The international monetary fund or IMF, basically promotes international monetary harmony to simplify the expansion of international trade. In a more detailed view, it advocates global monetary understanding, monitors the exchange rate and financial policies of member nations, and provides credit for member countries that are experiencing a temporary unbalance of payments.
Contrary to popular belief, It is not a world central bank which exists to help the economic development of poor, undeveloped countries, nor does it have any authority over its members domestic policies and regulations. It is a mutual establishment with voluntarily membership that enables its members to benefit from consultations with each other. This provides a stable environment for exchanging payments smoothly and quickly. Thus, the IMF greatly increases international trade, which, in effect, expands the world economy.
How does this system work? Established by the United Nations at a conference held in 1944 at Bretton Woods, New Hampshire, the IMF seeks monetary stability. At that time, because of all the recessions and the Great depression, people all over the world were demanding gold, instead of the national currency, beyond what national treasuries could supply. Therefore, many nations were coerced into abandoning the gold standard, which had given money a known and stable value. Now that countries could not depend on the steady value of gold, exchanging money became very difficult between the nations using gold and those that did not. These complications caused many of these nations to sell their products at a cheaper rate (way below its realistic value) just to undermine the trade of other nations selling the same products. There wasnt a high demand for foreign currencies that werent backed by gold; governments werent willing to take the chance on foreign currency and its current rates. This global turmoil caused the UN to create the IMF to help regulate the International trade.
From the headquarters in Washington D.C., membership is open to all independent countries with a current membership of 181 nations. On joining the fund, members are assigned a quota (a sort of membership fee) in special drawing rights or SDR, the funds unit of account whose value is based on the average value of five major currencies. Each members quota relates to their position in the global economy. Thus, the United States, as the leading economy, has a quota of about 27 billion dollars and gets 265,000 votes. Similar to the Stock Market, the amount of these quotas determine how many votes, or how much influence it will have in IMF decisions and deliberations. These quotas also establish how much the contributing member can borrow, should they be in a time of need. Hence, if a member has temporary balance of payment difficulties it applies to the fund, and will most likely receive the much-needed currency from the IMFs pool of resources, from which it will have to pay back.
Daily operations are the responsibility of a 24-member executive board, which represent member nations. But the main power goes to the Board of Governors, one from each member, and an equal number of alternate Governors. The IMF has a staff of 2,200, headed by a managing director, who is chairman of the executive board. These staff members are international civil servants and are in charge of carrying out IMF policies.
Though, it is important to note that the IMFs main goal and purpose is to create an overly simple international trade by the exchange of foreign currencies. Currencies have a value in terms of other currencies and what others are willing to pay for it (demand). The International Monetary Fund has effectively eliminated the restrictions on buying and selling national currencies by keeping members overly informed of each nations current value of its monetary unit. The IMF is also a research guide that calculates national outputs and how large or small a nations economy is, for all members to view. Many countries who lack personal finance and central banking turn to the IMF for assistance in solving financial and domestic or international economic problems.
By promoting trade between foreign nations, the IMF intensely increases the ever-expanding global economy. All nations depend on trade, because they are all faced with one major economic problem: scarcity, the concept of unlimited wants and limited resources. For the most part, peoples desires for things are greater than their ability to make them. This is basically what the study of economics is all about, to diminish the scarcity citizens are faced with on a daily basis. For instance, because of North Americas climate, the United States can not naturally produce coffee beans. Therefore, Americans must trade with foreign countries, in this case Columbia, to gain this product. This is where the IMF comes in. By simplifying the conditions of trade and minimizing the exchange risk, the US and Columbia can now trade at a faster flow and with larger quantities. Thus, it reduces the scarcity of coffee beans, which will lower the prices for the consumers and enables the economies in both countries to expand.
The other aspect of the IMF is to help its member countries with payment problems. If a member can not take in enough currency from what it buys from other nations, The IMF supplies and helps stabilize and control the exchange value of the members currency. This country borrows the funds money at a below-the-market interest rate, which goes to the nation whose currency is being used. This is very important because the world is so intertwined that if one region crumbles, everyone seems to suffer. This part of the IMF is essentially a global rescue package.
Currently, the IMF is concentrating on Asia, especially South Korea, where the U.S. and Japan are giving 10 billion dollars each (through the IMF). By loaning this money, the IMF has not only helped South Korea but also it has helped the world economy continue its prosperity. The US is now, more than ever, dependent on the international situation. This loaning out of money is not because of the generosity of the Americans, but because they need other nations for trade and stability. Just recently, the Dow Jones average took a drastic plunge because of an Asian stock market crash.
Investors worldwide are looking more and more at the global position, which will affect whether or not they will invest in stocks. Recently, a controversial debate in Congress raises the question of whether taxpayer money should go to the increasing contributions to the IMF. However, without this much needed assistance from the IMF, the Asian crisis will worsen with eventual negative consequences for the U.S. economy because these Asian countries will not be able to buy American goods or must cut prices so that American firms would find it hard to compete in international markets. Also, this financial affliction of Asian countries can harm U.S. security interests in Asia, claims Secretary of State, Madeleine Albright. Therefore, this policy of helping out member countries, especially by the United States, is greatly appreciated and needed by many unstable countries.
By overseeing the international monetary system, the International Monetary Fund creates a more sturdy and prosperous world economy. The IMF assists countries with economic problems and consults its members on improving economic policies. By improving the exchange rates between nations, the IMF promotes a sturdy and healthy universal trade. Therefore, The International Monetary Fund is the necessary tool that helps the global economy continue into the future.