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International Monetary Fund (IMF),United Nations(UN) specialized agency, founded at theBretton Woods Conferencein 1944 to secure internationalmonetarycooperation, to stabilize, and to expand international liquidity (access to hard currencies).
The first half of the 20th century was marked by two world wars that caused enormous physical and economic destruction inEuropeand aGreat Depressionthat wrought economic devastation in both Europe and theUnited States. These events kindled a desire to create a new international monetary system that would stabilize currency exchange rates without backing currencies entirely with gold; to reduce the frequency and severity ofbalance-of-paymentsdeficits (which occur when more foreign currency leaves a country than enters it); and to eliminate destructivemercantilisttrade policies, such as competitivedevaluationsandforeign exchangerestrictionsall while substantially preserving each countrys ability to pursue independent economic policies. Multilateral discussions led to the UN Monetary and Financial Conference in Bretton Woods,New Hampshire, U.S., in July 1944. Delegates representing 44 countries drafted the Articles of Agreement for a proposed International Monetary Fund that would supervise the new international monetary system. The framers of the new Bretton Woods monetary regime hoped to promoteworld tradeinvestment, andeconomic growthby maintaining convertible currencies at stable exchange rates. Countries with temporary, moderate balance-of-payments deficits were expected to finance their deficits byborrowingforeign currencies from the IMF rather than by imposingexchange controls, devaluations, or deflationary economic policies that could spread their economic problems to other countries.
After ratification by 29 countries, the Articles of Agreement entered into force on December 27, 1945. The funds board of governorsconvenedthe following year inSavannahGeorgia, U.S., to adopt bylaws and to elect the IMFs first executive directors. The governors decided to locate the organizations permanent headquarters inWashington, D.C., where its 12 original executive directors first met in May 1946. The IMFs financial operations began the following year.
The IMF is headed by a board of governors, each of whom represents one of the organizations approximately 180 member states. The governors, who are usually their countries finance ministers orcentral bankdirectors, attend annual meetings on IMF issues. The funds day-to-day operations are administered by an executive board, which consists of 24 executive directors who meet at least three times a week. Eight directors represent individual countries (ChinaFranceGermanyJapanRussiaSaudi Arabia, theUnited Kingdom, and theUnited States), and the other 16 represent the funds remaining members, grouped by world regions. Because it makes most decisions byconsensus, the executive board rarely conducts formal voting. The board is chaired by a managing director, who is appointed by the board for a renewable five-year term and supervises the funds staff of about 2,700 employees from more than 140 countries. The managing director is usually a European andby traditionnot an American. The first female managing director,Christine Lagardeof France, was appointed in June 2011.
Each member contributes a sum ofmoneycalled aquota subscription. Quotas are reviewed every five years and are based on each countrys wealth and economic performancethe richer the country, the larger its quota. The quotas form a pool of loanable funds and determine how much money each member can borrow and how much voting power it will have. For example, the United States approximately $83 billion contribution is the most of any IMF member, accounting for approximately 17 percent of total quotas. Accordingly, the United States receives about 17 percent of the total votes on both the board of governors and the executive board. TheGroup of Eightindustrialized nations (Canada, France, Germany,Italy, Japan, Russia, the United Kingdom, and the United States) controls nearly 50 percent of the funds total votes.
Since its creation, the IMFs principal activities have included stabilizing currency exchange rates, financing the short-term balance-of-payments deficits of member countries, and providing advice andtechnical assistanceto borrowing countries.
Under the original Articles of Agreement, the IMF supervised a modifiedgold standardsystem of pegged, or stable, currency exchange rates. Each member declared a value for its currency relative to the U.S.dollar, and in turn theU.S. Treasurytied the dollar to gold by agreeing to buy and sell gold to other governments at $35 per ounce. A countrysexchange ratecould vary only 1 percent above or below its declared value. Seeking to eliminate competitive devaluations, the IMF permitted exchange rate movements greater than 1 percent only for countries in fundamental balance-of-payments disequilibrium and only after consultation with, and approval by, the fund. InAugust1971 U.S. PresidentRichard Nixonended this system of pegged exchange rates by refusing to sell gold to other governments at thestipulatedprice. Since then each member has been permitted to choose the method it uses to determine its exchange rate: afree float, in which the exchange rate for a countrys currency is determined by thesupply and demandof that currency on the international currency markets; amanaged float, in which a countrys monetary officials will occasionally intervene in international currency markets to buy or sell its currency to influence short-term exchange rates; apegged exchange arrangement, in which a countrys monetary officials pledge to tie their currencys exchange rate to another currency or group of currencies; or afixed exchange arrangement, in which a countrys currency exchange rate is tied to another currency and is unchanging. After losing its authority to regulate currency exchange rates, the IMF shifted its focus to loaning money to developing countries.
Reed College – Economics Department – Background Briefing: International Monetary Fund
Official Site of the International Monetary Fund
International Monetary Fund – The IMF and the World Bank
Articles from Britannica Encyclopedias for elementary and high school students.
International Monetary Fund – Student Encyclopedia (Ages 11 and up)
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