The IMF has never been as important, or as lost

The International Monetary Fund's role has morphed several times since its founding. Now it is in the driver's seat on Europe, confronting the vast challenge of stagnating and ageing developed economies.

The Australian Parliament back in 1945 debated the wisdom of joining the Bretton Woods agreement that involved the creation of five international financial institutions. Led by the World Bank and International Monetary Fund, the Bretton Woods institutions would regulate and supervise the international banking system. Put simply, these institutions were to make sure we would never again have a financial crisis such as we experienced through the Great Depression of the 1930s.

Eddie Ward, the long-serving Labor member for East Sydney, opposed the bills, arguing: "Bretton Woods would enthrone a world dictatorship of private finance, more complete and terrible than any Hitlerite dream; destroy Australian democracy; pervert and paganise Christian ideals and endanger world peace."

Last weekend the IMF released its World Economic Outlook survey. Ward was wrong, again. Far from being the ogre institution predicted by Ward, the IMF that emerged from the pages of its latest outlook was lost and confused - discombobulated even.

The IMF's role has changed since the days when it was regarded by the Eddie Wards of the world as being part of a global conspiracy responsible for the Great Depression. Back then its most important role was supervising the foreign exchange system to ensure currencies traded in a fixed relationship to other members of the IMF's universe. Should a currency be under market pressure to devalue, the IMF stood ready to maintain fundamental equilibrium. It did so by prescribing the appropriate fiscal policies. If needed, funds would be advanced.

That role came to an end in the early 1970s when US president Richard Nixon simply closed the gold window, refusing to sell France US dollars at the fixed rate of $US35 to the ounce.

With the floating of the world's currency exchange system, the IMF had to find itself a new job. An opportunity opened up almost immediately when the oil producers of the Middle East created a cartel in 1960 that quadrupled the price of crude. Global markets were soon awash with petro-dollars looking for safe havens and steady interest returns.

While the private banks competed for the petro-dollar business, the IMF found little competition for being the lender of last resort on the buy-side of the oil market. All this liquidity soon created inflationary pressures around the globe with consequential impact on exchange rates.

In 1979 oil prices were trebled, thereby enlarging the flood of petro-dollars, many of which found their way, with the particular help of Citibank, to Latin America. Citibank was run by a Will Rogers-style banker called Walter Wriston, who explained his bold Latin American lending with the remark: "Countries don't go out of business … and that's very different from a company."

 

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Max Walsh

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Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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