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1944 – International Monetary Fund (IMF): Creating a new international monetary system

The International Monetary Fund (IMF) was founded in 1944 to promote international monetary co-operation, to foster stable exchange rates, and to provide temporary financial assistance to member countries encountering balance-of-payments difficulties.

During the 1930s, the world’s major economies suffered from unstable currency exchange rates and restrictive trade policies. In the aftermath of the Second World War, the badly damaged European economies required substantial external funding for reconstruction and development. There was a pressing need for international co-operation to address these issues.

In July 1944, delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. They reached an agreement, known as the Bretton Woods Agreement , which created two international institutions: the International Bank for Reconstruction and Development, also known as the World Bank, and the International Monetary Fund (IMF).

For most of its first three decades, the IMF’s primary concern was to maintain a fixed exchange rate system called the par value system. According to the par value system, the United States agreed to fix the price of gold at US$35 per ounce. The exchange rates of member currencies could be adjusted with the U.S. dollar within defined ranges. In the early 1970s, the fixed exchange rate system of Bretton Woods became unworkable for political and economic reasons (see Bretton Woods Agreement), and was replaced by a system of floating exchange rates.

Since its inception, the IMF has evolved in both size and functions. Today, 184 countries are members of the IMF. Each member country is represented by a governor on the IMF’s board of governors, which makes the organization’s major decisions; in most cases, several countries share one governor. The IMF is headed by a managing director, who chairs the board of governors . Each country subscribes to the IMF—pledges money to the IMF to create a pool of funds—according to its quota, which also determines a member’s voting rights. The quota is based on the economic, as well as political, importance of the country in world trade and finance.

These quotas provide the IMF with financial resources that it can use to assist members, and a member can borrow with few constraints against the first tranche (the first 25%) of its quota. In order to borrow against additional tranches, a country must meet further conditions. For example, before granting a second or third tranche loan, the IMF may reach agreement with the member country on a program to keep its budget deficit below a certain percentage of its gross domestic product (GDP) and/or remove barriers to foreign investment.

In recent years, the IMF has taken on a new role by coordinating lending and borrowing arrangements, as well as providing policy advice, in financial crises. For example, the IMF played a substantial role during both the Mexican peso crisis in 1995 and the 1997/98 East Asian financial crisis.

International financial crises such as the East Asian crisis have adversely affected the Canadian economy—in 1998, Canada’s exports to the Asia-Pacific region decreased sharply, and economic growth was dampened as a result. Furthermore, the Canadian dollar depreciated substantially against the U.S. dollar, partly because of uncertainty regarding the health of the world economy. However, through the IMF, Canada contributed to the resolution of the East Asian financial crisis. The recovery of the East Asian countries helped Canada restore its exports to the region.

Links

Canada and the IMF
Source: The IMF
http://www.imf.org/external/country/CAN/index.htm

Articles of Agreement of the International Monetary Fund
Source: International Monetary Fund
http://www.imf.org/external/pubs/ft/aa/index.htm

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