RutgersModelUnitedNations 5 1971-1976: IMF Shifts in Purpose In 1971, United States President Richard Nixon decided to end direct exchange of the U.S. Dollar for gold, effectively ending the gold standard. The gold system was increasingly unstable throughout the 1960s, and the inflation of the Dollar, which was pegged to the price of gold, sped up as market forces pushed up the prices. Since the IMF used the dollar as its reserve currency, this effectively ended the Bretton Woods System. It took several years for most countries to change over to floating currencies, but it was the effective end of the gold standard worldwide. The ensuing financial instability was known as Nixon Shock, and greatly affected the IMF’s role in global finances. 5 The IMF in its initial capacity had now become a useless entity, as it was originally established to monitor exchange and inflation rates to keep global economies on an even keel. It was able to do its job for some time, but after the United States shut down the conversion from dollars directly to gold, the world’s shift to floating currencies eliminated the need for the IMF as originally conceived. Floating currencies rely on market forces and prices and have little need to be regulated, and as such, the IMF’s days as a regulatory body ended with the shift from the gold standard. The IMF was still an enormous and wellfunded institution, however, rather than shut down its operations, it began to shift their focus. The IMF after 1971 became more oriented towards the development of economies and providing stability in the more fragile and complicated economies of developing countries. In 1974, The IMF established a fund to help countries to deal with oil induced inflation; this was their first foray into combating floating currency inflation. 6 In 1976, the IMF sold one third of its former gold reserves and used the proceeds to establish a trust fund for the development of poorer countries, marking the first foray into development banking. 7 These shifts in focus brought the IMF to greater prominence in 5 Bruce Muirhead, American Review of Canadian Studies; Autumn2004, Vol. 34 Issue 3, p439-462 6 Anthony Scaperlanda, Kyklos Vol 31, 1978679-690, Academic Search Premier. 7 Ibid.
RutgersModelUnitedNations 6 the international community; formerly a regulatory body observed by few, the Fund came under much more scrutiny as it took a more public role in helping the developing world. 1994: Mexican Peso Crisis The Mexican Peso Crisis was the first in a string of many financial crises in the mid-1990s and early 2000s. In 1994, the Mexican government attempted to devalue its currency per IMF recommendation in order to help their industries become exporters with the aid of the North American Free Trade Agreement (NAFTA). Once the Mexican government set off this process, however, it had no ability to control it, and the peso’s value was cut by almost half. The ensuing severe inflation kicked off a recession in the Mexican economy. The Mexican government, who had neglected to open a line of credit with the IMF before the devaluation announcement, quickly scrambled for assistance and the IMF, who still dealt with the regulation of currencies, was quick to step in. Timely and well-structured loans from the United States and the IMF helped Mexico alleviate the full depth of the crisis by rebuilding the Mexican reserves and allowing their financial institutions to stay viable even in the wake of a financial panic. 8 1997: East Asian Financial Crisis When on 2 July 1997 Thailand removed their exchange rate peg from the rising US dollar, the devaluation of the baht caused the East Asian Financial Crisis to sweep through much of Asia. The IMF and World Bank had been closely involved with Thailand dating back to the mid-1980s and viewed the country as a model of success, ignoring the inflation that accompanied Thailand’s huge amounts of growth and capital gains. The signs of an impending economic crisis in Thailand were evident because private investment far outstripped private savings, but outside observers thought the government generating a budget surplus showed that the imbalance in private spending 8 Joseph A. Whitt Jr., The Mexican Peso Crisis, The Federal Reserve Bank of Atlanta, http://www.frbatlanta.org/filelegacydocs/J_whi811.pdf Date Accessed 3/36/08