Selected Essays of James Tobin
Chapter 10: The IMF's misplaced priorities: flawed fund
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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