Let us make an in-depth study of the history, objectives, organisation, capital and quotas of International Monetary Fund (IMF).
History of IMF:
The establishment of International Monetary Fund is a great landmark in the history of international monetary cooperation.
After First World War, commercial rivalry rose among the major countries of the world.
The breakdown of gold standard caused a great panic and confusion. USA, England and France tried to establish exchange stability under Tripartite Agreement of 1936 but it also failed during the period of Second World War.
Some of the major countries of the world again tried to return to the gold standard. Thus, under gold standard, these countries wanted to maximise their exports and minimise imports. To achieve these objectives, several countries resorted to devaluation of currency.
Thus, during this period, there was almost destruction and devastation in most of the countries. Exchange rates started fluctuating which adversely affected the economy.
To the close of Second World War, dire need was felt for the establishment of a monetary institution. The British put forward a plan called ‘Keynes Plan’ while USA forwarded another plan named ‘White Plan’. An international conference was held at Bretton-wood in July 1944.
Representatives of 44 countries participated in this conference. As a result, the International Monetary Fund came into existence in December 1945 with the objective of promoting international economic stability by promoting the balanced growth of the member countries.
International Monetary Fund started its functioning from 1st March 1947. IMF was established with the motto to increase international liquidity of the member countries to make the balance of payment, favourable. Thus, the Fund is a pool of central bank reserves and national currencies which are made available to funding member under certain conditions.
IMF was established to overcome all trade restrictions and impediments and further to promote multilateral trade. Thus, the Fund is most deliberate attempt to organise the conduct of international monetary affairs.
Objectives of IMF:
According to the Second Amendment to the Articles of Agreement of International Monetary Fund, main objects of the IMF are stated below:
1. International Monetary Co-operation:
The foremost objective of the Fund was to establish monetary co-operation amongst the various member countries. IMF provides the machinery for consultation and collaboration on international monetary problems. During the Second World War, IMF had played a vital role to promote monetary co-operation amongst the different countries of the World.
2. To Promote Exchange Stability:
Before the Second World War, great instability was prevailing in the foreign exchange rates of different countries which had adversely affected the international trade. Thus, IMF has the objective to promote exchange stability and to avoid the bad effects of depreciation on exchange rates.
3. To Eliminate Exchange Control:
Another significant objective of IMF is to eliminate the control over foreign exchange. During war period, almost every country has fixed the exchange rate at a particular level. This has adversely affected the international trade. Hence, it becomes inevitable to remove the control over exchange rate by boosting international trade.
4. Establishment of Multilateral Trade and Payment:
IMF aimed at establishing and multilateral trade and payment system in place of old bilateral trade by the elimination of exchange restrictions which hampers the growth of smooth trade relations in the world trade.
5. Growth of International Trade:
IMF is useful to promote international trade by removing all obstacles and bottlenecks which had created unnecessarily restrictions. In this way, a significant role has been assigned to it so as to accelerate the growth of international trade by maintaining equilibrium in the balance of payment.
6. Balanced Economic Growth:
IMF helps the member countries to achieve the balanced economic growth. It facilitates the expansion of balanced growth by the promotion and maintenance of high level of employment as the primary objective of economic policy. For this purpose, IMF helps to exploit natural resources and to put into productive channel.
7. To remove the Disequilibrium in the Balance of Payment:
IMF helps the member nations to eliminate the disequilibrium in the balance of payment by selling or lending foreign currencies to the member countries. With its financial assistance and guidance, International Monetary Fund helps to lessen the degree of disequilibrium in the balance of payment of its member nations.
8. Expansion of Capital Investment in Under-develop Countries:
IMF provides assistance to import capital from the rich countries to the poor countries so that the poor or underdeveloped country get a chance to expand their capital investment on productive activities or social overheads which in turn helps to raise standard of living and to achieve prosperity among member countries.
9. Generating of Higher Employment and Income:
IMF helps to expand the trade with the significant measures of multilateral trade and balanced economic growth. This in turn generate employment and income.
10. To Develop Confidence:
Another objective was assigned to the IMF to create confidence among member countries by coming up to their rescue at the time of any crisis by providing temporary monetary help. This will provide them an opportunity to correct disequilibrium in the balance of payments.
11. Help during Emergency:
The fund will provide short-term monetary help to its member countries during any type of emergency.
12. Shorten the Duration and Lessen the Degree:
In accordance with the above, it shortens the duration and lessen the degree of disequilibrium in the international balance of payment of member countries.
The fund has two types of members as stated below:
(1) Original Members and
(2) Ordinary Members.
All those countries whose representatives took part in Bretton Woods Conference and who agreed to be the member of the Fund prior to 31st December, 1945, are called the original members of the Fund. All those who become its member subsequently are called ordinary members.
However, any country can cease to be its member after giving a notice in writing to that effect. I.M.F. can also terminate the membership of such a country as does not observe its rules. In 1947, the number of member-countries was 40 presently, there are 180 countries as members.
Organisation and Management of the Fund:
The Fund is an autonomous/organisation which is affiliated to the UNO. The management of the Fund is carried out by the Board of Executive Directors under the direction of the Managing Director. There are 21 Executive Directors of the Board, out of which 7 are permanent and 14 are elected from the remaining members. The permanent members are from the USA, UK, France, Germany, Japan, Italy and Canada.
IMF has two bodies of management:
(i) The Board of Governors.
(ii) The Board of Directors.
Every member country appoints one Governor to participate in the meeting of the Board of Governors. The Board of Governors make the general policy to carry on day-to-day working of IMF. The Board of Directors of the IMF holds the meeting at the office in Washington. One of the Directors is designated on the Managing Director of IMF. He is the chief executive.
The capital of IMF consists of the aggregate of the quotas allotted to member countries. Each member pays either 20 per cent of the quota or 10 per cent of its entire gold and dollar holdings. The member countries are allowed to pay their quota in their national currency.
The Fund has appointed certain central banks as its gold depositors, where members can deposit the gold to the credit of the Funds. These gold depositors are the Federal Reserve Bank of New York, the Bank of England, the Bank of France and the Reserve Bank of India. The Fund depositors must be tendered gold in the form of bars of 0.995 and gold coins cannot accepted.
The IMF utilise its gold holdings to acquire dollars and other currencies its operations. For instance, gold is sold of US 600 million dollar in 1957. In 1961, it sold gold worth US 300 to reduce its holdings of US dollars and 8 other currencies. As per agreement of the Fund, headquarter can be located in a country which have the highest quotas of capital of IMF. Presently, USA had the highest quota of capital as 50 per cent of the gold stock of the IMF.
IMF and Quotas:
IMF can purchase or sell the currencies of member countries as the currency of a country exceeds over 200 per cent of its quota. The total quota of IMF on 1st March 1947 was amounting to $ 7.5 million. In the meeting of IMF on 26th September 1978, the quota of IMF was increased by 50 per cent to deal with the imbalances of member countries and to increase the international liquidity in the world.
Each member country of the IMF is allotted a quota. The 25 per cent of quota was subscribed in gold and the remaining 75 per cent in terms of local currency. The member country is allowed to maintain the quota in terms of SDRs. India’s present quota in SDRs is 1717.5 million.
In September 1982, the IMF had a total membership of 146 with aggregate quotas amounting to SDR 61.1 billion. On 11th February 1983, the Interim Committee of IMF had increased the quota of resources of IMF from SDRs 61.1 billion to SDRs 90 million. The largest quota holders are USA, Britain, West Germany, France and Japan.
However, a member country’s quota has significance on the following grounds:
(i) The IMF insists that the magnitude of resources should be in gold and currencies by the member countries.
(ii) IMF has introduced a special unit of amount for resources which is known as special drawing rights. It affects the interest charges that the member pay on drawing of amount.
(iii)The management of the Fund determines the quota on the basis of economic strength of the economy of member country.
(iv) The members are trying to get SDRs linked to development needs and to get higher relative shares for less developed countries.