In Chapter 2, we saw how the development of the global monetary system after World War I, the gold-exchange standard, largely mirrored the arrangement the British empire had with some of its colonies before the war. As the victors of the war, and the main financial heavyweights of the world economy, Great Britain and the U.S. used the 1922 Genoa Conference to institute the gold-exchange standard, a new global monetary system in which their client states had to rely on the dollar or the pound sterling.
In theory, if the U.S. and Great Britain had been on a strict gold standard, then the gold-exchange standard would have been no difeerent from the gold standard. But because thirty-two foreign central banks needed to leave their gold with the two major central banks in order to give it salability across the planet, these two countries had significant leeway in inflating their currencies beyond their gold reserves, efectively exporting their inflation abroad. This alleviated the pressure on their currencies, particularly the overvalued pound sterling. The Genoa Conference was the prototype for the monetary arrangements that prevailed between the leading economies with reserve currencies and the neocolonies.
Bank of France Governor Emile Moreau astutely described this arrangement as “veritable financial domination” and a separation of currencies into two classes:
England having been the first European country to reestablish a stable and secure money has used that advantage to establish a basis for putting Europe under a veritable financial domination. The Financial Committee [of the League of Nations] at Geneva has been the instrument of that policy. The method consists of forcing every country in monetary difficulty to subject itself to the Committee at Geneva, which the British control. The remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England, and the deposit of a part of the reserve of the central bank at the Bank of England, which serves both to support the pound and to fortify British influence. To guarantee against possible failure they are careful to secure the cooperation of the Federal Reserve Bank of New York. Moreover, they pass on to America the task of making some of the foreign loans if they seem too heavy, always retaining the political advantage of these operations. England is thus completely or partially entrenched in Austria, Hungary, Belgium, Norway, and Italy. She is in the process of entrenching herself in Greece and Portugal.… The currencies [of Europe] will be divided into two classes. Those of the first class, the dollar and the pound sterling, based on gold, and those of the second class based on the pound and dollar—with a part of their gold reserves being held by the Bank of England and the Federal Reserve Bank of New York. The latter moneys will have lost their independence.
The larger the liquidity pool of a currency, the smaller the domestic impact of any inflationary credit creation by the respective monetary authority. In an economy in which the total demand for monetary cash balances is $10 billion, the money supply increasing by $1 billion would cause a far bigger impact on prices and economic calculation than if the same increase had happened in an economy in which the total demand for monetary cash balances was $100 billion. The larger the pool of liquidity using the Bank of England and the Federal Reserve payment and clearance networks, the less U.S. and British inflation would be felt at home.
After Genoa, the U.S. and the British governments' prime imperative was to get as many central banks to hold as much of their currencies as possible. This was unprecedented money printing and inflationism on a global scale. As other governments, institutions, and private actors began settling trade in dollars and pounds, they needed larger quantities of these reserves. World politics has since been largely motivated by major governments' desire to get their inflationary currencies adopted as international reserves to allow them to engage in more politically expedient inflation.
National central banks were the nodes of the fiat network. The more nodes that could be set up worldwide, the more gold would pour into the British and American central banks. The more liquidity that existed on the network, the more inflation America and Britain could getaway with. The dynamic created by the gold-exchange standard might lead an observer to wonder whether British and American support for national liberation movements was not purely altruistic but rather a self-interested move to create more fiat nodes in nascent countries.
The new global monetary system was termed a system of monetary nationalism by Friedrich Hayek:
By Monetary Nationalism I mean the doctrine that a country's share in the world's supply of money should not be left to be determined by the same principles and the same mechanism as those which determine the relative amounts of money in its different regions or localities. A truly International Monetary System would be one where the whole world possessed a homogeneous currency such as obtains within separate countries and where its flow between regions was left to be determined by the results of the action of all individuals.
It was only with the growth of centralized national banking systems that all the inhabitants of a country came in this sense to be dependent on the same amount of more liquid assets held for them collectively as a national reserve.
For a time the ascendancy of the gold standard and the consequent belief that to maintain it was an important matter of prestige, and to be driven off it a national disgrace, put an effective restraint on this power. It gave the world the one long period—200 years or more—of relative stability during which modern industrialism could develop, albeit suffering from periodic crises. But as soon as it was widely understood some 50 years ago that the convertibility into gold was merely a method of controlling the amount of a currency, which was the real factor determining its value, governments became only too anxious to escape that discipline, and money became more than ever before the plaything of politics. Only a few of the great powers preserved for a time tolerable monetary stability, and they brought it also their colonial empires. But Eastern Europe and South America never knew a prolonged period of monetary stability.
What came to be known as the “developing world” consists of countries that had not yet adopted modern industrial technologies by the time an inflationary global monetary system began replacing a relatively sound one in 1914. This dysfunctional global monetary system continuously compromised these countries' development by enabling local and foreign governments to expropriate the wealth produced by their people.
By 1914, the only nations that had achieved a considerable degree of industrialization and capital accumulation were those of Western Europe, as well as the U.S. and Canada. At the time, modern industrialization was beginning to spread into Eastern Europe, the north and south of Africa, and many parts of Asia and South America. The more a country engaged in trade with industrialized economies, the more it imported the revolutionary technologies of the nineteenth century, chief among them the steam and internal combustion engines. The more technologically advanced a developing nation became, the more it accumulated capital, the more productive its workforce became, and the higher its living standards were. World War I stunted this progress, and the global monetary system that emerged after (and consequently the Great Depression) undermined global economic development even further.
As central banks inflated away the value of their currencies, international trade and finance became the release valve through which national inflationary economic distortions would correct themselves. A devaluing currency encouraged citizens to unload their local currency for foreign currencies or for foreign goods. This in turn further reduced demand forthe local currency and further decreased its value. This dynamic undermined the ability of developing nation governments to finance themselves through inflation, necessitating even more inflation and taxation to finance spending. Governments could have tried reversing that trend by reducing inflation, but the statist economists of the time sought to flx it by limiting the free movement of capital and goods. Trade barriers proliferated during the Great Depression, resulting in heightened international hostilities around trade.
The imposition of trade barriers in turn resulted in a further deterioration of economic conditions in the countries imposing them, even as their own citizens suffered from these very policies. The governments imposing such barriers, and the economists advocating them, would of course never admit that inflation, increasing centralization, and protectionist policies caused the progressively worsening depression. Instead, political leaders blamed other countries and local ethnic minorities. Years of scapegoating and growing hostility toward foreigners and minorities came to a head in 1939. The world's totalitarian fiat regimes began to turn on each other and on their ethnic minorities. Hayek had identified this threat to global peace in his “Monetary Nationalism and International Stability” lectures in 1937.
Alas, his warnings fell on deaf ears. The monetary standard was no longer a homogeneous money freely moving around the world wherever its owners found the best use for it. Instead, state-controlled money became a tool for increasingly omnipotent governments to finance war and totalitarianism.
Government-approved history and economics textbooks are completely silent on the monetary origins of the Great Depression and World War II. The promoters of increased government centralization and control claimed this new alchemy allowed governments to build a bright future. In reality, government-controlled money destroyed the world's economies by the late 1930s, crippled global free trade, created omnipotent, totalitarian governments with many reasons to be hostile to one another, and increasingly turned previously prosperous and civilized populations into government dependents and cannon fodder.
Government-controlled money allowed economies to be centrally planned in a way that was probably last seen in the Western world during the last gasps of the Roman Empire. To fight the growing unemployment and inflation caused by their inflationist monetary policies, politicians imposed price controls, minimum wage laws, work-sharing laws, and various others brands of destructive statist economic policies. As the economy shrank further and people's lives suffered, they became more and more dependent on increasingly centralized governments that could conjure money from thin air. Such dependency upon the state served only to reinforce governments' power.
By controlling the money, governments could also extend their reach into the education system. Universities had been places where citizens could learn and train, but in a matter of decades, they were transformed into propaganda machines, bent on the indoctrination of young people. Toeing the statist line became more important than free inquiry, rational debate, and the exchange of ideas. Tenured statists have shaped the understanding of economics and politics for generations of leaders and economists in developing countries. This intellectual and historical context is essential to understanding the economic catastrophes of the developing world in the latter half of the twentieth century. The number and influence of third-world leaders who were educated in British and American universities from the 1930s onward is staggering.89 I have seen no systematic study or data on the topic, but anyone familiar with the economic history of developing countries, or with the rhetoric of any development agency or ministry in a developing country, will see this influence in the distinct stench of Marxist and Keynesian notions of central planning. The entire framing of the notion of economic development is driven ultimately by a highly socialist view of how an economy works. The alert reader will not miss the economic development literature's fascination with macroeconomic aggregates and the way in which the government and the development sector are viewed as the omniscient, omnipotent forces of justice working to achieve the holy goals of development.
As outlined in The Bitcoin Standard, the International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO) were the brainchildren of the communist activist Harry Dexter White. This fact does not feature heavily in these organizations' voluminous and slick marketing material, but it nonetheless makes a lot of sense when one examines what these institutions actually do. The function of central banking itself is the essence of communist and socialist thought. Back in 1844 when Karl Marx and Friedrich Engels penned their Communist Manifesto, a central bank was one of the ten main pillars of the communist program they sought to implement. The IMF's main role is as a global lender of last resort. Since individual governments can suffer from foreign reserve payment problems, and since this monetary system runs on an easy currency, it was almost inevitable that expansionary monetary policy would be used to keep this system functioning. Thanks to its flnancing from the U.S. Federal Reserve, the IMF is able to issue large amounts of U.S. dollar-denominated credit to central banks around the world and has performed this function continuously over the past seven decades. Its existence is essential for the U.S. dollar to maintain its role as the global reserve currency. Without a global lender of last resort, every third-world country would have run out of its dollar reserves, and their central banks would have gone bankrupt. Banks and individuals in these countries would then use other currencies, or gold, to engage in global trade. It is no coincidence that the IMF strictly forbids its members from tying their currencies to gold, because this would prevent the U.S. dollar from continuing to function as the global reserve currency, even though a global gold standard would achieve all of the IMF's stated goals of international stability, as it did in the nineteenth century.
The problem with the IMF serving as the lender of last resort is the same that exists with a monopoly central bank. Its ability to bail out individual banks is a huge moral hazard that incentivizes banks to take on more risk, as they can rely on being bailed out. As the IMF looks to maintain the role of the dollar as the global reserve currency, it encourages all governments to use it and lends to them when they run out of it. Under the gold standard, countries that ran out of gold and went bankrupt were effectively taken over by their creditors. Kings would abdicate if they were bankrupted, and entire lands would be taken over by other countries. There were very serious consequences to government defaults and bankruptcies, which taught fiscal and monetary responsibility. But with the IMF able to bail out countries, the consequences for government incompetence and mismanagement are far less serious, as political leaders can always borrow from the IMF to foist the cost of insolvency onto future citizens.
The initial purpose of the International Bank for Reconstruction and Development, later to be renamed the World Bank, was to finance the reconstruction of Europe and the development of the world's poorest countries. Inspired by the terrible Keynesian and socialist ideas infesting British and American universities, the Americans decided that what was needed for the world's poor countries to develop was funding for massive government development efforts. From the perspective of the average U.S. or U.K. bureaucrat and academic at the time, the Soviet Union was the exemplar of economic success. The Soviet brand of central planning would provide, they believed, substantial economic growth and development for poor countries. In order for the U.S. to prevent countries from allying with the Soviets, they reasoned, all centrally planned global development efforts should be American-led.
The World Bank was also financed with a line of credit from the U.S. Federal Reserve, and it was the main driver of development planning in the third world from the 1950s on. The bank's main business model is to issue development loans to poor countries and help them plan their development. The 'scholarship' of development economics in the past seventy years can best be understood as elaborate marketing material for these loans. When World Bank planning inevitably fails and the debts cannot be repaid, the IMF comes in to shake down the deadbeat countries, pillage their resources, and take control of political institutions. It is a symbiotic relationship between the two parasitic organizations that generates a lot of work, income, and travel for the misery industry's workers—at the expense of the poor countries that have to pay for it all in loans.
The General Agreement on Trade and Tariffs (GATT), later to evolve into the WTO, has been the forum in which governments seek to reach agreements on trade. Afler the value of currencies became arbitrary and unconnected to a neutral free-market commodity, and as capital controls limited the free movement of capital, trade became a significant pressure release valve for monetary distortions. The GATT/WTO was built on the insane premise that a central global authority could somehow regulate the (ow of trade to prevent imbalances, as if the trade (ows were the cause of the imbalances rather than a symptom of monetary manipulation. The GATT/ WTO severely undermined the free movement of goods and services in the twentieth century, even though technological advancements allowed for faster and cheaper movement of goods than ever before. One of the most important functions of the WTO today is to sti(e the free movement of technological innovations worldwide by forcing countries to accept U.S. patent and copyright law.)0 Forcing countries to apply U.S. intellectual property laws domestically makes it much harder for developing country industries to build on new technologies and slows the speed and spread of innovation. But it does benefit the large corporations that have enormous influence over the WTO.
In addition to these three main institutions, commonly referred to as the international financial institutions (IFIs), there has been a large growth in international and national development organizations globally. These organizations are involved with all aspects of life in the average third-world country and have grown into monopoly central planners with control over many sectors of developing economies.
The final component of the misery industry is its academic wing. This wing comprises thousands of academics who study development and plan, execute, and assess development projects and strategies worldwide. “Development economics” makes no sense whatsoever as an independent discipline of economics since the realities of economics are equally true in developing and developed countries. Nothing is gained from isolating developing countries' economies and studying them as if they were different. No intellectual reason exists for this separation, nor is there market demand for this ridiculous field of study. The demand is purely manufactured by the misery industry and its many intellectual tentacles.
Readers who are unfamiliar with development economics literature should consider themselves lucky. In seven decades, thousands of scholars have produced endless heaps of reports, papers, studies, and books on development economics, all of which essentially conclude nothing. These academics' only real achievement is the creation of very rich case studies on central planning's myriad failures, in an endless tale of self-reinvention with ever more ridiculous feel-good buzzwords and corporate boilerplate that never questions one universally important tenet: development requires debt and financing, which require growing amounts of bureaucracy and more funding. No matter what the latest global menace is, operationally, the solution is to convert a Federal Reserve line of easy money into thirdworld debt to produce more jobs for misery industry bureaucrats and their foot soldiers.
The misery industry's fiat foundations make it so far removed from the free market that it operates in a complete vacuum of accountability and responsibility. As explained by William Easterly, these organizations have a fundamental and intractable principal agent problem. The supposed beneficiaries of their services are not the ones paying for them, so the providers will never be accountable to them. They are instead accountable to their donors and funders in the rich countries. As such, their actions are always driven to satisfy the demands and interests of their employees first, their donors second, and their beneficiaries last. The misery industry is full of stories of projects that sound great to the donors but are terrible for the recipients.
Since the donors do not benefit from the project, they will never have more than a passing interest in its outcomes, as opposed to the beneficiaries whose lives are dependent on it, despite not having the power to control the project. This asymmetry creates highly skewed incentives for the project's providers and ensures they do not face real accountability for their actions. The World Bank has for decades been the butt of many jokes because it alone is responsible for assessing the success of its own projects. Whereas in a free market, the consumer is the beneficiary who decides which companies to “finance,” and governments have at least a pretense of political accountability to democratic institutions, in the misery industry, the only kind of accountability is self-accountability.
The World Bank itself decides on which projects to undertake and how much to fund them. Afterward, bureaucrats drawing a salary from the bank conduct internal reviews and issue assessments. As you would expect from any bureaucracy, it is not really possible for any real critical self-assessment to emerge because it does not have to. The World Bank's funding is practically limitless. So long as the Federal Reserve's fiat credit is accessible, there is no market pressure to deliver goods and services. The Fed ensures that the World Bank can never go out of business regardless of whether its projects fail miserably. Without real consequences, there cannot be real accountability.
The misery industry is also notorious for retaining and rewarding the most incompetent of its staff members, an ideal and lucrative gig for anyone seeking to avoid accountability and responsibility. In free markets, any job entails significant responsibilities and accountability, but working in development organizations comes with even less accountability than working in government. At least in the so-called public sector, the beneficiaries, or citizens, are also the ones funding the projects (albeit involuntarily), and the government at least pretends to want to serve them. In the misery industry, the payers are not the beneficiaries, and they rely on the misery industry for the assessment of its own work.
Projects in the misery industry pay lip service to serving the population of poor countries, but their underlying motivations can be best summed up in one phrase: self-preservation. Like any bureaucracy isolated from the healthy feedback of the free market, these organizations do not exist to serve their customers but rather their insiders. Failed policies can continue for decades as long as they are financed. The IFI's access to a line of credit from the Federal Reserve grants them immunity from market failure. After seven decades, their budgets and staff continue to grow each year, irrespective of performance, and this growth shows no sign of abating.
The more one reads about it, the more one realizes how catastrophic it has been to hand this class of powerful yet unaccountable bureaucrats an endless line of fiat credit and unleash them on the world's poor. This arrangement allows unelected foreigners with nothing at stake to control and centrally plan entire nations' economies. These organizations can easily override domestic property rights and institutions under the guise of development. The World Bank can decide on a development project and have the local government work on implementing it regardless of the domestic impact. Indigenous populations are removed from their lands, private businesses are closed to protect monopoly rights, taxes are raised, and property is confiscated to make the projects happen for the sake of development. Tax-free deals are provided to international corporations under the auspices of the IFIs, while local producers pay ever-higher taxes and suffer from inflation to accommodate their governments' fiscal incontinence.
The utilitarian and totalitarian impulses of the socialist and Keynesian textbooks taught to these development planners come to the fore in their dealing with poor populations. These textbooks teach that welfare and human well-being can be judged through statistical aggregates which central planners need to manage and through measuring the impact of policies on society. The fact that economics is fundamentally subjective, as Austrian economists teach, and that welfare metrics cannot be meaningfully measured any more than feelings can be measured, is not something that has occurred to the many economists of the misery industry.
The misery industry never lets methodology or logic get in the way of a good third-world loan, and so they have devised astonishingly ridiculous, and potentially criminal, ways of measuring the impact of their policies and loans on local welfare. Since the goals of development pertain to things like health, education, and general well-being, development planners will put prices on all these things and attempt to make economic plans to maximize national welfare, which would be a measure that includes gross domestic product (GDP), years of schooling, life expectancy, and similar development metrics. This might sound innocuous at first, but its application is the best argument against the mathematization fetish in economics.
By putting a price on human lives, projects that destroy them can go ahead as long as the financial return outweighs the “cost” of these destroyed lives. As all aspects of human life are priced on the central planners' spreadsheets, everything and everyone is within the purchasing power of bureaucrats with a limitless credit line; entire countries become computer games for them. And since the numerical values placed on human lives, health, and education are a product of the fictions of these economists, they can always be manipulated in whichever way makes the project sound good. World Bank projections always look great on paper but almost always fail in their implementation. These failures are an inevitable outcome of planning based on fictitious numbers with no measurement units.
Take, for example, an industrial plant, the construction of which would require displacing an entire village of indigenous people, producing enough pollution to ruin the lives of thousands who live on a river downstream. Such a plant would look great according to the World Bank's projections because they will find that the extra benefits it would produce, in the form of tax revenue for the government and jobs created, would be more valuable than the lives the factory would ruin. This is simply the inevitable outcome of using the collectivist mathematics fetish of twentieth-century economists as the guiding light for planning people's lives. In a free market where individuals could make their own choices, no industrial plant would be able to displace locals without compensating them enough to willingly sell their property. But with World Bank loans, greedy governments can run roughshod over their people in the pursuit of self-serving ends.
Proper economic analysis is methodologically individualistic because it recognizes there can be no rational or moral basis for centrally calculated collective decisions. Welfare is not comparable between individuals, and it cannot be added or subtracted across people. No collectivist central planner calculations have any coherent basis in fact. The economists who engage in them are no more legitimate than actors being paid by IFIs to appear as economists in front of third-world governments to entice them to draw on their infinite zero opportunity cost credit line.
The main ideas driving international development in the early years were Walt Rostow's theories on the linear stages of economic growth and modernization, the Harrod-Domar model on capital accumulation driving economic growth, and Rosenstein-Rodan's “big push” model. The Harrod-Domar model assumes and concludes (all of these models basically assume the conclusions they want) that growth is a direct function of the savings rate. The growth rate in an economy in this model is simply the savings rate multiplied by a made-up constant. The model argues that the reason developing countries do not have the desired economic growth is that they do not have enough savings. To have higher growth, they need more savings. But since developing countries cannot save because they are poor, the model assures us, it is incumbent upon their governments to borrow to flll “the savings gap.” In other words, debt must be acquired to ameliorate the savings deficiency and thus achieve the desired growth. According to Rosenstein-Rodan, the government's central planners would spend capital on a big push to build out critical infrastructure and transform the economy from agrarian, rural, and isolated to educated, modern, urban, and industrial.
While any sane economist would agree that capital accumulation is key to growth, it does not follow that governments borrowing capital would have the same effect as if they were to accumulate it. Borrowing is the exact opposite of saving, and investments financed by loans will incur extra interest costs, whereas investments financed with capital will incur no interest. But more importantly, when governments borrow to spend, they are centrally planning their economies and thereby gaining power over the productive members of their society who have to foot the bill. Diabolically, billions of people worldwide have been thrown into generations of debt slavery in order to finance their governments' megalomaniac economic plans.
One of the key insights from Austrian economics concerns the role of government in allocating capital. If the government owns capital goods, a market is not possible in these goods, so there will be no prices to determine the most productive uses of capital, and government will fail to allocate them in a way that meets the needs of the beneficiaries. As governments are handed large amounts of funds to spend, they are able to engage in all kinds of politically popular projects with little regard for the opportunity cost, alternatives, or long-term consequences. Whereas in a free market, capital is allocated by people who have generated it and is lost by those who do not use it productively, in a government-planned economy, politicians who did not earn the money are able to do with it as they please without facing the consequences of their folly. Government can continue to tax and borrow to finance itself as it makes bad economic decisions, while private actors are not afforded such a luxury.
Capital allocation by governments cannot be compared to capital allocation by individuals. It makes little sense to think of the money that governments spend as capital investment, as it really resembles consumption more than investment. Governments and politicians spend money more on buying votes and loyalty than on investing in the future. The profligacy of government development projects and the conspicuous consumption by everyone involved only highlights this point.
Having been miseducated at Keynesian and socialist fiat universities, development economists blamed the failures of their plan on everything and everyone except international lending and the World Bank. A new round of models, buzzwords, and development strategies were announced, and lending and central planning resumed under their banner. This ritual would continue for seven decades of insanity and has proven highly rewarding for those who work in the misery industry yet highly destructive to the powerless victims of their relentless help. The misery industry constantly judges its failures and concludes the problems lie in some of the meaningless cosmetic terms they use to impress each other (“more participatory planning is needed,” “stakeholder engagement needs to be improved,” etc.). The solution is inevitably bigger budgets, more debt, and more central planning.
After the failure of the initial generation of development planners, development economists moved on to more convoluted models that viewed development as a more complex transformation of society. With lots of meaningless mathematical models, the misery industry started moving toward a more hands-on approach to central planning, getting into smaller projects, managing critical infrastructure, and targeting poverty alleviation directly. The results were not much better than before. By the 1970s, the development failures piled high, and a lot of soul-searching within the misery industry would lead to more government control and more centralized economic planning. As the “dependency school” approach became more popular, government central planning became far more pervasive. The combination of global easy money, following the U.S. government's decision to suspend gold redeemability, and governments and international bureaucracies staffed with Keynesians and Marxists proved disastrous.
Global banks were flooded with liquidity they wanted to lend, and governments had an insatiable demand for more money to run their catastrophic schemes. The misery industry was more than happy to be the matchmaker. More and more developing countries became saddled with massive debt in the 1970s as interest rates continued to drop.
Toward the end of the 1970s, the inflationary pressures unleashed by the Keynesians at the U.S. Federal Reserve had escalated wildly, leading to increasingly high prices and speculative bubbles. Wealth holders worldwide started to dump their highly inflationary government monies in favor of gold. The price of gold had risen from $38 an ounce in 1971 to $800 in 1980, and there were serious concerns in Washington over the dollar's survival.
As things got perilous for the dollar, U.S. President Jimmy Carter, sagging in popularity thanks to a broad economic malaise, nominated economist Paul Volcker to serve as the twelfth chairman of the Board of Governors of the Federal Reserve System in July of 1979. Volcker immediately set to work saving the dollar from destruction by reining in monetary policy and raising interest rates, which had enormous repercussions globally. Suddenly, every government with an unsustainable but manageable debt burden under low interest rates was now unable to make their increasingly larger interest rate payments. The 1980s would be the decade of third-world debt crises.
As a third-world country's central bank's foreign reserves become insufficient to cover its government's debt obligations, the problem of the balance of payment functions described above turns the government's own insolvency into a national catastrophe. Under the classical gold standard, life could continue relatively normally for citizens of a country whose government went bankrupt. The king or government would be considered personally liable for the debts, and they would have to sell lands or property or abdicate their rule to their creditors. But under monetary nationalism, the first thing sovereigns can do when facing repayment problems is to lean on the central bank to use its monopoly control over virtually all of a country's capital to finance the government. This can take many forms, of course, all of which have been tried by your favorite kleptocratic regimes of the twentieth century. The simplest is for the government to issue more local debt and have the central bank buy it, which in turn increases the local currency supply, reducing its value. Inflation is just the first and most inevitable outcome of the debt burden and central planning foisted on poor countries. Far more terrible consequences follow as governments attempt to fight this inflation.
Should the government try to prevent the exchange rate from declining by setting a fixed rate, its reserves would collapse as people redeem their local currency for global reserve currencies. As it seeks to stem the bleeding of reserves, it will start to compromise the other functions of the central bank, with devastating consequences. It could begin to restrict trade to prevent people from sending their foreign exchange abroad. It could forcefully prevent capital from exiting the country. It could confiscate bank accounts. Each of these interventions would result in the exact opposite of their intended consequences. As capital controls proliferate, the government may maintain the foreign reserves already in its possession, but it would scare away any new foreign capital from entering the country for a very long time. This would snowball into an even bigger problem for the balance of payment accounts. Trade protectionism can prevent the loss of foreign reserves in the short run, but its second and third-order effects are highly destructive to the economy. Protectionist policies lead to a large increase in the cost of crucial goods and put more downward pressure on the currency, driving people to hold more foreign reserve currencies instead. Such policies also lead to an increase in the costs of imported inputs for domestic industries, which are usually fairly significant for developing countries reliant on developed countries for their most advanced capital goods. As the cost of importing capital goods increases for local producers, the competitiveness of local industries in global markets is severely compromised and exports decline, which in turn hurts the balance of payments further. While confiscating bank accounts can provide a quick short-term fix, it destroys the trust people have in their banking system and makes them far less likely to save for the future, reducing the amount of capital accumulating in banks.
As governments fell into debt servicing problems, their entire economic systems collapsed because their central banks allowed them to pillage productive capital to keep financing themselves and to keep paying off the misery industry loan sharks. As the misery industry's raison d'être is to lend and create more development programs, it also had a vested interest in maintaining the status quo, so it took steps to help governments avoid defaulting on their debts. Propping up states at risk of insolvency by having them borrow ever-larger amounts was the only way the circus of “economic development financing” could continue.
The IMF shined in its role as global lender of last resort in the 1980s, with its famous stabilization policies and structural adjustment programs. As countries were close to default, the IMF would provide them emergency financing conditional on their compliance with its package of stabilization policies and policy reforms. These policies were marketed around the world as free-market reforms, but in reality, they were largely a continuation of debt-financed government central planning.
The IMF's privatization programs replaced government monopolies with private monopolies, usually owned by the same people. As part of the debt relief deals signed with the misery industry, governments were asked to sell off some of their most prized assets. This included government enterprises, but also natural resources and entire swaths of land. The IMF would usually auction these to multinational corporations and negotiate with governments for them to be exempt from local taxes and laws. After decades of saturating the world with easy credit, the IFIs spent the 1980s acting as repo men. They went through the wreckage of third-world countries devastated by their policies and sold whatever was valuable to multinational corporations, giving them protection from the law in the scrap heaps in which they operated. This reverse Robin Hood redistribution was the inevitable consequence of the dynamics created when these organizations were endowed with easy money.
As part of these “free-market reforms,” the IMF would recommend imposing more taxes to close the budget gaps, using “free markets” as a cover to pass off its global fiat mining enterprise. The role of the IFIs as enablers for multinational corporations is something that has been repeated often by its leftist critics, such as John Perkins in his Confessions of An Economic Hitman. While there is some kernel of truth to Perkins's sensationalist stories, there is of course much that is missing. Having worked for these organizations for decades, Perkinsfls critique is typical of the lefty fiat insiders who criticize these institutions while living off of their paychecks, concluding that the problem is that they are free-market institutions and the solution is more central planning. In my estimation, approximately 90% of the people who work for international financial institutions can be classified as “leftist critics” of these institutions. American actor Joseph Stiglitz has made a lucrative career from these organizations by playing the role of an economist who criticizes them, demanding they shift toward more central planning and debt financing, even as he collects paychecks from them.
The work of Perkins and many others clearly exposes how much large multinational corporations benefit from the special arrangements that the IFIs negotiate for them with developing countries. However, that cannot be understood as the root problem but rather as a symptom of it. The enormous power of a credit line from the U.S. Federal Reserve that gives these organizations power over developing countries also makes them ripe for capture by multinational companies looking to do business in the developing world.
Fiat economists lash out at multinational corporations as if Nike and McDonald's are the most serious problems facing the third world, completely oblivious to the far more mendacious horror unleashed by the fiat debt that pays their salaries. This superficial ritual prevents them from coming to terms with harder questions: Why is there a global lender of last resort in the first place? Why do all the world's governments have to get into debt? Why should the IFIs get to plan economic development when the history of central planning is the history of comprehensive failure? Contrary to Perkins's vision, the problem is not that the IFIs allow free trade or free capital movement. The problem is that they control and centrally plan trade and investment and that their loans are impossible to repay. These problems do not start when the country defaults and needs a bailout; they start the moment that the first misery industry plutocrat sets foot in a country and begins to centrally plan its economy.
What happened in the 1970s and 1980s with third-world debt is no different from standard business cycles as explained by Austrian business cycle theory: the manipulation of interest rates downward causes an unsustainable increase in credit, which can only then be sustained with even lower interest rates and will implode as soon as these artificial rates normalize. This phenomenon was observed in stocks in the 1920s, dot-coms in the 1990s, and housing in the 2000s.
To get an idea of how utterly destructive the misery industry is, one need only pick up a development economics textbook and read the laughable explanations of this third-world debt crisis. It is astonishing to see the mental gymnastics required in order to pretend that the problem has nothing to do with the monetary policy that bankrolls the misery industry, or with flooding the third world with debt, or with their centrally planned economies. In the misery industry, the reason developing countries took on a lot of debt is that Arab countries raised oil prices in the aftermath of the 1973 Arab-Israeli War, which led to them having excess capital stored at banks, which banks then had to lend out. The inflationary monetary policy of lowered interest rates is completely ignored. To the extent that the U.S. Federal Reserve is ever blamed for this, it is only blamed for raising interest rates in 1980, not for the decade of low interest rates that had ensnared these countries in debt. The masochistic reader is invited to read chapter 13 of Michael P. Todaro and Stephen C. Smith's Economic Development and see for themselves a fine sample of these rationalizations.
The misery industry grew enormously while destroying the economies of the third world and bringing them to bankruptcy, and it also thrived while “rescuing” them from their debt crises. The staff and budgets of these organizations have continued to rise, before and after debt crises, irrespective of any success or failure metrics. IFI internal reports will forever bemoan their failures to achieve their macro goals and the individual failure of their projects. The only way to understand their continued survival is to realize that the feel-good buzzwords of their stated objectives (development, growth, sustainability, children's education, disease elimination, etc.) are not their actual objectives. Their survival can only be understood as the result of their success in meeting their real objectives: (1) providing lucrative careers for the insiders in these organizations, (2) maintaining the dollar's role as the global reserve currency, and (3) allowing the U.S. government an unprecedented degree of control over the economies of the world. On all three counts, the IFIs have succeeded remarkably. Any goal these organizations might have outside these three is rhetorical.
The impact of the misery industry has been to pillage the citizens of the worldfls poorest countries to the benefit of their governments and the U.S. government that issues the reserve currency they use. By ensuring the whole world stays on the U.S. dollar standard, the IMF guarantees the U.S. can continue to operate its inflationary monetary policy and export its inflation globally. Only when one understands the grand larceny at the heart of the global monetary system can one understand the plight of developing countries. Fiat economists are completely silent on this since their paycheck and third-world raj status are dependent on them not understanding it.
Domestically, the main impacts of the misery industry have been to allow governments to take on larger amounts of debt and to disrupt the flow of financial and human capital. Instead of allowing entrepreneurs and individuals to reap the rewards of their productive work and have the successful among them in charge of more capital allocation decisions, thus shaping the decisions of other producers in meeting their demands, the average third-world government confiscates the wealth of its productive citizens and puts capital in the hands of clueless, unaccountable misery industry central planners and their subordinates in local governments.
In the absence of a free market (thanks to the misery industry's central planning), the misery industry itself ends up being the most lucrative employer in developing countries. Instead of the brightest talents of developing countries seeking to work in a productive capacity and serve their fellow citizens, they are attracted to jobs in the misery industry and end up shuffling papers, writing reports, and conducting the studies nobody reads but that are necessary to keep the funding flowing.
On top of destroying the market economies of poor countries and turning them into centrally planned failures, the large amounts of debt enable them to persist longer in failed policies, which conveniently gives the donor governments a great excuse to control them politically. The net result is that the third world is not just centrally planned; it is also accountable to foreigners instead of locals. Without the misery industry to bail out every kleptocrat in the third world, there would not be constant inflation and recession. On the contrary, it would only take one of these crises to completely destroy any government that engaged in it, thus allowing for a new start. Had kleptocrats not constantly had recourse to the IFI's endless credit lines, they would quickly bankrupt themselves until they were replaced by governments that behaved responsibly and only spent less than they taxed. A single hyperinflationary episode that destroys a government and replaces it with a monetarily disciplined one is a far better outcome than the eternal purgatory of constantly high inflation, fiscal crises, capital controls, protectionism, and central planning that the IMF promotes.
If you live in a poor country, you are witnessing the collapse of your moneyfls value through your governmentfls own inflation and the inflation of the U.S. dollar backing it. You are suffering from monetary central planning on a local and global level. You are witnessing the distortion of your local markets through the intervention of foreign central planners. The brightest minds in your country will be tempted to enter into careers in the misery industry rather than produce something of value. The argument of this book is not that the misery industry is responsible for making poor countries poor. Rather, in light of all the ways in which the misery industry disrupts and destroys the economic and political institutions of a poor country, it is very hard to argue that it has not hampered developing countries from developing, growing, and eliminating poverty. In sum, the sprawling bureaucracy that is the misery industry has achieved precisely the opposite of its stated goal.
Within the development industry, there is an almost mystical air to the question of how development can happen. The time of simple answers is well past us at this point, and the gibberish reports produced by today's international organizations offer nothing concrete in their meaning-free but grammatically and politically correct platitudes. These organizations cannot in any meaningful way claim to have succeeded in their original missions. Nevertheless, the world has witnessed significant improvements in standards of living, along with the steady elimination of poverty, absolute poverty, illiteracy, and many diseases.
The idea that these organizations are in any way to thank for this progress is a fiction that not even their own economists entertain too seriously. An examination of the history of economic development over the past seven decades shows very clearly how there is no mystery to it and that development conforms to the fundamental tenets of economics. All over the world, and not just in developing countries, societies that have secure property rights, free markets, and relatively open international trade have prospered and eliminated poverty the most effectively. As nineteenth-century industrial technology has spread to the rest of the world in the twentieth century, despite government restrictions and controls, it has brought the living standard improvements that it always brings. As modern telecommunications technology has also spread worldwide, it has helped people integrate into markets, learn skills, and make massive productivity gains.
The most important stories of growth and transformation have been in countries that have escaped socialist regimes and transitioned to more market-friendly political institutions. China is the most important example. In the 1970s, China had little private property and an almost completely centrally planned economy. After the death of Mao Zedong, the founding father of the Chinese Communist Party, the country shifted gradually toward a market economy, and living standards improved drastically. Extreme poverty has been almost entirely eliminated in just four decades. Indiafls move away from the rule of British-educated Fabian socialists started in the 1980s, and with it has come a huge change in the living standards of many of the world's poorest. Neither of these countries had significant amounts of World Bank or IMF lending. Nor did they have anywhere near as many projects driving their development as the African and Latin American countries still languishing in poverty today.
Within Africa and Latin America, the only two examples of undeveloped countries that have successfully maintained economic growth for any appreciable period are Botswana and Chile, both of which are the freest market economies in their continents. Regimes that borrowed heavily and centrally planned their economies invariably ended up with economic disaster and hyperinflation.
Among development economists who subsist on “jobs” from the misery industry, the success of India and China is viewed as a testament to the good plans followed by their governments, and proof that active government management of the economy is necessary and good. But anyone without a paycheck from the misery industry can clearly see that the real driver of growth is the massive reduction of government intervention in their economies. It is also clear that further limiting the state and the misery industry will result in even faster growth and development. The policies of Chinese and Indian bureaucrats and politicians are not driving their economies forward because they are good policies but because they are far less horrible than the much more statist policies of the past.
Achieving economic development is no mystery. It merely requires peace, sound money, and the freedom of citizens to work, own property, accumulate capital, and trade freely. The mystery is how to centrally plan economic development while taking on large amounts of loans from international financial institutions. This is why development economists are ultimately mystified. Their job is not to end poverty or bring about development, but to further their careers and sustain the fiat international monetary system that makes their jobs possible, which forestalls economic growth in numerous ways.
I hope you enjoyed this preview chapter from The Fiat Standard. If you would like to order the book, click here.