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Pilot Issue

Financial Warfare

Editors' note: Economic globalization, and especially the forcible deregulation of financial markets, has become a topic of discussion in many activist groups. Although we think that a discussion of globalization should not focus too narrowly on the financial sphere, we would like to provide an overview over this aspect, written by Michel Chossudovsky, author of many insightful articles on financial markets and crises. In future issues of Tusovka we will follow it up by articles looking at other aspects of "globalization" and the struggles against its devastating effects on the lives of people.

(Olga & Alain)

Financial Warfare

By Michel Chossudovsky
Professor of Economics, University of Ottawa

- Monday, 21 September 1998 -

"Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men".
-- Franklin D. Roosevelt's First Inaugural Address, 1933

Contents of this article:

Humanity is undergoing in the post-Cold War era an economic crisis of unprecedented scale leading to the rapid impoverishment of large sectors of the World population. The plunge of national currencies in virtually all major regions of the World has contributed to destabilising national economies while precipitating entire countries into abysmal poverty.

The crisis is not limited to Southeast Asia or the former Soviet Union. The collapse in the standard of living is taking place abruptly and simultaneously in a large number of countries. This Worldwide crisis of the late twentieth century is more devastating than the Great Depression of the 1930s. It has far- reaching geo-political implications; economic dislocation has also been accompanied by the outbreak of regional conflicts, the fracturing of national societies and in some cases the destruction of entire countries. This is by far the most serious economic crisis in modern history.

The existence of a "global financial crisis" is casually denied by the Western media, its social impacts are downplayed or distorted; international institutions including the United Nations deny the mounting tide of World poverty: "the progress in reducing poverty over the [late] 20th century is remarkable and unprecedented..."1. The "consensus" is that the Western economy is "healthy" and that "market corrections" on Wall Street are largely attributable to the "Asian flu" and to Russia's troubled "transition to a free market economy".

Evolution of the global financial crisis

The plunge of Asia's currency markets (initiated in mid-1997) was followed in October 1997 by the dramatic meltdown of major bourses around the World. In the uncertain wake of Wall Street's temporary recovery in early 1998 -- largely spurred by panic flight out of Japanese stocks -- financial markets backslided a few months later to reach a new dramatic turning- point in August with the spectacular nose-dive of the Russian ruble. The Dow Jones plunged by 554 points on August 31st (its second largest decline in the history of the New York stock exchange) leading in the course of September to the dramatic meltdown of stock markets around the World. In a matter of a few weeks (from the Dow's 9337 peak in mid-July), 2300 billion dollars of "paper profits" had evaporated from the U.S. stock market.2

The ruble's free-fall had spurred Moscow's largest commercial banks into bankruptcy leading to the potential take- over of Russia's financial system by a handful of Western banks and brokerage houses. In turn, the crisis has created the danger of massive debt default to Moscow's Western creditors including the Deutsche and Dresdner banks. Since the outset of Russia's macro-economic reforms, following the first injection of IMF "shock therapy" in 1992, some 500 billion dollars worth of Russian assets -- including plants of the military industrial complex, infrastructure and natural resources -- have been confiscated (through the privatisation programmes and forced bankruptcies) and transferred into the hands of Western capitalists.3 In the brutal aftermath of the Cold War, an entire economic and social system is being dismantled.

`Financial Warfare'

The Worldwide scramble to appropriate wealth through "financial manipulation" is the driving force behind this crisis. It is also the source of economic turmoil and social devastation. In the words of renowned currency speculator and billionaire George Soros (who made 1.6 billion dollars of speculative gains in the dramatic crash of the British pound in 1992) "extending the market mechanism to all domains has the potential of destroying society".4 This manipulation of market forces by powerful actors constitutes a form of financial and economic warfare. No need to recolonise lost territory or send in invading armies. In the late twentieth century, the outright "conquest of nations" meaning the control over productive assets, labour, natural resources and institutions can be carried out in an impersonal fashion from the corporate boardroom: commands are dispatched from a computer terminal, or a cell phone. The relevant data are instantly relayed to major financial markets -- often resulting in immediate disruptions in the functioning of national economies. "Financial warfare" also applies complex speculative instruments including the gamut of derivative trade, forward foreign exchange transactions, currency options, hedge funds, index funds, etc. Speculative instruments have been used with the ultimate purpose of capturing financial wealth and acquiring control over productive assets. In the words of Malaysia's Prime Minister Mahathir Mohamad: "This deliberate devaluation of the currency of a country by currency traders purely for profit is a serious denial of the rights of independent nations".5

The appropriation of global wealth through this manipulation of market forces is routinely supported by the IMF's lethal macro-economic interventions which act almost concurrently in ruthlessly disrupting national economies all over the World. "Financial warfare" knows no territorial boundaries; it does not limit its actions to besieging former enemies of the Cold War era. In Korea, Indonesia and Thailand, the vaults of the central banks were pillaged by institutional speculators while the monetary authorities sought in vain to prop up their ailing currencies. In 1997, more than 100 billion dollars of Asia's hard currency reserves had been confiscated and transferred (in a matter of months) into private financial hands. In the wake of the currency devaluations, real earnings and employment plummeted virtually overnight leading to mass poverty in countries which had in the post-War period registered significant economic and social progress.

The financial scam in the foreign exchange market had destabilised national economies, thereby creating the preconditions for the subsequent plunder of the Asian countries' productive assets by so-called "vulture foreign investors".6 In Thailand, 56 domestic banks and financial institutions were closed down on orders of the IMF, unemployment virtually doubled overnight.7  Similarly in Korea, the IMF "rescue operation" has unleashed a lethal chain of bankruptcies leading to the outright liquidation of so-called "troubled merchant banks". In the wake of the IMF's "mediation" (put in place in December 1997 after high-level consultations with the World's largest commercial and merchant banks), "an average of more than 200 companies [were] shut down per day (...) 4,000 workers every day were driven out onto streets as unemployed".8 Resulting from the credit freeze and "the instantaneous bank shut-down", some 15,000 bankruptcies are expected in 1998 including 90 percent of Korea's construction companies (with combined debts of $20 billion dollars to domestic financial institutions).9  South Korea's Parliament has been transformed into a "rubber stamp". Enabling legislation is enforced through "financial blackmail": if the legislation is not speedily enacted according to IMF's deadlines, the disbursements under the bail-out will be suspended with the danger of renewed currency speculation.

In turn, the IMF sponsored "exit programme" (ie. forced bankruptcy) has deliberately contributed to fracturing the chaebols which are now invited to establish "strategic alliances with foreign firms" (meaning their eventual control by Western capital). With the devaluation, the cost of Korean labour had also tumbled: "It's now cheaper to buy one of these [high tech] companies than buy a factory -- and you get all the distribution, brand-name recognition and trained labour force free in the bargain"...10

The demise of central banking

In many regards, this Worldwide crisis marks the demise of central banking meaning the derogation of national economic sovereignty and the inability of the national State to control money creation on behalf of society. In other words, privately held money reserves in the hands of "institutional speculators" far exceed the limited capabilities of the World's central banks. The latter acting individually or collectively are no longer able to fight the tide of speculative activity. Monetary policy is in the hands of private creditors who have the ability to freeze State budgets, paralyse the payments process, thwart the regular disbursement of wages to millions of workers (as in the former Soviet Union) and precipitate the collapse of production and social programmes. As the crisis deepens, speculative raids on central banks are extending into China, Latin America and the Middle East with devastating economic and social consequences.

This ongoing pillage of central bank reserves, however, is by no means limited to developing countries. It has also hit several Western countries including Canada and Australia where the monetary authorities have been incapable of stemming the slide of their national currencies. In Canada, billions of dollars were borrowed from private financiers to prop up central bank reserves in the wake of speculative assaults. In Japan -- where the yen has tumbled to new lows -- "the Korean scenario" is viewed (according to economist Michael Hudson), as a "dress rehearsal" for the take over of Japan's financial sector by a handful of Western investment banks. The big players are Goldman Sachs, Morgan Stanley, Deutsche Morgan Gruenfell among others who are buying up Japan's bad bank loans at less than ten percent of their face value. In recent months both US Secretary of the Treasury Robert Rubin and Secretary of State Madeleine K. Albright have exerted political pressure on Tokyo insisting "on nothing less than an immediate disposal of Japan's bad bank loans -- preferably to US and other foreign "vulture investors" at distress prices. To achieve their objectives they are even pressuring Japan to rewrite its constitution, restructure its political system and cabinet and redesign its financial system... Once foreign investors gain control of Japanese banks, these banks will move to take over Japanese industry..."11

Creditors and speculators

The World's largest banks and brokerage houses are both creditors and institutional speculators. In the present context, they contribute (through their speculative assaults) to destabilising national currencies thereby boosting the volume of dollar denominated debts. They then reappear as creditors with a view to collecting these debts. Finally, they are called in as "policy advisors" or consultants in the IMF-World Bank sponsored "bankruptcy programmes" of which they are the ultimate beneficiaries. In Indonesia, for instance, amidst street rioting and in the wake of Suharto's resignation, the privatisation of key sectors of the Indonesian economy ordered by the IMF was entrusted to eight of the World's largest merchant banks including Lehman Brothers, Credit Suisse-First Boston, Goldman Sachs and UBS/SBC Warburg Dillon Read.12 The World's largest money managers set countries on fire and are then called in as firemen (under the IMF "rescue plan") to extinguish the blaze. They ultimately decide which enterprises are to be closed down and which are to be auctioned off to foreign investors at bargain prices.

Who funds the IMF bailouts?

Under repeated speculative assaults, Asian central banks had entered into multi-billion dollar contracts (in the forward foreign exchange market) in a vain attempt to protect their currency. With the total depletion of their hard currency reserves, the monetary authorities were forced to borrow large amounts of money under the IMF bailout agreement. Following a scheme devised during the Mexican crisis of 1994-95, the bailout money, however, is not intended "to rescue the country"; in fact the money never entered Korea, Thailand or Indonesia; it was earmarked to reimburse the "institutional speculators", to ensure that they would be able to collect their multi-billion dollar loot. In turn, the Asian tigers have been tamed by their financial masters. Transformed into lame ducks -- they have been "locked up" into servicing these massive dollar denominated debts well into the third millennium.

But "where did the money come from" to finance these multi- billion dollar operations? Only a small portion of the money comes from IMF resources: starting with the Mexican 1995 bail-out, G7 countries including the US Treasury were called upon to make large lump-sum contributions to these IMF sponsored rescue operations leading to significant hikes in the levels of public debt.13 Yet in an ironic twist, the issuing of US public debt to finance the bail-outs is underwritten and guaranteed by the same group of Wall Street merchant banks involved in the speculative assaults.

In other words, those who guarantee the issuing of public debt (to finance the bailout) are those who will ultimately appropriate the loot (eg. as creditors of Korea or Thailand) -- ie. they are the ultimate recipients of the bailout money (which essentially constitutes a "safety net" for the institutional speculator). The vast amounts of money granted under the rescue packages are intended to enable the Asian countries meet their debt obligations with those same financial institutions which contributed to precipitating the breakdown of their national currencies in the first place. As a result of this vicious circle, a handful of commercial banks and brokerage houses have enriched themselves beyond bounds; they have also increased their stranglehold over governments and politicians around the World.

Strong economic medicine

Since the 1994-95 Mexican crisis, the IMF has played a crucial role in shaping the "financial environment" in which the global banks and money managers wage their speculative raids. The global banks are craving for access to inside information. Successful speculative attacks require the concurrent implementation on their behalf of "strong economic medicine" under the IMF bail-out agreements. The "big six" Wall Street commercial banks (including Chase, Bank America, Citicorp and J. P. Morgan) and the "big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were consulted on the clauses to be included in the bail-out agreements. In the case of Korea's short-term debt, Wall Street's largest financial institutions were called in on Christmas Eve (24 December 1997), for high level talks at the Federal Reserve Bank of New York.14

The global banks have a direct stake in the decline of national currencies. In April 1997 barely two months before the onslaught of the Asian currency crisis, the Institute of International Finance (IIF), a Washington based think-tank representing the interests of some 290 global banks and brokerage houses had "urged authorities in emerging markets to counter upward exchange rate pressures where needed...".15 This request (communicated in a formal Letter to the IMF) hints in no uncertain terms that the IMF should advocate an environment in which national currencies are allowed to slide.16 Indonesia was ordered by the IMF to unpeg its currency barely three months before the rupiahs dramatic plunge. In the words of American billionaire and presidential candidate Steve Forbes: "Did the IMF help precipitate the crisis? This agency advocates openness and transparency for national economies, yet it rivals the CIA in cloaking its own operations. Did it, for instance, have secret conversations with Thailand, advocating the devaluation that instantly set off the catastrophic chain of events?" (...) Did IMF prescriptions exacerbate the illness? These countries' moneys were knocked down to absurdly low levels".17

Deregulating capital movements

The international rules regulating the movements of money and capital (across international borders) contribute to shaping the "financial battlefields" on which banks and speculators wage their deadly assaults. In their Worldwide quest to appropriate economic and financial wealth, global banks and multinational corporations have actively pressured for the outright deregulation of international capital flows including the movement of "hot" and "dirty" money.18 Caving in to these demands (after hasty consultations with G7 finance ministers), a formal verdict to deregulate capital movements was taken by the IMF Interim Committee in Washington in April 1998. The official communique stated that the IMF will proceed with the Amendment of its Articles with a view to "making the liberalization of capital movements one of the purposes of the Fund and extending, as needed, the Fund's jurisdiction for this purpose".19 The IMF managing director, Mr. Michel Camdessus nonetheless conceded in a dispassionate tone that "a number of developing countries may come under speculative attacks after opening their capital account" while reiterating (ad nauseam) that this can be avoided by the adoption of "sound macroeconomic policies and strong financial systems in member countries". (ie. the IMF's standard "economic cure for disaster").20

The IMF's resolve to deregulate capital movements was taken behind closed doors (conveniently removed from the public eye and with very little press coverage) barely two weeks before citizens' groups from around the World gathered in late April 1998 in mass demonstrations in Paris opposing the controversial Multilateral Agreement on Investment (MAI) under OECD auspices. This agreement would have granted entrenched rights to banks and multinational corporations overriding national laws on foreign investment as well derogating the fundamental rights of citizens. The MAI constitutes an act of capitulation by democratic government to banks and multinational corporations.

The timing was right on course: while the approval of the MAI had been temporarily stalled, the proposed deregulation of foreign investment through a more expedient avenue had been officially launched: the Amendment of the Articles would for all practical purposes derogate the powers of national governments to regulate foreign investment. It would also nullify the efforts of the Worldwide citizens' campaign against the MAI: the deregulation of foreign investment would be achieved ("with a stroke of a pen") without the need for a cumbersome multilateral agreement under OECD or WTO auspices and without the legal hassle of a global investment treaty entrenched in international law.

Creating a global financial watchdog

As the aggressive scramble for global wealth unfolds and the financial crisis reaches dangerous heights, international banks and speculators are anxious to play a more direct role in shaping financial structures to their advantage as well as "policing" country level economic reforms. Free market conservatives in the United States (associated with the Republican Party) have blamed the IMF for its reckless behaviour. Disregarding the IMF's intergovernmental status, they are demanding greater US control over the IMF. They have also hinted that the IMF should henceforth perform a more placid role (similar to that of the bond rate agencies such as Moody's or Standard and Poor) while consigning the financing of the multi-billion dollar bail-outs to the private banking sector.21

Discussed behind closed doors in April 1998, a more perceptive initiative (couched in softer language) was put forth by the World's largest banks and investment houses through their Washington mouthpiece (the Institute of International Finance). The banks proposal consists in the creation of a "Financial Watchdog -- a so-called "Private Sector Advisory Council" -- with a view to routinely supervising the activities of the IMF. "The Institute [of International Finance], with its nearly universal membership of leading private financial firms, stands ready to work with the official community to advance this process."22  Responding to the global banks initiative, the IMF has called for concrete "steps to strengthen private sector involvement" in crisis management -- what might be interpreted as a "power sharing arrangement" between the IMF and the global banks.23 The international banking community has also set up it own high level "Steering Committee on Emerging Markets Finance" integrated by some of the World's most powerful financiers including William Rhodes, Vice Chairman of Citibank and Sir David Walker, Chairman of Morgan Stanley. The hidden agenda behind these various initiatives is to gradually transform the IMF -- from its present status as an inter-governmental body -- into a full fledged bureaucracy which more effectively serves the interests of the global banks. More importantly, the banks and speculators want access to the details of IMF negotiations with member governments which will enable them to carefully position their assaults in financial markets both prior and in the wake of an IMF bailout agreement. The global banks (pointing to the need for "transparency") have called upon "the IMF to provide valuable insights [on its dealings with national governments] without revealing confidential information...". But what they really want is privileged inside information.24

The ongoing financial crisis is not only conducive to the demise of national State institutions all over the World, it also consists in the step by step dismantling (and possible privatisation) of the post War institutions established by the founding fathers at the Bretton Woods Conference in 1944. In striking contrast with the IMF's present-day destructive role, these institutions were intended by their architects to safeguard the stability of national economies. In the words of Henry Morgenthau, US Secretary of the Treasury in his closing statement to the Conference (22 July 1944): "We came here to work out methods which would do away with economic evils -- the competitive currency devaluation and destructive impediments to trade -- which preceded the present war. We have succeeded in this effort".25


1. United Nations Development Program, Human Development Report, 1997, New York, 1997, p. 2.

2. Robert O'Harrow Jr., "Dow Dives 513 Points, or 6.4", Washington Post, 1 September 1998, page A.

3. Bob Djurdjevic, Return looted Russian Assets, Aug. 30, Truth in Media's Global Watch, Phoenix, 30 August 98.

4. See "Society under Threat - Soros", The Guardian, London, 31 October 1997.

5. Statement at the Meeting of the Group of 15, Malacca, Malaysia, 3 November 1997, quoted in the South China Morning Post, Hong Kong, 3 November 1997.

6. See Michael Hudson and Bill Totten, "Vulture speculators", Our World, No. 197, Kawasaki, 12 August 1998.

7. Nicola Bullard, Walden Bello and Kamal Malhotra, "Taming the Tigers: the IMF and the Asian Crisis", Special Issue on the IMF, Focus on Trade No. 23, Focus on the Global South, Bangkok, March 1998.

8. Korean Federation of Trade Unions, "Unbridled Freedom to Sack Workers Is No Solution At All", Seoul, 13 January 1998.

9. Song Jung tae, "Insolvency of Construction Firms rises in 1998", Korea Herald, 24 December 1997. Legislation (following IMF directives) was approved which dismantles the extensive powers of the Ministry of Finance while also stripping the Ministry of its financial regulatory and supervisory functions. The financial sector had been opened up, a Financial Supervisory Council under the advice of Western merchant banks arbitrarily decides the fate of Korean banks. Selected banks (the lucky ones) are to be "made more attractive" by earmarking a significant chunk of the bail- out money to finance (subsidise) their acquisition at depressed prices by foreign buyers, -- ie. the shopping-spree by Western financiers is funded by the government on borrowed money from Western financiers.

10. Michael Hudson, Our World, Kawasaki, December 23, 1997.

11. Michael Hudson, "Big Bang is Culprit behind Yen's Fall", Our World, No. 187, Kawasaki, 28 July 1998. See also Secretary of State Madeleine K. Albright and Japanese Foreign Minister Keizo Obuchi, Joint Press Conference, Ikura House, Tokyo, July 4, 1998 contained in Official Press Release, US Department of State, Washington, 7 July, l998.

12. See Nicola Bullard, Walden Bello and Kamal Malhotra, op.  cit.

13. On 15 July 1998, the Republican dominated House of Representatives slashed the Clinton Administration request of 18 billion dollar in additional US funding to the IMF to 3.5 billion. Part of the US contribution to the bail-outs would be financed under the Foreign Exchange Stabilisation Fund of the Treasury. The US Congress has estimated the increase in the US public debt and the burden on taxpayers of the US contributions to the Asian bail-outs.

14. Financial Times, London, 27-28 December 1997, p. 3).

15. Institute of International Finance, Report of the Multilateral Agencies Group, IIF Annual Report, Washington, 1997.

16. Letter addressed by the Managing director of the Institute of International Finance Mr. Charles Dallara to Mr. Philip Maystadt, Chairman of the IMF Interim Committee, April 1997, quoted in Institute of International Finance, 1997 Annual Report, Washington, 1997.

17. Steven Forbes, "Why Reward Bad Behaviour, editorial, Forbes Magazine, 4 May 1998.

18. "Hot money" is speculative capital, "dirty money" are the proceeds of organised crime which are routinely laundered in the international financial system.

19. International Monetary Fund, Communique of the Interim Committee of the Board of Governors of the International Monetary Fund, Press Release No. 98/14 Washington, April 16, 1998. The controversial proposal to amend its articles on "capital account liberalisation" had initially been put forth in April 1997.

20. See Communique of the IMF Interim Committee, Hong Kong, 21 September 1997.

21. See Steven Forbes, op cit.

22. Institute of International Finance, "East Asian Crises Calls for New International Measures, Say Financial Leaders", Press Release, 18 April 1998.

23. IMF, Communique of the Interim Committee of the Board of Governors, April 16, 1998.

24. The IIF proposes that global banks and brokerage houses could for this purpose "be rotated and selected through a neutral process [to ensure confidentiality], and a regular exchange of views [which] is unlikely to reveal dramatic surprises that turn markets abruptly (...). In this era of globalization, both market participants and multilateral institutions have crucial roles to play; the more they understand each other, the greater the prospects for better functioning of markets and financial stability... ". See Letter of Charles Dallara, Managing Director of the IIF to Mr. Philip Maystadt, Chairman of IMF Interim Committee, IIF, Washington, 8 April 1998.

25. Closing Address, Bretton Woods Conference, Bretton Woods, New Hampshire, 22 July 1944. The IMF's present role is in violation of its Articles of Agreement.

Copyright by Michel Chossudovsky 1998. All rights reserved.

Michel Chossudovsky is a Professor of Economics, University of Ottawa and author of "The Globalisation of Poverty, Impacts of IMF and World Bank Reforms", Third World Network, Penang and Zed Books, London, 1997. He is also the author of "Dismantling Yugoslavia, Colonizing Bosnia," Covert Action Quarterly, Washington, D.C., Spring 1996, Number 56 and "The Business of Crime and the Crimes of Business: Globalization and the Criminalization of Economic Activity," Covert Action Quarterly, Washington, D.C., Fall 1996, Number 58.

Originally published in the Antifa Info-Bulletin, Research Supplement, September 24, 1998, this article appears in Tusovka (in English original and in Russian translation) with the author's permission. To publish or reproduce this text, contact the author at chossudovsky@sprint.ca or fax 1-514-425-6224.

Michel Chossudovsky, Department of Economics, University of Ottawa, Ottawa, K1N6N5 Canada; Voice box: 1-613-562-5800, ext. 1415; Fax: 1-514-425-6224; E-Mail: chossudovsky@sprint.ca; Alternative fax: 1-613-562-5999

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