To: Editorial Page Editors
From: Jude Wanniski
Re: The Evil Empire
With the International Monetary Fund now under fire from several directions for general incompetence, there are several points of view on why and how this has become an important topic for discussion. Most of them miss the point, including the just-issued report of the International Financial Institution Advisory Commission. I'd like you to get it straight in your own minds, as you ponder the report and its implications. For 25 years I have believed that the IMF is an Evil Empire that dispenses poisonous demands on poor countries of the world to keep them poor, and to mid-level countries which soon become poorer. It is no small matter, then, that when the GOP Congress last year gave the IMF another $18 billion to play with, that it did so on the grounds that this commission be set up to discuss reforms. Billions of people around the earth have been victimized by the IMF over the years, but because the beneficiaries have been the multinational banks of New York and Europe -- the heart of the big money Political Establishment -- the politicians of both parties have kept quiet and, for the most part, so have you, the opinion leaders of the Major Media.
If you read George Melloan's "Global View" column in Tuesday's WSJournal, "A Short Primer on What the IMF Is All About," you will get a better start than most. Melloan has been writing WSJ editorials about international banking and finance for more than 30 years and thus understands that the IMF problems began with the breakdown of the Bretton Woods international monetary system in 1971, when President Nixon ended the gold standard. The IMF had been set up in 1944 by the allied powers to assist in reconstruction of the world economy when the world war would end, as it did in 1945. The role of the IMF was to help member nations keep their currencies fixed to the dollar, which in turn was fixed to gold at $35 an ounce. Melloan says the IMF was the "cornerstone" of Bretton Woods, but it was really gold that was its cornerstone. The IMF simply puttered about, making small loans here and there to countries such as the United Kingdom -- where the Keynesians in charge never understood that the pound sterling was weak because it left its highest income-tax rate at 96%. Every time it devalued the pound to get the economy on the move, inflation simply pushed the productive forces into higher income-tax brackets, reducing the demand for "money," producing a surplus which the Bank of England should have mopped up. The process became known as "the British disease," which did not get proper treatment until Maggie Thatcher ran and won as a supply-sider in 1979, whittling the top rate down to 40% from 96%.
The reason the IMF's role changed in the years after the dollar floated was that the multinational banks suddenly found that countries to which they had loaned great amounts of money could not pay them back. Citicorp's Walter Wriston was one of the culprits here, because he had helped Milton Friedman talk Richard Nixon into permanently floating the dollar. The big banks, Citicorp first among them, had a problem figuring out where to lend the "money" the Federal Reserve was cranking out in its goal of expanding the economy. Wriston realized private companies were not good bets, so he came up with the idea of lending to sovereign nations, which theoretically could not default on their dollar debts. It was when the private banks had trouble collecting from these poorer countries, when commodity prices were deflating instead of inflating, that the banks got the Nixon administration to sell the idea of the IMF becoming the "lender-of-last resort." This meant, in practice, that the IMF would lend money to the countries in default so the countries could pay Citicorp the money it owed. A safety net for the big guys, you see.
That would not have been so bad, but the IMF soon began swarming with Ph.D. economists who knew that poor countries in economic trouble should do what Britain had been doing, which led to the British disease: Raise tax rates on the "rich," and devalue the currency. Even as you read this, the acting director of the IMF, Stanley Fischer of MIT, is applauding the decision in Buenos Aires to raise taxes to get the country moving again! If you look in his shoes, editors, you will find that Professor Fischer has cloven hooves. The Clinton administration actually would like Professor Fischer to be the new IMF director. So would his pals from academia, including Professor Paul Krugman, who writes a column for the NYTimes. Like Melloan of the WSJ, Krugman writes about the IMF and the Meltzer Report, in yesterday's NYT, "Errors of Commission." You can also learn something from his column, but because Krugman does not understand that poor countries will continue to get into trouble if commodity prices inflate and then deflate, because of the absence of a gold standard, he fusses around in cul de sacs.
The Meltzer committee says the IMF should not be making so many loans to poor countries because there is a "moral hazard" involved, as investors make bad loans knowing the IMF will come along to bail them out. Krugman writes: "But this is a fantasy. There is not a shred of evidence, for example, that the investors who poured money into Asia before the recent crisis thought at all about the possibility of future bailouts." Not so fast, Dr. Krugman. It is not the equity investors who count on the IMF, which can do nothing to bail them out when markets crash in Asian or Latin crises. It is a handful of banks, including Morgan Stanley, J.P. Morgan, Citicorp, and of course Goldman, Sachs, which now pays former Treasury Secretary Bob Rubin $15 million per year (for starters) to keep his eye on the IMF slush fund.
An alternative which Krugman mentions, editors, is to have the IMF make small, fast loans with fewer conditions, when they see a country getting into trouble. This is the prescription favored by the Democrats, who take their marching orders from Mr. Rubin at Goldman, Sachs and Steven Rattner at Lazard, Freres, the man who will be Treasury Secretary in a Gore administration. You see how it all works? I'm not sure things would be much better in a Bush administration, to tell you the truth, because the big banks have also financed the governor's campaign, and several of his economic advisors are the same as his Dad's. The big guys are not going to give up on their slush fund that easily.
As for the Meltzer Report, remember that Allan Meltzer is a clone of Milton Friedman, the fellow who helped create the mess in the first place, by talking Nixon into a floating dollar. Friedman is now on record saying the IMF should be torn down -- and so are Walter Wriston and former Nixon Treasury Secretary George W. Shultz, another Friedman acolyte. Should we tear down the IMF? No. Krugman is right. As long as the United States is responsible for causing monetary convulsions around the world, there has to be an IMF with an active slush fund to bail out the big banks. The only solution is to refix the dollar to gold, which would mean the IMF would once again putter around, doing very little damage to anyone.