Copyright © 2014
International Monetary Fund
Washington, D.C. 20090, U.S.A.
All Rights Reserved.
Cataloging-In-Publication
Joint Bank-Fund Library
Boughton, James M.
The IMF and the force of history : events that have shaped the global institution / James M. Boughton. – Washington D.C. : International Monetary Fund, 2014.
pages ; cm
Includes bibliographical references.
ISBN: 978-1-49830-683-6 (paper)
ISBN: 978-1-49831-919-5 (Epub)
ISBN: 978-1-49836-766-0 (pdf)
ISBN: 978-1-49830-237-1 (mobi)
1. International Monetary Fund—History. 2. Financial Institutions, International—History. I. International Monetary Fund. II. Title.
HG3881.I58 B683 2014
Disclaimer: The views expressed in this book are those of the author and should not be reported as or attributed to the International Monetary Fund, its Executive Board, or the governments of any of its member countries.
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Foreword
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Introduction
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THE EVENTS
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The Paris Peace Conference
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The Great Depression
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The Second World War
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The Rise of Multiple Economic Centers
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The Cold War
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African Independence
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The Vietnam War
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Globalization of Financial Markets
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Two Decades of Debt and Capital Crises
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Collapse of Communism
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The Great Recession
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Conclusion
Foreword
History will mark the early 21st century as a period of major changes to the global economic landscape. Successfully navigating this new world requires thoughtful reflection on the story so far. Understanding the ideals upon which any enterprise was founded illuminates the way forward. This is why the IMF puts great stock in chronicling its history, as this and other volumes attest.
The IMF was born out of crisis and the calamity of two world wars. Fortunately, in 1944, John Maynard Keynes and Harry Dexter White helped convene and lead a coalition of nations determined to establish an organization to help stabilize the global economy—based on the principle that economic cooperation was the only surefire recipe for success. The IMF was designed in the hopes of promoting international monetary cooperation, encouraging trade, and ensuring a smooth flow of global capital.
Throughout the years, the IMF ably filled this role. Working alongside its partners for 70 years, international economic stability became the rule rather than the exception. But reacting flexibly to new challenges was always part of the IMF’s modus operandi. Whether the emergence of new African nations, the collapse of the Bretton Woods system, the fall of the Berlin Wall, or the Latin American and Asian crises at the end of the 20th century, the IMF was called upon to adapt to changing circumstances.
The IMF also spearheaded the response to the global financial crisis, perhaps the most severe challenge since its creation. The aftermath still affects some parts of the world, but the IMF is already thinking about the future, grappling with the great economic challenges of the 21st century—growing diffusion and interconnectedness of economic power, resource scarcity and climate change, changing demographics, and income inequality.
Change, in the end, is the one constant. Its opposite: stasis and stagnation. As this booklet illustrates, the IMF does not shrink from change. It has adapted and reinvented itself without losing sight of its core values and mission of serving its members. After seven decades, it continues to fulfill its mandate: promoting global economic stability. This will also remain our mission for the future.
— Christine Lagarde
Introduction
Point III. “The removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance.”
Woodrow Wilson, Fourteen Points (1918)
The International Monetary Fund was forged from failure.
When the heads of government of the great powers met in Paris at the end of the First World War, they had before them a blueprint for restoring prosperity and world peace in the form of U.S. President Woodrow Wilson’s Fourteen Points. Six months later, they agreed on the terms of what would become known as the Treaty of Versailles, but key parts of the blueprint had been cast aside. Within a decade, prosperity was lost. In another decade, peace was gone as well. The most famous failure was Wilson’s inability to convince the U.S. Senate to confirm the country’s membership in the League of Nations. The most disastrous, however, was arguably the failure to lay the groundwork for economic cooperation among the world’s great trading nations. Whether U.S. membership in the League would have slowed the slide toward war in the 1930s is debatable. The effect of the autarkic or protectionist policies of the 1920s on the collapse of trade and output in the 1930s, however, is well established (Crucini and Kahn, 1996; Irwin, 1998).
When delegations from 44 countries met at Bretton Woods, New Hampshire, in July 1944 to establish institutions to govern international economic relations in the aftermath of the Second World War, avoiding a repeat of the failings of the Paris peace conference was very much on their minds. Creation of an International Bank for Reconstruction and Development would help restore economic activity, while creation of an International Monetary Fund would help restore currency convertibility and multilateral trade. Removing the barriers to trade, as envisaged by Wilson a quarter century earlier, was not enough. More active and institutionalized cooperation was now understood to be needed.
The failure of Paris was only the first of a series of historical events and ideological changes to influence the design and work of the IMF and the postwar international monetary system. This booklet surveys some of the key events of the past century and the shifts in economic theory that had the greatest influence on the Fund to draw some general conclusions about the force of history on the international monetary system.
The first three key events—the Paris peace conference, the Great Depression, and the Second World War—made the creation of a multilateral financial institution possible and largely determined the form it would take. Subsequent events caused the IMF to alter its practices in various ways to stay relevant in a changing world.