The IMF and the World Bank: protectors of capitalism

By Daniel Vila, People’s Weekly World, 17 January 1998

Imagine applying for a loan at a bank and being told that in order to receive the money you must agree to being hit in the face by Mike Tyson, in the stomach with a bat swung by Jose Canseco and kicked in the rear by a soccer player every morning for the rest of your life. Paying the money back is not as difficult as surviving the humiliating conditions of the loan.

On a global scale, the International Monetary Fund (IMF) and the World Bank impose similar humiliating conditions on poor countries before lending them money. The difference is that most countries that accept the loans do so because they have no other way of avoiding total financial collapse.

Before describing those conditions, we should see where this two-headed monster originated. The IMF and the World Bank were created at the Bretton Woods Conference held in the town by the same name located in New Hampshire and which began July 1, 1944.

Years of planning went into the conference, with the U.S. and Britain doing most of the theoretical investigations and assuming the role of convincing other countries of capitalism’s need for such a conference.

It should be noted that even before the U.S. entered the Second World War the ruling class was already considering the need for two organizations, one to stabilize exchange rates and another to provide the long term capital that would be needed for reconstruction after W.W.II. Early in 1941 a group of economists under the leadership of the secretary of the U.S. Treasury, Henry Morgenthau Jr., started working on the development of a comprehensive international monetary agreement.

At about the same time, a group of British economists led by John Maynard Keynes circulated a Proposal for an International Currency Union which had the purpose of fixing exchange rates in terms of a new international currency to be known as the bancor.

Not all sectors of the ruling class backed the creation of the IMF and the World Bank. As the Bretton Woods Conference opened, the New York Times, Wall Street Journal and Chicago Tribune all ran editorials condemning government management of exchange rates. This prompted the U.S. government to launch one of its most ambitious propaganda campaigns to guarantee public and congressional support.

Government officials gave speeches and prepared radio programs, pamphlets and short movies. They enlisted the collaboration of academics such as Harvard professor Jacob Viner, who called the proposal for an IMF the magnificent blueprint. The U.S. government defended the conference on the grounds that a monetary fund was essential for U.S. domestic prosperity and high employment; and that the U.S. had to show its willingness to be a world leader—the same arguments President Clinton used to defend NAFTA 50 years later.

The conference created the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank). The job of the IMF was establishment of stable exchange rates and provision of loans to countries facing short-term deficits in their balance of payments. The World Bank had the task of providing loans for major infrastructural investments for which private bank loans would not be available.

Both Houses of Congress, after minor opposition from Republicans, approved the results of the Bretton Woods Conference and on July 31, 1945 President Harry S. Truman signed the Bretton Woods Act.

The Bretton Woods Act firmly safeguards U.S. dominance. Voting in both the IMF and the World Bank is based on quotas that reflect each member-country’s economic strength. With 20 percent, the U.S has the largest number of votes in the bank. A similar concentration of power exists in the IMF. By custom, the head of the World Bank is American while the head of the IMF is European.

At the beginning of the Asian economic crisis, Indonesia, South Korea and Malaysia denied the need to borrow from the Breton Woods institution. And when circumstances forced them to borrow, there were intense negotiations in an attempt to reach agreements which would not further hurt their economies.

The IMF and World Bank usually demand that governments privatize the public sector, reduce social spending in order to balance budgets and allow unlimited access by foreign capital to their economies. All of these measures are feared by the capitalists of the smaller countries, since it leads to their displacement by foreign capitalists. The conditions also hurt workers in the poor countries since they increase unemployment and result in lower wages.

An article in the Jan. 11 issue of the British Manchester Guardian says: The IMF rescue package [for South Korea] will ultimately benefit the West far more than Seoul. The article describes how, in exchange for $57 billion from the IMF, South Korea had to liberalize and deregulate by dropping restrictions on foreign investment and takeovers.

This has already resulted in Proctor and Gamble taking over the Sangyong tissue company, Bosch taking over Kia Motors and Coca-Cola acquiring Doosan, the nation’s largest brewing institution.

An article in the Dec. 28 edition of Investors Business Daily, quotes a study by the conservative Heritage Foundation showing that of the 137 countries getting IMF loans between 1965 and 1995, some 81 percent of them increased their borrowing by 50 percent between 1981 and 1995. Mexico has been bailed out four times for a total of $74 billion.

Furthermore, the study found that more than half of the less-developed countries receiving IMF loans between 1965 and 1995 are no better off today and that one-third are worse off.

By forcing poor countries to open up their economies to the powerful Western countries in exchange for desperately needed funds, capitalists are acheiving through financial means what before WWII required gun boats.