Boughton: From Suez to Tequila

Boughton, JM. 2000. From Suez to Tequila: IMF as Crisis Manager. The Economic Journal 110: 273-291.

This paper explores the changing role of the IMF. It was initially created, in 1944, to provide resources in a short-term fashion to shore up economies.

"What brought Mexico to seek the assistance of the Fund was a formerly latent balance of payments problem that swiftly became manifest in response to a financial crisis, which shall be defined here as a sudden and catastrophic loss of net international assets that makes continuation of the existing policy regime impossible" (275).

The Fund was originally created in a world of limited capital mobility. That world clearly no longer exists in the same way, as capital movement is much less restricted.

"During the first decade of the IMF's life as a financial institution, what little lending the Fund did was aimed at helping countries establish currency convertibility for current account transactions at fixed exchange rate parities" (279).

In 1956, Egypt required the Fund's first major allotment of capital. This occurred because the Egyptian government nationalized the Suez canal, and French, British and Israeli governments attacked. Each of these four countries approached the Fund.

"The capital accounts as an independent force became a more general issue in the early 1960s, after most industrial countries had reestablished convertibility for current account transactions. When countries with the most advanced financial systems began dismantling capital controls, the Fund treated it as a welcome development and thus began to distance the institution further from the view that had prevailed at Bretton Woods" (281). This loosening of capital controls caused tension, eventually leading to the collapse of the Gold Pool, the institution of developed countries that attempted to keep the price of gold at 35$ an ounce.

After the collapse of the Gold Standard, in 1971 with Nixon separating the dollar from gold and in 1973 with the exchange market crisis, the world of international finance changed drastically.

"The major turning point both for the international financial system and for the crisis-management role of the IMF came in 1982" (284). Banks stopped lending.

The IMF response was large, and paved the way for IMF responses throughout the 1990s.