International Monetary Fund

Type: Group
On the web: http://www.imf.org
Employees: 2,700

The International Monetary Fund (IMF) is an organization of 185 countries dedicated to promoting global monetary cooperation and the health and stability of the international monetary system. Each member of the IMF contributes through the payment of quotas, which reflect that country's size in the world economy and determine its voting power (the US has a 17% voting stake). The IMF supports worldwide economic growth by granting loans and technical assistance to countries in need. The organization was formed by 45 countries in 1944 in an attempt to avoid the kinds of problems brought about by the Great Depression of the 1930s.

Key numbers for fiscal year ending April, 2007:
Sales: $1,138.9M

Officers:
First Deputy Managing Director: John Lipsky
CIO and Director, Technology and General Services: Jonathan Palmer
Director, Finance Department: Michael G. Kuhn

An international organization created for the purpose of:

1. Promoting global monetary and exchange stability.

2. Facilitating the expansion and balanced growth of international trade.

3. Assisting in the establishment of a multilateral system of payments for current transactions.

Investopedia Says:
The IMF plays three major roles in the global monetary system. The Fund surveys and monitors economic and financial developments, lends funds to countries with balance-of-payment difficulties, and provides technical assistance and training for countries requesting it.

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International organization, formed at the Bretton Woods economic conference in 1944, to maintain monetary stability in the world community. It has 184 members, including the United States. The IMF works closely with the International Bank for Reconstruction and Development (the World Bank). The International Monetary Fund's role has changed since the early 1970s when fixed-exchange rates were ended. The IMF currently directs much of its attention toward assisting developing countries manage their debts to foreign creditors.

The IMF makes loans in the form of drawings (Special Drawing Rights (Sdrs) by member countries. In recent years, the IMF has linked its lending activities to stringent internal restraints aimed at bringing inflation rates and the world debt crisis under control by reducing imports and increasing exports of debtor nations. Following the Asian financial crisis of 1997 and its destabilizing impact on developing countries worldwide, the IMF introduced several new credit facilities to assist member countries: a Supplemental Reserve Facility (SSF), established in December 1997 to assist nations with severe balance of payment problems, and a short-term Contingent Credit Lines (CCL) facility in April 1999 to provide countries with strong economic policies a line of defense against economic crises beyond their control.

The International Monetary Fund was established to foster international trade and currency conversion, which it does through consultation and loan activities. When created in 1946, the IMF had 39 member countries; by November 1999 the membership in the IMF had grown to 182 member countries. As of this writing, every major country is now a member, including the former communist countries, as are includes numerous small countries. The only exceptions are Cuba and North Korea.

To join the IMF, a country must deposit a sum of money called a quota subscription, the amount of which is based on the wealth of the country's economy. Quotas are reconsidered every five years and can be increased or decreased based on IMF needs and the prosperity of the member country. In 1999, the United States contributed the largest percentage of the annual contributions—18 percent—because it had the largest, richest economy in the world. Voting rights are allocated in proportion to the quota subscription.

Historical Development

The Depression in the 1930s devastated international trade and monetary exchange, creating a great loss of confidence on the part of those engaged in international business and finance. Because international traders lost confidence in the paper money used in international trade, there was an intense demand to convert paper money into gold—a demand beyond what the treasuries of countries could supply. Nations that defined the value of their currency in terms of a given amount of gold were unable to meet the conversion demand and had to abandon the gold standard. Valuing currencies in terms of given amounts of gold, however, had given currencies stable values that made international trade flow smoothly.

The relationship between money and the value of products became confused. Some nations hoarded gold to make their currency more valuable so that their producers could buy raw materials at lower prices. Other countries, desperate for foreign sales of their goods, engaged in competitive devaluations of their currencies. World trade became difficult. Countries restricted the exchange of currency, and even encouraged barter. In the early 1940s Harry Dexter White of the United States and John Maynard Keynes of the United Kingdom proposed the establishment of a permanent international organization to bring about the cooperation of all nations in order to achieve clear currency valuation and currency convertibility as well as to eliminate practices that undermine the world monetary system.

Finally, at an international meeting in Bretton Woods, New Hampshire, in July 1944, it was decided to create a new international monetary system and a permanent international organization to monitor it. Forty-four countries agreed to cooperate to solve international trade and investment problems, setting the following goals, for the new permanent, international organization:

• Unrestricted conversion of currencies
• Establishment of a value for each currency in relation to others
• Removal of restrictive trade practices

Creation of the International Monetary Fund

In 1946 in Washington, D.C., the international organization to monitor the new international monetary system came into existence—the International Monetary Fund (IMF). The purposes of the IMF are as follows:

To promote international monetary consultation, cooperation, and collaboration

To facilitate the expansion and balanced growth of international trade

To promote exchange stability

To assist in the establishment of a multilateral system of payments

To make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards

To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members

The Bretton Woods agreement created fixed exchange rates between countries based on the value of each country's currency in relation to gold or indirectly in relation to gold by relating their currency to the U.S. dollar. The United States in turn guaranteed that the dollar could be exchanged for gold at a fixed exchange rate. The United States, however, ultimately could not maintain the dollar's promised convertibility, ending it in 1971, in large part because of inflation and a subsequent run on the U.S. gold reserve. The fixed-exchange-rate system collapsed. This led to a managed flexible-exchange-rate system with agreement among major countries that they would try to coordinate exchange rates based on price indexes. However, without operational criteria for managing currency relationships, exchange rates have been increasingly determined by volatile international capital movements rather than by trade relationships.

Organizational Structure

The organization of the IMF has at its top a board of governors and alternate governors, who are usually the ministers of finance and heads of central banks of each member country. Because of their positions, they are able to speak authoritatively for their countries. The entire board of governors and alternate governors meets once a year in Washington, D.C., to formally determine IMF policies. During the rest of the year, a twenty-four-member executive board, composed of representatives or the total board of governors, meets a number of times each week to supervise the implementation of the policies adopted by the board of governors. The IMF staff is headed by its managing director, who is appointed by the executive board. The managing director chairs meetings of the executive board after appointment. Most staff members work at IMF headquarters in Washington, D.C. A small number of staff members are assigned to offices in Geneva, Paris, and Tokyo and at the United Nations.

Surveillance and Consultations

At least annually, a team of IMF staff members visits each member country for two weeks. The team of four of five meets with government officials, makes inquiries, engages in discussions, and gathers information about the country's economic policies and their effectiveness. If there are currency exchange restrictions, the consultation includes inquiry as to progress toward the elimination of such restrictions. Statistics are also collected on such matters as exports and imports, tax revenues, and budgetary expenditures. The team reports the results of the visit to the IMF executive board. A summary of the discussion is transmitted to the country's government, and for countries agreeing to the release of the summary, to the public.

Financial Assistance

The IMF endeavors to stabilize the international monetary system by temporarily lending resources in the form of foreign currencies and gold to countries experiencing international payment difficulties. There are a number of reasons why a country may need such assistance. One possibility is that the country has a trade deficit, which is often offset by lending, capital investment, and possibly aid from richer countries. However, confidence in the country's economic system and its ability to repay its debts becomes diminished in such a situation. The IMF requires that the borrowing country provide a plan for reform that will ultimately result in resolving the payments problems. Reforms such as tighter fiscal and monetary policies, good government control of expenditures, elimination of corruption, and provision for greater disclosure are required.

The most immediate assistance to a member country with payments difficulty is permission to withdraw 25 percent of the quota subscription that was initially paid in the form of gold or convertible currency. If the country still cannot meet its payments obligations it can, ultimately, borrow up to three times its original quota payment. The borrowing country must produce a plan of reform that will overcome the payments problem.

The IMF has a number of additional lending plans to meet various problems experienced by its members as well as emergency lending programs. There are Stand-By Arrangements disbursed over one to two years for temporary deficits, the Compensatory and Contingency Financing Facility for sudden drops in export earnings, Emergency Assistance for natural disasters, Extended Fund Facility to correct structural problems with maturities of greater length, the Supplemental Reserve Facility to provide loans to countries experiencing short-term payments problems due to a sudden loss of market confidence in the country's currency, and the Systemic Transformation Facility for the former communist countries in Eastern Europe and Russia.

Special Drawing Rights (SDRS)

In the 1960s, during an expansion of the world economy while gold and the U.S. dollar were the reserve currencies, it appeared that reserves were insufficient to provide for international trade needs. The IMF was empowered to create a new reserve asset, called the special drawing right (SDR), which it could lend to member countries. The value assigned to the SDR is the average of the world's major currencies. Countries with strong currencies agreed to buy SDRs when needed by a country because of payment problems, and in turn sell other currencies. However, at present SDRs are used mostly for repayment of IMF loans. Creation of SDRs is limited by the IMF constitution to times when there is a long-term global reserve shortage. The board of governors and alternate governors is empowered to make such a determination.

Loans to Poor, Indebted Countries

The IMF has created various loan facilities such as the Trust Fund to provide loans to its poorest member countries. In addition, the IMF works cooperatively with the World Bank, other international organizations, individual countries, and private lenders to assist poor, debt-ridden countries. It encourages such countries to restructure their economies to create better economic conditions and better balance of payment conditions.

There have been critics of the IMF's effectiveness. Such critics have noted, for example, instances of massive corruption on the part of recipient governments that resulted in IMF funds being stolen and/or wasted. Also, there have been a number of instances in which IMF efforts have been assessed as unsuccessful. Recommended restrictive fiscal policies have been seen as causing troublesome conditions, such as food shortages and citizen unrest. Nobel-prize-winning economist Robert Mundell, for example, has taken the position that current IMF policy options are insufficient to achieve stable international currency exchange and thereby foster international trade. He recommends that a global currency and world central bank be created to establish a stable international currency.

(See also: Global Economy; International Investment; International Trade)

Bibliography

Driscoll, David D. (1998). "What Is the International Monetary Fund?" www.imf.org.

Gotherstrom, Maria (1998). "Development and Financial Structure of the International Monetary Fund." Quarterly Review—Sveriges Riksbank (Stockholm) 4:60-74.

Hearing before the Subcommittee on General Oversight and Investigations of the Committee on Banking and Financial Services, U.S. House of Representatives. Review of the Operationsof the International Monetary Fund. No. 105-55.(1998). Washington, DC: U.S. Government Printing Office.

International Finance Section, Department of Economics, Princeton University, Princeton, NJ. Essays in International Finance: A Survey of Financial Liberalization (No.211), November 1998; The International Commercial System (No. 210), September 1998; Should the IMF Pursue Capial Account Convertibility? (No. 207), May, 1998; From Halifax to Lyons: What Has Been Done About Crisis Management? (No. 200), October 1996.

International Monetary Fund. (1999). "IMF, at a Glance— Factsheet." www.imf.org.

[Article by: BERNARD H. NEWMAN]

A fund established in 1944 with the aims of encouraging exchange stability and eliminating exchange controls, promoting international monetary co-operation, and expanding world trade. The IMF is not a bank (compare with World Bank, to which it is a sister organization), but it facilitates access to funds, although often under very stringent conditions. See structural adjustment.

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International Monetary Fund headquarters, Washington, D.C. (credit: Courtesy, International Monetary Fund)

Specialized agency of the United Nations system. It was conceived at the Bretton Woods Conference (1944) and officially founded in 1945 as a voluntary cooperative institution to help ensure the smooth international buying and selling of currency. More than 180 countries are members of the IMF. Its principal functions are stabilizing currency-exchange rates, financing the short-term balance-of-payments deficits of member countries, and providing advice and technical assistance to borrowing countries. Members contribute operating funds and receive voting rights according to their volume of international trade, national income, and international reserve holdings; the U.S. holds in excess of one-sixth of the voting rights, more than twice the percentage of any other member. The IMF has no coercive power over members, but it can refuse to lend money to members that do not agree to adhere to its policies; as a last resort it can ask members to withdraw from the organization. Critics of the IMF contend that the austerity and privatization measures it requires of borrowing countries reduce economic growth, deepen and prolong financial crises, and create severe hardships for the world's poorest people. See also International Bank for Reconstruction and Development; World Bank.

For more information on International Monetary Fund, visit Britannica.com.

International Monetary Fund (IMF), created at the Bretton Woods Conference in 1944, began operations on 1 March 1947.It had its inception on 1 July 1944, when delegates of forty-four nations met at Bretton Woods, New Hampshire, and proposed two associated financial institutions—the IMF, with $8 billion capital, and the International Bank for Reconstruction and Development. A recurrence of the restrictive trade policies, exchange instability, and international lending abuses that had characterized the interwar era was feared. After World War I, nations had sought monetary stability by returning to the gold standard, but in many instances the gold standard took the form of a weak version of the gold exchange standard. Its breakdown contributed to the 1929–1936 economic debacle.

The IMF's original purpose was to support world trade by reestablishing a stable international system. To this end, it was given the mandate to monitor the exchange rate policies of member countries and provide short-term loans in case of balance of payments problems.

Since the IMF and member nations accepted the dollar as equal to gold, the growing number of dollars in their central bank reserves, especially after 1958 and in turn the consequence of chronic U.S. government deficits, stimulated worldwide inflation. The gold exchange standard broke down in 1968–1971, notably after the United States ceased redeeming dollars in gold on 15 August 1971, thereby severely damaging the prestige of the IMF.

With the collapse of fixed exchange rates in 1973, the dominant role of the IMF was to provide financial support for member countries. As of 1993, it had 178 members and had become a major financial intermediary. Its involvement is virtually required before international bankers will agree to refinance or defer loans for Third World countries. The IMF was also instrumental in providing funds for the emerging market economies in eastern Europe following the breakup of the Soviet Union in 1991. The fund also provides information to the public, and technical assistance to governments of developing countries.

The IMF can make loans to member countries through standby arrangements. Depending on the size of the loan, the fund imposes certain conditions. Known as IMF conditionality, these measures often interfere with the sovereignty of member countries with regard to economic policy. IMF conditions can require devaluation of currencies, removal of government subsidies, cuts in social services, control over wages, trade liberalization, and pressure to pursue free-market policies. IMF conditionality has been criticized as being too severe, imposing hardship on debtor countries. Because IMF policies are imposed by an international agency consisting of industrialized countries, they give the appearance of maintaining the dependency of the Third World.

Critics point out that balance-of-payment problems in the Third World are often structural and long term, with the result that short-term stabilization by the IMF may lead to long-run development problems. Access of member countries to the fund's assets is determined by quota. Each member receives a quota based on the size of its economy. The quotas are defined in terms of Special Drawing Rights (SDRs), reserve assets created by the IMF to supplement world reserves. The value of SDRs for member nations requesting loans is determined by an IMF accounting system based on a weighted average of major economic powers' currencies.

Bibliography

Aufricht, Hans. The International Monetary Fund: Legal Bases, Structure, Functions. New York: F. A. Praeger, 1964.

Horsefield, J. Keith, ed. The International Monetary Fund, 1945–65: Twenty Years of International Monetary Cooperation. Washington, D.C.: International Monetary Fund, 1969.

International Monetary Fund. "Supplement on the IMF." IMF Survey 22 (October 1993): 1–28.

Salda, Anne C. M. The International Monetary Fund. New Brunswick, N.J.: Transaction, 1992.

An international institution charged with maintaining international monetary stability.

The International Monetary Fund (IMF) is an international organization that provides temporary financial assistance to any of its 184 member countries in order to correct their payment imbalances. The IMF was established during the conference at Bretton Woods, New Hampshire, in 1944 because the Allies wanted to avoid the competitive currency devaluations, exchange controls, and bilateral agreements that the world had witnessed prior to World War II. The IMF's main goal was to promote stable currencies in order to enhance international commerce.

Originally, the IMF's position was that restoring payments equilibrium could be achieved within a year by eliminating excess demand. It was not until 1974 that the IMF established the external fund facility to provide its members with up to three years of financial assistance and also introduced a long-term approach, termed the enhanced structural adjustment facility. In exchange for this financing, the IMF demands that borrowers make fundamental changes in their economies to prevent future balance of payments problems. These changes range from stabilization of the exchange rate and of government deficits to structural adjustment of the economy through privatization of state enterprises and liberalization of trade.

By article IV of its charter, the IMF was given the right to monitor on a yearly basis the exchange rate, monetary and fiscal policies, structural policies, and financial and banking policies of every member. It has been heavily involved in many Middle Eastern countries. It has been involved in Egypt and other North African countries since the 1970s. It became involved in Lebanon during the 1990s and finally in Sudan and Yemen through its Heavily Indebted Poor Countries Initiative (HIPC). One Middle Eastern country, Saudi Arabia, enjoys a permanent voting position on the IMF board of governors.

Bibliography

Spero, Joan. The Politics of International Economic Relations. London: Allen and Unwin, 1978.

Vreeland, James. The IMF and Economic Development. Cambridge, U.K.: Cambridge University Press, 2003.

— DAVID WALDNER
UPDATED BY KHALIL GEBARA

The International Monetary Fund (IMF) is an economic organization that promotes financial cooperation, economic stability, and fair trade among its 184 member nations and provides temporary monetary assistance to countries in need.

In its role as global economic watchdog, the IMF must continually keep an eye out for illegal activities. Following the events of September 11, 2001, that role took on an even greater urgency. Since then, the organization has launched a global effort to combat money laundering and to cut off funding to terrorist groups.

The need for a new world economic order. In the early 1940s, the world was still reeling from the financial turmoil of the Great Depression. As markets in the United States and around the world collapsed, countries sought to protect their weakened economies by closing their doors to foreign imports and restricting their citizens from making purchases abroad. The result was catastrophic; world trade nearly ground to a halt. In order to protect the world economy from suffering another similar blow, and to hasten financial recovery among war-torn nations, leaders from forty-five countries came together during the summer of 1944; their historic meeting in Bretton Woods, New Hampshire, established a new international system of economic collaboration called the IMF. The Bretton Woods Conference also launched the IMF's sister organization, the International Bank for Reconstruction and Development (IBRD), or World Bank. On December 27, 1945, representatives from twenty-nine member nations signed the Articles of Agreement, formally bringing the IMF into existence. The initial goals of the organization were to expand international trade, and to protect the stability of international currencies and exchange rates.

The IMF today. The IMF currently has three main responsibilities: surveillance, financial assistance, and technical assistance. The IMF keeps a watchful eye over its member nations throughout the year, monitoring each country's exchange rate and economic policies to protect the stability of the world economy. All member countries are entitled to financial assistance to help them recover from an economic crisis or to pay off foreign debt. By 2003, the IMF had about $88 billion in outstanding loans to eighty-eight nations. Because strategies of the IMF hold that one of the keys to worldwide economic stability is financial self-sufficiency, it has programs in place to teach countries how to plan and implement their own monetary, tax, and exchange rate policies.

With the increasing trend toward globalization (the merging of international markets), the IMF has turned its focus to emerging markets such as Asia and Latin America. By supporting economic growth and fostering the development of stable financial systems in these nations, the IMF hopes to avert an international financial crisis such as the worldwide depression of the late 1920s and 1930s, and to further strengthen the world economy.

Today, the IMF is headquartered in Washington, D.C., and staffed by a team of more than 2,500 people from nearly 140 countries. At the helm is the Board of Governors, composed of banking leaders and ministers of finance from each member country. The Board of Governors comes together once a year at the IMF-World Bank meeting, but much of the substantial operations are carried out by the twenty-four Executive Directors of the Executive Board. The Managing Director of the IMF serves as Chairman of the Executive Board. Corresponding to each Executive Director is one Governor from the International Monetary and Financial Committee (IMFC). This committee meets twice a year to advise the IMF on issues related to the international monetary system.

A country's voting power is based on the size of its economy and on the amount of the quota (subscription fee) it pays when it joins the IMF, however most decisions are based on a member consensus, rather than on a vote. The United States has the largest quota, contributing nearly 18% of the IMF's total funding.

Further Reading

Books

Danaher, Kevin, ed. Fifty Years is Enough: The Case Against the World Bank and the International Monetary Fund. Cambridge, MA: South End Press, 1994.

Harper, Richard H.R. Inside the IMF. San Diego, CA: Academic Press, 1998.

Stiglitz, Joseph E. Globalization and its Discontents. New York: W.W. Norton & Co., 2002.

Periodicals

Garritsen De Vries, Margaret. "The IMF Fifty Years Later." Finance & Development June 1995: 43—47.

Electronic

The International Monetary Fund. <http://www.imf.org> (January 31, 2003).

The International Monetary Fund (IMF) is a specialized agency of the United Nations that seeks to promote international monetary cooperation and to stimulate international trade. The IMF has worked to stabilize world currencies and to develop programs of economic adjustment for nations that require economic reform.

The IMF was created in 1944 at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire. It first began operation in 1947, from its headquarters in Washington, D.C., with a fund of $9 billion in bills and currency, of which the United States contributed almost a third. The creation of the IMF was seen as a way to prevent retaliatory currency devaluations and trade restrictions, which were seen as a major cause of the worldwide depression prior to World War II.

Membership is open to countries willing to abide by terms established by the board of governors, which is composed of a representative from each member nation. General terms include obligations to avoid manipulating exchange rates, abstain from discriminatory currency practices, and refrain from imposing restrictions on the making of payments and currency transfers necessary to foreign trade.

The voting power of the governors is allocated according to the size of the quota of each member. The term quota refers to the IMF's unit of account, which is based on each member's relative position in the world economy. This position is measured by the size of the country's economy, foreign trade, and relative importance in the international monetary system. Once a quota is set by the IMF, the country must deposit with the organization, as a subscription, an amount equal to the size of the quota. Up to three-fourths of a subscription may consist of the currency of the subscribing nation. Each subscription forms part of the reserve available to countries suffering from balance-of-payment problems.

When a member has a balance-of-payment problem, it may apply to the IMF for needed foreign currency from the reserve derived from its quota. The member may use this foreign exchange for up to five years to help solve its problems, and then return the currency to the IMF's pool of resources. The IMF offers below-market rates of interest for using these funds. The member country whose currency is used receives most of the interest. A small amount goes to the IMF for operating expenses.

In its early years the IMF directed its major programs toward maintaining fixed exchange rates linked to the U.S. dollar, which in turn could be converted at a standard rate into gold. Present IMF policy emphasizes an orderly adjustment of currency exchange rates to reflect underlying economic forces. Special attention has been given to the needs of developing countries, in the form of programs to provide long-term assistance to cover foreign exchange demands necessitated by high import prices, declining export earnings, or development programs. In appropriate circumstances the IMF may impose conditions on the use of IMF resources to encourage recipient countries to make needed economic reforms.

Since 1982 the IMF has concentrated on the problems of developing nations. It has gone beyond its own resources, encouraging additional lending from commercial banks. The IMF has also established new programs, using funds from its richer members, to provide money in larger amounts and for longer periods than those granted under the quota-driven lending procedures. It works closely with the World Bank on these and other international monetary issues.

An agency, dominated by wealthy nations, that lends money to developing nations.