The Bretton Woods System was created in 1944 in order to:
The Bretton Woods System made gold the ultimate reserve, but only the U.S. dollar was convertible into gold at a fixed rate and other currencies were pegged to the U.S. dollar. The pegged rate could be changed from time to time in the face of a fundamental disequilibrium.
To achieve its goals, the Bretton Woods agreement gave birth to two international institutions:
The IMF which started operations on December 27, 1945, with a membership of 39 countries, grew rapidly, and by 1993 included 177 countries. Although the former Soviet Union participated in the Bretton Woods Conference, it decided not to join. From Eastern Europe initially only Yugoslavia, Romania and Hungary joined the IMF. The reasons given for the reluctance of some of the socialist countries to join the IMF were related to
Following the collapse of the Soviet Union and the formation of the Common Wealth of Independent States, some former Soviet republics started joining the IMF. By 1994, Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan had joined the IMF.
The IMF was intended to play two major roles in the Bretton Woods System.
THE QUOTA SYSTEM
The IMF is financed by its members. Upon joining the IMF, a nation has to subscribe to a quota, which is based on its relative economic significance and the level of its international business activities. The size of the member's quota determine:
In 1944, the United States was assigned the largest quota, 31 percent. By October 10, 2002, this quota had decreased to 17.47 percent, or SDR37.15 billion. The quotas of Japan and Germany are 6.26 and 6.12 percent respectively, or SDR13.31 and SDR13.01 billion, while the United Kingdom and France had quotas of 5.05 percent each, or SDR10.74 billion, on October 10, 2002, when the dollar price of SDRs was pegged to a basket of currencies which contained US$0.5770, Euro 0.4260, ¥21, and £0.0984 or SDR1 = $1.322380.
Initially, upon joining the IMF and signing the Articles of Agreement, a member country had to pay 25 percent of its quota in gold (called gold tranche) and the remaining 75 percent in its own currency. Beginning with the year 1978, the Fund no longer required the payment of the reserve tranche in gold. Now, such payment could be made in "reserve tranche," that is, either in currencies acceptable to the IMF or in Special Drawing Rights(SDRs).
Under IMF rules, a member country could borrow from the IMF an amount equal to 25 percent of its quota in any given year. Any borrowing above this subscription requires the IMF's approval, and it is granted only for resolving a country's balance of payments problems.
VOTING POWER
The voting power is determined by 250 "basic votes" plus one vote for each SDR 100,000 of quota.
IMF CREDIT FACILITIES
(1) The Stand-By Arrangements (SBA):
The SBA is designed to address shrot-term balance-of-payments problems and is the most widely used facility of the IMF. A member country technically draws on this facility by using its own currency to purchase from the Fund other currencies or SDRs. The length of a SBA is typically 12-18 months.
(2) The Extended Fund Facility:
The EFF was established in 1974 to help countries address more protracted balance-of-payments problems with roots in the structure of the economy. The EFF provides for longer-term conditional borrowing beyond the Stand-By Arrangements, up to 100 percent of the member's quota annually and 300 percent cumulatively.
(3) The Supplemental Reserve Facility (SRF):
The SRF was established in 1997 to meet a need for very short-term financing on a large scale. The sudden loss of market confidence by emerging economies in the 1990s led to massive outflows of capital, which required loans on a much larger scale than anything the IMF had previously been asked to provide. Countries must repay the loan after a maximum of 2.5 years, but are expected to repay one year earlier. All SRF loans carry a substantial surcharge of 3-5 percentage points.
(4) The Contingent Credit Lines (CCL):
The CCL differs from other IMF facilities in that it aims to help members prevent crises. Established in 1997, it is designed for countries implementing sound economic policies, which may find themselves threatened by a crisis elsewhere in the world economy.
(5) The Compensatory Financing Facility (CFF):
The CFF was established in the 1960s to assist countries experiencing a sudden shortfall in export earnings or an increase in the cost of food imports caused by fluctuating world commodity prices.
(6) Poverty Reduction and Growth Facility (PRGF):
The PRGF was established in 1999 to provide conditional loans to Low-Income Countries at a concessional interest rate. Loans under PRGF are based on a Poverty Reduction Strategy Paper (PRSP), which is prepared by the country in cooperation with civil society and other development partners, in particular the World Bank. The interest levied on PRGF loans is only 0.5 percent, and loans may be repaid over a maximum period of 10 years.
SPECIAL DRAWING RIGHTS (SDRs)
Under the Bretton Woods System, countries' international reserves could consist of three assets: Gold, reserve currencies and reserve tranche positions. In 1967, a fourth reserve asset was created by the International Monetary Fund, named Special Drawing Rights (SDRs). SDRs are simply bookkeeping entries at the IMF in accounts for member countries and the Fund itself.
At first, SDR 1 = 1/35 ounce of gold = U.S.$1.00. Now, the SDR is valued on the basis of a currency basket; at present the basket is composed of the currencies of five major exporting countries. One SDR has the value of a basket containing 0.5720 U.S. dollars, 0.8000 French francs , 31.8000 Japanese yen , 0.0812 U.K. pounds, and 0.4530 German marks. This value is calculated daily on the basis of market exchange rates. SDRs were created and allocated in 1970s, 80s and 90s. There were over SDR 114.6 billion created and allocated as of April 30, 1993. The United States was assigned over SDR 26.5 billion in 1993.
Internet Applications
In order to access the IMF members' quotas and voting power, go to
http://www.imf.org/external/np/sec/memdir/members.htm
For all other information about the International Monetary Fund go to: