Despite the strenuous efforts of U.S. foreign policymakers, the IMF Bretton Woods system suffered a slow, painful death in the 1960s and early 1970s. Institutionally the IMF was at the center of many of the attempts to keep the system on life support. The organization's deposits, and ability to loan, were increased substantially in the 1960s. The IMF was also at the center of a series of proposals to reform and recast international monetary relations. The most interesting was the American proposal to supplant the dollar's reserve and liquidity role with an instrument called "Special Drawing Rights," or SDRs. The idea for the SDRs emerged from a 1963 G-10 study on the need for additional liquidity and was formally proposed by the United States in the summer of 1965. The French were vehemently against the SDR, or any instrument that increased the IMF's power, since they believed the organization was a vehicle for American hegemony. Tough and at times acrimonious negotiations finally produced an agreement that was signed in Rio de Janeiro in September 1967. The SDRs were hailed as a major accomplishment, a needed supplement to the IMF Bretton Woods system, but in fact they were never widely used.
Ironically the greatest beneficiary of the monetary disorder of the 1960s and 1970s might have been the IMF. Irrelevant during the late 1940s and 1950s, the organization became the focal point of efforts to fix a broken international monetary system. Increased capital and trade flows brought more balance of payments volatility, and the IMF was called upon repeatedly to bail countries out of foreign exchange crises. The British requested billions to stave off monetary crises in 1961, 1964, and 1966. None of this aid helped, as sterling was finally devalued in 1967, although unlike the 1949 devaluation, the IMF played a key role. Even the French were forced to ask the IMF for help to defend their currency after their currency collapsed in the wake of the May 1968 Paris street protests. The IMF also served as a convenient vehicle for U.S. foreign policy goals when direct aid was not politically feasible, especially in the case of the bailout of sterling.
The IMF's power and influence as an organization increased even more after the collapse of the global monetary rules it was assigned to oversee. Nixon ended dollar-gold convertibility at Camp David on 15 August 1971 without consulting the IMF. But every American attempt to restructure the system during the ensuing sixteen months did so with the IMF as the centerpiece organization. Any attempt to maintain the Bretton Woods fixed exchange rate system collapsed, however, after February 1973, when the United States and the world abandoned the short-lived Smithsonian agreement. The world returned to market-determined free exchange rates, the very system the IMF was established to prevent.
Economic malaise, in the form of international recession and a fourfold increase in oil prices, combined with exchange-rate volatility to spread balance-of-payments chaos worldwide. After Camp David the IMF's role, and even its customers, changed dramatically. After abandoning fixed exchange rates the large industrialized countries like Japan and the countries of western Europe were less concerned about balance-of-payments difficulties. Market-determined changes in cross exchange rates replaced the ineffective adjustment mechanism of the old IMF Bretton Woods system. Nor did these large countries need the liquidity provided by the IMF, unless they wanted to defend their exchange rates against the overwhelming forces of the market. But the countries of the developing world could not as easily ignore dramatic changes in their exchange rates, and the oil price surge left many unable to close their balance-of-payments gaps without outside help.
Thus in the 1970s the IMF acquired a new client—the developing world. The fund also had new subscribers—the states of the Middle East that had grown rich with profits from their oil. Countries like Kuwait and Saudi Arabia had vast amounts of money, some of which went to increased subscriptions to international organizations like the IMF, and most of which was "recycled" through American banks and invested in the underdeveloped world. This massive recycling was both a response to and the reason for the Third World debt crisis of the late 1970s and 1980s. The IMF increasingly found itself providing balance-of-payments financing to poorer countries hit hard by the energy price spikes of the 1970s and the debt crisis of the 1980s.
One of the most controversial aspects of the IMF's post–Bretton Woods lending program has been its requirement that funded countries undergo what is called "structural adjustment." Since IMF funding is meant to fill a balance-of-payments deficit, stabilize the foreign exchange rate, and avoid devaluation, the institution demands fundamental macroeconomic and institutional reforms to remove the causes of the payments imbalance. Stabilizing a currency and halting massive capital flows usually require policies that deflate the domestic economy, such as raising interest rates and slashing the size of the state's budget. Many critics contend that these measures hurt the weakest members of the affected society. The first programs cut are usually in much-needed social welfare, health care, and educational programs that help the poor. Higher interest rates deflate the economy and lead to increased unemployment. Furthermore, the poor do not have the option of transferring their assets and capital abroad, as the wealthy often do during currency crises in the underdeveloped world.
The harshness of the IMF's structural adjustment program—and U.S. policymakers' role in promoting these controversial plans—came into greater focus in the late twentieth century. Largely at the behest of the Clinton administration's Treasury Department, the massive IMF bailout of Mexico in 1995 required an economic reform plan that led to large layoffs and sharp downward pressure on workers' wages. Similar complaints have been voiced in East Asia, where Indonesia's efforts to calm a currency crisis through "structural readjustment" led to political turmoil, domestic unrest, and economic collapse. The IMF's reputation has been further damaged by the widespread misuse of its funds in Russia. Things got so bad that the IMF was publicly criticized by Joseph Stiglitz, the chief economist of its sister organization, the World Bank. Worse, the IMF was seen as a handmaiden for America's foreign policy goal of privatizing, reforming, and opening overseas markets. The sharp criticism forced the IMF to reassess all of its lending procedures and requirements, including its structural adjustment programs.
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