International Monetary Fund (IMF)

The International Monetary Fund (IMF) was founded in 1944 at the Bretton Woods conference in New Hampshire. The conference was an urgent attempt to deal with the inter regnum problems associated with international trade and exchange-rate instability. John Maynard Keynes of Britain and Harry Dexter White of the United States came up with plans to allow deficit nations to recover from temporary balance-of-payments problems. Regulations of the IMF dealing with the purposes, mem bership, quotas, subscriptions, and exchange-rate arrangements are outlined in Articles I through III of the IMF's Articles of Agreement.

A major objective of the IMF was to create a pool of resources based on mandatory contributions from its members, which could be drawn by member states to settle balance-of-payments problems. Each member of the IMF is assigned a quota, which is indicative of its importance in the global economy. The greater the importance of a nation to the global economy, the larger its quota (contribution) is expected to be. Contributions to the IMF have been payable in hard assets: one quarter in gold, or Special Drawing Rights (SDRs) (after amend ment of the articles), and three quarters in members' cur rencies.

Deficit nations purchase foreign currency using their own currencies to settle balance-of-payments deficit, and as their balance-of-payments position improves, they are expected to repurchase their currencies from the IMF. A nation can borrow a quarter of its gold tranche without restriction or conditions. The IMF charges interest rates and imposes conditions for borrowing its resources.

The resulting compromise out of the Bretton Woods system to deal with exchange-rate volatility was the adjustable peg, otherwise known as the gold exchange standard. The adjustable peg system allowed countries to peg their currencies and also to finance out of international reserves.

In the 1950s, a system of standby arrangements guar anteed members lines of credit with the IMF. The IMF introduced a new reserve asset, SDRs or paper gold, in the 1970s as a result of high inflation and illiquidity problems. The Bretton Woods system ultimately col lapsed in the 1970s, partly because gold cannot keep up with the volume of trade and also because America could no longer defend the convertibility of dollars to gold. For more information, see Carbaugh (2007), Lowenfeld (2003), and Perkins, Radlet, and Lindauer (2006).