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