Reflections on the International Monetary Fund
by Lawrence J. McQuillan

July 3, 2000 [ Copyright © 2008 by the Board of Trustees of Leland Stanford Junior University ]

IMF loans are unnecessary when governments maintain floating exchange rates.

The International Monetary Fund (IMF) was created in 1944 to supervise an international system of currency exchange rates, indeed setting forth to stabilize exchange rates. Each member country was instructed to declare a value for its currency relative to the U.S. dollar, which, in turn, was tied to gold at $35 an ounce. Only with IMF permission could a country alter its exchange rate by more than 1 percent of the declared value. President Nixon ended this system of "pegged" exchange rates in 1971 by refusing to sell gold to other governments at the stipulated price. Since then, each country has been permitted to choose the method—floating, fixed, or pegged—it uses to determine its exchange rate; the IMF lost its authority to regulate exchange rates.

The IMF was also created to occasionally lend foreign currencies, short term, to countries with balance-of-payments deficits—countries that have more foreign currency leaving their country than entering. This situation does not arise, however, in countries with floating exchange rates because market-determined exchange rates properly regulate the flow of foreign currency into and out of a country. Thus, IMF loans are unnecessary when governments maintain floating exchange rates, an option since 1971.

So the fund's original mission effectively ended in 1971. But it quickly reinvented itself as a financial medic to developing countries by providing subsidized long-term loans, with strings attached, to governments that mismanage their economies. IMF loans to countries in distress have risen substantially in real terms. Long-term dependence on such support has also risen. Ninety-five countries have relied on IMF assistance for ten years or more—a substantial fraction of the 182 member countries—yet there is no consensus among economists that IMF lending programs improve economic conditions in borrowing countries. In fact, evidence demonstrates that the IMF exacerbates problems.

Over the past decade, the IMF has committed tens of billions of dollars to Mexico, East Asia, Russia, and Brazil, with the understanding that foreign creditors would essentially be insured against default since countries in distress pay their outstanding liabilities using IMF funds. This arrangement has signaled to international lenders that the IMF will likely bail them out if their loans go bad, causing lenders to approve riskier loans. In Russia, IMF funds have financed the oligarchs' capital flight but IMF programs have not improved Russia's economy. Still, Russia is considered too nuclear to fail, and throwing money at a bad situation has unfortunately been judged as the best approach, even though it has been counterproductive and has saddled ordinary citizens with an enormous debt burden.

The IMF is obsolete, unnecessary, and even harmful. IMF programs encourage reckless global investments and unsound economic policies that contribute to global financial chaos. It is time to look to market-based alternatives that would forestall future global financial meltdowns. Floating exchange rates would prevent foreign-currency crises. Internationally accepted accounting practices and unfettered financial markets would coordinate global capital flows. Sound institutional reforms would promote investor confidence and self-sustaining economic growth.


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McQuillan Lawrence J., “ Reflections on the International Monetary Fund, “ Hoover Institute of Public Affairs, July 3, 2000 website