WHY WAS THE CREATION OF THE IMF IMPORTANT? - ECONOMY - 2024

The International Monetary Fund (IMF) is an international organization based in Washington DC. It was created in 1944, with the aim of rebuilding the international payment system.

Its importance lies in the fact that it has played a central role in managing balance of payments difficulties and international financial crises. Countries contribute money to a common fund, through a quota system, from which nations experiencing balance of payments problems can borrow money.

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It is currently made up of 189 nations, which strive to promote world monetary cooperation, facilitate international trade, guarantee financial stability, sustainable economic growth and promote a high level of employment, seeking to reduce poverty throughout the world.

Through the fund and other activities, such as collecting statistics and analysis, monitoring the economies of its members, and demand for particular policies, the IMF has been working to improve the economies of its member countries.

History of the creation of the IMF

After the First World War, the commercial rivalry between the main countries of the world increased. The breakdown of the gold standard caused great panic, as well as confusion.

Some of the major countries in the world tried to go back to the gold standard. Thus, these countries wanted to maximize their exports and minimize imports. Exchange rates began to fluctuate, which negatively affected the economy.

During the Great Depression in the 1930s, countries sharply raised barriers to foreign trade, thus trying to improve their economies in crisis. This led to the devaluation of national currencies and also to the decline of world trade.

The United States, England and France tried to establish the stability of their exchanges under the tripartite agreement of 1936. However, they also failed during the period of World War II.

These attempts proved counterproductive, because world trade declined dramatically, and living and employment standards plummeted in many countries.

Planning and meetings

This break in international monetary cooperation led the founders of the IMF to plan an institution to oversee the international monetary system.

The new global entity would guarantee exchange rate stability and would also encourage its member countries to remove exchange restrictions that made trade difficult.

Multilateral discussions produced the UN Monetary and Financial Conference at the Mount Washington Hotel in Bretton Woods, United States, in July 1944.

Representatives from 44 countries met to discuss a post-war framework for international economic cooperation and also how to rebuild Europe. There the articles of the agreement were drawn up to propose the International Monetary Fund, which would oversee the new international monetary system.

The creators of the new monetary regime hoped to promote world trade, investment, and economic growth.

Countries with moderate balance of payments deficits were expected to finance their deficits by borrowing foreign currencies from the IMF. This instead of imposing exchange controls, devaluations or deflationary economic policies.

Points of view

There were two views on the role that the IMF should assume as a global economic institution. US delegate Harry Dexter White envisioned an IMF that would function more like a bank, ensuring that borrowing states could pay their debts on time.

British economist John Maynard Keynes envisioned the IMF as a cooperation fund that member states could draw on to maintain their economic activity and employment due to periodic crises.

This vision suggested an IMF that would help governments and act as the United States government had done, in response to World War II.

The IMF was formally born on December 27, 1945, when the first 29 countries revalidated the articles of the agreement.

Reasons for its importance

International monetary cooperation

The main objective of the Fund was to establish monetary cooperation between the different member countries. The IMF provided the machinery for consultation and collaboration on international monetary problems.

The IMF has played a vital role in promoting monetary cooperation among the different countries of the world.

Promote the stability of trade

Before the Second World War, great instability prevailed in the exchange rates of different countries. This had negatively affected international trade.

Therefore, the IMF aimed to promote exchange rate stability and avoid the negative effects of exchange rate depreciation.

Eliminate exchange control

Another important goal was to remove control over currencies. During the war period, almost all countries had fixed the exchange rate at a particular level. This had negatively affected international trade.

Therefore, it was inevitable to eliminate control over the exchange rate, boosting international trade.

Establishment of multilateral trade and payment

The objective of the IMF was to establish a multilateral trading and payment system, rather than the old bilateral trade. This is due to the elimination of exchange restrictions that hinder the growth of commercial relations without problems in world trade.

International trade growth

The IMF was helpful in promoting international trade, by removing all obstacles and bottlenecks that had created unnecessary restrictions.

Thus, it was assigned an important role to accelerate the growth of international trade, by maintaining balance in the balance of payments.

Balanced economic growth

The IMF has helped member countries achieve balanced economic growth. This by promoting and maintaining a high level of employment as the main objective of economic policy.

For this purpose, the IMF has helped exploit natural resources and put them in a productive channel.

Eliminate the imbalance in the balance of payments

The IMF has helped member countries to eliminate the balance of payments imbalance by selling or lending foreign currencies to them, in addition to its financial assistance and guidance.

Expansion of capital investment in underdeveloped countries

The IMF has provided assistance to import capital from rich countries to poor countries. Thus, these underdeveloped nations have the opportunity to expand their capital investment in productive activities or social expenditures.

This in turn helps to raise the standard of living and also to achieve prosperity among the member countries.

Develop confidence

Another objective assigned to the IMF was to create confidence among member countries, by rescuing them in the moment of any crisis by providing temporary monetary aid. This gave them the opportunity to correct the imbalance in their balance of payments.

References

1. Wikipedia, the free encyclopedia (2019). International Monetary Fund. Taken from: en.wikipedia.org.
2. Lawrence McQuillan (2019). International Monetary Fund. Encyclopaedia Britannica. Taken from: britannica.com.
3. International Monetary Fund (2019). Cooperation and reconstruction (1944–71). Taken from: imf.org.
4. Sanket Suman (2019). International Monetary Fund (IMF): History, Objectives and Other Details. Economics Discussion. Taken from: economicsdiscussion.net.
5. IMF Site (2019). International Monetary Fund (IMF) Origins, Purpose, News. Taken from: imfsite.org.