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
j- Philip M. Crane,
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 Paul Volcker, head of the Federal Reserve, rushed to meet with Mexico's finance minister, Jesus Silva Herzog, and offered to put the American taxpayer into the breach.
A $600 million short-term loan was extended to get Mexico past its election date of July 4. It was called a "currency swap" because Mexico exchanged an equal number of pesos which it promised to redeem in U.S. dollars. Pesos, of course, were worthless in international markets—which is the reason Mexico wanted the dollars.
The importance of this loan was not its size nor even the question of repayment. It was the manner in which it was made.
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first, it was made by the Federal Reserve
The currency swaps had another advantage: they could be donesecretly. Volcker discreetly informed both the Administration and thekey congressional chairmen, and none objected. But the publicreporting of currency swaps was required only every quarter, so theemergency loan from the Fed would not be disclosed for three or fourmonths.... By that time, Volcker hoped, Mexico would be arrangingmore substantial new financing from the IMF.... The foreign assistancewas done as discreetly as possible to avoid setting off a panic, but alsoto avoid domestic political controversy.... Bailing out Mexico, itseemed, was too grave to be controversial.1
DEBT SWAP
