THE ROSETTA STONE (Part I)
Copyright 2002 J.N. TlagaJuly 1914 was the last month when the gold standard and pound sterling as the world reserve currency reigned supreme. For this reason, July 1914 readings of the British Cost of Living Index and of the American Consumer Price Index are adopted as 100 percent for purposes of all comparisons and calculations herein.
Decimal pound sterling dates back only to 1971. The old pound sterling, abbreviated "£" for Roman "Libra", was worth 20 shillings, and a shilling, abbreviated "s" for Roman "solidus", was worth 12 pence (abbreviated "d" for Roman "denarius"). £1 = 20s = 240d
GOLD STANDARD = FIAT IN DISGUISE is a recommended prerequisite:
The idea to manipulate the price of gold down in order to elevate foreign exchange value of the heavily-depreciated fiat Pound Sterling was originally conceived probably by Montagu Collet Norman, because that idea was conveyed into official policy when he happened to be the Governor of the Bank of England, and he happened to be the first and only Governor whose term in office lasted twenty four years, versus the usual two years and rare three. Why would the British imperial establishment have continuous need for Mr Norman's services from 1920 till 1944, when his predecessor Brien Ibrican Cokayne served from 1918 till 1920, and Walter Cunliffe, the only one who until then served longer than three years (no doubt on account of the First World War) was succeeded by Cocayne after five years of service? Most likely because Mr Norman was in control of a unique continuous policy which could not be entrusted to anyone else, which was more important and lasted longer than the First World War, and which was brought to its conclusion in 1944.
British mint price of gold in July 1914 (ever since 1717) was 77s 10.5d per 22-carat ounce (11/12 fine), or 934.5 pence. It translated into 1019.45 pence or 84s 11.45d per fine ounce. (Colloquially, it was known as "85-shilling gold").
On February 5, 1920, the London Gold Fixing was 127s 4d, or 1528 pence per fine ounce.
When we divide gold standard parity of 1019.45 pence by the February 5, 1920 fixing of 1528 pence we get 0.667. This would indicate that fiat pound sterling of February 5, 1920, heavily depreciated by wartime inflation, was worth 66.7 percent or 2/3 of the sterling of July 1914. But was it really?
The British Cost of Living Index stood in February 1920 at 230 percent in terms of 100 percent in July 1914. British Gold Standard Index in February 1920 was therefore at 2344.74d or 195s 4.74d level (1019.45 X 230% = 2344.74). Hence, the February 5, 1920 fixing of 1528 pence (127s 4d) was 34.8 percent below the gold's inflation value.
Where this 127s 4d fixing came from?
From sterling traded at $3.24 and 5/8 in New York the day before. When we divide sterling-dollar rate of exchange $3.24625 by sterling-dollar parity of July 1914, $4.86656, we get 0.667, and by dividing 1019.45d by 0.667 we get 1528 pence, which translates
into 127s 4d.
With British cost of living index at 100 in July 1914 and at 230 in February 1920, the February 1920 pound sterling was worth $2.11589 in dollars of July 1914. But with US consumer price index at 100 in July 1914 and 195 in February 1920, the February 1920 pound sterling was worth $4.12599 in dollars of February 1920.
When sterling-dollar purchasing power parity was $4.12599 in February 1920, where did $3.24625 rate came from?
At the time of inflationary boom, bankers who make the foreign exchange market are always far ahead of the game in order not to loose money on forward transactions in foreign trade. In view of this fact, our question should be rephrased to read: Why the Bank of England gave the marching orders to J.P. Morgan in New York to stop the sterling's decline against dollar at $3.24625?
The wholesale indices clearly suggested that as a result of the wartime inflation prices doubled in America and tripled in Britain. The retail price indices were not at that level yet because of wartime controls that were being dismantled only recently. At that point, somebody decided to apply brake to retail prices in UK and to roll them back before they reached the point of full adjustment. With US dollar's purchasing power reduced to one-half and that of British pound to one-third, pound's net decline against dollar was only one-third, hence $3.24625 was the right line in sand to defend. From this line, prices in England needed to be collapsed only by one-third to restore sterling's prewar rate of exchange of $4.86656, and if they were contained at the earlier stage of adjustment they would need to be collapsed even less than one-third. Drastic increase of interest rates was of course calculated to cut off the steam from the British postwar boom, but it would take until November 1920 for the retail prices to reach their high water mark at 276 percent, 24 points below the expected 300 percent.
The pain of deflating prices in England was initially rendered useless by parallel deflationary policy in the United States, but once American CPI's decline was conveniently arrested in April 1922, pound sterling closed its gap against dollar with only 36.6 percent reduction in cost of living index from 276 in November 1920 to 175 in April 1925, when gold standard and the prewar gold parity of the British pound were proclaimed restored. But were they really?
What was introduced at the end of April 1925 by the Chancellor of the Exchequer, Winston Churchill - (Norman to Churchill: "I will make you Golden Chancellor") - as the restoration of the prewar gold standard, was not a gold standard at all; it was Mr Churchill's "gold standard". Nineteen years later, identical "gold standard" was forced upon the world under Bretton Woods treaty (for which Mr Churchill's "gold standard" served as a prototype) with only one difference: the Bretton Woods "gold standard" was
maintained by making it a criminal offense for US nationals to own or posses monetary gold; in UK, Mr Churchill's "gold standard" was maintained by making gold available for purchase in bricks of 400 fine ounces only, which placed conversion of a sterling bill into gold beyond the reach of general public.
With American consumer price index at 172 in April 1925 and British cost of living index at 175, sterling-dollar purchasing power parity of 4.78313 was only 1.7 percent below the prewar sterling-dollar exchange rate of $4.86656.
But the gold parity was entirely different matter!
With British cost of living index at 175 in April 1925, British Gold Standard Index for that month was 1784 pence (1019.45 X 175% = 1784). Thus declaring April 1925 sterling to be at gold-standard parity of 1019.45 pence per fine ounce amounted to the suppression of the real price of gold by 42.86 percent.
What made this suppression possible?
The simple fact that purchasing power of the fiat Federal Reserve Note that passed around as "US dollar" was lower against gold by similar percentage (41.86) while gold coins of prewar weight were still in circulation. In effect, United States had two kinds of dollars in April 1925: gold dollar worth 100 cents, and Federal Reserve paper dollar worth 58.14 cents (100 / 172 = 0.5814)
The English gentlemen conformed sterling rate of exchange to the Federal Reserve dollar, worth 58 cents, and then they turned around and said that because sterling-dollar rate of exchange was the same as it was in July 1914, and the dollar gold coinage was also the same, so the sterling's gold parity was the same as it was in July 1914, namely 1019.45 pence per fine ounce.
In ANNOUNCING COPERNICAN REVOLUTION, where all these figures were presented to the world for the very first time, I wrote:
"Churchill's options were the same as if he got too much change from his grocer. He could say, "Excuse me, but you gave me too
much change", or he could pretend he never noticed the difference. He chose the second option.
"Can we blame him for making this choice. What would happen if Mr Churchill would write a letter to his US counterpart, who was already praised as the greatest Treasury Secretary since Alexander Hamilton, in which he would say, 'Excuse me Mr Mellon, but you re selling taxpayers gold for 58 cents on a dollar'?
"By not writing such a letter, Mr Churchill in effect ratified the situation where both, Britain and America had two-tier currencies: US dollar, worth 58 cents at home and 100 cents abroad; British pound, worth 11s 5d at home and 20s abroad. As a result, both countries had their exports impaired and imports enhanced."
On the second thought, that "too much change" analogy was incorrect. Why? Because it implies that gold price falsification by Mr Churchill was a crime of opportunity, so to speak. It implies that Churchill used two-tier dollar just because it landed on his lap. In reality, two-tier dollar was deliberately saved in April 1922, when it was on the way out, because without that two-tier dollar crutch, pound sterling had to be devalued to one-third of its gold standard parity, and that would have sent Norman and Churchill back to the square one.
A close-up window to look at Montagu Norman's machinations and to grasp what Mr Churchill's "gold standard" was really about was left open for latter day historians in 1927, when Poland devalued her new currency.
Back in 1924, Norman persuaded Polish Treasury Minister, Grabski, to stabilize Poland's currency in terms of gold. As a result, heavily depreciated Polish Mark was scrapped and replaced with new monetary unit Zloty, pegged to the gold parity of Swiss Franc (the last survivor of the Latin Monetary Union) which was often used in Poland as a yardstick of value for long term contracts during wartime inflation. Hence, the foreign exchange value of Zloty was pegged at 19.3 US cents. But three years later, Polish government abruptly devalued Zloty from 19.3 US cents to 11.22 US cents. It was the size of that devaluation that caught my attention, for it is still talking to us seventy-five years after the fact. When we divide 11.22 by 19.3 we get 0.581347. This tells us that Zloty's devaluation was calculated to match fiat dollar's purchasing power parity to the one-hundredth part of one penny (100 CPI / 172 CPI = 0.581395).
Poland's Zloty was devalued 41.86 percent not because its gold value was incorrectly calibrated, but because Polish government realized after the fact that fiat Federal Reserve dollar in which trade contracts and agreements were priced was worth 41.86 percent less than gold dollar to which the rate of exchange was tied.
What would happen if Poland would not devalue her Zloty to the level of the Dollar's and Pound's actual purchasing power parity?
Poland would be making her payments in 100-cent dollars or 20-shilling pounds, and would be receiving goods, services and payments in 58-cent dollars or 11-shilling-5-pence pounds.
So, here we have it:
By declaring official return of the Pound Sterling to the gold standard parity when Britain's Cost of Living Index was at 175 percent of the gold standard level, and thus falsely certifying to the world that one fine troy ounce of gold was again worth 85 shillings when in reality it was worth 148 shillings and 8 pence, Mr Churchill arranged for making British payments in 11-shilling-5 pence pounds and receiving foreign goods, services and payments in 20-shilling pounds.
As a result, UK was paying annually £240,000,000 for imports from US instead of £420,000,000 and £35,000,000 on account of war debt instead of £61,250,000, and was receiving £220,000,000 as return on foreign investments instead of £125,700,000.
In order to maintain so outlandish overvaluation of the fiat pound sterling, Montagu Norman had to find a way to maintain adequate gold reserves in order to keep the suppressed price of gold on its "gold standard" level. His problem was basically the same as that of gold cabal of today, except that he could not use derivatives to control demand for physical gold. He sought his salvation in four different directions:
(1) He made gold available in 400 fine ounces bricks only. At today's manipulated price of about $300, one would be able to redeem paper money for gold only if one would be ready to redeem $120,000 minimum.
(2) He made aggressive efforts to coerce foreign central banks to hold sterling bill as reserve currency equal to gold. For example, he was "telling the [Bank of France] that sterling was good for it, and that it could not have too much sterling." And the Bank of France official commented: "London is a free gold market, and that means that anybody is free to buy gold in London except the Bank of France." (Anderson, Economics..., p 181)
(3) He enforced effective embargo on foreign loans.
(4) He managed to shift substantial supplies of gold from New York to London (and also to Paris, to relieve the pressure on London) by courtesy of Benjamin Strong of the New York "Fed".
Every step of the way, this "Norman conquest of $4.86656 sterling" was a very precarious, "written on water" proposition. Without continuous access to American resources, assistance and cooperation, it could never see the light of day.
Ordinarily, when a currency unit is debased as a result of wartime counterfeiting, postwar solutions to the problem are twofold:
(1) Deflationary return to the prewar prices (that was the approach taken by the US of A after the Civil War); or
(2) Ratification of wartime inflation by reducing gold content of the currency to the purchasing power parity level (that was the approach ultimately taken by France after World War I -- Franc was devalued from the prewar 19.3 US cents to the new standard of 3.92 US cents).
United States approach was initially a deflationary one. Wartime inflation peaked at CPI 209 in June 1920, and from there the prices were aggressively deflated by 20 percent to CPI 167 in March 1922. But from April 1922 on, the prices were stabilized at the existing level. No further effort to deflate the prices was taken, and no initiatives were made to devalue US dollar against gold by 40 percent to conform its gold content to its current purchasing power parity. In other words, from April 1922 on, nothing was done to correct the dollar's de facto two-tier currency status. This of course would enable British CLI to catch up with American
CPI in April 1925, in order to declare that pound sterling was "at par".
At the time of introduction of Mr Churchill's "gold standard", England's gold reserves stood at £153,000,000 (36,000,000 fine ounces or 90,000 gold bricks). Even with $200,000,000 standby credit line at the Federal Reserve Bank of New York (9,675,000 fine ounces) and $100,000,000 credit line at J.P. Morgan & Company (4,837,500 ounces) this was not enough to maintain
11-shilling-5-pence pound overvalued 75 percent at 20-shilling level, by keeping the price of gold suppressed by nearly 43 percent.
And so, notwithstanding $11.5 billion expansion of bank credit in the United States between 1922 and 1927 that "was not needed by commerce" (Anderson, Economics... p 182) but was needed by the Bank of England (and by the bubble of the "Roaring Twenties"), by the summer of 1927, Montagu Norman's options were narrowed down to only two: either to raise the interest rates or to get more deposits of gold by other means.
To put it in the perspective of a basketball game, the American team was allowing the English team every opportunity to catch up with the losing score, and when the English team was going to lose anyway, the coach of English team, Montagu Norman, came to the coach of American team, Benjamin Strong, and demanded a flat out victory for the English. And because J.P. Morgan & Company was an agent of the Bank of England, and Benjamin Strong was an agent of J.P Morgan & Company, there was no
question that the English team would be afforded its victory, but at what price?!
In his famous essay, GOLD AND ECONOMIC FREEDOM, Alan Greenspan writes:
"More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates."
(By June 1928, 24,235,875 fine ounces of gold left the United States.)
"The 'Fed' succeeded" - Alan Greenspan continues - "it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market - triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of
bank failures. The world economies plunged into the Great Depression of the 1930's."
Very few economists explain the Great Depression in comparable terms. It is the correct view. Even though, Alan Greenspan had no clue that Montagu Norman operated pound sterling on pure fiat, and kept it fantastically overvalued 75 percent by way of suppressing the price of gold 43 percent - that was the economic reason, going far beyond "politically unpalatable", why Norman could not even consider raising interest rates - nevertheless Greenspan grasped the essential causes and effects right.
During the New York conference attended by Hjalmar Schacht on behalf of Reichsbank, by Charles Rist on behalf of the Bank of France, and by Montagu Norman and Benjamin Strong in the summer of 1927, Norman was pushing for uniform, across the board inflating of all four currencies in step with each other. Shacht and Rist said "No!", but returned home happy, because Strong told them not to pester Norman about sterling balances but to cash them for dollars and gold in New York. Norman remained in the States to make sure the easy money faucet, ostensibly "to help the farmer", was actually opened.
It is our contention, that the "Roaring Twenties" was a case of a bubble economy every step of the way, that that bubble was deliberately cultivated from 1922 on to maintain two-tier dollar for the benefit of sterling's false return to gold. "The excess credit which the Fed pumped into the economy" in 1927 did not "[spill] over into the stock market", as Alan Greenspan suggested in his essay; it directly expanded already existing spillover beyond stratospheric proportions.
(Alan Greenspan, did not seem to have a clue that at the time Benjamin Strong bamboozled and overwhelmed the Federal Reserve Board in 1927 into administering his "shot of whiskey to the markets", the US economy was already a bubble economy, and neither he seemed to have a clue that US economy was already in advanced stage of a bubble when he himself opened the Fed's money faucet in the wake of LTCM debacle in 1998.)
The fact that Norman's gold manipulation could not succeed without two-tier dollar, and that two-tier dollar was deliberately rescued in 1922 and then kept on respirator solely for this purpose, needs to be seen in historical context to grasp its significance and consequences. Come to think of it, the primary reason why most economists do not seem to have anything intelligent to say is that they confine their research and thought to economics alone.
When it became apparent that President Thomas Woodrow Wilson had spent himself into stroke and paralysis in vain, and United States Senate ultimately rejected his Treaty of Versailles with League of Nations covenant on March 19, 1920, Democrats nominated James Middleton Cox for President and Franklin Delano Roosevelt for Vice President to repackage Wilson's new world order agenda.
There are unspoken prerequisites one must meet in addition to statutory requirements to be considered for Presidential or Vice Presidential bid. Italians have a term for it in application to election of the Pope of Rome; the word is "papabile". Here it would sound awkward to say someone was or was not "presidentable". We may not have a word for it, but there is such thing as being "presidentable", and every one of us can tell instantly that FDR was not so "presidentable" in 1920. (It's like pornography in Potter
Stewart's dictum: We cannot define it, but we know when we see one.)
Why was FDR on Democratic ticket then? Because many men in "smoke filled rooms" were sold on the idea that his name would attract many votes from Theodore Roosevelt's Republican constituency. (It will be recalled that Wilson originally won US Presidency only because Theodore Roosevelt did to William Howard Taft in 1912 what H. Ross Perot did to George Herbert
Walker Bush in 1992.) And because he was considered to be one of their own by the British colonial establishment, then openly solidifying its position in America through its own front organization, Council on Foreign Relations. (Franklin Delano Roosevelt was a grandson of Warren Delano II, one of the largest opium dealers in China under protection of Union Jack. For J.P. Morgan crowd, that had to be "presidentable" enough. See: Gold Standard = Fiat in Disguise)
But the name "Roosevelt" failed to do its expected magic. Democrats received only 9 million votes, while Republican ticket of Warren Gamaliel Harding and John Calvin Coolidge received 16 million. Election of November 2, 1920 was rightfully perceived as a "solemn referendum" in favor of "America First" policy. And this is what Warren Gamaliel Harding said that got him elected in that solemn referendum:
"America's present need is
not heroics, but healing;
not nostrums, but normalcy;
not revolution, but restoration;
not agitation, but adjustment;
not surgery, but serenity;
not the dramatic, but the dispassionate;
not experiment, but equipoise;
not submergence in internationality
but sustainment in triumphant nationality."
Under Harding's administration, Congress ended war by joint resolution of July 2, 1921, and ratified peace treaties (separate from the Treaty of Versailles) with Germany and Austria-Hungary on October 18, 1921.
Then, on Easter Sunday, April 16, 1922, the Second World War started:
During the Genoa Economic Conference of 34 nations, convened on April 10 to rebuild European finance and commerce along the lines of the Treaty of Versailles, German Foreign Minister, Walther Rathenau, and Soviet Foreign Comissar, Georgi Vasilyevich Chicherin, met in a hotel in nearby Rapallo (like for illicit affair) and signed a rapprochement treaty with agreements to accord the Soviet Russia de jure recognition, to cancel prewar debts, to renounce war claims and reparations, and to apply most-favored-nation clause to their future trade agreements. The Genoa Conference then became redundant of course, because everyone realized the Treaty of Versailles was effectively checkmated; its luminaries, following the lead of Lloyd George, sheepishly drifted away, and the conference itself adjourned on May 19.
Why do we equate German-Soviet rapprochement treaty with the beginning of World War II (which in reality started 17 years later)?
The Great War of 1914-1918 firmly established that England, France and Russia could not defeat Germany and Austria-Hungary outrightly without massive intervention, both economic and military, of the United States. Thus when the United States under Harding walked away from the League of Nations and the Versailles order, a gigantic power vacuum emerged that was promptly exploited by two pariahs of Europe, Germany and Soviet Russia.
(Already in 1920, Winston Churchill, then War Minister in Lloyd George Liberal-Conservative coalition government, predicted that German-Soviet combination would create a mass against which the Western powers could not even defend themselves, and for this reason he advocated precisely the kind of rapprochement with Germany that Russia now sprang upon them in Rapallo.)
Now, let us put ourselves into the shoes of the English establishment, which thinks in terms of generations and centuries, not just next elections. We have laid deep plot to enslave the entire world with fiat money two hundred years ago. To this end we have financed one war after another, and now when the bloodiest of them all has left us nearly bankrupt, American President, elected by "solemn referendum", leaves us to the dogs, and just defeated Germany with utterly ruined by Communism Russia are ganging
up on us and are making the checkmate move we have dreaded the most.
What do we do? What in the world can we do?!
Short of abandoning our two hundred years old quest for enslaving the world and watching the new masters seizing control of the world, we have only one option: To sway Germany away from cementing the new alliance with Russia, and then to engineer what we have been doing so admirably well in the last two hundred years - yet another infernal war by which our adversaries will cancel each other out and leave us again as the surviving winners.
But to pull this one out we need plenty of money and we don't have it. Remember, the Great War of 1914-1918 was not really the First World War, it was the First War the British Empire Could Not Afford.
Instead of collecting war reparations from Germany, we need plenty of money to pay reparations to the Germans to sway them to abandon their alliance with the Communist Russia. And then we need plenty of money to bribe our French allies to make them go along with our scheming. They cannot see the big picture. We have to pay them enough so they would go along without asking unnecessary questions, and we have to do it without letting them know we are paying them.
Even if we would have that kind of money, we could not do it openly because England is a democracy, fraudulent democracy but democracy. After burying over nine hundred thousand relatives of our constituents on the battlefields of France, we would have very hard time to persuade them to vote for us so we could collect taxes from them in order to pay reparations to the Germans and bribes to the French. Come to think of it, they might consider us clinically diagnosed madmen.
In short, how can we do the impossible?
In the end, by standing in British establishment's shoes long enough, we will have to come to realization, that for the openers there was no way around subverting and destroying the Presidency of Warren Gamaliel Harding.
This standing in British establishment's shoes will be often employed in the subsequent parts of this essay in order to explain more and more complex issues a little better, for the ultimate objective of this presentation is not to cast recriminations for the past but to develop viable method to restore silver and gold by lawful electoral authority.
13 August 2002
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