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To prevent economic disorder and defuse political conflict American and British leaders initiated a conference which was known under the name of the United Nations Monetary and Financial Conference. In July, 1944, 730 representatives from 44 countries gathered in a New Hampshire town called Bretton Woods. Nowadays the conference is called the Bretton Woods conference. Its aim was to lay the foundation for the new financial and monetary postwar order. It also established GDP as a standard tool to measure a country’s economic progress. The Bretton Woods system was successful in achieving the common goals of the industrialized countries that had created it and proved to be effective in controlling all the conflicts until the end of the 1960s when it dissolved.
The primary figures behind the the Bretton Woods system were the renowned British economist John Maynard Keynes, an economic advisor to the British Treasury, and Harry Dexter White, Chief International Economist at the U.S. Treasury. As a result of the Bretton Woods conference, the two major international institutions, the International Monetary Fund (IMF) and the International Bank of Reconstruction and Development (IBRD), commonly known as the World Bank, were established.
THE IMF
Both J.M.Keynes and H.D.White developed independent plans for a multilateral institution which was to shape the international monetary system after the second World War. Their plans differed in the sense of the institution’s size, management and policies. The primary objective of the institution, later named IMF, was to provide financial assistance and promote international trade. As stated by H.D. White, the IMF had to be a multilateral relatively small institution which had to allocate its scarce resources among carefully selected countries. As claimed by J.M.Keynes the IMF had to be large enough to assist all the members on demand. Moreover, he believed it had to be managed by two “founder-States”. In addition, J.M.Keynes suggested introducing an international currency named Bancor which had to serve a unit of account within international clearing system. He advocated the foundation of the International Clearing Union. On the contrary, H.D.White proposed to lend national currencies pegged to gold, the base reserve currency. The currencies had to be convertible for trade and other current account transactions. The U.S dollar gained momentum and became the new global currency linked to the price of gold. Thus, H.D. White is considered to be the creator of the dollar’s privileged place in the new system.
When the Bretton Woods system collapsed, the IMF started providing concessional loans through the Trust Fund. In March 1986, the IMF set up the Structural Adjustment Facility, a concessional financing program, which was succeeded by the Enhanced Structural Adjustment Facility in December 1987. The IMF member states were able to choose any form of fixed exchange rate except for the currency’s peg to gold. They could peg their currencies to dollar or any other currency or even a currency basket. They could allow their currencies float freely or adopt the currency of another country, taking part in a currency bloc. They could form a part of a monetary unit.
At present there are 189 members which cooperate in resolving international monetary problems and share information on financial, fiscal, economic, and exchange policies. The IMF serves only to member states. To become a member state, a country has to agree to the IMF code of conduct, pay a quota subscription, allow exchange of foreign currency and ensure openness in economic policies. The membership enhances investment and trade resulting in increased employment. In addition, the IMF assists in solving financial problems and provides technical support.
The IMF is managed by the Board of Governors. The Board normally meets annually and consists of governors appointed by member states. They are either ministers of finance or governors of central banks. The Board of Governors communicates its comments, concerns, intentions, and wishes to the Executive Directors who hold formal sessions on a regular basis. They normally meet at least three times a week. There are 24 Executive Directors. Eight of them represent individual countries – the United State, the United Kingdom, France, Germany, Russia, China, Japan, and Saudi Arabia. The other 16 represent groups of the remaining countries.
The IMF has an international staff of about 2,600 economists, statisticians, research scholars, experts in public finance and taxation and in finance systems and banking, linguists, writers and editors, and support personnel, most headquartered in Washington, DC. The IMF is headed by a Managing Director who is also chairman of the Executive Board, which appoints him.
The IBRD
International Bank for Reconstruction and Development, commonly known as the World Bank, was founded on December 27, 1945. Its main purpose was to finance the reconstruction of the countries ruined by WWII. The bank was intended to provide low interest rates to the devastated countries of Europe and Japan. However, the countries preferred to take advantage of the United States Marshall Plan, officially known as the European Recovery Program or ERP, since it provided monetary support in the form of grants and loans which did not have to be repaid. The Marshall Plan is thought to have been one of the first tools of European integration as it removed trade barriers, modernized European industrial and business practices, renewed equipment and transport system, and set up institutions coordinating political policies and economic processes at a continental level. In fact, the Marshall Plan laid the foundation for the North Atlantic Treaty Organization (NATO).
On the grounds that the funding from the Marshall Plan became more popular than the funding from the IBRD, the World Bank rewrote its original mandate and started to provide loans and advisory services to poorer and less developed countries of the Third World. It switched to reducing global poverty by promoting development. The Bank initiated food production, health improvement, rural and urban development projects.
Nowadays, the IBRD is part of the World Bank Group and one of the leaders in the field of international development and poverty reduction. The World Bank makes three types of loans: project loans, sector adjustment loans, and SAP loans. Large infrastructure projects, for example building of dams, mines and power plants, are financed with project loans. To meet the direct cost of a project or to support sector-specific policy changes the IBRD provides sector adjustment loans. SAP loans are the loans given under the Bank’s Structural Adjustment Program. They offer short-term support in exchange for major changes within a country.
At first its staff included mainly economists, engineers and financial analysts. However, in the 1980s, with the expansion of its operations and the emergence of new social life issues, the Bank addressed the fields of cultural heritage, education, and communications. Consequently, it hired sectoral experts, social scientists, public policy experts, and others. In addition, the Bank improved its services, transparency of its activities, and client satisfaction.
At present the World Bank Group is made up of 189 organizations owned by the governments of member states. The member states are the countries which joined the IMF. The Bank supports their governments, institutions, and organizations. The institution sticks to the following rule: one dollar, one vote. Each country joining the IMF and the Bank has to pay a quota based on its wealth. The amount of money paid determines a country’s voting power. The higher the contribution is, the greater voting rights a country exercises. Thus, the Group of Seven, commonly called G7, that includes the industrialized nations like the U.S., the U.K., Canada, Germany, France, Italy, and Japan and holds over 40% of the votes, dominates decision-making and controls the IBRD. By comparison, China and India, the two fast growing economies representing 39 percent of the world’s population , have 4.65% and 3.05% of the votes respectively. On a side note, the Russian Federation was the member of the Group of Eight (G8) from 1998 through 2014. However, after Russia’s annexation of Crimea in March, 2014, the country was suspended from the G8. The Russian Federation has 2,79% of the votes. Governments of the emerging economies have to follow all the derivatives of the World Bank. If a country and its citizens resist doing that, they may be isolated and cut off from the Bank. Moreover, they are likely to lose any assistance. This erodes the sovereignty of the developing nations. Not surprisingly, the developing countries compare the Bank to an international economic cop and its policies to the new form of economic imperialism.