International Monetary Fund

INTERNATIONAL MONETARY FUND

INTERNATIONAL MONETARY FUND (IMF), created at the Bretton Woods Conference in 1944, began operations on 1 March 1947.It had its inception on 1 July 1944, when delegates of forty-four nations met at Bretton Woods, New Hampshire, and proposed two associated financial institutions—the IMF, with $8 billion capital, and the International Bank for Reconstruction and Development. A recurrence of the restrictive trade policies, exchange instability, and international lending abuses that had characterized the interwar era was feared. After World War I, nations had sought monetary stability by returning to the gold standard, but in many instances the gold standard took the form of a weak version of the gold exchange standard. Its breakdown contributed to the 1929–1936 economic debacle.

The IMF's original purpose was to support world trade by reestablishing a stable international system. To this end, it was given the mandate to monitor the exchange rate policies of member countries and provide short-term loans in case of balance of payments problems.

Since the IMF and member nations accepted the dollar as equal to gold, the growing number of dollars in their central bank reserves, especially after 1958 and in turn the consequence of chronic U.S. government deficits, stimulated worldwide inflation. The gold exchange standard broke down in 1968–1971, notably after the United States ceased redeeming dollars in gold on 15 August 1971, thereby severely damaging the prestige of the IMF.

With the collapse of fixed exchange rates in 1973, the dominant role of the IMF was to provide financial support for member countries. As of 1993, it had 178 members and had become a major financial intermediary. Its involvement is virtually required before international bankers will agree to refinance or defer loans for Third World countries. The IMF was also instrumental in providing funds for the emerging market economies in eastern Europe following the breakup of the Soviet Union in 1991. The fund also provides information to the public, and technical assistance to governments of developing countries.

The IMF can make loans to member countries through standby arrangements. Depending on the size of the loan, the fund imposes certain conditions. Known as IMF conditionality, these measures often interfere with the sovereignty of member countries with regard to economic policy. IMF conditions can require devaluation of currencies, removal of government subsidies, cuts in social services, control over wages, trade liberalization, and pressure to pursue free-market policies. IMF conditionality has been criticized as being too severe, imposing hardship on debtor countries. Because IMF policies are imposed by an international agency consisting of industrialized countries, they give the appearance of maintaining the dependency of the Third World.

Critics point out that balance-of-payment problems in the Third World are often structural and long term, with the result that short-term stabilization by the IMF may lead to long-run development problems. Access of member countries to the fund's assets is determined by quota. Each member receives a quota based on the size of its economy. The quotas are defined in terms of Special Drawing Rights (SDRs), reserve assets created by the IMF to supplement world reserves. The value of SDRs for member nations requesting loans is determined by an IMF accounting system based on a weighted average of major economic powers' currencies.

BIBLIOGRAPHY

Aufricht, Hans. The International Monetary Fund: Legal Bases, Structure, Functions. New York: F. A. Praeger, 1964.

Horsefield, J. Keith, ed. The International Monetary Fund, 1945–65: Twenty Years of International Monetary Cooperation. Washington, D.C.: International Monetary Fund, 1969.

International Monetary Fund. "Supplement on the IMF." IMF Survey 22 (October 1993): 1–28.

Salda, Anne C. M. The International Monetary Fund. New Brunswick, N.J.: Transaction, 1992.

Marie D. Connolly

Donald L. Kemmerer / a. g.

See also Banking ; Banks, Export-Import ; Bretton Woods Conference ; Corporations ; Dumbarton Oaks Conference ; Foreign Aid .