IMF: Past and Present - Essay Example

The breakdown of the international trade and monetary system led to the creation of the IMF with the purpose to stabilize the exchange rates of currencies and encouraging members to increase international trade by making a pool of funds available to member countries experiencing balance of payments difficulties. 

The member countries agreed that the value of the US$ follows the gold prices and that the other member currencies be pegged to the US$ with some room allowed for corrections (but with the agreement of the IMF). This par value system was also known as the Bretton Woods system.

In the 1960s, the US$ was seen as overvalued. As the US government started spending more especially due to the Vietnam War, the overvaluation of the US$ became even more of a burden for the US. Thus, in August 1971, then US President Richard Nixon announced that the US would temporarily suspend the US$ pegging to Gold. This led to a breakdown of the system and by March 1973, the major currencies were no longer pegged to the US$ and began to float against each other.

Subsequently, the IMF has assumed the role of maintaining stability and preventing crises in the international monetary system. The IMF does this by funding the countries in distress and by providing countries with surveillance (tracking economic data) and technical assistance (training for choosing and implementing the right economic policies). The key action of IMF is lending through Special Drawing Rights (SDR) to low-income countries or to countries needing emergency assistance. The value of SDR is determined by the value of several currencies and is re-evaluated every 5 years. As of the present, the value of 1 SDR is US$ 1.54003 (IMF SDR). The typical problem that the IMF treats is helping countries during difficult economic times to rebuild or stabilize their currencies, to re-establish economic growth, and/or to continue buying imports.

The IMF has performed this function very well over the years. The surveillance data on world economies that it continues to produce help many countries to adjust and/or to change their economic policies to continue growth. The surveillance data also alerts the countries against imminent dangers to their economies which helps trigger a timely response from the countries. Through its technical assistance service, the IMF has helped several low-income or post-conflict countries to develop and implement their economic policies. Without this assistance, these countries may be at a loss to decide how to design their economic policies thus leading to a regional monetary crisis. Most importantly, the lending done by the IMF to several countries at different times has helped prevent monetary breakdown. Some examples of this include loans to Mexico in the 1980s, helping Asian countries during the currency crisis in the late 1990s, lending to Poland in 2009 to prevent a major banking crisis (McGovern), and the most current example is Greece where IMF loans are helping keep the economy alive (IMF Greece).