The IMF at 80

Part One: A Legacy of Crisis & Change

The International Monetary Fund (IMF), also known simply as the Fund, is jointly holding its annual meeting with the World Bank next week, October 21-26th in Washington D.C. Thousands of delegates, including government officials, bankers, consultants, journalists, and academics will also be marking the 80th anniversary of the IMF’s founding in 1944, in Bretton Woods. This milestone coincides with critical debates about its future role in a rapidly fragmenting global economy.

The IMF was an essential component of the new Global Financial Architecture established by the great powers in the aftermath of World War II. The Fund was the idea of the eminent British economist John Maynard Keynes and Harry Dexter White, a senior US Treasury official. They wanted to build an institutional framework to avoid the destructive economic policies and financial competition (known as “ beggar-thy-neighbor policies “) that followed World War I, and create the foundation for post-war economic reconstruction and prosperity.

Delegates from 44 allied countries convened at the Mount Washington Hotel in Bretton Woods, New Hampshire in July of 1944. The conference led to the establishment of the IMF and the International Bank on Reconstruction and Development (IBRD), now the World Bank. A sister organization, the General Agreement on Tariffs and Trade (GATT) which was designed to promote fair and free trade was established in 1947.  The IMF and the World Bank and the rules they promulgated became known as the Bretton Woods System.  

The Bretton Woods institutions and the Global Financial Architecture (GFA) they created is effectively part and parcel of a system of alliances and treaties, such as the North Atlantic Treaty Organization in 1949, and the European Union in 1993. They bound together the major Western nations and Japan in the post-World War II period into a new bloc of democratic and capitalist economies.  

The Bretton Woods Conference delegates at work, July 1944

Keynes and White promoted the idea of a system that was designed to stabilize the global financial system and promote free trade and economic development. The two battled over the shape of the new institutions: Keynes wanted a more flexible framework, while White pushed for a dollar-based centralized system.  Unsurprisingly, the US vision prevailed. Bretton Woods marked the end of a world dominated by Great Britain, and the beginning of US ascendancy in global trade and finance.

Founding Principles of the IMF

The IMF was based upon the following rules: first, the exchange rate system was a modified gold standard, with the dollar fixed at $35/oz ; second, currency exchange rates were fixed to the dollar and could not be changed without IMF approval; and third, each country was given a contribution quota by the IMF, which could be drawn down if the country faced balance of payments pressures. 

However, the drawdown would be conditional upon the country agreeing to a stabilization plan, including fiscal and monetary austerity that would bring back the country to financial stability. Thus the IMF became the guardian of the new Global Financial Architecture, with a dual mission of financing and surveillance.

Did you know… ⧉

⧉ The Global Financial Architecture (GFA) is a system of rules, institutions, policies, and practices that govern the global financial system. Its purpose is to promote international cooperation and stability, and to support economic development, international trade, and investment.

The surveillance function consists of regular reviews of individual countries’ economic performance (the so-called Article IV reviews) by IMF economists, who research global economic and financial conditions and issues. The IMF employs about 1200 economists to fulfill this mission. (In comparison, the Federal Reserve employs 400 economists.)

The financing aspect of the Fund’s mission has meant that it became the de facto lender of last resort. Many of the early recipients of Fund financing were major European countries emerging from the ravages of World War II.

The IMF is governed up by its Board of Directors, with a weighed voting system based on relative economic importance, which gives the United States and other major countries a significant majority. Member countries now number 190.

“ If the IMF didn’t already exist, we would have to invent it.

Raghuram Rajan

Key IMF Turning Points

Over the decades since its founding, financial innovation, globalization and financial and economic shocks forced the IMF to adapt its mission to keep up with profound changes in the global financial and economic system. The main turning points were as follows:

• President Richard Nixon’s decision to abandon the gold standard in 1971, followed by the floating of the dollar and other major currencies in 1973—and a drastic change in the role of the IMF.

• OPEC-driven oil shock of 1972-73 and the subsequent flood of so-called “petrodollars”

• 1982 developing countries debt crisis

• 1989 collapse of the communism and the integration of former Soviet Bloc countries in the global economy.

• 1995 emerging markets financial crisis

• 1997 Asian Debt Crisis

• 1998 Ruble Crisis

• 2002 Argentine default

• 2008 Global Financial Crisis

• 2020-22 COVID Shock

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Current Challenges Facing the IMF