International Monetary Fund -International Monetary Fund- Addressing Fundamental Economic Goals On an International Level The International Monetary Fund is an important function that makes world trade less strenuous. The International Monetary Fund, or IMF as it is called, provides support and supervision to nations in all stages of economic progress. International trade is a key element to enable nations, large and small, to strengthen their economic positions. Larger nations need the international market to export their goods and services, and smaller nations also need this world scale market to import products so they are able to produce more efficiently. In order to achieve these goals, one major component must be in place.
The ability to value other nation’s currency. Throughout the years, many different ways have been used to do this, mostly ending in failure. There is no perfect way to accurately measure the true value of another country’s currency. The International Monetary Fund is an effort to see each country’s economic position, offer suggestions, and provide the fundamental economic security that is essential to a thriving (world) economy. Many of the domestic economic goals are reiterated by the INF on an international level.
To understand the current INF we will investigate the events leading up to its existence. Between 1879 and 1934 major nations used a method of international exchange known as the Gold Standard. The Gold Standard was simply a fixed-rate system. The rate was fixed to gold. In order for this system to function properly three things had to happen.
First, each nation had to define its currency to gold (this definition then could not change). Second, each nation must than maintain a fixed relationship to its supply of money and its amount of actual gold. Third, the on-hand gold must be allowed to be exchanged freely between any nations throughout the world. With all of those policies successfully in place, the exchange rates of the participating countries would then be fixed to gold, therefore to each other. To successfully maintain this relationship some adjustments had to be made from time to time. For example, two countries A and B are doing international business together and A buys more of B’s products than B buys of A’s. Now B doesn’t have enough of A’s currency to pay for the excess products purchased.
B now has what’s called a balance of payment deficit. In order to correct for this deficit the following must occur; Actual gold must now be transferred to A from B. This transfer does two things. First, it reduces B’s money supply (a fixed ratio must be maintain between the actual amount of gold, and the supply of money) hence lowering B’s spending, aggregate income, and aggregate employment, ultimately reducing the demand for A’s products. Second, A’s money supply is now increased, raising A’s spending, aggregate income, and aggregate employment, ultimately raising the demand for B’s products.
These two events happen simultaneously stabilizing the exchange rate back to its equilibrium. The Gold Standard served the world’s economy very well until one unfortunate event happened. The Great (worldwide) Depression of the 1930’s presented the world with a new set of problems to be dealt with, not only domestically, but throughout the entire world. The situation was bad, so bad that nations would do anything to dig themselves out of economic disaster. Nations now would break the biggest rule of the Gold Standard. Nations started to redefine the value of there currency to gold.
This act of devaluation, as it was called, disrupted the entire world’s perception of the relationship of each country’s currencies to there own. Bartering systems were tried, however, eventually the Gold Standard failed. After The Depression international trading was crippled. A new method of international currency exchange had to be developed. Many ideas were listened to, but not until 1944 would a new entirely accepted method be adopted.
During this year in Bretton Woods, New Hampshire a modified adjustable-peg system was formed, in addition to this new innovative system, the International Monetary Fund was formed. For many years the Bretton Woods adjustable-peg system worked well. This system became more and more dependent of the United States currency’s value. Since from the inception of the IMF in 1946 the United States government would exchange currency so that one ounce of gold equaled 35 US dollars. As more and more people found that 1 ounce of gold for 35 dollars was bargain, the supply of gold and US dollars became scarce (many people were trading their US dollars for gold). Eventually the general census of the world did not value 1 ounce of gold to 35 US dollars.
The value of the US dollar was now in question on an international scale. In 1970, the United States declared that it would no longer offer 35 dollars for an ounce of gold. The Bretton Woods system, that grew to value the entire economic exchange values on the stability of the US dollar now lost its basic component. What to do now? A new system of international currency exchange values was inevitable. The IMF shortly after the discovery of the need for new currency exchange values were evident decided to change its policies. Each country was now able to define its own currency with a few exceptions. First, the nation couldn’t be equated with gold. Second, the IMF had to know exactly how each country calculated the value of its currency. There were and still are many different ways to accomplish this.
The free float method (a capitalistic market system, where currency is freely exchanged), the managed float method (similar to the free float, were the government buys or sells large quantities of its own currency to effect the value), or it may be pegged to another nations currency (a direct relationship to another country’s currency value). There are other ways to define currency, the former methods are, by far, the most common. By this change in policy, the IMF actually has more control, now the IMF has intimate knowledge of other country’s economic systems. This knowledge is key in improving international trade and the ultimate well-being of all nations. The utilization of this newly obtained knowledge is known as surveillance.
This surveillance allows the IMF to supervise the economic policies of countries, mostly the ones who are borrowing funds. And assure that funds of the IMF will be paid back in a timely fashion, so that other countries are able to take advantage of borrowing power in their time of need. The IMF as an organization does several things. It provides technical counseling to nations with economic problems where there are fundamental problems with the nations economy. It provides a helping hand, financially, to nations that are experiencing economic trouble.
And it sets values to each of the participating members currency through a series of policies. The nations that own the IMF are members strictly by choice. Any nation that is willing and able to join is welcome, however, there are some governing guidelines that must be followed, included among other things is financial disclosure. When a nation decides to join the International Monetary Fund there is a financial obligation. This cost is in the form of a quota, th …