International Monetary Fund - IMF

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DEFINITION of 'International Monetary Fund - IMF'

The International Monetary Fund (IMF) is an international organization created for the purpose of standardizing global financial relations and exchange rates. The IMF generally monitors the global economy, and its core goal is to economically strengthen its member countries. Specifically, the IMF was created with the intention of:

1. Promoting global monetary and exchange stability.

2. Facilitating the expansion and balanced growth of international trade.

3. Assisting in the establishment of a multilateral system of payments for current transactions.

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BREAKING DOWN 'International Monetary Fund - IMF'

Fixed exchange rates, also known as the Bretton Woods system (named after the original UN conference at which the IMF was conceived), refer to the value of a currency being tied to the value of another currency, or to gold. The system of fixed exchange rates was established by the IMF as a way to bolster the global economy after the Great Depression and World War II. This system was abolished in 1971, and ever since, the IMF has promoted the system of floating exchange rates, which means that the value of a currency can change in relation to the value of another. This is the familiar system today. For example, when the U.S. economy suffers, the dollar's value goes down in relation to that of, say, the euro of the European Union, and the opposite is also true. The exchange rates established by the IMF allow countries to better manage economic growth and trade relations. These exchange rates are set in order to prevent economic collapse, which can occur with runaway exchange rates, which occurs when the rates continue to rise.

The IMF vs. the World Bank

The IMF works hand-in-hand with the World Bank, and although they are two separate entities, their interests are aligned, and they were created together. While the IMF provides only shorter-term loans that are funded by member quotas, the World Bank focuses on long-term economic solutions and the reduction of poverty and is funded by both member contributions and bonds. The IMF is more focused on economic policy solutions, while the World Bank offers assistance in such programs as building necessary public facilities and preventing disease.

How a Country Can Join the IMF

Countries must apply to be a part of the IMF, although any country can apply. Over time, the stipulations of being a member have changed, with membership requirements being more relaxed when the Fund was in its early stages. Countries are required to make membership payments, or quotas, which are assigned to individual countries based on their economic size and stipulate how much they contribute. These quotas are larger for more powerful economies, and they form a pool from which countries in need can take loans. Member countries are also required to adhere to the Code of Conduct, and stricter regulations may be imposed on those countries who apply in hopes of financial aid.

Members not only have access to the broad range of services provided by the IMF, but also to the economic records of other member countries.

History of the IMF

The IMF has completely reshaped the global economy and redefined the ways in which countries trade with and take loans from other countries. The IMF was first conceived at a UN conference in 1944, among the 44 attending countries, before it was officially created in 1945. These countries wanted to globally stabilize exchange rates and financial communication between countries, especially following the disastrous Great Depression and World War II. Goals included international cooperation and trade, the reduction of poverty and financial crises, and economic growth. Although the Fund has evolved over the years to become what it is today and adapt to changing times, it still operates around the same guiding principles.

The IMF played a large role in the economic restructurization of the post-World War II world. After the war, some countries were in economic distress, and others were reluctant to trade with certain countries after the fighting. The Fund helped smooth over the economic post-war transition period and restabilize the global economy so it could move toward prosperity, using systems such as fixed exchange rates.

The IMF Today

Currently, there are 188 member countries in the IMF, which is based out of Washington, D.C. Each country or region is represented by a member on the Fund's Executive Board and numerous staff members. The ratio of board members from each country is based on the country's global financial position, so that the most powerful countries in the global economy have the heaviest representation. The United States has the highest voting power, followed by Asian countries such as Japan and China and Western European countries such as Britain, Germany, France, and Italy.

While the IMF sets standards for the global economy and monitors the financial communications between countries, it also helps those countries in need by lending them the money necessary to turn their economy around and rebuild their financial structure. Countries contribute to a pool from which countries in need can borrow as a short-term loan. The IMF also assists countries in developing sustainable financial policies, provides economic advice, helps countries maximize their financial effectiveness, and works to help developing countries stabilize and sustain themselves in the global economy.

For an example of the advice the IMF provides to its member countries, read The New York Times article "I.M.F. Cautions U.S. on Stocks, Insurance, and Mutual Funds." This article discusses the Fund's observation that U.S. stocks are priced too high and its prediction of how that will affect the economy in the near future, making recommendations on how to fix what's wrong before it becomes a problem.

For an example of how the IMF works to stabilize countries with spiraling economies, read The Wall Street Journal article "Greece, Creditors Reach Agreement on Bailout Terms," which goes into detail on the 2015 economic crisis in Greece. The article shows the IMF's role in the economic decisions surrounding Greek debt, such as helping to decide how to handle the debt and making contributions to offer debt relief. It also mentions ways in which the IMF contributed to past debt relief, and touches on the IMF's reasoning behind decisions to offer financial help or not.

The IMF plays three major roles in the global monetary system. The Fund surveys and monitors economic and financial developments, lends funds to countries with balance-of-payment difficulties, and provides technical assistance and training for countries requesting it.

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