Drilling still further down, we find a curious feature of the IMF loan proposal. If the United States gave the IMF $100 billion in cash, it would receive an interest-bearing note from the IMF in exchange. However, the note would be denominated not in dollars but in SDRs. Since the SDR is a nondollar world currency, its value fluctuates against the U.S. dollar. The SDR exchange value is calculated partly by reference to the dollar, but also by reference to a currency basket that includes the Japanese yen, the euro, and the U.K. pound sterling. This means that when the IMF note matures, the United States will receive back not the original $100 billion but a different amount depending on the fluctuation of the dollar against the SDR. If the dollar were to grow stronger against the other currencies in the SDR basket, the United States would receive less than the original $100 billion loan in repayment, because the nondollar basket components would be worth less. But if the dollar were to grow weaker against the other currencies in the SDR basket, the United States would receive more than the original $100 billion loan in repayment, because the nondollar basket components would be worth more. In making the loan, the U.S. Treasury was betting against the dollar since only a decline in the dollar would enable the United States to get its money back. This $100 billion bet against the dollar was not mentioned in the president’s letter and went largely unrecognized by Congress at the time. As it happens, it proved a political time bomb that came back to haunt the United States and the IMF ahead of the 2012 presidential election.
The president’s letters also misled Congress about the loan commitment’s purpose. They state in several places that the loan proceeds would be used by the IMF for assistance “primarily to developing and emerging market countries.” In fact, the IMF’s new borrowing capacity was used primarily to bail out the Eurozone members Ireland, Portugal, Greece, and Cyprus. Little of the cash was used for emerging markets lending. The misleading language was intended to dodge criticism from Congress that U.S. taxpayer money would be used to bail out Greek bureaucrats who retired at age fifty with lifetime pensions, while Americans were working past seventy to make ends meet.
These deceptions and the Treasury’s bet against the dollar went unnoticed in the frenzy of auto company bailouts and stimulus packages. Under the leadership of House Democrat Barney Frank and Senate Republican Richard Lugar, the U.S. commitment to the IMF borrowings was buried in a war spending bill and was passed by Congress on June 16, 2009. The IMF issued a press release with remarks by then managing director Dominique Strauss-Kahn touting the legislation and describing it as a “significant step forward.”
While the legislation provided for the $100 billion U.S. commitment, the IMF did not actually borrow the funds right away. The commitment was like a credit line on a MasterCard that the cardholder has not yet used. The IMF could swipe the MasterCard at any time and get the $100 billion from the United States simply by issuing a borrowing notice.
In November 2010 the Obama plan to finance IMF bailouts had the rug pulled out from under it by the midterm elections and the Republican takeover of the House of Representatives. Republican success was fueled by Tea Party resentment at earlier bailouts for Wall Street banks Goldman Sachs and JPMorgan Chase. Barney Frank lost his House Financial Services Committee chairmanship, and the new Republican leadership began examining the implications of the U.S. commitment to the IMF.
By early 2011, the European sovereign debt crisis had reached a critical state, and it was impossible to disguise the fact that U.S. funds, if drawn by the IMF, would be used to bail out retired Greek and Portuguese bureaucrats. Conservative publications featured headlines like “Why Is the U.S. Bankrolling IMF’s Bailouts in Europe?” On November 28, 2011, Barney Frank announced his retirement. Also in 2011 Senator Jim DeMint (R-S.C.) introduced legislation to rescind the U.S. commitment to the IMF. The DeMint bill was defeated in the Senate on a 55–45 vote. That defeat needed votes from Republicans, which were provided by Richard Lugar (R-Ind.) and a few others. On May 8, 2012, the Tea Party struck back by supporting Richard Mourdock, who went on to defeat Lugar in a primary election, forcing Lugar’s retirement after thirty-six years as a senator. One by one the IMF’s friends in the U.S. Congress were stepping aside or being forced out. With regard to the Frank and Lugar departures from Congress, the IMF’s Lagarde gave a Gallic shrug and said, “We will miss them.”
By late 2013, the sparring match between the White House and Congress over funding for the IMF had grown more intense. After the London G20 Summit, the IMF had taken further steps to increase its borrowing power beyond the original commitments, shifting some of the U.S. lending commitment away from debt toward a quota increase—in effect, it moved part of the U.S. money from temporary lending to permanent capital. These 2010 changes, which also followed through on the London Summit commitments to increase the voting power of China, required congressional approval beyond that contained in the 2009 Barney Frank legislation. Hundreds of eminent international economists, and prominent former officials such as Treasury secretary Hank Paulson, who had engineered the Goldman Sachs bailout in 2008, publicly called on Congress to approve the legislation. However, President Obama did not include the new requests in his 2012 or 2013 budgets, in order to avoid making a campaign issue out of U.S. taxpayer support for European bailouts.
At this point Christine Lagarde’s impatience with the process began to boil over. During the World Economic Forum in Davos on January 28, 2012, she hoisted her Louis Vuitton handbag in the air and said, “I am here with my little bag, to actually collect a bit of money.” In an interview with The Washington Post published on June 29, 2013, she was more pointed and said, “We have been able to significantly increase our resources . . . notwithstanding the fact that the U.S. did not contribute or support that move. . . . I think everybody would like to complete the process. Let’s face it. It has been around a long time.”
Fortunately for the IMF, the controversial U.S. funds commitment was not needed in the short run. By late 2012, the European sovereign debt crisis had stabilized, as growth continued in the United States and China, albeit at a slower rate than hoped for by the IMF. But after the history of debt crises in Dubai, Greece, Cyprus, and elsewhere from 2009 to 2013, it appeared to be just a matter of time before the situation somewhere destabilized and the U.S. commitment would be needed to finance another rescue package.
The IMF’s role as a leveraged lender, in effect a bank, is now institutionalized. The IMF has evolved from a quota-based swing lender to a leveraged lender of last resort like the Federal Reserve. Its borrowing and lending capabilities are well understood by economic experts, if not by the public at large. But even experts are largely unfamiliar with or confused by the IMF’s greatest power—the ability to create money. Indeed, the name of the IMF’s world money, the special drawing right, seems designed more to confuse than to enlighten. The IMF’s printing press is standing by, ready for use when needed in the next global liquidity crisis. It will be a key tool in engineering the dollar’s demise.
■ One Currency
John Maynard Keynes once mused that not one man in a million was able to understand the process by which inflation destroys wealth. It is as likely that not one woman or man in ten million understands special drawing rights, or SDRs. Still, the SDR is poised to be an inflationary precursor par excellence. The SDR’s mix of opacity and unaccountability permits global monetary elites to solve sovereign debt problems using an inflationary medium, which in turn allows individual governments to deny political responsibility.
The SDR’s stealth qualities begin with its name. Like Federal Reserve and International Monetary Fund, the name was chosen to hide its true purpose. Just as the Federal Reserve and IMF are central banks with disguised names, so the SDR is world money in disguise.
Some monetary scholars, notably Barry Eichengreen of the University of California at Berkeley, object to the use of the term money as applied to SDRs, viewing the units as a me
re accounting device used to shift reserves among members. But the IMF’s own financial reports refute this view. Its annual report contains the following disclosures:
The SDR may be allocated by the IMF, as a supplement to existing reserve assets. . . . Its value as a reserve asset derives from the commitments of participants to hold and accept SDRs. . . . The SDR is also used by a number of international and regional organizations as a unit of account. . . . Participants and prescribed holders can use and receive SDRs in transactions . . . among themselves.
As money is classically defined as having three essential qualities—store of value, unit of account, and medium of exchange—this disclosure clinches the case for the SDR as money. The IMF itself says the SDR has value, is a unit of account, and can be used as a medium of exchange in transactions among designated holders. The three-part money definition is satisfied in full.
The amount of SDRs in circulation is minuscule compared to national and regional currencies such as the dollar and euro. The SDR’s use is limited to IMF members and certain other official institutions and is controlled by the IMF Special Drawing Rights Department. Further, SDRs will perhaps never be issued in banknote form and may never be used on an everyday basis by citizens around the world. But even such limited usage does not alter the fact that the SDR is world money controlled by elites. In fact, it enhances that role by making the SDR invisible to citizens.
The SDR can be issued in abundance to IMF members and can also be used in the future for a select list of the most important transactions in the world, including balance-of-payments settlements, oil pricing, and the financial accounts of the world’s largest corporations such as ExxonMobil, Toyota, and Royal Dutch Shell. Any inflation caused by massive SDR issuance would not immediately be apparent to citizens. The inflation would show up eventually in dollars, yen, and euros at the gas pump or the grocery, but national central banks could deny responsibility with ease and point a finger at the IMF. Since the IMF is not accountable to any electoral process and is a self-perpetuating supranational organization, the buck would stop nowhere.
The SDR’s history is as colorful as its expected future. It was not part of the original Bretton Woods monetary architecture agreed to in 1944. It was an emergency response to a dollar crisis that began in 1969 and continued in stages through 1981.
During the Bretton Woods system’s early decades, from 1945 to 1965, international monetary experts worried about a so-called dollar shortage. At that time the dollar was the dominant global reserve currency, essential to international trade. Europe’s and Japan’s industrial bases had been devastated during the Second World War. Both Europe and Japan had human capital, but neither possessed the dollars or gold needed to pay for the machinery and raw materials that could revive their manufacturing. The dollar shortage was partly alleviated by Marshall Plan aid and Korean War spending, but the greatest boost came from the U.S. consumer’s newfound appetite for high-quality, inexpensive imported goods. American baby boomers, as teenagers in the 1960s, may recall driving to the beach in a Volkswagen Beetle with a Toshiba transistor radio in hand. By 1965, competitive export nations such as Germany and Japan were rapidly acquiring the two principal reserve assets at the time, dollars and gold. The United States understood that it needed to run substantial trade deficits to supply dollars to the rest of the world and facilitate world trade.
The international monetary system soon fell victim to its own success. The dollar shortage was replaced with a dollar glut, and trading partners became uneasy with persistent U.S. trade deficits and potential inflation. This situation was an illustration of Triffin’s dilemma, named after Belgian economist Robert Triffin, who first described it in the early 1960s. Triffin pointed out that when one nation issues the global reserve currency, it must run persistent trade deficits to supply that currency to its trading partners; but if the deficits persist too long, confidence in the currency will eventually be lost.
Paradoxically, both a dollar shortage and a dollar glut give rise to consideration of alternative reserve assets. In the case of a dollar shortage, a new asset is sought to provide liquidity. In the case of a dollar glut, a new asset is sought to provide substitutes for investing reserves and to restore confidence. Either way, the IMF has long been involved in the contemplation of alternatives to the dollar.
By the late 1960s, confidence in the dollar was collapsing due to a combination of U.S. trade deficits, budget deficits, and inflation brought on by President Lyndon Johnson’s “guns and butter” policies. U.S trading partners, notably France and Switzerland, began dumping dollars for gold. A full-scale run on Fort Knox commenced, and the U.S. gold hoard was dwindling at an alarming rate, leading to President Nixon’s decision to end the dollar’s gold convertibility, on August 15, 1971.
As caretaker of the international monetary system, the IMF confronted collapsing confidence in the dollar and a perceived gold shortage. The U.K. pound sterling had already devalued in 1967 and was suffering its own crisis of confidence. German marks were considered attractive, but German capital markets were far too small to provide global reserve assets in sufficient quantities. The dollar was weak, gold was scarce, and no alternative assets were available. The IMF feared that global liquidity could evaporate, triggering a collapse of world trade and a depression, as had happened in the 1930s. In this strained environment, the IMF decided in 1969 to create a new global reserve asset, the SDR, from thin air.
From the start, the SDR was world fiat money. Kenneth W. Dam, a leading monetary scholar and former senior U.S. government official who served in the Treasury, the White House, and Department of Defense, explains in his definitive history of the IMF:
The SDR differed from nearly all prior proposals in one crucial respect. Previously it had been thought essential that any new international reserves created through the Fund, and particularly any new reserve asset, be “backed” by some other asset. . . . The SDR, in contrast, was created out of (so to speak) whole cloth. It was simply allocated to participants in proportion to quotas, leading some to refer to the SDR as “manna from heaven.” Thereafter it existed and was transferred without any backing at all. . . . A ready analogy is to “fiat” money created by national governments but not convertible into underlying assets such as gold.
Initially the SDR was valued as equivalent to 0.888671 grams of fine gold, but this IMF gold standard was abandoned in 1973 not long after the United States itself abandoned the gold standard with respect to the dollar. Since 1973, the SDR’s value has been computed with reference to a reserve-currency basket. This does not mean that the SDR is backed by hard currencies, as Dam points out, merely that its value in transactions and accounting is calculated in that manner. Today the basket consists of dollars, euros, yen, and pounds sterling in specified weights.
SDRs have been issued to IMF members on four occasions since their creation. The first issue was for 9.3 billion SDRs, handed out in stages from 1970 to 1972. The second issue was for 12.1 billion SDRs, also done in stages from 1979 to 1981. There was no SDR issuance for almost thirty years, from 1981 to 2009. This was the King Dollar era engineered by Paul Volcker and Ronald Reagan, which continued through the Republican and Democratic administrations of George Bush, Bill Clinton, and George W. Bush. Then in 2009, in the wake of the financial crisis and in the depths of a new depression, the IMF issued 161.2 billion SDRs on August 28 and 21.5 billion SDRs on September 9. The cumulative SDR issuance since their creation is 204.1 billion, worth over $300 billion at the current dollar-SDR exchange rate.
The history makes it clear that there is a close correspondence between periods of SDR issuance and periods of collapsing confidence in the dollar. The best index of dollar strength or weakness is the Price-adjusted Broad Dollar Index, calculated and published by the Federal Reserve. The Fed’s dollar index series begins in January 1973 and is based on a par value expressed as 100.00 on the index. The first SDRs issued in 1970
to 1972 predate this index but were linked to the dollar’s 20 percent collapse against gold at the time.
The second SDR issuance, from 1979 to 1981, immediately followed a dollar breakdown from a Fed index level of 94.2780 in March 1977 to 84.1326 in October 1978—an 11 percent decline in nineteen months. After the issuance, the dollar recovered its standing, and the index hit 103.2159 in March 1982. This was the beginning of the King Dollar period.
The third and fourth SDR issuances began in August 2009, not long after the dollar crashed to an index level of 84.1730 in April 2008, near its level in the crisis of 1978. The lags of approximately a year between index lows and SDR issuance are a reflection of the time it takes the IMF to obtain board approval to proceed with new issuance.
Unlike the issuance in the 1980s King Dollar period, the massive 2009 issuance did not result in the dollar regaining its strength. In fact, the dollar index reached an all-time low of 80.5178 in July 2011, just before gold hit an all-time high of $1,895.00 on September 5. The difference in 2011 compared to 1982 was that the Fed and Treasury were pursuing a weak-dollar policy, in contrast to Paul Volcker’s strong-dollar policy. Nevertheless, the 2009 SDR issuance served its purpose, reliquefying global financial markets after the Panic of 2008. Markets regained their footing by late 2012 with the stabilization of the European sovereign debt crisis after Mario Draghi’s “whatever it takes” pledge on the ECB’s behalf. By 2012, global liquidity was restored, and SDRs were once again placed on the shelf, awaiting the next global liquidity crisis.
The Death of Money Page 24
