Prepared Statement by Rep. Ron Paul Before the House Committee on Banking and Financial Services Subject: Hearing on East Asian Economic Conditions
Putting aside Constitutional and sovereignty issues (especially concerning the Exchange Stabilization Fund and the "warehousing" at the Federal Reserve), the arguments for more IMF money can not only be addressed and rebutted but should be rejected.
These bailouts come at a cost--both to the individual taxpayer and to the country. The taxpayer either has a portion of his or her paycheck seized in the form of higher taxes or loses purchasing power through increased inflation as a result of monetizing the debt. In order to subsidize corrupt foreign governments, make investors and bankers who made bad decisions whole, and fund lavish bailout salaries, the taxpayer suffers the opportunity cost of forgone funds for education, child care, health care, food and housing for which they cannot go the IMF and get a loan for "Special Drawing Rights" to pay their own bills.
These bailouts also come at a cost to the country as a whole. Once past the shell games and other budgetary gimmicks, according the Congressional Research Service, the IMF added a cumulative $4.3 billion to our national debt as of January 1991. Despite a formal inquiry in November 1997 regarding this discrepancy, the Treasury Department has neither answered our question nor released up-to-date data which will show that the national debt has increased further because of our increased quota obligations. No political slight of hand can obscure the fact that this is not a "neutral exchange of monetary assets."
Requested reforms with money now will only exacerbate the problem. The IMF has proven that it will ignore any conditions as soon as it has its hands on the money. The IMF comes before us hat in hand for a replenishment of funds in part because it ignored previous lending conditions. The IMF cannot even be trusted to uphold basic human and economic rights such as the right of freedom of association to join a labor union as this Congress has so instructed. In South Korea, the IMF is not only bailing out sovereign debt but the private commercial debt of the very chaebol that compete with U.S. companies (see appendix A).
We must protect our economic and national security concerns. There is no more forceful proponent of privatization than myself, but, even I am wary of contracting out our national security to the IMF. Indeed, it is my firm belief that we should not repeat the economic and monetary mistakes that got us into this mess that compels me to urge this body to embark on another path. The arguments that we are only paying one-fourth to one-fifth of the Asian bailout bill and are leveraging the contributions of others becomes less appealing when one realizes that U.S. banks, according to a Bank of International Settlements report, have only an eight percent exposure in the region (The New York Times, January 28, 1998, p. D1).
It is our economic security that concerns me most. We must protect the value of the dollar and the free trading system. Market-led relative price declines (due to productivity gains, increased economies of scale, and new technology) as witnessed with the return of the gold standard after the Civil War until the establishment of the Federal Reserve System should not be confused with government-induced competitive devaluations of national fiat currencies as we experienced during the Great Depression and may see accelerate in East Asia.
The new money only insulates foreign governments from the need to be responsive to market forces (only compounding the problems) and the desires of their own people--not just their cronies and families. Visible U.S. support for these regimes and policies could haunt us as citizens of foreign countries see the U.S. propping up the very governments that oppress them.
Good afternoon, Chairman Leach, Congressman LaFalce and other Members of the Committee, thank you for this opportunity today. Although I am
a Freshman Member on the Committee now, I served on this committee in the 1970s and 1980s and have some experience following the evolution of the International Monetary Fund and the nature of its bailouts. In addition, while a Member of this Committee, I served as a member of the U.S. Gold Commission and co-authored the minority report, the Case for Gold, with Lewis Lehrman. I have included "A Layman's Guide to the Asian Bubble Trouble," by John Mueller of Lehrman Bell Mueller Cannon, Inc. (see appendix B) because it provides a succinct and clear assessment of the situation.
We should not fund the International Monetary Fund (IMF) request for the New Arrangements to Borrow or the quota increase. The IMF is an anachronistic relic of the now-defunct Bretton Woods monetary system of fixed exchange rates and international redeemability of gold as a monetary unit. The Fund has not proven to be an effective tool in managing international currencies and has done nothing to effectively warn us of the dangers that have marred the international financial system over the past several years. The bailout of Mexico three years ago only served to encourage the same monetary policies that are now giving us the crisis in East Asia. We are at a point in our history where formidable figures, like former Secretaries of the Treasury William Simon and George Schultz and former chairman of Citicorp/Citibank Walter Wriston, are calling for the U.S. withdrawal from the IMF. Congress should seriously consider that option (see appendix c).
Cause of the Current Problem
The basic cause of the current crises the various nations are facing in East Asia, comes from a flawed monetary policy. Congressman Lee Hamilton writes of the cause of the Asian economic crises (January 28, 1998), "In a word, there was too much of everything: over- investment,over-lending, and over-building, in ill-conceived real estate and industrial projects...and over-guidance, with too many bureaucrats and government officials deciding which companies receive loans and investment." The Congressional Research Service concurs, "To one degree or another, most of these countries have been facing difficulties with their balance of payments, over-expansion of production capacity, rising real estate values, overvalued equities, and excessive bank lending (The 1997 Asian Financial Crisis November 25, 1997, p. 6)."
These countries have inflated their currencies at an annual rate of 20 to 30% over the past decade which has led to mal-investment, excess debt, over capacity, and an artificial boom period which predictably leads to a corrective bust. Fluctuating fiat currencies, according to sound monetary principles, always produce financial and monetary chaos. Without considering the basic cause of the problems that exist in East Asia, we are unable to devise sound policy here at home or internationally.
The most important Congressional responsibility, with regards to currencies, is to maintain a sound dollar. It has now been 27 years
since our currency has been linked to gold. Since that time the dollar has lost more than 50% of its value. The Constitution mandates that only silver and gold can be legal tender. Because this admonition has been ignored in dollar terms, gold has gone up nearly tenfold. If we continue to follow current policy of bailing out foreign countries through appropriations and further credit expansion, we do exactly the opposite of what we should be doing. This will further undermine the value of the dollar expand our trade imbalances and lead to a crisis in the United States similar to that which East Asia is facing today. We should never lose sight of our responsibility to maintain the value of the dollar. We certainly should never deliberately undermine the value of the dollar in a feeble attempt to prop up the value of other currencies, for whatever reason.
Great danger lies ahead. I agree that the markets are in great danger, but this is no justification for doing the wrong thing. It is true that protectionist sentiments may well result from current conditions. We must oppose such sentiments as harmful to our own interests and to the prosperity of the global trading system. Obviously, competitive devaluations are even more troublesome than the lesser efforts at protectionism through tariffs. All world governments and central banks have embarked on a program of systematic inflation of their own currencies which serves to lower their respective values in the marketplace. The currency crises and trade disruptions are indeed very serious because, if uncorrected, these will lead to political chaos. My disagreement with those who have expressed the concern about the impending danger is that we ought not continue the very policy that brought such crises to Asia.
The only answer is a new approach to understanding currencies. A universal worldwide currency controlled by the marketplace and not the politicians would go a long way toward solving many of our financial and trade problems. Just as it would be devastating for the United States to have 50 different government fiat currencies with competing monetary policies, it is chronically disruptive for hundreds of countries throughout the world expanding credit at different rates and pretending that a sound efficient economy can operate under those conditions. The serious shortcoming of chronic currency devaluation is that although the money supply may gradually increase, the ramifications of these increases do not come in the same manner--they come with sudden jolts to the value of the currency as well as to consumer prices. The policies of the IMF exacerbate these gyrations.
There are three significant reasons why we in the Congress should oppose the replenishment of IMF bailout money: moral, economic and political.
1. It's morally wrong to take funds from innocent taxpayers and give part of their paychecks to special interests, whether they be foreign corporations, foreign governments or for the benefit of the lending agencies in this country, as well as U.S. corporations who have invested in East Asia. To argue that there is no cost to the taxpayer begs the question of why we are appropriating more money. Let us not ignore those who would have benefitted from the use of their own money: those same taxpayers.
2. We should oppose this bailout for economic reasons. The whole concept is based on unsound economic policy. A lack of understanding of how credit creation undermines the value of the dollar will make it difficult, if not impossible, to prevent the currency crises from affecting our economy. Transferring wealth from one country to another, diluting the value of a stronger currency for the benefit of a poorer currency, can never rectify the serious harm done by decades of monetary mischief. Even if it does work on a temporary basis, like is claimed in Mexico, there are still economic victims. The taxpayer of the United States did not benefit by the Mexico bailout, the Mexican citizens certainly suffered a lot, and it has encouraged the policies that have given us the East Asia crises.
Let us not ignore the lessons of the IMF-led Mexican bailout: The IMF will try to ignore with impunity the expressed conditions of the Member nations regarding its lending policies. The IMF's normal rules for lending limit it to 100% of a country's quota at any one time and 300% cumulatively. This precedent was broken in 1995 with Mexico which was offered 688% of its quota. Last year, South Korea was lent nearly 2000% of its quota--20 times the IMF's own lending guideline. Conditionality on the IMF does not work. It is no wonder the IMF is "scraping the bottom of the barrel" after tossing away other people's money in open defiance of its own lending guidelines. Equally bad, investors learned that profits are theirs to keep and losses are to be socialized with the burden falling on everyone else. Many analysts have commented that if we had not bailed out Mexico and instituted the moral hazard problem, we would not need to bail out East Asia today; I agree.
3. There are strong political reasons to oppose this bailout. I have yet to have any of my constituents come to me and ask me to vote a $20
billion appropriation for the benefit of foreigners or U.S. investors overseas. I also have not met any constituent who actually believes there is "no cost to the American taxpayers." When statements like that are made, it only serves to further undermine confidence in government. There's enough lack of integrity in government already, let alone pretending that this type of an appropriation is permissible because "it doesn't add to the deficit."
A defeat of the IMF appropriations by the United States will be a very positive step in the direction of tackling the very serious problem which must be addressed. That is considering a sound currency for the United States and setting an example for the world. Only a gold or other commodity standard of money can do this. Political, or paper money, can only work for a short period of time. Furthermore, it significantly contributes to the empowering of authoritarian governments. Only honest, sound money can protect the people from this.