Ron Paul View on IMF Bill HR 1488
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at the time)
by Ron Paul
“Bretton Woods is dead. Long live Bretton Woods!,” cheer the supporters of H.R. 1488. Created in the postwar era as an institution to manage the global fixed exchange rate system, the International Monetary Fund (IMF) lost any remaining justification for United States’ continued involvement when President Richard Nixon closed the gold window in 1971. The IMF’s charge of maintaining “pegged but adjustable exchange rates” no longer suits the current global financial system. Although the IMF has tried to “reinvent” itself to adapt to changing international systems, other institutions are better equipped to promote multinational development assistance, if one even accepts that that is a goal that we should pursue. H.R. 1488 should be rejected.
Since the IMF no longer uses gold as a reserve currency to aid countries with temporary balance-of-payments problems, the gold from the original donors should be returned to the respective member nations. Any corresponding corrections in quota allotments should be made in “paper gold” or Special Drawing Rights (SDRs). Original quota subscriptions were paid 25% in gold and 75% in the local currency. So-called “hard currencies” now play that role.
The huge growth of the private international capital markets makes it necessary for a doubling of our “quota” or contribution, argue the supporters of the IMF. It is exactly such growth of private international capital markets that renders the IMF an anachronism. The technologically-driven increases in both the size and speed of private global capital transfers severely limits the IMF’s ability to “manage” or control these markets. In other words, private market regulation will naturally discipline the governments of countries that manage their fiscal affairs irresponsibly.
It is this irrational fear of the private international capital markets–and the discipline they instill–that drives the IMF to wax apocalyptic of the dangers of the free market. If a country follows irresponsible policies that discourage savings and investment–policies that impoverish their citizens, the IMF no longer has the same capability to counteract the discipline of the working private markets that it used to have. Under the previous international financial regime under the IMF, the Fund allowed a country to manipulate its economic policies, often for politically-expedient reasons, without the same fear of the discipline of the private international capital markets.
The IMF, by subverting the market, encourages countries to “skate on thinner ice” than they would otherwise have been permitted if properly disciplined by the private international capital markets. This moral hazard, with its easy credit scheme, pushes countries to follow policies that would not have been possible without IMF-style lack of discipline. Set up to allow member countries to finance short-term balance of payments difficulties, the IMF has strayed into aid over the long-term to countries that flout fiscal common sense.
According to Doug Bandow of the Cato Institute, eleven nations had relied on IMF aid for more than 30 years through 1993; 32 countries borrowed from the Fund for between 20 and 29 years; and 41 nations, nearly one-fourth of the world’s total, had been borrowers for between 10 and 19 years. Clearly, the IMF is in a business of long-term development assistance through its General Arrangements to Borrow (GAB). The supporters of the GAB are not only content to subvert market discipline in a short-term, limited way, but they now claim to need the New Arrangements to Borrow (NAB) capability to extend their waning influence.
The development institution mission that the IMF now claims to have converted itself into merely duplicates the efforts of other institutions that have the authority and expertise to act as one. Groups as diverse as the libertarian Cato Institute and the Friends of the Earth, a worldwide network of environmental organizations, point out that the IMF is not a development organization and should get out of the development business. The Enhanced Structural Adjustment Facility (ESAF) should be opposed.
The U.S. Treasury request for the IFIs totals $1.557 billion. This request for taxpayer dollars takes money from the productive sectors of the U.S. economy to redistribute it to the less productive (read corrupt foreign government) sectors. The higher taxes imposed to fund this irresponsibility causes higher unemployment, an increase in the cost of credit, higher inflation with deficit spending, and higher interest rates. This result makes it harder for the recipients of IMF assistance to follow a more fiscally-responsible path to economic development, thus, creating a vicious circle of the need for more IMF aid.
Reflecting its feeble attempt to change its spots, the IMF has spawned several regional International Financial Institutions (IFIs). It is yet unexplained why an institution whose role is to promote global monetary cooperation and fiscal and monetary responsibility needs overlapping regional organizations to duplicate their activities. Perhaps the IFIs are coming to the conclusion that financial decisions are best decided at the lowest level possible since local agents have better information with which to make appropriate decisions–though it must be said that they could never claim to operate with perfect information.
“The IMF’s role in the global economy,” according to a report by the Friends of the Earth, “is to promote monetary cooperation and fiscal and monetary responsibility. The IMF could do this by publicly releasing more of the country[‘s] economic information that it collects. By providing accurate information to the market, the IMF could reduce the rampant speculation that can bring about an international fiscal crisis like Mexico’s.” The report adds, “In fact, it is the secretive policies and lack of information disclosure [by the IMF] that can make volatile capital flows so disruptive.” In fact, the IMF actually promotes fiscal and monetary irresponsibility.