2016 Volume 58 Issue 3 Pages 9-18
This article aims to shed light on the role of the IMF (the Fund) in the establishment of the Bretton Woods monetary system. Previous studies argued that it was the Marshall Plan and the EPU that facilitated Western European reconstruction, monetary stability and exchange liberalization, while regarding the Fund as having failed to resolve the serious dollar shortage in the same period and accordingly lapsing into dormancy.
Contrary to the common view, however, primary sources show that the Fund’s Managing Director and leading staff members sought aggressively to intervene in the process of establishing an intra-European multilateral payment scheme. These efforts persisted even after the Marshall Plan and subsequent “ERP Decision” prohibited the Fund from providing finance to the Europeans. The Fund’s staff regarded the rise of the OEEC and the EPU as potentially undermining to the Fund’s prestige in the field of exchange liberalization.
As early as 1950, therefore, the Fund began considering policies that would prompt its members to remove their exchange restrictions. Attributing the prevalence of exchange restrictions to a worldwide dollar shortage, the Fund’s staff pointed out the need for international policy coordination and stressed the importance of tighter macroeconomic policies aimed at stabilizing international balance of payments. The Fund's emphasis on the need for austerity measures rested on the so-called absorption approach that was being formulated at the time in the Fund’s Research Department. Furthermore, the reform of the financing system undertaken under the leadership of Managing Directors Mr. Gutt and Mr. Rooth enabled the Fund to intervene in the macroeconomic policy-making of its member nations through its financing role.
Consultations on Article XIV began in March 1952, and the Fund began promoting its members’ monetary stability and exchange liberalization in accordance with its liberalization policies. Major Western European currencies returned to convertibility at the end of 1958, and in February 1961, the Fund’s European members transitioned to Article VIII status. It is evident that the Fund was impelled by the bitter experience of “dormancy” to extend its mandate from the relatively minor role of providing short-term finance to the dynamic one of implementing policy on monetary stability and exchange liberalization.
