Kristalina Georgieva’s nomination as Managing Director of the International Monetary Fund is entirely appropriate. She is a Bulgarian communist by background, for 14 years until 1993 a Professor at the Karl Marx Higher Institute of Economics under that country’s communist government. The IMF itself and its sister institution the World Bank have since their foundation been anti-market forces of central planning. It is high time the Trump Administration and other believers in the free market acted to close down these clogs to the global economy.
The influence of Communist thinking on the IMF and World Bank has always been strong. The Soviet Union were active participants in the 1944 Bretton Woods conference that established them. More important, the two Western leaders at the conference were John Maynard Keynes, not technically a Communist but sympathetic to Communist teachings since the 1930s and Harry Dexter White, undoubtedly a Communist since he was an active Soviet spy. Their influence is celebrated by the World Bank in naming its main conference room the Keynes-White Room – presumably the alternative location for big meetings is the Rosenberg-Philby Suite.
“Russia is the first instance of a socialist country in action – and it works!” enthused White. Accordingly, he sought to bring the benefits of Soviet efficiency and innovation to the whole world, by sponsoring global institutions that would plan for the world economy just as Gosplan planned for the Soviet one. Both he and Keynes supported an all-powerful institution that would regulate global balances of payments and direct the global economy accordingly. It was only Britain’s economic weakness and American strength that led to the creation of the IMF, regulating only payments deficits, rather than Keynes’ vision of a Clearing Union that would regulate both deficit and surplus countries, operating a global currency “bancor.”
Both participants rejected the pre-war Gold Standard, which had through market forces regulated payment disparities automatically (curiously enough, the third participant in Bretton Woods, the Soviet Union, was not entirely averse to the Gold Standard since it was itself a major gold producer, second only to South Africa.)
By a stroke of luck for the world, White did not become the first chairman of the IMF. By the time the appointment was made Harry Truman was President and suspicion was rising about White’s Soviet espionage. Truman had a healthy distaste for Soviet spies but realized that withdrawing White’s name suddenly might cause awkward questions to be asked. Thus, in a master stroke of diplomacy he instituted the system from which Georgieva appears about to benefit, of a European chairman for the-IMF while the United States runs the World Bank.
As a consequence of Truman’s self-denial, the IMF became a much less powerful institution than White and Keynes had intended. In its first three decades, it contented itself with providing loans to industrial countries having difficulties under the Bretton Woods quasi-fixed exchange rate system. With those loans, it provided stern advice to recipient countries about how they must cut public spending and increase taxes to get the balance of payments back in line, but that advice was inevitable under the Bretton Woods system in any case.
Britain suffered three decades of very slow growth and constant balance of payments crises, while most other countries were enjoying economic miracles, because its feeble governments could not keep public spending under control. It would have fared better under a free-floating system (as was proposed in 1952) which would have allowed the pound to sink soggily to its equilibrium level. It would also have fared better under a Gold Standard, which would have imposed the required discipline automatically on the British budget so that follies like Macmillan’s 1958 sacking of Peter Thorneycroft would have immediately been punished by the markets, forcing the inept Macmillan to resign in well-deserved disgrace.
In any case, Britain’s perpetual balance of payments crises in 1945-79 were not the IMF’s fault, but that of the Bretton Woods system itself. The IMF indeed played a useful role for Prime Minister James Callaghan in 1976 (shortly after Bretton Woods had collapsed, but before the IMF had figured out a new role) in forcing his government to abandon its wild over-spending.
After 1979, the IMF took on a new role, that of bullying Third World governments. Whenever a government got into balance of payment difficulties, the IMF would lend it money, and impose conditions that in practice amounted to a massive tax increase, usually accompanied by wasteful spending on social and environmental projects the IMF favored. After a couple of decades of this, demand for the IMF’s services declined to the vanishing point — also money was readily available in the over-liquid international capital markets. Thus in 2000-07 the IMF’s balance sheet shrank markedly and it seemed likely that it would eventually atrophy, although it also became clear that there was no effective way of closing the institution, however useless it was.
After 2008, a wave of left-wing governments in major centers and a rather manufactured panic about the effects of the global recession, caused the IMF to be successful in its search for re-capitalization, with a massive increase in 2010-15. The demand side of the equation was solved by the EU using the IMF to fund partially the bailouts of various of its members and near members, so huge amounts were committed to Greece, Cyprus and Ukraine. In Greece, for example, IMF money was used to perpetuate Greece’s grossly uneconomic membership of the euro, which grossly overprices the lackadaisical Greek labor force, while massive haircuts were imposed on the private sector banks who had been foolish enough to lend to the country.
In Europe, the IMF has cooperated with an equally anti-market institution, the Brussels bureaucracy, to prevent market reforms in EU members and near members. More recently, it has single-handedly engaged in a bailout of the Mauricio Macri government in Argentina, to the tune of close to $50 billion. Contrary to the IMF’s past bailout patterns, this bailout enabled the Macri government to postpone essential budget-cutting from the waste of leftist administrations of Nestor Kirchner and his wife and successor Cristina Fernandez. Consequently, the country is now over-indebted and in poor shape going into the November election that will almost certainly bring Cristina Fernandez back to power, pushing Argentina into the kind of impoverished chaos that we now see in Venezuela.
The World Bank also has a thoroughly anti-market approach. It lends primarily to governments, for projects many of which are sponsored and pushed by the World Bank’s own staff. Private sector participation is very limited, and public-sector solutions preferred. This leads to huge corruption and aggrandization of governments, most of which lack the capability to manage the large percentage of the economy for which they are theoretically responsible.
In addition, the World Bank pushes projects that reflect the fashionable theories among the Western intelligentsia; thus dozens of hopelessly uneconomic steel mills were set up in country after country in the 1960s. Later, the World Bank’s emphasis switched to environmental projects, some of which (though by no means all) were indeed beneficial for the environment but produced no hard-currency income with which the World Bank debt could be serviced. Today, the emphasis is on projects that combat global warming, the fashionable nostrum of the moment. Naturally, many of these projects produce energy at hopelessly uneconomic costs, or in other ways subtract from the economic viability of the poor country in which they are situated, and which must pay back the debt it has incurred.
The World Bank and IMF did not fill an economic gap, except in the highly disturbed years after World War II. Once the private international capital markets got going again, after 1960, there was ample finance available for any economically robust project, wherever it was situated. Advice for Third World governments was also available, from the London merchant banks who had provided such advice very effectively before 1914. Once the euro-market got going, they were perfectly capable of replicating their pre-1914 function in this area. Alas, the World Bank and IMF undercut the private markets, providing advice for free (if generally of extremely poor quality) and thereby preventing the London merchant banks from re-filling their traditional market niche.
Since 1994, money has been only too available, as central banks worldwide have flooded the international financial system with spurious liquidity. As with all liquidity excesses, this has produced a gigantic wave of misguided lending and investment in Third World countries, most of which will have to be written off, damaging both the countries and their lenders.
The World Bank and IMF have contributed to this excess lending, mostly by financing countries and projects that did not deserve funding in any kind of free-market system. The countries to which they have lent have wasted the money even more grossly than their neighbors, while the projects for which they have lent have had even less economic reality than those financed by the private sector (which were at least desired by somebody, other than international bureaucrats).
In an ideal world, the next economic downturn would see the World Bank and IMF rendered insolvent as their loans went sour, while disgraceful provisions by which they cut ahead of the private sector in creditors’ restructurings would be ignored. Demands from both institutions for new capital would be firmly rejected, and they would be forced to shut up shop, forcing a mass of otherwise unemployable overstuffed officials onto the job market. Sadly, in our naughty world, this Nirvana is very unlikely indeed.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)