Creature From Jekyll Island by G. Edward

less developed countries will ever be able to pay back the principal on these loans?' When no one spoke up, I asked, 'If the loans are never going to be repaid, why should we again bail out the countries and arrange payment for their interest?'

The answer came from several voices at once, 'If we don't arrange for their interest payments, the loans will go into default, and it could put our American banks in jeopardy.' Would the customers lose their money? No, came the answer, but the stockholders might lose dividends.

In amazement, I leaned back in my large, leather chair, only two seats from the President of the United States. I realized that nothing in the world could keep these high government officials from scrambling to protect and bail out a few very large and sorely troubled American banks.2

1. New York Times, April 15,1994, p. A9.

2. James G. Watt, The Courage of A Conservative (New York: Simon and Schuster, 1985), pp. 124-25.

BUILDING THE NEW WORLD ORDER

115

PANAMA

The first major score in the game had been made under the Carter Administration when Panama fell in arrears on the payment of its loans. A consortium of banks including Chase Manhattan, First National of Chicago, and Citibank brought pressure to bear on Washington to give the Canal to the Panamanian government so it could use the revenue to pay interest on its loans. Although there was massive opposition to this move among the American people, the Senate yielded to insider pressure and passed the give-away treaty. The Panamanian government inherited $120 million in annual revenue, and the interest payments to the banks were restored. As Congressman Philip Crane observed:

At the time of the Torrijos-backed coup in 1968, Panama's total official overseas debt stood at a manageable and, by world standards, modest $167 million. Under Torrijos, indebtedness has skyrocketed nearly one thousand percent to a massive $1.5 billion. Debt-service ratio now consumes an estimated 39 percent of the entire Panamanian budget.... What it appears we really have here is not just aid to a tinhorn dictator in the form of new subsidies and canal revenues the treaties would give to the Torrijos regime, but a bailout of a number of banks which should have known better than to invest in Panama and, in any event, should not escape responsibility for having done so.1

The Panama bailout was a unique play. In no other country did we have an income-producing property to give away, so from that point forward the bailout would have to be done with mere money.

To pave the way for that, Congress passed the Monetary Control Act of 1980 which authorized the Federal Reserve to 'monetize foreign debt.' That is banker language meaning that the Fed was now authorized to create money out of nothing for the purpose of lending to foreign governments. It classifies those loans as 'assets'

and then uses them as collateral for the creation of even more money here in the United States. That was truly a revolutionary expansion of the Fed's power to inflate. Until then, it was permitted to make money only for the American government. Now, it was able to do it for any government. Since then it has been functioning as a central bank for the entire world.

j- Philip M. Crane, Surrender in Panama (Ottawa, Illinois: Caroline House Books, W 7 8 ) . pp. 64,68.

116

THE CREATURE FROM JEKYLL ISLAND

MEXICO

By 1982, almost every Third-World government was running

behind in payments. Mexico led the way by announcing it could not send any more money that year on its $85 billion debt. Federal Reserve Governor Henry Wallich rushed to Switzerland to negotiate an IMF loan of $4.5 billion through the Bank of International Settlements. The central banks of Europe and Japan provided $1.85

billion (about 40%); the rest came from the Federal Reserve.

Commercial banks postponed payments on the principal for two years; but, with the infusion of new loans, payment on the interest was resumed. That did not solve the problem. Within a few years, Mexico was in arrears again and, in 1985, the banks agreed to postpone $29 billion in payments and rolled over another $20

billion, which means they issued new loans to pay off the old.

In that same year, Secretary of the Treasury James Baker

announced the government's plan to solve the world's debt crisis. It was a formal statement encouraging banks to continue lending to Third-World governments provided they promised to enact economic reforms favoring a free market. It was more of a philosophy than a plan, because there was no hope that it would be implemented by any of the socialist governments receiving the loans.

Behind the announcement was the implication that the federal government, acting through the Federal Reserve System, could be counted on to assist if the loans went sour. Baker called for funneling $29 billion over three years primarily to Latin American countries, of which Mexico was a prime recipient.

CURRENCY SWAP

Shortly after the Mexican government had loaned $55 million to Fidel Castro, it announced to the banks: 'We will pay only what we have, and no more.' Whereupon