Legality of Mexican Bailout Questioned

July/​August 1995 • Policy Report

Is there a legitimate role for the International Monetary Fund(IMF) in the post‐​Bretton Woods era? That question and others regardingthe future of the international monetary system were the focus of the CatoInstitute’s 13th Annual Monetary Conference, “GlobalMonetary Order: What Next?” held in the F. A. HayekAuditorium, May 25.

The conference, directed by Cato vice president for academicaffairs James A. Dorn and cosponsored withthe Durell Institute, attracted over 150 participants and wascovered by the Wall Street Journal, The Economist, Dow Jones TV,and TV Azteca.

Allan H. Meltzer, one of the country’s leading monetaryeconomists, opened the conference by calling for an end to theIMF. He pointed to the moral hazard created by the fund’sfinancial aid to Mexico and to ex‐​communist countries and warnedof the inflationary threat posed by Special Drawing Rights. Insteadof reforming the fund, Meltzer would abolish it so that it could nolonger redistribute wealth at taxpayers’ expense.

Steve Hanke, a professor of economics at Johns HopkinsUniversity, called the IMF “an empty shell” — becausethe U.S. dollar is no longer convertible into gold, and thesystem of fixed exchange rates (which existed under the BrettonWoods agreement) has long since been replaced by a system of peggedexchange rates.

Judy Shelton, author of Money Meltdown, agreed that the IMFshould be abolished and argued that the Mexican bailoutdemonstrated that the fund has become “too politicized …to have credibility as an independent arbiter.”

In sharp contrast were the views of John Williamson of theInstitute for International Economics and Stanley Fischer, first deputymanaging director at the IMF. Williamson called for increasingthe fund’s resources, turning it into a “world bankruptcy court,“and having it determine “fundamental equilibrium exchangerates.” Fischer, in an impromptu speech at the invitation of panelmoderator and deputy editor of The Economist Clive Crook,defended the role of the IMF on the grounds that “unfortunately, youneed someone to be around to help keep the situationrunning.”

In his closing remarks, Dorn contrasted what he called the“market-socialist” approach to global monetary order,advocated by those who favor expanding the scope and authority ofthe IMF, with Hayek’s market‐ liberal approach. In the Hayekian approach,said Dorn, there is no pretense of knowledge, and individualshave a right to choose the monetary institutions they prefer.

The role of the IMF was not the only topic of discussion. Inanother panel, Anna J. Schwartz, from the National Bureau of EconomicResearch, questioned the legality of the Clinton administration’suse of the Exchange Stabilization Fund to bail out the holders ofMexican debt. In her view, “The $20 billion loan extended toMexico … is foreign aid, which otherwise requirescongressional appropriation.” The Mexican crisis wascharacterized by Roberto Salinas‐​Leon, director of the Center forFree Enterprise Research in Mexico, as a “crisis ofconfidence” brought about by the Mexican government’s discretionary approachto monetary and fiscal policy.

As an alternative to the discretionary approach, which hasbrought so much instability to the monetary system, Jerry L. Jordan,president and CEO of the Federal Reserve Bank of Cleveland,called for the spontaneous development of monetary standards.“The notion that the best regime or the best standard can beCHOSEN,” he said, “implies a great‐​man theory.… Analternative view is that the best regime and the best standard(if a standard is useful) should be allowed to evolve from free competitionin the market.”

Cato adjunct scholar Leland B. Yeager dismissed the notionthat exchange‐​rate volatility depends on the exchange‐​rate sys​tem​.In his opinion, volatility is a reflection of the very nature ofthe current national monetary regimes that are based on governmentfiat money and discretionary central banks. He suggested thatprivatization would be “a feasible route to sound money.”

The conference concluded with a discussion of monetary unionand free trade. Sir Alan Walters, former economic adviser to MargaretThatcher, said that monetary unions do not necessarily create internal freetrade at the cost of external trade. And, given the Mexicanbailout following on the heels of the North American Free TradeAgreement, he also concluded that free‐​trade areas do not imply monetary union.

Other speakers included Owen Humpage of the Federal ReserveBank of Cleveland; Alan Stockman of the University of Rochester;Kevin Dowd, professor of financial economics, Sheffield Hallam University;George Selgin, Cato adjunct scholar and University of Georgiaeconomist; Barry Eichengreen, professor of economics at theUniversity of California at Berkeley; Richard Timberlake, emeritusprofessor of economics, University of Georgia; and Cato chairman William A. Niskanen.