Federal Reserve Bank of Minneapolis. The views expressed herein are not necessarily those of the Federal Reserve System.

The International Monetary Fund was established after World War II to manage a system of fixed exchange rates. In the early 1970s that system collapsed, and since then the IMF has been a bureaucracy in search of a mission. In the 1990s the IMF has greatly increased its lending, especially in Mexico in 1995 and in Asia in 1997-1998. This evolution has led to an extensive debate on the appropriateness of its activities and has raised the question: What should be the mission of the IMF? One view in this debate is that the IMF should be abolished. A second view is that the IMF should serve as an international lender of last resort by expanding its lending to debtor countries in financial difficulty to prevent worldwide financial crises. A third view is that the IMF should take on a new role; namely, it should serve as a type of international bankruptcy court that handles international debt problems. Our view is that the IMF should cease its lending activities altogether. We argue that there is no need for the IMF to act as a lender of last resort because any threats to the integrity of the international financial system as a whole can be effectively handled by the central banks of the major powers. Moreover, current IMF lending policies encourage improvident international lending. We do not believe, however, that the IMF should be abolished. We think, for example, that the IMF can serve an important role as a type of international bankruptcy court that handles international debt problems