International Monetary Fund

[Qurratulain]

International Monetary Fund


The International Monetary Fund was established to foster international trade and currency conversion, which it does through consultation and loan activities. When created in 1946, the IMF had 39 member countries; by November 1999 the membership in the IMF had grown to 182 member countries. As of this writing, every major country is now a member, including the former communist countries, as are includes numerous small countries. The only exceptions are Cuba and North Korea.

To join the IMF, a country must deposit a sum of money called a quota subscription, the amount of which is based on the wealth of the country's economy. Quotas are reconsidered every five years and can be increased or decreased based on IMF needs and the prosperity of the member country. In 1999, the United States contributed the largest percentage of the annual contributions—18 percent—because it had the largest, richest economy in the world. Voting rights are allocated in proportion to the quota subscription.

Historical Development

The Depression in the 1930s devastated international trade and monetary exchange, creating a great loss of confidence on the part of those engaged in international business and finance. Because international traders lost confidence in the paper money used in international trade, there was an intense demand to convert paper money into gold—a demand beyond what the treasuries of countries could supply. Nations that defined the value of their currency in terms of a given amount of gold were unable to meet the conversion demand and had to abandon the gold standard. Valuing currencies in terms of given amounts of gold, however, had given currencies stable values that made international trade flow smoothly.

The relationship between money and the value of products became confused. Some nations hoarded gold to make their currency more valuable so that their producers could buy raw materials at lower prices. Other countries, desperate for foreign sales of their goods, engaged in competitive devaluations of their currencies. World trade became difficult. Countries restricted the exchange of currency, and even encouraged barter. In the early 1940s Harry Dexter White of the United States and John Maynard Keynes of the United Kingdom proposed the establishment of a permanent international organization to bring about the cooperation of all nations in order to achieve clear currency valuation and currency convertibility as well as to eliminate practices that undermine the world monetary system.

Finally, at an international meeting in Bretton Woods, New Hampshire, in July 1944, it was decided to create a new international monetary system and a permanent international organization to monitor it. Forty-four countries agreed to cooperate to solve international trade and investment problems, setting the following goals, for the new permanent, international organization:

Unrestricted conversion of currencies

Establishment of a value for each currency in relation to others

Removal of restrictive trade practices



Source: Encyclopedia

Creation of the International Monetary Fund

In 1946 in Washington, D.C., the international organization to monitor the new international monetary system came into existence—the International Monetary Fund (IMF). The purposes of the IMF are as follows:

To promote international monetary consultation, cooperation, and collaboration

To facilitate the expansion and balanced growth of international trade

To promote exchange stability

To assist in the establishment of a multilateral system of payments

To make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards

To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members

The Bretton Woods agreement created fixed exchange rates between countries based on the value of each country's currency in relation to gold or indirectly in relation to gold by relating their currency to the U.S. dollar. The United States in turn guaranteed that the dollar could be exchanged for gold at a fixed exchange rate. The United States, however, ultimately could not maintain the dollar's promised convertibility, ending it in 1971, in large part because of inflation and a subsequent run on the U.S. gold reserve. The fixed-exchange-rate system collapsed. This led to a managed flexible-exchange-rate system with agreement among major countries that they would try to coordinate exchange rates based on price indexes. However, without operational criteria for managing currency relationships, exchange rates have been increasingly determined by volatile international capital movements rather than by trade relationships.

Organizational Structure

The organization of the IMF has at its top a board of governors and alternate governors, who are usually the ministers of finance and heads of central banks of each member country. Because of their positions, they are able to speak authoritatively for their countries. The entire board of governors and alternate governors meets once a year in Washington, D.C., to formally determine IMF policies. During the rest of the year, a twenty-four-member executive board, composed of representatives or the total board of governors, meets a number of times each week to supervise the implementation of the policies adopted by the board of governors. The IMF staff is headed by its managing director, who is appointed by the executive board. The managing director chairs meetings of the executive board after appointment. Most staff members work at IMF headquarters in Washington, D.C. A small number of staff members are assigned to offices in Geneva, Paris, and Tokyo and at the United Nations.

Surveillance and Consultations

At least annually, a team of IMF staff members visits each member country for two weeks. The team of four of five meets with government officials, makes inquiries, engages in discussions, and gathers information about the country's economic policies and their effectiveness. If there are currency exchange restrictions, the consultation includes inquiry as to progress toward the elimination of such restrictions. Statistics are also collected on such matters as exports and imports, tax revenues, and budgetary expenditures. The team reports the results of the visit to the IMF executive board. A summary of the discussion is transmitted to the country's government, and for countries agreeing to the release of the summary, to the public.

Financial Assistance

The IMF endeavors to stabilize the international monetary system by temporarily lending resources in the form of foreign currencies and gold to countries experiencing international payment difficulties. There are a number of reasons why a country may need such assistance. One possibility is that the country has a trade deficit, which is often offset by lending, capital investment, and possibly aid from richer countries. However, confidence in the country's economic system and its ability to repay its debts becomes diminished in such a situation. The IMF requires that the borrowing country provide a plan for reform that will ultimately result in resolving the payments problems. Reforms such as tighter fiscal and monetary policies, good government control of expenditures, elimination of corruption, and provision for greater disclosure are required.

The most immediate assistance to a member country with payments difficulty is permission to withdraw 25 percent of the quota subscription that was initially paid in the form of gold or convertible currency. If the country still cannot meet its payments obligations it can, ultimately, borrow up to three times its original quota payment. The borrowing country must produce a plan of reform that will overcome the payments problem.

The IMF has a number of additional lending plans to meet various problems experienced by its members as well as emergency lending programs. There are Stand-By Arrangements disbursed over one to two years for temporary deficits, the Compensatory and Contingency Financing Facility for sudden drops in export earnings, Emergency Assistance for natural disasters, Extended Fund Facility to correct structural problems with maturities of greater length, the Supplemental Reserve Facility to provide loans to countries experiencing short-term payments problems due to a sudden loss of market confidence in the country's currency, and the Systemic Transformation Facility for the former communist countries in Eastern Europe and Russia.

Special Drawing Rights (SDRS)

In the 1960s, during an expansion of the world economy while gold and the U.S. dollar were the reserve currencies, it appeared that reserves were insufficient to provide for international trade needs. The IMF was empowered to create a new reserve asset, called the special drawing right (SDR), which it could lend to member countries. The value assigned to the SDR is the average of the world's major currencies. Countries with strong currencies agreed to buy SDRs when needed by a country because of payment problems, and in turn sell other currencies. However, at present SDRs are used mostly for repayment of IMF loans. Creation of SDRs is limited by the IMF constitution to times when there is a long-term global reserve shortage. The board of governors and alternate governors is empowered to make such a determination.

Loans to Poor, Indebted Countries

The IMF has created various loan facilities such as the Trust Fund to provide loans to its poorest member countries. In addition, the IMF works cooperatively with the World Bank, other international organizations, individual countries, and private lenders to assist poor, debt-ridden countries. It encourages such countries to restructure their economies to create better economic conditions and better balance of payment conditions.

There have been critics of the IMF's effectiveness. Such critics have noted, for example, instances of massive corruption on the part of recipient governments that resulted in IMF funds being stolen and/or wasted. Also, there have been a number of instances in which IMF efforts have been assessed as unsuccessful. Recommended restrictive fiscal policies have been seen as causing troublesome conditions, such as food shortages and citizen unrest. Nobel-prize-winning economist Robert Mundell, for example, has taken the position that current IMF policy options are insufficient to achieve stable international currency exchange and thereby foster international trade. He recommends that a global currency and world central bank be created to establish a stable international currency.