International Monetary Fund: Organization, Functions, and Role in the International Economy

Abstract

The International Monetary Fund (IMF), conceived at the Bretton Woods conference in July 1944, has become the focal point of the international monetary system. Created in 1946 with 46 members, it has grown to include 184 countries. The IMF has six purposes that are outlined in Article I of the IMF Articles of Agreement. They are the promotion of international monetary cooperation; the expansion and balanced growth of international trade; exchange rate stability; the elimination of restrictions on the international flow of capital; insuring confidence by making the general resources of the Fund temporarily available to members; and the orderly adjustment of balance of payment (BOP) imbalances. At the Bretton Woods conference, the IMF was tasked with coordinating the system of fixed exchange rates to help the international economy recover from two world wars and the instability in the interwar period caused by competitive devaluations and protectionist trade policies. From 1946 until 1973, the IMF managed the 'par value adjustable peg' system. The U.S. dollar was fixed to gold at $35 per ounce, and all other member countries' currencies were fixed to the dollar at different rates. This system of fixed rates ended in 1973 when the United States removed itself from the gold standard. Floating exchange rates and more open capital markets in the 1990s created a new agenda for the IMF - the resolution of frequent and volatile international financial crises. The Asian financial crisis of 1997-8 and subsequent crises in Russia and Latin America revealed many weaknesses of the world monetary system. To better help it achieve its overall goal of promoting a stable international monetary system, the IMF's format has changed dramatically since it was created in 1945. Designed initially to provide short-term balance of payments (BOP) lending and monitor member countries' macroeconomic policies, the IMF has steadily incorporated microeconomic factors such as institutional and structural reforms into its activities. These had been seen previously as the exclusive province of the World Bank and other development agencies. The IMF found that, in order to pursue its core responsibilities in the changed world economy, it needed to pay greater attention to second generation reforms, as economists call these sorts of issues. IMF member countries agreed on a quota increase in 1997. The U.S. Congress subsequently appropriated additional funding for the IMF in October 1998 in the midst of the Asian financial crises, a decision that engendered considerable debate in light of growing criticism of the IMF and its lending practices. In 2002, the IMF did not request any additional increase in funding. Although appropriations of new funds for the IMF is not pending, Congress exercises oversight authority over U.S. policy at the IMF and over its lending practices. This report supports congressional oversight of the IMF by providing an understanding of its organization, functions, and role in the world economy. This report will be updated only if major events and new developments require.