A landmark in the history of world economic cooperation is the creation of the International Monetary Fund, briefly called IMF.
The genesis of the Fund lies in the breakdown of Gold Standard, which created a vacuum in the field of international trade. With the abandonment of gold standard in the ‘thirties all countries realised the need for international cooperation in economic affairs, as veritable chaos had resulted in the system of foreign exchange rates and international trade after the end of the gold standard system.
As a result, each country tried to secure its own interest at the cost of others. Each deliberately undervalued its currency to secure an advantage for its exports. They started following ‘beggar-my- neighbour’ policies in currency matters as well as in matters of international trade. Competitive exchange depreciations, exchange controls, import and. export regulations and bilateral trade pacts were the order of the day, and world trade as a whole declined to a great extent.
International investments also suffered very much as a result of the uncertainty created by the frequently changing exchange rates. In short, international trade and investments passed through the worst period in the ‘thirties.
It was then recognised that the monetary disorder of the world could be corrected only by mutual agreement between nations having international economic relations. International monetary cooperation became the dire need of the day.
Since it was not possible to revive the gold standard, a new system “had to be devised, a system which would provide sufficient flexibility through international assistance without affecting the internal economic order of the country, as also an efficient payments mechanism which would permit and foster high and stable levels of world trade. Different nations put forward different plans in this respect. In 1943, the United States Treasury published a proposal for the establishment of an International Stabilisation Fund of the United and Associated Nations. In the same period Great Britain also proposed the establishment of air International Clearing Union.
The American proposal is known as ‘White Plan’, and the British proposal is known a ‘Keynes Plan’, after their principal authors Mr. White and Lord Keynes respectively. In 1944, a joint plant plan in the shape of a “Joint Statement by Experts on the Establishment of International Monetary Fund of the United and Associated Nations” emerged, which became the basis for the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, from July 1 to July 22, 1944.
The purpose of the Bretton Woods Conference was to devise means for assuring a system of international trade and payments consistent with the dual objectives of high world productivity and trade and domestic employment and income with economic stability. At this meeting, it was decided that an ‘International Monetary Fund’ (IMF) be organised embodying a working mechanism for the smooth settlement of international payments in order to achieve the objectives.
However, the IMF itself was organised in 1946, and commenced operations in March, 1947.