What’s good anti-inflation policy in Washington may Walter be disastrous in Ankara or Brasilia or many other cor- Wriston, ners of the world. Where does all this leave the big meet international banks? In trouble. lesser customers lay dead on the bank and deeply involved in what Lorenzo battlefields. The Medici bank never goes on beyond its nation’s borders fully recovered from its losses. -- which essentially changes all the de’ Medici When bankers tell you not to worry, rules. U.S. banks are taking 90- that sovereign countries “can’t” day deposits from OPEC sources By Norman Gall default on their loans, remind them and lending them to less-developed of the Medicis, remind them of nations for terms as long as ten IN THE 14TH CENTURY a poor, London’s famous Baring Brothers years. Half of Bank of America’s less-developed country began destroyed by Argentinian defaults, deposits are for-eign today, up to make its influence felt in the remind them of Russia’s defaults from 31% in 1971; Citicorp’s are international economy as a major on czarist bonds and of all the 75%, up from 44%. By the end exporter of a basic raw material. U.S. jurisdictions that defaulted on of 1978 U.S. commercial bank The country was England. The loans from Europeans in the 19th loans to Brazil and Mexico alone product was wool. Sophisticated century. Remind them that Spain equaled the combined capital of Italian bankers, sensing opportunity -- though it was the OPEC of the the 12 largest U.S. banks. And in England’s exportable surplus 16th century by dint of its control not just the American banks. and the rest of Europe’s need for of the New World’s gold and silver Among the Japanese banks, wool, moved in. The bankers were -- defaulted at least eight times three-quarters of their overseas shocked by what they saw. Here on debt owed to foreign bankers. loans are to developing countries. was a brawling, backward country Almost every major bank in the All this overseas activity adds to whose rulers were always fight-ing world is today an international the upward pressure caused by civil wars. So primitive domestic inflation on the was the economy that demand for loans. Put money was very scarce, simply, bank lending and the monarchs were has far outstripped the chronically short of growth of bank capital. the wherewithal to pay As recently as the mid- their proops. To get an 1960s the prevailing rule assured supply of wool, of thumb for prudent the Italian bankers made banking was to limit English loans. But the outstanding loans to English turned out to be about 15 times capital in deadbeats, and England’s order to maintain enough creditors had to do what reserves to absorb the English themselves potential loan losses. did centuries later: take During the international control of customs to lending boom of the collect what was due them. 1970s, this multiplier rose Even then the bankers steadily until it reached didn’t always get out an average of almost 30- with a whole skin. The to-1 for the eight largest famous Medici bank of U.S. money center Florence staked Ed-ward banks. Among U.S. IV in the savage Wars, banks, Chase Manhat- of the Roses. Edward tan’s outstanding won, but his purse was claims are 31 times empty and many of the capital; Chemical’s,

Forbes, June 23, 1980 33; Continental Illinois, 26; Wallich was saying: The party in and investing that took place in the Bankers Trust, 37; Irving Trust, nearly over; it has been going on 19th century and the great wave 31. For Japan’s largest bank, too long. Note Wallich’s reference that billowed up after the world Dai-Ichi Kangyo, the multiplier to inflation. These loans to poor was OPEC-ed in 1973. If Victorian is 42, and for Fuji Bank, Japan’s and developing countries are Britain shipped its surplus savings fourth largest interna-tional closely related to the increased rate to Argentina to build railroads, the lender, it is 36. Deeply involved of inflation the entire world has railroads themselves could generate as they all are in international suffered since 1970. Note Wallich’s the income to service the loans. lending, these giant banks could reference to “the financing of Not surprisingly, of the 87 foreign conceivably have their joint total consumption-oriented oil imports.” government loans of £1 million or capital wiped out by a series of To use a helpful analogy with more issued in London from 1860 to defaults on the international scene. private business, it was as if the 1876, nearly half had maturities of Like backward, brawling 14th- banks were lending people money terms from 100 years to perpetuity. century England, the poorer to cover operating losses rather But if an American bank lends Arab countries of the world are now deep than for productive investment. money to an African nation so that in debt to the over-extended bankers To go back to our original example: the African nation can burn oil, of the richer nations and, like many It does make a difference whether there is no productive investment old monarchies, they can service the Italian bankers’ money went to generating cash to pay the interest. their debts only by borrowing finance the wool trade or to finance So much for those who say, “Why more. To say that sovereign states wars. The one is a productive not just roll these loans over and cannot default is to ignore history. investment, the other is not. This over?” People will lend you long- Earlier, this year, in bankers’ is a major difference be-tween the term money to buy a house or build language, Federal Reserve great wave of international lending a factory. But who would give you Governor Henry C. a 25-year loan for a Wallich spoke some big party you want unpleasant truths. to throw tomorrow? He told a meeting Granted that many of bankers that of today’s loans commercial bank loans are hardly self- to the poorer countries liquidating, most had grown 23% a year people assume on average since 1975, the governments nearly trebling in five would not let their years. “Such a rate banks sink even if of growth,” he said, a number of poorer “exceeds the rate of countries defaulted; overall credit expansion the governments or that can be sustained their central banks by any banking system would take over the not in the grip of bad loans. If so, galloping inflation. they might feed the For the longer run one flames of domestic must ask whether the inflation. There is world’s banking system also no guarantee can meet increased of when, how and demands by less- on what terms the developed countries government would even if these demands intervene. In the reflect genuine 1932 presidential investment financing campaign, Franklin rather than the financing D. Roosevelt of consumption- promised that, if oriented oil imports.” elected, he would

Forbes, June 23, 1980 make sure that c o u n t r i e s “it will no longer defaulted on be possible for their debts. i n t e r n a t i o n a l These disasters bankers or others were both to sell foreign cause and securi-ties to the effect of the investing public drying up of of America on international the implied lending after understanding 1928 -- initially that these to divert securities have funds into been passed on or stock market ap-proved by the speculation. State Department MIT economist or any other C h a r l e s agency of the Kindleberger government.” blames the The great surge cutoff in of U.S. foregin international lending in the late 1920s was taken to secure debt repayment credit for triggering and triggered by the 1924 Dawes by defaulting governments. fueling the Great Depression. Plan. An earlier version of today’s But under Roosevelt, the U.S. We’ve learned a lot since then, petrodollar recycling, it provided government did not intervene. yet once again the financial world that a big loan would be floated Many banks failed and many is in the same peculiar situation in several countries as when the vic- to finance the torious allies were continued payment trying to extort of war reparations by war reparations Germany. The U.S. from Germany.It share of the Dawes couldn’t be done loan, managed by except through J.P. Morgan & Co., a peculiar ar- was $110 million. It rangement under was oversubscribed which the winners 11 times. The kept the losers public impression in the game by of broad U.S. bankrolling them. government support That’s what’s for foreign lending happening today. was reinforced by The poor countries the intimate dealings of the world are be-tween the State losing their shirts to Department and OPEC but, through New York banking the foreign banks, houses during OPEC and the the U.S. military industrial nations interventions in are trying to keep Central America and the poor countries the Caribbean before in the game. But 1930, when strong the bankers are measures were beginning to bridle.

Forbes, June 23, 1980 “The smaller and medium-size limits of 20% of capital, which stormy, trying times, but in fact European and U.S. regional blocked further loans to such big they witnessed an unprecedented banks now are refusing to go customers as Brazil and Nigeria. expansion of international trade into syndicated loans,” says a Okay, you say. The banks may be and a rise in the standard of living German banker, Hans Berndt of in trouble. The poorer countries in almost every corner of the world Mannheim’s Badische Kommunale are in trouble.So, what’s new? -- except where the prosperity was Landesbank. “A year ago there The govern-ments will bail them swamped by runaway population were about 250 banks participating out. What has all this to do with growth. Until the Seventies in international lending, while my business, with my investments, began, this steady expan-sion was today there are only 60 or 80. This with my plans to buy a new house or restrained by relatively limited leaves the burden of lending to the build a new factory? Just this: The liquidity. During the Fifties and giant banks, many of which are whole situation poses an almost Sixties the world’s monetary reaching their limits of lending to impossible choice for bankers, reserves grew by 2.7% yearly, the countries that borrow most.” politicians and ordinary people. one-third as fast as the growth of German and Japanese banks have Because international lending is world trade. There was continuing approached or exceeded lending becoming excessively risky, the fear of a possible “dollar shortage” limits to big borrowers like Brazil, world must choose on the one hand and of insufficient world liquidity and their governments are warning between a dangerous slowdown in to sustain international trade. them to take it easy. German banks world economic activity and the This caused constant complaints have been using Luxembourg, danger of even faster inflation on from the poorer coun-tries who with its strict bank secrecy laws, the other. It is not a comfortable wanted easier credit, but it also as their “offshore” platform for choice. It can lead to defaults in helped to hold down inflation. launching the bulk of their $40 the courts and blood in the streets. This sober but basically sound billion in outstanding loans to We are accustomed to thinking situation was reversed dramatically less-developed countries, but now of the post-World War II years as in the 1970s. Suddenly inflation their Luxembourg rates doubled over exposure is being previous decades consolidated into in the industrial their general balance countries.They tripled sheets in response to in the poorest lesser- new German bank developed countries legislation. Like U.S. (LDCs). Infla-tion banks, German banks rates quadrupled in recently have taken a the “middle income” bed beating in the bond LDCs, from whose markets and also have ranks came the incurred heavy losses biggest international by lending at relatively b o r r o w e r s : low fixed interest; Brazil, Iran, the their capital is getting Philippines, Nigeria, stretched thin. As for Korea, Algeria, the go-go Japanese Turkey, Mexico banks, which alone and Yugoslavia. generated two-fifths Liquidity was no of the huge increase in longer a problem, Europmarket lending but inflation was. in 1977-78, their During the 1970s, finance ministry has the world’s official since cut their foreign reserves took a lending to half the $1 quantum jump, billion monthly rate multiplying fivefold of recent years and in current dollars, imposed country loan from $78 billion at

Forbes, June 23, 1980 the end of 1969 to have gone on a $398 billion by 1979 lending spree, much if central bank gold of it to the poorer hoards are valued at countries. And this the old official price is how the LDCs of $35 an ounce. have been kept in But they multiplied the game. Tinker- tenfold -- to $830 to-Evers-to-Chance. billion -- during Western Europe the decade, if gold buys oil from OPEC. is valued at market It them sells enough prices. A large goods to the poorer share of central bank countries to cover reserves of foreign the deficit with exchange earn OPEC. The poorer interest as deposits countries pay for in the Euromarkets, Europe’s goods with the central pool money borrowed of international from the commer- liquidity. Not cial banks. The surprisingly this banks get the money market also has from OPEC. This multiplied tenfold is called recycling. over the past decade You could also call to almost $1 tril-lion. it a confidence game. The name of all In 1977 a panel this is easy money of distinguished -- liquidity, in economists headed technical terms. by the able Paul We must go back McCracken, former four centuries to find chairman of the U.S. anything comparable Council of Economic to the monetary expansion that took side. FORBES has explained this Advisers, confirmed this. The place during the 1970s, back to the phenomenon at length (FORBES, panel reported that industrialized influx of New World treasure into Nov. 15, 1976 and Sept. 15, 1977). nations’ “ability to reduce the [oil] the European economy through What gold and silver were to Spain, deficit to levels below anticipated Spain and Portugal. But the 16th- monopoly-priced oil is to OPEC. magnitudes depended partly century money explosion occurred Since 1973, when OPEC rulers on larger deficits in the nonoil- over a much longer time span than began holding the world to ransom, developing coun-tries.These were the current one. It took 160 years their currency reserves have possible as a result of unprecedented (1500-1660) for this treasure to increased sixfold. The attendant increases in private lending to triple Europe’s stock of silver and inflation has cut the value of these countries, with private banks increase the gold in circulation those reserves, but using Morgan in OECD countries acting as by one-fifth. Foreign merchants, Guaranty’s ratio for discounting turntables for OPEC surplus funds.” bankers and artisans besieged inflation, OPEC’s foreign assets of According to International and invaded Spain and Portugal $224 billion in 1979 would have Monetary Fund calculations, there to siphon away this treasure by been worth only $68 billion in is a one-year lag between increases selling goods and ser-vices, just 1974. The oil users have, in effect, in the world’s monetary reserves as foreigners tried to siphon away used inflation to partially insulate and expansion of the world money the OPEC surplus of the 1970s. themselves from OPEC’s greed. supply, and a 30-month lag before The Spanish gold and silver bred Drawing upon these OPEC surpluses world reserve increases are felt in inflation on the bad side and vast either as deposits or as certificates world inflation. By this rule of economic development on the good of deposit, the commercial banks thumb, reserve increases taking

Forbes, June 23, 1980 place in 1979-80 as a result of last suddenly tripled to $30 billion, of outside funds -- sucking the year’s and this year’s stiff oil price hugely increasing the dollar money out of oil users. Instead increases will be felt in price rises holdings of foreign banks. Again, of only one powerful machine during 1982-83. If this is correct, the according, to the McCracken dumping liquidity into the current slowing of inflation will be Report on world inflation, the size system, suddenly there were two. temporary, reflecting the relatively of U.S. payments deficits over There is, moreover, an flat trend in oil prices between the pe-riod effectively removed extraordinary multiplier at work 1975 and 1979. And perhaps the balance-of-payments constraints in the Euromarkets. Because they next burst of inflation will lead to in other OECD countries and are unregulated and free from yet another doubling of oil prices. facilitated a massive expansion of reserve requirements, they are The Euromarkets, where all this money supplies. The McCracken not dependent on new deposits to liquidity accumulates, had a Report calls this explosion generate additional lendable funds. humble beginnings. They were “the most important mishap in How fast the system could spin and created in the 1950s as a modest recent economic policy history.” create new money like cotton candy haven for the dollar holdings of Suddenly, nobody was short of was demonstrated in 1978, the year Soviet bloc countries against the money. That may be a good thing of greatest Euromarket growth up possibility of a U.S. freeze of their for individuals. It isn’t good for to that time, when the amount of depos-its, similar to what actually a world where there are only so money in its accounts expanded by happened with last year’s blocking many goods and services available. $140 billion to $662 billion. In that of Iranian assets. Between 1964 Until 1973 the main source of year, loans to nonoil LCDs doubled and 1970, however, Euromarket such new reserves was the U.S. to $26.9 billion. Easy come, easy holdings of dollars suddenly began payments deficits. But after the go.In 1978, for example, Brazil to swell, growing from $17 billion 1973-74 OPEC price increases, increased its borrowing from $2.8 to $90 billion in those six years. OPEC became the leading supplier billion in 1977 to $5.6 billion; This was, of course, Korea, from $1.3 before OPEC had taken billion to $2.7 billion; the bit in its teeth.What the Philippines, from happened? Simply that $700 million to $2.1 the U.S. began running billion; Algeria, regular balance-of- from $723 million payments deficits and to $2.6 billion. at the same time U.S. As a result of this new Treasury regulations borrowing, central discouraged American bank reserves in Latin companies from America, for example, repatriating profits from expanded by one- overseas operations. third dur-ing 1978, These expatriate dollars contributing to a rise settled in Europe, and in the region’s general the number of U.S. inflation rate from banks with branches 40% in 1978 to 47% and offices in London in 1979. Give people grew from 11 in 1963 money to spend and to 60 by 1974. Like they will spend it. bees to honey, the U.S. There is no mystery banks went where the as to why inflation money was. Treasury took off in the 1970s. regulations also made it Will the acceleration more profitable for U.S. of economic banks to keep deposits d e v e l o p m e n t in overseas branches. launched during the In 1971 the U.S. monetary explosion payments deficit of the 16th and 17th

Forbes, June 23, 1980 centu-ries now come to an end like a roller coaster as speculators H. Gipson, formerly of Boston’s as the money explosion of the shuttled back and forth between Batterymarch Financial Corp., 1970s and 1980s slows? For slow gold, commodities and the dollar. warned recently. His was a rare it must. Slowing it already is. According to IMF statistics based public statement of a view that This question is hard to come to on current gold prices, the value of bankers usually express only in grips with because of the gossamer world reserves jumped by 11.6% private. “To avoid a catastrophic forms that money has assumed in one month (September 1979). default by so large a borrower, during its rapid expansion, It contracted slightly last October, U.S. banks have no choice but assuming new identities daily. It after the U.S. Federal Reserve to roll over their old loans and to can be in the form of metallic jacked up dollar interest rates. It make large new ones [to cover commodities, paper currencies, surged again by 13.5% in December continuing payment deficits]. proliferating credit schemes or and 16.4% in January after the The real risk in foreign loans is a items of electronic accounting on seizure of U.S. hostages in Iran, the once-in-a-lifetime wave of defaults international computer networks. U.S. freeze of Iranian assets and by many borrowers at the same Lord Armstrong, chairman of the Soviet invasion of Afghanistan. time, an event that would render Britain’s Midland Bank, is a retired Then the price of gold peaked at many large banks insolvent.” civil servant who is fascinated by $8.50 per ounce in mid-January; Shades of the Medicis, of Baring money’s chang-ing forms. “It’s the commodity markets collapsed; Brothers, of the Dawes loans. such a marvelous thing,” he says. silver crashed; and interest rates Until recently Brazil was the “If you imagine it beginning with began their descent, bringing a darling of the international financial cattle, or cowrie shells, or gold, tidal wave of funds into the Euro- community, because of the and think where economic “miracle” it is now, as of 1968-74, when metaphysical as a Brazil’s gross national tap on a telex, or product grew by an a click on a tiny annual average of computer, and 10%.Brazil borrowed yet basically the aggressively, doubling concept is the same its foreign debt every thing. It is one of three years since 1968. the most precious In sense, in flation was facts in the world, Brazil’s best friend. if you try to Some economists control money in calculate that, with one place, it gets world inflation uncon-trolled in averaging 12.5% yearly another. Liquidity since 1973, the real is the word that is cost of amortization applied to it, but and interest on an it is much more eight-year Eurodollar than that. It is gaseous rather than markets and forcing down the loan made in 1970 with a three- liquid. That is what makes it such London Interbank-offered rate, the year grace period would be half its a fascinating human invention, floating baseline interest rate for original value. The Brazilians were such an expression of freedom international lending. From nearly paying their creditors in 50-cent in a strange way, be-cause it is 20% in mid-April it fell to around dollars while their creditors were literally uncontrollable. And yet 10% in May -- to the great relief pressing more dollars on them! it is like fire: You must prevent of U.S. corporate borrowers and of But today foreign bankers are it from getting out of hand.” debt-ridden countries like Brazil. down on Brazil, almost to a man. Money in recent months came Right now the situation is relatively This turn-about illustrates why close to bursting into flame. In quiet, but the international financial the game may be ending, why late 1979 and early 1980 the value crisis is by no means over. the winners of the money are no of the world’s monetary reserves “Brazil illustrates the economic longer willing to stake the losers. careened from month to month risks faced by U.S. banks,” James The bankers are down on Brazil

Forbes, June 23, 1980 because Brazil seems headed for Nobody wanted to cause a general power politics. Its foreign debt a midyear crisis, with inflation panic by striking the first blow, expanded from $1.6 billion in running at 87% for the past 12 and nobody wanted to leave the 1972 to nearly $13 billion today, months and likely to reach 100% ring alone to face the confusion even as exports stagnated and as by July if present trends continue. in the noisy arena beyond the Yugoslavs working abroad were This year Brazil’s payments for klieg lights and the smoke. sent home, cutting off an important oil and debt service alone will be While Brazil and the bankers were source of income for the country. roughly one-fifth greater than the eyeing each other in early 1980, To keep Yugoslavia from being government’s $20 billion export many smaller developing economies absorbed into the Soviet bloc, target. In January 1979 Brazil’s were fal-ling into much more Western governments will probably $12 billion in borrowed reserves desperate financial straits. They have to finance its foreign debt. were worth nearly a year’s imports, include: Turkey, the Philippines, Such a bailout is now going on but since then Brazil’s import Thailand, Korea, Sudan, Poland, in Turkey, the economically bill has dou-bled. Those reserves Pakistan, Nicaragua, Panama, prostrate member of the North are being drawn down fast and Egypt, Jamaica, Zaire, Ethiopia, Atlantic Treaty Organi-zation. A could be down to three months Kenya, Morocco and Yugoslavia. $1.1 billion concessional loan of today’s imports unless Brazil Last year the volume of lending by package has been put together borrows more money very soon. commercial banks to non-OPEC by 16 Western governments for Last month the Bank of Montreal, developing countries expanded by Turkey, but Turkish negotiators the world’s fifth-ranking loan nearly one-third, to $35 billion, in Paris have been saying syndicator, ran into a stone wall. with the bulk of this money being they need $3 billion in 1980. It was trying to recruit banks to provided by 12 banks in Germany, German banks have been heavily take pieces of a $350 million loan Japan and the U.S., plus the Bank of involved in intensive debt for Brazil’s National Economic Montreal. Prudence says the banks renegotiations with Poland, the Development Bank, the world’s should pull bank. But banks are not largest debtor among Soviet- larg-est government development ordinary private businesses, and bloc countries. Commenting on bank and previously a prized the economic viability of several Poland’s efforts to stretch out customer of foreign banks. The of these countries is important payments of $6.5 billion falling poor response to the loan was strategically, in one way or another, due in 1980 in its $19.5 billion especially embarrassing at a time to the major Western powers. hard-currency debts to foreign when Euromarkets were being Who will make the next move? banks, one American banker was flooded with new money and Several debt renegotiations already very frank: “We don’t want to London Interbank-of-fered rates are under way.Small cases, not encourage the Poles to go back to had dropped from nearly 20% to highly politicized, can be hundled the Russians for help. On the other 11% over a three-week period. In easily. For example, Togo, a little hand, we don’t want to play the trying to sell the loan, the Bank African state whose per capita heroes, especially with Bra-zil’s of Montreal offered to sacrifice income declined by 4.1% annually debts handing over our heads.” its own management fee and keep during the 1970s, was able to Financial crises aside, all this $125 million of the exposure for reschedule $100 million in debts could have dire consequences for itself. Upon receiving an invitation quickly this year.On the other international trade, upon which to participate, Japanese banks hand, Nicaragua is demanding millions of Ameri-can jobs depend. consulted their finance ministry, rescheduling of $490 million in Apart from the small republics of which not only vetoed involvement commercial bank debt, plus $100 Latin America and black Africa, the in the Brazil loan but also warned million in interest arrears, over main countries now in debt trouble that Japan’s new country-risk 25 years at 7% flat interest, in a are the high-growth economies limits would impede most of its package that would include a seven- of the Seventies: Brazil, Poland, banks from joining new Bra-zil year initial grace period. Is that all Turkey, Korea, Thailand and the syndications for the rest of 1980. the country’s new rulers want? Oh, Philippines. Good customers of the Now Brazil and the world’s major no. They also want a substantial U.S., all of them. Can they continue banks, not knowing what to do, net inflow of new loans as well. to trade with the U.S. at the current circle cautiously like two dozen After President Tito’s death, rate, if U.S. banks can no longer prizefighters tossed into the ring Yugoslavia again is expected to finance the oil imports needed to by some absentminded promoter. play a volatile role in East-West keep their economies growing

Forbes, June 23, 1980 as fast as they did in the 1970s? bank governors issued a stiff chorus of cheers elsewhere. This The big banks and the monetary warning about the dangers of is because the U.S. can’t solve its authorities of the U.S., Europe and unsupervised Euromarkets to the balance of pay-ments problems Japan are groping their way toward international banking system. without hurting world trade. a restruc-turing of international Both the U.S. Federal Reserve and A cheap money lobby, something lending mechanisms. They are the Bundesbank have been seeking like the U.S. Greenback movement awed by the prospective task of some kind of international control of the 19th century, is forming managing the enormous increase over Eu-romarkets, but this has been among LDCs. A trade boom, even in the petrodollars expected to resisted by the Bank of England. if fueled by inflation, is their only flow through the world’s monetary The British like the idea of having hope for increasing exports in the system in the Eighties. The less- hundreds of foreign bank branches short term and for getting new developed countries are being creating many jobs and reviving loans to pay off old loans and to pushed in the direction of the London’s former grandeur as the buy oil. The LDCs are criticizing International monetary Fund in order world’s leading financial center. the IMF Substitution Account to prevent them from putting too The British government has been plan. After the IMF meeting in much stress on commercial banks. so keen on reserving bank jobs for Hamburg stalled on the plan, Morgan Guaranty’s senior its own citizens that it has been Brazilian Finance Minister Ernane vice president of international denying work permits to senior Galveas claimed a victory for his economics Rimmer deVries is executives of foreign banks to and other developing nations. The one of international bank-ing’s manage their London branches. But participating countries, he said, most respected economists. He more recently, it has been reported had recognized that “recycling chooses his words carefully: that the Bank of England is in the dollars had priority over the “Greater direct lending by OPEC process of changing its mind about IMF Substitution Account.” surplus countries to nations in controlling Euromarket lending. Manuel Moreyra, president of deficit, the IMF substitution While U.S. and German central Peru’s Central Bank, has become account and the provision of off- bankers agree about controlling one of Latin America’s more market diversification facilities all the Euromarkets, they are at odds respected monetary officials for can play a useful role in lessening about the ur-gency of the need to his key role in transforming Peru the economic and financial risks find a substitute for the dollar as from an international financial overshadowing the next few years.” the world’s sole reserve currency; pariah into an object of avid Don’t be put off by the cautious the Germans don’t want their mark courtship by bankers. “The world words. DeVries is sounding the to share this role. The dollar’s is entering a period of deepening alarm. How much help can he expect? recent show of strength enabled the financial problems,” he says. “The The International Monetary Fund industrial countries to avoid a drawl old Bretton Woods system, based has about $30 billion available over this issue at the Hamburg on the dollar, may have had its for lending to member countries, meeting in April of the IMF Interim deficiencies, but at least it was a which is ex-pected to expand Committee. Discussion was system. It worked for 26 years substantially when a 50% increase postponed on the proposed IMF after World War II, while both in national quotas, soon to be Substitution Account, an attempt to international trade and the world approved, becomes effective this soak up the hundreds of billions of economy grew very fast. Now we year. In early 1980 the IMF loaned dollars floating loosely around the have no system at all. The present $850 million to South Korea and world. In-stead, the IMF staff was floating exchange rate system is $659 million to the Philippines. It ordered to go to OPEC countries a complete failure. There is no joined in the Turkey bailout and to borrow surplus petrodollars mechanism for disciplining either may grant a large credit to Egypt. for recycling to deficit coun-tries. surplus or deficit countries . . .” But how far can even $45 billion But the dollar problem won’t go David Rockefeller in a FORBES go? And how long can the world away. The dollar is likely to come interview (June 9) mentioned that depend upon the unregulated, under pressure as U.S. interest the OPEC countries themselves free-wheeling Euromarkets rates fall. What if the dollar turns were beginning to share some of to decide the fate of nations? weak again, as it probably will? If the burden. Because they are now At the April meeting of the Bank it does, there will be a gnashing handling an increasing share of the of International Settlements of teeth in Washington and in oil formerly channeled through in Basel, the world’s central European and OPEC capitals but a the Seven Sisters international oil

Forbes, June 23, 1980 companies, they are beginning dis-ruptions, will end up by to give direct credits. This will paralyzing the international capital certainly help, but OPEC has flows upon which everybody’s never shown signs of being a trade and prosperity depend. charitable institution and, with There is, of course, a way out. a few exceptions like Kuwait With a strengthened IMF, the and Saudi Arabia, its members nations might gradually accept a need all the dollars they can get: painful but bearable slowdown in IOUs from Jamaica, say, or the their economies while the money Sudan won’t pay for machinery supply is brought under control. from Germany or wheat from the This is probably the only way out. U.S. The LDCs realize this and What are the prospects for such continue to pray that international unity of action? Would the liquidity will remain swollen so French wheat farmer and the U.S. that they can continue to borrow steelworker, the Za-irean copper easily and, ultimately, cheaply. miner, the German autoworker and At the moment the world faces the Arab oil sheikh willingly accept two equally grim scenarios: what seem to be banker-imposed Scenario one: Lending will sacrifices to help reestablish world continue to dwindle, and there financial stability?Would they will be defaults from which the reelect politicians who tried to various governments will have impose such sacri-fices? Could to rescue their banks. The poor the governments of nations like countries will no longer be able Turkey and Brazil even survive the to buy goods from the industrial imposition of such sacrifices? To countries, which, in turn, will ask the question is almost to answer suffer depressed economies and it. Yet without a slowing of world lack the means to pay OPEC. economic growth, without a partial The entire world economy will drying up of international liquidity, sink into low gear. The poor will even worse consequences loom. starve. The rich countries will We are in the midst of an stagnate. Even the Communists international financial crisis so will have nothing to cheer arcane that it rarely makes the about. The U.S.S.R. and Eastern headlines or the evening news.It Europe depend heavily on world is going to last for a long time and trade, and all seek cheap credits. have unforeseeable consequences. Scenario two: The merry-go-round The money explosion started by the will speed up again. OPEC will Span-ish silver galleons went on for continue raising oil prices. The 160 years and changed the world. politicians, unwilling or unable to impose austerity on the industrial countries, will encourage the banks to provide plenty of liquid-ity both for their own economies as well as for those of the poorer countries; and inflation will move up another notch or two. For a while the faster inflation will enable the poor countries to handle the debts they constantly incur because they will be servicing the debt with dollars that are constantly shrinking.But the faster inflation, with its attendant

Forbes, June 23, 1980