The Death of Money (27 page)

The largest IMF commitments came from the European Union and Japan, each committing
$100 billion, and China, which committed another $50 billion. Other large commitments
of $10 billion each came from the other BRIC nations, Russia, India, and Brazil, and
from the developed nations of Canada, Switzerland, and Korea.

The most contentious commitment to the IMF’s new borrowing facility involved the United
States. On April 16, 2009, just days after the G20 summit,
President Obama sent letters to the congressional leadership requesting its support
for a $100 billion commitment to the new IMF borrowings. The president, guided by
Rubin protégé Mike Froman, had made a verbal pledge of the $100 billion at the summit,
but he needed
legislation to deliver on the actual funding. The letters to Congress stated that
the new funding was a package deal intended to increase IMF votes for China and to
force gold sales by the IMF. President Obama’s letters also called for “a special
one-time allocation of Special Drawing Rights, reserve assets created by the IMF . . .
that will increase global liquidity.” The president’s letters were refreshingly candid
on the IMF’s ability to print world money.

China wanted additional votes at the IMF, and it wanted more gold dumped on the market
to avoid a run-up in the price at a time when it was acquiring gold covertly. The
United States wanted the IMF to print more world money. The IMF wanted hard currency
from the United States and China to conduct bailouts. The deal, which had something
for everyone, had been carefully structured by Mike Froman and other sherpas at the
summit and signed on by Geithner, Obama, and the G20 leaders.

Looking a bit deeper, the Obama letter to Congress contained another twist. The new
commitments to the IMF came not as quotas but as loans, consistent with the IMF’s
growing role as a leveraged bank. The president sought to reassure Congress that the
loan to the IMF was not an expenditure and therefore would have no impact on the U.S.
budget deficit.
The president’s letter said, “That is because when the United States transfers dollars
to the IMF . . . the United States receives in exchange . . . a liquid, interest-bearing
claim on the IMF, which is backed by the IMF’s strong financial position, including . . .
gold.” This statement is entirely true. The IMF does have a strong financial position,
and it has the third-largest gold hoard in the world after the United States and Germany.
It was curious that just as Federal Reserve officials were publicly disparaging gold’s
role in the monetary system, the president felt the need to mention gold to the Congress
as a confidence booster. Despite disparagement of gold by academics and central bankers,
gold has never fully lost its place as the bedrock of global finance.

Drilling still further down, we find a curious feature of the IMF loan proposal. If
the United States gave the IMF $100 billion in cash, it would receive an interest-bearing
note from the IMF in exchange. However, the note would be denominated not in dollars
but in SDRs. Since the SDR is a nondollar world currency, its value fluctuates against
the U.S. dollar.
The SDR exchange value is calculated partly by reference to the dollar, but also by
reference to a currency basket that includes the Japanese yen, the euro, and the U.K.
pound sterling. This means that when the IMF note matures, the United States will
receive back
not
the original $100 billion but a different amount depending on the fluctuation of
the dollar against the SDR. If the dollar were to grow stronger against the other
currencies in the SDR basket, the United States would receive
less
than the original $100 billion loan in repayment, because the nondollar basket components
would be worth less. But if the dollar were to grow weaker against the other currencies
in the SDR basket, the United States would receive
more
than the original $100 billion loan in repayment, because the nondollar basket components
would be worth more. In making the loan, the U.S. Treasury was betting
against
the dollar since only a
decline
in the dollar would enable the United States to get its money back. This $100 billion
bet against the dollar was not mentioned in the president’s letter and went largely
unrecognized by Congress at the time. As it happens, it proved a political time bomb
that came back to haunt the United States and the IMF ahead of the 2012 presidential
election.

The president’s letters also misled Congress about the loan commitment’s purpose.
They state in several places that the loan proceeds would be used by the IMF for assistance
“primarily to developing and emerging market countries.” In fact, the IMF’s new borrowing
capacity was used primarily to bail out the Eurozone members Ireland, Portugal, Greece,
and Cyprus. Little of the cash was used for emerging markets lending. The misleading
language was intended to dodge criticism from Congress that U.S. taxpayer money would
be used to bail out Greek bureaucrats who retired at age fifty with lifetime pensions,
while Americans were working past seventy to make ends meet.

These deceptions and the Treasury’s bet against the dollar went unnoticed in the frenzy
of auto company bailouts and stimulus packages. Under the leadership of House Democrat
Barney Frank and Senate Republican Richard Lugar, the U.S. commitment to the IMF borrowings
was buried in a war spending bill and was passed by Congress on June 16, 2009. The
IMF issued a press release with remarks by then managing director Dominique Strauss-Kahn
touting the legislation and describing it as a “
significant step forward.”

While the legislation provided for the $100 billion U.S. commitment, the IMF did not
actually borrow the funds right away. The commitment was like a credit line on a MasterCard
that the cardholder has not yet used. The IMF could swipe the MasterCard at any time
and get the $100 billion from the United States simply by issuing a borrowing notice.

In November 2010 the Obama plan to finance IMF bailouts had the rug pulled out from
under it by the midterm elections and the Republican takeover of the House of Representatives.
Republican success was fueled by Tea Party resentment at earlier bailouts for Wall
Street banks Goldman Sachs and JPMorgan Chase. Barney Frank lost his House Financial
Services Committee chairmanship, and the new Republican leadership began examining
the implications of the U.S. commitment to the IMF.

By early 2011, the European sovereign debt crisis had reached a critical state, and
it was impossible to disguise the fact that U.S. funds, if drawn by the IMF, would
be used to bail out retired Greek and Portuguese bureaucrats. Conservative publications
featured headlines like “
Why Is the U.S. Bankrolling IMF’s Bailouts in Europe?” On November 28, 2011, Barney
Frank announced his retirement. Also in 2011 Senator Jim DeMint (R-S.C.) introduced
legislation to rescind the U.S. commitment to the IMF. The DeMint bill was defeated
in the Senate on a 55–45 vote. That defeat needed votes from Republicans, which were
provided by Richard Lugar (R-Ind.) and a few others. On May 8, 2012, the Tea Party
struck back by supporting Richard Mourdock, who went on to defeat Lugar in a primary
election, forcing Lugar’s retirement after thirty-six years as a senator. One by one
the IMF’s friends in the U.S. Congress were stepping aside or being forced out. With
regard to the Frank and Lugar departures from Congress, the IMF’s Lagarde gave a Gallic
shrug and said, “
We will miss them.”

By late 2013, the sparring match between the White House and Congress over funding
for the IMF had grown more intense. After the London G20 Summit, the IMF had taken
further steps to increase its borrowing power beyond the original commitments, shifting
some of the U.S. lending commitment away from debt toward a quota increase—in effect,
it moved part of the U.S. money from temporary lending to permanent capital. These
2010 changes, which also followed through on the London Summit commitments to increase
the voting power of China,
required congressional approval beyond that contained in the 2009 Barney Frank legislation.
Hundreds of eminent international economists, and prominent former officials such
as Treasury secretary Hank Paulson, who had engineered the Goldman Sachs bailout in
2008, publicly called on Congress to approve the legislation.
However, President Obama did not include the new requests in his 2012 or 2013 budgets,
in order to avoid making a campaign issue out of U.S. taxpayer support for European
bailouts.

At this point Christine Lagarde’s impatience with the process began to boil over.
During the World Economic Forum in Davos on January 28, 2012, she hoisted her Louis
Vuitton handbag in the air and said, “
I am here with my little bag, to actually collect a bit of money.” In an interview
with
The
Washington Post
published on June 29, 2013, she was more pointed and said, “
We have been able to significantly increase our resources . . . notwithstanding the
fact that the U.S. did not contribute or support that move. . . . I think everybody
would like to complete the process. Let’s face it. It has been around a long time.”

Fortunately for the IMF, the controversial U.S. funds commitment was not needed in
the short run. By late 2012, the European sovereign debt crisis had stabilized, as
growth continued in the United States and China, albeit at a slower rate than hoped
for by the IMF. But after the history of debt crises in Dubai, Greece, Cyprus, and
elsewhere from 2009 to 2013, it appeared to be just a matter of time before the situation
somewhere destabilized and the U.S. commitment would be needed to finance another
rescue package.

The IMF’s role as a leveraged lender, in effect a bank, is now institutionalized.
The IMF has evolved from a quota-based swing lender to a leveraged lender of last
resort like the Federal Reserve. Its borrowing and lending capabilities are well understood
by economic experts, if not by the public at large. But even experts are largely unfamiliar
with or confused by the IMF’s greatest power—the ability to create money. Indeed,
the name of the IMF’s world money, the special drawing right, seems designed more
to confuse than to enlighten. The IMF’s printing press is standing by, ready for use
when needed in the next global liquidity crisis. It will be a key tool in engineering
the dollar’s demise.

■
One Currency

John Maynard Keynes once mused that not one man in a million was able to understand
the process by which inflation destroys wealth. It is as likely that not one woman
or man in ten million understands special drawing rights, or SDRs. Still, the SDR
is poised to be an inflationary precursor par excellence. The SDR’s mix of opacity
and unaccountability permits global monetary elites to solve sovereign debt problems
using an inflationary medium, which in turn allows individual governments to deny
political responsibility.

The SDR’s stealth qualities begin with its name. Like
Federal Reserve
and
International Monetary Fund,
the name was chosen to hide its true purpose. Just as the Federal Reserve and IMF
are central banks with disguised names, so the SDR is world money in disguise.

Some monetary scholars, notably Barry Eichengreen of the University of California
at Berkeley,
object to the use of the term
money
as applied to SDRs, viewing the units as a mere accounting device used to shift reserves
among members. But the IMF’s own financial reports refute this view. Its annual report
contains the following disclosures:

The SDR may be allocated by the IMF, as a supplement to existing reserve assets. . . .
Its
value
as a reserve asset derives from the commitments of participants to hold and accept
SDRs. . . . The SDR is also used by a number of international and regional organizations
as a
unit of account. 
. . . Participants and prescribed holders can
use and receive SDRs in transactions
 . . . among themselves.

As money is classically defined as having three essential qualities—store of value,
unit of account, and medium of exchange—this disclosure clinches the case for the
SDR as money. The IMF itself says the SDR has value, is a unit of account, and can
be used as a medium of exchange in transactions among designated holders. The three-part
money definition is satisfied in full.

The amount of SDRs in circulation is minuscule compared to national and regional currencies
such as the dollar and euro. The SDR’s use is
limited to IMF members and certain other official institutions and is controlled by
the IMF Special Drawing Rights Department. Further, SDRs will perhaps never be issued
in banknote form and may never be used on an everyday basis by citizens around the
world. But even such limited usage does not alter the fact that the SDR is world money
controlled by elites. In fact, it enhances that role by making the SDR invisible to
citizens.

The SDR can be issued in abundance to IMF members and can also be used in the future
for a select list of the most important transactions in the world, including balance-of-payments
settlements, oil pricing, and the financial accounts of the world’s largest corporations
such as ExxonMobil, Toyota, and Royal Dutch Shell. Any inflation caused by massive
SDR issuance would not immediately be apparent to citizens. The inflation would show
up eventually in dollars, yen, and euros at the gas pump or the grocery, but national
central banks could deny responsibility with ease and point a finger at the IMF. Since
the IMF is not accountable to any electoral process and is a self-perpetuating supranational
organization, the buck would stop nowhere.

The SDR’s history is as colorful as its expected future. It was not part of the original
Bretton Woods monetary architecture agreed to in 1944. It was an emergency response
to a dollar crisis that began in 1969 and continued in stages through 1981.