03-10-2012, 12:25 PM
The Functions of the IMF & the World Bank
The International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD), also known as the Bretton Woods Institutions
(BWIs), were formed in Bretton Woods, New Hampshire in 1944 on the eve of the end of
World War II. They were precursors to the United Nations and other multilateral
institutions formed after World War II and reflected the new spirit of cooperation between
nations, especially in economic matters. As you will learn in this E-Book, the operations of
the BWIs have had an important impact on concepts of development and development
policy.
The first three parts of this section discuss the events leading up to the Bretton
Woods Conference. They will explain how at the founding of the IMF and the IBRD the
founders were not directly concerned with "development" as we know it today. They were
more concerned about avoiding behavior among nations that led to economic catastrophe
and war and they also wanted to prepare for the economic problems they believed would
confront them after the end of World War II.
In the fourth section, we will describe the functions of the IMF. You will learn about
key concepts relating to that institution, such as "par value" under the fixed exchange rate
system, "surveillance" after the collapse of the fixed rate system, "convertibility," and
"conditionality." Although these terms may not strike you as important to "development,"
they are in fact integrally tied to your well being and your country’s economic, even cultural,
future.
The Rough Road to Bretton Woods: Looking for Stability and Growth
Those who attended the Bretton Woods Conference in New Hampshire wanted to
establish a monetary system that would prevent the repetition of the chaos during the interwar
period (1918-1939), which was marked by high inflation, restrictions on international
trade and payments, speculation in the foreign exchange market, sharp movements in central
banks’ foreign reserves, wildly fluctuating exchange rate movements, gold shortages, and
sharp drops in economic activity (deflation). To accomplish stability and economic growth,
the founders of the IMF agreed upon a "gold exchange standard." The reference to gold is
important, so let’s review a bit of history before we explain the Bretton Woods System in
more detail.
The IMF’s Functions and Structure
The IMF Articles of Agreement are intended to be a Code of Good Conduct
controlling members’ monetary policies. Article I, which lists the purposes of the IMF,
reflects the founders’ view that the IMF’s primary function should be to keep the
international monetary system running smoothly. Monetary order, in turn, would promote
economic growth and fair trade, goals stated in Art. I (ii). The IMF addresses these goals in
various ways. Let’s begin with a brief discussion of the Bretton Woods fixed exchange rate
system, which is related to the gold exchange standard we mentioned earlier.