International Monetary Fund

IN JULY 1944, WHEN the Allies had clearly turned the tide of war against the Germans and Japanese, representatives of the United Nations (UN) met at Bretton Woods, New Hampshire, for a conference on postwar monetary and financial issues. The participating nations were concerned that several factors might combine to cause another catastrophic economic depression, which might then sow the seeds for another terrible conflict.

In particular, they wished to offset some of the effects of the unprecedented destruction caused by the war, as well as the problems caused by discharging millions of combatants into the labor pool while shifting from military-to consumer-oriented production. More than anything else, the participating nations wished to avoid the economic protectionism that had been seen during the Great Depression as a brake on economic decline, but had actually accelerated the decline. An emphasis on the salutary effects of increasing international trade defined the atmosphere at the Bretton Woods conference. The conference resulted in the creation of two institutions that would continue to shape the world's economies long beyond the immediate aftermath of the conflict's end: the International Bank for Reconstruction and Development and the International Monetary Fund (IMF).

The primary architects of the institutions that emerged from the Bretton Woods conference were the British economist John Maynard Keynes and the American Harry Dexter White. The IMF formally came into existence on March 1, 1947. Initially established with $8.8 billion in contributions from participating nations, the International Monetary Fund was framed to aid nations whose currencies did not trade well internationally. Those nations could contribute their own currencies to the fund and draw out an equivalent amount in more [Page 560]flexible currencies such as the U.S. dollar or the British pound.

The key to managing the fund would be to maintain a balance between the weak and strong currencies, and a number of regulations were put in place to ensure that such a balance could be maintained. First, if possible, nations wishing to “borrow” from the fund, had to “trade” gold reserves or currencies convertible to gold equivalent to 25 percent of what they wished to borrow, though no nation would be required to “trade” more than 10 percent of its total gold reserves or convertible currencies.

Second, borrowing nations had to pay a service fee of .75 percent of what they were borrowing. In addition, they would pay interest of .5 percent at six months, of one percent at one year, of 1.5 percent at two years, and of two percent at three years. If their borrowing exceeded 25 percent of their original contributions to the fund, the interest rates would increase by .5 percent at each stage, and if it exceeded 50 percent of their contribution, the interest would increase by still another .5 percent at each stage.

If the interest rate reached four percent, the IMF would put the borrower on notice that its borrowing privileges were in danger of being revoked. If the interest rate reached five percent, the International Monetary Fund could impose whatever sanctions it deemed appropriate to expedite its recovery of as much of the borrowed funds as possible.

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