IMF and the Force of History

42 Pages·2014·2.677 MB·English

by  James M. Boughton

THE IMF
A N D
THE FORCE
HISTORY
OF
EVENTS THAT HAVE SHAPED
THE GLOBAL INSTITUTION
James M. Boughton
©International Monetary Fund. Not for Redistribution
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 | 5
Introduction | 7
THE EVENTS
The Paris Peace Conference | 9
The Great Depression | 11
The Second World War| 13
The Rise of Multiple Economic Centers | 17
The Cold War | 18
African Independence | 21
The Vietnam War| 23
Globalization of Financial Markets | 25
Two Decades of Debt and Capital Crises | 27
Collapse of Communism | 30
The Great Recession | 32
Conclusion | 35
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F O R E W O R D
History will mark the early 21st century as a period of major changes to the global economic land-
scape. Successfully navigating this new world requires thoughtful reflection on the story so far. Under-
standing 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 May-
nard 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 circum-
stances.
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 demo-
graphics, 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
5
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I N T R O D U C T I O N
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. Pres-
ident 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 estab-
lish 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 interna-
tional 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.
7
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Negotiations over the
Treaty of Versailles, signed
on June 28, 1919, paved the way
for economic and political turmoil
for years to come.
8
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THE PARIS
PEACE
CONFERENCE
Economics was far from being a high priority at the Paris peace conference of 1919. The borders of
Europe had to be redrawn one by one, and that task alone took up most of the six months of high-
level meetings. A means had to be found to pay the costs of the war and the costs of rebuilding, and
solving that problem was about all the economics that any of the leaders had the patience for. They
created the League of Nations, but its economic functions were poorly defined and never did gel into
an effective role.1 They created the International Labour Organization, but its role was specialized
and limited.
The conference’s neglect of economics did not result from a failure to understand the importance of
international trade for prosperity and thus for maintaining the peace. As the quotation at the head of
this prologue shows, Woodrow Wilson had made this relationship clear in his “fourteen points” speech
to the U.S. Congress in January 1918. Instead, the neglect of economics occurred largely because the
limitations of the invisible hand were not well understood. For a generation or more, the international
gold standard had provided a measure of stability with little need for overt cooperation. The challenge
seemed to be simply to avoid imposing barriers to trade or otherwise interfering with markets.
In the economic turmoil that followed the war, that passive approach was not nearly enough. Some
countries remained on the gold standard, but others did not. Without clear guidance or any institu-
tional check on behavior, competitive devaluations and punitive tariffs became a common temptation
1 For all its weaknesses, the League of Nations did undertake economic tasks including lending for financial stabilization. It also demonstrat-
ed the potential benefits of multilateral economic cooperation, at least to those who worked there. Its staff included a highly distinguished
cadre of economists, several of whom later greatly influenced the IMF through their work (e.g., Tjalling Koopmans, Ragnar Nurkse, and Jan
Tinbergen), by joining the staff (e.g., Jacques Polak and Marcus Fleming), or even becoming head of the institution (Per Jacobsson). For an
analysis of the economic work of the League, see Pauly (1997). For a brief memoir, see Polak (1994, pp. xiv–xv).
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