Since the advent of the GFC in 2007 there has been a resurgence of activity and interest in the IMF, which, in the years previously, had seemed to be in danger of becoming irrelevant.
What is It?
The IMF is an organization affiliated with the United Nations based in Washington DC. Its membership is comprised of most of the world’s national governments. Its mission has expanded over the years since its inception and now includes surveillance and monitoring of economic and financial developments, the provision of policy advice to members, particularly crisis-prevention advice, the making of short term loans to nations in financial trouble, the provision of training and technical assistance, and the setting of economic and financial codes and standards.
The Managing Director of the IMF since 2007 is a French one-time communist and former Minister of Economy & Finance, Dominique Strauss-Kahn. He is expected to retire in 2012 and run as the Socialist Party’s candidate for the presidency of France. Predicted to replace him is the former British Prime Minister, Gordon Brown, who is known for selling off Britain’s gold at US$300 per ounce, effectively the bottom of the present bull market in gold.
The IMF was created in 1944 at Bretton Woods in New Hampshire, at an historic meeting held by representatives of the allied nations. It was one of a trio of organizations formed at that time, the other two being the forerunners of the World Bank and of the World Trade Organization. Under the influence of J.M. Keynes, the famous British economist, the representatives planned and formulated an economic and financial design for the post WW2 world. The 3 organizations were intended to stabilize the world’s finance and currency systems, promote trade, and provide aid for developing nations.
Prior to WW1 developed nations had operated on a gold standard, whereby gold coins were minted as money and so-called paper money was freely and fully redeemable in gold. This had the effect of constraining individual government’s ability to create money. Along with many other things, the gold coin standard was destroyed by WW1.
Following the end of the war, a modified gold standard was set up. This was the gold bullion standard. Gold coins were no longer issued, but paper money, at least theoretically, was redeemable in gold bullion. Since gold was no longer required for coins, this considerably reduced the constraint previously imposed on governments. But the Great Depression destroyed the gold bullion standard, particularly after President Roosevelt seized America’s gold and banned individuals from owning it. By the time of Bretton Woods the world was in need of a new monetary system. What eventuated was the gold reserve system. During the time of the Great Depression and the lead-up to it, the world had been troubled by the lack of fixed exchange rates and the practice of countries manipulating their rates in order to gain a trade or other advantage. This was particularly the case with so-called competitive devaluations, where countries pursued policies intended to decrease the value of their currency and hence increase their exports. Bretton Woods set up a global system of fixed exchange rates to be overseen and protected by the IMF. It also provided a gold reserve currency, namely the US dollar. Due to Europe’s self-destruction by 2 world wars, the USA at that stage possessed approximately 80% of the world’s monetary gold. The USA agreed to back its Federal Reserve dollars with gold valued at $35 an ounce, and to redeem from any foreign government, its notes, with gold at that price. The US dollar thus became the world’s reserve currency. In return, the USA was granted veto power over IMF decisions.
By the late 1960s, the Bretton Woods system had begun to fail. The USA had become involved in a number of costly wars, particularly in Vietnam, and was flooding the world with dollars. Foreign governments, particularly that of De Gaulle in France, became concerned about America’s ability to redeem them all and began demanding gold. In the end the USA succumbed, and in 1971 repudiated its agreement to redeem with gold.
Since 1971, fixed exchange rates have virtually disappeared and been replaced by floating exchange rates which constantly fluctuate. This increases the risk and complexity of world trade and investment. Almost by default of anything better, the world switched from the Bretton Woods, gold reserve standard, to a so-called US Treasury-bill, or dollar, standard. The USA has continued to live beyond its means and to flood the world with irredeemable paper dollars, to the extent that creditor nations with large dollar reserves are increasingly concerned that they will ever receive any real value for them. This has become even more so since America has seemingly begun purposely to depreciate its currency. Calls have arisen for reform.
A number of proposed reforms of the world’s currency system have been put forward, some of which involve a modified and invigourated IMF. One suggestion is that the dollar should be replaced as the world’s currency by an IMF issued currency called Special Drawing Rights [“SDRs”], which would be based on an expanded pool of funds to be provided it by its members. This would require much increased contributions from emerging nations such as China, India and Brazil. These countries object to doing so, however, without receiving an increased say in IMF affairs, which they see as presently dominated by Western governments, particularly that of the USA. This would also mean the IMF taking over the nominal role of the World Bank, which to a large extent it has done already.
Other reform proposals include rejecting use of the dollar in international transactions and instead increased use, on a bilateral basis, of other national currencies. Or perhaps even less desirable, a return to protectionism, including capital controls. Significant change in the short term in the world currency system now seems almost inevitable.
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