ,par value" or "adjustable peg system of exchange rates, which had been established by the original Articles and maintained until March of 1973, to the generalized "floating" rates which exist today.5 Among the purposes of the IMF, the Articles set forth what must be a primary objective of every modern country: to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members.... 6 The operative provisions of the Articles establish the IMF's essential functions and the rules of conduct for its members. The original Articles called for each member to declare a par value for its currency and to maintain its market value within 10 percent of par. 7 Under the 3. See Bretton Woods Agreements Act Pub. L. No. 94-564, §1, 90 Stat. 2660 (1976) (codified at 22 U.S.C. §286e-5 (1976)). See also IMF, PROPOSED SECOND AMENDMENT TO THE ARTICLES OF AGREEMENT OF THE INTERNATIONAL MONETARYFUND (1976). The Proposed Second Amendment became effective on April 1, 1978, upon acceptance by three-fifths of the members having four-fifths of the voting power, as required by Article XVII (b) (Article XXVIII (a) of the Second Amendment), 7 Mf SURVEY 97 (1978) (Fund Press Release No. 78/19). All further references to "the Articles" shall be to the Second Amendment to the Articles of Agreement, unless the reference is otherwise identified. Parallel citations will be made where appropriate. 4. See Article 11, Second Amendment, supra note 3. See also R. SOLOMON, THE INTERNATIONAL MONETARY SYSTEM 1945-1976, at 12-13 (1977) for a brief description of the par value system. It is this system that, due to international reluctance to adjust par values, came to be known as the system of "fixed" exchange rates. 5. See R. SOLOMON, supra note 4, at 267; see generally id. at 267-89. 6. Article T(ii), Second Amendment, supra note 3. 7. Article IV, §(5)(c),(f), original Articles, supra note YALE STUDIES IN WORLD PUBLIC ORDER [VOL.-5 Second Amendment, members are merely required to choose appropriate exchange arrangements and to conduct ex- change transaction s consistently with specified "good faith" standards.