Atelier 18, article 5
© Financial warfare
by Michel Chossudovsky(*)
"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)
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
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
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.
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
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
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
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
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
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,
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, Communiqué 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, Communiqué 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.
(*)Michel Chossudovsky is Professor of Economics, University of Ottawa, author of The Globalisation of Poverty, Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997.