How the IMF Props Up the Bankrupt Dollar System
By F. William Engdahl, US/Germany

Gods of Money cover One of the crucial pillars of support for today's Dollar System is Washington's control of the International Monetary Fund, the IMF. The way this actually works is carefully disguised, behind a facade of technocrats and economic theory of free market ideology. In reality, the IMF is a modern era collection agency for the Dollar Empire. It collects its tribute, through major international banks, who use the dollars to further extend the power of American financial and corporate hegemony, in effect the driving motor of what is globalization.

Ironically, though the IMF is a main prop of the Dollar System, it's nominally headed by a European, today a German, Horst Koehler, and before him, by a Frenchman, Michel Camdessus. The real power is carefully concealed behind the facade. Under the constitution of the IMF, no major decision is possible without 85% support of the board of directors. The United States, which drafted the original IMF charter at Bretton Woods New Hampshire in 1944, made sure it had the decisive veto control with an 18% vote share. That veto remains to today. Insiders know well that the IMF is run by Washington. It is no accident that its headquarters is also there.

The IMF was originally created in the 1944 Bretton Woods New Hampshire international monetary conference, called by President Roosevelt to set up a postwar monetary and trade system. It was intended as a fund to support stability of currencies and trade of the postwar European allied countries. At that time Washington held the vast bulk of world gold reserves and expected to lend dollars to rebuild Europe. The original IMF idea was to pool a share of reserves of member states, which any single state could then borrow, in event of a short term payments crisis, to stabilize their currency. Ten years after the Great Depression, the major industrial nations, including the USA, were concerned with creation of a stable, growing Europe, not least as an export market for US products. The first member to borrow was Great Britain after the war. The last European state was Italy in 1977.

The IMF is retooled in 1980s

Since 1977, no European or G7 country has gone to the IMF to borrow. Instead they have borrowed from private banks or issued state debt. They know all too well how destructive the IMF conditions are. By the end of the 1970s some people were suggesting the IMF had outlived its role, much as some argue with NATO after the end of the Cold War. Washington had other ideas for the IMF however.

The role of the IMF changed dramatically in the early 1980s, under US pressure. Instead of serving as a stabilizing fund for industrial countries of Europe or Japan, the IMF became the decisive agency controlling economic policy of underdeveloped countries. What evolved since the first Latin American debt crises of the early 1980s, was an entirely new role for the IMF to act as policeman to collect dollar loans for private New York and international banks. The IMF became the driving motor for what came to be called "globalization."

After the first oil price rise of 400% in the 1970s, many developing countries such as Brazil, Argentina, or most of Africa, borrowed heavily to finance needed oil imports, or trade deficits. They borrowed dollars from major international banks operating in the London Eurodollar market. London was the center for, in effect, the recycling of the large sums of petrodollars from Arab OPEC countries to US and other major banks.

The major banks took the new oil dollars and immediately relent them at a nice profit, to countries like Argentina or Egypt. Before the 1970s Argentina had been a fast-growing economy developing modern industry, agriculture and a rising standard of living for its people. It had almost no foreign debt. Ten years later, the country was under control of the IMF and foreign banks. The US changed the rules, in the process creating the debt crisis.

In October 1979, a dramatic shock occurred for the debtor countries. Overnight their cheap dollar loans cost them 300% more interest charge. Paul Volcker of the Federal Reserve Bank in the US, unilaterally changed US interest policy to force the dollar higher against other currencies. The effect was to raise US interest rates 300% and rates in the London bank market by even more. The bank loans to Argentina and other countries had been made in "floating" rate agreements. If the key international rate in the London bank market, LIBOR, was low, Argentina would pay a low rate on its dollar loans. But when it suddenly rose 300% in 1979-1980, many countries suddenly faced a payments crisis.

It took until 1982 for the crisis to reach default level. At that point, Washington demanded the IMF be brought in to police a debt collection process on developing debtor nations. This came to be called the Third World Debt Crisis. The impression was created that countries like Argentina were guilty for mismanagement. In reality, whatever political corruption may have existed in the debtor countries, the corruption of the IMF system and the petrodollar recycling was far greater. The Volcker interest rate shock completed the package of destruction of living standards on behalf of dollar debts.

How did the IMF act in the third world debt crisis? Here is where it becomes clear that the role of the IMF was to support the dollar hegemony of the United States, and not to help poor countries get through a temporary debt problem.

The 'Washington Consensus'

The IMF has been described by some as a tool of neo-colonialism. That is too mild, as 19th Century British or European colonialism, however harsh, never managed to accomplish the extent of devastation and destruction of health and living standards the IMF has done since the 1970s.

The IMF operates as a supranational agency to take control over helpless debtor states, to impose economic policies that force the country ever deeper into debt, while opening the market to foreign, often US capital and global corporate exploitation. The fact that debtor countries never get out of their dollar debt, only deeper in, is deliberate. IMF policy in fact insures this. The dollar debt is a major prop of the dollar system and of private international banks. When that debt is repaid, banks lose power and credit contracts. So long as debt grows, bank credit can grow, the paradox of modern banking.

The tip-off that the real purpose of the IMF is quite different from its public claims, is that despite repeated proof of the destructiveness of its policies, called "conditionalities," the IMF has never changed the method it uses in a target country. There is a reason for that.

Take Argentina as a case in point. In early 2002 Argentina defaulted on repaying $141 billion in foreign dollar debt. One of the most devastating economic collapses in modern history ensued. The IMF was crucial. In early 2000 Argentina had turned to the IMF for emergency credit to prevent a collapse of its currency, then fixed to the strong US dollar. As the dollar rose, Argentina found its exports trade collapsing. The country went into recession. The IMF stepped in with a $48 billion "rescue" package. But there were conditions.

First the government had to agree to severe IMF-dictated cuts in government spending before it would get any money. State subsidies on food for low income were ended, triggering food riots. Interest rates exploded in a vain effort to convince foreign banks and bondholders to not sell. That only worsened the economic depression. State companies were forced to privatize to raise money and "promote free market" liberalization. The Buenos Aires water system was sold for pennies to Enron, as was a pipeline going from Argentina to Chile.

Washington insisted all the while that Argentina hold to its fixed currency value, arguing that the trust of foreign bondholders and creditors was the priority. Meanwhile the country sank into its worst depression in memory, as millions lost jobs, and bank accounts were in the final stage frozen, so ordinary citizens could not even draw savings for life necessities.

What exactly does the IMF do when it comes into a crisis country that asks for emergency lending to overcome a debt or currency crisis? The IMF always uses the same program, regardless of whether it is Russia or Argentina, Zimbabwe or South Korea, all very different cultures, economies and situations. The IMF demands are often referred to as the Washington Consensus, the name given in 1990 by a US economist and IMF backer, John Williamson, to describe the IMF method of attack.

IMF medicine almost always includes demands to privatize state industries, to slash public spending even on health and education, devalue the national currency against the dollar, and open the country to free flow of international capital-both in and, especially, out.

First the IMF demands the government in question sign a secret Memorandum of Understanding with the IMF, in which it agrees to a list of "conditionalities", the pre-condition for getting any penny of IMF aid. Under today's globalized free capital markets, banks do not invest in a country that does not have the IMF seal of approval. So the IMF role is far more than giving some emergency loan. It determines if a country gets any money from any source at all-World Bank, private banks and other.

The conditions of an IMF deal are always the same. Privatization of state industries is top on the list. The effect of privatization with a cheap Peso or Rouble currency is that foreign dollar investors are able to buy up the prime assets of a country dirt cheap. Often the politicians involved in the country get corrupted by the lure of under-the-table deals in privatizing their national assets. Foreign multinationals can grab profitable mining, oil, or other national treasures with their dollars.

The case of the Yeltsin government in Russia is classic, with dollar billionaires emerging overnight on the looting of national assets via IMF-dictated privatization. The Clinton Administration backed the process fully. They knew it turned Russia into a dollar zone, and that was the intent.

The second demand of the IMF is that a country liberalize, that is open, its financial and banking markets to foreign investors. This allows high-profile speculators like George Soros or Citibank or Credit Suisse to come into a country, run up asset prices in a speculation, take huge profits, as in Thailand in the mid-1990s, and quickly sell, then exit with huge gains, as the local economy collapses behind them. Then Western multinationals can come in after, and take prime assets at very low cost.

This is what happened to Asia in the 1990s. The IMF and US Treasury, which actually determines US IMF policy, began strong pressure on the fast-growing East Asia "Tiger" economies in 1993, to remove national controls on capital flows. They argued it would help Asia get large sums of money to invest. What it did was give US pension funds and big banks a huge new market for speculation. Too much money flowed in, and an unhealthy real estate bubble grew. It burst when Soros and other US speculators deliberately pulled the plug in 1997, triggering the Asia crisis. The end result was that for the first time, Asian economies were forced to turn to the IMF to be rescued.

But the IMF did not "rescue" any Asian economy in 1998. It rescued international banks and hedge fund speculators. In Indonesia, the IMF demanded the government raise interest rates to 80%, on the argument that would keep foreign investors from leaving, and stabilize the situation. In fact, as critics like Joseph Stiglitz charged at the time, the IMF interest rate demands guaranteed a full-blown collapse of the Indonesian and other Asian banking systems.

Once the IMF got control of South Korea, one of the strongest industrial economies in the world, it demanded breakup of large industry conglomerates, charging "corruption" and "crony capitalism." In fact, Washington hoped to weaken a growing competitor and open the door for US companies like GM or Ford to take over. In part it worked, until Korea and other regional economies were strong enough to re-impose national controls. Malaysia openly defied the IMF demands and imposed currency controls during the crisis. The damage to Malaysia was minimal as a result, a great embarrassment to the IMF.

The next step for IMF conditions, is the demand a country turn to "market-based" domestic prices. This is code for eliminating government subsidies or price controls. Often developing countries have state-subsidized fuel or food or other necessities for their people. In 1998 the IMF demanded, for example, that Indonesia remove state food subsidies for the poor. The idea of "market-based price" is itself a fiction. A market is man-made. The market in Switzerland or Denmark or Japan is different from the market in Cuba or Cameroon. What the IMF is after is a slashing of state budgets to minimize the state role in the economy and make a target country defenseless against foreign takeover of its key assets. The government share in the fragile economy is cut also, in order to insure foreign banks get their "pound of flesh."

Finally the IMF demands the country devalue its currency, and massively, often by 60-70% or more. Here the argument is that this will make its exports "more competitive" and bring more income to repay the foreign dollar debts. This is a crucial part of the IMF Washington Consensus medicine. If, say, Chile devalues the Peso in half, or the Republic of Congo, it must export twice as many tons of copper to earn the same dollar of export surplus. For the giant multinationals in the industrial world, it means the cost of raw materials has become cheaper by half.

Over the past twenty years since the IMF stepped in to play the major role in reorganizing developing countries, world raw materials prices have been dramatically depressed, even though demand has risen. The reason is that countries of Africa, Latin America and elsewhere are mainly raw materials exporters, and their commodities, like oil, are all exported in dollars. They need to earn dollars to repay dollar debts. The IMF policies have driven their raw material prices, measured in dollars, drastically lower. This has been deliberate, but is never admitted. The IMF is an agency of American dollar domination of the global economy, not an agency to help developing countries.

The real IMF record

None of this is exaggeration, unfortunately. IMF defenders claim that "market liberalization" has resulted in major economic growth over the past 20 years in developing countries. The reality is opposite. In a study done by Joseph Stiglitz when he was at the World Bank, between 1989 and 1997 the GDP of every country in the former Soviet Union had fallen to levels of 30% to 80% of that before the collapse of state controls, with the sole exception of Poland. The level in Russia was only 60% that in 1989. GDP had collapsed 40%, and unemployment went from 2 million to 60 million. The rapid privatization without adequate legal and institutional safeguards such as unemployment insurance or health insurance, led to social catastrophe comparable to wartime. IMF demands to free capital movement allowed new Russian dollar oligarchs such as Berezovsky to plunder billions of dollars and put it into secret bank accounts in Cyprus or Liechtenstein, while they bought luxury villas in Monte Carlo. [1]

The IMF record in Africa is as outrageous and destructive. In Zimbabwe, the IMF demanded the government privatize certain state companies and cut subsidies on food, education and health care to get IMF aid. The government complied with most demands, and then the IMF accused it of funding the war in the Democratic Republic of Congo, using that as an excuse to deny giving Zimbabwe loans. In Kenya the IMF earlier demanded that specific individuals be named to the government of Moi, people friendly to Western interests. Washington then charged these governments being "corrupt," which conveniently blinds Western opinion from realizing the moral travesty taking place under IMF auspices.

Deeper in debt ...

Take the official World Bank debt statistics and it becomes obvious that the IMF game is to support the dollar. The first debt crisis in the Third World erupted in 1982. The IMF stepped in to "stabilize" the debt problem. Since then, the foreign debts of developing countries have risen exponentially. In Argentina, the earlier "success" of the IMF, foreign debt stood at $62 billion in 1990. In 2000 it was $146 billion. Brazil's foreign debt has gone from $120 billion to $240 billion in the same time. Iran, isolated from the IMF system by US sanctions, is one of the few developing countries which has managed to reduce its foreign debt.

The total foreign dollar debt of all low and middle income countries rose from $1.4 trillion in 1990 to $2.5 trillion in 2000, almost double. In most cases, the unpayable interest costs on the debts were merely added to the amount of principal owed foreign lenders, at compound interest rate, of course. With compound interest charges often 10% to 15% per year, the debt grows exponentially.

The result is a Ponzi debt pyramid, in which the more a country pays, the more it owes. Bankers call it "interest capitalization." It is no different from the plight of a poor shopkeeper debtor who is forced to turn to a mafia loan shark to survive and ends up paying more and more at ever more interest, until he is bankrupt and the mafia takes all his possessions. The IMF and banks know only some 80% of Third World debts can ever be repaid. They care only about the legal fiction and the ability to use the debt as a lever to grab assets cheaply. According to the World Bank, between 1980 and 1986, for a group of 109 debtor countries, payment of interest alone to the creditors on foreign debts totalled $326 billion. Repayment of principal on the same debts totalled another $322 billion, for a combined capital flow out to the New York and other creditor banks, in debt service, of $658 billions on an original debt of $430 billion. Yet, despite this enormous effort, these 109 debtors still owed the banks a sum of $882 billion in 1986. This was because of the pyramid effect of compound interest, interest capitalization and Volcker's floating rate policy.

In 1990 the developing world repaid some $150 billion in interest on dollar debt, three times all aid received. This was a huge boost to the dollar credit system, which lends on the basis of assuming it will be repaid the entire $2.5 trillion third world debt. The IMF allows that myth to continue. Occupied Iraq today must still "honor" billions in debts of the Hussein era, many to the former Soviet Union, despite its devastated situation. Russia is still forced to admit billions in debt from the Soviet era to Western agencies. Under the IMF system, debt is more sacred than human life. [2]

The vicious trick in all IMF-led "debt restructuring," is that so long as a debtor is able to pay interest on its loans, the creditor banks in New York or London or elsewhere do not have to declare their loan in default. Even if they know it never will be repaid, they treat it as if it were a fully good credit, and use it as capital collateral for further bank lending. The banking system of the dollar world is to a major degree propped up by the pyramid of unpayable third world loans from Africa to Indonesia to Argentina to Croatia.

There has been a dramatic slowdown in economic growth in developing economies over the past two decades since the IMF was brought in to police the debtor states in 1982. There is a direct link. In Latin America, if we take per capita GDP growth, there was a growth of 75% between 1960 and 1980. In the following 20 years to 2000, per capita GDP grew a mere 6%.

In Sub-Sahara Africa, per capita GDP grew by 36% in the two decade period to 1980. Then, it fell by a staggering 15% the next two decades. According to the World Bank itself, some 300 million Africans, almost half of the Continent, survive on less than ? 0.65 a day. IMF-dictated cuts in national health care have resulted in rising infant mortality across the Continent. In 2002 Malawi underwent famine. It coincided with the April 2002 decision by the IMF to suspend Malawi on allegations of "corruption." The IMF had ordered Malawi's government to sell its grain reserves in order to repay a South African bank loan of the National Food Reserve Agency. The IMF also ordered export of maize to service debt, ignoring a developing famine crisis. The IMF piously denied it played any role in the famine crisis however. [3]

For Arab states, including Algeria, Morocco, GDP growth per capita swung from a plus 175% between 1960-1980 to a minus 2% in the following two decades, a staggering collapse.

The only apparent exception to this negative trend is East Asia including China. Here growth was faster between 1980 and 2000. But the reason is the including of China, which saw a 400% increase in GDP and accounts for 83% of the region's population. China has adamantly refused any dealings with the IMF, and runs a controlled state-guided economy with full currency controls, hardly an IMF model state.

Globalization is a word used today, often without precision. If we use the word globalization to refer to the entire process of IMF and WTO-led neo-colonialism under the Dollar System, then it is a descriptive term. It describes the creation of a global dollar imperium, a Pax Americana. Establishment critics of the IMF system such as Joseph Stiglitz, himself a former Clinton adviser and World Bank official, make accurate charges against the IMF. They assume, however, that it is merely misguided policy that leads to the problems. The entire IMF institution, along with the World Bank and WTO, however, have been deliberately developed to advance this globalization of the Dollar System, the second pillar of Pax Americana after the military power. It is no mistaken policy, no result of bureaucratic blunders. That is the crucial point to be understood. The IMF exists to support the Dollar System. [4]


1. Mark Weisbrot et al, "Growth may be good for the poor — But are IMF and World Bank Policies good for growth?", Center for Economic Policy Research, Washington, August 2000. The paper is a strong critique of IMF policy, documenting the real decline in living standards since 1980 in IMF target countries.

2. World Bank, "World Development Indicators", 2002, Table 4.16, External Debt.

3. Anecdotal evidence of the effect of IMF demands on Africa can be found in the magazine, African Business, January 2003, "Who Caused the Malawi Famine?" by Kwesi Owusu and Francis Ng'ambi.

4. A useful but limited critique of IMF policies is found in Stiglitz, Joseph, Globalization and its Discontents, London, W.W. Norton, 2002.

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