International Monetary Fund



International Monetary Fund

Introduction

The International Monetary Fund (IMF) is a treaty-based, voluntary association of countries based on their real or potential impacts on the world's economy. It currently controls assets amounting to US$215 billion and has 182 member countries. Unlike the World Bank, the other “pillar” of the world economy, the IMF has no subsidiaries or affiliates. Its highest authority resides with the Board of Governors (which meets annually), each of whom is appointed by a member country.

IMF membership has varied over time, as has its role and responsibilities in world affairs. The evolution of the IMF can roughly be divided into phases based on the degree of functionality, relevance, and shifting purpose. Initially, the IMF was established at the Bretton Woods Conference (along with the World Bank) in New Hampshire with the signing of the Articles of Agreement in July 1944 and declaration of exchange values by the 44 member countries at the first meeting in 1946. However, most economists and historians disregard the impacts of the early IMF since the most important signatories (Western industrial democracies) refused to establish rules regarding the conversion of each other's currencies into their specific reserves until December 27, 1958.

From that point until the decision by the American President Richard Nixon on August 15, 1971, to refuse conversion of U.S. notes of exchange into gold from the Federal Reserve, the IMF operated to stabilize exchange rates by setting “pegs” that regulated exchange values. This policy constrained the degree to which individual countries could pursue deflationary valuations to stimulate exports or foreign direct investment (FDI) but ensured that variations in exchange rates would also be constrained. In addition, it was believed that the pegs would alleviate uncertainty regarding the risks of FDI and thus help spur reconstruction following World War II. This peg arrangement reflected the desire of the Bretton-Woods signatories to incorporate both the advantages of the prewar gold standard and the flexibility of floating exchange rates that were popular during the interwar years. In addition, it was believed that the disadvantages of submission to the vagaries of the business cycle under the gold standard and the dangers of under- or overvaluation and trade imbalances under the floating exchange rate system could be avoided.

In the end, a compromise was reached that resulted in a relatively weak version of the IMF in comparison with the current incarnation. With convertability of member currencies established in 1959, however, the IMF managed to oversee a generally sustained, long period of expanded world trade, economic growth, and stability within the industrialized democracies until 1970. With the adoption of floating exchange rates in 1973, the IMF began a 5-yr. (year) period of restructuring and adjustment that led to amendment of the constitution in 1978. The most notable adjustment was the replacement of the mechanism of pegged exchange rates with frequent consultation (usually once a year), technical advice, policy support, and loan conditions to ensure that member countries follow policies designed to support economic ...