A Brief History of IMF

Posted on : May, 18 2010


A brief History of IMF.

In order to understand IMF and it's role in global economics, we have to see roots of it. It’s a very interesting case study in itself. IMF was formed just before end of World War II in “Bretton Woods’s conference” and purpose was to "Engage nations in economic co-operations so that they don't get into wars and rather grow together".

In my opinion "IMF is one of the biggest success story of last century when it comes to organization that works to make nations work together". They formed and supported superb and robust foundation for international trade co-operation. Below chart can be a good proof that IMF was successful to a great extent in their vision.

War, Killings Pre and Post IMF.

Killings in War Year Wise 

Let’s see IMF and it’s Role in different eras.

Post WW II, : Global Economic Structure foundation. 1944 – 1971 (Formation of global platform with Gold Standard)

Primary goals in this era i.e. immediately post world war II were to

1)       Assist the reconstruction of the world's international payment system and

2)       “Stabilize exchange rates” those were very unstable in wartime.

3)       Provision for countries contributed to a pool, to borrow on a temporary basis, by countries with payment imbalances (All these transactions were happening in gold).

The IMF was extremely important in that era. It turned out to be a platform to establish, stabilize and support the global economic system.

It sounds odd today but there were Fixed Currency Conversion Rate between USD and other participating countries as per “Bretton Woods’s system” for 27 Years. If you see chart below it becomes very obvious. (In other words there were once a while re-valuation with IMF involvement but there was nothing like daily conversion rate.)

Currency	Code	2000	1990	1980	1970	1960	1950
Pound Sterling	GBP	0.6609	0.5632	0.4303	0.4167	0.3571	0.3564
Deutsche Mark	DEM	2.1272	1.6157	1.8177	3.6600	4.2	4.195
Indian Rupee	INR	44.942	17.505	7.8629	7.5	4.7619	4.7619
Japanese Yen	JPY	107.76	144.79	226.74	360	360	361.1
Swiss Franc	CHF	1.6888	1.3892	1.6757	4.373	4.373	4.373

Currency conversion in USD.

So the Structure was that All currencies were pegged to USD and USD was pegged to Gold as below.

Gold Pegging til 1971

Gold Pegging Structure.

Post Bretton Woods’s system : Another Era began in IMF’s history 1972–81. (No more Gold Discipline !  Print Money fast..)

On 15 August 1971 something happened that changed the world economic system dramatically.    United States declared that on “temporary” basis they are abandoning Gold Standard. (Expense of Vietnam War and Ambitious programs of president Nixon mainly drove this and even today it stands abandoned). This step was birth of “Floating Rate” currency system that we have even today. “None of the paper currencies today are backed by anything except faith on Governments and Central Banks.”

Though gold standard was abandoned and currencies started flowing freely, UDS -> INR went in range of 50 (on which whole outsourcing is based), IMF’s role still continued due to fact that it was well-established global balance of payment network. Also IMF had huge gold. Even today they posses 3,005.3 Tons of gold which they accumulated as interest payment (during gold standards), common pool contributions, etc..

So in this era of 1972 –1981, IMF started playing a role of Lender due to Oil Shocks. Also the IMF created a new concessional loan program called the Structural Adjustment Facility for poor countries.

Debt and painful reforms : 1982–89  (Money Supply Shrink ! Very high Interest Rates.)

In  order to control runaway inflation of 70s, Central Banks hiked interest rates in 80s. (e.g. Paul Volker hiked Interest Rate to 21% in US thereby allowing dollar to regain it’s value. This created debt crisis worldwide. IMF supported world even during this crisis by lending money. Though austerity measures took years for nations to come out of that crisis completely.

New political maps :  1990-2004 (The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union)

The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union kept IMF busy in developing economic structure for new countries that separated from formal Soviet Union. 

Also in this era IMF helped Indonesia, Korea in financial crisis. IMF started HIPC initiative to help poor countries as well.

Credit Crisis (2005 till date) Burst of Housing bubble.

This is nothing but today’s era and IMF has been busy in helping nations across globe e.g. Greece recently. It has responded to this crisis by tripling it’s lending capacity as well.

So, this is where we are in this whole financial history since WWII. Let’s see what someone write about IMF and world Financial History in 2030 how many new eras come and what they do in those.