Put the IMF Out of Its Misery
Pity the poor International Monetary Fund. For the first quarter
century of its existence, the IMF had a clear, important mandate.
Today it has none.
It was born in the closing years of World War II, when
representatives from 44 nations met in Bretton Woods, N.H., to
create a new international financial system. Under the rules they
established, the dollar was fixed to gold at $35 per ounce, and all
the central banks pegged their currencies to the dollar. The banks
simply agreed to intervene to sell and buy their currencies for
dollars whenever the value of those currencies rose or fell too
much. For the next 25 years, inflation was low and stable, and the
world economy flourished.
The IMF was the mechanic that kept this system running smoothly.
Often, this meant staying out of the way: When a certain nation's
currency rose in value, the central bank of that nation would buy
dollars and sell its local currency to bring it back into line.
When its currency fell, the bank would sell dollars to buy back its
depreciating local currency. But sometimes there weren't enough
dollars available. The system suddenly was in peril.
Enter the IMF to the rescue. Its lines of credit were the oil that
could provide the offending central bank the reserves to stave off
financial disaster and keep the system running smoothly. The IMF
knew when to intervene (shortage of reserves), how much to
intervene (enough to restore confidence that the central bank could
stand behind the fixed value of money), and, most importantly, when
to stop intervening (when confidence was restored and the currency
was near parity).
But in the late 1960s and early 1970s, the wheels began to come off
the system that produced monetary stability. The United States,
mired in Vietnam and spending to create a Great Society , could no
longer hold up its end of the bargain. Ballooning budget deficits
led many to believe the United States couldn't maintain the
$35-per-ounce gold peg. Nervous dollar holders around the world
lined up to convert their dollars into gold.
Neither the cascading deficits nor the dwindling gold reserves did
anything to ease the concern about the dollar. The United States
had to react, and the path it chose led to the demise of the
Bretton Woods System. The dollar peg to gold was loosened in 1968
and discarded completely in August 1971. Then, in early 1973, the
last vestiges of pegged currencies were set aside. Suddenly, the
IMF found itself with a large bureaucracy, an expensive building,
and nothing to do.
But, as with all bureaucracies, self-preservation was paramount.
The IMF would re-invent itself and prove its relevancy. So over the
last 30 years it has been finding new reasons to intervene. A
country can't pay its loans? Send in an IMF team to the rescue.
Unfortunately, the "rescues" usually leave countries even more in a
To see why, consider the post-1973 formula for intervention the IMF
developed -- one with perverse incentives that dooms most countries
to failure. Want an IMF loan? First you must raise tax rates and
devalue your currency. Translated into English, this means destroy
incentives for people to work, save and invest, and destroy any
remaining confidence in your monetary system.
What are the chances that a country adopting such policies will
grow and position itself to pay off the new debt? Probably slim to
none. Which is good news for the IMF, because it initiates a new
cycle of aid and dependency that will bring the country back again,
hat in hand. The IMF has a new client state to add to its existing
Which brings us to today. As the IMF prepares for its Sept. 23-24
meetings in Dubai, UAE, it's fair to ask: Should the IMF still
exist? Given its recent history, the answer appears to be no. Some
would therefore conclude that the IMF should be abolished outright.
After all, its large, luxurious building in the center of
Washington would make beautiful condominiums. What a marvelous way
to relieve the city's housing shortage.
But here's a more compassionate proposal: Simply give IMF employees
the proper incentives in deciding where and when to impose their
pre-conditions for loans. Require that, henceforth, the pensions of
all IMF employees be invested exclusively in the bonds of the
countries in which they choose to intervene. In no time, such a
plan would bring the optimal number of interventions -- and the
optimal number of IMF employees.
is director of the Center for International Trade and Economics at
The Heritage Foundation.
Reprinted with permission of Foxnews.com