THE CLAIRE FOSS JOURNAL
DON'T LET THEM SELL YOU A BILL OF GOODS ABOUT REFORMING THE IMF
Ready to Lend a Helping Hand
Remember when global deregulation was presented to us as something inevitable?
We were told that there was nothing we could do but accept unemployment
mass hunger as our destiny. Trying to undo it, we were assured, would be
like King Canute ordering the sea to back up.
Now suddenly those in the saddle seem to have second thoughts on that.
That undoubtedly has to do with the fact that the spreading collapse of
currencies, stock and bond markets is endangering their booty. With cybernetic
speed the misfortunes of the victims are suddenly catching up with the
victimizers. In the US Congress time is even being taken from the Lewinski
drama to question whether the International Monetary Fund knew what it
was doing when it prescribed higher dosages of the same high interest rates
and more of the deregulation that had already brought on the world's disasters.
The cry is even being heard in government circles for "reforming" the
Tony Blair, the British PM who seems to believe that every problem can
be solved with a purring sales approach, told the NY Stock Exchange that
there was need for a "one-year multilateral effort to reform the global
financial system to prevent the kind of currency crisis that has swept
through Asia and Russia and now threatens Brazil. The international financial
system needs to be modernised to meet the challenges of the new century."
But wasn't modernisation and reform to meet the new century precisely what
was heaped on us over the past decade and more?
Listen to the WSJ (22/8): "Mr. Blair's comments add to the emerging
global consensus that something must be done to insulate developing nations
from financial volatility, the dark side of international capital flows
that have flooded emerging markets over the past decade. These cross-border
flows have been encouraged by the IMF, the US and other major industrialised
nations, which have urged developing countries to open their borders to
foreigners wanting to build factories and buy stocks and bonds. Developing
nations have generally considered such capital inflows a welcome way to
jump-start economic growth, raise incomes and create jobs. ...[But] increasingly
policy makers in the US, the UK and many other nations are reconsidering
the wisdom of rapid liberalization of capital movements. The problem is
that nobody has a clear idea of what changes are necessary or how to implement
It is not that alternative policies have not been proposed, but they
have been passed over in silence to establish the inevitability of the
IMF policy. Keynes, for example, outlined a plan in which the responsibility
of keeping a balance of payments would fall on both debtor and creditor
nations. If a debtor nation exceeded its quota of drawing rights (based
on the its foreign trade over the five preceding years) by more than 25%
it was obliged to devalue its currency and the interest rates it paid to
the Clearing Union would go up. If its deficit reached 150% of its drawing
rights it could export capital only with the permission of the Clearing
Union. But likewise creditor nations with a positive trade balance had
to raise the exchange rate of their currency. The interest paid on any
excess over 25% above their quote would go to the Clearing Union. Failing
that the interest on their excess trade balance would be forfeited to the
United Nations that would apply it to peace-keeping or economic aid to
less developed countries.
Barring high-interest rates as a means of combatting inflation is another
way of stabilising the world monetary system, because high interest rates
not only attract hot money, but undermine the economy. Exchange controls
are far less destructive. Without them neither Canada nor the United Kingdom
would have had a hard time coming through the early postwar years. The
restoration of statutory reserves placed with the central bank would provide
a less harmful way of restricting credit where inflation was a problem.
But, of course, it would be necessary to allow the central bank to alter
the reserve requirement--a power that was taken from the Bank of Canada
in 1967 to prepare for the unrestricted financial market.
The WSJ goes on to quote US Treasury Secretary Rubin: "It's very easy
to throw new ideas out on the table, and it's an important thing to do.
But the key is to analyse them with the seriousness that will enable judgments
to be made about all the possible ramifications and how this might work.
And I don't think that any of this is perfectly understood." It requires
no small amount of brass for an official who spent years twisting arms
of the countries to accept the IMF conditions that did them in, to talk
about the importance of new ideas or to express the view that nobody understands
"perfectly" how such new ideas might work.
What might have provided Mr. Rubin with an "imperfect" clue that what
he was peddling could not work was that the lever for stabilising the world
economy was the revenue of a class of people of notoriously unlimited appetites--money-lenders.
And as their exactions soared interest rates periodically collapsed along
with the economy. And in the resulting churning of the economy only speculators
could thrive. As a highly successful Wall Street trader none of this should
be new to Mr. Rubin. But there too lurks a conflict of interest.
More than just an intellectual conundrum what we are faced with is a
power conflict. A strategic fortress is caving in before our eyes, and
that is why it would be naive to believe that institutions like the IMF
and the Bank for International Settlements can be "reformed"--even the
word has become suspect. They will have to be liquidated and the monetary
system of the world rebuilt to provide a fair balance between debtors and
Copyright (C) 1998 COMER. May be reproduced with proper acknowledgement.
"Economic Reform" is the monthly newsletter of the Committee on Monetary
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