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11 29 2015 | by Victor Xing | Central Banks

What is the difference between IMF, World Bank and FED?

The Bretton Woods organizations (IMF, IBRD), then and now

Both the IMF and International Bank for Reconstruction and Development (IBRD), which is now part of the World Bank, were created as a result of the 1944 Bretton Woods Conference.  The conference itself was to establish a post war international monetary system with economist John Maynard Keynes as one of the principal architects.  This ushered in the “Bretton Woods Era” that lasted until 1971.  During this period, major currencies were pegged against the dollar (at the insistence of the U.S.), with the dollar convertible into gold.

Bretton Woods Conference - the creation of IMF and World Bank
Bretton Woods Conference

Political horsetrading during this process created a legacy which IMF managing directors are traditionally European (but more often than not French, please see International Monetary Fund – Managing Director), and the World Bank is agreed to be a U.S. led institution with a U.S. citizen as president (World Bank list of presidents).

The IMF was established with the mission to oversee the fixed exchange rate arrangement from the Bretton Woods Conference, provide short-term capital to aid balance of payments, and to provide capital investments for economic growth.  Not knowing the U.S. would unilaterally terminate convertibility of the U.S. dollar to gold in 1971 to end the Bretton Woods era, the IMF proceeded to create the Special Drawing Rights (SDRs) in 1969 to support the Bretton Woods fixed exchange rate system (at the time economists were concerned about insufficient dollar liquidity, but post 1971 expansionary U.S. monetary policy eventually resolved the liquidity issue), and the new international reserve asset would fall under the auspices of the IMF.  Please see Special Drawing Rights (SDRs).

The IBRD was launched with the objective of financing the reconstruction of European nations following the second World War.  This function was later superseded by theMarshall Plan, and the World Bank subsequently shifted its focus to developing nations from Europe.  The World Bank’s objectives were later refined into its official goal ofreduction of poverty, promotion of foreign investment and international trade and to the facilitation of capital investment.  Mission scope in recent years also included environmental initiatives.

Some of the World Bank’s practices were questioned in the past, as critics argued that the institution had used loan assistance as a leverage to achieve political objectives.

The first country to receive a World Bank loan was France. The Bank’s president at the time, John McCloy, chose France over two other applicants, Poland and Chile. The loan was for US$250 million, half the amount requested, and it came with strict conditions. France had to agree to produce a balanced budget and give priority of debt repayment to the World Bank over other governments. World Bank staff closely monitored the use of the funds to ensure that the French government met the conditions. In addition, before the loan was approved, the United States State Department told the French government that its members associated with the Communist Party would first have to be removed. The French government complied with this diktat and removed the Communist coalition government. Within hours, the loan to France was approved.

Yet, political interference lived on.  U.S. and Japan, the dominant powers over World Bank and the Asian Development Bank have been trying to prevent allies from joining China’sAsian Infrastructure Investment Bank

The U.S. allegedly tried to keep Australia and South Korea from becoming prospective founding members, after they expressed an interest in it.  However, both Australia and South Korea applied to join the bank in March 2015.

In early March 2015, the United Kingdom’s Chancellor of the Exchequer, George Osborne, announced that the UK had decided to apply to join the Bank, becoming the first major Western country to do so. The announcement was criticised by the U.S. Obama Administration. A US government official told Financial Times, “We are wary about a trend toward constant accommodation of China, which is not the best way to engage a rising power.” The official further stated that the British decision was taken after “no consultation with the US.”

Brookings also acknowledged the political forces behind the World Bank and the ADB:How will the United States respond to AIIB’s expanding membership?

But the United States and Japan remain on the outside looking in. As the two dominant powers in the World Bank and the ADB, Washington and Tokyo are clearly wary about ceding ground to Beijing. Both states repeatedly declare that they want to fully involve China in building a 21st century international order; the prospects seem more promising in the global economy than anywhere else. However, by maintaining their distance from the bank, American and Japanese responses seem problematic at best and churlish at worst. They also fuel Chinese suspicions that the United States and Japan are unprepared to accord China international standing commensurate with its increased economic weight.


Federal Reserve and its monetary policy independence

Despite the Federal Reserve’s controversial beginning and its “checkered past” of helping the Treasury Department finance the war and to monetize the nation’s debt obligation, theFED has managed to maintain its monetary policy independence free of political interference since the 1951 Treasury-Federal Reserve Accord.

Moreover, the FED is focused on its Congressional mandated objectives.  Its policies are macroeconomic in nature with a strong emphasis on managing the nation’s money supply (funding cost) and fine tuning financial conditions (transmission mechanism between policy tools and effects on the real economy).  Unlike the IMF and World Bank’s global mandates, the FED’s responsibilities rest purely on the U.S. economy.

Next article11 28 2015 | by Victor Xing | Central Banks

What is FED Chair Yellen’s monetary policy?