America's Money Machine

PART III / DEBACLE OF AN IDEA
The International Monetary Fund was set up to provide a reserve pool
of the currencies of the members and to make them available on application
to meet currency needs of indigent members, and thereby prevent
exchange fluctuations, and international currency crises. The significant
thing about the International Monetary Fund was that it restored to
sanctity the gold exchange system, first hallowed by the Geneva Conference
of 1922, but so thoroughly discredited thereafter by the worldwide
collapse of 1932.
The heart of the new gold exchange standard was the U. S. dollar,
which was equated with gold in the Fund's Articles of Agreement.
Let us say Country A (one ofthose nations now called "less developed"
or "developing") had a deficit in its international transactions-that is,
it was unable to sell abroad as much as it wished to buy abroad-and
needed money to pay its foreign creditors. Its own currency was unacceptable
to its creditors. It could, under the rules, apply to the Fund and
obtain dollars to tide it over, hopefully, until it could set its house in
order. In exchange for the dollars the Fund would receive currency ofthe
borrowing country in an amount equivalent-that is, theoretically equivalent-to
the dollars obtained. Obviously, the currency of Country A
would not be of equivalent value of the dollars received or the foreign
creditors themselves would accept Country A's currency in settlement of
debts owing, and Country A would not be under necessity ofapplying to
the Fund for aid.
The subordinate currencies were not equivalent mainly because their
central banks were unable, or unwilling, to deliver gold for their currencies
on demand, and importantly because many of them had no nominal
gold equivalents-that is, in the language of the Fund, no par values had
been established. One ofthe first tasks ofthe Fund was to get the member
countries to establish par values, or gold convertibility, for their currencies.
This required more internal fiscal discipline than most countries
were willing or able to exercise.
The Fund started business with a pool of $7.47 billion nominal value
of currencies subscribed by the participating members, of which $2.75
billion was subscribed by the United States. The United States, however,
was the only member country that maintained gold convertibility of the
dollar,* that is, that freely delivered gold at the statutory parity of $35
an ounce to foreign governments and central banks in exchange for
*International convertibility, that is. Since 1933 U. S. citizens have been unable to obtain
gold for their paper currency.