Definition of International Monetary Fund (IMF)

One of the most important players in the current international financial system, the IMF was created to administer a code of fair exchange practices and provide compensatory financial assistance to member countries with balance of payments difficulties. The role of the IMF was clearly spelled out in its articles of agreement:

1. To provide international monetary cooperation through a permanent institution that provides the machinery for consultation and collaboration on international monetary problems.

2. To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

3. To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

4. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions that hamper the growth of world trade.

5. To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with the opportunity to correct maladjustments in the balances of payments without resorting to measures destructive of national or international balances of payments of members.

When a member entered the IMF, it was obliged to submit a par value of its currency in gold or in US dollars. Once that value was established it could only vary by 1 percent either way and any changes required the permission of the IMF. All transactions with other members were then exercised at that rate.

The resources of the IMF came from the subscriptions for member countries. Subscriptions were determined on the basis of the member’s relative economic size, 25 percent of the quota was to be paid in gold and the rest in the member’s domestic currency. The size of the quota was important because it determined the member’s voting power and the amount it could borrow. In practice, members could borrow up to the first 25 percent of their quota, which was called the “gold tranche” beyond the gold tranche, the IMF imposed conditions.

Although the goals and ground rules for membership are still the same, the IMF has changed considerably since its creation. Its capital has been increased several times. The gold tranche has become the “first credit tranche” and other “upper credit tranches” have been added. In 1969 it created the first SDRs.

The IMF has evolved with the perceived problems of the times. In 1963 it introduced the Compensating Financing Facility to help countries with temporarily inadequate foreign exchange reserves resulting from events such as crop failure. In 1974 it set up the Oil Facility to help oil importing developing countries. It also set up the Extended Fund Facility for countries with structural difficulties, created the Trust Fund of 1976 to allow the sale of gold for the development of third world countries and in the 1980s it negotiated special standby facilities for countries with foreign debt problems.