Vanderbilt Journal of Transnational Law

First Page



It is a commendable achievement that, in the atmosphere of a war shattered world, it was at all possible to fashion an international currency system at the Bretton Woods Conference in 1944. Indeed, the International Monetary Fund represents a historic milestone in international cooperation. Since its inception at Bretton Woods, however, the international monetary system has been plagued by two major problems. First, the expanded use of trade constraints by countries following policies of full employment and internal price stability tends to foster a balance of payments disequilibrium; consequently, the present mechanism for adjustment is not satisfactory. Events after May of 1971, when the fixed exchange rates broke down, have made it clear that a return to the system fashioned at Bretton Woods is not feasible. The United States suspended the convertibility of the dollar in August of 1971 and ushered in a period that saw a floating of the currencies of major trading nations until the Smithsonian Agreement on realignment of currencies in December of that year. Six months later, in June of 1972, the British sterling--the other major reserve currency--went off the peg and has been floating since that time. The problem of the undervalued and overcompetitive German mark and Japanese yen is still very much alive. Increasingly the international monetary system is threatening disorder and detrimental effects on world trade. President Nixon, in his opening address at this year's IMF Annual Meeting, aptly described it as a "system that almost every year presents a new invitation to a monetary crisis." Secondly, no orderly arrangement exists for generating international liquidity to meet the demands of expanding world trade. This article will focus on only the first of these problems.

Under the present institutional constraints, adjustment can be achieved through several methods. The first is a complete revolution that would adopt, for instance, a scheme such as the Triffin Plan. Although an ambitious solution, its implementation is not politically feasible in our present world. Secondly, adjustment could be encouraged by resorting more frequently either to such direct controls as tariffs, quantitative restrictions and exchange controls or other interferences with international trade--such as casting a wider net via anti-dumping and countervailing duty laws. This solution tends to impede international trade, however, and for that reason is unacceptable. Thirdly, the present excessively rigid adjustable peg system could be modified to achieve greater flexibility. Because of the present trend toward economic nationalism and protectionism aimed at reducing unemployment levels, the more sensible path lies in engineering greater flexibility into the present adjustment mechanism. This alternative would allow nations greater autonomy to pursue their domestic economic policies of full employment and thereby reduce pressures toward protectionism. Considering the alternatives, the widening of the band to permit greater flexibility is a step in the right direction.

This article sets forth the adjustment problem, with an initial discussion of the present adjustment system, its shortcomings and the merit of the wider band. The discussion then proceeds to a detailed exposition of the present legal regime of the exchange rates against which the legality of the widening of the band is analyzed.