Monetary Sovereignty


A. Introduction


B. The Principle of Monetary Sovereignty








Exchange control


Sovereign debt and monetary legislation


C. Monetary Sovereignty and International Legal Disputes


D. Monetary Legislation as Confiscation


E. Fair and Equitable Treatment of Aliens


F. Other Challenges to Monetary Legislation




The European Convention on Human Rights


The European Union


A. Introduction


The State theory of money has been discussed in some detail earlier in this book.1 The State theory proceeds on the assumption that every State is entitled to create and define a monetary system and to issue money in pursuance of it. As a result, money is an institution created by or under the authority of a domestic legal system, and falls within the jurisdiction of the issuing State.2 The present chapter will consider the extent to which customary international law underpins the national right to issue money and to organize a monetary system. It will also consider the extent to which action taken in the monetary sphere may be open to challenge on international or constitutional grounds.

B. The Principle of Monetary Sovereignty


The State’s undeniable sovereignty over its own currency is traditionally recognized by public international law; to the power granted by municipal law there corresponds an international right, to the exercise of which other States cannot, as a rule, object.3 In other words, if a State enjoys sovereignty over its monetary system, then no international wrong or any resultant claim can arise from any action taken by that State to control or manage that system. As the Permanent Court of International Justice noted,4 ‘it is indeed a generally accepted principle that a state is entitled to regulate its own currency’. Domestic courts have, on occasion, noted the same principle.5 It follows that money, like tariffs, taxation, or the admission of aliens is one of those matters which prima facie fall essentially within the domestic jurisdiction of individual States.6


It must also follow that, subject to such exceptions as customary international law7 or treaties8 have grafted upon this rule, the municipal legislator is free to define the currency of his country,9 to decide whether or not it should be pegged to another currency,10 to determine the means by which monetary and exchange rate policies are to be defined and implemented, to devalue or revalue the currency,11 to allow or prohibit the use of foreign currencies within its borders,12 to impose exchange controls, or to take other measures affecting monetary relations. Customary international law does not normally fetter the municipal legislator’s discretion in these matters or characterize his measures as an international wrong13 for which he could be held responsible, just as it leaves him the freedom to decide whether he wishes to introduce a particular type of tax and whether he levies tax at a particular rate. And if a State enjoys sovereignty over its currency and monetary system, it must necessarily follow that, as a matter of international law, other States are bound to recognize that sovereignty and the consequences of its exercise.14 Yet this statement, whilst perhaps attractive in its simplicity, may appear to overstate the position and some further examination of these principles thus becomes necessary.


In so far as the currency of an issuing State is concerned, it may be said that the concept of monetary sovereignty exhibits features of both an internal and an external character. ‘Internal’ sovereignty includes the rights to define the monetary system, to devalue the currency, and to operate a monetary policy; ‘external’ sovereignty includes the right to impose a system of exchange control. In broad terms, the exercise of an internal monetary power cannot be questioned, and must be respected, by other States. For example, as has been shown, the obligation to recognize the monetary sovereignty of other States lies at the heart of the lex monetae principle.15 There will thus generally be no basis upon which a State or its courts can impugn the decision of another State to withdraw or replace its currency or generally to reorganize its monetary system,16 nor will the monetary policy of a particular State be open to legal challenge before the courts of another State. In contrast, the exercise of ‘external’ monetary sovereignty—such as the imposition of a system of exchange control—necessarily has a greater impact upon other States and their nationals. It is thus perhaps unsurprising that international law pays greater attention to the precise scope of external monetary sovereignty, with the result that the purported exercise of such sovereignty may be more susceptible to challenge.17 Nevertheless, the principle remains that a proper exercise of such sovereignty cannot be impugned before any domestic or international tribunal.18


The principle of monetary sovereignty becomes a little more obscure when one considers the ability of a State to determine the extent to which foreign monetary laws are to be applicable within the borders of that State.19 There can be no doubt that (a) customary international law allows each State to devise its own system of private international law, and (b) the extent to which foreign monetary laws may be applied is a matter which can legitimately be regulated by such a system. Yet it is suggested that such rules must, as a matter of public international law, demonstrate a sufficient degree of consistency with the principles of monetary sovereignty just discussed. The precise extent of that requirement is by no means clear, but a few general points may be made. First of all, if a State has the sovereign right to organize its monetary system, this must include the right to replace that currency and to specify the basis of conversion (‘recurrent link’) between the old and the new units; this position reflects the principle of nominalism, which has been discussed earlier.20 Secondly, the obligation to recognize such a reorganization is imposed by international law; it must thus have practical consequences which go beyond the mere recognition of a factual state of affairs. For example, in the view of the present writer, an obligation to recognize a change in the currency system of another country necessarily connotes a duty to recognize that contractual obligations expressed in the former currency remain valid when converted into the new currency at the rate prescribed by the recurrent link, and that they should be enforceable by judicial proceedings to the like extent; what is the practical value of the former obligation if the latter duty does not exist? It must therefore follow that customary international law requires that monetary relationships continue to be effective under these circumstances, and that a monetary substitution alone cannot be used as a basis for the termination of monetary obligations expressed in the former currency units.21 On the other hand, customary international law does not require other States to enforce the consequences of every financial adjustment made by an issuing State. This point is illustrated by reference to a revalorization of debts; the legislator or judiciary of a particular State may take the view that the question of the revalorization of a depreciated debt should be subject to the lex monetae, whilst in another State the same question may be determined by the law applicable to the debt.22 Customary international law contains no rule which would prescribe the application of one or the other solution; it is thus open to a State and its courts to adopt either solution when formulating an appropriate rule as part of its system of private international law.


It must be said that the principle of monetary sovereignty has not always been unquestioned, and various attempts have been made to limit the obligation of a State to recognize the right of other States to regulate their currencies and to determine their monetary policy at their discretion. Thus:

(a) in a case decided in 1688, an English court refused to give effect to the depreciation of the Portuguese currency, because this would reduce the effective value of a bill drawn in London and Portugal could not alter the value of property in England;23

(b) in 1800, the United States protested to the Spanish Government against the debasement of the Spanish currency, complaining that the value of debts expressed in that currency had thereby been significantly reduced;24 and

(c) in France and countries influenced by its legal system, it is occasionally stated that ‘les lois monétaires sont strictement territoriales’, thus suggesting that the jurisdictional ambit of monetary laws is restricted to a purely domestic context. Statements of this kind are easy to make but difficult to define and apply. Nevertheless, the Supreme Court of Syria held that a contract for the payment of ‘francs’ made between the Syrian Government and an Egyptian firm was subject to an international rule by which legal tender legislation, enacted after the date of the contract, applied only within the territory of the legislating State and did not affect contracts with a foreigner.25


Whilst these attempts to limit the international recognition of monetary changes are of historical interest, there can be no doubt that they are now obsolete, and—as already noted—that States are now under an international obligation to recognize the sovereignty of other States in the monetary field. It should not, however, be overlooked that the rules of customary international law will give way to any countervailing treaty obligations, and that in some respects the content of customary law may itself be shaped by international treaties which have won general acceptance. The Treaty on the Functioning of the European Union (TFEU) provides an example of the former category,26 whilst the latter category is represented by the Articles of Agreement of the International Monetary Fund.27 Subject to that reservation, however, the present chapter is principally concerned with general rules of customary international law.


Having defined the nature and scope of monetary sovereignty under international law, it is now proposed to illustrate the application of that principle in four particular types of circumstances.



As regards the international effects of an internal monetary depreciation,28 it has been explained that all monetary obligations—whether expressed in the domestic or a foreign currency—are subject to the principle of nominalism.29 The promise to pay 10,000 Swiss francs is satisfied by the payment of whatever are declared to be 10,000 Swiss francs by Swiss law as in effect at the time when payment falls due. This rule of municipal law is, for all practical purposes, universally accepted. In order to be consistent with it, public international law must follow suit; if under all relevant municipal systems, effect is to be given to the Swiss monetary law, then it must necessarily follow that Switzerland does not violate any international duty by the exercise of its sovereign powers over its own currency. The available authorities establish complete harmony between international and domestic law on this point by recognizing a State’s right to allow its currency to depreciate.30 Thus in Adam’s Case, a British subject held bonds issued by an American railway company and suffered a loss as a result of the issue of greenbacks and the consequent depreciation of the dollar; having regard to the principles just noted, the fall in value of the dollar could not constitute the basis of a claim against the United States, for it had committed no international wrong.31 Likewise, if a State elected to abandon the gold standard—thus causing a depreciation of the currency—persons holding banknotes prior to the abandonment cannot claim against the issuing State for the resultant loss, for a State has the sovereign right to manage its currency in this way, and thus, no wrong was committed as a result of a decision to abandon the gold standard.32 Finally, in a case which came before the Supreme Court of Germany, an Italian creditor whose German debtor had repaid a loan in depreciated German marks claimed to be entitled to payment on a gold basis. He alleged the existence of a rule of public international law to the effect that loans made by foreigners were invariably repayable according to their gold value. Such a rule would plainly fly in the face of the nominalistic principle. Referring to the practice in England and other countries, the Supreme Court summarily disposed of the creditor’s manifestly absurd contention.33


It must be said, however, that these general principles of customary international law will frequently give way to treaty obligations which specifically address matters of monetary conduct.34 In modern times, the customary rules are likely to be of limited practical application.



It must follow from the points just made that, as a rule, a State is within its rights to bring about the (external) devaluation of its currency, for example, by varying its system of exchange controls such that the exchange value of the domestic currency is reduced, or by taking any other step which might achieve the same end. A State may not only allow its currency to depreciate; it may also take active steps to achieve that end, provided that it does not act in a discriminatory manner.35 This right again flows from the universal acceptance of the principle of nominalism. That, in consequence, a State has no liability for a non-discriminatory devaluation of its currency has been stated with great precision by the Government of Canada:36 ‘Un principe bien établi en droit international exhonore les gouvernements de toute responsabilité pour les pertes dues à une dévaluation de leurs devises, pourvu que cette dévaluation s’accomplisse sans discrimination.’


This rule seems to have been followed by the European Commission of Human Rights,37 by the French Foreign Claims Commissions,38 and repeatedly affirmed by the Foreign Claims Settlement Commission of the United States.39 A few treaties which apply a different rule provide an insufficient basis upon which to vary the general customary rule just stated.40 But, yet again, the general rule naturally is subject to explicit treaty obligations to contrary effect.41


In addition, it may be noted that a decision to devalue the CFA franc by 50 per cent in 199442 created litigation in what may be described as a quasi-international context. A number of French citizens had spent their careers in the former French colonies and their pensions were expressed and paid in the CFA franc. The devaluation accordingly halved the value of their retirement incomes. Since France had itself been a party to the devaluation, some of the affected pensioners sued the French State for compensation. However, the Conseil d’État rejected the claim on the basis that the devaluation was of a general nature which had widespread effects, and had no characteristics that were specific to the claimant pensioners.43 This decision would appear to be in line with the commentary in the present section.


It should be appreciated, however, that consideration may have to be given to the terms of the instrument or obligation at issue. In Crane v Austria and City of Vienna,44 bonds issued by the City of Vienna were primarily payable in Austrian crowns, but there was also an express provision allowing the holder to claim payment in New York in US dollars at a fixed exchange rate. This was a genuine option of currency and the tribunal gave effect to the obligation to pay in US dollars at the stated rate of exchange. As the tribunal noted, however, there may be other cases in which there is merely an option to seek payment in a different location without stipulating a pre-set rate of exchange. In such a case, it must be assumed that the debtor must pay in the currency of the place of payment at the rate of exchange prevailing on the date on which payment falls due.



It is within a State’s discretion to decide whether or not it should legislate with a view to revalorizing debts which have arisen on the level of private law45 and which, as a result of the depreciation of the State’s currency, have become worthless or at least considerably reduced in intrinsic value. This follows from the apparent absence of any rule of customary international law which requires individual States to provide for the revalorization of their currencies under these circumstances.


It is possible to state these views because the number of countries which have taken care of the effects of monetary depreciation by revalorization is small.46 The number of countries which have objected to a failure to revalorize on the part of other States is even smaller; even the German Supreme Court—which can fairly be described as the foremost protagonist of the fundamental equities of revalorization—refused to apply ordre public in favour of a German national who was entitled to payment of an old mark debt under a contract governed by the laws of Czechoslovakia, whose laws did not provide for revalorization.47 Likewise, at the end of the Second World War, several States in South East Asia introduced legislation to revalorize debts which had been discharged by worthless Japanese military notes, but the decision of the Philippines not to take such a step was within the scope of the discretion afforded to it by customary international law, and thus could not constitute an international wrong.48 A similar situation arose in relation to French franc securities issued in London by the French Government between 1915 and 1918.49 At the time of the issue, the sterling equivalent of these obligations amounted to some £50 million, but the depreciation of the franc reduced this figure to £13.5 million by 1930. The British Government sought an ‘equitable measure of compensation’ for the British holders, partly because of the special circumstances under which the securities were issued and partly because the French Government itself demanded payment in gold francs from its own debtor governments. The French Government declined to consider the matter, on the grounds that:

The determination both of the financial policy of a State, so long as that policy is not disputed on grounds of law, and of any measures of equity which may be considered proper to take in connection with that policy, is entirely a matter for the State in question, i.e. in the present case, for France.

This statement effectively asserts the broad national discretion in the monetary field which has already been described in this section, and it is perhaps significant that the British Government elected not to pursue the matter beyond this point. Certainly, the claim against France appears to have been based upon a general appeal to notions of fairness, rather than upon any specific rule of international law.


It is true that a different result may be required in the very specific cases which the widespread practice of States treats in a privileged manner. This has occurred in the context of pensions. Thus, when the value of pensions payable to British pensioners of Argentine companies fell by some 60 per cent as a result of the devaluation of the Argentine peso in 1955, the Argentine Government substantially acceded to a British request for ‘an equitable solution’.50 Whilst this may reflect a rule of customary international law, it must be said that it has not always been applied consistently.

Exchange control


While it does not seem ever to have been seriously doubted that, in principle, a State is entitled to abrogate gold or similar protective clauses,51 there is much authority in support of the further right to introduce exchange control with all its incidental ramifications.


The British Government,52 the Government of Canada,53 and the Government of the United States54 have frequently stated their acceptance of this position. Thus, Canada ‘recognises the right of each country to control its foreign exchange resources, and restrictions of this nature, so long as they are not discriminating against Canadian citizens, cannot give rise to a claim’.55 The Foreign Claims Settlement Commission of the United States has propounded the same principle on a number of occasions.56 Acceptance of this principle is also implicit in a number of treaties which have restricted or regulated the national right to impose exchange controls, for it would clearly be unnecessary to constrain the exercise of a right which did not exist.57 It follows that national laws requiring the surrender of foreign currency,58 imposing restrictions on the export of currency,59 or modifying contractual terms in support of a system of exchange control60 are not inconsistent with customary international law. The principle of national sovereignty likewise serves to legitimize sanctions against another State by means of blocking or freezing measures.61 It should, however, be said that—so far as customary law is concerned—this particular aspect of monetary sovereignty does not entitle a State to exercise any degree of direct control over transactions which involve its currency but which occur abroad and are governed by a foreign system of law; this is so even though any payment made in respect of that transaction would ultimately have to be reflected by account movements on the clearing system which is operated within that State.62