The IMF as the linchpin of the fixed exchange rate regime The International Monetary Fund (IMF) was set up in 1944 by the victorious allied powers at Bretton Woods, N.H. It was designed to serve as the linchpin of the post World War II international monetary system based on fixed exchange rates. It was well-understood that there could be no fixed exchange rate system without a gold anchor. Thus gold was retained as a bedrock, but multiple credit expansion was permitted, even encouraged. The U.S. dollar was to be treated as equivalent of gold. This meant that gold was double-counted in the system. Member countries were called upon to subscribe their quota of IMF capital in gold, called the first tranche, which set the limit of each member’s line of credit with the IMF called drawing rights. A second tranche was also available to members in good standing in case of emergency (read: in case of a run on the central bank). The system worked tolerably well for some 25 years. But it was flawed on the strength of double-counting the gold reserve. Every time a government imposes on the market two different standards of value to be enforced as equivalent, the market hits back through the operation of Gresham’s Law. The postwar international monetary system was no exception to this rule. The bad penny (the dollar) drove the good penny (gold) out of circulation. Gold hoarding by governments an
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