HOW THE FIAT MONEY IS BEING DEFENDED
PART II
Copyright 2003 J. N. Tlaga
France could not return the world to gold standard on her own. Her economy was much too small for that. President de Gaulle could only ask other nations to join France in this effort, but asking export-dependent nations to confront the world's key fiat currency was like asking people to confront organized crime in a mafia controlled town.
President de Gaulle's non-monetary confrontational policies - such as leaving the integrated structure of NATO, vetoing UK application for membership in the European Economic Community, supporting independence of Quebec, or publicly confronting US policies in Indochina - had only annoyance value; they
could hardly be expected to induce the Anglo-American establishment to return to gold and silver and to abandon its quest for global control based on key fiat currency.
And the remedies of a monetary nature - taking settlements of the French trade balances in gold only and withdrawing from London Gold Pool - were destined to be ineffective either. They could only amplify the fact that inflation value of gold was much higher than $35 per ounce, and thus would only encourage others to keep redeeming their dollars for gold until the Fort Knox supplies would run out. France could not bring the gold standard back, she could only bring the gold exchange standard down.
But to bring down the Bretton Woods gold exchange standard was one thing, and to knock down the English imperial establishment from its throne on top of the world was quite another. Bretton Woods was only a transitory stage in the long tedious journey from silver and gold to the fiat currency that began in 1717. The sole purpose of the Bretton Woods order was merely to prime the unearned money pump.
When Federal Reserve notes were introduced in 1914, they did not displace all gold dollars overnight. They were only declared "as good as gold", and they were being patiently added up to the US money supply for twenty years until one day gold could be withdrawn entirely. Bretton Woods order was created to the very same end. The idea was to elevate Federal Reserve notes to the status of the official international currency side by side with gold with underlying intent to displace it eventually. President de Gaulle's attack on Bretton Woods order began when displacement of gold was nearly complete. Charles de Gaulle was not in the position to restore the gold standard, he could only accelerate formal ratification of the fiat dollar standard. And that was so not because the return to gold was no longer possible, but because the means available to
the French President were inadequate for the task at hand.
Read between the lines, Professor Johnson's address to the Imperial Club of Canada can be summarized as follows:
For the benefit of Jacks and Jennies of the world, we shall continue to maintain that return to gold is impossible on the usual excuses, e.g., "gold yields no interest to the holder whereas credit substitutes do", "erratic changes in the stock of money resulting from the vagaries of technical change and new discoveries in the industry producing the monetary commodity", etc, etc.
But for the benefit of our own imperial establishment, we hereby declare that "surrender by organized society of a realized possibility of conscious control is simply inconceivable", meaning, imperial "conscious control" of the entire world by means of the global fiat currency will not be abandoned.
How do we know our reading between the lines is correct?
We know it because the usual excuses are demonstrably false, as we have shown in Part I, while the imperial "conscious control" of the world is true. (Already in
www.gold-eagle.com/editorials_02/tlaga011902.html we have shown that the idea of imperial control of the world by way of global fiat currency happened to be older than the government of these United States, and that its underlying purpose was to produce the fruits of war without war.)
Thus Professor Johnson in effect said to President de Gaulle:
Anglo-American establishment is determined to eliminate gold as international money, and to replace it with its own fiat currency. Nothing France can do can stop this process. France's only option is to allow this
transition to take place gradually or to force sudden jump into floating exchange system. But bringing down the Bretton Woods order will not return gold to its old status of international currency. Ever since World War I,
gold has been used primarily for manipulating the exchange value of the fiat currencies in order to maintain key currencies permanently overvalued. The entire secret of the global control lies in possessing permanently overvalued fiat currency. That was the true meaning of the Bretton Woods order! See: www.gold-eagle.com/editorials_00/tlaga121100.html
Because France opted for upholding her pro-gold stance to the bitter end, the Anglo-American establishment had to activate a number of countermeasures to meet the impending collapse of the Bretton Woods order half way or even closer. In the array of these countermeasures, shorting US dollar on gargantuan scale stands out as the ultimate measure.
(1) November 18, 1967. Devaluation of the British Pound from $2.80 to $2.40. The purposes were: (a) to improve the British foreign trade position in preparation for impending showdown; (b) to secure the means for delivering the ultimate coup de grâce to gold; (c) to relieve the pound from its burden of the dollar's first line of defense.
(2) March 15, 1968. London gold market closes for extended "holiday" when March 14 demand exceeded 225 tons. On March 17, London Gold Pool is abolished and two-tier gold market is introduced. The purpose was to curtail dollar convertibility to gold at $35 per ounce, and to force US trade partners to accumulate US dollars as reserves. London market reopens on April 1 to everyone's realization that physical market had shifted (or has been relegated?) in the meantime to Zurich.
(3) May 1968. Cretin "revolution" in France. The purpose was to destabilize Gaullist régime, and to price French exports out of competition by forcing outlandish, across-the-board wage increases. Resulting lower export earnings reduced French pressure on US gold reserves.
(4) May 31, 1968. IMF articles are amended by introduction of Special Drawing Right (SDR), a new international unit of account defined as 0.888671 gram of fine gold, heralded as gold substitute, but in reality
serving as US dollar substitute (whose gold definition was the same). The purpose was to check the run on US gold by introducing alternate fiat money for international settlements, which President de Gaulle could not criticize as bearing "the stamp or control of any one country in particular". SDR was originally proposed by Keynes as "bancor" long before the Bretton Woods conference.
(5) October 1969. Germany succumbs to the pressure to revalue mark upward. Revaluation rate is fixed at 9.3 percent on October 24 after ostensible diagnostic free float. The rationale is to make German exports
more expensive, so that German earnings in US dollars and resulting demand for gold are scaled down. We call the free float test "ostensible" because even after 9.3 percent revaluation, German mark remained heavily undervalued.
(6) December 1970. In order to provide ample financing for massive short sale of the US dollar on never before attempted scale, President Nixon is successfully deceived by openly irrational "full-employment budget" proposal of Herbert Stein, then Deputy Chairman of the Council of Economic Advisors. Stein persuaded Nixon that the best way to assure full employment in the election year of 1972 was to open the Fed's liquidity faucet until the economy was saturated with additional money supply of at least fifteen billion dollars that would ultimately be required under full employment conditions. When provided with additional money supply as if already operating under full employment, the economy of itself would upgrade the rate of employment - Stein's argument sang.
Herbert Stein's Keynesian con wasn't entirely new. It was originally devised in 1947 to provide dollar liquidity for Bretton Woods system, but Marshall Plan, unveiled at Harvard on June 5, 1947, managed to accomplish that purpose under better pretenses ("noble" assistance to foreign nations rather than vulgar money printing scheme).
Because Richard Nixon believed he lost his first presidential bid to John Kennedy on account of economic downturn in 1960, he embraced Stein's sophistry as "self-fulfilling prophecy", and extracted a firm commitment from Arthur Burns that the Fed would cooperate and supply all the liquidity required. Who was Arthur Burns besides being the Fed's Chairman? He was the very same Arthur Burns who ten years later, while sitting on Ronald Reagan's policy council in the election year 1980, told Herbert Stein that he endorsed Reagan's highly implausible plan for balancing the budget by 1983 because... "if you dissented from it, your whole usefulness in the organization was lost." www.thirdworldtraveler.com/Democracy_America/TriumphConservatism_POAD.html
Richard Nixon never said: Hey, all you are proposing to do is to procure some fifteen billion dollars for the bankers on the theory this money will be used to create the jobs I need for 1972. But money is money, it can be used for anything!
That the money was intended to finance a gigantic short sale of the US dollar apparently never entered his mind. Nixon never shied away from a daring plan, but even for him this would be too fantastic to contemplate.
Early in January 1971, Burns opened the Fed's money faucet, and let it run. But the flowing money failed to produce the jobs Herbert Stein promised it would. Quite to contrary, it aggravated employment situation still further. What was wrong?
One day, New York Fed was buying Treasury bonds to pump dollars into economy, and on the next day the same New York Fed was selling the same bonds to foreign central banks to reacquire the same dollars it injected the day before. Plain vanilla deficit spending would have generated the new jobs President Nixon needed (or thought he needed) for his re-election, but naked money expansion merely sent the new dollars for a quick circular excursion abroad.
On liquidity basis (dollars only, i.e., excluding transactions paid in Treasury securities with entities other than foreign central banks), national balance of payments for 1971, as reported by US Department of Commerce, was in deficit of $22 billion, a net increase of $18.2 billion from $3.8 billion in 1970.
Where these additional 18.2 billion dollars of deficit came from? They came primarily from two sources:
One source was the sharp increase in imports by $5.7 billion, from $39.9 billion deficit in 1970 to $45.6 billion deficit in 1971, and the other source was the shocking increase of deficit in "errors and unrecorded transactions" category by $9.8 billion, from $1.1 billion deficit in 1970 to $10.9 billion deficit in 1971. Together these two categories accounted for $15.5 billion of $18.2 net increase in 1971 balance of payments deficit.
To say it bluntly, $9.8 billion of the new money provided by Arthur Burns were simply smuggled abroad, for such is the meaning of "errors and unrecorded transactions" category, and $5.7 billion were shifted abroad
under false pretenses of increased imports.
Why do we label those imports as fraudulent. Because we think they were mostly intra-company transfers, many in the form of prepaid trade bills, orchestrated by the multinational corporations for two purposes: (1)
to liquidate their foreign inventories, and (2) to convert their dollar proceeds into undervalued foreign currencies. The market driven increase in imports of such magnitude would be inconsistent with 8.4 percent increase of European export prices compared to only 2.4 percent increase in US export prices in 1971.
Needless to say, the bulk of the Fed's new dollars once abroad was promptly used to buy undervalued foreign currencies, which were likely to appreciate against US dollar.
German mark was the primary target. When daily inflow of dollars reached $1 billion on May 4, 1971, and the next billion was presented for exchange in the first 40 minutes of trading on May 5, Bundesbank closed the Frankfurt market. When it reopened on May 10, German mark was a floating currency.
The plague of the sinking dollar was of course infecting other currencies as well. Dutch guilder was floated together with German mark, and Swiss franc and Austrian schilling were revalued 7.07 and 5.05 percent respectively. Belgium and France adopted two-tier currency rates: dollars received as a result of legitimate foreign trade transactions were exchanged at the official IMF rates, while the smuggled dollars were allowed to find their own "financial" rate.
Canadian dollar was set afloat already on May 31, 1970, i.e., nearly a year before the German mark, in the face of growing volume of US dollars presented for exchange by American visitors. The smuggling of the private individuals assets to Canada turned into flood when Harry Browne published his book "How You Can Profit from the Coming Devaluation" (1970, Arlington House), which suggested purchasing gold, silver and foreign currencies as a hedge against inevitable devaluation of US dollar. For a Regular Joe and Plain
Jane, a day trip to Canada was the only practical way to get hold of the hedges suggested by Harry Browne.
One aspect of that global short sale of US dollars still remains very little known because it attests to the terminal stupidity of central bankers:
The very same central bankers who were trying to contain the swelling waves of the unwanted US dollars and who were imploring the Fed to close down its money faucet, were lending the very same dollars into the Eurodollar market via the Bank for International Settlements to cash in on the escalating interest rates. And so, the very same dollars that were acquired, say, by Bundesbank in Frankfurt one morning were being placed by BIS with Eurobanks in the afternoon only to show up in Frankfurt the next morning buying another load of German marks.
That was precisely the reason why the grand total of the foreign exchange assets (US dollars and UK pounds) recorded by the central banks was much higher than the grand total of the Fed's and the Bank of England's liabilities to the same central banks.
In their search for higher interest rates, the central bankers were exchanging the same dollars for their own currencies over and over again, and the bubble of their stupidity kept on expanding until it was punctured on
August 9, 1971, when the British ambassador to the United States, George Rowland Stanley Baring of the famous banking family (and a former governor of the Bank of England), showed up at the US Treasury and demanded that BOE $3 billion reserves be exchanged for gold. The game was over, but the central bankers of all the nations, whose "economic miracles" were built on the overvalued dollar in Bretton Woods years, never knew about it until President Nixon fired his shotgun on Sunday, August 15, 1971. The bankers heard about it for the first time on TV, just like everybody else.
Whenever someone tries to hypnotize us with central bankers omniscience, we should take it with a pinch of salt, or three. The only reason central bankers stupidity is not a common knowledge, is that they are always in the position to hush it up with piles of newly printed cash. And the same applies to central bankers alleged omnipotence. They are only hired hands.
(If Alan Greenspan would have a power of his own, he would have invited Queen of England here to bestow upon her the title of an honorary Maid of the Federal Reserve System; instead, he flew to a remote Scottish castle to kneel before Queen of England in order to receive the title of an honorary Knight of the British Empire.)
For the Bank of Japan, Nixon's announcement of the closing of "gold window" at US Treasury and of imposing import surcharge of 10 percent until all currencies were realigned was not reason enough to abandon the Bretton Woods routines. Japan was ripping so great benefits from her yen incredible
undervaluation that Nixon "shoku" was perceived as a bad dream that would somehow disappear of its own if it was not made real by a change in Bank of Japan policies. The poor souls in Tokyo went into complete denial; they could not bring themselves into recognition that their Bretton Woods bonanza was over. (Ironically, Nixon preempted "Bonanza" to make his announcement.) And so, Bank of Japan continued to exchange US dollars at the IMF official rate of ¥360 after August 15, while all other major currency markets were closed until the new parity of US dollar was announced. That irrational policy turned the Tokyo foreign currency market into speculators festival. But having exchanged $4.4 billion by August 27, Bank of Japan finally had to abandon infanticide of yen at ¥356.4 and to allow it to appreciate 5 percent, while imposing a ceiling on non-residents yen deposits in Japanese commercial banks. (The ancillary prohibition on prepayment of trade bills to Japanese exporters indirectly confirms the thesis that unneeded "imports" were being used for moving the Fed's dollars abroad.)
With those additional 4.4 billion US dollars dumped upon yen in August 1971, the sum total of US dollars that were supplied by Arthur Burns for short sale abroad during eight month period, January till August 1971, exceeded by far the sum total of the Marshall Plan foreign assistance to fifteen European nations ($13,325,800,000) during four year period, April 1948 till June 1952.
The alternate appraisal of the magnitude of the sum total of US dollars supplied for short sale abroad is provided by the fact that that sum was 150 percent the size of the US gold reserves in Fort Knox. Yes, the sum total of the fiat dollars supplied by Arthur Burns (a mere hired hand at the Fed) for short sale abroad exceeded by 50 percent the total value of US gold reserves.
Can anyone think of a better canvas for painting the merits of Professor Johnson's thesis that fiat money is better for the economy because of... "erratic changes in the stock of money resulting from the vagaries of
technical change and new discoveries in the industry producing the monetary commodity"?
How erratic the vagaries of technical change would have to be to produce 150 percent of the Fort Knox gold in just eight months?!)
On the second thought, there was much more to that short sale of US dollars than a mere hedge against devaluation. People who orchestrated it already knew that notwithstanding all the gestures and "best efforts"
to the contrary, there was to be no return to the fixed rates of exchange. And to operate floating exchange system, rapidly growing supply of liquidity for constantly expanding arbitrage and hedging operations was required. What in 1971 perspective appeared as out of this world expansion of liquidity, in retrospect it appears as rather modest seed installment toward building a pool of "hot money" that would soon be urgently needed. It would not be long when the floating exchange system with all its derivatives would require not a few billions of dollars but quite a few hundreds of billions of dollars. But for a time being, transition to world finances without gold proceeded gradually and cautiously to make it look as spontaneous, unplanned
development.
June 8, 2003
J.N.Tlaga
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