The International Monetary Fund

The International Monetary Fund (also called as IMF) arbitrage support points provided a narrower band for spot movements than the gold export and import points under the gold standard. It might appear that, under the original IMF agreement, the acceptable band of spread in exchange rate fluctuations amounts to a total of 2 percent: 1 percent in either direction.

However, the International Monetary Fund rules stipulated that those support points applied only to exchange rate movements with respect to other currencies than the dollar. It might, for example, be possible for the French franc rate to have been at its lowest dollar support point while the German mark was at its highest.

The spread between the franc and the mark could then drop to its lowest support point and the franc and the mark would then be 2 percent. Under the original IMF rules, the mark could then drop to its lowest support point and the franc rise to its highest for an additional 2 percent variation from par. That would give a total possible exchange movement in a range of 4 percent.

The provisions relating to parities and limits to exchange rate fluctuations, as well as certain other features of the original IMF agreement, were designed to prevent a recurrence of the competitive devaluations of currencies that took place during the 1930s.

In addition, the agreement stipulated that the members were to avoid restrictions on current payments (trade in merchandise, services including income, and unilateral transfers), as well as discriminatory currency practices.

The British economist Keynes, in the pre-Bretton Woods debates apparently favored the creation of an international central bank or a national central banks' bank. On the other hand, Harry White, the American Treasury official, in those same debates, did not favor such an institution, and it was not adopted at the Bretton Woods conference.

An international central bank would have raised some important political questions, some of which revolved around the surrender of a country's control over its money to an institution responsible to such a large group of members that it would be effectively responsible to none.

However, the lack of an international central bank made it difficult for many nations to trade at customary levels during periods of temporary balance of payments deficits and to protect their rates of exchange.

Such countries had no institution to which they could turn for temporary short-term loans to tide them over the difficult periods. As a result, there was frequent recourse to exchange controls and other barriers to trade and a consequent decrease in world commerce.

Unfortunately, for political reasons, many countries have not taken the internal steps necessary--- deflation, price controls, and income policies--- to combat balance of payments deficits in a more constructive way.

Partners: | eucasino