Pillaging the World: The History and Politics of the IMF (part 3)

The Post-War Boom: The IMF Casts its Net
The post-war years were characterized by the rapid economic growth of all leading industrial nations, referred to as the “Wirtschaftswunder” (“economic miracle”) in Germany. Although IMF lending played only a minor role during this time, the organization’s leadership did not remain inactive. On the contrary: the second IMF chief Ivar Rooth, a former Governor of the Swedish Central Bank and ex-Director of the Basel Bank for International Settlements, set out on a course that was to acquire major significance in the later history of the organization – introducing conditionality, i.e. establishing obligatory requirements for granting loans.

Harry Dexter White had already made a proposal along these lines at the Bretton Woods Conference, but encountered fierce resistance from the British. Meanwhile, however, Britain’s position had continued to deteriorate. Former colonies, mainly in Africa, were fighting for their independence, and in the Middle East the Suez crisis was looming – providing the US with an opportunity to advance its own interests in the IMF more forcefully.

By establishing so-called “stand-by arrangements”, Ivar Rooth added the principle of “conditionality” to the IMF’s toolbox. The granting of loans was now subjected to conditions that went far beyond the specification of loan deadlines and the level of interest rates.

In implementing these measures, which were tightened after Britain’s defeat in Suez led to a rise of tensions in Anglo-American relations, the IMF’s strategists developed a strategy that helped them to cleverly deceive the public. Starting in 1958, they obliged the governments of debtor countries to draw up “letters of intent” in which they had to express their willingness to undertake “reasonable efforts” to master their balance of payments problems. This made it seem as though a country had itself proposed the measures that were actually required by the IMF.

But even that did not go far enough for the IMF. As a next step, loans to be disbursed were sliced into tranches (“phasing”) and thus made conditional upon the respective debtor country’s submissiveness. In addition, the IMF insisted (and still insists) that agreements between the IMF and its debtors should not be considered international treaties and therefore should not be subject to parliamentary approval. Finally, the IMF decreed that any agreements with it were not intended for the public eye and had to be treated as classified information – a scheme that applies to this day.

Conditions were to be continually tightened in the course of the IMF’s history and would prove to be a crucial mechanism for increasing foreign domination of developing countries. They also contributed to the growing power of the IMF, because the World Bank, most governments and the vast majority of international commercial banks from now on only granted loans to those countries which, on the basis of the fulfillment of the IMF’s criteria, had received its “seal of approval”.

In 1956 a meeting was held in Paris that was to win landmark importance for the later development of the IMF. Struggling to repay a loan, Argentina had to sit down with its creditor countries and representatives of the IMF in order to have new conditions dictated to it. The meeting took place in the offices of French Finance Minister Pierre Pflimlin, who also chaired it. It did not remain the only one of its kind. In subsequent years, meetings between IMF representatives, creditors and debtors were held frequently in the same place, gradually developing into fixed monthly conferences that were to become known as the “Paris Club”. A scope of extremely important decisions were taken within this framework – without parliamentary consent and hidden from the eyes of the public. Commercial banks around the world soon recognized the importance of these conferences, and therefore started their own “London Club”, whose meetings usually took (and still take) place simultaneously with those of the Paris Club.

Barely noticed by the global community, the IMF subsequently turned to a field of activity that was to boost its power massively in a relatively short time. The wave of declarations of independence by African states at the beginning of the 1960s marked the beginning of a new era. Countries that had been plundered for decades by colonialism and lay in tatters economically, now had to find their proper place in the world and especially in the world economy under rapidly changing conditions. Their governments therefore needed money. Since most of these countries offered commercial banks too little security due to social tensions, political unrest and barely existing infrastructure, the IMF took advantage of the situation and offered its services as a creditor.

Although most African countries were so poor that they were only granted relatively modest sums, even these had consequences. The maturity dates of interest and principal payments relentlessly ensured that states that had just escaped from colonial dependence were seamlessly caught in a new network of financial dependence on the IMF.

As credit lending required the debtor’s membership in the IMF, the organization, whose founding members had only included three African countries – Egypt, Ethiopia, and South Africa – was joined by more than 40 additional African states between 1957 and 1969. In 1969, 44 out of 115 members were African. Although they made up more than one third of the overall organization, their voting rights that same year amounted to less than 5 %.
Chile 1973:

Embarking upon the Path of Neoliberalism
The beginning of the 1970s marked the end of the post-war boom, a twenty-five year period of economic expansion in which workers in the leading industrial nations had been granted great social concessions and experienced a hitherto unknown improvement of their living standards. It was the internal disintegration of the Bretton Woods system that brought about the end of that period. As a result of rising US investment abroad and escalating military spending – particularly for the Vietnam War – the amount of dollars globally in circulation had continually increased. All attempts by the US government to bring this proliferation under control had failed because US capital had blended with foreign capital and no nation on earth was capable of reining in this massive concentration of financial power.

In 1971, the United States, for the first time in its history, ran a balance of payments deficit. At the same time the imbalance between the global dollar supply and US gold reserves stored in Fort Knox assumed such dimensions that even raising the gold price to $?38.00 and then to $?42.20 could no longer guarantee its exchange against an ounce of gold. On August 15, 1971, US President Nixon pulled the brakes and severed the link between gold and the dollar, displaying the typical arrogance of a superpower by not consulting a single ally.

In December 1971, a conference of the G10 group, founded in 1962 by the world’s top ten industrialized nations, decided on an alignment of exchange rates, which brought about a readjustment of the dollar’s value against other currencies. This led to a devaluation of the dollar, ranging from 7.5 % against the weak Italian lira to 16.9 % against the strong Japanese yen. In February 1973, the dollar was devalued again, but it soon became clear that the system of fixed exchange rates could no longer be upheld. In March 1973, the G10 and several other industrialized countries introduced the system of flexible exchange rates to be established by the central banks – without consulting a single country outside the G 10 and despite the fact that the new regime blatantly contradicted article 6 of the founding document of the IMF on fixed exchange rates and monetary stability.

The abolition of fixed exchange rates historically terminated the core tasks of the IMF. The only role left for it was that of a lender in charge of the allocation of funds and their conditionality, entitled to inspect the accounts of applicants and thus exercise direct influence on their policies. However, it was exactly this function for which extremely favorable conditions would soon arise.

In 1973, the members of the Organization of the Petroleum Exporting Countries (OPEC), which had been founded in 1960, used the Yom Kippur War between Egypt and Israel to curb the amount of oil supplied to the West (“oil embargo”) and drastically raise oil prices. This led to a huge increase in the profits of oil companies and oil-producing countries. These gains ended up in commercial banks, which in turn tried to use them for profitable investments. As the global economy slipped into a recession in 1974?/?75 and investment opportunities in industrialized countries dwindled, the lion’s share of the money took on the form of loans to third world countries in Asia, Africa and South America, which – due to their increased expenditures after the rise in oil prices – urgently needed money. The IMF itself responded to the increased credit needs of developing countries by introducing the “Extended Fund Facility” in 1974, from which member countries could draw loans of up to 140 % of their quota with terms of four and a half to ten years.

Although the facility had been specifically set up to finance much-needed oil imports, the IMF – as well as the banks – cared little about what the money was actually spent on. Whether it went straight into the pockets of dictators such as Mobutu in Zaire, Saddam Hussein in Iraq or Suharto in Indonesia – who either squandered it, transferred it to secret foreign accounts or used it for military purposes, in each case driving up the national debt – did not matter to the IMF and the banks as long as they received their interest payments regularly.

However, the situation changed abruptly when Paul Volcker, the new chairman of the US Federal Reserve, raised its prime rate (the interest rate at which commercial banks can obtain money from central banks) by 300 % in order to reduce inflation in 1979. The United States slipped into another recession, which meant that fewer raw materials were needed due to lower economic activity.

For many developing countries the combination of receding demand, falling raw material prices and skyrocketing interest rates meant that they could not meet their payment obligations to international banks. A massive financial crisis loomed. The debt burden of developing countries at the beginning of 1980 amounted to a total of $?567 billion. A payment default of this magnitude would have led to the collapse of many Western banks and therefore had to be prevented at all costs.
It was at this point that the IMF was given its first great chance to enter the stage as a lender of last resort. While its public relations department spread the news that the organization was working on bail-outs in order to “help” over-indebted countries, the Fund took advantage of its incontestable monopoly position and tied the granting of loans to harsh conditions. In doing so, it was able to draw on two different experiences gained in the preceding years.

Firstly, a CIA-supported military coup in Chile in September 1973 had ended socialist president Salvador Allende’s rule and brought fascist dictator Augusto Pinochet to power. Pinochet had immediately reversed Allende’s nationalizations, but found no remedy against galloping inflation. In an attempt to regain control of the situation, he had turned to a group of 30 Chilean economists (known as the “Chicago Boys” because they had studied at the Chicago School of Economics under Nobel Prize winner Milton Friedman) and proposed to them a clearly defined division of labor: He would provide for the suppression of any kind of political and trade union opposition and crush all labor disputes, while they were to carry out a radical austerity program on the basis of neoliberal ideas.

Within a few weeks an extensive catalog of measures was developed. It called for a drastic limitation of money supply, cuts in government spending, layoffs in the public sector, privatization in health care and education, wage cuts and tax increases for working people, while at the same time lowering tariffs and corporate taxes. The program was openly referred to as a “shock therapy” by either side.
Both Pinochet and his partners, who were presented to the public as a “government of technocrats”, fulfilled their side of the agreement to the hilt. While the dictator violently smashed any opposition to the government’s drastic measures and ensured that many political dissidents disappeared forever, the “Chicago Boys” launched a frontal assault on the working population. They drove up unemployment, which had stood at 3 % in 1973, to 18.7 % by the end of 1975, simultaneously pushing inflation to 341 % and plunging the poorest segments of the population into even deeper poverty. The impacts of the program actually aggravated the problem of social inequality for decades to come: In 1980, the richest 10 % of the Chilean population amassed 36.5 % of the national income, expanding their share to 46.8 % in 1989, while at the same time that of the poorest 50 % fell from 20.4 % to 16.8 %.

During his bloody coup, Pinochet had fully relied on the active support of the CIA and the US Department of State under Henry Kis?singer. When implementing the toughest austerity program ever carried out in a Latin American country, the “Chicago Boys” received the full backing of the IMF. Regardless of all human rights violations, IMF loans to Chile doubled in the year after Pinochet’s coup, only to quadruple and quintuple in the following two years.

The IMF’s other experience concerned the UK. Great Britain’s inexorable economic decline over two and a half decades had made the country the IMF’s largest borrower. From 1947 to 1971, the government in London had drawn loans totaling $?7.25 billion. After the recession of 1974?/?75 and speculative attacks on the pound, it had come under even greater pressure. When in 1976, the British government once again turned to the IMF for help, the United States seized the opportunity to demonstrate their power. Allying themselves with the resurgent Germans, they forced the Labour government under Prime Minister Harold Wilson to limit public spending, impose massive cuts in social programs, pursue a restrictive fiscal policy, and refrain from import controls of any kind. This drastic intervention represented a hitherto unknown encroachment on the sovereignty of a European borrower country, resulting in the fact that no leading Western industrialized country ever again applied for an IMF loan.

Source: By Ernst Wolff Global Research, December 17, 2014