The International Monetary Fund, widely known as the IMF, is an international cooperative institution headquartered in Washington, D.C., whose main mission is to promote and assist in international monetary stability. With its initial organization coming at the end of World War II, for many years the main goal of the IMF was to oversee a system of stable, fixed exchange rates among the currencies of member nations. Since 1971, the exchange rates of the world's currencies have been allowed to float, with supply and demand market forces determining their value. As of 2004 the IMF consisted of 184 member countries, which pay an initial quota subscription to become members. The organization works to achieve and enhance a stable world economy through the promotion of open financial disclosure among member nations, the provision of loans during periods of economic crises, and technical assistance provided through educational and promotional means.

The IMF has come under criticism from some sources for its role in high-profile assistance offered to the Mexican, South Korean, and Russian economies, among others. The member nations, however, continue to support the organization in its efforts to sustain international economic stability and promote international trade.


The events that ultimately led to the creation of the IMF had their origins in the conclusion of World War I. The economic terms of surrender were negotiated at the 1919 peace conference in Paris. As part of the peace treaty, known as the Treaty of Versailles, England and France demanded large amounts of war reparation payments from Austria and Germany to help rebuild their war-torn economies. However, the Austrian and German economies were depleted, too. This forced them to rely on foreign imports for goods and services unable to be produced locally. When a country imports more than it exports, it runs a balance of payments deficit. Together with other factors, the result may be a devaluation of the currency, since foreign sellers often demand to be repaid in their own currencies. The addition of war reparations on top of a large balance of payments deficit exacerbated the economic crisis, resulting in hyperinflation and political instability in Germany.

The great British economist John Maynard Keynes had participated in the peace conference following World War I and foresaw the scenario described above. Indeed, his book The Economic Consequences of the Peace predicted a second world war as an inevitable consequence of the severe penalties and lack of political and economic cooperation following the conclusion of World War I.


Keynes was determined to avoid repeating the mistakes made in the Treaty of Versailles. As World War II came to a close in 1944, an international conference was held at the resort community of Bretton Woods, New Hampshire. Forty-four nations were represented at the conference, with the chief negotiators being Keynes from Great Britain and Harry Dexter White from the United States. The result of their deliberations was the creation of the International Monetary Fund. The original goals of the fund were to aid members needing foreign exchange to conduct international trade and to promote a system of fixed exchange rates.

The original plan called for the U.S. dollar to be pegged to gold at a rate of $35 per ounce. Other currencies were set at fixed exchange rates to the dollar, and thus indirectly tied to gold. Countries participating agreed to set a "par" value for their currency based on this fixed exchange rate, allowing for a 1 percent fluctuation band. Should a country experience problems maintaining its par value, the IMF stood ready to lend foreign exchange to aid the cause. Member nations made an initial deposit into the fund known as a quota subscription. These deposits formed a pool from which the IMF could extend loans to members. As a special provision, if a member nation experienced chronic problems maintaining its par value, it would be allowed a one-time devaluation of its currency of up to 10 percent.


In 1969 the IMF created a new hybrid asset to serve as a reserve currency. The new financial asset was named a special drawing right, or SDR. The value of an SDR is a function of the current value of five different currencies from which it is comprised. They include the U.S. dollar, the Japanese yen, the United Kingdom pound sterling, and the respective euro values of Germany and France. The respective weights of the currencies, which constitute SDRs value, are revised every five years.

Member nations may use SDRs in a variety of ways. These include exchanging SDRs for other monetary assets or for maintaining operations, and exchanging SDRs directly with other members in exchange for foreign currencies to address a balance of payments problem. Since part of the mission of the IMF is to promote and enhance international trade, the board of governors has the option to decide on periodic special allocations of SDRs to augment members' existing reserve accounts.


In addition to the IMF, the Bretton Woods Agreement resulted in the formation of the World Bank. Formally known as the International Bank for Reconstruction and Development, the World Bank's primary goal is to promote economic growth among the world's developing nations. It does so by effectively serving an investment-banking role, issuing bonds and notes to raise new investment capital, which it in turn lends to poor nations to finance specific projects. Typical projects include those associated with enhanced transportation routes, electric power development, and increased agricultural production.

As they share the ancestry of the Bretton Woods conference plus related economic roles, confusion between the IMF and the World Bank is common among the general public. They remain, however, two distinct organizations with their own individual goals and agendas aimed at promoting economic health and development among the world's nations.


The system of fixed exchange rates created by the Bretton Woods Agreement and overseen by the IMF lasted from 1946 until 1971. For much of that period, the system worked very well. The U.S. dollar was pegged to gold and most other currencies were pegged to the dollar. During much of this period the United States ran a trade surplus, exporting more goods and services than it imported. Thus, the amount of U.S. dollars held domestically on net increased, causing little strain on the international monetary system.

This scenario changed during the 1960s. As the United States expanded its level of imports and increased industrial output during the Vietnam War, the amount of dollars held overseas expanded greatly. These dollars were deposited in foreign banks, allowing the banks to extend U.S. dollar denominated loans. The supply of U.S. dollars outstanding expanded significantly. At the same time, as more dollars were presented for redemption, the U.S. gold supply was being depleted. By the end of the decade, there were more dollars outstanding than there was gold to back them. In August 1971 the Nixon administration acknowledged the situation by closing the gold window, refusing to allow foreign central banks to exchange U.S. dollars for gold.

The Smithsonian Agreement of that year began the process of ending the Bretton Woods system of fixed foreign exchange rates. The initial agreement called for expanded fluctuation of exchange rates from 1 percent to 2.25 percent; subsequent economic activity made these bands unfeasible. Governments then decided to let their respective currencies float relative to each other, and the world moved to a floating exchange rate system.


In 1978, the IMF formally amended its constitution to alter its role in the world economy. It now plays a number of roles in its overall mission of promoting international stability and growth. These roles fall generally under three areas: surveillance, technical assistance, and financial assistance.

In its surveillance function, the IMF serves as a watchdog over member nations' economic policies. Each nation consults with IMF staffers on a regular basis regarding current and potential policy changes that may affect both the domestic economy and that of other nations. In this role, the IMF attempts to promote coordination and transparency in international economic policy, with the belief that open communication and mutual consideration of new policy initiatives will result on net in more robust international stability and trade.

Technical assistance to member nations takes up a large amount of daily operations at the fund. With a staff of approximately 2,700 experts from 140 countries, including many economists and statisticians, the IMF provides expertise and consultation on matters involving the implementation of both fiscal and monetary policy, trade laws and tariff measures, and programs aimed at strengthening and stabilizing local currency values. The technical staff produces numerous articles and publications designed to inform and educate policymakers on international economic affairs. Included are statistical compilations on trade, capital flows, employment, and other economic data. The technical area extends to educational training sessions, which are provided both at the IMF and jointly with other economic institutes throughout the world.

Perhaps the one area that has brought the IMF the most attention and raised its image among the general public has been its role of providing financial assistance to nations experiencing economic crises. This involves providing credits or arranging loans for nations experiencing such problems as severe balance of payments deficits or a sudden devaluation of their currency.

The 1990s saw the IMF make global headlines with several widely publicized financial assistance programs. The first occurred in 1995 with the crisis in Mexico. Faced with a severe devaluation of its currency due to a rapid loss of confidence in its policies, the Mexican government turned to the IMF for what was then a record $17.8 billion financial assistance package. While attempting to move towards a market-oriented economy, Russia required financial assistance several times during the 1990s. Included were large loans in both 1996 and 1998. And, in 1997, an extended crisis throughout much of east Asia resulted in the IMF arranging financial assistance for South Korea, Indonesia, and Thailand.

These financial assistance programs, which have grown successively larger in amount, have met with severe criticism from some sources. The IMF has been labeled a "bailout" source for poorly run economies, serving as a safety net for policymakers unable or unwilling to make difficult decisions which market discipline demanded. In addition, critics claim that IMF policies encourage poor nations to carry huge amounts of international debt, forcing them to use a large proportion of their annual revenues to make interest payments. The IMF has responded to its critics by actively working with both the public and private sectors to promote better information flow and legislation designed to prevent additional financial crises from taking place. The organization continues to develop systems and procedures designed to limit such crises from spreading to other countries and enveloping entire geographical regions.

The modern International Monetary Fund remains a major player on the global economic stage. The fund continues to grow and expand in its new roles within a world of floating exchange rates and rapid capital flows. The modern IMF wears a number of hats, including overseer and communicator of national policies and legislation, consultant and educator on numerous fiscal and monetary issues, and intermediary and lender for nations whose currencies come under pressure.

Critics continue to denounce the IMF for forcing nations in need to adopt its policy recommendations as a condition of assistance. In addition, the fund raises concerns among those who claim it acts as a safety net to alleviate poor or ineffective domestic monetary and trade policies. The IMF is also frequently charged with favoring bankers and elite classes, obstructing debt reduction for the world's poorest countries, and ignoring human rights violations. "Street protesters have it exactly right, for example, when they argue that the economic policies imposed on developing nations by the International Monetary Fund and World Bank have hammered the poor," Eric Pooley wrote in Time. "Using loans and the threat of default as levers, the IMF has pushed more than 90 countries to accept its brand of free-market shock therapy: lowering trade barriers, raising interest rates, devaluating currencies, privatizing state-owned industries, eliminating subsidies and cutting health, education, and welfare spending." While such programs attract foreign investment and stimulate the economy, they also tend to increase the cost of living and hurt small, local businesses.

Such criticisms are not likely to dissipate soon. Nevertheless, the 184 member nations continue to support the IMF in the belief that open communication and coordinated policies will lead to greater stability and promote a climate which fosters growth in international trade and development.

Howard Finch

Revised by Laurie Hillstrom


International Monetary Fund. "Common Criticisms of the IMF." Available from < >.

International Monetary Fund. "The IMF at a Glance." Available from < >.

Pooley, Eric. "The IMF: Dr. Death? A Case Study of How the Global Banker's Shock Therapy Helps Economies but Hammers the Poor." Time, 24 April 2000.

Also read article about International Monetary Fund from Wikipedia

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