International Monetary Fund - IMF

Categories: Econ, International

Wasn't this Tom Cruise's thing? Eh, maybe a different IMF.

The goal of the IMF is to stabilize the exchange of trade among nations, particularly the less politically stable, smaller emerging market developing third world…or whatever other politically correct name for economically weak countries comes to mind.

So, what actually is the fund? Well, it was started in 1944 as WW2 was coming to a close, and the aftermath of The Great Depression, which financially infected the world, was still on everyone’s minds. Countries wanted there to exist some stabilizing force in their exchange of promissory paper, as they bought and sold goods from each other.

The scars of the 1930s currency devaluations were still a Thing. And everyone had this image of it taking a wheelbarrow of German marks, the German currency at the time, to buy a loaf of bread. Now...that loaf had really awesome raisins in it. But it was still just a loaf of bread.

Think of the IMF in the same vein as you would a market maker in a stock. That is, a given exchange allows an investor to make a market in, say, Amazon, where, at this moment, she’s a buyer at $1,502 and a seller at $1,514, and makes a $12 spread on each share sold.

Her only basic requirement? She has to continue to make a market in good times or bad, with volatile spikes and moves in the stock, under any conditions. So she has to hold in inventory many shares of ticker: AMZN in order to make that market.

Well, the IMF is basically that. But with the inventory being the currencies in the countries in which it eases trade. Loading up on rubles one day, as it reduces exposure to the Chinese currency, or RMB, and adding euros on other days while it’s reducing Zimbabwean dollars.

The short idea here is to simply make sure exchange rates and international payments systems run smoothly. Today, almost 200 countries participate in the dance, hoping to stimulate the interaction of trade among all nations. And this makes sense, generally, right? If everyone has something to lose, then they have less interest in like killing each other.

And that whole stabilizing of trade makes for more predictable commerce, and a more trustworthy ability to plan and build and liquidity or trust in a credit system, so that countries can take on modest amounts of leverage with credit terms, making sales happen more easily all around the world.

In going through the IMF, or trading through their system, the world then has much better financial “surveillance” as to how well or poorly a given country is doing commercially.

A big spike in banana sales from India? Well, that’s probably good. But what does it mean to the countries competing against India in selling those bananas? Well, through the IMF trading system, the numbers are easy to check. And if it looks as if sales are falling through the floor for India’s competitors, then the IMF can sometimes step in to buy a bunch of bananas and find another buy for them…elsewhere.

And this is a problem at times, because the worst managed countries tend to get the most attention. Corrupt governments. Hi Somalia, Mexico, and Rwanda. We’re lookin’ at you. But not directly in the eyes.

Or ludicrously unfair tax policy to favor the rich. Hi Greece, checkin’ you out. Or to favor the poor. Hey, Venezuela. How’d that huge, leveraged bet on oil prices going up work out for ya?

Yeah. None of those countries have done…well. And the disciplined group of relatively wealthy countries have had to step in at times and bail them out with huge loans to stave off either civil war or just, um…war. That is, typically, the IMF watches and advises those who seem to have their acts together...and lends money to those who don't.

The 5 largest stakeholders in the IMF are the US, Japan, France, Germany, and the UK. China? Where are you? We need you in here.

The fund itself was capitalized, or funded, by initial capital contributions, and there are more coming, as more and more countries teetering on the edge of full bankruptcy, uh...come a-knockin’.

Related or Semi-related Video

Finance: What is an International Money ...4 Views

00:00

Finance Allah Shmoop What is the International Monetary Fund or

00:06

the IMF or IMF If you're just thie goal of

00:11

the I M f is to stabilize the exchange of

00:14

trade among nations particularly you know the less politically stable

00:18

ones the smaller ones the emerging market ones the developing

00:21

ones the Third World or whatever other politically correct name

00:25

for economically weak countries comes to mind So what actually

00:28

is the fund Well it was started in nineteen Forty

00:31

for as two was coming to a close And the

00:34

aftermath of the Great Depression which financially infected the world

00:38

was still on everyone's minds Countries wanted there to exist

00:42

some stabilizing force in their exchange of promissory paper I

00:46

bonds as they bought goods and services from each other

00:49

The scars of the nineteen thirties currency devaluations all around

00:53

the world were still a thing and everyone still had

00:55

this image of it Taking a wheel barrel of German

00:58

marks the German currency at the time to buy a

01:01

loaf of bread had crazy inflation from a bunch of

01:04

paper was worth but well you know that loaf had

01:07

really awesome raisins in it but still was a loaf

01:10

of bread Okay well think of the IMF and the

01:11

same vein as you would a market maker in a

01:14

stock that is a given exchange allows an investor to

01:17

make a market in say Amazon stock where at this

01:20

moment she's a buyer at fifteen Oh two in the

01:22

cellar at fifteen fourteen and she makes twelve dollars spread

01:26

on each share sold her only basic requirement While she

01:29

has to continue to make a market in good times

01:31

or bad with volatile spikes and moves in the stock

01:34

under any conditions she has toehold in inventory lots and

01:37

lots of shares of a M CNE in order to

01:40

make that market like just make it be liquid Well

01:43

that's basically how the I M F works But with

01:46

the inventory being the currencies in the countries in which

01:49

it eases trade but may load up on rubles one

01:53

day is it reduces exposure that the Chinese currency or

01:56

RMB then may add euros on other days while it's

01:59

reducing Zimbabwean dollars Yeah the short idea here is to

02:03

simply make sure that exchange rates and international payment systems

02:07

run smoothly Liquid Lee So today almost two hundred countries

02:10

participate in the dance hoping to stimulate the interaction of

02:13

trade among all nations And this makes sense generally right

02:17

Like if everyone has somethingto lose well then they probably

02:21

have less interest in doing things like Oh you know

02:24

kill each other And that whole stabilising of trade makes

02:26

for more predictable commerce more trustworthy ability to plan and

02:30

build and liquidity or trust in a credit system so

02:33

that countries can take on modest amounts of leverage with

02:36

credit terms making sales happen more easily all around the

02:39

world Yeah it's a good idea And going through the

02:42

IMF or trading through their system The world then has

02:44

much better financial surveillance as to how well or poorly

02:48

a given country is doing economically or at least commercially

02:52

like how well they're selling bananas or coffee beans or

02:55

oil or whatever they sell a big spike in banana

02:57

sales from India Well that's probably good But what does

03:00

it mean to the countries competing against India in selling

03:04

those bananas well through the IMF trading system The numbers

03:07

are easy to check and it looks as if sales

03:09

are for falling through the floor For India's competitors Well

03:12

then the IMF can sometimes step in and buy a

03:14

bunch of bananas you know because they have appeal and

03:17

find another buyer for them elsewhere And this is a

03:21

problem at times because well the worst managed countries the

03:24

most corrupt ones tend to get the most attention right

03:26

Corrupt governments You thinking Somalia Mexico Rwanda Yeah we're looking

03:30

at you guys or it's all about ludicrously unfair tax

03:34

policy to favor the rich high Greece were looking at

03:37

you or to favor the poor a Venezuela How'd that

03:40

huge leverage bed on oil prices going up work out

03:43

for you there Yeah none of those countries have done

03:45

well and the disciplined group of relatively wealthy countries have

03:49

had to step in at times and bail them out

03:52

with huge loans to stave off either civil war or

03:55

mass starvation or well you know just to stave off

03:58

war Typically the IMF watches and advises those who seem

04:02

to have their acts together And it lends money to

04:04

those who don't The five largest stakeholders in the IMF

04:07

are the US Japan France Germany and the U K

04:09

Hey China where are you We need you in here

04:12

Well the fund itself was capitalized are funded by initial

04:15

capital contributions a gazillion years ago And there are more

04:18

coming as more and more countries teeter on the edge

04:21

of a well full bankruptcy Yeah You know more countries

04:24

they're going to be coming in Aachen for a western 00:04:26.804 --> [endTime] dough

Find other enlightening terms in Shmoop Finance Genius Bar(f)