THE CREATURE FROM JEKYLL ISLAND
A Second Look at the Federal Reserve
by G. Edward Griffin
Chapter Four
A Second Look at the Federal Reserve
by G. Edward Griffin
Chapter Four
HOME, SWEET LOAN
The history of increasing government intervention
in the housing industry; the stifling of
free-market forces in residential real estate; the
resulting crisis in the S&L industry; the bailout of
that industry with money taken from the taxpayer.
As we have seen in previous chapters, the damage done by the
banking cartel is made possible by the fact that money can be
created out of nothing. It also destroys our purchasing power
through the hidden tax called inflation. The mechanism by which it
works is hidden and subtle.
Let us turn, now, from the arcane world of central banking to
the giddy world of savings-and-loan institutions. By comparison,
the problem in the savings-and-loan industry is easy to comprehend.
It is simply that vast amounts of money are disappearing into
the black hole of government mismanagement, and the losses must
eventually be paid by us. The end result is the same in both cases.
SOCIALISM TAKES ROOT IN AMERICA
It all began with a concept. The concept took root in America
largely as a result of the Great Depression of the 1930s. American
politicians were impressed at how radical Marxists were able to
attract popular support by blaming the capitalist system for the
country's woes and by promising a socialist Utopia. They admired
and feared these radicals; admired them for their skill at mass
psychology; feared them lest they become so popular as to win a
plurality at the ballot box. It was not long before many political
figures began to mimic the soap-box orators, and the voters
enthusiastically put them into office.
While the extreme and violent aspects of Communism generally
were rejected, the more genteel theories of socialism became
Popular among the educated elite. It was they who would naturally
become the leaders in an American socialist system. Someone had to look after the masses and tell them what to do for their own
good, and many with college degrees and those with great wealth
became enamored by the thought of playing that role. And so, the
concept became widely accepted at all levels of American life—the
"downtrodden masses" as well as the educated elite—that it was
desirable for the government to take care of its citizens and to
protect them in their economic affairs.
And so, when more than 1900 S&L's went belly-up in the Great
Depression, Herbert Hoover—and a most willing Congress—
created the Federal Home Loan Bank Board to protect depositors in
the future. It began to issue charters to institutions that would
submit to its regulations, and the public was led to believe that
government regulators would be more wise, prudent, and honest
than private managers. A federal charter became a kind of government
seal of approval. The public, at last, was being protected.
Hoover was succeeded by FDR in the White House who
became the epitome of the new breed. Earlier in his political career,
he had been the paragon of free enterprise and individualism. He
spoke out against big government and for the free market, but in
mid life he reset his sail to catch the shifting political wind. He went
down in history as a pioneer of socialism in America.
It was FDR who took the next step toward government
paternalism in the S&L industry—as well as the banking industry—by
establishing the Federal Deposit Insurance Corporation
(FDIC) and the Federal Saving and Loan Insurance Corporation
(FSLIC). From that point forward, neither the public nor the
managers of the thrifts needed to worry about losses. Everything
would be reimbursed by the government.
A HOUSE ON EVERY LOT
At about the same time, loans on private homes became
subsidized through the Federal Housing Authority (FHA) which
allowed S&Ls to make loans at rates lower than would have been
possible without the subsidy. This was to make it easier for
everyone to realize the dream of having their own home. While the
Marxists were promising a chicken in every pot, the New Dealers
were winning elections by pushing for a house on every lot.
In the beginning, many people were able to purchase a home
who, otherwise, might not have been able to do so or who would
have had to wait longer to accumulate a higher down payment. On the other hand, the FHA-induced easy credit began to push up the
price of houses for the middle class, and that quickly offset any real
advantage of the subsidy. The voters, however, were not perceptive
enough to understand this canceling effect and continued to vote
for politicians who promised to expand the system.
The next step was for the Federal Reserve Board to require
banks to offer interest rates lower than those offered by S&Ls. The
result was that funds moved from the banks into the S&Ls and
became abundantly available for home loans. This was a deliberate
national policy to favor the home industry at the expense of other
industries that were competing for the same investment dollars. It
may not have been good for the economy as a whole but it was
good politics.
ABANDONMENT OF THE FREE MARKET
These measures effectively removed real estate loans from the
free market and placed them into the political arena, where they
have remained ever since. The damage to the public as a result of
this intervention would be delayed a long time in coming, but
when it came, it would be cataclysmic.
The reality of government disruption of the free market cannot
be overemphasized, for it is at the heart of our present and future
crisis. We have savings institutions that are controlled by government
at every step of the way. Federal agencies provide protection
against losses and lay down rigid guidelines for capitalization
levels, number of branches, territories covered, management policies,
services rendered, and interest rates charged. The additional
cost to S&Ls of compliance with this regulation has been estimated
by the American Bankers Association at about $11 billion per year,
which represents a whopping 60% of all their profits.
On top of that, the healthy component of the industry must
spend over a billion dollars each year for extra premiums into the
so-called insurance fund to make up for the failures of the
unhealthy component, a form of penalty for success. When some of
the healthy institutions attempted to convert to banks to escape this
Penalty, the regulators said no. Their cash flow was needed to
support the bailout fund.
INSURANCE FOR THE COMMON MAN?
The average private savings deposit is about $6,000. Yet, under
the Carter administration, the level of FDIC insurance was raised from $40,000 to $100,000 for each account. Those with more than
that merely had to open several accounts, so, in reality, the sky was
the limit. Clearly this had nothing to do with protecting the
common man. The purpose was to prepare the way for brokerage
houses to reinvest huge blocks of capital at high rates of interest
virtually without risk. It was, after all, insured by the federal
government.
In 1979, Federal Reserve policy had pushed up interest rates,
and the S&Ls had to keep pace to attract deposits. By December of
1980, they were paying 15.8% interest on their money-market
certificates. Yet, the average rate they were charging for new
mortgages was only 12.9%. Many of their older loans were still
crunching away at 7 or 8% and, to compound the problem, some of
those were in default, which means they were really paying 0%.
The thrifts were operating deep in the red and had to make up the
difference somewhere.
The weakest S&Ls paid the highest interest rates to attract
depositors and they are the ones which obtained the large blocks of
brokered funds. Brokers no longer cared how weak the operation
was, because the funds were fully insured. They just cared about
the interest rate.
On the other hand, the S&L managers reasoned that they had to
make those funds work miracles for the short period they had
them. It was their only chance to dig out, and they were willing to
take big risks. For them also, the government's insurance program
had removed any chance of loss to their depositors, so many of
them plunged into high-profit, high-risk real-estate developments.
Deals began to go sour, and 1979 was the first year since the
Great Depression of the 1930s that the total net worth of federally
insured S&Ls became negative. And that was despite expansion
almost everywhere else in the economy. The public began to
worry.
FULL FAITH AND CREDIT
The protectors in Washington responded in 1982 with a joint
resolution of Congress declaring that the full faith & credit of the
United States government stood behind the FSLIC. That was a
reassuring phrase, but many people had the gnawing feeling that,
somehow, we were going to pay for it ourselves. And they were
right. Consumer Reports explained:
Behind the troubled banks and the increasingly troubled
insurance agencies stands "the full faith and credit " of the
Government—in effect, a promise, sure to be honored by Congress,
that all citizens will chip in through taxes or through inflation to make
ail depositors whole. 1
1- "How Safe Are Your Deposits?", Consumer Reports, August, 1988, p. 503.
The plight of the S&Ls was dramatically brought to light in
Ohio in 1985 when the Home State Savings Bank of Cincinnati
collapsed as a result of a potential $150 million loss in a Florida
securities firm. This triggered a run, not only on the thirty-three
branches of Home State, but on many of the other S&Ls as well. The
news impacted international markets where overseas speculators
dumped paper dollars for other currencies, and some rushed to
buy gold.
Within a few days, depositors demanding their money caused
$60 million to flow out of the state's $130 million "insurance" fund
which, true to form for all government protection schemes, was
terribly inadequate. If the run had been allowed to continue, the
fund likely would have been obliterated the next day. It was time
for a political fix.
On March 15, Ohio Governor Richard Celeste declared one of
the few "bank holidays" since the Great Depression and closed all
seventy-one of the state-insured thrifts. He assured the public there
was nothing to worry about. He said this was merely a "cooling-off
period ... until we can convincingly demonstrate the soundness of
our system." Then he flew to Washington and met with Paul
Volcker, chairman of the Federal Reserve Board, and with Edwin
Gray, chairman of the Federal Home Loan Bank Board, to request
federal assistance. They assured him it was available.
A few days later, depositors were authorized to withdraw up to
$750 from their accounts. On March 21, President Reagan calmed
the world money markets with assurances that the crisis was over.
Furthermore, he said, the problem was "limited to Ohio."2
2- Ohio Bank Crisis That Ruffled World," U.S. News & World Report, April 1,1985,
This was not the first time there had been a failure of state sponsored
insurance funds. The one in Nebraska was pulled down
ln when the Commonwealth Savings Company of Lincoln
failed. It had over $60 million in deposits, but the insurance fund had less than $2 million to cover, not just Commonwealth, but the
whole system. Depositors were lucky to get 65 cents on the dollar,
and even that was expected to take up to 10 years.1
1. "How Safe Are Deposits in Ailing Banks, S&Ls?," U.S. News & World Report, March 25,1985, p. 74.
AN INVITATION TO FRAUD
In the early days of the Reagan administration, government
regulations were changed so that the S&Ls were no longer
restricted to the issuance of home mortgages, the sole reason for
their creation in the first place. In fact, they no longer even were
required to obtain a down payment on their loans. They could now
finance 100% of a deal—or even more. Office buildings and
shopping centers sprang up everywhere regardless of the need.
Developers, builders, managers, and appraisers made millions. The
field soon became overbuilt and riddled with fraud. Billions of
dollars disappeared into defunct projects. In at least twenty-two of
the failed S&Ls, there is evidence that the Mafia and CIA were
involved.
Fraud is not necessarily against the law. In fact, most of the
fraud in the S&L saga was, not only legal, it was encouraged by the
government. The Garn-St. Germain Act allowed the thrifts to lend
an amount of money equal to the appraised value of real estate
rather than the market value. It wasn't long before appraisers were
receiving handsome fees for appraisals that were, to say the least,
unrealistic. But that was not fraud, it was the intent of the
regulators. The amount by which the appraisal exceeded the
market value was defined as "appraised equity" and was counted
the same as capital. Since the S&Ls were required to have $1 in
capital for every $33 held in deposits, an appraisal that exceeded
market value by $1 million could be used to pyramid $33 million in
deposits from Wall Street brokerage houses. And the anticipated
profits from those funds was one of the ways in which the S&Ls
were supposed to recoup their losses without the government
having to cough up the money—which it didn't have. In effect the
government was saying: "We can't make good on our protection
scheme, so go get the money yourself by putting the investors at
risk. Not only will we back you up if you fail, we'll show you
exactly how to do it."
1. "How Safe Are Deposits in Ailing Banks, S&Ls?," U.S. News & World Report,
March 25,1985, p. 74.
THE FALLOUT BEGINS
In spite of the accounting gimmicks which were created to
make the walking-dead S&Ls look healthy, by 1984 the fallout
began- The FSLIC closed one institution that year and arranged for
the merger of twenty-six others which were insolvent. In order to
persuade healthy firms to absorb insolvent ones, the government
provides cash settlements to compensate for the liabilities. By 1984,
these subsidized mergers were costing the FDIC over $1 billion per
year. Yet, that was just the small beginning.1
1 "Filling FSLIC," by Shirley Hobbs Scheibla, Barron's, Feb. 9,1987, p. 16.
Between 1980 and 1986, a total of 664 insured S&Ls failed.
Government regulators had promised to protect the public in the
event of losses, but the losses were already far beyond what they
could handle. They could not afford to close down all the insolvent
thrifts because they simply didn't have enough money to cover the
pay out. In March of 1986, the FSLIC had only 3 cents for every
dollar of deposits. By the end of that year, the figure had dropped
to two-tenths of a penny for each dollar "insured." Obviously, they
had to keep those thrifts in business, which meant they had to
invent even more accounting gimmicks to conceal the reality.
Postponement of the inevitable made matters even worse.
Keeping the S&Ls in business was costing the FSLIC $6 million per
day. By 1988, two years later, the thrift industry as a whole was
losing $9.8 million per day, and the unprofitable ones—the corpses
which were propped up by the FSLIC—were losing $35.6 million
per day. And, still, the game continued.
By 1989, the FSLIC no longer had even two-tenths of a penny
for each dollar insured. Its reserves had vanished altogether. Like
the thrifts it supposedly protected, it was, itself, insolvent and
looking for loans. It had tried offering bond issues, but these fell far
short of its needs. Congress had discussed the problem but had
failed to provide new funding. The collapse of Lincoln Savings
brought the crisis to a head. There was no money, period.
THE FED USURPS
THE ROLE OF CONGRESS
In February, an agreement was reached between Alan
Greenspan, Chairman of the Federal Reserve Board, and M. Danny
Wall, Chairman of the Federal Home Loan Bank Board, to have $70 million of bailout funding for Lincoln Savings come directly
from the Federal Reserve.
This was a major break in precedent. Historically, the Fed has
served to create money only for the government or for banks. If it
were the will of the people to bail out a savings institution, then it is
up to Congress to approve the funding. If Congress does not have
the money or cannot borrow it from the public, then the Fed can
create it (out of nothing, of course) and give it to the government.
But, in this instance, the Fed was usurping the role of Congress and
making political decisions entirely on its own. There is no basis in
the Federal Reserve Act for this action. Yet, Congress remained
silent, apparently out of collective guilt for its own paralysis.
Finally, in August of that year, Congress was visited by the
ghost of FDR and sprang into action. It passed the Financial
Institutions Reform and Recovery Act (FIRREA) and allocated a
minimum of $66 billion for the following ten years, $300 billion
over thirty years. Of this amount, $225 billion was to come from
taxes or inflation, and $75 billion was to come from the healthy
S&Ls. It was the biggest bailout ever, bigger than the combined cost
for Lockheed, Chrysler, Penn Central, and New York City.
In the process, the FSLIC was eliminated because it was
hopelessly insolvent and replaced by the Savings Association
Insurance Fund. Also created was the Banking Insurance Fund for
the protection of commercial banks, and both are now administered
by the FDIC.
As is often the case when previous government control fails to
produce the desired result, the response of Congress is to increase
the controls. Four entirely new layers of bureaucracy were added to
the existing tangled mess: the Resolution Trust Oversight Board, to
establish strategies for the RTC; the Resolution Funding Corporation,
to raise money to operate the RTC; The Office of Thrift
Supervision, to supervise thrift institutions even more than they
had been; and the Oversight Board for the Home Loan Banks, the
purpose of which remains vague but probably is to make sure that
the S&Ls continue to serve the political directive of subsidizing the
home industry. When President Bush signed the bill, he said:
This legislation will safeguard and stabilize America's financial
system and put in place permanent reforms so these problems will
never happen again. Moreover, it says to tens of millions of
savings-and-loan depositors, "You will not be the victim of others' mistakes. We will see—guarantee—that your insured deposits are secure."1
1- "Review of the News," The New American, Sept. 11,1989, p. 15.
THE ESTIMATES ARE SLIGHTLY WRONG
By the middle of the following year, it was clear that the $66
billion funding would be greatly inadequate. Treasury spokesmen
were now quoting $130 billion, about twice the original estimate.
How much is $130 billion? In 1990, it was 30% more than the
salaries of all the school teachers in America. It was more than the
combined profits of all the Fortune-500 industrial companies. It
would send 1.6 million students through the best four-year colleges,
including room and board. And the figure did not even
include the cost of liquidating the huge backlog of thrifts already
seized nor the interest that had to be paid on borrowed funds.
Within only a few days of the announced increase, the Treasury
again revised the figure upward from $130 billion to $150 billion.
As Treasury Secretary Nicholas Brady told the press, "No one
should assume that the estimates won't change. They will."
Indeed, the estimates continued to change with each passing
week. The government had sold or merged 223 insolvent thrifts
during 1988 and had given grossly inadequate estimates of the cost.
Financiers such as Ronald Perelman and the Texas investment
partnership called Temple-Inland, Inc., picked up many of these at
fantastic bargains, especially considering that they were given cash
subsidies and tax advantages to sweeten the deal. At the time,
Danny Wall, who was then Chairman of the Federal Home Loan
Bank Board, announced that these deals "took care" of the worst
thrift problems. He said the cost of the bailout was $39 billion. The
Wall Street Journal replied:
Wrong again. The new study, a compilation of audits prepared by
the Federal Deposit Insurance Corporation, indicates that the total cost
of the so-called Class of '88 will be $90 billion to $95 billion, including
fax benefits granted the buyers and a huge amount of interest on
government debt to help finance this assistance....
But the 1988 thrift rescues' most expensive flaw doesn't appear to
be the enrichment of tycoons. Rather it's that none of the deals ended
or even limited the government's exposure to mismanagement by the
new owners, hidden losses on real estate in the past, or the vicissitudes
of the real-estate markets in the future.... And some of the deals appear to be sham transactions, in which failing thrifts were sold to
failing thrifts, which are failing all over again....
Although the thrifts proved to be in far worse shape than the Bank
Board estimated, Mr. Wall defends his strategy for rescuing them with
open-ended assistance. "We didn't have the money to liquidate," he
says.1
1. "Audit Report by FDIC Shows Wall's Estimates for Thrift Bailouts in 1988 Were Wildly Low," by Charles McCoy and Todd Mason, The Wall Street journal, Sept. 14, 1990, p. A-12.
When Congress passed HRREA the previous year to "safeguard
and stabilize America's financial system," the staggering
sum of $300 billion dollars was authorized to be taken from taxes
and inflation over the following thirty years to do the job. Now,
Federal Reserve Chairman Alan Greenspan was saying that the
true long-term cost would stand at $500 billion, an amount even
greater than the default of loans to all the Third-World countries
combined. The figure was still too low. A non-biased private study
released by Veribank, Inc. showed that, when all the hidden costs
are included, the bill presented to the American people will be
about $532 billion.2 The problems that President Bush promised
would "never happen again" were happening again.
2. "S&L Industry Rebuilds As Bailout Reaches Final Phase," Veribank News Release, Veribank, Inc. (Wakefield, Massachusetts), January 12,1994, p. 2.
BOOKKEEPING SLEIGHT OF HAND
Long before this point, the real estate market had begun to
contract, and many mortgages exceeded the actual price for which
the property could be sold. Furthermore, market interest rates had
risen far above the rates that were locked into most of the S&L
loans, and that decreased the value of those mortgages. The true
value of a $50,000 mortgage that is paying 7% interest is only half of
a $50,000 mortgage that is earning 14%. So the protectors of the
public devised a scheme whereby the S&Ls were allowed to value
their assets according to the original loan value rather than their
true market value. That helped, but much more was still needed.
The next step was to create bookkeeping assets out of thin air.
This was accomplished by authorizing the S&Ls to place a monetary
value on community "good will"! With the mere stroke of a
pen, the referees created $2.5 billion in such assets, and the players
continued the game.
Then the FSLIC began to issue "certificates of net worth," which
were basically promises to bail out the ailing S&Ls should they
need it- The government had already promised to do that but, by
printing it on pieces of paper and calling them "certificates of net
worth, " the S&Ls were allowed to count them as assets on their
books. Such promises are assets but, since the thrifts would be
obligated to pay back any money it received in a bailout, those
pay-back obligations should also have been put on the books as
liabilities. The net position would not change. The only way they
could count the certificates as assets without adding the offsetting
liabilities would be for the bailout promises to be outright gifts with
no obligation to ever repay. That may be the eventual result, but it
is not the way the plan was set up. In any event, the thrifts were
told they could count these pieces of paper as capital, the same as if
the owners had put up their own cash. And the game continued.
The moment of truth arrives when the S&Ls have to liquidate
some of their holdings, such as in the sale of their mortgages or
foreclosed homes to other S&Ls, commercial banks, or private
parties. That is when the inflated bookkeeping value is converted
into the true market value, and the difference has to be entered into
the ledger as a loss. But not in the never-never land of socialism
where government is the great protector. Dennis Turner explains:
The FSUC permits the S&L which sold the mortgage to take the
loss over a 40-year period. Most companies selling an asset at a loss
must take the loss immediately: only S&Ls can engage in this patent
fraud. Two failing S&Ls could conceivably sell their lowest-yielding
mortgages to one another, and both would raise their net worth! This
dishonest accounting in the banking system is approved by the highest
regulatory authorities.1
1.Dennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwell publishing, Inc., 1983), p. 141
U.S. News & World Report continues the commentary:
Today, scores of savings-and-loan associations, kept alive mainly
by accounting gimmicks, continue to post big losses.... Only a fraction
of the industry's aggregate net worth comprises hard assets such as
mortgage notes. Intangible assets, which include bookkeeping entries
such as goodwill, make up nearly all of the industry's estimated net
Worth of 37.6 billion dollars.2
2.Touch And Go for
Troubled S&Ls," by Patricia M. Scherschel, U.S. News & t Report, March 4,1985, p. 92.
ACCOUNTING GIMMICKS
ARE NOT FRAUD
We must keep in mind that a well managed institution would
never assume these kinds of risks or resort to fraudulent
accounting if it wanted to stay in business for the long haul. But
with Washington setting guidelines and standing by to make up
losses, a manager would be fired if he didn't take advantage of the
opportunity. After all, Congress specifically said it was OK when it
passed the laws. These were loopholes deliberately put there to be
used. Dr. Edward Kane explains:
Deception itself doesn't constitute illegal fraud when it's
authorized by an accounting system such as the Generally Accepted
Accounting Principles (GAAP) system which allows institutions to
forego recording assets at their true worth, maintaining them instead
at their inflated value. The regulatory accounting principles system in
1982 added even new options to overstate capital.... Intense
speculation, such as we observed in these firms, is not necessarily bad
management at all. In most of these cases, it was clever management.
There were clever gambles that exploited, not depositors or savers, but
taxpayers.1
1. "FIRREA: Financial Malpractice," by Edward J. Kane, Durell Journal of Money and Banking, May, 1990, p. 5.
The press has greatly exaggerated the role of illegal fraud in
these matters with much time spent excoriating the likes of Donald
Dixon at Vernon S&L and Charles Keating at Lincoln Savings.
True, these flops cost the taxpayer well over $3 billion dollars, but
all the illegal fraud put together amounts to only about one-half of
one per cent of the total losses so far.2 Focusing on that minuscule
component serves only to distract from the fact that the real
problem is government regulation itself.
2. "Banking on Government," by Jane H. Ingraham, The New American, August 24, 1992, p. 24.
JUNK BONDS ARE NOT JUNK
Another part of the distraction has been to make it appear that
the thrifts got into trouble because they were heavily invested in
"junk bonds."
Wait a minute! What are junk bonds, anyway? This may come
as a surprise, but those held by the S&Ls were anything but junk. In
fact, in terms of risk-return ratios, most of them were superior grade
investments to bonds from the Fortune-500 companies. So-called junk bonds are merely those that are offered by smaller companies which are not large enough to be counted among the
nation's giants. The large re-investors, such as managers of mutual
funds and retirement funds, prefer to stay with well-known names
like General Motors and IBM. They need to invest truly huge
blocks of money every day, and the smaller companies just don't
have enough to offer to satisfy their needs. Consequently, many
stocks and bonds from smaller companies are not traded in the
New York Stock Exchange. They are traded in smaller exchanges or
directly between brokers in what is called "over the counter."
Because they do not have the advantage of being traded in the
larger markets, they have to pay a higher interest rate to attract
investors, and for that reason, they are commonly called high-yield
bonds.
Bonds offered by these companies are derided by some brokers
as not being "investment grade," yet, many of them are excellent
performers. In fact, they have become an important part of the
American economy because they are the backbone of new industry.
The most successful companies of the future will be found among
their ranks. During the last decade, while the Fortune-500 companies
were shrinking and eliminating 3.6 million jobs, this segment
of new industry has been growing and has created 18 million new
jobs.
Not all new companies are good investments—the same is true
of older companies—but the small-company sector generally provides
more jobs, has greater profit margins, and pays more
dividends than the so-called "investment-grade" companies. From
1981 to 1991, the average return on ten-year Treasury bills was 10.4
per cent; the Dow Jones Industrial Average was 12.9 per cent; and
the average return on so-called junk bonds was 14.1 per cent.
Because of this higher yield, they attracted more than $180 billion
from savvy investors, some of whom were S&Ls. It was basically a
new market which was orchestrated by an upstart, Michael Milken,
at the California-based Drexel Burnham Lambert brokerage house.
CAPITAL GROWTH WITHOUT
BANK LOANS OR
INFLATION
One of the major concerns at Jekyll Island in 1910 was the trend
to obtain business-growth capital from sources other than bank
loans. Here, seventy years later, the same trend was developing again in a slightly different form. Capital, especially for small
companies, was now coming from bonds which Drexel had found a
way to mass market. In fact, Drexel was even able to use those
bonds to engineer corporate takeovers, an activity that previously
had been reserved for the mega-investment houses. By 1986, Drexel
had become the most profitable investment bank in the country.
Here was $180 billion that no longer was being channeled through Wall Street. Here was $180 billion that was coming from people's savings instead of being created out of nothing by the banks. In other words, here was growth built upon real investment, not inflation. Certain people were not happy about it.
Glenn Yago, Director of the Economic Research Bureau and Associate Professor of Management at the State University of New York at Stony Brook, explains the problem:
It was not until high yield securities were applied to restructuring through de-conglomeration and takeovers that hostilities against the junk bond market broke out.... The high yield market grew at the expense of bank debt, and high yield companies grew at the expense of the hegemony of many established firms. As Peter Passell noted in The Nezu York Times, the impact was first felt on Wall Street, "where sharp elbows and a working knowledge of computer spreadsheets suddenly counted more than a nose for dry sherry or membership in Skull and Bones."1
1. Glenn Yago, funk Bonds: How High Yield Securities Restructured Corporate America (New York: Oxford University Press, 1991), p. 5.
The first line of attack on this new market of high-yield bonds was to call them "junk." The word itself was powerful. The financial media picked it up and many investors were frightened away.
The next step was for compliant politicians to pass a law requiring S&Ls to get rid of their "junk," supposedly to protect the public. That this was a hoax is evident by the fact that only 5% ever held any of these bonds, and their holdings represented only 1.2% of the total S&Ls assets. Furthermore, the bonds were performing satisfactorily and were a source of much needed revenue. Nevertheless, The Financial Institutions Reform and Recovery Act, which was discussed previously, was passed in 1989. It forced S&Ls to liquidate at once their "junk" bond holdings. That caused their prices to plummet, and the thrifts were even further weakened as they took a loss on the sale. Jane Ingraham comments:
Overnight, profitable S&Ls were turned into government-owned basket cases in the hands of the Resolution Trust Corporation (RTC). To add to the disaster, the RTC itself, which became the country's biggest owner of junk bonds ... flooded the market again with $1.6 billion of its holdings at the market's bottom in 1990....
So it was government itself that crashed the junk bond market, not Michael Milken, although the jailed Milken and other former officials of Drexel Burnham Lambert have just agreed to a $1.3 billion settlement of the hundreds of lawsuits brought against them by government regulators, aggrieved investors, and others demanding "justice."1
1."Banking on Government," pp. 24, 25. Quoted in "Banking on Government," p. 26.
Incidentally, these bonds have since recovered and, had the S&Ls been allowed to keep them, they would be in better financial condition today. And so would be the RTC.
With the California upstarts out of the way, it was a simple matter to buy up the detested bonds at bargain prices and to bring control of the new market back to Wall Street. The New York firm of Salomon Brothers, for example, one of Drexel's most severe critics during the 1980's, is now a leading trader in the market Drexel created.
If you're going to wreck a business the size of the U.S. Thrift industry, you need a lot more power than Michael Milken ever had. You need the power of national political authority, the kind of power possessed only by regulators and Congress. Whatever "hold" Milken or junk bonds may have had on the S&Ls, it was nothing compared with the interventions of Congress.
At the time this book went to press, the number of S&Ls that operated during the 1980s had dropped to less than half. As failures, mergers, and conversion into banks continue, the number will decline further. Those that remain fall into two groups: those that have been taken over by the RTC and those that have not. Most of those that remain under private control—and that is a relative term in view of the regulations they endure—are slowly returning to a healthy state as a result of improved profitability, asset quality, and capitalization. The RTC-run organizations, on the other hand, continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off. Losses from this group are adding $6 billion per year to the ultimate cost of bailout. President Clinton was asking Congress for an additional $45 billion and hinting that this should be the last bailout—but no promises.
The game continues.
The second reason is that any honest inquiry would soon reveal the shocking truth that Congress itself is the primary cause of the problem. By following the socialist path and presuming to protect or benefit their constituency, they have suspended and violated the natural laws that drive a free-market economy. In so doing, they created a Frankenstein monster they could not control. The more they tried to tame the thing, the more destructive it became. As economist Hans Sennholz has observed:
The real cause of the disaster is the very financial structure that was fashioned by legislators and guided by regulators; they together created a cartel that, like all other monopolistic concoctions, is playing mischief with its victims.1
1. "The Great Banking Scandal," by Hans F. Sennholz, The Freeman, Nov., 1990, p. 405.
The thrifts have become the illegitimate half-breed children of the Creature. And that is why the savings-and-loan story is included in this study.
If America is to survive as a free nation, her citizens must
become far more politically educated than they are at present. As a
people, we must learn not to reach for every political carrot
dangled in front of us. As desirable as it may be for everyone to
afford a home, we must understand that government programs
pretending to make that possible actually wreak havoc with our
system and bring about just the opposite of what they promise.
After 60 years of subsidizing and regulating the housing industry,
how many young people today can afford a home? Tinkering with
the laws of supply and demand, plus the hidden tax called inflation
to pay for the tinkering, has driven prices beyond the reach of
many and has wiped out the down payments of others. Without
such costs, common people would have much more money and
purchasing power than they do today, and homes would be well
within their reach.
Under the Hoover and Roosevelt administrations, new government agencies were established which purported to protect deposits in the S&Ls and to subsidize home mortgages for the middle class. These measures distorted the laws of supply and demand and, from that point forward, the housing industry was moved out of the free market and into the political arena.
Once the pattern of government intervention had been established, there began a long, unbroken series of federal rules and regulations that were the source of windfall profits for managers, appraiser, brokers, developers, and builders. They also weakened the industry by encouraging unsound business practices and high-risk investments.
When these ventures failed, and when the value of real estate began to drop, many S&Ls became insolvent. The federal insurance fund was soon depleted, and the government was confronted with its own promise to bail out these companies but not having any money to do so.
The response of the regulators was to create accounting gimmicks whereby insolvent thrifts could be made to appear solvent and, thus, continue in business. This postponed the inevitable and made matters considerably worse. The failed S&Ls continued to lose billions of dollars each month and added greatly to the ultimate cost of bailout, all of which would eventually have to be paid by the common man out of taxes and inflation. The ultimate cost is estimated at over one trillion dollars.
Congress appears to be unable to act and is strangely silent. This is understandable. Many representatives and senators are the beneficiaries of generous donations from the S&Ls. But perhaps the main reason is that Congress, itself, is the main culprit in this crime. In either case, the politicians would like to talk about something else.
In the larger view, the S&L industry is a cartel within a cartel. The fiasco could never have happened without the cartel called the Federal Reserve System standing by to create the vast amounts of bailout money pledged by Congress.
As we have seen, the game called Bailout has been played over and over again in the rescue of large corporations, domestic banks, and savings-and-loan institutions. The pretense has been that these measures were necessary to protect the public. The result, however, has been just the opposite. The public has been exploited as billions of dollars have been expropriated through taxes and inflation. The money has been used to make up losses that should have been paid by the failing banks and corporations as the penalty for mismanagement and fraud.
While this was happening in our home-town stadium, the same game was being played in the international arena. There are two primary differences. One is that the amount of money at stake in the international game is much larger. Through a complex tangle of bank loans, subsidies, and grants, the Federal Reserve is becoming the "lender of last resort" for virtually the entire planet. The other difference is that, instead of claiming to be Protectors of the Public, the players have emblazoned across the backs of their uniforms: Saviors of the World.
The announced purposes of these organizations were admirable. The World Bank was to make loans to war-torn and underdeveloped nations so they could build stronger economies. The International Monetary Fund (IMF) was to promote monetary cooperation between nations by maintaining fixed exchange rates between their currencies. But the method by which these goals were to be achieved was less admirable. It was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard. In other words, it was to allow governments to escape the discipline of gold so they could create money out of nothing without paying the penalty of having their currencies drop in value on world markets.
Prior to this conference, currencies were exchanged in terms of their gold value, and the arrangement was called the "gold exchange standard." This is not the same as a "gold-standard" in which a currency is backed by gold. It was merely that the exchange ratios of the various currencies—most of which were not backed by gold—were determined by how much gold they could buy in the open market. Their values, therefore, were set by supply and demand. Politicians and bankers hated the arrangement, because it was beyond their ability to manipulate. In the past, it had served as a remarkably efficient mechanism but it was a strict disciplinarian. As John Kenneth Galbraith observed:
The Bretton Woods arrangements sought to recapture the advantages of the gold standard—currencies that were exchangeable at stable and predictable rates into gold and thus at stable and predictable rates into each other. And this it sought to accomplish while minimizing the pain imposed by the gold standard on countries that were buying too much, selling too little and thus losing gold." 1
1. John Kenneth Galbraith, Money: Whence It Came, Where It Went (Boston^ Houghton Mifflin, 1975), pp. 258, 259.
The method by which this was to be accomplished was exactly the method devised on Jekyll Island to allow American banks to create money out of nothing without paying the penalty of having their currencies devalued by other banks. It was the establishment of a world central bank which would create a common fiat money for all nations and then require them to inflate together at the same rate. There was to be a kind of international insurance fund which would rush that fiat money to any nation that temporarily needed it to face down a "run" on its currency. It wasn't born with all these features fully developed, just as the Federal Reserve wasn't fully developed when it was born. That, nevertheless, was the plan, and it was launched with all the structures in place.
The theoreticians who drafted this plan were the well-known Fabian Socialist from England, John Maynard Keynes,1 and the Assistant Secretary of the U.S. Treasury, Harry Dexter White.
1. Keynes often is portrayed as having been merely a liberal. But, for his lifelong involvement with Fabians and their work, see Rose Martin, Fabian Freeway; High Socialism in the U.S.A. (Boston: Western Islands, 1966)
Beneath the line Remould it nearer to the heart's desire, the mural
depicts Shaw and Webb striking the earth with hammers. Across
the bottom, the masses kneel in worship of a stack of books
advocating the theories of socialism. Thumbing his nose at the
docile masses is H.G. Wells who, after quitting the Fabians,
denounced them as "the new machiavellians." The most revealing
component, however, is the Fabian crest which appears Between
Shaw and Webb. It is a wolf in sheep's clothing!1
1. See Zygmund Dobbs, The Great Deceit: Social Pseudo-Sciences (West Sayville, New York: Veritas Foundation, 1964), opposite p. 1. Also Rose L. Martin, Fabian Freeway: High Road to Socialism in the U.S.A. (Boston: Western Islands, 1966), pp. 30, 31.
Harry Dexter White was America's chief technical expert and
the dominant force at the conference. He eventually became the
first Executive Director for the United States at the IMF. An
interesting footnote to this story is that White was simultaneously a
member of the Council on Foreign Relations (CFR) and a member
of a Communist espionage ring in Washington while he served as
Assistant Secretary of the Treasury. And even more interesting is
that the White House was informed of that fact when President
Truman appointed him to his post. The FBI had transmitted to the
White House detailed proof of White's activities on at least two
separate occasions.2 Serving as the technical secretary at the Bretton
Woods conference was Virginius Frank Coe, a member of the same
espionage ring to which White belonged. Coe later became the first
Secretary of the IMF.
2. See: David Rees, Harry Dexter White: A Study in Paradox (New York: Coward, McCann & Geoghegan, 1973); Whittaker Chambers, Witness (New York: Random House, 1952); Allen Weinstein, Perjury: The Hiss-Chambers Case (New York: Vintage Books, 1978); James Burnham, The Web of Subversion: Underground Networks in the U.S. Government (New York: The John Day Co., 1954); Elizabeth Bentley, Out of Bondage (New York: Devin-Adair, 1951)
Thus, completely hidden from public view, there was a complex
drama taking place in which the intellectual guiding lights at
the Bretton Woods conference were Fabian Socialists and Communists.
Although they were in disagreement over method, they were
in perfect harmony on goal: international socialism.
There were undoubtedly other reasons for Communists to be enthusiastic about the IMF and the World Bank, despite the fact that the Soviet Union elected at the time not to become a member. The goal of the organizations was to create a world currency, a world central bank, and a mechanism to control the economies of all nations. In order for these things to happen, the United States would of necessity have to surrender its dominant position. In fact, it would have to be reduced to just one part of the collective whole. That fit in quite nicely with the Soviet plan. Furthermore, the World Bank was seen as a vehicle for moving capital from the United States and other industrialized nations to the underdeveloped nations, the very ones over which Marxists have always had the greatest control. They looked forward to the day when we would pay their bills. It has all come to pass.
One of the routine operations at the IMF is to exchange worthless currencies for dollars so the weaker countries can pay their international bills. This is supposed to cover temporary "cash-flow" problems. It is a kind of international FDIC which rushes money to a country that has gone bankrupt so it can avoid devaluing its currency. The transactions are seldom paid back.
Although escape from the gold-exchange standard was the long-range goal of the IMF, the only way to convince nations to Participate at the outset was to use gold itself as a backing for its own money supply—at least as a temporary expedient. As Keynes explained it:
I felt that the leading central banks would never voluntarily relinquish the then existing forms of the gold standard; and I did not desire a catastrophe sufficiently violent to shake them off involuntarily. The only practical hope lay, therefore, in a gradual evolution in the forms of a managed world currency, taking the existing gold standard as a starting point.1
1. John Maynard Keynes, The Collected Writings of, Vol V (1930 rpt. New York: Macmillan, 1971), p. xx.
It was illegal for American citizens to own gold at that time, but everyone else in the world could exchange their paper dollars for gold at a fixed price of $35 per ounce. That made it the de facto international currency because, unlike any other at the time, its value was guaranteed. So, at the outset, the IMF adopted the dollar as its own international monetary unit.
Dennis Turner cuts through the garbage:
SDRs are turned into loans to Third-World nations by the creation of checking accounts in the commercial or central banks of the member nations in the name of the debtor governments. These bank accounts are created out of thin air. The IMF creates dollars, francs, pounds, or other hard currencies and gives them to a Third-World dictator, with inflation resulting in the country where the currency originated.... Inflation is caused in the industrialized nations while wealth is transferred from the general public to the debtor country. And the debtor doesn't repay. 2
2. Dennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwel l Publishing, 1983), p. 32
When the IMF was created, it was the vision of Fabian Socialist John Maynard Keynes that there be a world central bank issuing a reserve currency called the "bancor" to free all governments from the discipline of gold. With the creation of SDRs, the IMF had finally begun to fulfill that dream.
On August 15,1971, President Nixon signed an executive order declaring that the United States would no longer redeem its paper dollars for gold. So ended the first phase of the IMF's metamorphosis. It was not yet a true central bank, because it could not create its own world currency. It had to depend on the central banks of its member nations to provide cash and so-called credits; but since these banks, themselves, could create as much money as they wished, from now on, there would be no limit.
The original purpose had been to maintain fixed rates of exchange between currencies; but the IMF has presided over more than two hundred currency devaluations. In private industry, a failure of that magnitude might be cause for going out of business, but not in the world of politics. The greater the failure, the greater the pressure to expand the program. So, when the dollar broke loose from gold and there was no longer a ready standard for measuring currency values, the IMF merely changed its goal and continued to expand its operation. The new goal was to "overcome trade deficits."
A trade deficit is a condition that exists when a country imports a greater value of goods than it exports. In other words, it spends more than it earns in international trade. This is similar to the situation of an individual who spends more than he earns. In both cases, the process cannot be sustained unless: (1) earnings are increased; (2) money is taken out of savings; (3) assets are sold; (4) money is counterfeited; or (5) money is borrowed. Unless one of these occurs, the individual or the country has no choice but to decrease spending.
Increasing one's earnings is the best solution. In fact, it is the only solution for the long haul. All else is temporary at best. An individual can increase his income by working harder or smarter or longer. A country does it the same way. But it cannot happen unless private industry is allowed to flourish in a system of free-enterprise. The problem with this option is that few politicians respect the dynamic power of the free-enterprise system. Their world is built upon political programs in which the laws of the free market are manipulated to achieve politically popular goals. They may desire the option of increasing the nation's income by increasing its productivity, but their political agenda prevents that from happening.1
1. It is the author's opinion that it's time to get the politicians wearing Uncle-Sam suits off our backs. Which is easier said than done, because Americans still like their protectionist subsidies: tariffs to protect the business man, minimum wages and compulsory unionism to protect the worker, ethnic quotas in hiring to protect the underdog, cradle-to-the-grave insurance programs, unemployment benefits, disability compensation, extreme environmental and safety measures—regardless of cost. Free enterprise can and will produce all of these benefits in order to compete for buyers and employees alike. But, as long as these measures are compulsory and chosen on the basis of political popularity without regard to economic consequences, American industry will never be able to recover. And then none of the illusory benefits will remain.
The second option is to obtain extra money out of savings. But
there are virtually no governments in the world today that have
any savings. Their debts and liabilities exceed assets by a large
margin. Likewise, most of their industries and their citizens are in a
similar position. Their savings already have been consumed by
government.
The third option, the selling of assets, also is not available for most countries. By assets, we mean tangible items other than merchandise which is normally for sale. Although these, too, are assets in the broad meaning, in accounting methodology, they are classified as inventory. The only government asset that is readily marketable is gold, and few countries today have a stockpile from which to draw. Even in those cases, what little they have is already owed to another government or a bank. As for private assets, nations can, for a while, sell these to foreign buyers and offset their negative trade balances. That is what has been happening in the United States for many years as office buildings, stocks, factories, and entire companies have been sold to foreign investors. But the fact remains that the nation is still spending more than it earns, and that process cannot continue indefinitely. Foreign ownership and control over industry and commerce also create sociological and political problems. Underdeveloped countries do not have to worry about any of that, however, because they have few private assets to sell.
When the dollar was separated entirely from gold in 1971, it ceased being the official IMF world currency and finally had to compete with other currencies—primarily the mark and the yen— on the basis of its relative merit. From that point forward, its value increasingly became discounted. Nevertheless, it was still the preferred medium of exchange. Also, the U.S. was one of the safest places in the world to invest one's money. But, to do so, one first had to convert his native currency into dollars. These facts gave the U.S. dollar greater value on international markets than it otherwise would have merited. So, in spite of the fact that the Federal Reserve was creating huge amounts of money during this time, the demand for it by foreigners was seemingly limitless. The result is that America has continued to finance its trade deficit with fiat money— counterfeit, if you will—a feat which no other nation in the world could hope to accomplish.
We have been told that our nation's trade deficit is a terrible and that it would be better to "weaken the dollar" to bring it an end. Weakening the dollar is a euphemism for increasing inflation. In truth, America is not hurt by a trade deficit at all. In reality We are the benefactors while our trading partners are the victims. We get the cars and TV sets while they get the funny money. We get the hardware. They get the paperware.
There is a dark side to the exchange, however. As long as the dollar remains in high esteem as a trade currency, America can continue to spend more than it earns. But when the day arrives—as it certainly must—when the dollar tumbles and foreigners no longer want it, the free ride will be over. When that happens, hundreds of billions of dollars that are now resting in foreign countries will quickly come back to our shores as people everywhere in the world attempt to convert them into yet more real estate, factories, and tangible products, and to do so as quickly as possible before they become even more worthless. As this flood of dollars bids up prices, we will finally experience the inflation that should have been caused in years past but which was postponed because foreigners were kind enough to take the dollars out of our economy in exchange for their products.
The chickens will come home to roost. But, when they do, it will not be because of the trade deficit. It will be because we were able to finance the trade deficit with fiat money created by the Federal Reserve. If it were not for that, the trade deficit could not have happened.
Back to the main topic, which is the five methods by which a trade deficit can be paid. Through the process of elimination, the fourth option of borrowing is where the action is today for most of the world, and that is where the IMF positioned itself in 1970. Its new mission was to provide loans so countries can continue to spend more than they earn, but to do so in the name of "overcoming trade deficits."
Whereas the International Monetary Fund is evolving into a world central bank which eventually will issue a world currency based on nothing, its sister organization, the World Bank, has become its lending agency. Acting as Savior of the World, it seeks to aid the underdeveloped nations, to feed the hungry, and to bring a better life to all mankind. In pursuit of these humanitarian goals, it provides loans to governments at favorable terms, usually at rates below market, for terms as long as fifty years, and often with no payments due until after ten years.
Funding for these loans comes from member states in the form of a small amount of cash, plus promises to deliver about ten-times more if the Bank gets into trouble. The promises, described as "callable capital," constitute a kind of FDIC insurance program but with no pretense at maintaining a reserve fund. (In that sense it is more honest than the real FDIC which does maintain the pretense but, in reality, is based on nothing more than a similar promise.)
Based upon the small amount of seed money plus the far greater amount of "credits" and "promises" from governments of the industrialized countries, the World Bank is able to go into the commercial loan markets and borrow larger sums at extremely low interest rates. After all, the loans are backed by the most powerful governments in the world which have promised to force their taxpayers to make the payments if the Bank should get into trouble. It then takes these funds and relends them to the underdeveloped countries at slightly higher rates, making a profit on the arbitrage.
The unseen aspect of this operation is that the money it processes is money which, otherwise, would have been available for investment in the private sector or as loans to consumers. It siphons off much-needed development capital for private industry, prevents new jobs from being created, causes interest rates to rise, and retards the economy at large.
This hidden agenda becomes crystal clear in the nature of what the Bank calls Sectoral Loans and Structural-Adjustment Loans. In the first category, only part of the money is to be used for the costs of specific projects while the rest goes to support policy changes in the economic sector. In the second group, all of the money is for policy changes and none of it is for projects. In recent years, almost half of the loans to underdeveloped countries have been in that category. What are the policy changes that are the object of these loans? They add up to one thing: the building of world socialism.
As the Fabians had planned it, the word socialism is not to be used. Instead, the loans are issued for government hydro-electric projects, government oil refineries, government lumber mills, government mining companies, and government steel plants. It is delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats. When the money comes from government, goes to government, and is administered by government, the result will be the expansion of government.
Here is an example. One of the policy changes often required by the World Bank as a condition of granting a loan is that the recipient country must hold down its wages. The assumption is that the government has the power—and rightfully should have the power—to set wages! In other words, one of the conditions of its loan is that the state must be omnipotent.
Paul Roberts holds the William E. Simon Chair of Political Economy at the Center for Strategic and International Studies in Washington. Writing in Business Week, he says:
The entire "development process" has been guided by the belief that reliance on private enterprise and equity investment is incompatible with economic and social progress. In place of such proven avenues of success, development planning substituted loans and foreign aid so that governments of the LDCs [Less Developed Countries] could control economic activity in keeping with plans drawn up by experts.
Consequently, economic life in the LDCs was politicized from the start. By endowing governments with extensive control over their economies, the U.S. set up conditions exactly opposite to those required for economic growth.1
1. "How 'Experts' Caused the Third World Debt Crisis," by Paul Craig Roberts, Business Week, November 2,1987.
Ken Ewert explains further that the conditions imposed by the Fund are seldom free-market oriented. He says:
The Fund concentrates on "macro-policies," such as fiscal and monetary policies or exchange rates, and pays little attention to fundamental issues like private property rights and freedom of enterprise. Implicit ... is the belief that with proper "macromanagement" any economic system is viable....
Even more important, it has allowed governments the world over to expropriate the wealth of their citizens more efficiently (through the hidden tax of inflation) while at the same time aggrandizing their own power. There is little doubt that the IMF is an influence for world-wide socialism.1
1 "The International Monetary Fund," by Ken S. Ewert, The Freeman, April, 1989, PP-157,158
An important feature of the Structural-Adjustment Loans is that the money need not be applied to any specific development project. It can be spent for anything the recipient wishes. That includes interest payments on overdue bank loans. Thus, the World Bank becomes yet one more conduit from the pockets of taxpayers to the assets of commercial banks which have made risky loans to Third-World countries.
Nevertheless, the "structural-adjustment" conditions provide a scapegoat for local politicians who can now place the blame for their nation's misery on big, bad "capitalists" from America and the IMF. People who have been taught that it is government's role to provide for their welfare, their health care, their food and housing, their jobs and retirement—such people will not be happy when they hear that these "rights" are being threatened. So they demonstrate in the streets in protest, they riot in the commercial sections of town so they can steal goods from stores, and they throng to the banner of leftist politicians who promise to restore or increase their benefits. As described by Insight magazine:
National strikes, riots, political upheavals and social unrest in Argentina, Bolivia, Brazil, Ecuador, Egypt, Haiti, Liberia, Peru, Sudan and elsewhere have at various times been attributed to IMF austerity programs....
Some came to the fund with domestic trouble already brewing and seized on the fund as a convenient scapegoat.1
1. "IMF Hands Out Prescription for Sour Economic Medicine," Insight, February 9, 1987, p. 14.
Quite true. An honest reading of the record shows that the IMF,
far from being a force for austerity in these countries, has been an
engine of socialist waste and a fountain of abundance for the
corrupt leaders who rule.
In Uganda, government security forces have engaged in mass detentions, torture, and killing of prisoners. The same is true under the terrorist government in Zimbabwe. Yet, both regimes continue to be the recipients of millions of dollars in World Bank funding.
Zimbabwe (formerly Rhodesia) is a classic case. After its independence, the leftist government nationalized (confiscated) many of the farms previously owned by white settlers. The most desirable of these lands became occupied by the government's senior ruling-party officials, and the rest were turned into state-run collectives. They were such miserable failures that the workers on these farmlands were, themselves, soon begging for food. Not daunted by these failures, the socialist politicians announced in 1991 that they were going to nationalize half of the remaining farms as well. And they barred the courts from inquiring into how much compensation would be paid to their owners.
The IMF was represented in Zimbabwe at the time by Michel Camdessus , the Governor of the central Bank of France, and a former finance minister in Francois Mitterrand's Socialist government. After being informed of Zimbabwe's plan to confiscate additional land and to resettle people to work on those lands, Camdessus agreed to a loan valued at 42 billion rands with full knowledge that much of it would be used for the resettlement project.
Perhaps the worst violations of human rights have occurred in Ethiopia under the Marxist regime of Mengistu Haile Mariam. The famine of 1984-85, which threatened the lives of millions of people, was the result of government nationalization and disruption of agriculture. Massive resettlement programs have torn hundreds of thousands of people from their privately owned land in the north and deported them to concentration-camp "villages" in the south, complete with guard towers. A report by a French voluntary medical-assistance group, Doctors without Borders, reveals that the forced resettlement program may have killed as many people as the famine itself.1 Dr. Rony Brauman, director of the organization, describes their experience:
1. "Ethiopia Bars Relief Team," by Blaine Harden, Washington Post, December 3, 1985, p. A-21.
2. "Famine Aid: Were we Duped?" by Dr. Rony Brauman, Raider's Digest, October '1986, p. 7]
Armed militiamen burst into our compounds, seized our
equipment and menaced our volunteers. Some of our employees were
beaten, and our trucks, medicines and food stores confiscated. We left
Ethiopia branded as enemies of the revolution. The regime spoke the
truth. The atrocities committed in the name of Mengistu's master plan
did make us enemies of the revolution. 2
1. James Bovard, The World Bank vs. The World's Poor, Cato Policy Analysis (Washington, D.C.: Cato Institute, 1987), pp. 4-6.
In the late 1970s the same story unfolded in Communist Vietnam. There were resettlement programs, forced collectivization, concentration camps, atrocities, and tens of thousands of dissidents escaping to the sea only to drown in overcrowded, leaky boats. Throughout it all, the regime was generously funded by the World Bank.
Laos has jailed thousands of political prisoners; Syria has massacred 20,000 members of its opposition; Indonesia has uprooted several million people from their homelands in Java; the Sandinistas in Nicaragua murdered their opposition and terrorized the nation into submission; Poland, while a puppet state of the Soviet Union, brutally suppressed its trade-union movement; China massacred its dissident students and imprisoned its religious leaders; and the former Soviets slaughtered civilians in Afghanistan while conducting a relentless espionage war against the entire free world. Yet, these regimes have been the recipient of literally billions of dollars from the World Bank.
How can the Bank's managers continue in conscience to fund such genocidal regimes? Part of the answer is that they are not permitted to have a conscience. David Dunn, head of the Bank's Ethiopia Desk explained: "Political distinctions are not something our charter allows us to take into account."2 The greater part of the answer, however, is that all socialist regimes have the potential for genocide, and the Bank is committed to socialism. The brutalities of these countries are all in a days work for serious socialists who view them as merely unfortunate necessities for the building of their utopia. Lenin said you cannot make an omelet without cracking a few eggs. George Bernard Shaw, one of the early leaders of the Fabian Socialist movement, expressed it this way:
2. "Harnessing World Bank to the West," Insight, February 9, 1987, p. 8.
Under Socialism, you would not be allowed to be poor. You would be forcibly fed, clothed, lodged, taught, and employed whether you liked it or not. If it were discovered that you had not character and industry enough to be worth all this trouble, you might possibly be executed in a kindly manner; but whilst you were permitted to live, you would have to live well. 1
1.George Bernard Shaw, The Intelligent Woman's Guide to Socialism and Capitalism I928; rpt. New Brunswick, New Jersey: Transaction Books, 1984), p. 470.
The IMF/World Bank is the protege of the Federal Reserve. It would not exist without the flow of American dollars and the benevolence of American leadership. The Fed has become an accomplice in the support of totalitarian regimes throughout the world. As stated at the beginning of this study, that is one of the reasons it should be abolished: It is an instrument of totalitarianism.
Graham Hancock has been an astute observer of the international-aid "industry" and has attended their plush conferences. He knows many of the leading players personally. In his book, Lords of Poverty, he speaks of the IMF's Structural-Adjustment loans:
Corrupt Ministers of Finance and dictatorial Presidents from Asia, Africa, and Latin America are tripping over their own expensive footwear in their unseemly haste to "get adjusted." For such people, money has probably never been easier to obtain than it is today; with no complicated projects to administer and no messy accounts to keep, the venal, the cruel and the ugly are laughing literally all the way to the bank. For them structural adjustment is like a dream come true. JSJ sacrifices are demanded of them personally. All they have to do—amazing but true—is screw the poor, and they've already had plenty of practice at that.1
1. Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business (New York: Atlantic Monthly Press, 1989), pp. 59,60.
In India, the World Bank funded the construction of a dam that
displaced two million people, flooded 360 square miles, and wiped
out 81,000 acres of forest cover. In Brazil, it spent a billion dollars to
"develop" a part of the Amazon basin and to fund a series of
hydroelectric projects. It resulted in the deforestation of an area half
the size of Great Britain and has caused great human suffering
because of resettlement. In Kenya, the Bura irrigation scheme
caused such desolation that a fifth of the native population
abandoned the land. The cost was $50,000 per family served. In
Indonesia, the transmigration program mentioned previously has
devastated tropical forests—at the same time that the World Bank
is funding reforestation projects. The cost of resettling one family is
$7,000, which is about ten-times the Indonesian per-capita income.
Livestock projects in Botswana led to the destruction of grazing land and the death of thousands of migratory animals. This resulted in the inability of the natives to obtain food by hunting, forcing them into dependence on the government for survival. While Nigeria and Argentina are drowning in debt, billions from the World Bank have gone into building lavish new capital cities to house government agencies and the ruling elite. In Zaire, Mexico, and the Philippines, political leaders became billionaires while receiving World Bank loans on behalf of their nations. In the Central African Republic, IMF and World Bank loans were used to stage a coronation for its emperor.
The record of corruption and waste is endless. But the real eye-opener is in the failure of socialist ventures, those magnificent projects which were to bring prosperity to the underdeveloped countries. Here are just a few examples.
Argentina once had one of the highest standards of living in Latin America. But then it became the recipient of massive loans from the World Bank as well as commercial banks in the United States. Since the money was given to politicians, it was used to build the only system politicians know how to build: socialism. By 1982, the Gross National Product was in a nose dive, manufacturing had fallen to less than half of capacity, thousands of privately owned companies had been forced into bankruptcy, unemployment was soaring, and so was welfare. By 1989, inflation was running at an average of 5,000% and, in the summer of that year, topped at 1,000,000%! Banks were offering interest rates of 600% per month in hopes of keeping deposits from being moved out of the country. People were rioting in the streets for food, and the government was blaming greedy shop owners for raising prices. The nation was hopelessly in debt with no way to repay.
Brazil is run by the military, and the state controls the economy. Government-owned companies consume 65% of all industrial investment, which means that the private sector is limited to 35% and is shrinking. The government used loans from U.S. banks to create an oil company, Petroleo Brasileiro S.A., which became Latin America's largest corporation. Despite huge oil deposits and record-high oil prices, the company operated at a loss and was not even able to produce enough gasoline for its own citizens. By 1990, inflation was running at 5,000%. Since 1960, its prices had risen to 164,000 times their original level. A new crime was invented called hedging against inflation," and people were arrested for charging the free-market price for their goods and for using dollars or gold as money. Led by Communist organizers, mobs roamed the streets shouting "We're hungry. Steal what you will!" The nation was hopelessly in debt with no way to repay.
The experience in Mexico was a carbon copy of that in Brazil, except that the amount of money was larger. When the world's fourth largest oil reserves were discovered, Mexican politicians reached for the brass ring. With billions borrowed from U.S. banks, they launched Petroleos Mexicanos (PEMEX) and soon became the world's fifth largest oil producer. They also built chemical plants and railroads, and launched many other industrial projects. These were run as welfare agencies instead of businesses: too many people on the payroll, too many managers, excessive salaries, too many holidays, and unrealistic benefits. The ventures floundered and lost money. Private businesses failed by the thousands, and unemployment rose. The government increased the minimum wage causing more businesses to fail and more unemployment. That led to more welfare and unemployment benefits. To pay for that, the government borrowed even more and began creating its own fiat money. Inflation destroyed what was left of the economy.
Price controls were next, along with rent and food subsidies, and doubling the minimum wage. By 1982, Mexicans were trading their pesos for dollars and sending their savings out of the country, as the peso became all but worthless in commerce.1 In 1981, the average wage for Mexican workers was 31% of the average wage for Americans. By 1989, it had fallen to 10%. Mexico, once one of the major food exporters in the world, was now required to import millions of dollars worth of food grains. This required still more money and more loans. All this occurred while oil prices were high and production was booming. A few years later, when oil prices fell, the failures and shortfalls became even more dramatic.
1. The same American banks that were making the loans were soliciting this flight capital and ended up getting deposits of the same money they had lent. It was nice business both ways.
In 1995, Mexico's bank loans were once again on the brink of default, and, once again, U.S. taxpayers were thrown into the breech by Congress to cover more than $30 billion at risk. Although this loan was eventually repaid, the money to do so was extracted from the Mexican people through another round of massive inflation, which plunged their standard of living even lower. The nation is now hopelessly mired in socialism. The Communist Party, promising "reform" and still more socialism, is attracting a large following and could become a potent political force.
Thus, the saga continues. After pouring billions of dollars into underdeveloped countries around the globe, no development has taken place. In fact, we have seen just the opposite. Most countries are worse off than before the Saviors of the World got to them.
The method by which gold was to be eliminated in international trade was to replace it with a world currency which the IMF, acting as a world central bank, would create out of nothing. The method by which world socialism was to be established was to use the World Bank to transfer money—disguised as loans—to the governments of the underdeveloped countries and to do so in such a way as to insure the demise of free enterprise. The money was to be delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats. When the money comes from government, goes to government, and is administered by government, the result will be the expansion of government.
The theoreticians who dominated the conference at Bretton Woods were the well-known Fabian Socialist from England, John Maynard Keynes, and the Assistant Secretary of the U.S. Treasury, Harry Dexter White. White became the first Executive Director for the United States at the IMF.
The Fabians were an elite group of intellectuals who agreed with Communists as to the goal of socialism but disagreed over tactics. Whereas Communists advocated revolution by force and violence, Fabians advocated gradualism and the transformation of society through legislation.
It was learned in later years that Harry Dexter White was a Member of a Communist espionage ring. Thus, hidden from view, there was a complex drama taking place in which the two intellectual founders of the Bretton-Woods accords were a Fabian Socialist and a Communist, working together to bring about their mutual goal; world socialism.
Capital for the IMF and the World Bank comes from the industrialized nations, with the United States putting up the most. Funds consist partly of hard currencies—such as the dollar, yen, mark and franc—but these are augmented by many times that amount in the form of "credits." These are merely promises by the member governments to get the money from their taxpayers if the Bank gets into trouble with its loans.
While the IMF is gradually evolving into a central bank for the world, the World Bank is serving as its lending arm. As such, it has become the engine for transferring wealth from the industrialized nations to the underdeveloped countries. While this has lowered the economic level of the donating countries, it has not raised the level of the recipients. The money has simply disappeared down the drain of political corruption and waste.
This is an accurate rendering of the stained-glass window in the Beatrice Webb House in Surrey, England, headquarters of the Fabian Society. It depicts Sidney Webb and George Bernard Shaw striking the earth with hammers to "REMOULD IT NEARER TO THE HEART'S DESIRE." Note the wolf in sheep's clothing in the Fabian crest above the globe.
next
BUILDING THE NEW WORLD ORDER
Here was $180 billion that no longer was being channeled through Wall Street. Here was $180 billion that was coming from people's savings instead of being created out of nothing by the banks. In other words, here was growth built upon real investment, not inflation. Certain people were not happy about it.
Glenn Yago, Director of the Economic Research Bureau and Associate Professor of Management at the State University of New York at Stony Brook, explains the problem:
It was not until high yield securities were applied to restructuring through de-conglomeration and takeovers that hostilities against the junk bond market broke out.... The high yield market grew at the expense of bank debt, and high yield companies grew at the expense of the hegemony of many established firms. As Peter Passell noted in The Nezu York Times, the impact was first felt on Wall Street, "where sharp elbows and a working knowledge of computer spreadsheets suddenly counted more than a nose for dry sherry or membership in Skull and Bones."1
1. Glenn Yago, funk Bonds: How High Yield Securities Restructured Corporate America (New York: Oxford University Press, 1991), p. 5.
The first line of attack on this new market of high-yield bonds was to call them "junk." The word itself was powerful. The financial media picked it up and many investors were frightened away.
The next step was for compliant politicians to pass a law requiring S&Ls to get rid of their "junk," supposedly to protect the public. That this was a hoax is evident by the fact that only 5% ever held any of these bonds, and their holdings represented only 1.2% of the total S&Ls assets. Furthermore, the bonds were performing satisfactorily and were a source of much needed revenue. Nevertheless, The Financial Institutions Reform and Recovery Act, which was discussed previously, was passed in 1989. It forced S&Ls to liquidate at once their "junk" bond holdings. That caused their prices to plummet, and the thrifts were even further weakened as they took a loss on the sale. Jane Ingraham comments:
Overnight, profitable S&Ls were turned into government-owned basket cases in the hands of the Resolution Trust Corporation (RTC). To add to the disaster, the RTC itself, which became the country's biggest owner of junk bonds ... flooded the market again with $1.6 billion of its holdings at the market's bottom in 1990....
So it was government itself that crashed the junk bond market, not Michael Milken, although the jailed Milken and other former officials of Drexel Burnham Lambert have just agreed to a $1.3 billion settlement of the hundreds of lawsuits brought against them by government regulators, aggrieved investors, and others demanding "justice."1
1."Banking on Government," pp. 24, 25. Quoted in "Banking on Government," p. 26.
Incidentally, these bonds have since recovered and, had the S&Ls been allowed to keep them, they would be in better financial condition today. And so would be the RTC.
With the California upstarts out of the way, it was a simple matter to buy up the detested bonds at bargain prices and to bring control of the new market back to Wall Street. The New York firm of Salomon Brothers, for example, one of Drexel's most severe critics during the 1980's, is now a leading trader in the market Drexel created.
REAL PROBLEM IS
GOVERNMENT REGULATION
So the real problem within the savings-and-loan industry is
government regulation which has insulated it from the free market
and encouraged it to embark upon unsound business practices. As
the Wall Street Journal stated on March 10,1992: If you're going to wreck a business the size of the U.S. Thrift industry, you need a lot more power than Michael Milken ever had. You need the power of national political authority, the kind of power possessed only by regulators and Congress. Whatever "hold" Milken or junk bonds may have had on the S&Ls, it was nothing compared with the interventions of Congress.
At the time this book went to press, the number of S&Ls that operated during the 1980s had dropped to less than half. As failures, mergers, and conversion into banks continue, the number will decline further. Those that remain fall into two groups: those that have been taken over by the RTC and those that have not. Most of those that remain under private control—and that is a relative term in view of the regulations they endure—are slowly returning to a healthy state as a result of improved profitability, asset quality, and capitalization. The RTC-run organizations, on the other hand, continue to hemorrhage due to failure by Congress to provide funding to close them down and pay them off. Losses from this group are adding $6 billion per year to the ultimate cost of bailout. President Clinton was asking Congress for an additional $45 billion and hinting that this should be the last bailout—but no promises.
The game continues.
CONGRESS IS PARALYZED,
WITH GOOD REASON
Congress seems disinterested and paralyzed with inaction. One
would normally expect dozens of politicians to be calling for a
large-scale investigation of the ongoing disaster, but there is hardly
a peep. The reason becomes obvious when one realizes that
savings-and-loan associations, banks, and other federally regulated
institutions are heavy contributors to the election campaigns of
those who write the regulatory laws. A thorough, public investigation
would undoubtedly turn up some cozy relationships that the
legislators would just as soon keep confidential. The second reason is that any honest inquiry would soon reveal the shocking truth that Congress itself is the primary cause of the problem. By following the socialist path and presuming to protect or benefit their constituency, they have suspended and violated the natural laws that drive a free-market economy. In so doing, they created a Frankenstein monster they could not control. The more they tried to tame the thing, the more destructive it became. As economist Hans Sennholz has observed:
The real cause of the disaster is the very financial structure that was fashioned by legislators and guided by regulators; they together created a cartel that, like all other monopolistic concoctions, is playing mischief with its victims.1
1. "The Great Banking Scandal," by Hans F. Sennholz, The Freeman, Nov., 1990, p. 405.
A CARTEL WITHIN A CARTEL
Sennholz has chosen exactly the right word: cartel. The savings and-loan
industry, is really a cartel within a cartel. It could not function without Congress standing by to push unlimited amounts of money into it. And Congress could not do that without the
banking cartel called the Federal Reserve System standing by as the
"lender of last resort" to create money out of nothing for Congress
to borrow. This comfortable arrangement between political scientists
and monetary scientists permits Congress to vote for any
scheme it wants, regardless of the cost. If politicians tried to raise
that money through taxes, they would be thrown out of office. But
being able to "borrow" it from the Federal Reserve System upon
demand, allows them to collect it through the hidden mechanism of
inflation, and not one voter in a hundred will complain. The thrifts have become the illegitimate half-breed children of the Creature. And that is why the savings-and-loan story is included in this study.
SUMMARY
Our present-day problems within the savings-and-loan industry
can be traced back to the Great Depression of the 1930s.
Americans were becoming impressed by the theories of socialism
and soon embraced the concept that it was proper for government
to provide benefits for its citizens and to protect them against
economic hardship. Under the Hoover and Roosevelt administrations, new government agencies were established which purported to protect deposits in the S&Ls and to subsidize home mortgages for the middle class. These measures distorted the laws of supply and demand and, from that point forward, the housing industry was moved out of the free market and into the political arena.
Once the pattern of government intervention had been established, there began a long, unbroken series of federal rules and regulations that were the source of windfall profits for managers, appraiser, brokers, developers, and builders. They also weakened the industry by encouraging unsound business practices and high-risk investments.
When these ventures failed, and when the value of real estate began to drop, many S&Ls became insolvent. The federal insurance fund was soon depleted, and the government was confronted with its own promise to bail out these companies but not having any money to do so.
The response of the regulators was to create accounting gimmicks whereby insolvent thrifts could be made to appear solvent and, thus, continue in business. This postponed the inevitable and made matters considerably worse. The failed S&Ls continued to lose billions of dollars each month and added greatly to the ultimate cost of bailout, all of which would eventually have to be paid by the common man out of taxes and inflation. The ultimate cost is estimated at over one trillion dollars.
Congress appears to be unable to act and is strangely silent. This is understandable. Many representatives and senators are the beneficiaries of generous donations from the S&Ls. But perhaps the main reason is that Congress, itself, is the main culprit in this crime. In either case, the politicians would like to talk about something else.
In the larger view, the S&L industry is a cartel within a cartel. The fiasco could never have happened without the cartel called the Federal Reserve System standing by to create the vast amounts of bailout money pledged by Congress.
Chapter Five
NEARER TO THE
HEART'S DESIRE
The 1944 meeting in Bretton Woods, New Hampshire,
at which the world's most prominent socialists
established the International Monetary Fund
and the World Bank as mechanisms for eliminating
gold from world finance; the hidden agenda
behind the IMF/World Bank revealed as the
building of world socialism; the role of the Federal
Reserve in bringing that about. As we have seen, the game called Bailout has been played over and over again in the rescue of large corporations, domestic banks, and savings-and-loan institutions. The pretense has been that these measures were necessary to protect the public. The result, however, has been just the opposite. The public has been exploited as billions of dollars have been expropriated through taxes and inflation. The money has been used to make up losses that should have been paid by the failing banks and corporations as the penalty for mismanagement and fraud.
While this was happening in our home-town stadium, the same game was being played in the international arena. There are two primary differences. One is that the amount of money at stake in the international game is much larger. Through a complex tangle of bank loans, subsidies, and grants, the Federal Reserve is becoming the "lender of last resort" for virtually the entire planet. The other difference is that, instead of claiming to be Protectors of the Public, the players have emblazoned across the backs of their uniforms: Saviors of the World.
BRETTON WOODS:
AN ATTACK ON GOLD
The game began at an international meeting of financiers,
Politicians, and theoreticians held in July of 1944 at the Mount
Washington Hotel in Bretton Woods, New Hampshire. Officially,it was called the United Nations Monetary and Financial Conference,
but is generally referred to today as simply the Bretton Woods
Conference. Two international agencies were created at that meeting:
the International Monetary Fund and its sister organization,
the International Bank for Reconstruction and Development-—
commonly called the World Bank. The announced purposes of these organizations were admirable. The World Bank was to make loans to war-torn and underdeveloped nations so they could build stronger economies. The International Monetary Fund (IMF) was to promote monetary cooperation between nations by maintaining fixed exchange rates between their currencies. But the method by which these goals were to be achieved was less admirable. It was to terminate the use of gold as the basis of international currency exchange and replace it with a politically manipulated paper standard. In other words, it was to allow governments to escape the discipline of gold so they could create money out of nothing without paying the penalty of having their currencies drop in value on world markets.
Prior to this conference, currencies were exchanged in terms of their gold value, and the arrangement was called the "gold exchange standard." This is not the same as a "gold-standard" in which a currency is backed by gold. It was merely that the exchange ratios of the various currencies—most of which were not backed by gold—were determined by how much gold they could buy in the open market. Their values, therefore, were set by supply and demand. Politicians and bankers hated the arrangement, because it was beyond their ability to manipulate. In the past, it had served as a remarkably efficient mechanism but it was a strict disciplinarian. As John Kenneth Galbraith observed:
The Bretton Woods arrangements sought to recapture the advantages of the gold standard—currencies that were exchangeable at stable and predictable rates into gold and thus at stable and predictable rates into each other. And this it sought to accomplish while minimizing the pain imposed by the gold standard on countries that were buying too much, selling too little and thus losing gold." 1
1. John Kenneth Galbraith, Money: Whence It Came, Where It Went (Boston^ Houghton Mifflin, 1975), pp. 258, 259.
The method by which this was to be accomplished was exactly the method devised on Jekyll Island to allow American banks to create money out of nothing without paying the penalty of having their currencies devalued by other banks. It was the establishment of a world central bank which would create a common fiat money for all nations and then require them to inflate together at the same rate. There was to be a kind of international insurance fund which would rush that fiat money to any nation that temporarily needed it to face down a "run" on its currency. It wasn't born with all these features fully developed, just as the Federal Reserve wasn't fully developed when it was born. That, nevertheless, was the plan, and it was launched with all the structures in place.
The theoreticians who drafted this plan were the well-known Fabian Socialist from England, John Maynard Keynes,1 and the Assistant Secretary of the U.S. Treasury, Harry Dexter White.
1. Keynes often is portrayed as having been merely a liberal. But, for his lifelong involvement with Fabians and their work, see Rose Martin, Fabian Freeway; High Socialism in the U.S.A. (Boston: Western Islands, 1966)
THE FABIAN SOCIETY
Sidney & Beatrice Webb
The Fabians were an elite group of intellectuals who formed a
semi-secret society for the purpose of bringing socialism to the
world. Whereas Communists wanted to establish socialism quickly
through violence and revolution, the Fabians preferred to do it
slowly through propaganda and legislation. The word socialism
was not to be used. Instead, they would speak of benefits for the
people such as welfare, medical care, higher wages, and better
working conditions. In this way, they planned to accomplish their
objective without bloodshed and even without serious opposition.
They scorned the Communists, not because they disliked their
goals, but because they disagreed with their methods. To emphasize
the importance of gradualism, they adopted the turtle as the
symbol of their movement. The three most prominent leaders in the
early days were Sidney and Beatrice Webb and George Bernard
Shaw. A stained-glass window in the Beatrice Webb House in
Surrey, England is especially enlightening. Across the top appears
the last line from Omar Khayyam:
Dear love, couldst thou and I with fate conspire
To grasp this sorry scheme of things entire,
Would we not shatter it to bits, and then
Remould it nearer to the heart's desire!
1. See Zygmund Dobbs, The Great Deceit: Social Pseudo-Sciences (West Sayville, New York: Veritas Foundation, 1964), opposite p. 1. Also Rose L. Martin, Fabian Freeway: High Road to Socialism in the U.S.A. (Boston: Western Islands, 1966), pp. 30, 31.
COMMUNIST MOLES
2. See: David Rees, Harry Dexter White: A Study in Paradox (New York: Coward, McCann & Geoghegan, 1973); Whittaker Chambers, Witness (New York: Random House, 1952); Allen Weinstein, Perjury: The Hiss-Chambers Case (New York: Vintage Books, 1978); James Burnham, The Web of Subversion: Underground Networks in the U.S. Government (New York: The John Day Co., 1954); Elizabeth Bentley, Out of Bondage (New York: Devin-Adair, 1951)
There were undoubtedly other reasons for Communists to be enthusiastic about the IMF and the World Bank, despite the fact that the Soviet Union elected at the time not to become a member. The goal of the organizations was to create a world currency, a world central bank, and a mechanism to control the economies of all nations. In order for these things to happen, the United States would of necessity have to surrender its dominant position. In fact, it would have to be reduced to just one part of the collective whole. That fit in quite nicely with the Soviet plan. Furthermore, the World Bank was seen as a vehicle for moving capital from the United States and other industrialized nations to the underdeveloped nations, the very ones over which Marxists have always had the greatest control. They looked forward to the day when we would pay their bills. It has all come to pass.
IMF STRUCTURE AND FUNDING
The International Monetary Fund appears to be a part of the
United Nations, much as the Federal Reserve System appears to be
a part of the United States government, but it is entirely independent.
It is funded on a quota basis by its member nations,
almost two hundred in number. The greatest share of capital,
however, comes from the more highly industrialized nations such
as Great Britain, Japan, France, and Germany. The United States
contributes the most, at about twenty per cent of the total. In
reality, that twenty per cent represents about twice as much as the
number indicates, because most of the other nations contribute
worthless currencies which no one wants. The world prefers
dollars. One of the routine operations at the IMF is to exchange worthless currencies for dollars so the weaker countries can pay their international bills. This is supposed to cover temporary "cash-flow" problems. It is a kind of international FDIC which rushes money to a country that has gone bankrupt so it can avoid devaluing its currency. The transactions are seldom paid back.
Although escape from the gold-exchange standard was the long-range goal of the IMF, the only way to convince nations to Participate at the outset was to use gold itself as a backing for its own money supply—at least as a temporary expedient. As Keynes explained it:
I felt that the leading central banks would never voluntarily relinquish the then existing forms of the gold standard; and I did not desire a catastrophe sufficiently violent to shake them off involuntarily. The only practical hope lay, therefore, in a gradual evolution in the forms of a managed world currency, taking the existing gold standard as a starting point.1
1. John Maynard Keynes, The Collected Writings of, Vol V (1930 rpt. New York: Macmillan, 1971), p. xx.
It was illegal for American citizens to own gold at that time, but everyone else in the world could exchange their paper dollars for gold at a fixed price of $35 per ounce. That made it the de facto international currency because, unlike any other at the time, its value was guaranteed. So, at the outset, the IMF adopted the dollar as its own international monetary unit.
PAPER GOLD
But the Fabian turtle was crawling inexorably toward its
destination. In 1970, the IMF created a new monetary unit called
the SDR, or Special Drawing Right. The media optimistically
described it as "paper gold," but it was pure bookkeeping wizardry
with no relationship to gold or anything else of tangible value.
SDRs are based on "credits" which are provided by the member
nations. These credits are not money. They are merely promises
that the governments will get the money by taxing their own
citizens should the need arise. The IMF considers these to be
"assets" which then become the "reserves" from which loans are
made to other governments. As we shall see in chapter ten, this is
almost identical to the bookkeeping sleight-of-hand that is used to
create money out of nothing at the Federal Reserve System. Dennis Turner cuts through the garbage:
SDRs are turned into loans to Third-World nations by the creation of checking accounts in the commercial or central banks of the member nations in the name of the debtor governments. These bank accounts are created out of thin air. The IMF creates dollars, francs, pounds, or other hard currencies and gives them to a Third-World dictator, with inflation resulting in the country where the currency originated.... Inflation is caused in the industrialized nations while wealth is transferred from the general public to the debtor country. And the debtor doesn't repay. 2
2. Dennis Turner, When Your Bank Fails (Princeton, New Jersey: Amwel l Publishing, 1983), p. 32
When the IMF was created, it was the vision of Fabian Socialist John Maynard Keynes that there be a world central bank issuing a reserve currency called the "bancor" to free all governments from the discipline of gold. With the creation of SDRs, the IMF had finally begun to fulfill that dream.
GOLD IS FINALLY ABANDONED
But there was still an obstacle. As long as the dollar was the
primary currency used by the IMF and as long as it was redeemable
in gold at $35 per ounce, the amount of international money that
could be created would be limited. If the IMF were to function as a
true world central bank with unlimited issue, the dollar had to be
broken away from its gold backing as a first step toward replacing
it completely with a bancor, an SDR or something else equally free
from restraint. On August 15,1971, President Nixon signed an executive order declaring that the United States would no longer redeem its paper dollars for gold. So ended the first phase of the IMF's metamorphosis. It was not yet a true central bank, because it could not create its own world currency. It had to depend on the central banks of its member nations to provide cash and so-called credits; but since these banks, themselves, could create as much money as they wished, from now on, there would be no limit.
The original purpose had been to maintain fixed rates of exchange between currencies; but the IMF has presided over more than two hundred currency devaluations. In private industry, a failure of that magnitude might be cause for going out of business, but not in the world of politics. The greater the failure, the greater the pressure to expand the program. So, when the dollar broke loose from gold and there was no longer a ready standard for measuring currency values, the IMF merely changed its goal and continued to expand its operation. The new goal was to "overcome trade deficits."
TRADE DEFICITS
The topic of trade deficits is a favorite among politicians,
economists, and talk-show hosts. Everyone agrees they are bad, but
there is much disagreement over what causes them. Let's have a try
at it. A trade deficit is a condition that exists when a country imports a greater value of goods than it exports. In other words, it spends more than it earns in international trade. This is similar to the situation of an individual who spends more than he earns. In both cases, the process cannot be sustained unless: (1) earnings are increased; (2) money is taken out of savings; (3) assets are sold; (4) money is counterfeited; or (5) money is borrowed. Unless one of these occurs, the individual or the country has no choice but to decrease spending.
Increasing one's earnings is the best solution. In fact, it is the only solution for the long haul. All else is temporary at best. An individual can increase his income by working harder or smarter or longer. A country does it the same way. But it cannot happen unless private industry is allowed to flourish in a system of free-enterprise. The problem with this option is that few politicians respect the dynamic power of the free-enterprise system. Their world is built upon political programs in which the laws of the free market are manipulated to achieve politically popular goals. They may desire the option of increasing the nation's income by increasing its productivity, but their political agenda prevents that from happening.1
1. It is the author's opinion that it's time to get the politicians wearing Uncle-Sam suits off our backs. Which is easier said than done, because Americans still like their protectionist subsidies: tariffs to protect the business man, minimum wages and compulsory unionism to protect the worker, ethnic quotas in hiring to protect the underdog, cradle-to-the-grave insurance programs, unemployment benefits, disability compensation, extreme environmental and safety measures—regardless of cost. Free enterprise can and will produce all of these benefits in order to compete for buyers and employees alike. But, as long as these measures are compulsory and chosen on the basis of political popularity without regard to economic consequences, American industry will never be able to recover. And then none of the illusory benefits will remain.
The third option, the selling of assets, also is not available for most countries. By assets, we mean tangible items other than merchandise which is normally for sale. Although these, too, are assets in the broad meaning, in accounting methodology, they are classified as inventory. The only government asset that is readily marketable is gold, and few countries today have a stockpile from which to draw. Even in those cases, what little they have is already owed to another government or a bank. As for private assets, nations can, for a while, sell these to foreign buyers and offset their negative trade balances. That is what has been happening in the United States for many years as office buildings, stocks, factories, and entire companies have been sold to foreign investors. But the fact remains that the nation is still spending more than it earns, and that process cannot continue indefinitely. Foreign ownership and control over industry and commerce also create sociological and political problems. Underdeveloped countries do not have to worry about any of that, however, because they have few private assets to sell.
THE COUNTERFEIT OPTION
The counterfeit option is available only if a country happens to
be in the unique position of having its currency accepted as the
medium of international trade, as has been the case for the United
States. In that event, it is possible to create money out of nothing,
and other nations have no choice but to accept it. Thus, for years,
the United States has been able to spend more money than it earned
in trade by having the Federal Reserve create whatever it needed. When the dollar was separated entirely from gold in 1971, it ceased being the official IMF world currency and finally had to compete with other currencies—primarily the mark and the yen— on the basis of its relative merit. From that point forward, its value increasingly became discounted. Nevertheless, it was still the preferred medium of exchange. Also, the U.S. was one of the safest places in the world to invest one's money. But, to do so, one first had to convert his native currency into dollars. These facts gave the U.S. dollar greater value on international markets than it otherwise would have merited. So, in spite of the fact that the Federal Reserve was creating huge amounts of money during this time, the demand for it by foreigners was seemingly limitless. The result is that America has continued to finance its trade deficit with fiat money— counterfeit, if you will—a feat which no other nation in the world could hope to accomplish.
We have been told that our nation's trade deficit is a terrible and that it would be better to "weaken the dollar" to bring it an end. Weakening the dollar is a euphemism for increasing inflation. In truth, America is not hurt by a trade deficit at all. In reality We are the benefactors while our trading partners are the victims. We get the cars and TV sets while they get the funny money. We get the hardware. They get the paperware.
There is a dark side to the exchange, however. As long as the dollar remains in high esteem as a trade currency, America can continue to spend more than it earns. But when the day arrives—as it certainly must—when the dollar tumbles and foreigners no longer want it, the free ride will be over. When that happens, hundreds of billions of dollars that are now resting in foreign countries will quickly come back to our shores as people everywhere in the world attempt to convert them into yet more real estate, factories, and tangible products, and to do so as quickly as possible before they become even more worthless. As this flood of dollars bids up prices, we will finally experience the inflation that should have been caused in years past but which was postponed because foreigners were kind enough to take the dollars out of our economy in exchange for their products.
The chickens will come home to roost. But, when they do, it will not be because of the trade deficit. It will be because we were able to finance the trade deficit with fiat money created by the Federal Reserve. If it were not for that, the trade deficit could not have happened.
Back to the main topic, which is the five methods by which a trade deficit can be paid. Through the process of elimination, the fourth option of borrowing is where the action is today for most of the world, and that is where the IMF positioned itself in 1970. Its new mission was to provide loans so countries can continue to spend more than they earn, but to do so in the name of "overcoming trade deficits."
IMF LOANS: DOOMED BUT SWEET
These loans do not go into private enterprises where they have
a chance of being turned for a profit. They go into state-owned and
state-operated industries which are constipated by bureaucracy
and poisoned by corruption. Doomed to economic failure from the
start, they consume the loans with no possibility of repayment.
Even the interest quickly becomes too much to handle. Which
means the IMF must fall back to the "reserves," back to the
"assets," back to the "credits," and eventually back to the taxpayers
to bail them out.Whereas the International Monetary Fund is evolving into a world central bank which eventually will issue a world currency based on nothing, its sister organization, the World Bank, has become its lending agency. Acting as Savior of the World, it seeks to aid the underdeveloped nations, to feed the hungry, and to bring a better life to all mankind. In pursuit of these humanitarian goals, it provides loans to governments at favorable terms, usually at rates below market, for terms as long as fifty years, and often with no payments due until after ten years.
Funding for these loans comes from member states in the form of a small amount of cash, plus promises to deliver about ten-times more if the Bank gets into trouble. The promises, described as "callable capital," constitute a kind of FDIC insurance program but with no pretense at maintaining a reserve fund. (In that sense it is more honest than the real FDIC which does maintain the pretense but, in reality, is based on nothing more than a similar promise.)
Based upon the small amount of seed money plus the far greater amount of "credits" and "promises" from governments of the industrialized countries, the World Bank is able to go into the commercial loan markets and borrow larger sums at extremely low interest rates. After all, the loans are backed by the most powerful governments in the world which have promised to force their taxpayers to make the payments if the Bank should get into trouble. It then takes these funds and relends them to the underdeveloped countries at slightly higher rates, making a profit on the arbitrage.
The unseen aspect of this operation is that the money it processes is money which, otherwise, would have been available for investment in the private sector or as loans to consumers. It siphons off much-needed development capital for private industry, prevents new jobs from being created, causes interest rates to rise, and retards the economy at large.
THE HIDDEN AGENDA:
WORLD SOCIALISM
Although most of the policy statements of the World Bank deal
with economic issues, a close monitoring of its activities reveal a
Preoccupation with social and political issues. This should not be
surprising considering that the Bank was perceived by its founders
as an instrument for social and political change. The change which
it was designed to bring about was the building of world socialism,
and that is exactly what it is accomplishing today.This hidden agenda becomes crystal clear in the nature of what the Bank calls Sectoral Loans and Structural-Adjustment Loans. In the first category, only part of the money is to be used for the costs of specific projects while the rest goes to support policy changes in the economic sector. In the second group, all of the money is for policy changes and none of it is for projects. In recent years, almost half of the loans to underdeveloped countries have been in that category. What are the policy changes that are the object of these loans? They add up to one thing: the building of world socialism.
As the Fabians had planned it, the word socialism is not to be used. Instead, the loans are issued for government hydro-electric projects, government oil refineries, government lumber mills, government mining companies, and government steel plants. It is delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats. When the money comes from government, goes to government, and is administered by government, the result will be the expansion of government.
Here is an example. One of the policy changes often required by the World Bank as a condition of granting a loan is that the recipient country must hold down its wages. The assumption is that the government has the power—and rightfully should have the power—to set wages! In other words, one of the conditions of its loan is that the state must be omnipotent.
Paul Roberts holds the William E. Simon Chair of Political Economy at the Center for Strategic and International Studies in Washington. Writing in Business Week, he says:
The entire "development process" has been guided by the belief that reliance on private enterprise and equity investment is incompatible with economic and social progress. In place of such proven avenues of success, development planning substituted loans and foreign aid so that governments of the LDCs [Less Developed Countries] could control economic activity in keeping with plans drawn up by experts.
Consequently, economic life in the LDCs was politicized from the start. By endowing governments with extensive control over their economies, the U.S. set up conditions exactly opposite to those required for economic growth.1
1. "How 'Experts' Caused the Third World Debt Crisis," by Paul Craig Roberts, Business Week, November 2,1987.
Ken Ewert explains further that the conditions imposed by the Fund are seldom free-market oriented. He says:
The Fund concentrates on "macro-policies," such as fiscal and monetary policies or exchange rates, and pays little attention to fundamental issues like private property rights and freedom of enterprise. Implicit ... is the belief that with proper "macromanagement" any economic system is viable....
Even more important, it has allowed governments the world over to expropriate the wealth of their citizens more efficiently (through the hidden tax of inflation) while at the same time aggrandizing their own power. There is little doubt that the IMF is an influence for world-wide socialism.1
1 "The International Monetary Fund," by Ken S. Ewert, The Freeman, April, 1989, PP-157,158
An important feature of the Structural-Adjustment Loans is that the money need not be applied to any specific development project. It can be spent for anything the recipient wishes. That includes interest payments on overdue bank loans. Thus, the World Bank becomes yet one more conduit from the pockets of taxpayers to the assets of commercial banks which have made risky loans to Third-World countries.
AUSTERITY MEASURES
AND SCAPEGOATS
Not every measure advocated by the IMF and World Bank is
socialistic. Some of them even appear to be in support of the private
sector, such as the reduction of government subsidies and welfare.
They may include tax increases to reduce budget deficits. These
policy changes are often described in the press as "austerity
measures," and they are seen as hard-nosed business decisions to
salvage the failing economies of underdeveloped countries. But, as
the wolf (in sheep's clothing) said to Little Red-Riding-Hood, "All
the better to fool you with, my dear." These austerity measures are merely rhetoric. The borrowing nations usually ignore the conditions
with impunity, and the World Bank keeps the money coming
anyway. It's all part of the game. Nevertheless, the "structural-adjustment" conditions provide a scapegoat for local politicians who can now place the blame for their nation's misery on big, bad "capitalists" from America and the IMF. People who have been taught that it is government's role to provide for their welfare, their health care, their food and housing, their jobs and retirement—such people will not be happy when they hear that these "rights" are being threatened. So they demonstrate in the streets in protest, they riot in the commercial sections of town so they can steal goods from stores, and they throng to the banner of leftist politicians who promise to restore or increase their benefits. As described by Insight magazine:
National strikes, riots, political upheavals and social unrest in Argentina, Bolivia, Brazil, Ecuador, Egypt, Haiti, Liberia, Peru, Sudan and elsewhere have at various times been attributed to IMF austerity programs....
Some came to the fund with domestic trouble already brewing and seized on the fund as a convenient scapegoat.1
1. "IMF Hands Out Prescription for Sour Economic Medicine," Insight, February 9, 1987, p. 14.
FINANCING CORRUPTION
AND DESPOTISM
Nowhere is this pattern more blatant than in Africa. Julius
Nyerere, the dictator of Tanzania, is notorious for his "villagization"
program in which the army has driven the peasants from
their land, burned their huts, and loaded them like cattle into trucks
for relocation into government villages. The purpose is to eliminate
opposition by bringing everyone into compounds where they can
be watched and controlled. Meanwhile the economy staggers,
farms have gone to weed, and hunger is commonplace. Yet,
Tanzania has received more aid per capita from the World Bank
than any other nation. In Uganda, government security forces have engaged in mass detentions, torture, and killing of prisoners. The same is true under the terrorist government in Zimbabwe. Yet, both regimes continue to be the recipients of millions of dollars in World Bank funding.
Zimbabwe (formerly Rhodesia) is a classic case. After its independence, the leftist government nationalized (confiscated) many of the farms previously owned by white settlers. The most desirable of these lands became occupied by the government's senior ruling-party officials, and the rest were turned into state-run collectives. They were such miserable failures that the workers on these farmlands were, themselves, soon begging for food. Not daunted by these failures, the socialist politicians announced in 1991 that they were going to nationalize half of the remaining farms as well. And they barred the courts from inquiring into how much compensation would be paid to their owners.
The IMF was represented in Zimbabwe at the time by Michel Camdessus , the Governor of the central Bank of France, and a former finance minister in Francois Mitterrand's Socialist government. After being informed of Zimbabwe's plan to confiscate additional land and to resettle people to work on those lands, Camdessus agreed to a loan valued at 42 billion rands with full knowledge that much of it would be used for the resettlement project.
Perhaps the worst violations of human rights have occurred in Ethiopia under the Marxist regime of Mengistu Haile Mariam. The famine of 1984-85, which threatened the lives of millions of people, was the result of government nationalization and disruption of agriculture. Massive resettlement programs have torn hundreds of thousands of people from their privately owned land in the north and deported them to concentration-camp "villages" in the south, complete with guard towers. A report by a French voluntary medical-assistance group, Doctors without Borders, reveals that the forced resettlement program may have killed as many people as the famine itself.1 Dr. Rony Brauman, director of the organization, describes their experience:
1. "Ethiopia Bars Relief Team," by Blaine Harden, Washington Post, December 3, 1985, p. A-21.
2. "Famine Aid: Were we Duped?" by Dr. Rony Brauman, Raider's Digest, October '1986, p. 7]
FINANCING FAMINE AND GENOCIDE
In the 1980s, the world was saddened by photographs of
starving children in Ethiopia, but what the West did not realize was
that this was a planned famine. It was modelled after Stalin's starvation program in the Ukraine in the 1930s and Mao's starvation
of the peasants in the '40s. Its purpose was to starve the
population into total submission to the government, for it is the
government which decides who will eat and who will not. Yet,
right up to the time Mengistu was overthrown, the World Bank
continued to send him hundreds of millions of dollars, with much
of it going specifically to the Ministry of Agriculture, the very
agency in charge of the resettlement program.1 1. James Bovard, The World Bank vs. The World's Poor, Cato Policy Analysis (Washington, D.C.: Cato Institute, 1987), pp. 4-6.
In the late 1970s the same story unfolded in Communist Vietnam. There were resettlement programs, forced collectivization, concentration camps, atrocities, and tens of thousands of dissidents escaping to the sea only to drown in overcrowded, leaky boats. Throughout it all, the regime was generously funded by the World Bank.
Laos has jailed thousands of political prisoners; Syria has massacred 20,000 members of its opposition; Indonesia has uprooted several million people from their homelands in Java; the Sandinistas in Nicaragua murdered their opposition and terrorized the nation into submission; Poland, while a puppet state of the Soviet Union, brutally suppressed its trade-union movement; China massacred its dissident students and imprisoned its religious leaders; and the former Soviets slaughtered civilians in Afghanistan while conducting a relentless espionage war against the entire free world. Yet, these regimes have been the recipient of literally billions of dollars from the World Bank.
How can the Bank's managers continue in conscience to fund such genocidal regimes? Part of the answer is that they are not permitted to have a conscience. David Dunn, head of the Bank's Ethiopia Desk explained: "Political distinctions are not something our charter allows us to take into account."2 The greater part of the answer, however, is that all socialist regimes have the potential for genocide, and the Bank is committed to socialism. The brutalities of these countries are all in a days work for serious socialists who view them as merely unfortunate necessities for the building of their utopia. Lenin said you cannot make an omelet without cracking a few eggs. George Bernard Shaw, one of the early leaders of the Fabian Socialist movement, expressed it this way:
2. "Harnessing World Bank to the West," Insight, February 9, 1987, p. 8.
Under Socialism, you would not be allowed to be poor. You would be forcibly fed, clothed, lodged, taught, and employed whether you liked it or not. If it were discovered that you had not character and industry enough to be worth all this trouble, you might possibly be executed in a kindly manner; but whilst you were permitted to live, you would have to live well. 1
1.George Bernard Shaw, The Intelligent Woman's Guide to Socialism and Capitalism I928; rpt. New Brunswick, New Jersey: Transaction Books, 1984), p. 470.
REASON TO ABOLISH
THE FEDERAL RESERVE
The top echelon at the World Bank are brothers under the skin
to the socialist dictators with whom they do daily business. Under
the right circumstances, they could easily switch roles. What we
have seen is merely a preview of what can be expected for the
entire world if the envisioned New World Order becomes operational. The IMF/World Bank is the protege of the Federal Reserve. It would not exist without the flow of American dollars and the benevolence of American leadership. The Fed has become an accomplice in the support of totalitarian regimes throughout the world. As stated at the beginning of this study, that is one of the reasons it should be abolished: It is an instrument of totalitarianism.
GETTING RICH FIGHTING POVERTY
While the top leaders and theoreticians at the IMF and World
Bank dream of world socialism, the middle managers and political
rulers have more immediate goals in mind. The bureaucracy enjoys
a plush life administering the process, and the politicians on the
receiving end obtain wealth and power. Ideology is not their
concern. Socialism, capitalism, fascism, it makes no difference to
them as long as the money flows. Graham Hancock has been an astute observer of the international-aid "industry" and has attended their plush conferences. He knows many of the leading players personally. In his book, Lords of Poverty, he speaks of the IMF's Structural-Adjustment loans:
Corrupt Ministers of Finance and dictatorial Presidents from Asia, Africa, and Latin America are tripping over their own expensive footwear in their unseemly haste to "get adjusted." For such people, money has probably never been easier to obtain than it is today; with no complicated projects to administer and no messy accounts to keep, the venal, the cruel and the ugly are laughing literally all the way to the bank. For them structural adjustment is like a dream come true. JSJ sacrifices are demanded of them personally. All they have to do—amazing but true—is screw the poor, and they've already had plenty of practice at that.1
1. Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business (New York: Atlantic Monthly Press, 1989), pp. 59,60.
Livestock projects in Botswana led to the destruction of grazing land and the death of thousands of migratory animals. This resulted in the inability of the natives to obtain food by hunting, forcing them into dependence on the government for survival. While Nigeria and Argentina are drowning in debt, billions from the World Bank have gone into building lavish new capital cities to house government agencies and the ruling elite. In Zaire, Mexico, and the Philippines, political leaders became billionaires while receiving World Bank loans on behalf of their nations. In the Central African Republic, IMF and World Bank loans were used to stage a coronation for its emperor.
The record of corruption and waste is endless. But the real eye-opener is in the failure of socialist ventures, those magnificent projects which were to bring prosperity to the underdeveloped countries. Here are just a few examples.
CONVERTING MONEY INTO FAILURE
Before receiving loans from the World Bank, Tanzania was not
wealthy, but it fed its own people, and it had economic growth After receiving more than 3 billion dollars in loans, it nationalized
the nation's farms and industries and converted every business into
a government agency. It built a truck assembly plant, a tire factory,
electronic factories, highways, ports, railways, and dams. Tanzania's
industrial production and agricultural output fell by almost
one-third. Food was the main export in 1966. Under socialism, food
had to be imported—paid for by foreign aid and more loans from
the World Bank. The country is hopelessly in debt with no way to
repay. Argentina once had one of the highest standards of living in Latin America. But then it became the recipient of massive loans from the World Bank as well as commercial banks in the United States. Since the money was given to politicians, it was used to build the only system politicians know how to build: socialism. By 1982, the Gross National Product was in a nose dive, manufacturing had fallen to less than half of capacity, thousands of privately owned companies had been forced into bankruptcy, unemployment was soaring, and so was welfare. By 1989, inflation was running at an average of 5,000% and, in the summer of that year, topped at 1,000,000%! Banks were offering interest rates of 600% per month in hopes of keeping deposits from being moved out of the country. People were rioting in the streets for food, and the government was blaming greedy shop owners for raising prices. The nation was hopelessly in debt with no way to repay.
Brazil is run by the military, and the state controls the economy. Government-owned companies consume 65% of all industrial investment, which means that the private sector is limited to 35% and is shrinking. The government used loans from U.S. banks to create an oil company, Petroleo Brasileiro S.A., which became Latin America's largest corporation. Despite huge oil deposits and record-high oil prices, the company operated at a loss and was not even able to produce enough gasoline for its own citizens. By 1990, inflation was running at 5,000%. Since 1960, its prices had risen to 164,000 times their original level. A new crime was invented called hedging against inflation," and people were arrested for charging the free-market price for their goods and for using dollars or gold as money. Led by Communist organizers, mobs roamed the streets shouting "We're hungry. Steal what you will!" The nation was hopelessly in debt with no way to repay.
The experience in Mexico was a carbon copy of that in Brazil, except that the amount of money was larger. When the world's fourth largest oil reserves were discovered, Mexican politicians reached for the brass ring. With billions borrowed from U.S. banks, they launched Petroleos Mexicanos (PEMEX) and soon became the world's fifth largest oil producer. They also built chemical plants and railroads, and launched many other industrial projects. These were run as welfare agencies instead of businesses: too many people on the payroll, too many managers, excessive salaries, too many holidays, and unrealistic benefits. The ventures floundered and lost money. Private businesses failed by the thousands, and unemployment rose. The government increased the minimum wage causing more businesses to fail and more unemployment. That led to more welfare and unemployment benefits. To pay for that, the government borrowed even more and began creating its own fiat money. Inflation destroyed what was left of the economy.
Price controls were next, along with rent and food subsidies, and doubling the minimum wage. By 1982, Mexicans were trading their pesos for dollars and sending their savings out of the country, as the peso became all but worthless in commerce.1 In 1981, the average wage for Mexican workers was 31% of the average wage for Americans. By 1989, it had fallen to 10%. Mexico, once one of the major food exporters in the world, was now required to import millions of dollars worth of food grains. This required still more money and more loans. All this occurred while oil prices were high and production was booming. A few years later, when oil prices fell, the failures and shortfalls became even more dramatic.
1. The same American banks that were making the loans were soliciting this flight capital and ended up getting deposits of the same money they had lent. It was nice business both ways.
In 1995, Mexico's bank loans were once again on the brink of default, and, once again, U.S. taxpayers were thrown into the breech by Congress to cover more than $30 billion at risk. Although this loan was eventually repaid, the money to do so was extracted from the Mexican people through another round of massive inflation, which plunged their standard of living even lower. The nation is now hopelessly mired in socialism. The Communist Party, promising "reform" and still more socialism, is attracting a large following and could become a potent political force.
Thus, the saga continues. After pouring billions of dollars into underdeveloped countries around the globe, no development has taken place. In fact, we have seen just the opposite. Most countries are worse off than before the Saviors of the World got to them.
SUMMARY
The IMF and the World Bank, were created at a meeting of
global financiers and politicians held at Bretton Woods, New
Hampshire, in 1944. Their announced goals were to facilitate
international trade and to stabilize the exchange rates of national
currencies. The unannounced goals were quite different. They were
the elimination of the gold-exchange standard as the basis of
currency valuation and the establishment of world socialism. The method by which gold was to be eliminated in international trade was to replace it with a world currency which the IMF, acting as a world central bank, would create out of nothing. The method by which world socialism was to be established was to use the World Bank to transfer money—disguised as loans—to the governments of the underdeveloped countries and to do so in such a way as to insure the demise of free enterprise. The money was to be delivered from the hands of politicians and bureaucrats into the hands of other politicians and bureaucrats. When the money comes from government, goes to government, and is administered by government, the result will be the expansion of government.
The theoreticians who dominated the conference at Bretton Woods were the well-known Fabian Socialist from England, John Maynard Keynes, and the Assistant Secretary of the U.S. Treasury, Harry Dexter White. White became the first Executive Director for the United States at the IMF.
The Fabians were an elite group of intellectuals who agreed with Communists as to the goal of socialism but disagreed over tactics. Whereas Communists advocated revolution by force and violence, Fabians advocated gradualism and the transformation of society through legislation.
It was learned in later years that Harry Dexter White was a Member of a Communist espionage ring. Thus, hidden from view, there was a complex drama taking place in which the two intellectual founders of the Bretton-Woods accords were a Fabian Socialist and a Communist, working together to bring about their mutual goal; world socialism.
Capital for the IMF and the World Bank comes from the industrialized nations, with the United States putting up the most. Funds consist partly of hard currencies—such as the dollar, yen, mark and franc—but these are augmented by many times that amount in the form of "credits." These are merely promises by the member governments to get the money from their taxpayers if the Bank gets into trouble with its loans.
While the IMF is gradually evolving into a central bank for the world, the World Bank is serving as its lending arm. As such, it has become the engine for transferring wealth from the industrialized nations to the underdeveloped countries. While this has lowered the economic level of the donating countries, it has not raised the level of the recipients. The money has simply disappeared down the drain of political corruption and waste.
REMOULD IT |NEARER | TO THE | HEARTS |DESIRE
This is an accurate rendering of the stained-glass window in the Beatrice Webb House in Surrey, England, headquarters of the Fabian Society. It depicts Sidney Webb and George Bernard Shaw striking the earth with hammers to "REMOULD IT NEARER TO THE HEART'S DESIRE." Note the wolf in sheep's clothing in the Fabian crest above the globe.
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BUILDING THE NEW WORLD ORDER
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