International Monetary Fund (IMF) is an international monetary institution established by different countries after the World War II with an objective of providing exchange stability throughout the world and increasing liquidity so that balanced multilateral trade is promoted through the cooperation of the member nations.
Various historical conditions and events that led to the establishment of IMF are summarized below:
(i) Gold standard functioned with reasonable success and provided a medium of international payments before World War I.
(ii) The onset of World War I forced most of the countries to abandon gold standard and put restrictions on the movement of gold as well as goods.
(iii) After the World War I, some countries came back on the gold standard but the gold standard could not work well between the period 1919-1931.
(iv) The world faced the Great Depression of the thirties between 1929 to 1936. Prices, profits, share prices, production, employment and income of the leading countries fell very low. Competitive devaluation, tariffs and exchange controls were adopted by the nations.
(v) World War II (1939-45) further disrupted the pattern of international trade and dislocated the economies of the world.
After the world-wide depression and the World War II, it was recognised that (a) the gold standard could not be restored in future; and (b) lack of any mechanism like the gold standard would generate instability of exchange rates and discourage international trade and investment.
Therefore, the monetary authorities of the world felt the need for international cooperation to establish a stable international monetary order. With this objective, a conference of 44 major countries was held at Breton Woods, New Hampshire, in July 1944.