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Opening Statement by Rep. Ron Paul
Banking Committee Hearing January 30, 1998
Asian Financial Crises

As I have stated many times before, what we are witnessing now is the natural consequence of a sustained world-wide credit expansion of unprecedented proportions. According to free market/sound money economics, all credit expansions set the stage for the correction. Markets make the necessary corrections and should be allowed to do so.

In the previous hearing in November, the claim was made that this funding for the International Monetary Fund (IMF) is a "neutral" exchange of monetary assets. This exchange is not neutral for the taxpayer or the country.

We take money out of the paychecks of the working people of this country and give them nothing in return--they cannot pay for child care or education with the IMF's Special Drawing Rights (SDRs) nor can they go to the IMF for a loan to pay off their loans from credit cards, tuition, cars or mortgages. We are witnessing record numbers of bankruptcies in America today: this is not a fair deal for average Americans.

It is not a "neutral" exchange for our country either. We are being asked to tax our citizens more than are already being taxed in order to give their hard-earned money to the IMF in exchange for SDRs. Supporters claim that this is merely an exchange of monetary assets with no budgetary consequences. But when we get past the gimmickry and budgetary shell games, we know that our membership with the IMF has in fact contributed to our national debt. It is not neutral. It costs us.

We submitted questions to Mr. Lawrence Summers, Secretary of the Treasury, following the Full Committee Hearing on November 13, 1997. We asked him, "According to the Congressional Research Service (CRS), cumulative outstanding U.S. national net debt attributable to transactions with the IMF totalled over $4.6 billion at the end of January 1991 and contributed nearly 0.2% of total U.S. government debt outstanding at the end of calendar year 1990. Due to the approval of a quota increase in November 1991, the net debt outstanding attributable to the IMF will have increased, according to CRS. Yet, in your testimony, you claim that the United States gains financially from our dealings with the IMF. How do you reconcile these claims with the objective numbers presented?"

Not only has he refused to respond to our inquiries, but the Treasury has not released updated data for CRS to complete its study. We need to stop the budgetary shell games used to deceive the American people. We must oppose new funding for the IMF.



Questions submitted by Congressman Ron Paul
for Treasury Deputy Secretary Lawrence H. Summers
Full Committee Hearing on the East Asian Economic Conditions
November 13, 1997

1. Article 1 sec 9 para 7 of the U.S. Constitution states clearly "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time." Since there has been no new appropriation of funds for the Exchange Rate Stabilization Fund (ESF) since its creation (under the Gold Reserve Act of 1934 which established the Fund and authorized the Secretary of the Treasury to use the resources of the Fund "for the purposes of stabilizing the exchange value of the dollar"), and since there never has been an appropriation of funds that the Federal Reserve may use to finance the bailout of foreign central banks at U.S. taxpayer expense, how do you justify the constitutionality of using the ESF and the Federal Reserve's so-called "warehouse" facility for these purposes?

Given that the ESF was used in the past to pay for unauthorized CIA operations and the U.S. Executive Director of the IMF's salary and travel expenses (see Julie Corwin's article The Slush Fund, The International Economy, March/April 1995), do you agree that the ESF may have been misused in the past and that this possible misuse warrants closer Congressional scrutiny of the ESF? What reforms, such as increased transparency, should Congress implement to safeguard against possible future abuses?

2. Given the breadth of scholarly research on the Exchange Rate Stabilization Fund, [For example, see Walker Todd's The Federal Reserve Board and the Banking Crisis of the 1930s, in George Kaufman, Research in Financial Services: Private and Public Policy, vol. 8 (1996), pp. 97-138, Greenwich, CT: JAI Press Inc., at 114-116, 121-123; and his Disorderly Markets: The Law, History, and Economics of the Exchange Stabilization Fund and U.S. Foreign Exchange Market Intervention, in George Kaufman, ed., Research in Financial Services: Private and Public Policy, vol. 4 (1992), pp. 111-179, Greenwich, CT: JAI Press Inc.; his article, A History of International Lending, in vol. 3 of the same series (1991), pp. 201-289; and Robert L. Hetzel, Sterilized Foreign Exchange Intervention: The Fed Debate in the 1960s, Economic Quarterly, vol. 82 (no. 2, spring 1996), pp. 21-46, Federal Reserve Bank of Richmond;Anna J. Schwartz, "A master of the art? The distinguished but flawed record of Alan Greenspan at the Federal Reserve," (book review of Steven K. Beckner, Back from the Brink: The Greenspan Years), in London Times Literary Supplement, Sept. 26, 1997, p. 12; W. Lee Hoskins and James W. Coons, Mexico: Policy Failure, Moral Hazard, and Market Solutions, Policy Analysis No. 243, Cato Institute, October 10, 1995; affidavit filed by Anna J. Schwartz for the plaintiffs-appellants in the appeal, Schultz v State of New York, case no. 96-6184, U.S. Court of Appeals for the Second Circuit, October 1996; affidavit filed by R. Christopher Whalen for the plaintiffs-appellants in the appeal, Schultz v State of New York, case no. 96-6184, U.S. Court of Appeals for the Second Circuit, October 1996; and Anna Schwartz's From Obscurity to Notoriety: A Biography of the Exchange Stabilization Fund in the Journal of Money, Credit and Banking, May 1997, pp. 135-153.], how do you justify the "precedent" you referred to in your testimony?

Prior to Mexico in 1995, the largest ESF loan was $1 billion. In 1995, President Clinton committed $20 billion to Mexico. Prior to Mexico, the longest ESF loan was for 6 months; President Clinton made an ESF funding commitment available for 10 years. Do you see "mission creep" developing with the ESF taking on a progressively larger role (and a role for which Congress never intended)?

While the Congress did authorize U.S. participation in the International Monetary Fund (IMF), the Articles of Agreement of the IMF, as amended in 1978, should be properly characterized such that United States would not

"undertake strong unilateral actions, like the closing of the Treasury's gold window in 1971 or the floating of the dollar in 1973, but would consult with other industrial economy central banks and finance ministries to avoid unanticipated policy actions that would be destabilizing to foreign exchange markets. This amounts to a commitment to 'do no harm' going forward and assuredly was not intended to be a commitment by the U.S. authorities to use the financial resources of the United States itself as a sword to defend particular exchange rates decided upon by foreign monetary authorities," Anna Schwartz, a leading monetary scholar and expert, maintains in the accompanying affidavit filed for the plaintiffs in the case of Robert L. Schultz, et al., v. State of New York, et al., case no. 95-CV-133, U.S. District Court for the Northern District of New York (Albany), May 1995. "The stability that is to be maintained is of the auction market mechanism, not of a particular price or range of prices that might be set at that auction. In the economics profession since the 1970s the general view is that sterilized foreign exchange interventions have no lasting effect on market prices, although some economists have searched for possible ways in which sterilized intervention could affect exchange rates. No solid empirical evidence supports their searches. It is generally accepted, however, that unsterilized intervention by central banks does affect exchange rates, because it is simply monetary policy conducted by open market operations in foreign rather than domestic securities."

Is it not clear that the Articles of the IMF are a negative command that the U.S. monetary authorities should not undertake unilateral actions affecting foreign exchange rates without consultation with the IMF instead of giving them the unintended meaning that the U.S. authorities should be ready to intervene positively?

3. According to the Congressional Research Service (CRS), cumulative outstanding U.S. national net debt attributable to transactions with the IMF totalled over $4.6 billion at the end of January 1991 and contributed nearly 0.2% of total U.S. government debt outstanding at the end of calendar year 1990. Due to the approval of a quota increase in November 1991, the net debt outstanding attributable to the IMF will have increased, according to CRS. Yet, in your testimony, you claim that the United States gains financially from our dealings with the IMF. How do you reconcile these claims with the objective numbers presented?

4. "The collapse of the real economic sector in any country experiencing such a horrendous sequence of ill-advised monetary and macroeconomic policies, as Mexico was before 1995, will end only when the current austerity regime ends, and the austerity regime is the price understandably demanded by foreign lenders for new loans to Mexico... Foreign intervention enables government authorities to avoid correcting their monetary policy mistakes," Anna Schwartz and others might argue.

She remarked regarding the Mexican peso bailout, "[that it is] an exercise in futility for authorities to intervene. Those that do intervene believe they are protecting their currencies against disorderly markets, or because they deem their currencies to be too strong or too weak, or because they want to be known as members in good standing in a coordinated intervention. The fact is that, as often as the U.S. authorities have taken action to quell disorderly markets, no lasting change has been the outcome [emphasis added]. Foreign currency prices are less volatile than other asset prices, like equities. To intervene to change the market's evaluation of a currency does not deal with the fundamental economic conditions that underlie medium-term changes in the exchange value of a currency. Coordinated intervention seems successful when it supports the direction in which the market is moving on its own. In any event, countries that intervene, however deluded they are, believe they are protecting their own currencies.

"In the Mexican rescue, our authorities believe that they should protect the peso. Is this a defensible reason for U.S. intervention, given that intervention to protect the dollar is itself questionable?" Given that it is futile to attempt to change the market's evaluation of the value of a currency, and that such intervention permits and encourages governments to maintain irresponsible policies where economic fundamentals do not justify artificial values of the currency, is it not a waste of U.S. taxpayer money to continue such folly? By which economic principles and theories, supported by what economic data, do you justify these interventions?





 

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