On the I.M.F.’s Nefarious Activities – Greece, Indonesia, and Who Knows What Else

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.

Over the weekend, the New York Times reported that WikiLeaks transcripts suggested that the International Monetary Fund (I.M.F.) had discussed the possibility of hatching nefarious plots against Greece. Immediately, Prime Minister Alexis Tsipras accused the I.M.F. of trying to “politically destabilize Europe.”

While this current flap is wrapped in conjecture and speculation at this point, past experience with the I.M.F.’s role in destabilizing Indonesia during the Asian Financial Crisis and promoting regime change are facts.

On August 14, 1997, shortly after the Thai baht collapsed on July 2, Indonesia floated the rupiah. This prompted Stanley Fischer, Deputy Managing Director of the I.M.F., to proclaim that “the management of the I.M.F. welcomes the timely decision of the Indonesian authorities. The floating of the Rupiah, in combination with Indonesia’s strong fundamentals, supported by prudent fiscal and monetary policies, will allow its economy to continue its impressive economic performance of the last several years.”

Contrary to the I.M.F.’s expectations, the rupiah did not float on a sea of tranquility. It plunged from 2,700 rupiahs per U.S. dollar at the time of the float to lows of nearly 16,000 rupiahs per U.S. dollar in 1998. Indonesia was caught up in the maelstrom of the Asian crisis.

By late January 1998, President Suharto realized that the I.M.F. medicine was not working and sought a second opinion. In February, I was invited to offer that opinion and began to operate as Suharto’s Special Counselor. Although I did not have any opinions on the Suharto government, I did have definite ones on the matter at hand. After many discussions with the President, I prescribed the following antidote: an orthodox currency board in which the rupiah would be fully convertible into the U.S. dollar at a fixed exchange rate and would be fully backed by U.S. dollar reserves. On the day that news hit the street, the rupiah soared by 28 percent against the U.S. dollar on both the spot and forward markets. These developments infuriated the U.S. government and the I.M.F..

Ruthless attacks on the currency board idea and the Special Counselor ensued. Suharto was told in no uncertain terms – by both the President of the United States, Bill Clinton, and the Managing Director of the I.M.F., Michel Camdessus – that he would have to drop the currency board idea or forego $43 billion in foreign assistance. He was also aware that his days as President would be numbered if the rupiah was not stabilized.

Economists jumped on the bandwagon, too. Every half-truth and non-truth imaginable was trotted out against the currency board idea. In my opinion, those oft-repeated canards were outweighed by the full support for an Indonesian currency board (which received very little press) by four Nobel Laureates in Economics: Gary Becker, Milton Friedman, Merton Miller, and Robert Mundell.

Why all the fuss over a currency board for Indonesia? Merton Miller understood the great game immediately. He wrote to me when, Mrs. Hanke and I were in residence at the Shangri-La Hotel in Jakarta, saying the Clinton administration’s objection to the currency board was “not that it wouldn’t work but that it would, and if it worked, they would be stuck with Suharto.” Much the same argument was articulated by Australia’s former Prime Minister Paul Keating: “The United States Treasury quite deliberately used the economic collapse as a means of bringing about the ouster of President Suharto.” Former U.S. Secretary of State Lawrence Eagleberger weighed in with a similar diagnosis: “We were fairly clever in that we supported the I.M.F. as it overthrew [Suharto]. Whether that was a wise way to proceed is another question. I’m not saying Mr. Suharto should have stayed, but I kind of wish he had left on terms other than because the I.M.F. pushed him out.” Even Michel Camdessus could not find fault with these assessments. On the occasion of his retirement, he proudly proclaimed: “We created the conditions that obliged President Suharto to leave his job.”

To depose Suharto, two deceptions were necessary. The first involved forging an I.M.F. public position of open hostility to currency boards. This deception was required to convince Suharto that he was acting heretically and that, if he continued, it would be costly. The I.M.F.’s hostility required a quick about-face: Less than a year before the Indonesian uproar, Bulgaria (where I was President Stoyanov’s advisor) had installed a currency board on July 1, 1997 with the enthusiastic endorsement of the I.M.F.; Bosnia and Herzegovina (where I advised the government on currency board implementation) followed suit under the mandate of the Dayton Peace Agreement and with I.M.F. support on August 11, 1997.

Shortly after Suharto departed, the I.M.F.’s currency board deception became transparent. On August 28, 1998, Michel Camdessus announced that the I.M.F. would give Russia the green light if it chose to adopt a currency board. This was followed on January 16, 1999 with a little-known meeting in Camdessus’ office at the I.M.F. headquarters in Washington, D.C.. The assembled group included I.M.F. top brass, Brazil’s Finance Minister Pedro Malan, and the central bank’s Director of Monetary Policy Francisco Lopes. It was at that meeting that Camdessus suggested that Brazil adopt a currency board.

The second deception involved the widely-circulated story that I had proposed to set the rupiah’s exchange rate at an overvalued level so that Suharto and his cronies could loot the central bank’s reserves. This take-the-money-and-run scenario was the linchpin of the Clinton administration’s campaign against Suharto. It was intended to “confirm” Suharto’s devious intentions and rally international political support against the currency board idea and for Suharto’s ouster.

The overvaluation story was enshrined by the Wall Street Journal on February 10, 1998. The Journal reported that Peter Gontha had summoned me to Jakarta and that I had prepared a working paper for the government recommending that the rupiah-U.S. dollar exchange rate be set at 5,500. This was news to me. I did not meet, nor know of, Peter Gontha, nor had I authored any reports about Indonesia or proposed an exchange rate for the rupiah.

I immediately attempted to have this fabrication corrected. It was a difficult, slow, and ultimately an unsatisfactory process. Although the Wall Street Journal reluctantly published a half-baked correction on February 14, the damage had been done.

The Journal’s original fabrication (or some variant of it) was repeated in virtually every major magazine and newspaper in the world, and it continues to reverberate to this day, even in so-called scholarly books and journals. 

Setting the record straight has been complicated by the official spinners at the I.M.F.. Indeed, they have been busy as little bees rewriting monetary history to cover up the I.M.F.’s mistakes, and Indonesia represents one of its biggest blunders. To this end, the I.M.F. issued a 139-page working paper “Indonesia: Anatomy of a Banking Crisis: Two Years of Living Dangerously 1997–99” in 2001. The authors include a “politically correct” version of the currency board episode asserting, among other things, that I counseled President Suharto to set the rupiah-dollar exchange rate at 5000. This pseudoscholarly account, which includes 115 footnotes, fails to document that assertion because it simply cannot be done. That official I.M.F. version of events also noticeably avoids referencing any of my published works or interviews based on my Indonesian experience.

That episode and its manipulations are not unique in the political world. It is useful, though, after time and events unfold, to set facts straight in order to understand the situation then and now. Other countries, such as Greece, are currently experiencing some of the vagaries of similar treatments. Let’s hope that they, and all of us, do not have to pay later for such nefarious activity.