IFI Law - Book Chapter 2 Flashcards
What were the three contributing factors that signaled the need for a new international financial order after the Second World War?
A1: The first factor was the collapse of the gold standard, emphasizing the importance of a stable currency regime and the negative consequences of a lack of policy coordination among states. This led to mercantilist policies and mutual harm in terms of job losses, income declines, and social disruptions.
A2: The second factor was political changes following the First World War, with a loss of trust in pre-war elites. The war’s impact increased support for social welfare and improved working conditions, as well as the rise of communism and fascism. These changes made a return to pre-war monetary arrangements unlikely.
A3: The third factor was the acknowledgment, both by the United States and its allies, of the U.S. as the pre-eminent economic power. This recognition set the stage for the U.S. to play a leading role in shaping new international financial arrangements after the war.
Why did most of the attention at the conference focus on the International Monetary Fund (IMF), and what were the key concerns of countries like the US and the UK regarding the international monetary system post-World War II?
Most attention at the conference focused on the IMF because many countries, including the US and the UK, were determined to avoid the trade and monetary policies that had contributed to the Great Depression of the 1930s. They sought to establish a new basis for the international monetary system. Key concerns included preventing protectionist policies, avoiding currency devaluations, and ensuring reasonably stable exchange rates.
Why was the notion of establishing an international organization to oversee monetary arrangements considered novel, and what concerns did participating delegations have about ceding sovereignty to an external entity?
Establishing an international organization to oversee monetary arrangements was novel, and many participating delegations lacked experience in delegating oversight of their exchange rate policy to an external, potentially independent actor. This raised concerns about ceding some of each state’s sovereignty to an outside entity.
Why was there relatively less focus and controversy surrounding the International Bank for Reconstruction and Development (IBRD) compared to the International Monetary Fund (IMF) during the conference?
The IBRD, focusing on funding development and reconstruction, was a more familiar concept to the delegations, as they had experience borrowing from banks for development projects. This familiarity made it easier for the delegations to reach agreement on the arrangements for the IBRD, in contrast to the more novel concept of an international organization overseeing monetary arrangements like the IMF.
What unresolved issues remained at the end of the Bretton Woods Conference regarding the IMF and the IBRD?
Unresolved issues included the roles of the executive directors, the nature of conditions (if any) attached to IMF financing, and the location of the headquarters for both institutions.
What was the primary purpose of the International Monetary Fund (IMF)?
The IMF was established as a fund to which each member state contributed resources. Member states were entitled to temporarily withdraw resources to address their balance of payments problems, provided they complied with the obligations specified in the IMF’s Articles of Agreement. The balance of payments problem arises when a country faces challenges in maintaining equilibrium in its international transactions.
What role does the quota play in the functioning of the IMF, and how does it affect member states?
The quota plays a central role in the IMF, determining the size of each member state’s contribution, the amount of financing it can obtain, and the state’s share of total votes. Member states with larger quotas have more votes, and the Articles provided for majority voting. This arrangement meant that states, regardless of size, had to accept certain IMF policies and procedures, requiring them to surrender some sovereign decision-making prerogatives to the organization.
How did the Bretton Woods system differ from the gold standard, and what were the key features of the new system introduced by the IMF?
The Bretton Woods system replaced the gold standard by requiring countries to set the par value of their currency in terms of the U.S. dollar, which was fixed in terms of a set amount of gold. Currencies could fluctuate within a limited band around the par value, and significant changes required consultation and approval from the IMF. The system aimed to encourage stable currency values and offered financial support to countries facing balance of payment problems.
What were the two carrots offered to member states to encourage them to adopt and maintain a stated par value for their currency under the IMF agreement?
The first carrot allowed member states, upon joining the IMF, to delay adopting a par value until their economies stabilized.
The second carrot was the promise of financial support from the IMF for countries facing balance of payment problems, with the amount of support based on the member state’s quota. Conditions attached to this funding were an unresolved issue at Bretton Woods.
What were the two important points about the IMF regarding member states’ obligations?
A1: Member states agreed to allow the IMF to conduct regular surveillance over their monetary policies to ensure consistency with maintaining their currency’s par value. The IMF could offer advice during these surveillance missions, and the country was free to use it as it saw fit.
A2: Monetary commitments made by member states focused on their current transactions. States were obliged to allow free payments for all current transactions, including unrestricted international trade transactions. However, states retained the right to impose restrictions on capital transactions, primarily referring to longer-term productive investments.
What does on par value mean?
The term “on par value” typically refers to the concept of maintaining or fixing the value of a currency in terms of another currency or a standard, such as gold. In the context of international monetary systems like the Bretton Woods system, countries participating in the system were required to set a specific value, known as the “par value,” for their national currency in terms of a reference currency, often the U.S. dollar.
What three categories of accounts exist in a country’s balance of payments?
Current Account
Capital Account
Financial Account
What is the primary focus of the current account in a country’s balance of payments?
The current account focuses on the flow of goods, services, income, and current transfers between a country and the rest of the world. It includes international trade transactions, income from investments, and current transfers like remittances.
Can a single transaction be simultaneously recorded in both the current account and the capital account of a country’s balance of payments?
No, a single transaction is typically classified either in the current account or the capital account, but not in both. These categories are considered mutually exclusive in the context of international economics.
What types of transactions are included in the capital account of a country’s balance of payments?
The capital account involves the movement of financial assets, including long-term investments and capital transfers, between a country and the rest of the world. Components include foreign direct investment, portfolio investment, and capital transfers such as debt forgiveness.
In addition to the current account and the capital account, what other category is commonly included in the presentation of a country’s balance of payments?
In addition to the current account and the capital account, the financial account is commonly included in the presentation of a country’s balance of payments. The financial account provides details about changes in ownership of financial assets and liabilities.
In the context of the IMF, what were the rights and obligations of member states concerning current and capital transactions?
Rights and Obligations for Current Transactions: Member states were obligated to allow free payments for all current transactions, including unrestricted international trade transactions. This aimed to ensure a stable environment for international trade, and member states were required to facilitate the flow of funds associated with current transactions.
Rights and Flexibility for Capital Transactions: Member states retained the right to impose restrictions on capital transactions, which involve longer-term financial movements, such as investments in stocks, bonds, and real estate. This flexibility allowed states to control the movement of capital in and out of their country, especially for investments with a longer duration.
What was an important issue left unresolved at Bretton Woods regarding IMF financing, and how did the IMF address this issue in its early operations?
An important issue left unresolved at Bretton Woods was whether conditions would be attached to IMF financing. In its early operations, the IMF decided that it would need to attach conditions to increase confidence that the state would be able to repay the IMF in a timely manner.
What does the obligation of member states to allow free payments for current transactions encompass, and what right do states retain in this context?
Member states were obliged to allow unrestricted payments for all international trade transactions and other payments due within the current period, typically a year. However, states retained the right to impose restrictions on capital transactions, primarily referring to productive investments with a duration longer than the current period.
What was the primary purpose of establishing the International Bank for Reconstruction and Development (IBRD) after the Second World War?
To finance the reconstruction of Europe after the Second World War and to support the development of its poorer member states.
Each participating state would purchase shares in the bank, and the number of shares would be determined by a formula similar to that used for IMF quotas.
While each share carried an equal vote in IBRD affairs, member states with different numbers of shares had varying sizes of votes.
How did the voting structure work within the International Bank for Reconstruction and Development (IBRD)?
In the IBRD, each share held by a participating state granted an equal vote in the affairs of the bank. However, because member states had different numbers of shares, their votes varied in size. This structure ensured representation based on financial contributions.
How did the IBRD differ from the IMF in terms of financing and project funding? (important)
Unlike the IMF, which provided general financing to the budgets of its member states, the IBRD had a more specific focus. It was authorized to make loans and provide guarantees for projects aimed at raising the productivity of labor and improving the standard of living in the member states where it operated.
Under what circumstances was the IBRD authorized to provide loans or guarantees, and how did it act in relation to other sources of finance?
The IBRD was authorized to provide loans or guarantees for projects that contributed to raising productivity and living standards in its member states. However, it was expected to do so only in situations where the member state was unlikely to obtain financing from other sources. The IBRD, acting as a lender of last resort for these projects, was not intended to compete with other sources of finance unless in special circumstances.
How did the U.S. financial community’s stance differ regarding the International Bank for Reconstruction and Development (IBRD) compared to the IMF during the ratification process?
The U.S. financial institutions were less opposed to the IBRD than the IMF. Some expressed support for the IBRD ratification due to two reasons.
The IBRD was expected to act primarily as a guarantor of loans, supporting lending transactions by financial institutions. It was also expected to fund projects that might not be funded otherwise, indicating that it would not compete directly with financial institutions.
The familiarity of the financial community with a government-sponsored bank, the U.S. Export–Import Bank, and the similarity of the IBRD’s lending transactions to those of the Export–Import Bank contributed to their confidence in the IBRD.
