Ron Paul’s Remarks on the Conference Report on the IMF
(J. Bradley Jansen was Ron Paul’s legislative staffer on these issues at this time)
Congressman Ron Paul
Fourteenth District of Texas
Remarks on THE FOREIGN OPPERATIONS APPROPRIATIONS CONFERENCE REPORT
REGARDING the International Monetary Fund (IMF)
Mr. Speaker, Congress wisely did not vote to appropriate $3.5 billion appropriation for the IMF which will be used to help finance the New Arrangements to Borrow (NAB). These funds will not be used much differently than previous funds allocated to the IMF over the years under the GAB, or General Arrangements to Borrow. Regardless of what we are told and how this funding is described, these funds are used for more bail-outs to countries in trouble and present a burden to the U.S. taxpayer.
The IMF has a poor track record of preventing financial crises. “All of the major currency and banking crises of the last five years have occurred under conditions of heightened surveillance by the IMF,” according to Gregory Fossedal, a leading expert on the subject, reports William Simon, the former secretary of the Treasury and the current president of the Olin Foundation, in a recent issue of the Wall Street Journal. This article clearly explains why the IMF “may actually promote crises, because governments often resist sound economic and financial policies…because they know that the IMF will be there to bail them out in the event of a crisis.” We should add that the IMF will be bailing them out with U.S. taxpayers’ money if we fail to follow the sound judgment of the House and reject any additional IMF funding.
Such “moral hazard” fears are widespread and well founded. “[With outside assistance], governments may be encouraged to delay necessary policy reforms and investors may be tempted to continue pouting money into recklessly run economies on the assumption that they will be bailed out if things go wrong,” writes Robert Choate in the Financial Times. Under the IMF’s standard limits on borrowing, countries are limited to 150% of their respective quota. Thailand will get $3.9 billion from the IMF or 505% of its quota, and Indonesia will get $10.1 billion or 490% of its quota. While these allotments are larger than the IMF’s own rules would normally allow, Mexico was offered $17.8 billion or 688% of its quota in 1995. What was the lesson Thailand and Indonesia learned from the IMF’s treatment of Mexico?
“[The generosity of several governments and international institutions towards Indonesia] is likely to cause more problems than it resolves…Investors will be encouraged to take ever bigger risks in other emerging economies, confident that they too will be bailed out. This may already be happening: when word came on October 31st that an agreement had been reached with Indonesia, share prices rose in Brazil, another country where investors are worried about a currency collapse. If the IMF, and especially the Americans, stand ready to help the Indonesians, the markets seem to have concluded, they are certain to come to the aid of Brazil…The structure and size of the Indonesian loans package create worrying precedents,” writes The Economist in the current issue.
Although it is assumed that only Third World nations are bailed-out, the United States has been a recipient of such funds when the dollar was under attack in the late 1970’s. For every benefit there is a cost. One of the costs to those who receive funds will be the acceptance of “conditionalities” placed on them by the IMF which will advocate certain policies for those countries receiving the money. Generally, this deals with directives on taxes, spending and deficits. Although currently our dollar and economy seem strong, we are nevertheless setting the stage for the day when the U.S. dollar will once again need to be bailed out along IMF “surveillance and conditionalities” on how to manage our own economy.
The IMF was set up by the Bretton Woods Agreement in 1944 and came into operation shortly after World War II. The original intent of the IMF was to permit short-term loans to prop up those currencies whose issuing countries had negative balance of payments under the pseudo fixed-exchange rates of the Bretton Woods Agreement. However, this entire system collapsed in the early 1970’s, and the IMF has since then had to create a new job for itself. It now supports the economies of weaker nations by making “structural” long-term loans and bails out currencies that have come under attack such as in Mexico, Russia, Thailand, and most recently Indonesia.
Economics of the IMF
This whole process is doomed to failure. Some knowledgeable economists, even in the 1940’s, predicted that the concept of the IMF would not work and they were vindicated in 1971 when the fixed exchange rates established under Bretton Wood’s system collapsed. Bretton Woods institutionalized the notion that the IMF could be made of the “lender of last resort” to all the countries of the world by bailing out the weaker currencies, just as the Federal Reserve portends to be the lender of last resort to our domestic banks. The problem is that this type of “insurance” encourages a recklessness monetary idea.
The floating rates, which have existed since the breakdown of Bretton Woods in 1971, have functioned only with the assistance of the free-market floating rate system. Nevertheless, fluctuating fiat currencies eventually lead to chaos as we currently see in the Asian markets. Worldwide currency and financial conditions today are exactly opposite of what a market determined single hard currency would produce. To the extent governments manipulate the value of their currencies at will, we can expect sharp and sudden adjustments in the economies of the world.
The IMF’s policies resulted in international inflationism with the use of the Special Drawing Rights (SDR’s) and its guarantee that the weak currencies will bail out the even weaker currencies. It is through the IMF, along with the World Bank, that international economic planning is pursued while enhancing the concept of international government. The IMF, through the manipulation and bailing out of certain currencies, serves as a welfare tool of transferring real wealth from the richer to the poorer countries. The mechanism of the IMF, over the years, has also served to bail out banks which overextended themselves “investing” poor nations but do not want to be left holding the bag. Likewise, corporations which are encouraged to invest overseas through our inappropriate loan subsidies, such as the Overseas Private Investment Corporation and the Export-Import Bank, are also able to socialize the cost of risky ventures when these weaker economies predictably threaten a default.
The IMF comes to the rescue of the bankers and the corporations as well as the wealthy individuals of the particular countries being bailed out. For the most part the real cost falls on the United States’ taxpayers because they pay a disproportionate share of the IMF funding. Thus, the American taxpayer suffers through a lower standard of living. If we were to put purple dye on the bills that we were sending to Indonesia today, the bankers and investors on Wall Street would be walking around with purple pockets tomorrow.
The $3.5 billion new appropriation for the IMF was not brought to the House floor in the Conference Report on the Foreign Operations Appropriations bill. It was not funded in the House version of the Foreign Ops bill but did appear fully funded in the Senate version. The exact reason why it was not in the House version is not clear, but quite possibly it was to avoid open discussion about this new funding program that we are about to embark on at the U.S. taxpayer’s expense. Because of this process, we have had no House debate on this issue, there has been no expression of any interest in the House and certainly only a minimum understanding regarding this new funding. There are many powerful special interests that influence complicated legislation like this and easily skirt the attention of most Members of Congress.
The most facetious argument made by the political supporters of this appropriation, as has been the case over the decades, is that there is “no cost” for it. Although it requires an appropriation, the claim is that this is merely a “transfer of assets” between the United States and the IMF. The argument goes that if we give the IMF $3.5 billion, it, in turn, will give us a financial instrument indicating that we are entitled to the $3.5 billion the IMF pays interest on the funds they hold. The fallacy, of course, is that this money is taken out of the economy, removed from available sources of credit and is no longer available to the American citizen. Just because the CBO calls this a transfer of assets and is not counted in the budget deficit does not make it harmless, to say the least. These funds are “justified” in the name of “protecting the international monetary system” which is nothing more than bailing out countries which have spent and inflated more than others and hope to receive their salvation at U.S. taxpayer expense.
No additional funding should be given to the IMF. The IMF is no longer fulfilling its original intent and is now actually involved in projects which were never authorized. Even Bill Simon and George Schultz, both former Secretaries of the Treasury, advocate abolishing the IMF. 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 entire Mexico bail out a couple of years ago required more than $50 billion, mostly U.S. taxpayers’ money, to temporarily stabilize Mexico’s financial markets. However, this was primarily done to bail out the government of Mexico, as well as bankers and investors on Wall Street. Since the IMF is incapable of preventing problems, in time the market will make it irrelevant. But in the meantime, the process will continue to cost the American taxpayers a lot of money regardless of whether or not it’s accounted for in the deficit. The least that should be done is that if we feel compelled to pour more money into the IMF, we should demand the return of the U.S. gold that the IMF holds. According to the central bankers of the world, gold has been totally discredited, and the managers of fiat currencies claim to manage quite well without it. If this is the case, there is no sound reason for the IMF to hold gold and, thus, the gold should be “restituted,” or dispersed to the respective countries. The IMF has spent more than $170 billion since the 1960’s, and since 1978 there has been no monetary role for gold according to central bankers.
The IMF is nothing more than an international “engine” for inflation “fueled” by the creation of credit. The IMF’s Special Drawing Rights is an international fiat currency that, through the dilution effect, the weak currencies bail out the even weaker ones. Even if there is only a minimal increase in taxation necessary to finance IMF appropriations, the resulting inflationary impact is something that cannot be avoided or ignored.
There is no economic nor political benefit to the United States to continue participating in the IMF. Financial conditions around the world are now as precarious as they have ever been and a financial bubble built on the inflationary nature of all fiat currencies, along with IMF monetary mischief, warrants immediate and serious discussion regarding the need for a sound currency based on real value.
All financial bubbles and all inflations require corrections by recessions or depressions. These unwise central bank policies always result in these conditions. Although it might be tempting to divert blame from the central bankers of the world, including our Federal Reserve and the IMF, the responsibility truly lies with the U.S. Congress which permits these policies to exist by abdicating responsibility over monetary policy and appropriates funds to the IMF every time it is asked.
In time, the dollar will surely be on the receiving end of negative market forces. The dollar as a reserve currency has enjoyed the benefit of foreign central banks willing to hold them while we merrily march on with our inflationary policy and deficit financing. However, no country can pursue a policy that perpetuates huge negative balance of payments and negative balances of trade for extended periods of time. Eventually those dollars must return to their origin and devalue its existing currency. If one is concerned about the seriousness of the recent crises in Mexico, Indonesia, Thailand and elsewhere in the Far East, one should be that much more concerned about what will happen when the target becomes the U.S. dollar. This will probably occur after there is a definite downturn in our economy with escalating deficits. The mirage of low deficits that some claim for the U.S. Federal budget will be replaced by the reality that we are spending our children’s future by borrowing hundreds of billions of dollars each year from the various trust funds. Today, inflating the dollar to bail out a weaker currency may give the appearance of working, but once the tables are turned, dollar inflation, in order to bail out the dollar or the U.S. economy, will do exactly the opposite.
The time to correct this problem is now. The U.S. House should vote down funding $3.5 billion to perpetuate an international monetary system of finance which is doomed to fail, which is unfair, and which serves the powerful special interests at the expense of the American taxpayer–if it ever comes up for a vote. Unfortunately though, economic and financial chaos around the world will only serve as an excuse for the believers in strong international government to further intervene and pursue their goals. But what is needed is less government, less inflation and less international management of our currencies and our economy and more emphasis on a sound currency, free markets, and individual liberty.