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.
