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World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.
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Chapter 10: The IMF's misplaced priorities: flawed fund

James Tobin


10. The IMF’s misplaced priorities: flawed fund* They did it in the 1930s, and now they’re threatening to do it again. ‘They’ are the lords of world finance – international bankers, central bankers, finance ministers, and, since 1945, the International Monetary Fund. Faced with currency crises that endanger both financial systems and whole economies, they invariably give priority to finance. Their standard remedies, fiscal stringency and punitive interest rates, are devastating to economic life. They destroy jobs and bankrupt enterprises. But their authors assure the world that restoring the confidence of lenders and investors worldwide in the soundness of governments’ financial policies is essential for prosperity and growth. Prime ministers and presidents have to go along. The trouble is that the resulting recessions themselves undermine the credit-worthiness of businesses and governments. During the 1930s, financial soundness meant sticking stubbornly to the established gold values of currencies. The attempt led to the Great Depression, and the gold standard ultimately collapsed anyway. The recent IMF bailout packages for Thailand, Indonesia, and South Korea, true to form, demand austere fiscal and monetary policies along with drastic structural reforms. But the announcement of these packages did not inspire the hoped-for confidence in financial markets. The runs on the countries’ reserves continued, and their currencies and stock markets continued to slide. This episode will not end in world depression, but it will doom Asian tigers, accustomed to 6 to 8 per cent growth, to severe slowdowns. In the 1930s, Weimar Germany’s Chancellor Bruening ignored...

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