Cora lost some interest when we tackled the IMF (International Monetary Fund). Admittedly, this organization seems less flashy and controversial than the World Bank. Don't let the bland exterior of their website fool you like it did us - this organization is more powerful and complicated than we imagined. Cora's interest picked up when she discovered we would talk gold and possible international intrigue (you do what you can to keep their interest, even if it involves puns).

Each member of the World Bank must first be a member of the IMF. To join the IMF, each member state, originally, was assigned a quota based on its gold and dollar reserves (based on U.S. currency), its average imports, the variability of its exports and their ratio to the national income. Initially, each member country paid 25% of its quota and pledged the balance in its own currency, if the balance is ever called for. This quota is the country's contribution to the loaning resources of the IMF, or - more simply - IMF's capital.

A country's quota, in the past and today, also determines its voting strength in the IMF. In turn, a country's quota also determines the total credits it is permitted to draw. This 'quota deal' led to a good number of problems in payback when a country fell short of monetary goals. The IMF was very strict about lending money, and many countries couldn't meet demands to borrow money.

In the past, these quotas and the implications drawn from a country's number of quotas were sources of true discontent between IMF and its critics. The burdens of meeting IMF goals often fall on the urban poor, because middle-income Third World countries could turn to international private banks to avoid a foreign-exchange crisis. The poorest countries, however, didn't have this luxury. The IMF, for these poorest countries, was often the only place to borrow money. When these countries couldn't meet the IMF demands, their monetary units fell in value and social unrest occurred.

In the late 1970s and early 1980s, the IMF began to understand their critics, and they took a look at how their policies helped undermine these governments. Although they made some measurable changes, today's critics of the IMF feel even more could be done. In fact, some critics wish the IMF would just go away, because they believe IMF objectives are inappropriate for many countries.

Today, the IMF fulfills several objectives. The first goal is to provide loans to countries so they can restore conditions for sustainable economic growth. These loans are - unlike World Bank loans - not meant for projects. Instead, these loans help maintain international reserves, stabilize currencies, and help to continue to pay for imports without the imposition of trade restrictions or capital controls.

The next objective for the IMF is called "surveillance." No, they don't employ spies. In fact, this form of communication has become increasingly more open since 2001. Since the beginning of the IMF, they were mandated to watch the exchange rate policies of its members to ensure effective operation of the international monetary system. In 1977, the IMF was required to complete a comprehensive analysis of the general economic situation and policy strategy of each member country. The ultimate goal of this 'surveillance' is to help member countries achieve financial stability and sustainable economic growth.

The IMF claims these surveillance objectives remain the same as they were 25 years ago, but the framework has changed. The basic change now is that discussions held between IMF and member countries concerning specific financial structures are made more available to the general public. Whether or not this transparency is crucial is unknown, as the practice is fairly new.

The third objective for the IMF is through technical assistance. This doesn't mean the IMF supplies computers to schools. This means the IMF provides structure for a country's fiscal and monetary policy through statistical research and lending patterns. The IMF states the demand for their assistance far outweighs their ability to help, so they focus on crisis prevention, debt relief, and poverty reduction. These three topics would appear to be the most important, as help in these areas helps reduce the chance for social unrest.

We might wonder why the IMF is so concerned with politics as well as money. One reason is the logic that politics and money are tied together in today's global economies. Another reason is the fear of a "domino effect." If you set up a line of dominos for your kids, and ask them to push the first one, they'll see what you mean by this analogy. These days, when one country develops a severe case of monetary crisis, the effect can quickly spread to other countries. The reason this happens even more so today is because our countries are increasingly tied to each other through foreign exports and imports (refer to previous three articles on Keynesian Economics and export demand).

In 1970, member countries began payment for IMF memberships with SDRs (Special Drawing Rights). The capital contribution was still 25%, and was still based on a country's resources. The difference with SDRs is the capital is no longer based on U.S. dollars and gold standards, because gold tends to fluctuate with production and value, and the U.S. dollar benefited more than other monetary units with the original membership plan. The original SDR was based on several currencies: the dollar, mark, yen, franc, and pound. Now, the SDRs are based on the euro, dollar, yen, and pound. Notice the SDRs are built from the currencies of the leading countries in the World Bank (see last week's article).

The last distribution of SDRs was in 1981. However, the addition of new IMF members without SDR allocations brings the prospect of an additional distribution of these bits of what is known as "paper gold." The decision for this allocation will be made after all members agree to distribute SDRs in an effort to equalize each country's allocation of quotas.

You don't need to pull out the Monopoly money to help your kids understand asset allocation. Next week, we'll uncover the mysteries of currency exchange and the global importance of the American dollar. Then, we might understand why a drop in the dollar means more than a drop in the bucket.

Until then,
Linda Goin