The 1940s saw a changing world, one haunted by the spectre of the Great Depression, one ravaged by the ongoing World War, and one marked by a lack of economic consensus or structure. The solution to these problems which 44 nations agreed on was the 1944 Bretton Woods Agreement, a multilateral attempt to establish economic rules for the new world. The agreement was created with two prongs: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), the World Bank’s precursor. The organisations founded at Bretton Woods have remained the linchpins of the modern financial order. Despite its great significance in the global economy, the IMF is not very well understood. This may be due to nomenclature: the World Bank intuitively appears to be an institution that lends money to states, which is in essence its core role. It is harder to pin a relevant description to the International Monetary Fund. Another reason may just be the complexity of the IMF’s role today. This can best be seen upon closer examination of the founding of the fund.
The IMF was designed in part as a solution to the economic issues of the 1940s. One aspect of these issues was the competitive currency devaluations pursued by many countries, particularly in Europe, facilitated by loose currency standards and a lack of international cooperation. Two starkly different layouts for the IMF were put forward by a representative of the United States, Harry Dexter White, and a representative of the United Kingdom, John Maynard Keynes, respectively. They differed on how to best solve the pre-existing economic problems in three key ways. First, White believed in a smaller IMF that made its resources available selectively, contrasted with Keynes’ idea of a larger fund. This was mostly due to a preference on White’s behalf for security and stability over growth. Second, Keynes proposed a new international reserve currency, the bancor, whilst White defended the use of traditional national currencies. Third, White envisioned the IMF as a multilateral, international organisation, whereas Keynes actively wanted it to be dominated by the US and the UK. White’s proposals were largely favoured in all three of these matters, which had a significant influence on the IMF’s original role and capabilities.
Thus, the IMF was given the mandate ‘to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy’. Article I of the Constitution then expands on this notion by specifying that the IMF should ‘promote international cooperation’ (Article I.i), ‘promote exchange stability’ and prevent currency wars (Article I.ii), create a ‘multilateral system of payments’ to facilitate foreign exchange and trade (Article I.iv), and ‘correct maladjustments in the balance of payments’ of member states (Article I.v). These aims were built upon an infrastructure consisting of a global reserve system based on the dollar and gold, a system of fixed exchange rates that were known as ‘adjustable pegs’, current account transactions, and membership quotas that gave the IMF capital. The IMF acted both as a stabilising regulating agent that enabled countries to trade and compete in a more even market and as a bank that members could draw on to repair their balance sheets in difficult situations.
On March 1, 1947, the IMF formally began its operations, seeing its first release of capital in May. The Fund continued under the Bretton Woods system for another two decades during which it had relatively high levels of success in maintaining economic stability for its 29 original member states. Most of the countries that participated in IMF programs were developed nations and there was no large depression after the Second World War despite significant government debt. This was facilitated in part by the Marshall Plan and generally favourable global economic conditions. However, the system began to see friction with a changing world economy. The US monopoly on gold was diminishing, as it had possessed three-quarters of the non-communist world’s gold reserves in 1945, whereas it only controlled half by the end of the 1950s. This was due to a large accumulation in gold on the behalf of other IMF states, especially Germany. Over time, due to factors such as shocks to the UK economy in 1960, and a weakening in the US current account, the US gold reserves started to dwindle as countries converted their dollar reserves to gold. This was eventually halted, which forced countries into a de facto ‘dollar standard’ and reduced their demand for dollars, producing an excess supply of the currency. This placed the US in an unsustainable position, which the IMF tried to mitigate in 1969 through the creation of Special Drawing Rights, a reserve asset that is still used by the IMF as an accounting measure today. Despite their best efforts, the United States unilaterally suspended the convertibility of the dollar into gold in 1971. That marked the demise of the Bretton Woods system and the rise of the modern economy.
In 1978, the IMF made an amendment to its Constitution to grant it a wider mandate since its role had been taken down alongside the dollar-gold standard, as countries had shifted to regulating and deciding their own currency exchanges. This change granted the IMF three main purposes. First, the IMF would continue to encourage its members to allow full convertibility of their currencies. Second, the IMF would act as an advisory body to countries in managing their balance of payments and economic policy. Third, the IMF would continue to provide short and medium-term economic assistance to member countries facing monetary difficulties. These reforms gave the IMF a practical role in the modern economy, shifting from the embodiment of an international agreement on currencies and exchange to an actively involved body seeking to benefit its members.
Over the past four decades, the IMF has executed a variety of interventions and actions. The restructuring of debt in Mexico and Brazil, for instance, was a resounding success, helping the countries stave off the harms resulting from defaults. At other times, there was controversy about specific conditions attached to loans and their consequences. The IMF has grown, from its small community of 28 members to a current membership of 190 countries. It holds almost $1 trillion worth of funds to lend and advises almost 130 nations a year. Despite these great changes, its mission and impact have remained constant, serving to stabilise and regulate the international monetary system.