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To: George Melloan, Wall Street Journal

From: Jude Wanniski

Re: The International Monetary Fund

Your Tuesday column, “Whither the IMF?” asks some of the right questions and
comes to some of the right conclusions, George, but I am afraid you still do
not see that the evils perpetrated by the IMF are the result of a greenback
world. If the Bush administration were to follow the advice of Jack Kemp and
fix the dollar to gold, the IMF no longer would have any reason to run
around the world “fixing” the economies of countries that have suffered
because of the floating dollar.

You know I have been writing about the “Evil
Empire” for more than 25 years, trying to get an U.S. president to tackle
the problem. The fact is that as long as the dollar can inflate and deflate,
as the Federal Reserve makes errors on one side of its balance sheet or the
other, our money-center banks and our Financial Establishment will use the
IMF as a safety net, to get their bad loans paid back by our taxpayers when
foreign governments are beaten down by the storms created by the chaotic
greenback dollar.

Your crisp and clear opening graph is worth quoting in full, before I
sharpen my point about gold: “When the International Monetary Fund
reinvented itself after the collapse of the Bretton Woods monetary system in
1971, it didn’t lack for ambition. It had started life with Bretton Woods 27
years earlier as a lender to countries temporarily short of foreign
exchange. After the 1971 collapse, it gave itself a somewhat larger task:
running the world.”

Exactly, but it did not happen exactly that way.

Before President Richard Nixon blew up the Bretton Woods international monetary system on Aug. 15, 1971, by tearing the paper dollar away from its gold anchor, our big
money-center banks could unilaterally lend money to developing countries in
Asia, Latin America and Africa. With a unit of account as good as gold,
inflation or deflation were not considerations going into the
loans. Good banks were able to do what good bankers can do in assessing the
borrower’s creditworthiness.

When banks no longer could guess which
direction the dollar would take as it swooped in inflationary and
deflationary directions, the big guys decided to shift to multilateral
loans. If Countries X, Y and Z looked like good prospects, private banks
could assemble loan packages for them. If Country Y got caught on the wrong
side of the dollar and could not come up with the funds to pay the banks,
the IMF would send a team to Country Y, offering to lend from the IMF pool
of capital that had been assembled by the Western governments, with the U.S.
really in charge. Country Y would get enough money to pay down its debts to
Citicorp or Chase or the B of A, but only on the condition that they follow
economic policy guidelines laid down by the IMF team.

What has frustrated me over the years, George, is the question of
conditionality. If a superior private banker considers a loan to a family,
corporation or country, it will be most interested in the prospects that
there will be sufficient growth in the borrowing unit so added revenues will
be able to service the debt. Not so with the IMF. The conditions are always
such that the first consideration is getting the money for Citicorp, Chase
or the B of A. The economic model deployed for that purpose leads to an
insistence that Y devalue its currency, so it can improve its export prices
to earn hard currency, and that it raise taxes to balance its domestic
budget. This is evil advice, as you know, which is why I have called the IMF
an “Evil Empire.”

Most of the poverty in the world today can be directly
traced to IMF conditionality, which it at times recommends to the United
States, when our political establishment would like it to. No question, our
money men control the IMF. If you look further, though, you may acknowledge
the inference of your opening paragraph, that if the dollar were once again
linked to gold, ending inflations and deflations, the tide would not
continue in the direction of global economic weakness and the poverty of the
underdeveloped world, but would turn toward global economic expansion. There
would still be an IMF, but it would be defanged, reformed indirectly.

The Asian crisis, which you attributed “partly” to “free-floating finance,”
was really all the result of the Asian countries thinking they could anchor
their currencies to the U.S. dollar, which had been more or less stable
against gold for several years. The blunders you attribute to the Thailand
bankers were really forced upon them, as they tried to maintain their link
to the dollar, which inflated in 1993 to $385 gold from $350 and then began
its deflation in 1997 to $330. The early euphoria of the baht’s inflation
was offset by the squeeze.

The IMF did make matters worse, but at the heart
of the problem was the reliance of the Asian governments on the wisdom and
experience of Alan Greenspan and his Fed colleagues. I think Greenspan
himself will tell you that gold is superior to green in matching dollar
supply to dollar demand.

Having known you for almost 30 years, George, from the early days I joined
the Journal editorial page in 1972, I would urge you to make the extra push
in the direction Jack Kemp took with his call for a new gold standard. It is
so easy to do that President George W. Bush could accomplish it with the
stroke of his pen on an executive order to Treasury Secretary Paul O’Neill.
Yes, Fed Chairman Greenspan says it would have to be followed up with a
statute, but there would be little or no resistance from Congress. Such an
executive order would simply ask O’Neill to stabilize the dollar value of
Treasury’s international gold reserves at $325 per ounce, which is what Kemp
recommends as a level that would dissolve the deflation that is dragging the
economy south.

Nobel-Prize-winning Professor Bob Mundell made this
recommendation to the Reagan administration 20 years ago this September, but
the powers that be still thought it would be better to manage the dollar in
its ups and downs. Now that we have seen how wild that ride can be, in both
directions, there is no reason to continue.

If you knew you could solve so many of the problems of poverty on Earth with your signature, wouldn’t you do it? Independence Day would be a good time to make that resolution, a world free of the Evil Empire.

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