Tuesday, May 18, 2010

A Brief History of IMF


















Posted on : May, 18 2010


A brief History of IMF.

In order to understand IMF and it's role in global economics, we have to see roots of it. It’s a very interesting case study in itself. IMF was formed just before end of World War II in “Bretton Woods’s conference” and purpose was to "Engage nations in economic co-operations so that they don't get into wars and rather grow together".

In my opinion "IMF is one of the biggest success story of last century when it comes to organization that works to make nations work together". They formed and supported superb and robust foundation for international trade co-operation. Below chart can be a good proof that IMF was successful to a great extent in their vision.

War, Killings Pre and Post IMF.
Killings in War Year Wise 



Let’s see IMF and it’s Role in different eras.

Post WW II, : Global Economic Structure foundation. 1944 – 1971 (Formation of global platform with Gold Standard)








Primary goals in this era i.e. immediately post world war II were to


1)       Assist the reconstruction of the world's international payment system and
2)       “Stabilize exchange rates” those were very unstable in wartime.
3)       Provision for countries contributed to a pool, to borrow on a temporary basis, by countries with payment imbalances (All these transactions were happening in gold).

The IMF was extremely important in that era. It turned out to be a platform to establish, stabilize and support the global economic system.

It sounds odd today but there were Fixed Currency Conversion Rate between USD and other participating countries as per “Bretton Woods’s system” for 27 Years. If you see chart below it becomes very obvious. (In other words there were once a while re-valuation with IMF involvement but there was nothing like daily conversion rate.)

Currency
Code
2000
1990
1980
1970
1960
1950
GBP
0.6609
0.5632
0.4303
0.4167
0.3571
0.3564
DEM
2.1272
1.6157
1.8177
3.6600
4.2
4.195
INR
44.942
17.505
7.8629
7.5
4.7619
4.7619
JPY
107.76
144.79
226.74
360
360
361.1
CHF
1.6888
1.3892
1.6757
4.373
4.373
4.373

Currency conversion in USD.












So the Structure was that All currencies were pegged to USD and USD was pegged to Gold as below.


Gold Pegging til 1971



Gold Pegging Structure.


Post Bretton Woods’s system : Another Era began in IMF’s history 1972–81. (No more Gold Discipline !  Print Money fast..)

On 15 August 1971 something happened that changed the world economic system dramatically.    United States declared that on “temporary” basis they are abandoning Gold Standard. (Expense of Vietnam War and Ambitious programs of president Nixon mainly drove this and even today it stands abandoned). This step was birth of “Floating Rate” currency system that we have even today. “None of the paper currencies today are backed by anything except faith on Governments and Central Banks.”

Though gold standard was abandoned and currencies started flowing freely, UDS -> INR went in range of 50 (on which whole outsourcing is based), IMF’s role still continued due to fact that it was well-established global balance of payment network. Also IMF had huge gold. Even today they posses 3,005.3 Tons of gold which they accumulated as interest payment (during gold standards), common pool contributions, etc..

So in this era of 1972 –1981, IMF started playing a role of Lender due to Oil Shocks. Also the IMF created a new concessional loan program called the Structural Adjustment Facility for poor countries.


Debt and painful reforms : 1982–89  (Money Supply Shrink ! Very high Interest Rates.)

In  order to control runaway inflation of 70s, Central Banks hiked interest rates in 80s. (e.g. Paul Volker hiked Interest Rate to 21% in US thereby allowing dollar to regain it’s value. This created debt crisis worldwide. IMF supported world even during this crisis by lending money. Though austerity measures took years for nations to come out of that crisis completely.

New political maps :  1990-2004 (The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union)

The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union kept IMF busy in developing economic structure for new countries that separated from formal Soviet Union. 









Also in this era IMF helped Indonesia, Korea in financial crisis. IMF started HIPC initiative to help poor countries as well.

Credit Crisis (2005 till date) Burst of Housing bubble.

This is nothing but today’s era and IMF has been busy in helping nations across globe e.g. Greece recently. It has responded to this crisis by tripling it’s lending capacity as well.


So, this is where we are in this whole financial history since WWII. Let’s see what someone write about IMF and world Financial History in 2030 how many new eras come and what they do in those.

2 comments:

  1. Not sure if the consciousness is out there on this important issue ? It relates to the development of the floating status of the dollar and other currencies in relation to gold. Here's a simple fact -> without the development of the pure floating currency system after BW, the further development of real-time gold backed digital currencies would not have taken place. It appears that the ultimate purpose of the dollar was not necessarily for the use as a currency, as it is in the fiat paradigm , but for its use as a real-time measure for commodities (gold) where it can act as a "bridge" within a gold-as-money paradigm. Keeping in mind that we still price economic widgets in fiat currency, a "bridge" from fiat pricing to weighted gold payment requires a real-time "translation". That is where the dollar has its true value within the law of weights and measures. We can now buy a single stick of gum using fully gold backed digital currency in real-time, anywhere on the globe and close out the transaction without leaving any lingering debt ... and do so in the twinkling of an eye. There is no monetary problem as per design. It's a fait accompli. The challenge is simply marketing and scale up.

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  2. Amaresh Ashok GangalFebruary 4, 2011 at 12:14 PM

    Yes You are absolutely right in Digital world it will be more easy to have Money Translation with bullions. But the system need to be reformed.. Or rather revolutionized. !!

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