History of the IMF

Even today the fundamental issues of these arguments over the process of creation of the IMF system remain unresolved. The main reason for this can be thought of as the fact that even today there is insufficient understanding of the points of how the Allies’ postwar plans resulted in the structure of the IMF, where among these plans the Allies were fundamentally in opposition to each other, and how this opposition was reflected in the agreement. This work will reconsider these points by looking mainly at the process of formation of the Keynes and White plans during the period prior to the Bretton Woods Agreements and identifying various confrontations that emerged during that process.

“Everywhere else in the world, though, politicians and businessmen insist that one of the biggest problems with the I.M.F. is that, contrary to the view of Congress, it acts as the United States Treasury’s lap dog. Ask in Jakarta or Moscow, and the response is the same: The fund never ventures far without looking back for the approving nod of its master” (Sanger 1998). These joint efforts by the U.S. government and the International Monetary Fund (hereinafter Fund or IMF) are predicated on the idea of Neoliberalism or the Washington Consensus that supports a free and open global market economy. On the other hand, international financial institutions such as the IMF and the Bank for International Settlements (BIS) are considered to have taken a position between the market and nation states, and they have comprehensive visions for the world economy. Thus the U.S. could not completely control the Bretton Woods institutions, and the IMF retained considerable autonomy as an international institution.

The transition of the Western Europeans to Article VIII status in 1961 was the end of the postwar transitional period. The 1950s was the period when major countries gradually attained stability of their exchange rates against the U.S. dollar and exchange liberalization; in other words, the gap between the U.S. as an outstanding creditor and Europeans—the dollar shortage—disappeared. As the supply of dollars became excessive in the late 1950s, the stability of the international monetary system was gradually undermined and the world entered into the decade of a dollar crisis.

On 7 September 1956, the IMF Executive Board offered the position of IMF Managing Director to Per Jacobsson (Horsefield 1969, p. 387). Jacobsson, a Swedish economist, had been Economic Adviser at the Bank for International Settlements in Basel, Switzerland, since 1931. The offer came as a surprise to many, but in spite of the negative advice of some of his close colleagues and friends, Jacobsson decided to accept it (Jacobsson 1979, pp. 283–284). He would remain the Fund’s Managing Director until his sudden death from an heart attack on 5 May 1963, at the age of 69.

One of the features of the international monetary system after World War II has been the establishment of international financial organizations (Bretton Woods Institutions) as an integral part of the governance structure to manage the international monetary system. However, the views about the role of the international financial organizations, especially the International Monetary Fund (IMF), have been largely divided into two approaches.

The end of 1958 saw an attempt to restore convertibility of major Western European currencies by shifting from the managed economic system of the war years and the postwar period to a market economic system. Until then, in the world of international finance the free movement of capital had been impeded by strong trade and foreign-exchange controls in each country. These controls had been centered on the closed pound and the Sterling bloc. Despite the fact that the pound shared with the dollar the status of a key currency worldwide, it could not be exchanged freely for dollars outside the bloc of nations using the pound as currency. The restoration of convertibility between the pound and the dollar marks the end of the postwar transitional period. However, the postwar pound was not strong enough to restore convertibility on its own. The obstacle was the large amount of pounds confined within the pound bloc. There were fears of a massive liquidation and outflow of those pounds accompanying the restoration of convertibility. The success or failure of restoration of convertibility depended on whether or not it would be possible to prepare sufficient foreign reserves or liquidity in preparation for currency speculation. Any shortages in these needed to be addressed by relying on international cooperation. This chapter will describe in detail the process of restoration of convertibility of major Western European currencies, particularly the pound, during the 1950s, from the standpoint of securing foreign reserves.

No other member of the IMF has experienced such a peculiar relationship with the institution as France has had. On the one hand, France, as a major signatory nation of the Bretton Woods Agreement, has been one of the most important members of the IMF, sending several high-ranking officials to the Fund, including Managing Directors. On the other hand, the position of France often has been contrary to the IMF’s views and it has proposed distinctively alternative plans for an international monetary system. France has in fact been a “watchdog” of the Bretton Woods System (Bordo et al. 1994, p. 10).

This chapter will focus on the relationship between the International Monetary Fund (IMF) and the Federal Republic of Germany (Germany hereinafter) from the 1950s through the start of the 1960s. During this period, Germany rapidly advanced liberalization of trade and foreign exchange as it accumulated gold and foreign reserve through its current account surplus. Despite the fact that Germany had joined the IMF in August 1952, since by that point in time Germany already had a current account surplus it did not have the opportunity to receive financial support from the IMF, and already by 1956 its liberalization of trade and foreign exchange largely was complete.

From the beginning of the 1950s to 1963, Italy experienced rapid economic development and eventually declared the external convertibility of its currency with the major European nations in 1958. In this period, Italy participated in the Bretton Woods system and the European integration process. In this chapter, we will review how the Bretton Woods system infected and restricted the economic policy management of the member countries by examining the Italian experience.

A key element in the 1944 Articles of Agreement of the International Monetary Fund (IMF) was fixed exchange rates. However, while most IMF member countries sought to establish or maintain fixed exchange rates in the 1950s, the Canadian government placed the Canadian dollar under a flexible exchange rate regime. Canada began using a flexible rate in September 1950 and returned to a fixed rate in May 1962.

During the time of the prewar international gold standard, Japan had issued large amounts of external bonds, mainly in London and New York financial markets, as the balance of Japanese external bonds issued peaked in 1930 at JPY2,268 million, accounting for about 15 % of Japan’s estimated GNP. But Japan’s access to raising such bonds was closed off by the Great Depression and the collapse of the international gold standard. After the end of World War II and 6 years of occupation led by the General Headquarters, Supreme Commander for the Allied Powers (GHQ/SCAP), Japan regained independence in April 1952 and joined the IMF and the World Bank in August of that year. Japan’s participation in the Bretton Woods system had been realized with the strong support of the U.S. government, which had desired an independent Japanese economy after a turnabout in its postwar policies toward Japan. At that time, expectations had risen in Japan that this would open a path toward access to foreign capital for purposes of economic restoration and development in place of American aid. While its participation in the Bretton Woods system enabled Japan to raise long-term funds from the World Bank, to do so it needed to resolve the issue of repayment of outstanding prewar external debts on which it effectively had defaulted during World War II. In July 1952, a conference on resolution of these debts was held in New York between the Japanese government and representatives of British, French, and the United States’ bondholders under the terms of the San Francisco Peace Treaty, and an agreement was reached in September of that year, under which Japan resumed payment on nearly all government bonds, not including those issued in France. The success of negotiations on resolution of external debts was important in that it meant Japan had regained the trust of international society and served as the starting point for Japan’s postwar access to foreign capital.

Japan joined the IMF in August 1952, 8 years after the Bretton Woods Conference. Germany joined the IMF in that same month. About 12 years later, in April 1964, Japan’s status shifted to that of an IMF Article VIII nation. The leading Western European member states already had acceded to Article VIII status 3 years earlier. While under Article XIV status, Japan had borrowed funds from the IMF in 1953 and 1957 and concluded standby line of credit agreements in 1962 and 1964, but since acceding to Article VIII status it has not borrowed from the IMF once. Japan’s shift to Article VIII status was carried out when the time was fully ripe.

The history of China’s engagement with the IMF was complicated by China’s broader political and economic relations with the capitalist world during the first three decades of the IMF’s operations. Chinese officials, government ministers and bankers were prominent at the Bretton Woods conference in 1944, enjoying the support of the Allied powers while the Japanese war still raged. During the early years of the Fund’s operations, the civil war in China preoccupied the KMT regime. After the victory of the Chinese Communist Party China’s territorial boundaries were not resolved with both the KMT and the PRC claiming to be the legitimate government of ‘China’. In the early 1970s, Mao reached out to the US President Nixon to begin to re-engage with the global system, a process that culminated in Deng Xiao-ping’s Open Door Policy in December 1978. After 30 years of gradual opening to international trade and investment, China joined the IMF in April 1980, unseating the Republic of China (ROC). Although Chinese experts influenced the design of the Bretton Woods institutions, the PRC was thus a late-comer to the IMF, joining when many key structures were already in place and left with the legacy of China (Taiwan)’s policy choices over 25 years.