IMF and the Force of History : Events and Ideas That Have Shaped the Global Institution

James Boughton

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 2014
• eBook ISBN: 9781498306836

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The Events

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 institutional check on behavior, competitive devaluations and punitive tariffs became a common temptation for a quick fix to economic ills. Margaret MacMillan (2001) is surely right in arguing that the Versailles treaty cannot be held solely responsible for these and other ills of the twentieth century, but neither can it be absolved from blame.

What does this experience have to do with the IMF? A quarter century afterward, it was very much on the minds of those who were drawing up the designs for the new institution. In the view of John Maynard Keynes (1883–1946), the head of the British delegation, the “contractionist pressure on world trade” brought on by the “special protective expedients which were developed between the two wars” resulted in large measure from futile efforts “to protect an unbalanced position of a country’s overseas payments.” Creation of an “international clearing union” would obviate the need for such “forced and undesired dodges” (Horsefield, 1969, pp. 3–18). Without the clearing union (which eventually morphed into the IMF), the expected persistent creditor position of the United States would depress world economic growth and drive the world back into protectionist policies, regardless of how quickly or well production and trade could be reconstructed after the war.

Harry Dexter White (1892–1948), the chief drafter of the IMF charter for the U.S. delegation, was equally impressed by the need to avoid the passive errors of Versailles. His initial plan noted that during “the last twenty years” (that is, throughout the interwar period), countries had often imposed protectionist policies because they lacked adequate gold reserves, and it warned that the same problems would arise and would constitute a major barrier to the growth of trade after the war. An international monetary fund would enable countries in that position to economize on their gold reserves and thus avoid recourse to trade barriers, payments barriers, and bilateral clearing schemes (Horsefield, 1969, pp. 37–82).

As early as 1935, when France and Great Britain were contemplating currency devaluations that were aimed at improving their competitive positions but that threatened to spark a vicious cycle of retaliatory actions, White argued that the U.S. Treasury should intervene by encouraging an international agreement to stabilize exchange rates (Boughton, 2002). That led to the Tripartite Agreement of 1936 and set the stage for more comprehensive and institutionalized agreements later on. When the Articles of Agreement for the IMF were adopted at Bretton Woods in 1944, they specified that one purpose of the institution was “to avoid competitive exchange depreciation.”

It is important to note that for both Keynes and White the motivating principle for creating the IMF was to engender postwar economic growth by establishing an institution that would prevent a relapse into autarky and protectionism, not just to avoid a recurrence of the Depression. The impetus was less the Depression than the necessity of rebuilding and engendering economic growth after the war.

The Great Depression

In a major study of the history of the international monetary system in the twentieth century, Michael Bordo and Barry Eichengreen (1998) argued that the Great Depression of the 1930s was the “defining moment” for the system. Without the Depression as a catalyst, they concluded, the necessary political support to create the postwar system could never have emerged. That claim seems exaggerated, because the dangers of financial chaos were already apparent before the Depression, and the effects would have been seriously damaging even if the world had muddled through the 1930s without a full-scale and persistent state of depression. Nonetheless, the Great Depression certainly was a major influence on the initial design of the IMF.

The Depression amplified the negative consequences of Versailles, as an implosion of international trade interacted with domestic policy errors to deflate both output and prices around the world. It severely tested the confidence of analysts and voters in the efficacy of free markets and strengthened belief in an activist role for the public sector in economic life.

It thus became easier and more natural to start discussions on a postwar framework from the assumption that an intergovernmental agency with substantive powers would be beneficial and even essential for the international financial system.

The combined effects of Versailles (the absence of a stabilizing system in international finance) and the Depression were import...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Introduction
• The Events
• Footnotes