The IMF is a specialist agency of the United Nations, set up after the Second World War mainly as a result of bilateral agreement between the USA and the UK at the Bretton Woods conference of 1944. It was intended to be a means of producing stable international economic relations and, above all, a stable international currency and set of exchange rates. In a sense it was a replacement for the old gold standard which had been abandoned almost everywhere by 1931. The trouble with the gold standard, under which all currencies had to be directly backed by equivalent amounts of gold held by central banks, was that although it produced stability of currencies, its effect was automatic and often very harsh. Thus a country with a balance of payments difficulty would find its unemployment rate increasing in an uncontrollable fashion. In addition, as the supply of gold was not variable by direct political decision, an essentially arbitrary physical restriction was placed on the amount of money available in the world, reducing the possibility of economic growth. Yet when the gold standard was abandoned, anarchy reigned in the international money markets, with instant devaluations or revaluations, and great instability, which itself acted as a restraint on international trade and economic development.
What was needed, it was felt, was a form of international currency which could support national currencies, reduce uncertainty and bring stability, but which would not be automatic in the way gold was. Thus it was vital that the IMF should allow a country undergoing a balance of payments problem to be much more moderate in its internal economic regulatory moves than had been possible in the past. Essentially the IMF worked like a supranational central bank, with member countries paying in an initial deposit (part of this still had to be in gold), and then being allowed to draw out more than they had put in, as a debt to the Fund, when in balance of payments or currency crises. These debts had to be repaid, usually within five years, and rates of interest, varying with the amount borrowed, had to be paid. The arrangement allowed a country to pay its international debts without having to impose internal deflationary controls to reduce demand, and thus possibly increase unemploy-ment. In addition, the total funds in the international economic system could be increased by the Fund simply announcing that each share held by member countries was increased by a certain percentage, as has happened on several occasions to meet the permanent pressure for increased international liquidity.
If the IMF system was to avoid the anarchy of the period after the abandonment of the gold standard, however, its automatic control had to be replaced with some form of international political authority. Thus the IMF was given the power to impose economic policy restrictions on member countries wishing to borrow large amounts, and these controls, which have often been imposed, usually take the form of requirements to reduce inflation, especially by cuts in government expenditure and tax increases. The IMF restrictions on credit have often been seen by left-wing parties, and even by sections of cabinets which have borrowed, as involving undue interference with more socialist-oriented economic policies, and have thus been blamed for preventing the growth of welfare state policies in nations with economic problems. Originally it was also intended that no member state should be able to devalue its currency without consultation with the Fund, but this has never been observed, partly because devaluation decisions are usually taken in great urgency and secrecy.
It would probably be agreed by economists that the IMF has not been the great breakthrough in terms of international economic management that was hoped for, although it has certainly produced stability without the harshly automatic consequences of the gold standard. Probably its greatest drawback has been its failure to expand international liquidity to meet demand. In part this comes from the initial unwillingness of the USA at Bretton Woods to agree to the British idea that member nations who were enjoying a long-term and strong balance of payments advantage should be required to increase imports, thus easing the debt problem for the rest of the world. As the USAwas in such a position from 1944 until at least the mid-1950s, this was not surprising. The absence of this restriction, however, has allowed countries like Germany and Japan to benefit from their economic strength without regard to the impact it was having on the rest of the international economy.
As the IMF is inevitably linked to capitalist economic systems and theory, it was spurned by most members of COMECON. Since the collapse of the Soviet economic system, however, most former Soviet republics and Eastern European countries have become members of the IMF, even though the economies in question will not be in a fit state to benefit or help for years. Increasingly, since the mid-1970s, the IMF has become much less important to Europe as the European Union (EU) developed its own monetary control system, The completion of the union of currencies with the creation of the new euro for most EU countries has created a huge economic unit, ‘Euroland’, within which the IMF can not hope to have much influence.
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