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WE HAVE BEEN HAD

Copyright 1997 J.N. Tlaga

Part - II

What is central bank?

Central bank, also known as "bank of issue", has right to counterfeit money. This is all one needs to know to grasp the entire meaning of this institution.

This counterfeited money is always a paper money because the very idea of counterfeiting gold died together with the last medieval alchemist. A one dollar coin that contains 25.8 grains of standard gold (9/10 fine) is worth 25.8 grains of standard gold whether it was minted officially or counterfeited.

In January 1914, total bank deposits in America were $14 billion, and New York bankers needed to raise $32 billion over the next six years.

How to serve 32 gallons of wine from a 14-gallon barrel? That was the dilemma that led to the creation of the central bank in America under the name and style of the Federal Reserve System, colloquially referred to as "The Fed".

Under centralized banking system, the process of raising new capital is reversed. Bankers do not have to bother to attract savings of the willing depositors before lending to the ultimate borrowers. They can create "deposits" out of nothing. With central bank in place, the bankers can help themselves to a gallon of wine and then pour a gallon of water back into the barrel.

Within six years, from $14 billion in January 1914, total bank deposits in America grew to $29.4 billion. But the real increase was much higher, because, in the same period, $9.5 billion were lent to England and her allies to finance their Great War with Germany, and $22.6 billion were spent by the US Government for its own part in that war. These were the 32 billion dollars the New York bankers needed to raise.

(Federal Reserve System was created by rational design, drawn in the Bank of England and executed by a cabal of bankers from New York, led by J.P. Morgan and Company, to finance the Allied side in World War I. Without unlimited access to the US capital market, England and her allies would have lost the war. A lot of unsavory hay has been made over the years from the fact that Paul Moritz Warburg played key role in developing and enacting the Federal Reserve legislation. People who do that, do not seem to understand that New York banks of that era were either "British" or "German". Because it were the "British" banks who decided to saddle America with a central bank, they had to invite someone from the leading "German" bank, Kuhn Loeb and Company, otherwise Jacob Henry Schiff might have disrupted J.P. Morgan's vespers. Paul Moritz Warburg was an excellent choice, because he was not the brightest of the Warburg brothers, and was by nature a lecturer. So, instead of "imposing" their design upon "German" bankers, Morgan's people allowed Paul Moritz Warburg to "persuade" them to accept his design.)

By 1920 the purchasing power of the Gold Standard Dollar, diluted by uninterrupted stream of counterfeited "dollars" in the form of "Federal Reserve Notes", was reduced to 49.5 cents. The post-war deflation of 1921-22 managed to restore the dollar value only to 59-cent level. And even after four depression years, purchasing power of Gold Standard Dollar went no further than 76.5 cents in 1933.

The price of gold was raised in 1934 from $20.67 to $35 per ounce for the benefit of foreigners mostly, because Americans had already been compelled to surrender their gold at $20.67 per ounce in the previous year. At $35 per ounce, the external dollar was pegged to gold at 59 cents in terms of 1913 dollar. At this rate, gold became overvalued by 30%, and dollar became undervalued by 23%. This of course caused massive inflow of foreign gold to America.

Increase of the price of gold to $27 per ounce would have been sufficient to peg the 76.5-cent dollar to its actual gold parity.

By increasing the price of gold to $35 per ounce, which corresponded with 59 cent level of the 1913 dollar, Franklin Delano Roosevelt set the dollar's foreign exchange value at the level 23% lower than its current domestic purchasing power (76.5 cents in the 1913 dollar), and thereby made the advance preparation for World War II inflation.

It would take nine years for purchasing power of the 1934 dollar to descend to the $35 per ounce gold parity at 59-cent mark in terms of the 1913 dollar. This momentary equilibrium in 1943, when Roosevelt Dollar's gold parity and greenback's purchasing power both stood at 59-cent mark in terms of the 1913 Gold Standard Dollar is of key importance here.

The median purchasing power of the 1942-1943 dollar, which sets the exact point of equilibrium between Roosevelt Dollar's external and domestic value, is adopted here as the 100-cent level for subsequent calculations.

Adopting any other year as "100" reference point would be on its face misleading, because ever since the Gold Standard Dollar was debased by the Fed, there was only one moment in history, however brief, when dollar's foreign exchange value and domestic purchasing power were identical in terms of the Gold Standard Dollar. And that moment corresponds with the median purchasing power of the 1942-1943 dollar.

Domestic depreciation did not stop in 1943, of course, and two-tier Roosevelt Dollar, that until 1943 was worth more at home than it was worth abroad, merely reversed its disparity; from 1943 on, dollar would be worth more abroad, and less and less at home.

This 1942-1943 dollar, that was worth 59 cents at home and 59 cents abroad in terms of 1913 dollar, was adopted by the planners of the post-war monetary order as the world official reserve currency, to serve as a pulling locomotive of the International Monetary Fund. Under the Bretton Woods agreements of July 22, 1944 which created both the International Monetary Fund and the World Bank, the member governments were to define their currency units pro forma in weight of gold, and these assumed "gold parities" would then be translated into the official par values in relation to the US dollar. The IMF currencies themselves were not made convertible to gold, they were made convertible only to US dollars, and only dollars were made officially convertible to gold.

By the time John Meynard Keynes and Harry Dexter White concluded their preliminary negotiations in 1943, the greenback was worth 97 cents in terms of its median 1942-43 value.

By the time the Bretton Woods agreements were signed on July 22, 1944, the greenback was worth 95 cents.

By the time US Congress approved the Bretton Woods deal and President Truman signed it into law on August 4, 1945, the greenback was worth 93 cents.

By the time the Secretary of the Treasury, John Snyder, certified the US dollar to the IMF in September 1946 at its 100-cent value of "15 and 5/21 grains of gold 9/10 fine", the greenback was worth less than 86 cents.

And, by the time the IMF began its foreign exchange operations in 1947, the greenback sank to 75 cents.

In economic terms, this was prima facie revaluation of 75-cent dollar for purposes of foreign exchange upward 33% to 100-cent dollar level, but the New York Times never reported it as such. "Dollar Stays at $35 an Ounce" is not the same as "Dollar Revalued One Third".

That's how the Bretton Woods rigged casino, in which 75-cent chips would be cashed for 100-cent gold-convertible dollars, was formally established.

From the position of American manufacturer, this two-tier dollar that was worth 75 cents at home and 100 cents abroad, translated into hidden export tariff of 33% and hidden 25% subsidy to imports from abroad.

A US-made product, priced at home $100 in 75-cent fiat dollars, was worth only $75 in 100-cent gold-convertible dollars, but the moment it was offered for sale abroad, its price would automatically go up 33% because the same dollar bill was worth 75 cents at home and 100 cents abroad.

The effect of selling a $100 product for $100 abroad was the same as selling it for $133 at home. This, of course, priced the US-made products out of the markets abroad, and discouraged US exports across the board, while the same two-tier dollar also worked in reverse to the advantage of the imports from abroad. Foreign products, priced in 100-cent dollars, were 25% cheaper when offered for nominally the same price on 75-cent dollar market.

Disparity between 100-cent Roosevelt dollar and 75-cent greenback was automatically pricing every foreign product one-fourth cheaper in America, and every American product one-third more expensive abroad.

Meanwhile, the fiat dollar continued to depreciate. This did not affect its external rate of exchange, because, under Bretton Woods rules, it was a duty of the member governments to peg their currencies to gold-convertible dollar within 1% of each currency's par value. From the perspective of half a century of continuous destruction of American economy, this may sound like mockery on the grave, nevertheless it is a fact, that the foreign governments, which were deriving outlandish trade benefits from the overvalued dollar, were actually required under an agreement, signed and ratified by the US Government, to keep dollar continuously overvalued by pegging their currencies to dollar's outdated par value.

While the ceiling of the 100-cent dollar was firmly supported by its convertibility to gold, the floor of the inconvertible greenback, printed without respite, was sinking steadily. By 1953, the year of Eisenhower's inauguration and the end of Korean War, the greenback was worth less than 63 cents in terms of Roosevelt dollar and the consumer dollar of 1942-43.

By 1971, the paper dollar went down to 41 cents, while the gold-convertible dollar was still worth 100 cents.

If the "gold parities" of other currencies would have been maintained at the declared level, that is, if other countries experienced zero inflation and the purchasing power of their currencies remained the same, the 41-cent dollar would have caused the hidden export tariff to rise to 144%, and would have increased the import price subsidy to 59%. The effect of selling an American-made $100 product for $100 abroad would have been the same as selling it for $244 at home, while foreign manufacturers would be in the position to sell identical or better product for $41 in America and still make a profit.

But "gold parities" of other currencies were not kept at their declared level, and their purchasing power was also depreciating.

If the rate of inflation abroad would be the same as in the United States, the 1947 disparity, with one-third tariff on US exports and one-fourth subsidy to foreign imports, would be maintained symmetrically over the years. But the rate of inflation abroad was not uniform. Countries with lower inflation, would see the undervaluation of their currencies and the corresponding foreign trade edge increasing, while countries with higher inflation would see their edge diminishing.

The simplest method to maintain the required parity with US dollar without undue pegging expenditures was to inflate in step with US dollar. The initial edge of one-third hidden tariff on US exports and one-fourth hidden subsidy to foreign imports provided enough infrastructure for quick economic miracles; there was no need to push for more.

When Japanese Government certified its yen to the IMF at 0.00246853 grams of gold or 12,600 yen per ounce of gold and promised to maintain dollar-yen exchange rate at 360 yen to 1 dollar, it assumed no obligation to exchange every 12,600 yen for one ounce of fine gold, nor to maintain yen's gold parity at 0.00246853 grams forever. All it promised to do was to see to it that 1 US dollar would be exchanged for 360 yen until that rate was officially changed through the IMF.

Japanese Government kept its promise. It was continuously assuring the exchange rate of 1 US dollar into 360 Japanese yen. The value of the yen in terms of gold depreciated over the years, of course, as was the case with all other fiat currencies, including US dollar. In constant yen, Japanese were paying less and less for cheaper and cheaper dollar, while in current yen they were pretending to pay the same for the dollar that pretended to be the same. Meanwhile, the only thing that was staying the same was that 35 paper dollars could be exchanged from abroad for one ounce of fine gold at the US Treasury.

Bretton Woods system, that started as a rigged casino where guests could cash 75-cent chips for 100-cent dollars, inevitably became a crazy country club where every "squire" would pretend to be somebody else. While the casino owners would be gradually reducing the price of their chips from 75 cents in 1947 to 41 cents in 1971, the guests would be gradually adding counterfeited bills (some would add more, some would add less) to the monies with which they would be purchasing their chips.

The real price would change little, because cheaper and cheaper money would be paying lower and lower price, but at the end of the day each chip, no matter how little it was paid for, could still be cashed for 100-cent gold- -convertible dollar.

Then, on August 15, 1971, the casino manager announced: "We will no longer pay for your chips in 100-cent dollars."

Aside from serving as an instrument of alignment of fixed rates of exchange, the gold-convertible dollar also served to siphon US national gold reserves from Fort Knox to the "allied" central banks. Under Bretton Woods system, Federal Reserve Bank of New York became de facto central bank of the entire world. Paper dollars, in the form of Federal Reserve Notes, replaced monetary gold in foreign transactions, and US Government could and would settle its external accounts (armies abroad, foreign aid) by printing new dollars; the exchange premium only encouraged this practice.

The outflow of dollars would be further exacerbated by massive export of capital by multinational corporations, which, could add one-third or more to their capital by moving it abroad, and then collect one-fourth or more in price subsidy by importing the products of their expatriated plants back to the United States, with still more profit, from lower wages paid to foreign workers and from borrowings denominated in quicker deteriorating currencies, piling up on top.

Finally, there were millions of American tourists playing millionaires abroad. They could never get over that miraculous expansion of their dollars upon crossing the US border. Somehow it never occurred to them that their own grand children would one day be denied university education to pay for those miracles.

And when the inflow of dollars would begin to exceed the foreign countries trade requirements and foreign central banks reserve needs, the excess dollars would be returned to these shores in exchange for gold bullion at $35 per ounce. It may come across as a shock to many of us now, but it is a documented fact that the first wave of major purchases of US monetary gold by foreign central banks was financed with... Marshall Plan dollars.

US gold reserves at Fort Knox have reached their all time peak on September 21, 1949, at $24,690,998,991. At $35 per ounce, this equaled 705,457,114 ounces. By June 30, 1973, of these 705 million ounces only 267 million ounces would remain, while combined gold stock of Germany, Switzerland, France, Italy, Holland, Belgium, England and Japan would reach 521 million ounces.

To grasp the magnitude of the loss of 438 million ounces of gold, one must realize that the indemnity of five billion francs Bismarck extorted from France after 1870 war was the equivalent of 46,671,130 ounces. 46 million ounces of gold versus 438 million ounces of gold. And our country was not defeated by the United Nations, as France was defeated by Prussia. Our indemnity was imposed upon us by our own government. And the worst was still to come, for, contrary to persistently maintained spin, the Bretton Woods system was not abolished in Camp David. Closing the "gold window" merely replaced monetary gold with our government's IOUs.

Part - I