The IMF moved from planning to active lending and currency support as countries rebuilt after World War II. This was a key step toward making the Bretton Woods rules workable, since members could now request help for balance-of-payments (BoP) shortages—problems paying for imports and external obligations.
France became the first country to use IMF resources, drawing on the Fund to address external payment pressures. Early drawings signaled that the IMF was becoming the main official backstop for short-term BoP financing under Bretton Woods’ fixed-but-adjustable exchange rates.
The United States enacted the European Recovery Program (Marshall Plan), providing large-scale aid to help restart production, stabilize finances, and rebuild trade in Western Europe. This reduced the immediate strain on countries’ external accounts and complemented IMF efforts to restore payments stability.
Western European countries created the European Payments Union (EPU) to make trade easier despite scarce dollars and persistent controls. By netting out trade payments multilaterally instead of settling each deal in scarce hard currency, the EPU helped revive intra-European trade while countries worked toward full convertibility.
The IMF introduced the Stand-By Arrangement (SBA) to provide pre-approved access to financing for countries facing BoP pressure. SBAs became a practical way to support fixed exchange rates by giving members confidence that temporary external deficits could be financed while policy adjustments took effect.
Seventeen European countries signed the European Monetary Agreement (EMA) to provide a framework for monetary cooperation as Europe moved from controlled payments toward fuller currency convertibility. It was designed to replace the EPU once convertibility conditions were met.
By late 1958, many Western European countries restored current-account convertibility under IMF Article VIII, meaning residents and firms could generally make payments for trade and services without special restrictions. This shift marked a more fully functioning Bretton Woods system, with the IMF playing a central role in oversight and support.
The United States and several European central banks agreed to coordinate gold market interventions to keep the market price near the official $35 per ounce level. This was an attempt to protect the core Bretton Woods link—dollar convertibility into gold for official holders—amid growing demand for gold.
As capital flows grew and pressure rose on reserve-currency countries, major industrial states established the General Arrangements to Borrow (GAB). The GAB allowed the IMF to borrow extra funds from participating countries in exceptional situations, strengthening its capacity to defend the par value system during crises.
The UK devalued the pound from $2.80 to $2.40, a major parity change in a leading Bretton Woods currency. The episode highlighted the system’s core challenge: countries tried to maintain fixed rates, but persistent BoP deficits and market pressure often forced large adjustments.
Heavy demand for gold made coordinated sales unsustainable, and the London Gold Pool was liquidated in March 1968. Authorities then moved toward a “two-tier” approach separating official gold transactions from market trading, revealing how hard it had become to keep gold, the dollar, and fixed exchange rates aligned.
To address worries about a shortage of international reserves and the strain of relying on U.S. dollars and gold, the IMF created Special Drawing Rights (SDRs). SDRs are an IMF reserve asset allocated to members, intended to supplement official reserves and support stability in the fixed-rate system.
The United States unilaterally suspended the dollar’s convertibility into gold for official holders, closing the “gold window.” Because the dollar-gold link was the anchor for the Bretton Woods system, this step made the existing fixed-rate structure largely unworkable and accelerated the move toward floating rates.
Major economies negotiated new exchange rate parities and wider trading bands to stabilize currencies after the 1971 shock. The agreement temporarily reshaped the system around a devalued dollar, but it did not restore the credible gold-based anchor that had supported Bretton Woods.
IMF Balance-of-Payments Lending and the Bretton Woods Monetary System (1947–1971)