Ron Paul First Statement on International Economic Turmoil
September 16, 1998
(J. Bradley Jansen was Ron Paul’s legislative staffer for these issues at this time)
Opening Statement by Rep. Ron Paul
House Banking and Financial Services Committee
Hearing on International Economic Turmoil
15 September 1998
As we debate the international economic turmoil we are witnessing today, proponents of an expanded mission for the International Monetary Fund will argue that we need to act quickly to approve the additional funding. They would like us to believe that the IMF will staunch the “contagion” and promote “stability.” And that there is no other bureaucratic institution that can handle the job. Events have proven how specious these arguments are. The turmoil is the natural consequence of a sustained world-wide credit expansion of unprecedented proportions.
When some of us opposed the IMF bailout of Thailand over a year ago claiming that it would contribute to the moral hazard problem and add an incentive for the problem to spread, we were shouted down with condescending lectures that if we failed to “rescue” Thailand the financial contagion would spread to other countries. We tried their approach; it failed. The U.S. Treasury and the IMF orchestrated a bailout of a corrupt and inept government in Thailand for the benefit of itself and rich foreign investors. South Korea and Indonesia were two of the countries lined up to bail out the government in Thailand (where the voters showed greater wisdom by kicking out the government).
We tried the U.S. Treasury and IMF approach to stop the contagion. Jeffery Sachs explained it well when he characterized the IMF as the Typhoid Mary of emerging markets, spreading recession where ever it went. The IMF’s approach created a moral hazard that then infected both South Korea and Indonesia which suffered what was then referred to as the “Asian flu” but what must now be called the “IMF flu.” Under the tutelage of the IMF, we bailout the countries that had bailed out the others with taxpayer dollars. The people of South Korea and Indonesia had a better solution–they also kicked out the corrupt rulers the IMF was propping up against the will of the people.
The more money the IMF and the U.S. Treasury threw at the problem in a desperate attempt to mask over the failure of their approach, the bigger the bailouts grew and the wider the crises spread. Russia and Ukraine are but the latest examples. More will surely follow. The IMF flu continues to spread its contagion.
A recent Wall Street Journal article (“IMF Says Resources Are Low As Needs Rise in Global Crisis”, September 13, 1998) reports, “Many critics complain the IMF’s loans don’t actually bail out crisis-ridden countries, and, falling further into turmoil, they end up wasting their precious aid. Russia is a case in point,…[after it] received its special emergency package in July, the political and economic chaos there only intensified. Some key House leaders pointed to a newspaper interview in a Russian economic daily, in which Anatoly Chubais, Russia’s previous IMF liaison, reportedly said Russia had to deceive the IMF in order to get its emergency aid in July.“
The Kansas City Star reports (“GOP lawmakers hesitant to give $18 billion to IMF Money is wasted on inefficiency and corruption, some say,” September 13, 1998) that many economists argue that IMF prescriptions cause higher unemployment and lower living standards for the lower classes and that “the idea of the IMF stepping in to help actually leads to more bad or even corrupt lending and investing practices among the wealthy overseas. Cynthia Latta, at Standard & Poor’s DRI, an economic forecasting and consulting firm, adds, ‘What the IMF does by throwing money at problems is keep things going and avoid the need to accept losses until they can be passed onto the taxpayers,’ she said. ‘Maybe the Republicans finally see this is what is going on.’”
The supporters of the IMF-led bailouts have a strange definition of “stability:” plunging value of currencies, economic systems collapsing and exchange of goods and services reduced to barter over monetary media. After witnessing the riotous response to IMF programs in Asia and the near complete collapse of the economy in Indonesia, how do the proponents of an expanded mission for the IMF define “stability?”
Perhaps the best annunciation of the IMF’s view of the world comes from an address by Michel Camdessus, Managing Director of the IMF (“Russia’s Transformation Efforts at a Turning Point” at a Conference of the U.S.-Russia Business Council; Washington, D.C., March 29, 1995) a few years ago on Russia,
For more than three years now, the IMF has been helping Russia’s efforts to stabilize and reform its economy and to establish the conditions needed for sustainable growth in output and living standards…Confidence has been undermined; domestic saving and investment have been discouraged; capital flight has continued; economic activity has still not begun to recover; and the poor, particularly among the elderly, have suffered very severely from the ravages of rapid inflation and deep recession… you will see if I quote from President Yeltsin’s address to the Federal Assembly last month. President Yeltsin said: ‘This year we are to build a bridge from our inflationary past to our investment future. If we don’t do this, it will be an unpardonable waste of time… The main start-up condition is financial stabilization and the strengthening of the ruble… The target for 1995 is to substantially reduce inflation and to make it predictable. If we meet that condition, we will be able to actually begin shaping a potential for economic growth.’
The IMF director explained that the IMF program in Russia aimed to reduce inflation, reduce the budget deficit and was committed to liberalization and structural reform. He added, “I am also impressed by the commitment to monetary discipline at the central bank,” and explained:
Following a marked tightening of monetary policy since late 1994, inflation last month was down to 11 percent. But there is much further to go. The program requires that this tight monetary stance be maintained, with no direct central bank lending to the government and no net lending to banks. This tight credit policy will not only reduce inflation, but also, of course, help to stabilize the ruble and contribute to a rebuilding of international reserves [emphasis added].
ARTIFICIAL CREDIT CREATION CAUSE OF TURMOIL
The IMF director explained it well: artificial credit creation by government (and the monetizing of government debt) causes inflation that destabilizes currencies and is the root cause of the international turmoil we are witnessing–this time in Russia. By following an inflationist, easy credit policy, the Russian government has brought many of the current problems on itself. Printing money to cover excessive government spending contributes to inflation which, in turn, devalues the currency. The monetary meltdown in Russia, worsened with International Monetary Fund involvement, is a natural consequence of correcting misguided policies. Market reality should be acknowledged and allowed to make the necessary corrections. According to free market/sound money economics, all credit expansions set the stage for the correction.
The new, post-Bretton Woods era is one where the IMF is not only unneeded but counterproductive. Martin Mayer, guest scholar at the Brookings Institution and author of The Bankers: The Next Generation, writes in a recent column (“Who Should Regulate the Banks,” Barrons August 31, 1998), “Seen through a wide-angle lens, the storms that have buffeted banking (and incidentally, Asia and Russia) reveal our ongoing passage from a climate where banks dominate markets to a climate where markets dominate banks.”
VACCINE EXISTS FOR IMF FLU
It is interesting to note that there seems to be a vaccine for the IMF flu. Hong Kong, Singapore and Taiwan were relatively unaffected by the turmoil. Hong Kong has a currency board that limits the monetary authority’s ability to create credit artificially. Singapore’s banking system does has not a government-backed deposit insurance. The Republic of China on Taiwan is not a member of the IMF, for geopolitical reasons, and knows that it will never receive an IMF bailout–therefore, it must take responsibility for its own actions and not rely on “burden sharing” whereby every tries to privatize their own profits but socialize their losses (with predictably disastrous results).
Governmental institutions, such as the IMF, that attempt to “manage” the market are destined to fail. Better alternatives exist. Federal Reserve Board Governor Alan Greenspan makes clear that the gold standard approach makes adjustments automatically without the need for a money manager. His September 1, 1981 Wall Street Journal article could be applied to Russia now; he proposed to institute convertibility gradually by, in effect, “creating a dual currency with a limited issue of dollars [or in this case rubles] convertible into gold. Initially, they could be deferred claims to gold, for example, five-year Treasury notes with interest and principal payable in grams or ounces of gold.”
Wayne Angell, then senior member of the Board of Governors of the Federal Reserve, did in fact propose a similar gold standard approach specifically for Russia in a 1992 Izvestia newspaper interview. Excerpted later in a Wall Street Journal article (“My Plan for a Russian Currency,” March 26, 1992), he wrote, “There is widespread agreement that in order for Russia and the other states of the former Soviet Union to reap the full benefits of a market economy, sound money with a stable value in terms of purchasing power is required.” IMF prescriptions for currency devaluations violate this simple principle.
Other thoughtful proposals to allow for market mechanisms to work are being proposed and deserve consideration. I hope that our speakers today could provide some insight into these ideas. One is to acknowledge the current reality and “dollarize” the economy such as Panama and use U.S. currency notes as legal tender in Russia–this action could legitimize much of the black market trade in the country. Another benefit is that Panama tends to have lower interest rates than its neighbors.
A politically more palatable proposal could be to legalize dollars in parallel with a ruble governed only by a currency board as Argentina has instituted. Former Argentine Finance Minister Domingo Cavallo’s advice stems from Argentina’s successful experience arresting hyperinflation. Any market proposal must curtail the government’s ability to create credit artificially.
Murray Rothbard, in an article A Gold Standard For Russia, reprinted in his book Making Economic Sense, comments on the interview Wayne Angell gave for Izvestia, that he “proceeded to a cogent explanation of the importance of a prompt return to gold…To gain credibility [after being systematically depreciated], to become a truly hard money, Angell explained, the ruble must become what Angell, with remarkable candor, referred to as ‘honest money.’” Average Russians have suffered long enough with the IMF’s prescriptions for dishonest money.
We should follow the recommendations of the National Family Farm Coalition which is concerned with the loss of export markets to the IMF flu and reject new IMF funding. Sound monetary policies are the only prescription that can prevent the shredding of our paper currencies and paper markets.