The original Articles of Agreement of the IMF, under the Breton Woods system of adjustable pegging, required every member country to declare par value of its currency in terms of gold or U.S. dollars. The U.S. dollar was convertible into gold.
The Articles allowed the member countries to make adjustments in the par value of their currencies for correcting disequilibrium in their balance of payments. A Country can make adjustments up to 10% by simply informing the IMF.
However, for changes more than 10%, but below 20%, the country was required to obtain prior approval from the IMF. For any change exceeding 20%, the approval by the two-third members of the Fund was necessary.
Generally, the permission was given whenever a fundamental disequilibrium in the balance of payments was to be corrected. The fund discouraged the competitive currency devaluation. It could terminate the membership of a country if it changed the par value of its currency without its approval.
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Under the revised Articles of Agreements of the IMF, the member countries are given autonomy regarding exchange arrangements. The exchange rates are allowed to float or change according to the demand and supply conditions in the exchange market and also on the basis of internal price levels.
This, however, does not mean that complete instability in the exchange rates is allowed. The Articles require the IMF to exercise surveillance to ensure proper working of the international monetary system.
Under the surveillance arrangements of the Fund, the member countries are expected to follow three norms:
(i) They should avoid manipulating exchange rates to prevent balance of payments adjustments or to gain competitive advantages over other members.
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(ii) They should intervene in the exchange market, if necessary, to counter disorderly short term movements in the exchange value of their currency.
(iii) In adopting an intervention policy, they should take into account the interest of the other members.