IMF/World Bank

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    Hey Professor Herbener,

    I just finished re-reading Hazlitt’s book on Bretton Woods and have a few quick questions for you regarding the IMF/World Bank. Normally, I only come up with 1-2 questions after reading, but I came up with more from this book. Please take your time responding, they’re not important at all!

    1.) What exactly are special drawing rights (SDR)s? After reading Hazlitt’s books and a few other articles, I’m still not exactly sure. Is it an international paper currency that is supposedly equivalent in value to gold and US dollars? Other articles have told me that the SDR isn’t exactly a currency. What was there purpose when the Bretton Woods institutions were created (I presume they were used to try and stop gold from flowing out of the US? By telling people that SDRs were just as good if not better than gold, some could have been more inclined to accept them?) What is their purpose today, in the post-gold standard years?

    2.) In Hazlitt’s Man v. the Welfare State, it said that under the IMF, a country can’t have itscurrency fluctuate by more than 1% of its parity rate. However, in, From Bretton Woods to World Inflation, Hazlitt said that a country can reduce the purchasing power of its currency by 10% and face no consequences. Which is correct?

    3.) Does the IMF give out loans, or is it exclusively used for currency exchange? Overall, does the US benefit from its inflated fixed exchange rate under the IMF, or does it hold the shorter end of the stick because dollars are constantly being exchanged for other inflated currencies? I know it helped them string the gold standard along, but I’m just wondering who it helps/hurts in the post-gold standard years.

    4.) In the book, Hazlitt did not talk fondly about deflation. He used Belgium as an example, and said it leads to unemployment and causes goods with fixed prices to stop being made. However, Ron Paul, Rothbard, and others have said that deflation isn’t so bad. What do you think?

    As always, thanks so much for your help!


    Under Bretton-Woods, when the Fed inflated the dollar a portion of the new money would be acquired and held by foreign central banks who could then inflated their currencies proportionately. The pegged exchange rates were a gauge by which officials could tell whether or not a country had over- or under-inflated relative to dollar inflation. The IMF served as the enforcement wing of the system imposing “austerity” programs on over-inflating countries and extending them loans to make sure that U.S. banks would be paid regardless of the financial distress their profligate ways generated.

    3. As long as foreign countries did not redeem dollars for gold in the U.S., the U.S. gained from the system. It could inflate without currency devaluation (since foreign currencies were inflated proportionately) or significant domestic price inflation (since dollars were held overseas). In the system, both the IMF and the World Bank extend loans. Officially, the IMF loans are short-term to help countries with balance-of-payments or exchange rate problems while the World Bank makes long-term loan for capital projects.

    4. There are different types of deflation. There is the forced monetary deflation of central banks, which harms economic efficiency. Then there is the market correction of a previous monetary inflation, which helps restore economic efficiency. Then there is so-called “growth deflation” in which prices decline as production of goods expands more than production of money. This, too, helps efficiency. Take a look at Joe Salerno’s article:

    2. It might be the case that the regulation changed from the writing of one book to the other.

    1. SDRs were introduced near the end of the Bretton-Woods system to increase the reserve positions of countries participating in the IMF. This was an effort to replace the gold being drained from the system through dollar redemption.

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