Guest Analyst
July 04, 2001

Jude Wanniski*

Memo To: George Melloan, WSJournal
From: Jude Wanniski
Re: The International Monetary Fund

Your Tuesday column, “Whither the IMF?” asks some of the right questions and comes to some of the right conclusions, George, but I am afraid you still do not see that the evils perpetrated by the IMF are the result of a greenback world. If the Bush administration were to follow the advice of Jack Kemp and fix the dollar to gold, the IMF no longer would have any reason to run around the world “fixing” the economies of countries that have suffered because of the floating dollar. You know I have been writing about the “Evil Empire” for more than 25 years, trying to get an U.S. President to tackle the problem. The fact is that as long as the dollar can inflate and deflate, as the Federal Reserve makes errors on one side of its balance sheet or the other, our money-center banks and our Financial Establishment will use the IMF as a safety net, to get their bad loans paid back by our taxpayers when foreign governments are beaten down by the storms created by the chaotic greenback dollar.

Your crisp and clear opening graph is worth quoting in full, before I sharpen my point about gold: “When the International Monetary Fund reinvented itself after the collapse of the Bretton Woods monetary system in 1971, it didn’t lack for ambition. It had started life with Bretton Woods 27 years earlier as a lender to countries temporarily short of foreign exchange. After the 1971 collapse, it gave itself a somewhat larger task: running the world.”

Exactly, but it did not happen exactly that way. Before President Richard Nixon blew up the Bretton Woods international monetary system on August 15, 1971, by tearing the paper dollar away from its gold anchor, our big money-center banks could unilaterally lend money to developing countries in Asia, Latin America, and Africa. With a unit of account as good as gold, inflation or deflation was not a factor in the considerations going into the loans. Good banks were able to do what good bankers can do in assessing the borrower’s creditworthiness. When banks no longer could guess which direction the dollar would take as it swooped in inflationary and deflationary directions, the big guys decided to shift to multilateral loans. If Countries X, Y and Z looked like good prospects, private banks could assemble loan packages for them. If Country Y got caught on the wrong side of the dollar and could not come up with the funds to pay the banks, the IMF would send a team to Country Y, offering to lend from the IMF pool of capital that had been assembled by the Western governments, with the US. really in charge. Country Y would get enough money to pay down its debts to Citicorp or Chase or the B of A, but only on the condition that they follow economic policy guidelines laid down by the IMF team.

What has frustrated me over the years, George, is the question of conditionality. If a superior private banker considers a loan to a family, corporation or country, it will be most interested in the prospects that there will be sufficient growth in the borrowing unit so added revenues will be able to service the debt. Not so with the IMF. The conditions are always such that the first consideration is getting the money for Citicorp, Chase or the B of A. The economic model deployed for that purpose leads to an insistence that Y devalue its currency, so it can improve its export prices to earn hard currency, and that it raise taxes to balance its domestic budget. This is evil advice, as you know, which is why I have called the IMF an “Evil Empire.” Most of the poverty in the world today can be directly traced to IMF conditionality, which it at times recommends to the United States, when our Political Establishment would like it to. No question, our money men control the IMF. If you look further, though, you may acknowledge the inference of your opening paragraph, that if the dollar were once again linked to gold, ending inflations and deflations, the tide would not continue in the direction of global economic weakness and the poverty of the underdeveloped world, but would turn toward global economic expansion. There would still be an IMF, but it would be defanged, reformed indirectly.

The Asian crisis, which you attributed “partly” to “free-floating finance,” was really all the result of the Asian countries thinking they could anchor their currencies to the U.S. dollar, which had been more or less stable against gold for several years. The blunders you attribute to the Thailand bankers were really forced upon them, as they tried to maintain their link to the dollar, which inflated in 1993 to $385 gold from $350 and then began its deflation in 1997, to $330. The early euphoria of the baht’s inflation was offset by the squeeze. The IMF did make matters worse, but at the heart of the problem was the reliance of the Asian governments on the wisdom and experience of Alan Greenspan and his Fed colleagues. I think Greenspan himself will tell you that gold is superior to green in matching dollar supply to dollar demand.

Having known you for almost 30 years, George, from the early days I joined the Journal editorial page in 1972, I would urge you to make the extra push in the direction Jack Kemp took with his call for a new gold standard. It is so easy to do that President George W. Bush could accomplish it with the stroke of his pen on an executive order to Treasury Secretary Paul O’Neill. Yes, Fed Chairman Greenspan says it would have to be followed up with a statute, but there would be little or no resistance from Congress. Such an executive order would simply ask O’Neill to stabilize the dollar value of Treasury’s international gold reserves at $325 per ounce, which is what Kemp recommends as a level that would dissolve the deflation that is dragging the economy south. Nobel-Prize winning Professor Bob Mundell made this recommendation to the Reagan administration 20 years ago this September, but the powers that be still thought it would be better to manage the dollar in its ups and downs. Now that we have seen how wild that ride can be, in both directions, there is no reason to continue. If you knew you could solve so many of the problems of poverty on Earth with your signature, wouldn’t you do it? Independence Day would be a good time to make that resolution, a world free of the Evil Empire.

* Jude Wanniski: As an associate editor of The Wall Street Journal from 1972 to 1978, Jude Wanniski repopularized the classical theories of supply-side economics. His book, The Way The World Works, became a foundation of the global economic transformation launched by the Reagan Administration. He founded Polyconomics in 1978 to interpret the impact of political events on financial markets, keeping institutional investors informed on U.S. and world events that bear on their decisions. His network of long-standing relationships with members of the Executive and Congressional branches, the Federal Reserve Board and leading opinion makers augments Polyconomics` analysis. Mr. Wanniski, and Polyconomics, Inc., have achieved recognition worldwide for the efficacy of the supply-side political-economic model.