History and Purpose of IMF and World Bank
A model of international economic and monetary cooperation, the IMF and World Bank were created to serve as mediators in the post-World War II economic system. They were held responsible for the balance of trade, payments and financial flows. They have recently been under great criticism due to a quarter-century of financing schemes that have led to the ruination of emerging economies and unsustainable national debt. U.S. and British officials started working on post-war economic stability and development plans in 1942 (Edwin ). Keynes as well as White proposed creating organisations which would provide short-term aid of financial nature to countries with short-term balance of payments deficiencies; this support was designed to make sure that these nations did not adopt protectionist or predatory economic plans in attempt to optimise their balance of payments stance, which was the goal of both White and Keynes (Scott).
A fixed exchange rate system, which was viewed as more favourable to international commerce than floating exchange rates, was the goal of both schemes, although they differed significantly in key important ways. Due to this, from 1942 to 1944, bilateral and multilateral meetings of allied financial specialists were convened in attempt to agree on a single strategy. It was at the July 1944 UN Monetary and Financial Conference at Bretton Woods, New Hampshire, with the participation of delegates from 44 countries, that agreement was eventually obtained. Both the IMF and the World Bank were established at the Bretton Woods Conference. An important function of the IMF is to give short-term financial support to countries who are facing temporary balance of payments deficits, while also serving as a venue for discussion and collaboration. The following section discusses international monetary systems with reference to the approach of Keynes and Bretton Woods along with other economists (Helleiner).
Current economic theory was unable to explain the reasons of the severe global mic collapse or give an acceptable public policy response to jump-start output and employment during the Great Depression in the 1930s. Britain’s British economist John Maynard Keynes was instrumental in changing economic thought by overturning long-held beliefs that free markets would offer full employment— that everyone who needed a job could get one provided that they were be flexible in their salary expectations. Keynes’s theory, which bears his name, asserts that aggregate demand—measured as the amount of spending by consumers, firms, and the government—is the primary driving force in an economy. According to John Maynard Keynes, free markets do not contain self-balancing processes that lead to full employment. Government involvement by Keynesian economists is justified by public policies that aim to maintain full employment and stable prices. Debtor countries have limited options, as Keynes recognised. Only nations with a trade surplus have the power to modify their policies, thus they are the ones who must do it. For the creditor nations, he devised a clever method of encouraging them to invest their surplus funds back into the debtor economies (Monbiot).
A lack of general demand might lead to protracted periods of unemployment, Keynes claimed. Net exports are the total of four factors: consumption, investment, government expenditures, and net imports (the difference among what a country sells to as well as buys from foreign countries). Demand growth must originate from one of these four sources. However, when the economy is in a slump, falling consumer spending frequently dampens demand. Uncertainty can lead to a decrease in spending on discretionary items like homes and cars, which can have a negative impact on the economy as a whole. As a result of customers cutting down on their purchases, businesses may be forced to scale back their investment plans in response to dwindling demand. As a result, the government now has the responsibility of raising output. With regard to Keynesian economics and the business cycle, it is important for the government to intervene and control these fluctuations in economic activity (Davidson).
Criticisms of IMF and World Bank
A variety of governmental and private economic actions have an impact on aggregate demand. Macroeconomic results can be adversely affected by private sector actions, such as lower consumer spending throughout a recession. In other cases, government intervention is necessary, such as a fiscal stimulus package, to correct market failings. Because of this, Keynesian economics favours a mixed economy that is largely driven by the private sector but is supplemented by some government intervention. Labour shortages and surpluses occur often due to the delayed response of prices and wages to supply and demand changes. Changes in aggregate demand have the biggest short-term impact on actual production and employment rather than prices. Price changes, according to Keynesians, do not even affect output as much as they think they should since prices are very stable. If government expenditure, for example, rises but all other spending components stay the same, production will rise. When expenditure rises or falls, the output varies by a factor that is proportional to that change. This is a feature of Keynesianism. Fiscal multipliers over one indicate that a dollar increase in government expenditure will lead to a rise in production of more than one dollar.
These three economists alone do not lead to any policy recommendations. Keynesians believe that reducing the amplitude of the business cycle, which they rate as one of the most significant economic issues, should be the primary goal of policymakers. Rather than deeming imbalanced government budgets as a problem, Keynes favoured so-called counter – cyclical fiscal measures, which work against the flow of the economy. Some Keynesians propose budget deficits on labor-intensive infrastructural development to boost employment and keep wages stable during recessions. When there is a lot of demand-side growth, they would boost taxes in order to moderate the economy as well as prevent inflation. Monetary policy may also stimulate the economy by lowering interest rates, for example. A liquidity trap arises when advances in the money supply do not result in reduced interest rates, and so do not stimulate production and employment.
Since, as he stated, “In the long run, we are all dead,” Keynes suggested that governments should deal with issues now rather than wait for market forces to sort them out. For the avoidance of doubt, this does not imply that Keynesians propose monthly policy adjustments for the purpose of preserving full employment. To put it another way: people don’t trust governments to get the job done because they don’t know enough.
Accordingly, the nearly three decades that before and followed the Bretton Woods monetary accords are generally seen to be a period of relative stability, order, and discipline. It’s possible that not enough attention has been paid to the fact that it took about 15 years after the Bretton Woods Conference in 1944 before the system was fully operating and that there were symptoms of instability during that period. While Bretton Woods was an era of stability, it is more realistic to think of it as a transitional stage that led to the creation of the current international monetary system. 44 Allied nations convened at New Hampshire’s Bretton Woods Mountain resort in July 1944 to establish a new global monetary arrangement 1 Individual countries’ policy objectives were to be protected while the system was designed to enhance international trade. Intended as a replacement for the interwar financial system, which some believe led directly to the Great Depression and World War II (Steil).
Theoretical Basis of Keynesian Economics
When it came to international affairs, discussions were dominated by those of the United States and the United Kingdom at the time. Both countries had different goals after World War II, with Britain emerging as a significant debtor nation and the United States as the world’s largest creditor. As Harry Dexter White advocated for more stable exchange rates to help free up the global market for American goods, the U.S. side prioritised this goal. With John Maynard Keynes at the helm, the British government campaigned for more currency flexibility in order to improve the country’s balance of payments. Following the Bretton Woods agreement, the dollar was defined at 1/15th of an ounce of gold, and a number of countries’ currencies were tied to the dollar to varied degrees (Steil points out that the Bretton Woods accord was not fully implemented until 1961). Money’s main function is to enable the exchange of things, and fixed exchange rates would restore money to its core purpose. Individuals in countries are bonded together by trade because it encourages economic cooperation, and as a result, conflict is far less likely. To put it clearly, killing one’s commercial partners is a costly endeavour. In the current climate, it is indeed easy to lose sight of the importance of currency pegs, which is why politicians and economists alike lament the fact that China hasn’t done so (Oatley).
Both the International Monetary Fund and the World Bank were established as part of the Bretton Woods Agreement. In December 1945, these organisations were formally established, and they have endured the test of time as essential foundations of international capital finance and commerce. As a result of President Richard M. Nixon’s worry that the country’s gold reserves were running low, the dollar was deflated in 1971. The dollar’s convertibility to gold was temporarily halted due to a run on the gold reserves. 1 The Bretton Woods System had disintegrated by the year 1973. A country’s currency might thereafter be pegged to the price of gold or to any other form of exchange arrangement it wished. However, they might also choose to let the currency float freely and then let economic forces establish its value against other currencies, or they could connect it to another country’s currency or a currency basket.
It’s hard to overstate the significance of the Bretton Woods Accords. In the wake of World War I, the International Monetary Fund and the World Bank, two Bretton Woods institutions, aided in the reconstruction of Europe. As a result, both organisations have remained true to their original aims while simultaneously adapting to meet the needs of modern-day global governments (Shapiro).
The IMF’s mission was to keep tabs on currency exchange rates as well as designate countries in need of international monetary assistance. The World Bank, formerly known as the International Bank for Reconstruction and Development, was founded to handle monies available for aiding countries damaged by World War II. This century, the International Monetary Fund has 190 members and continues to promote global financial cooperation. In addition, the World Bank’s loans and grants to countries assist support these initiatives (Goldstein).
While Keynes was still living, his theories were investigated and questioned by a number of current philosophers, despite their considerable acceptance at the time. During that time, the emergence of stagflation weakened support for keynesian theory. Economists of the monetarist school contended that governments could not control the economic cycle through fiscal policy but that an effective use of money supply management could. It was also held by monetarists, who think that money can affect output in the near term but only create inflation over time. As a result, Keynesian economists increasingly embraced these criticisms and added to the original hypothesis a comprehension of money’s long-run objectivity — the notion that a transformation in the stock of money impacts only economic variables in the economy, like prices and wages, and has no impact on real variables, such as employment and output. A revival of Keynesian ideas followed the global financial crisis in 2007–08 (Woods). Many governments, particularly those in the United States and the United Kingdom, implemented economic policies based on this theory in the wake of the financial crisis. “If you were going to look to only one economist to grasp the issues facing the economy, there is little question that the economist would be John Maynard Keynes,” stated Harvard professor N. Gregory Mankiw in the New York Times in late 2008. The work of John Maynard Keynes, who died more than 50 years ago, is still the bedrock of current macroeconomics. According to Keynes, “Practical folks, who feel themselves to be completely immune from any intellectual influence, are frequently the slaves of some deceased economist.'” Only a dead economist can be more influential in 2008 than Keynes. Another cause of financial crises is an imbalance in trade between countries. A country’s trade deficit contributes to its overall debt burden. To compound matters, the greater their debt, the more difficult it is to establish a trade surplus. International debt has a devastating effect on people’s lives, the environment, and the global economy (Elhefnawy).
Conclusion
The demise of the Bretton Woods system is a topic of significant dispute in the financial community. Numerous reasons have been proposed, including the continuation of producing fiat money while retaining a gold peg, the budget deficit issues, the Vietnam War, and increased marginal tax rates, to name a few. Almost everyone can agree that the United States had an ever-increasing trade deficit and could never build trust on reducing it. As a result, the study of economic credibility would become a distinct subject, and “open” macroeconomic models like the Mundell-Fleming model would gain importance.
As a lender of last resort to Asian countries in need of foreign financing, the International Monetary Fund should have taught us that one size does not fit all when it comes to policy prescriptions. Thus, the type of capital rules a nation should adopt from the wide range of options available will depend on the individual circumstances. If I were to attempt to include all possible national capital restrictions in this short text, it would be arrogant of me. Regulating money flows is essential, but it is by no means adequate if we are to promote global prosperity. It’s hardly unexpected that currency (liquidity) crises have occurred so frequently in recent years in a world of uncertainty. If and when currency crises are acknowledged in an efficient market model, common opinion generally rationalises their existence as a necessary disciplinary tool. huge swaths of human endeavour remain unscathed.” In an open economy, we’ve enlarged Keynes’s notion of effective demand. It is indeed easy to see how variations in the exchange rate affect the overall level of demand for locally produced goods in a free market since they affect exports and imports, interest rates, and domestic investment. As a result of Keynes’s premise of effective demand, (1) central currency controls are needed, whereas (2) international accords lay the primary responsibility for fixing international payments imbalances on the creditor countries are essential (s). Only then would Keynes’ “moderately conservative” theory guide the way to a golden period for the twenty-first century’s global economic system.
References
Brett, Edwin A. The world economy since the war: the politics of uneven development. Greenwood, 1985.
Davidson, Paul, ed. Post Keynesian macroeconomic theory. Edward Elgar Publishing, 2011.
Elhefnawy, Nader. “What is Centrism?”: An Examination of Centrism as a Conservative Political Philosophy.” (2020).
Goldstein, Morris. “The IMF as Global Umpire for Exchange Rate Policies.” C. Fred Bergsten and the World Economy (2006): 313-32.
Helleiner, Eric. “Reinterpreting Bretton Woods: international development and the neglected origins of embedded liberalism.” Development and Change 37.5 (2006): 943-967.
Monbiot, George. Lord Keynes really did propose the International Monetary Fund. The Guardian. 2018. https://www.theguardian.com/commentisfree/2008/nov/18/lord-keynes-international-monetary-fund
Newton, Scott. “A ‘visionary hope’frustrated: JM Keynes and the origins of the postwar international monetary order.” Diplomacy and Statecraft 11.1 (2000): 189-210.
Oatley, Thomas. International political economy. Routledge, 2018. Pp 340-346.
Shapiro, H. “A Prescription For Progress.” Fast Track: A Legal, Historical, and Political Analysis. Brill Nijhoff, 2006. 125-160.
Steil, Benn. “The Battle of Bretton Woods.” The Battle of Bretton Woods. Princeton University Press, 2013.
Woods, Ngaire. “The globalizers.” The Globalizers. Cornell University Press, 2014.
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