Are the World Bank and International Monetary Fund the witting tools of global corporations, holding down small countries so vampire capitalists can suck the blood of the poor?
Or are they wise, omniscient dispensers of money and technical assistance that are indispensable for any growth in the poorer nations of the world?
Such are the contrasting views one hears in news stories on these institutions’ meetings and the associated protests in Washington D.C. As usual, the real answer lies somewhere between these two extremes. The issues are complicated, so I will examine them over two weeks.
Let me say at the outset that I think both the IMF and the World Bank are useful institutions that do more good than harm. I don’t think abolishing them would help either the world’s poor or the environment. But it is also clear to me that the world has changed a great deal in the last 25 years and that these two institutions have not changed with it.
First, one has to understand how the IMF and World Bank came into being. Both were born at an international conference held at Bretton Woods, N.H. in mid-1944. By that time it was pretty clear that the Allies would win the war. It was also clear that new economic arrangements would be needed after the war.
Before the war, international financial transactions had been carried out on the gold standard. While many countries used paper currencies, net flows of money between countries could ultimately be settled with gold or silver.
But by 1944, all the warring nations except the U.S. were paupers. The U.S. held virtually all of the world’s gold stocks. Reestablishing a gold-based international payments system would be like playing poker with one person holding the entire deck.
Leaders saw that enormous amounts of capital would be required to rebuild the devastated economies of the European allies. Britain, France, Belgium and the Netherlands had suffered enormous damage to industry, housing and transportation infrastructure.
In World War I, private banks had furnished most of the capital needed by England and France. But these countries had defaulted on some debt in the economically rocky inter-war period. Economic leaders assumed that private capital markets would be unwilling and unable to come up with the greater sums needed after the much more physically destructive World War II.
The solution was to set up the International Monetary Fund. The IMF backstopped a new international payments system in which the U.S. dollar was pegged to gold at $35 dollars per ounce. Other currencies were pegged to the dollar.
The IMF was set up to make loans of foreign exchange to countries that had short-term balance of payments problems, thus relieving them of the need to devalue their currencies in the short run.
An International Bank for Reconstruction and Development would handle reconstruction. This “World Bank” would sell bonds in private capital markets and lend money to member countries to repair war damage. The bonds would be backed by the guarantee of the member governments, enabling them to be sold at low interest rates. The bank would employ a corps of technicians who could evaluate the technical and financial soundness of proposals to rebuild factories, housing and infrastructure.
The two institutions did just that in their first 15 years of existence. The international payments system worked remarkably well, and European recovery, boosted by U.S. bilateral aid under the Marshall plan and extended to West Germany by fear of the Russians, was remarkable.
By the late 1950s, little work remained for the Bank under its initial mandate. Europe was reconstructed. But world politics gave it another task. England, France, the Netherlands and Belgium all divested themselves of their colonial empires.
Dozens of new nations had appeared in Africa and Asia. All needed capital and technical assistance. What could be better than having the bank step in with its access to capital and its project lending expertise?
The initial role of the IMF, serving as facilitator of a payments system in which the U.S. dollar play a central role, lasted a decade longer. But the U.S. failed to hold up its end of the deal. In the 1960’s, it let the dollar inflate, pumping up consumption and imports, and a balance of payments deficit.
The Bretton Woods agreement specified that if other countries accumulated greater stocks of U.S. dollars than they wanted to, they could always turn such dollars in to the U.S. in exchange for gold. That worked as long as the U.S. had gold to hand out.
But by the early 1970s, the gold cupboard was effectively bare, and the Nixon administration unilaterally terminated the system in 1971-‘73. The Bretton Woods payment system was dead, and so, logically, was any reason for the IMF’s existence.
But the demise of Bretton Woods was followed closely by the oil price shocks of the 1970s. These caused balance of payment crises in many developing countries and profoundly altered global flows of capital.
The IMF stepped into a new role as a global lender of last resort and imposer of economic discipline on countries with feckless economic policies. That role has persisted for some 27 years, longer than its intended one of facilitating international payments for rich countries. The World Bank also saw changes in its role, but that is a subject to continue next week.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.