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A quick summary of chapter 2. Have a quick look if you are interested in the International Monetary Fund (IMF) since this chapter is devoted on the IMF’s history and its development over the years. 

I highly recommend this book if you are interested in global financial crises. 

Part 1: IMF Headquarters and the Induction Course.

-          The IMF headquarters in located on 19^th Street in downtown Washington, three blocks west of the White House.

-          Every year the IMF extends positions to about 100 economists, many of them are recent recipients of doctorates from the world’s most prestigious graduate schools – Harvard, Stanford, MIT, Chicago, Cambridge, Oxford, and the London School of Economics.

-          The heart of IMF’s staff are its economists.

-          When new recruits join the IMF, they receive a two week training course in the IMF Institute.

-          In addition to lectures on technical economic issues, the students take a course called “Financial Programming”.

Part 2: “Financial Programming”

-          This course is designed to teach students how the IMF helps countries in trouble.

-          The book describes some deficiencies of the program, as dictated by Mohsin Khan, the Institute’s director.

-          The course starts by teaching students how the IMF helps countries that have large current account deficits by extending them loans in exchange for a program designed by the IMF to help the country get back on its feet again.

-          The course then teaches students how to design such a program for countries. Again, these countries usually have a current account crisis i.e. imports are much higher than exports and the country is running out of hard currency to facilitate more foreign transactions. Examples of such strategies are:

o   Raising taxes and lowering government spending in order to lower the budget deficit.

o   Raise the interest rate and limit the growth of the money supply.

o   Currency devaluation.

-          A quote taken from one of the IMF textbooks describing such strategies: “These policies often focus primarily on containing aggregate demand”.

-          But these economic theories do not apply to today’s conditions. Khan states: “It’s not clear our economic theory works.”

Part 3: New Type of Financial Crises

-          In today’s world, crises can erupt for reasons quite different from the traditional cases of a country running a large current account deficit.

-          Capital is more globally mobile than ever before, and sudden withdraws of foreign capital from a country spurs other types of problems for the country. These withdrawals occur for various reasons, but often as a result of a weakness in the country’s banking system.

-          This type of new crises can be referred to as “capital account crises”, rather than “current account crises.”

-          IMF’s traditional remedy would be deep budget cuts and the likes.

-          Khan also states that the IMF staffers are heavily oriented by macroeconomics, while lacking the necessary expertise relating to banking issues.

-          Khan reveals that the institute taught nothing related to issues in the financial sector prior to the crises that erupted in Asia back in 1996.

Part 4: IMF Internal Disputes

-          The IMF is a tight-knit, hierarchical organization.

-          Usually when there is a mission to a troubled country, a team would go to the country’s officials with a predetermined program documents prepared by the chiefs at the IMF. If the country has great objections to the program, then the issue would be debated privately within the IMF.

-          The book states that: “Revealing internal differences of opinion to outsiders constitutes a serious breach of discipline, because of the Fund’s need to convey (both to the country and to the markets) the impression that it knows what it is doing.

-          Even past employees of the Fund reveal that internal disputes are very common within the organization.

-          However, superiors in the Fund usually have the last say in what happens.

Part 5: Managing Director and the First Deputy Managing Director

-          At the very top of the IMF’s hierarchy are two people who have been placed in their jobs by the world’s most powerful governments:

o   The Managing Director, who is usually a European choice.

o   And the First Deputy Managing Director, who is an American choice. 

-          Stanley Fischer (1994-2001), Deputy Managing Director

-          Michel Camdessus (1987-2000), Managing Director

-          The role of the IMF staff and top management, important as they are, is only part of the story. As an international organization, after all, the IMF has political masters.

Part 6: The Twenty-four Executive Directors

-          The twenty four executive directors meet as often as three times a week to pass judgment on every major Fund decision. The managing director and the first deputy managing director chair the session.

US

17.10% of the votes

Japan

6.14%

Germany

6.00%

Africa

3.22%

Arab Countries

2.95%

Latin America

2.46%

-          The G7 countries control nearly half the votes

Part 7: The Birth of the IMF

-          The IMF was initiated by the Secretary of Treasury Henry Morgenthau Jr. on December 14, 1941. He directed his assistant Harry White to prepare a memo on the establishment of a fund for the Allied powers that “should provide the basis for postwar international monetary arrangements.”

-          That memo began a process in which White would join Britain’s John Keynes, the 21^st century most influential economist, to draft the plan for the creation of the IMF and the World Bank that was approved in 1994 at a conference in Bretton Woods.

-          White favored a system in which currency would be fixed, with an international fund aimed at maintaining those exchange rates. He also favored controls on international capital and restricting investors/bankers from moving money across borders. Freely flowing capital, he believed, offered few benefits and threatened to reignite the monetary chaos that lead to the great depression.

Part 8: IMF during the Bretton Woods Period

-          The “Bretton Woods System” had as its anchor the US dollar, whose value back then was pegged to gold. (1 Ounce of gold = $35). All other members of the IMF were required to set the values of their currencies in terms of gold or dollar. If a country wanted to change its foreign exchange rate by more than 1%, it had to obtain the IMF’s consent. Movement of private capital across national borders was highly restricted.

Part 9: The IMF after the 1970s

-          In the 1970s, the US fell victim to inflation, which made it abandon its pegging arrangement with the gold. This destroyed the role of the dollar as an anchoring currency. In 1973, the world’s major currencies began to move freely against each other.

-          IMF still acts as a credit union for countries. Each member has to deposit money “quota”. 25% in gold or hard currency. Trouble= can withdraw the 25%, and if the country implements an IMF program, it can withdraw 75%. More can be given in case of a real emergency.

Blustein, P. (2001). The chastening: the crisis that rocked the global financial system and humbled the imf. (pp. 19-50). New York, NY: Public Affairs