International Monetary Fund

Also called: IMF · Topic: The Making of a Global World · NCERT: Class 10, Ch 3 "The Making of a Global World"

Meaning

The International Monetary Fund (IMF) is an international body set up at the Bretton Woods conference in July 1944. Its job was to help member countries deal with their external surpluses and deficits, which means how much more or less a country earns from the outside world than it pays out. It began financial operations in 1947.

It matters because the IMF was one of the two pillars of the world economy after the Second World War. It guarded the fixed exchange rate system that supported the post-war boom of 1950–70. Its make-up also shows who held power in the world: the Western industrial countries ran it, and the US had an effective veto.

Explanation

Background: why the IMF was created

• The ruin left by the Second World War
• The war lasted six years. At least 60 million people were killed, about 3% of the world's 1939 population. More of the dead were civilians than soldiers.

• Large parts of Europe and Asia were destroyed. Rebuilding had to be planned and paid for.

• Lesson 1 from the inter-war years: mass production needs mass consumption

• Factories that make goods in huge numbers need huge numbers of buyers.
• People can only keep buying if their incomes are high and stable. That needs full employment, meaning jobs for everyone, all the time.

• Markets alone cannot promise this, so governments must step in.

• Lesson 2: full employment needs control over flows

• A government can keep everyone in work only if it can control the movement of goods, capital (money) and labour (people) across its borders.

• The fear behind both lessons: the Great Depression of the 1930s had shown what happens when trade and money fall apart. The IMF was meant to stop that from happening again.

Birth at Bretton Woods, 1944

• The IMF was planned at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, USA.
• Delegates from 44 nations met at the Mount Washington Hotel from 1 to 22 July 1944 [2][3].
• Key people [2]:
• John Maynard Keynes, adviser to the UK Treasury.

• Harry Dexter White, US Assistant Secretary of the Treasury.

• The IMF's founding rules, the Articles of Agreement, were adopted on 22 July 1944. 29 countries accepted them first [2][3].

• The same conference created the IBRD (World Bank). The IMF and the IBRD are together called the Bretton Woods twins.
• Financial operations began in 1947.

How it worked and who ran it

• Mandate: to deal with the external surpluses and deficits of member nations. A surplus means a country earns more from abroad than it spends there. A deficit means it spends more than it earns.
• The system it guarded was the Bretton Woods monetary system:
• Fixed exchange rates. A currency could not rise and fall freely against other currencies.
• National currencies, such as the Indian rupee, were pegged (tied) to the US dollar at a set rate.
• The dollar was tied to gold at $35 per ounce. A government holding dollars could ask the US to swap them for gold at that price.

• In short, gold backed the dollar and the dollar backed every other currency.

• Who decided things?

• The Western industrial powers controlled decision-making.

• The US held an effective veto, so no major decision could pass against it.

• Who it was designed for: the IMF and the World Bank were built for industrial countries, not for poor countries trying to develop.

How it changed over time, and the results

• 1950–70: the boom years
• World trade grew over 8% a year, and incomes grew nearly 5% a year.

• Unemployment averaged under 5% in most industrial countries.

• From the late 1950s: a turn to the developing world

• Once Europe and Japan had been rebuilt, the twins turned their attention to developing countries.
• Real power did not shift. Ex-colonial powers still controlled vital resources, and Western firms got cheap rights to them.

• The newly independent countries organised as the G-77 (1964) and demanded a New International Economic Order (NIEO) [4][6].

• 1971–73: the system the IMF guarded collapsed

• From the 1960s the US spent heavily abroad. Its finances weakened.
• There were too many dollars in the world and too little gold in US vaults, so the dollar could no longer hold its value against gold.
• On 15 August 1971, President Richard Nixon suspended the dollar's convertibility into gold, an act called the "closing of the gold window" [7].

• The Smithsonian Agreement (17–18 December 1971) tried to set new fixed rates but did not last. By early 1973 the major currencies were floating, meaning the market set their value from day to day [7][8].

• After the mid-1970s: debt crises

• Developing countries could no longer get cheap official loans. They had to borrow from Western commercial banks and private lenders.
• The result was repeated debt crises and deeper poverty, worst of all in Africa and Latin America.

Time, place and evidence

• Period: the end of the Second World War and after. The IMF was planned in 1944, began operations in 1947, and the fixed-rate system it managed lasted until 1971–73.
• Place: Bretton Woods, New Hampshire, USA, at the Mount Washington Hotel [2][3].
• Key people:
• John Maynard Keynes (UK) and Harry Dexter White (US), the two main planners [2].

• Richard Nixon, the US President who ended dollar–gold convertibility in 1971 [7].

• Key powers: the US, which led the Western world after the war, and the Western industrial countries, which controlled decisions.

• How we know:
• The IMF Articles of Agreement, adopted on 22 July 1944 [3].
• The World Bank's own archive on Bretton Woods [2].
• IMF historical writing on the end of the gold link in 1971 [7].
• NCERT Class 10, Chapter 3, "The Making of a Global World".

Don't confuse with

• IBRD / World Bank: the other Bretton Woods twin. The IMF dealt with external surpluses and deficits. The IBRD was set up to finance post-war reconstruction by lending money to rebuild war-damaged countries.
• Bretton Woods system: this was the monetary arrangement itself (currencies pegged to the dollar, dollar fixed to gold at $35 an ounce). The IMF is the institution created to look after it. The system collapsed in 1971–73. The IMF itself was not abolished.
• Smithsonian Agreement (1971): this was not the founding of the IMF. It was a Group of Ten deal signed in Washington in December 1971 that tried, and failed, to rescue fixed exchange rates [7][8].
• G-77 / UNCTAD (1964): this was not a Bretton Woods body. It was a grouping of developing countries formed at UNCTAD I in Geneva to challenge the Western-run order that the IMF stood for [4][5].

Prelims Hooks

• The IMF was planned at the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, USA, held 1–22 July 1944 and attended by 44 nations [2][3].
• The IMF Articles of Agreement were adopted on 22 July 1944 and first accepted by 29 countries [2][3].
• Person–role pairs: Keynes was adviser to the UK Treasury. Harry Dexter White was US Assistant Secretary of the Treasury [2].
• IMF dealt with external surpluses and deficits; IBRD financed post-war reconstruction. Both began financial operations in 1947. A common trap: 1944 is the year they were planned, 1947 the year operations began.
• Under Bretton Woods, currencies were pegged to the dollar and the dollar was fixed to gold at $35 per ounce. The US held an effective veto in decision-making.
• Chronological order: Bretton Woods (1944) → operations begin (1947) → G-77 (1964) → Nixon ends dollar–gold convertibility (15 August 1971) → Smithsonian Agreement (December 1971) → currencies float (early 1973) → NIEO Declaration (1 May 1974) [4][6][7][8].

Mains Points

• The IMF came from a reading of the 1930s, not from faith in free markets.
• The planners believed that markets alone could not give full employment. So they built a managed order, with fixed exchange rates, controls on the flow of money, and an IMF to watch over trade balances.

• The boom of 1950–70 (trade growth over 8%, unemployment under 5%) is the strongest evidence for this approach. The collapse of fixed rates after 1971 is the strongest evidence against it [7].

• The IMF reflected who held power, not who needed help.

• It was built for industrial countries. The Western powers ran it, and the US had an effective veto.
• Newly independent Asian and African nations had won political freedom but stayed economically weak. The IMF and World Bank turned to them only from the late 1950s.

• The G-77 (1964) and the NIEO (resolution 3201, 1974) can be read as an attempt to complete decolonisation on the economic side [4][6].

• The end of the IMF's fixed-rate order changed the world economy.

• US overspending abroad cost the dollar its gold anchor, and exchange rates began to float [7][8].
• Without cheap official loans, developing countries borrowed from private banks, which led to debt crises in Africa and Latin America.
• In the same years, MNCs moved production to low-wage Asia. This set the stage for the rise of China, India and Brazil, which is useful for a GS-I answer on continuity and change in the world economy.

Related concepts

• Bretton Woods Conference
• Bretton Woods system
• World Bank
• Fixed exchange rate
• Marshall Plan
• General Agreement on Tariffs and Trade
• Multinational corporation
• Group of 77
• New International Economic Order
• Floating exchange rate

Read more

• Rebuilding the world economy: Bretton Woods to globalisation