The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It also offers financial and technical assistance to its members, making it an international lender of last resort. Its headquarters are located in Washington, D.C., USA.
The IMF was established in December 1945 following ratification of the Articles of Agreement of the Fund, formulated at the United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire 1944. The first 29 countries signed its Articles of Agreement. The Fund became a specialized agency of the UN in 1947.
The purposes of the fund are to encourage international monetary cooperation, facilitate the expansion and balanced growth of international trade, assist member countries in correcting balance of payment deficits and promote foreign exchange stability.
The 'Bretton Wood System', or international monetary system established by the Fund, was based upon a policy of fixed exchange rates, the elimination of exchange restrictions, currency convertibility and the development of a multilateral system of international payments. Exchange rates were based upon a par value system which required member countries to constrain fluctuations in their exchange rates within a margin of plus or minus one percent round a par value expressed in terms of US dollars, which in turn were convertible into gold at a fixed rate.
The fund relies upon members' contributions and borrowing arrangements to finance its' operations. Members contributions, payable in SDR, other members' currencies or its own currency, are determined by a quota system which assigns each member a quota related to its national income, monetary reserves, ratio of exports to national income and other economic indicators. A members' quota, which is periodically reviewed and revised, also determines its drawing rights on funds under both regular and special facilities, its allocation of SDRs and its voting power. In 1962 an agreement was concluded whereby the Group of Ten: Belgium, Canada, the US, Italy, Japan, The Federal Republic of Germany, the Netherlands, Sweden, the UK, France, along with Switzerland, undertook to provide up to $6900 million in their own currencies if required the Fund. These General Agreements to Borrow were reformed in 1983 and renewed for 5 further years from 1988. Until 1983 only the Group of Ten plus Switzerland could borrow under the scheme, but this right was extended to other members of the IMF and the funds available were increased to SDR 17 billion.
A member's quota in the IMF determines the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of Special Drawing Rights (SDRs). SDRs are defined in terms of a basket of major currencies used in international trade and finance. Till 1981 the value of the SDR was based upon a weighted basket of 16 currencies. At present, the currencies in the basket are the euro, the pound sterling, the Japanese yen and the United States dollar. Before the introduction of the euro in 1999, the Deutsche mark and the French franc were included in the basket. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance.
In 1971 the ministers and Central Bank governors of the Group of Ten signed a Smithsonian Agreement, which resulted in a 10% devaluation of the dollar and a realignment of exchange rates.
In 1976 a Jamaica Agreement was signed. The agreement reduced the role of gold in the international monetary system, acknowledged the system of 'floating' exchange rates, revised the valuation and possible uses of the SDR and authorized the sale of the Fund's gold reserves for the benefit of developing member countries.
Today the IMF describes itself as "an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty".