History of the International Monetary Fund (IMF)
During the second world war, monetary experts in USA and U.K started thinking about the monetary problems likely to be faced with the war. The need for economic and monetary cooperation among countries was keenly felt.
In 1943, international negotiations were on to correct the disorderliness in the monetary system. A stabilization fund was suggested by Dexter and White in USA. Lord J.M. Keynes put forth a proposal to create an international clearing union which was termed as Keynes plan. The two sets of proposal were subjected to an intensive discussion and served as the basis for the Bretton Woods conference. The Bretton Woods conference was held at New Hampshire in the United States in July 1944. It was attended by the representatives of 44 countries. This was known as Bretton Woods Monetary plan.
The Bretton Woods conference decided to setup two organizations:
- International Monetary Fund (IMF) and
- International Bank for Reconstruction and Development (IBRD) which is popularly known as World Bank.
The International Monetary Fund (IMF) was established on 27th December 1945. But it commenced its operations from 1st March 1947 and its first transactions were made in May 1947. The initial membership was 30 countries which rose to 181 countries in 1996. The funds of the IMF are subscribed by the member countries. Each member country subscribes to the fund as per its quota fixed by the IMF.
Objectives of IMF:
The IMF specifies its objectives in Article 1 of Articles of agreement. Two amendments were made in this Article in 1969 and 1978. While the foremost objective of the IMF is to promote International Monetary Cooperation there are still certain objectives as discussed below:
1. Exchange stability:
The IMF aims at maintaining and promoting exchange stability. The instability in foreign exchange rate leads to competitive exchange depreciation of currency. The IMF aims to avoid competitive exchange depreciation of currency and to promote exchange stability among member countries.
2. System of payments:
International Monetary Fund facilitates the system of international payments by eliminating the disputes before countries. Multilateral system of payments and conversion of national currencies hamper international trade. IMF facilitates smooth payments among world countries.
3. Adjustments in balance of payments:
The fund’s resources are made available to member countries. This gives them adequate protection, enabling them to correct maladjustment in their balance of payments. Member countries repose confidence in the IMF as it ensures timely help by adjusting the BOP.
4. Less disequilibrium in the international balance of payments:
IMF reduces the disequilibrium in international payments of members. It removes international foreign exchange problems which distort the economic development.
5. Balanced growth of global trade:
The IMF facilitates the expansion and balanced growth of international trade by laying down the rules for the conduct of international finance.
6. Overcoming short term balance of payment deficits:
The IMF provides short and medium term assistance for overcoming short term balance of payment deficits.
7. Economic integrity:
The IMF instills confidence in its members and strengthens the economic integrity of the member nations.
Administration of the IMF:
The second amendment to the Articles of Agreement provided for some important changes in the organization and structure of IMF. The organizational setup of IMF consists of a Board of Governors, executive Board, a Managing Director, a council and a staff with its headquarters in Washington, USA. There are several adhoc and standing committees appointed by the Board of Governors and the Executive Board. In addition, there is an interim committee also known as International Monetary and Financial Committee appointed by the Board of Governors. Decision making power is vested in the Board of Governors and the Executive Board. The Board of Governors which is the apex body of the IMF consists of one Governor and one alternate Governor appointed by the each member country. The Minister of Fiance or the Governor of Central Bank of a country can act as the Governor of the IMF.
Board of Governors of IMF:
The Board of Governors has 24 members and it meets annually. In the annual meeting, the details of the fund activities for the previous year are reported. Decisions on the policies of the fund are arrived at the annual meeting. Any of the five member countries accounting for 25 per cent or more of the total voting rights can convene the special meeting of the board. The Board of Executive Directors are entrusted with the majority of the decision making powers.
Executive Board of IMF:
The executive board consists of 21 directors. U.S.A, U.K, Germany, France and Japan appoint one director each and five executive directors are appointed by them. As one of the largest contributors to the Fund, Saudi Arabia appoints a sixth executive director. The remaining 15 executive directors are elected at an interval of two years by the rest of the members on geographical basis.
Managing Director of IMF:
The managing director of IMF is elected from among the executive directors. Generally, the managing director is a politician or an important official. He will also be the non-voting chairman of the executive board. The managing director will act as both the chairman of the executive board and head of the Fund.
Under the Articles of agreement, the executive board of IMF is vested with enormous powers. So, it relates to all fund activities including its regulatory, supervisory and financial activities Major change can be brought about in the IMF procedure only with 85 per cent majority in the executive board. The executive board meets frequently as it has to be in continuous session.
The International Monetary Fund and Financial Committee (IMFC)
The International Monetary and Financial Committee (IMFC) was set up in October 1974. It has 22 members. It advises the board of governors on supervising the management and adaptation of the international monetary system.
At present the IMF policies are formulated on the basis of negotiations between member countries. Recently, three changes have been incorporated.
- IMF is not insisting on deposit of gold by member countries
- It has introduced a special unit of account of international liquidity which is known as Special Drawing Rights (SDR).
- SDRs are linked to development needs.