[Congressional Record Volume 144, Number 145 (Tuesday, October 13, 1998)]
[Extensions of Remarks]
[Pages E2146-E2147]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   FREE MARKETS, NOT THE IMF, IS THE ANSWER TO GLOBAL ECONOMIC CRISIS

                                 ______
                                 

                          HON. PHILIP M. CRANE

                              of illinois

                    in the house of representatives

                       Tuesday, October 13, 1998

  Mr. CRANE. Mr. Speaker, one of the biggest issues being negotiated 
between our Congressional Leadership and the White House is funding for 
the International Monetary Fund, the IMF. Indeed, debate over how best 
to address the various international financial crisis de jour is taking 
place all over the world.
  I urge the Leadership to consider the thoughts of monetary policy 
experts like the Nobel Prize winning economist Milton Friedman. 
Specifically, I commend to my colleagues' attention an article from the 
Tuesday, October 13, 1998 edition of the Wall Street Journal by Mr. 
Friedman entitled: ``Markets to the Rescue''.
  Among other ideas, Mr. Friedman suggests that the IMF's interventions 
in markets around the world has caused or exacerbated the various 
economic crises which, in turn, are having a significant impact on the 
otherwise healthy U.S. economy.
  I urge my colleagues to consider what Mr. Friedman has to say about 
the IMF before we give one more dime of our taxpayers' money to that 
international agency.

             [From the Wall Street Journal, Oct. 13, 1988]

                         Markets to the Rescue

                          (By Milton Friedman)

       The air is rife with proposals to reform the International 
     Monetary Fund, increase its funds and create new 
     international agencies to help guide global financial 
     markets. Indeed, Congress and the Clinton administration 
     spent much of the last week's budget negotiations find-tuning 
     the details of the U.S.'s latest $18 billion IMF subvention 
     package. Such talk is on a par with the advice to the 
     inebriate that the cure for a hangover is the hair of the dog 
     that bit him. As George Shultz, William Simon and Walter 
     Wriston wrote on this page in February: ``The IMF is 
     ineffective, unnecessary, and obsolete. We do not need 
     another IMF. . . . Once the Asian crisis is over, we should 
     abolish the one we have.'' Centralized planning works no 
     better on the global than on the national level.
       The IMF was established at Bretton Woods in 1944 to serve 
     one purpose and one purpose only: to supervise the operation 
     of the system of fixed exchange rates also established at 
     Bretton Woods. That system collapsed on Aug. 15, 1971, when 
     President Nixon, as part of a package of economic changes 
     including wage and price ceilings, ``closed the gold 
     window''--that is, refused to continue the commitment the 
     U.S. had undertaken at Bretton Woods to buy and sell gold at 
     $35 an ounce. The IMF lost its only function and should have 
     closed shop.


                         international Agencies

       But few things are so permanent as government agencies, 
     including international agencies. The IMF, sitting on a pile 
     of funds, sought and found a new function: serving as an 
     economic consulting agency to countries in trouble--an agency 
     that was unusual in that it offered money instead of charging 
     fees. It found plenty of clients, even though its advice was 
     not always good and, even when good, was not always followed. 
     However, its availability, and the funds it brought, 
     encouraged country after country to continue with unwise and 
     unsustainable policies longer than they otherwise would have 
     or could have. Russia is the latest example. The end result 
     has been more rather than less financial instability.
       The Mexican crisis in 1994-95 produced a quantum jump in 
     the scale of the IMF's activity. Mexico, it is said, was 
     ``bailed out'' by a $50 billion financial aid package from a 
     consortium including the IMF, the U.S., other countries and 
     other international agencies. In reality Mexico was not 
     bailed out. Foreign entities--banks and other financial 
     institutions--that had made dollar loans to Mexico that 
     Mexico could not repay were bailed out. The internal 
     recession that followed the bailout was deep and long; it 
     left the ordinary Mexican citzen facing higher prices for 
     goods and services with a sharply reduce income. That remains 
     true today.
       The Mexican bailout helped fuel the East Asian crisis that 
     erupted two years later. It encouraged individuals and 
     financial institutions to lend to and invest in the East 
     Asian countries, drawn by high domestic interest rates and 
     returns on investment, and reassured about currency risk by 
     the belief that the IMF would bail them out if the unexpected 
     happened and the exchange pegs broke. This effect has come to 
     be called ``moral hazard,'' though I regard that as something 
     of a libel. If someone offers you a gift, is it immoral for 
     you to accept it? Similarly, it's hard to blame private 
     lenders of accepting the IMF's implicit offer of insurance 
     against currency risk. However, I do blame the IMF for 
     offering the gift. And I blame the U.S. and other countries 
     that are members of the IMF for allowing taxpayer money to be 
     used to subsidize private banks and other financial 
     institutions.
       Seventy-five years ago, John Maynard Keynes pointed out 
     that ``if the external price level is unstable, we cannot 
     keep both our own price level and our exchanges stable. And 
     we are compelled to choose.'' When Keynes wrote, he could 
     take free capital movement for granted. The introduction of 
     exchange controls by Hjalmar Schacht in the 1930's converted 
     Keynes's dilemma into a trilemma. Of the three objectives--
     free capital movement, a fixed exchange rate, independent 
     domestic monetary--free capital movement, a fixed exchange 
     rate, independent domestic monetary policy--any two, but not 
     all three, are viable. We are compelled to choose.
       The attempt by South Korea, Thailand, Malaysia and 
     Indonesia to have all three--with the encouragement of the 
     IMF--has produced the external financial crisis that has 
     pummeled those countries and spread concern around the world, 
     just as similar attempts produced financial crisis in Britian 
     in 1967, in Chile in the early 1980's, in Mexico in 1995 and 
     in many other cases.
       Some economists, notably Paul Krugman and Joseph Stiglitz, 
     have suggested resolving the trilemma by abandoning free 
     capital movement, and Malaysia has followed that course. In 
     my view, that is the worst possible choice. Emerging 
     countries need external capital, and particularly the 
     discipline and knowledge that comes with it, to name the best 
     use of their capacities. Moreover, there is a long history 
     demonstrating that exchange controls are porus and that the 
     attempt to enforce them invariably leads to corruption and an 
     extension of government controls, hardly the way to generate 
     healthy growth.
       Either of the other alternatives seems to me far superior. 
     One is to fix the exchange rate, by adopting a common or 
     unified currency, as the states of the U.S. and Panama (whose 
     economy is dollarized) have done and as the participants in 
     the Euro propose to do, or by establishing a currency board, 
     as Hong Kong and Argentina have done. The key element of this 
     alternative is that there is only one central bank for the 
     countries using the same currency: the European Central Bank 
     for the Euro countries; the Federal Reserve for the other 
     countries.
       Hong Kong and Argentina have retained the option of 
     terminating their currency boards, changing the fixed rate, 
     or introducing central bank features, as the Hong Kong 
     Monetary Authority has done in a limited way. As a result, 
     they are not immune to infection from foreign-exchange crises 
     originating elsewhere. Nonetheless, currency boards have a 
     good record of surviving such crises intact. Those options 
     have not been retained by California or Panama, and will not 
     be retained by the countries that adopt the Euro as their 
     sole currency.
       Proponents of fixed exchange rates often fail to recognize 
     that a truly fixed rate is fundamentally different from a 
     pegged one. If Argentina has a balance of payments deficit--
     if dollar receipts from abroad are less than payments due 
     abroad--the quantity of currency (high-powered or base money) 
     automatically goes down. That brings pressure on the economy 
     to reduce foreign payments and increase foreign receipts. The 
     economy cannot evade the discipline of external transactions; 
     it must adjust. Under the pegged system, by contrast, when 
     Thailand had a balance of payments deficit, the Bank of 
     Thailand did not have to reduce the quantity of high-powered 
     money. It could evade the discipline of external 
     transactions, at least for a time, by drawing on its dollar 
     reserves or borrowing dollars from abroad to finance the 
     deficit.
       Such a pegged exchange rate regime is a ticking bomb. It is 
     never easy to know whether a deficit it transitory and will 
     soon be reversed or is a precursor to further deficits. The 
     temptation is always to hope for the best, and avoid any 
     action that would tend to depress the domestic economy. Such 
     a policy can smooth over minor and temporary problems, but it 
     lets minor problems that are not transitory accumulate. When 
     that happens, the minor adjustments in exchange rates that 
     would have cleared up the

[[Page E2147]]

     initial problem will no longer suffice. It now takes a major 
     change. Moreover, at this stage, the direction of any likely 
     change is clear to everyone--in the case of Thailand, a 
     devaluation. A speculator who sold the Thai baht short could 
     at worst lose commissions and interest on his capital since 
     the peg meant that he could cover his short at the same price 
     at which he sold it if the baht was not devalued. On the 
     other hand, a devaluation would bring large profits.
       Many of those responsible for the East Asia crisis have 
     been unable to resist the temptation to blame speculators for 
     their problems. In fact, their policies gave speculators a 
     nearly one-way bet, and by taking that bet, the speculators 
     conferred not harm but benefits. Would Thailand have 
     benefited from being able to continue its unsustainable 
     policies longer?
       Capital controls and unified currencies are two ways out of 
     the trilemma. The remaining option is to let exchange rates 
     be determined in the market predominantly on the basis of 
     private transactions. In a pure form, clean floating, the 
     central bank does not intervene in the market to affect the 
     exchange rate, though it or the government may engage in 
     exchange transactions in the course of its other activities. 
     In practice, dirty floating is more common: The central bank 
     intervenes from time to time to affect the exchange rate but 
     does not announce in advance any specific value that it will 
     seek to maintain. That is the regime currently followed by 
     the U.S., Britain, Japan and many other countries.


                             Floating Rate

       Under a floating rate, there cannot be and never has been a 
     foreign exchange crisis, though there may well be internal 
     crises, as in Japan. The reason is simple: Changes in 
     exchange rates absorb the pressures that would otherwise lead 
     to crises in a regime that tried to peg the exchange rate 
     while maintaining domestic monetary independence. The foreign 
     exchange crisis that affected South Korea, Thailand, Malaysia 
     and Indonesia did not spill over to New Zealand or Australia, 
     because those countries had floating exchange rates.
       As between the alternatives of a truly fixed exchange rate 
     and a floating exchange rate, which one is preferable depends 
     on the specific characteristics of the country involved. In 
     particular, much depends on whether a given country has a 
     major trading partner with a good record for stable monetary 
     policy, thus providing a desirable currency with which to be 
     linked. However, so long as a country chooses and adheres to 
     one of the two regimes, it will be spared foreign-exchange 
     crises and there will be no role for an international agency 
     to supplement the market. Perhaps that is the reason why the 
     IMF has implicitly favored pegged exchange rates.
       The present crisis is not the result of market failure. 
     Rather, it is the result of governments intervening to or 
     seeking to supersede the market, both internally via loans, 
     subsidies, or taxes and other handicaps, and externally via 
     the IMF, the World Bank and other international agencies. We 
     do not need more powerful government agencies spending still 
     more of the taxpayers' money, with limited of nonexistent 
     accountability. That would simply be throwing good money 
     after bad. We need government, both within the nations and 
     internationally, to get out of the way and let the market 
     work. The more that people spend or lend their own money, and 
     the less they spend or lend taxpayer money, the better.

     

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