The International Monetary Fund (IMF) is perhaps one of the most misunderstood economic institutions operating on a worldwide scale. The IMF, as is often thought, is not a global central bank, it is not a development bank for Third World nations, nor does it dictate monetary policy to its members. Likewise, it is not to be confused with the World Bank. The IMF was founded as a result of the United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire, in July 1944. The conference was attended by 45 countries including the United States. The IMF was established to promote worldwide monetary cooperation, international trade, and most importantly, stability in foreign exchange. By December 1945 enough countries had ratified the charter to make it a viable institution. The IMF, which in 1998 had 182 member countries, is headquartered in Washington, D.C.
One of the first and most important acts of the newly formed IMF was to establish a method for standardizing the par value of each member nation's currency. It was felt by many economists, most notably John Maynard Keynes (1883-1946) of Great Britain and Harry Dexter White of the U.S. Department of the Treasury, that the Great Depression was exacerbated by currency inconvertibility. During the depression there was a tremendous demand for gold because of a lack of trust in paper currency. Those national treasuries that exchanged their currency for gold could not meet this demand and many countries, most notably the United Kingdom, were forced to abandon the gold standard against which they pegged the value of their currency. This made foreign exchange unstable because the value of these various currencies was no longer pegged to a fixed standard—the price of gold. Especially problematic was establishing a currency exchange rate between those countries still on the gold standard and those who had abandoned it. This situation led to nations hoarding gold or currency that could be converted to gold on demand, thus shrinking monetary exchange, foreign trade, and jobs dependent on foreign trade. As a result the world economy faltered with the worldwide prices of goods falling by 48 percent between 1929 and 1932 and the value of international trade falling 63 percent.
The ability to exchange currency is a central feature of world trade. The currency of each country has a value in terms of the currency of every other country. This exchange value is in a constant state of flux but in late 1946 the IMF standardized the par value of its members' currencies and developed various strategies for easing currency convertibility. Par values were standardized using gold. Since the United States also pegged the value of the dollar to gold at $35 per ounce, the value of other currencies for practical purposes became pegged to the dollar. Members of the IMF were required to value their currency within I percent of this par value and any deviation required IMF consent. This policy continued for nearly 25 years until the early 1970s when the Nixon administration ceased converting dollars for gold.
With the discontinuance of a par value system based on gold IMF members now use a variety of ways of valuing their currency. One way is to allow the currency to float freely with its value being determined on currency markets, a method favored by many industrial nations. In another method, a country may choose to manipulate currency markets in its favor by buying and selling its own currency. In a third alternative, a country may choose to peg the value of its currency to that of another currency. Regardless of the method used, IMF members may not peg the value of their currency to gold and the criteria used to establish the par value of their currencies must be divulged. In spite of national currencies going off the gold standard, the IMF is generally regarded as still being an important international regulatory agency that promotes an environment for orderly and stable currency exchange arrangements.
In addition to overseeing the international monetary system, the IMF also makes loans to its members during financial crises. In 1983 and 1984 the IMF lent $28 billion to member countries that were in arrears to other IMF members. In 1995 it lent Mexico $17 billion and Russia $6.2 billion. The money for these loans comes from quota subscriptions or membership fees that are based on the wealth of each nation. The wealthier the country, the higher the quota subscription. Quotas are reviewed every five years and can be raised or lowered depending on the economic health of the country. The United States, which is the IMF's wealthiest member, contributes about $38 billion while the Marshall Islands, the least wealthy, contributes about $3.6 million. There is also a specific correlation between the amount of money a member country can borrow and the amount of that country's quota subscription. In the event that the quota subscriptions cannot meet demand, the IMF has an established line of credit with governments and banks throughout the world. This line of credit is known as the General Arrangements to Borrow. The IMF can also borrow money from member governments for specific programs and uses. Oftentimes the IMF will borrow money for a member country at a more favorable rate than the country could do on its own. The IMF lends money only to member countries with foreign currency payment problems. A member country can withdraw 25 percent of its quota that was paid in gold or a readily converted currency. If this is not sufficient it is possible for the country under certain prescribed conditions to borrow three times its quota subscription over a period of time. In these cases, however, the IMF will insist on concurrent economic reforms to alleviate the underlying problems.
By 1998 the IMF held quotas worth $210 billion. This figure, however, is not a real figure in that 75 percent of each member's quota is paid in its own national currency. Since most of these currencies are not in demand outside of the issuing country, the real value of the IMF quota fund is somewhere around $105 billion. Those member countries that borrow from the IMF invariably ask for currency that can be readily converted, such as the dollar, yen, deutsche mark, pound sterling, or the French franc.
The IMF, despite the goodwill it has accumulated since its establishment, is not without its critics. Many such critics feel that the Asian crisis of the late 1990s was caused in part by IMF policies. The IMF (along with Western governments and banks) stood accused of encouraging Asian governments to loosen controls on foreign borrowing by their private domestic companies. This led to an escalation of foreign debt and when things got shaky a subsequent outflow of this Western money. The result was a devaluation of currencies and economies. Critics feel that IMF policies should promote domestic rather than foreign borrowing (even if it's more expensive) and hold foreign banks more responsible for "reckless lending." The IMF has also been criticized for "intruding" into the political process of Asian debtor nations and ignoring the "moral hazards" that accompany quick bailouts.
The governing authority of the IMF is the board of governors of which each member country contributes a governor and an alternate governor. The board of governors is responsible for the admission of new members, adjustment of quotas, and the election of executive directors. The board of executive directors oversees the managing director and the administrative staff. The interim committee of the board of governors was established in 1974 to analyze the international monetary system and make recommendations to the board of governors.
[ Michael Knes ]
Culpepper, Roy, ed. Global Development Fifty Years after Bretton Woods: Essays in Honour of Gerald K. Helleiner. New York: St. Martin's Press, 1996.
Driscoll, David D. "What Is the International Monetary Fund?" Washington: International Monetary Fund, 1998. Available from www.imf.org .
Fischer, Stanley. "In Defense of the IMF: Specialized Tools for a Specialized Task." Foreign Affairs 77 (1998).
Levinson, Mark. "The IMF in Asia: Its Solution Is the Cause of the Crisis." Dissent 45 (1998).