Text 1 The imf

As trade and the level of other international financial transactions have increased, the need to cooperate internationally to facilitate and stabilize the flow of dollars, marks, yen, pounds, and other currencies has become vital. To meet this need, a number of organizations have been founded. The International Monetary Fund (IMF) is the most important of these.

Early Monetary Regulation

The formation of the IMF stemmed in part from the belief of many analysts that the Great Depression of the 1930s and World War II were both partly caused by the near-chaotic international monetary scene that characterized the years between 1919 and 1939. Wild inflation struck some countries. Many countries suspended the con­vertibility of their currencies, and the North broke up into rival American, British, and French monetary blocs. Other countries, such as Germany, abandoned convert­ibility altogether and adopted protectionist monetary and trade policies. It was a period of open economic warfare—a prelude to the military hostilities that followed.

As part of postwar planning, the Allies met in 1944 at Bretton Woods, New Hampshire, to establish a new monetary order. The Bretton Woods System operated on the basis of "fixed convertibility into gold." The system relied on the strength of the U.S. dollar, which was set at a rate of $35 per ounce of gold.

The delegates at Bretton Woods also established the IMF and several other institutions to help promote and regulate the world economy. Thus, like the GATT, the IMF was created by the West, with the United States in the lead, as part of the liberalization of international economic interchange.

The Bretton Woods system worked reasonably well as long as the American economy was strong, international confidence in it remained high, and countries accepted and held dollars on a basis of their being "as good as gold." During the 1960s and the early 1970s, however, the Bretton Woods system weakened, then col­lapsed. The basic cause was the declining U.S. balance-of-payments position and the resulting oversupply of dollars held by foreign banks and businesses. Countries were less willing to hold surplus dollars and increasingly redeemed their dollars for gold. U.S. gold reserves fell precipitously, and in 1971 this forced the United States to abandon the gold standard. In place of fixed convertibility, a new system, one of "free-floating" currency relations, was established. The conversion from a fixed standard to floating exchange rates in the international monetary system increased the IMF's importance even more because of the potential for greater and more rapid fluctuations in the relative values of the world's currencies.

In the initial period after the end of the Bretton Woods system, international money managers assumed that exchange rates among the EDCs would fluctuate slowly and within narrow boundaries. This has not been true. Instead, the exchange rates of most currencies have fluctuated greatly. For instance in January 1985, one dollar equaled 258 yen ($1 = ¥258). A decade later the yen value had changed 68 percent, and stood at $1 = ¥80 in 1995. Then it moved in the opposite direction by 56 percent and in mid-2002 was $1 =¥125.

Such large fluctuations occur because governments have frequently had diffi­culty in managing international monetary exchange rates. To do so, a country's central bank, for example, may choose to create demand by buying its own currency if it wishes to keep its price up. The price goes up because of increased demand for a limited supply of currency. Conversely, a central bank that wishes to lower the value of its currency may create a greater supply by selling its currency. Governments sometimes even cooperate to control any given currency by agreeing to buy or sell it if it fluctuates beyond certain boundaries. Given the more than $1.5 trillion in cur­rency exchanges each day, however, even the wealthiest countries with the largest foreign reserves often find themselves unable to adequately regulate the rise and fall of their currencies.

The role of the IMF

The IMF began operations in 1947 with 44 member-countries. Since then the IMF has grown steadily, and in 2002 membership stood at 183. Indeed, about the only countries not in the IMF are those few (such as Nauru, which uses the Australian dollar) that do not have their own currency and have adopted the currency of a larger neighbor. The IMF's headquarters are in Washington, D.C. The managing director of the IMF since 2007 is Dominique Strauss-Kahn²¹, a former Finance and Economy minister in Lionel Jospin’s “Plural Left” government.

The IMF sought a multilateral solution to a multilateral problem – guarding against the continuation of the selfishly competitive “beggar-my-neighbour” practices of currency restrictions and devaluations at others’ expense that had destroyed the world economy in the 1930s. Cast in the mold of commercial liberalism, the IMF sought to create global institution to maintain currency-exchange stability, primarily for orderly currency relations among wealthy powers but secondary as a lender of last resort for poor as well as rich countries experiencing financial crisis.

Those were the IMF’s origins at its birth. Since then the global marketplace has expanded and, with that growth, has come the increasingly economic interdependence of all states, or globalization through integration of national economies. As a result, the conditions in which the IMF was created have vanished, and with global transformations the IMF has evolved to perform new roles.

In addition to stabilizing exchange rates in order to facilitate international trade, the chief aims of the IMF, as set in its Articles of Agreement include:

• Promoting international monetary cooperation

• Facilitating the expansion of international trade

• Promoting exchange stability

• Establishing a multilateral system of payments

• Allocating resources available

• Shortening the duration of, and reducing the degree of disequilibrium in, members’ balances of payments

How the IMF works

Each IMF member is represented on its governing board, which meets annually to fix general policy. Day-to-day business is conducted by a twenty-two-member executive board chaired by a managing director who is also administrative head of a staff of approximately two thousand employees. The IMF derives its operating funds from its member-states. Contributions (and thus voting strength) are based on a country's rational income, monetary reserves, and trade balance. The IMF's voting thus is weighted according to a state's monetary contribution to the IMF, giving a larger voice to the wealthier states.

Special Drawing Rights

To help stabilize national currencies, the IMF has Special Drawing Rights (SDRs) that serve as reserves on which central banks of needy countries can draw. SDR value is based on an average, or market basket, value of several currencies, and SDRs are acceptable as payment at central banks. In April 2002, one SDR equaled about 1.25 U.S. dollars (SDR = $1.25). A country facing an unacceptable decline in its currency can borrow SDRs from the IMF and use them in addition to its own reserves to counter the price change. As of the end of February 2002, the IMF had SDR 61.7 billion ($77.1 billion) in loans and credit lines outstanding to 88 countries.

While SDRs have helped, they have not always been sufficient to halt instability. One problem is that the funds at the IMF's command are paltry compared to the immense daily flow of about $1.5 trillion in currency trading. Also, monetary regu­lation is difficult because countries often work at odds with one another.

Exchange –rate stability and other activities

The IMF's operations are administrated by a code of conduct governing exchange rate policies and restrictions on payments, primarily in the interest of promoting freer exchange of currencies. The IMF is, in this capacity, a multilat­eral forum for government consultation on major monetary questions. Beyond this, the IMF seeks to provide exchange stability through two instruments: influ­encing currency values and permitting members experiencing financial crises to recover by drawing foreign exchange from the IMF. The regime underlying the IMF assigns it the task of performing as a pooling arrangement, based on the requirement that all members will contribute to a common bank of monetary reserves from which they can draw to overcome short-term deficits in their balance of payments. In this regard, the IMF is designed to serve as a lender of last resort when one of its members is threatened by an economic downturn that could destroy its economy. Contributions are based on a quota system set according to a state's national income, gold reserves, and other factors affecting each member's ability to contribute. In this way, the IMF operates like a credit union that requires each participant to contribute to a common pool of funds from which it can borrow when the need arises. This is the cooperative spirit of liberalism in practice. Each member contributes twenty-five percent of its quota in hard currency (presently, the U.S. dollar, British pound, French franc, Ger­man mark, or Japanese yen)—the so-called credit tranche—with the remainder in its own currency. Each member then has a right to purchase foreign exchange from the IMF in amounts equal to the value of its credit tranche, but the maxi­mum may run much higher. The currency pool is designed to maintain stable exchange values among all members' currencies. When a member suffers a short-term deficit in its balance of payments that cannot be financed through commercial banks, purchases of foreign exchange from the IMF are made avail­able to carry it through the temporary crisis.

The IMF Focus on LDCs and CITs

The IMF typically lends countries money to support their currency or to stabilize their financial situation by refinancing their debt. Over the last two decades, the IMF has especially concentrated on loans to LDCs and to CITs, with virtually all of the IMF's funds going to those countries. Russia, with $10.6 billion in loans and credit, was the IMF's biggest client as of late 2001. Indonesia was second, with its $10 billion outstanding credits and loans.

Comprehension