Lagarde Should Buck IMF Tradition and Get Tough: Echoes
Men are from Mars, but the IMF is from Venus. Or should be. That’s the message the International Monetary Fund’s new managing director, Christine Lagarde, delivered when she was campaigning for the job.
"If I were elected as managing director," Lagarde said, "I would stand on my feet as a woman, not necessarily with a pair of trousers, and certainly with a level of testosterone that would be lower than many in the room today."
Lagarde was referring not only to her troubled predecessor, Dominique Strauss-Kahn, but also to the tendency of the world’s financial leaders to quarrel. Lagarde holds comity to be crucial.
She's wrong on this count. The IMF is too much Venus, and too little Mars. It has been since it was founded 77 years ago this month at a conference in the White Mountains of New Hampshire.
July 1944 was a month when Mars ruled the globe. As emissaries from more than 40 nations settled into the Mount Washington resort at Bretton Woods, 15,000 Danes, armed only with guns, were defying Nazi tanks on the streets of Copenhagen.
The institutions created in New Hampshire that year -- the IMF, the World Bank and the postwar gold-exchange standard -- weren't just about creating an orderly global monetary system. They were also intended as a check against mankind's aggressive impulses. President Franklin D. Roosevelt wrote in to the conference that nations must “cooperate in peace as we have in war.”
Venus was the patron goddess of the conference. The attendees got the message: teambuilding first, details later. Money was there to serve peace, not the other way around.
That bias caused a fragility in the institutions they assembled. Some observers had expected free trade to be a big theme of the conference; they were disappointed. The countries agreed that a pure gold standard, under which depositors might withdraw gold at their banks whenever they desired, at the whiff of trouble, represented automatic fiscal discipline beneficial to growth. But those at Bretton Woods feared depositors might destabilize a country by suddenly withdrawing all the gold.
So planners opted for a regime under which only countries, not individuals, might demand gold at the deposit windows. In the short term, this decision protected weaker countries from the market. But it enabled governments to fib to themselves about their budgets or exchange problems -- which only delayed and intensified their eventual days of reckoning.
Emissaries also created an institution to lend money to countries in crisis. That was the IMF. The fund, John Maynard Keynes said, would give nations “a breathing spell” with short-term loans as well as write policy prescriptions.
One critic of cooperation-uber-alles was Henry Hazlitt, an editorialist from the New York Times. Bretton Woods had not yielded the kind of cooperation that freed individuals, such as a grand free-trade agreement, Hazlitt noted. Rather, the individual had been lost in the effort, and Bretton Woods was “primarily the cooperation of governments." Without the check of a true gold standard, he predicted, the policy of national governments or international authorities toward money would prove counterproductively arbitrary. Hazlitt thought that pursuing the goal of cooperation without simultaneously emphasizing free markets was giving too much tribute to Venus.
The conference ignored Hazlitt. Keynes, who favored both cooperation and inflation over deflation, proved to be the star. At a closing session, he argued that only cooperation between nations could prevent nightmares like World War II. Guests sang “For He’s a Jolly Good Fellow” to the Briton.
The half-century that followed seems to some the triumph of Keynes and Venus. The West, in love with itself and the IMF, stayed together. The IMF raced like a medic from crisis to crisis, doctoring nations in financial distress. Over the decades the West wore down that non-cooperator, the Soviet Union, and prevailed over it.
But Bretton Woods institutions also wrought damage. The very details that had been left until later in the name of comity at the conference now turned out to matter. In fact, their absence sowed weakness and discord.
For without a highly defined policy to follow, the IMF had license to prescribe whatever medicine it deemed necessary for a country in exchange for an emergency loan. Sometimes the regime the IMF demanded was too close to socialism for a country’s government to swallow. Sometimes the countries found the regime excessively friendly to free markets.
The fund's experts handed over their prescriptions for national governments in secret, leaving chagrined politicians to announce to the electorate the tax increases, devaluations or import bans the fund was requiring. In Asia and especially the Middle East, the IMF's habit of propping up of regimes in the name of stability antagonized citizens.
The European Monetary Union was created in the founding spirit of Bretton Woods. Bringing Greece into the euro was an example of putting comity first in the Bretton Woods style. European authorities overlooked that Athens was following another Bretton Woods tradition, that of massaging data.
This suggests that a contentious but honest international debate about the euro's future -- one that leads to clearer criteria for the IMF's future bailouts -- is far more important than emphasizing urgency and mounting a united front, as Lagarde has done. The IMF can't afford to keep putting rescues before reason.
Lagarde is more than capable of leading such a discussion. She's a strong debater, who cut deals and wrote rules as the head of the French finance ministry and in her early life as a lawyer. She should remember that a tough but durable agreement will forge stronger comity, in the long run, than a goal of comity for its own sake ever could.
(Amity Shlaes, a Bloomberg View columnist and a senior fellow in economy history at the Council on Foreign Relations, oversees the Echoes blog. The opinions expressed are her own.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the editor responsible for this story:
Timothy Lavin at email@example.com