The International Monetary Fund, both criticized and lauded for its efforts to promote financial stability, continues to find itself at the forefront of global economic crisis management.
By Jonathan Masters and Andrew Chatzky – Since its inception in July 1944, the International Monetary Fund (IMF) has undergone considerable change as chief steward of the world’s monetary system. Officially charged with managing the global regime of exchange rates and international payments that allows nations to do business with one another, the fund recast itself in a broader, more active role following the 1973 collapse of fixed exchange rates, intervening in developing countries from Asia to Latin America. In 2010, it gained renewed relevance as the European sovereign debt crisis unfolded.
The fund has received both criticism and credit for its efforts to promote financial stability.
Forty-four allied nations convened at the Bretton Woods Conference in 1944 to establish a postwar financial order that would facilitate economic cooperation and prevent a rehash of the currency warfare that helped usher in the Great Depression. The new regime was intended to foster sustainable economic growth, promote higher standards of living, and reduce poverty. The historic accord founded the twin institutions of the World Bank and the IMF and required signatory countries to peg their currencies to the U.S. dollar. However, the system of fixed exchange rates broke down in the late 1960s and early 1970s due to an overvaluation of the U.S. dollar and President Richard Nixon’s decision to suspend the greenback’s convertibility into gold.
The IMF is akin to a credit union that permits its membership access to a common pool of resources—funds that represent the financial commitment or quota contributed by each nation, relative to its size. In theory, members with balance-of-payments trouble seek recourse with the IMF to buy time to rectify their economic policies and restore economic growth. The fund pursues its mission in three fundamental ways:
Surveillance. A formal system of review monitors the financial and economic policies of member countries and offers macroeconomic and financial policy advice.
Technical assistance. Practical support and training directed mainly at low- and middle-income countries help manage their economies.
Lending. The fund gives loans to member countries that are struggling to meet their international obligations. Loans, or bailouts, are provided in return for implementing specific IMF conditions designed to put government finances on a sustainable footing and restore growth. more>