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Milton Friedman on What government is for

Second, the IMF has been a destabilizing factor in East Asia, not so much because of the conditions it imposed on clients, whether good or bad, as by sheltering private financial institutions from the consequences of unwise investments. It is not too much to say that, had there been no IMF, there would have been no East Asia crisis, though countries might have had internal crises—as with Japan, whose troubles cannot be blamed on the IMF.

Context. From an article on the East Asian financial crisis, which he traces to three elements: stagnation in Japan, the pegging of exchange rates to the U.S. dollar by national central banks, and the existence and policies of the International Monetary Fund. This is the second of the two points with which he concludes; the first is that a developing country should prefer either a truly fixed rate with no national central bank or a floating rate plus a national central bank to a pegged exchange rate.

How Asia Fell
Column, 1999, The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
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Milton Friedman, “How Asia Fell” (The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2, 1999). https://miltonfriedman.org/quotes/no-imf-no-east-asia-crisis-1998

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He also said

  1. Mexico, it is said, was bailed out by a $50 billion financial aid package from a consortium including the IMF, the United States, other countries, and other international agencies. The reality is that Mexico was not bailed out. Foreign entities—banks and other financial institutions—that had made dollar loans to Mexico that Mexico could not repay were bailed out. The internal recession that followed the bailout was deep and long and left the ordinary Mexican citizen with a sharply reduced income facing higher prices for goods and services. That remains true today.

    Context. From an article on the East Asian financial crisis, which he traces to three elements: stagnation in Japan, the pegging of exchange rates to the U.S. dollar by national central banks, and the existence and policies of the International Monetary Fund. Just before, he calls the Mexican crisis of 1995 the most recent example of a major currency crisis in a country with a central bank and pegged exchange rates.

    How Asia Fell
    Column, 1999, The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
    Checked against the sourceRead the source
  2. Under a clean floating rate, there cannot be a foreign exchange crisis. There may be internal crises, as in Japan, but they would not be accompanied by a foreign exchange crisis. The reason is simple: Changes in exchange rates absorb the pressures that in a pegged regime lead to crises. The foreign exchange crisis that affected Korea, Thailand, Malaysia, and Indonesia did not spill over to New Zealand or Australia because those countries had floating exchange rates.

    Context. From an article on the East Asian financial crisis, which he traces to three elements: stagnation in Japan, the pegging of exchange rates to the U.S. dollar by national central banks, and the existence and policies of the International Monetary Fund. Earlier, he defines clean floating as a regime in which the central bank does not intervene in the market to affect the exchange rate.

    How Asia Fell
    Column, 1999, The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
    Checked against the sourceRead the source
  3. The IMF was established at Bretton Woods in 1944 to serve one purpose only: to supervise the operation of the system of fixed exchange rates established at Bretton Woods. That system ended on August 15, 1971, when President Nixon, as part of a package of economic changes including wage and price ceilings, closed the gold window; that is, he ended the commitment that the United States had undertaken at Bretton Woods to buy and sell gold at $35 an ounce. With the official death of the Bretton Woods system in 1973, the IMF should have been abolished. But few things are so permanent as government agencies, including international agencies. The IMF, sitting on a pile of funds, sought and found a new function: serving as an economic consulting agency to countries in trouble. It found plenty of clients, even though its advice was not always good.

    Context. From an article on the East Asian financial crisis, which he traces to three elements: stagnation in Japan, the pegging of exchange rates to the U.S. dollar by national central banks, and the existence and policies of the International Monetary Fund.

    How Asia Fell
    Column, 1999, The Times (London), October 12, 1998, as “Clear Lessons to Be Learnt from the East Asian Episode”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
    Checked against the sourceRead the source

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