The IMF has been in existence for the last 65 years but still strong conflicts in the view of its role and importance in today’s international economy exist. In one quarter some believe that it has fitted well in the global economy with the need for reforms. Some see that its functional time has elapsed in the face of flexible exchange rates and open capital markets. It is therefore important for an objective view of the role and performance of the institution in the context of its evolution from the Bretton Wood system to its reincarnation during the major economic and political shocks of the 1970s and 80’s up to today’s emerging markets crisis (Bordo & James, 1999). This paper looks at the role of IMF in the Bretton Woods system, how it has changed since then, and the reason why it has been controversial.
The Bretton Wood system lasted between 1944-73 period during which the IMF was seen as a system of rules rather than an institution. It was designed to overcome the market failure crisis of the 1930s after the Great Depression. This crisis included the collapse of capital markets, prevalent imposition of exchange controls and protectionism in trade, currency devaluations, and destabilizing short-term capital flows. In this background, the IMF had four major functions as outlined in the IMF Articles of Agreement (Baylis, Smith & Owens, 2008).
IMF was to see through smooth progress of the end of exchange controls and shift to current control convertibility. This meant that the member countries retaining controls were to hold regular discussions with IMF as outlined in Article XIV. Secondly, the agreement was to institute pegged, but modifiable exchange rates based on the nominal rate of the US dollar or a precise gold value. This was to eliminate the fear of spirited devaluations thought to have been a tool for trade warfare in the 1930s. Thirdly, it was to avail short-term finance for correcting the temporary balance of payments disequilibria for which a pool of additional reserves was created. Moreover, it was to create an economic institution with organizational structures similar to those of the United Nations.
The IMF has changed in several ways since the Bretton Wood system ended in 1973. The par value system of exchange rates was abandoned as countries choose their exchange rates measures liberally under the amended Article IV. Countries could either use the floating rates to insulate from external shocks or pegged rates. Another change was in the sanctioned capital controls of the IMF. With increasing economic integration in the world, international private capital markets could be used by countries to finance the balance of payments rather than the financing by IMF. Another change was in its membership where countries gaining independence from colonialism joined. Also, members from the former USSR joined after its collapse in 1980 (Bordo & James, 1999).
IMF has been very controversial due to its association with politics. It has been viewed as to advance the interests of the United States and its cronies. In its origin, it was largely the creation of US motivated by the belief that, in the words of Treasury Secretary Morgenthau commenting during its launch, “Prosperity, like Peace is indivisible….” (Bordo & James, 1999), therefore seen as propagating an American way of thinking.
The IMF has been in existence for the last 65 years during which it has evolved from the Bretton Wood system to the period during the major economic and political shocks of the 1970s and 80’s up to today’s emerging markets crisis. Its role during the Bretton Wood system included seeing through smooth progress of the end of exchange controls and shift to current control convertibility and to institute pegged, but modifiable exchange rates based on the nominal rate of the US dollar or a precise gold value among others. It has also changed in its composition and roles since the Bretton Wood system. However, it has been controversial in its association with politics.
Bordo, M. D. & James H. The international Monetary Fund: Its Present Pole in Historical Perspective. A report for U.S Congressional International Financial Institution Advisory Commission, November, 1999.
Baylis, J., Smith, S. & Owens, P. The Globalization of World Politics. Oxford University Press. 2008.