What Is The IMF, Anyway?

I have to admit. When this story broke, I asked my husband this very same question. Even if I did know what it was, it was not registering with me the impact of this arrest on my daily life.

Dominique Strauss-Kahn, the head of the International Monetary Fund, was arrested this weekend for allegedly sexually assaulting a maid in his hotel room. He has denied the allegations. For more on the criminal case, see this AP story.

Strauss-Kahn's arrest leaves a vacuum at the top of the IMF at a key moment for the global economy. I'll get to that in a minute, but it's worth pausing here to answer a more basic question: What is the IMF, anyway?

I spoke this morning with Eswar Prasad, a former IMF economist who now works at Cornell and the Brookings Institution.

You can think of the IMF sort of like a credit union for countries, Prasad told me. Its members — countries from around the world — put money in. And the credit union lends that money out to members that need it.

This makes the IMF sound all warm and fuzzy. And for several decades after the IMF was created at the end of World War II, it was pretty warm and fuzzy.

At that time, the world's major currencies were fixed — a dollar was always worth the same amount of British pounds, the same amount of French francs, etc. (This is a bit of an oversimplification, but it gives the basic idea.) This was known as the Bretton Woods system.

During this time, the IMF made short-term loans to help countries keep the value of their currency fixed. The biggest recipient of IMF loans during this era was the UK, according to Prasad.

But Bretton Woods was dismantled in the 1970s, and the world of money changed profoundly. In the new world, the value of global currencies changes constantly. (A year ago, one British pound bought you $1.45; today, it buys you about $1.60.)

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