IMF

INTERNATIONAL MONETARY FUND (IMF)

The Great Depression of the 1930s had an enormous impact on the

advanced industrialised states. In the United States and Europe agricultural

prices fell, unemployment skyrocketed, banks closed leaving

people penniless, factories stood idle, and international trade collapsed.

Indeed, the onset of the Depression was one of the main reasons why

so many ordinary Germans were willing to follow Hitler into war in

1939.

At the same time, the outbreak of war in Europe proved to be a key

factor in the United States’ economic recovery. Increases in the level of

production needed to fight the war stimulated economic growth, put

people back to work, and money into circulation. One of the important

questions confronting American policymakers, however, was how

to maintain the new level of economic activity after the war. Would

the international economy dramatically slow down again? Would

high tariffs continue to be a feature of the international economic

landscape? Would high levels of unemployment return?

The purpose of the Bretton Woods Conference was primarily

to ensure that these things did not happen. The 1944 Conferencehad two main goals: to stabilise the value of money and to promote

international trade. Along with the World Bank, the International

Monetary Fund (IMF) was created to facilitate both these goals.

Article 1 of the IMF’s Charter states that its purpose is to:

• promote international monetary cooperation;

• facilitate the expansion and balanced growth of international trade;

• promote and maintain high levels of employment;

• promote exchange stability and avoid competitive exchange rate

depreciation;

• eliminate foreign exchange restrictions;

• offer resources to countries to correct maladjustments in their

balance of payments without resorting to measures destructive of

national or international prosperity;

• shorten the duration and lessen the degree of disequilibrium in the

international balance of payments of its members.

The original mandate of the IMF was achieved primarily by linking

the world’s currencies to the American dollar. Members were required

to fix the value of their currencies in relation to the dollar. Changes

beyond 1 per cent had to be discussed with the other members of the

Fund and agreed to by them. Investors, manufacturers, and states benefited

enormously from what was called the par value system. Not only

did it give them a clear idea of the actual value of different currencies, it

also helped to bring a degree of predictability to the international

economy. The par value system lasted until the early 1970s, when the

US decided it could no longer afford to allow countries to convert

their US dollars into gold.

It is customary to talk about the collapse of the Bretton Woods

system in the early 1970s. This is not quite correct. In fact, the IMF

survived because the need for monetary stability became more crucial

in the absence of fixed exchange rates. None the less, the role of the

IMF has changed since the 1970s. True, it continues to promote monetary

stability and trade, but increasingly its role is to assist countries

that are in the midst of financial crisis. Indeed, it has become something

of an economic crisis management institution. It offers financial and

technical assistance to countries experiencing monetary problems and

remains a lender of last resort. This gives the IMF enormous power to

determine the economic fate of countries experiencing balance-ofpayment

problems. If, for example, a member country has continuing

economic problems, the IMF will initiate Structural Adjustment

Programmes (SAPs). These macroeconomic reforms can includedebt reduction strategies, privatisation policies, and cuts in public

spending. Unfortunately, these strategies generally impact on the poor

most severely. It is for this reason that SAPs are regarded as particularly

iniquitous by some observers.

Today, the IMF has more critics than friends. Some economists

suggest that the world economy would function better without it, and

that many of its SAPs exacerbate crises rather than alleviate them.

Others suggest that while it is an imperfect institution, it is better at

maintaining economic stability than many governments. Whatever the

truth, there is little evidence to suggest that the IMF is heading for the

institutional scrap-heap. There have been muted calls for a new Bretton

Woods conference, but this message has not yet filtered up to

policymakers and government officials. At the same time, it is hard to

imagine how the global economy could function effectively without

some institutional guidance. The challenge is to ensure that a balance is

struck between good economic management and human needs. In

striking this balance, the IMF appears to have a long way to go.