Origins, History of the IMF The International Monetary Fund was first conceived between July 1-22, 1944, at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The conference was attended by representatives of 45 nations, which were called together in order to plan and lay the groundwork for a cooperative economic framework to solve global financial crises before they occur. One key reason for the conference was to put in place the fiscal mechanisms which would provide protection against a possible repeat of the terrible Great Depression of the 1930s.

Also, another significant reason for the Bretton Woods conference was that WWII was showing signs of winding down in 1944, and the allied nations that were about to put the finishing touches on the defeat of the Nazis and of Japan, were seeking solutions to hitherto chaotic international monetary relations. It was a time for the practical and shared exploration of solutions that would bring prosperity as well as peace to many nations that were devastated by WWII.

A further reason for the Bretton Woods conference was spawned by the myriad of mistakes nations made during the Great Depression, and in intervening years; policies needed to be reviewed so the same mistakes are avoided in the future. During that decade, as economic activity in the major industrial countries weakened, many countries tried to shore up economies by placing stifling restrictions on their imports. What this did was merely add impetus to the downward spiral in world trade, in output, and in employment. In order to conserve fading gold reserves and foreign exchange, some countries cut back on the rights their citizens had to buy abroad. Also during that period, some nations devalued their currencies, and others introduced a lot of red-tape type restrictions on their citizens' ability to hold foreign exchange.

In the end, the methodologies aforementioned nations instituted proved to be self-defeating, and no country was able to shore up a competitive edge for very long. Hence, the international economy was devastated by ill-timed methods of "fixing" economies, and living conditions in many nations suffered - as did world trade.

For some additional and insightful background into the IMF's origins and functionality, it may be instructive to turn to excerpts from professor Leland Yeager's book, International Monetary Relations: Theory, History, Policy. Yeager holds two impressive titles: the Ludwig von Mises Distinguished Professor Emeritus of Economics at Auburn University; and the Paul Goodloe McIntire Professor of Economics Emeritus at the University of Virginia.

The IMF resulted from lengthy discussions of separate American, British, Canadian, and French proposals drafted during World War II," he writes. In the British "Keynes Plan," an international clearing union was proposed, that would create an international system of payment called "bancor." Each member country's central bank would then accept payments in bancor, "without limit from other central banks. Debtor countries could obtain bancor by using automatic overdraft facilities with the clearing union.

The limits to these overdrafts would be generous and would grow automatically with each member country's total of imports and exports," Yeager continued. "Charges of 1 or 2% a year would be levied on both creditor and debtor positions in excess of specified limits." And further, a portion of the credits, under the British proposal, might be "forgiven" and in the end, turn out to be "gifts" to the developing nation receiving the loan. Any large imbalances in the repayments could, under the proposal by the British, be covered by massive and automatic U.S. credits to the rest of the world - up to billions of American dollars.

Americans Reject British proposal

But the American representative at the organizational sessions, Harry Dexter White of the U.S. Treasury, rejected the British idea. White's plan involved having member IMF nations pour money into a currency pool, from which needy countries might borrow to tide them over. Although both the British and U.S. plans steered clear of re-instituting the Gold Standard and proposed strong exchange-rate stability, the final compromise looked more like the U.S. plan then the British plan.

Purposes for the IMF

On December 27, 1945, the IMF became an official world economic organization. Twenty-nine nations signed the "Articles of Agreement" on that date.

The main purposes for the IMF are laid out in Article I of the "Articles of Agreement," which states that "The IMF is...

"This is necessary for the IMF to meet the needs of an ever-changing global economic and financial system." bit of historical context is appropriate here. During the beginning years of the IMF (1945 -1960), there was very little financing, since the U.S. "Marshall Plan" assumed that role in large part. In the years 1961-1970, the IMF unveiled a new "supplementary reserve asset" - better known as "special drawing right " (SDA) - and a standing borrowing arrangement with the IMF's larger creditor members to supplement the IMF pot of money in times of "systemic crisis." In the years 1971-1980, there were two world oil crises, causing the IMF to expand its financing, and its system of disbursal to its poorest members ("concessional lending" came into being).
And, to be exact, the IMF says it does not technically "lend" money, as a traditional bank would write the borrower a check, for example. Rather, financial assistance is provided with a creative exchange of monetary assets - something akin to a "swap" of assets between the IMF and the nation that is receiving the monetary help. That being said, the IMF's literature says interest is still charged and the purchase and repurchase of currencies from the IMF is "functionally equivalent to a loan."

During the decade of the 1980s, huge debts built up by developing (i.e. Third World) countries, which forced the IMF to offer higher levels of assistance - financed of course through borrowed resources. And in the 1990s, the IMF set up a temporary lending facility to help ease formerly centrally planned economies into the world market system.

IMF Financing Mechanisms

The main IMF financial mechanism (or, in simple terms, the main money account) is called the GRA - General Resources Account. The number of nations contributing to the GRA (as of mid-2001) was 38. In the first 25 years of its existence, the nations borrowing from the IMF were mostly industrial countries caught in a financial bind. But in the last 25 years, most nations borrowing from the IMF were "developing" and "emerging market" countries.

And in hard core terminology, loans aren't really "loans" at all - in IMF terms they are "arrangements." When the Executive Board of the IMF approves an arrangement, after back up is shown to the Executive Board as to how the arrangement is to be repaid, the loan is issued in phased installments.

Very poor countries are allowed to borrow from the IMF at the lowest interest rate ("concessional" rate) of 1%, and the payback if over a longer period of time than "non-concessional" loans. That loan for the low-income nation is issued through the Poverty Reduction and Growth Facility (PRGF). The loans which go to other countries are issued in five facilities: Stand-By Arrangements (SBA), the Extended Fund Facility (EFF), the Supplemental Reserve Facility (SRF), the Contingent Credit Lines (CCL), and the Compensatory Financing Facility (CFF).

PRGF: The interest rate on PRGF loans (for the poorest nations borrowing money) is usually a mere 0.5% to 1%, and are to be repaid over a period of 5 1/2 to 10 years. The financing for concessional lending is arranged through a cooperative effort of 94 nations - and this commitment to the poorest of nations will be limited by the IMF to about 1 billion a year until 2005.

SBA: Stand-By Arrangements are only designed to take care of short-term "balance-of-payments" issues for a given country. SBA is the most frequently used form of loan from the IMF. The length of SBA is usually 12-18 months, and is expected to be repaid within 2 1/4 to 4 years without an approved extension.

EFF: This type of loan is over a longer period of disbursal (3 years), and the repayment is usually 4 1/2 to 7 years.

SRF: Supplemental Reserve Facility loans are to be repaid within a year and a half, and there is a substantial surcharge of 3-5 percentage points.

CCL: This is…