by Paul Lines

Created on: December 18, 2011   Last Updated: December 20, 2011

The International Monetary Fund (hereinafter the IMF) was created towards the end of the Second World War. To be precise it evolved following a meeting of representatives from 45 countries at Bretton Woods, USA in July 1945, with the fund itself being formalised in December of the same year when 29 countries signed up the funds articles.

Original objective

The original objective of the IMF was to create an international regulatory barrier designed to avert a repeat of the collapse of the international monetary system that led the great depression of the 1930s. At that time, in an effort to protect their own economies from harm and to encourage internal growth, countries had introduced protectionist measures against imports from others and allowed their exchange rates to fall to make their own goods more attractive. Unfortunately, the consequence of this action was to exacerbate the depression.

The focus of the initial IMF objective therefore, which was embedded within what has become known as the Bretton Woods Agreement, was an agreement between the signature nations to peg exchange rates against the US dollar unless unforeseen circumstances caused shocks to their balance of payments.

An additional role of the IMF at that time, funded by capital contributions from its signatory states, was to extend short term funding or loans to countries that were experiencing balance of payment difficulties, enabling these countries the necessary period of time to resolve their problems.

Post 1971

The Bretton Woods agreement came to an end finally, following a crisis with the overvaluation of the US dollar. Effectively, this therefore allowed national currencies to return to the previous system of freedom to float against each other on the open market, which sparked fears of financial market unrest. However, the expected return to the volatility of international markets prior to the Bretton Woods Agreement did not occur and this freedom of exchange has prevailed ever since.

Mid-1970s Change of direction

Although the IMF continued its balance of payments loan programme post the Bretton Wood Agreement, there was a recognisable change in some areas of its activities from the mid-1970s. At that time, it began to focus a significant part of its financial aid programme towards assisting poorer countries that were experiencing considerable and increasing balance of payment difficulties. This was a particularly important role in the 1980s, when a slump in industrial nations brought

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