Brown Web of Debt The Shocking Truth about our Money System (3rd ed)

Chapter 24 - Sneering at Doom

Dr. Henry Makow, a Canadian researcher, adds some evidence for this theory. He quotes from the 1938 interrogation of C. G. Rakovsky, one of the founders of Soviet Bolshevism and a Trotsky intimate, who was tried in show trials in the USSR under Stalin. Rakovsky maintained that Hitler had actually been funded by the international bankers through their agent Hjalmar Schacht in order to control Stalin, who had usurped power from their agent Trotsky. But Hitler had become an even bigger threat than Stalin when he took the bold step of creating his own money. Rakovsky said:

[Hitler] took over for himself the privilege of manufacturing money and not only physical moneys, but also financial ones; he took over the untouched machinery of falsification and put it to work for the benefit of the state . . . . Are you capable of imagining what would have come . . . if it had infected a number of other states and brought about the creation of a period of autarchy. If you can, then imagine its counterrevolutionary functions . . . .6

Autarchy is a national economic policy that aims at achieving selfsufficiency and eliminating the need for imports. Countries that take protectionist measures and try to prevent free trade are sometimes described as autarchical. Rakowsky’s statement recalls the editorial attributed to the The London Times, warning that if Lincoln’s Greenback plan were not destroyed, “that government will furnish its own money without cost. It will pay off debts and be without a debt. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of the civilized governments of the world.” Germany was well on its way to achieving those goals. Henry C K Liu writes of the country’s remarkable transformation:

The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began.7

In Billions for the Bankers, Debts for the People (1984), Sheldon Emry also credited Germany’s startling rise from bankruptcy to a world

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power to its decision to issue its own money. He wrote:

Germany financed its entire government and war operation from 1935 to 1945 without gold and without debt, and it took the whole Capitalist and Communist world to destroy the German power over Europe and bring Europe back under the heel of the Bankers. Such history of money does not even appear in the textbooks of public (government) schools today.

What does appear in modern textbooks is the disastrous runaway inflation suffered in 1923 by the Weimar Republic (the common name for the republic that governed Germany from 1919 to 1933). The radical devaluation of the German mark is cited as the textbook example of what can go wrong when governments are given the unfettered power to print money. That is what it is cited for; but again, in the complex world of economics, things are not always as they seem . . . .

Another Look at the Weimar Hyperinflation

The Weimar financial crisis began with the crushing reparations payments imposed at the Treaty of Versailles. Hjalmar Schacht, who was currency commissioner for the Republic, complained:

The Treaty of Versailles is a model of ingenious measures for the economic destruction of Germany. . . . [T]he Reich could not find any way of holding its head above the water other than by the inflationary expedient of printing bank notes.

That is what he said at first; but Zarlenga writes that Schacht proceeded in his 1967 book The Magic of Money “to let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the ‘accepted wisdom’ the financial community has promulgated on the German hyperinflation.”8 Schacht revealed that it was the privately-owned Reichsbank, not the German government, that was pumping new currency into the economy. Like the U.S. Federal Reserve, the Reichsbank was overseen by appointed government officials but was operated for private gain. The mark’s dramatic devaluation began soon after the Reichsbank was “privatized,” or delivered to private investors. What drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would sell the mark short, betting on its decreasing value. Recall that in the short sale, speculators borrow something they don’t own, sell it, then

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“cover” by buying it back at the lower price. Speculation in the German mark was made possible because the Reichsbank made massive amounts of currency available for borrowing, marks that were created on demand and lent at a profitable interest to the bank. When the Reichsbank could not keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.9

According to Schacht, not only was the government not the cause of the Weimar hyperinflation, but it was the government that got the disaster under control. The Reichsbank was put under strict regulation, and prompt corrective measures were taken to eliminate foreign speculation by eliminating easy access to loans of bank-created money. Hitler then got the country back on its feet with his MEFO bills issued by the government.

Schacht actually disapproved of the new government-issued money and wound up getting fired as head of the Reichsbank when he refused to issue it, something that may have saved him at the Nuremberg trials. But he acknowledged in his later memoirs that Feder’s theories had worked. Allowing the government to issue the money it needed had not produced the price inflation predicted by classical economic theory. Schacht surmised that this was because factories were sitting idle and people were unemployed. In this he agreed with Keynes: when the resources were available to increase productivity, adding money to the economy did not increase prices; it increased goods and services. Supply and demand increased together, leaving prices unaffected.

These revelations put the notorious hyperinflations of modern history in a different light . . . .

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Chapter 25

ANOTHER LOOK AT THE

INFLATION HUMBUG:

SOME “TEXTBOOK”

HYPERINFLATIONS REVISITED

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

– John Maynard Keynes,

Economic Consequences of the Peace (1919)

The rampant runaway inflations of Third World economies are widely blamed on desperate governments trying to solve their economic problems by running the currency printing presses,

but closer examination generally reveals other hands to be at work. What causes merchants to raise their prices is not a sudden flood of money from customers competing for their products because the money supply has been pumped up with new currency. Rather, it is a dramatic increase in the merchants’ own costs as a result of a radical devaluation of the local currency; and this devaluation can usually be traced to manipulations in the currency’s floating exchange rate. Here are a few notable examples . . . .

The Ruble Collapse in Post-Soviet Russia

The usual explanation for the drastic runaway inflation that afflicted Russia and its former satellites following the fall of the Iron Curtain is that their governments resorted to printing their own money, diluting the money supply and driving up prices. But as William

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Engdahl shows in A Century of War, this is not what was actually going on. Rather, hyperinflation was a direct and immediate result of letting their currencies float in foreign exchange markets. He writes:

In 1992 the IMF demanded a free float of the Russian ruble as part of its “market-oriented” reform. The ruble float led within a year to an increase in consumer prices of 9,900 per cent, and a collapse in real wages of 84 per cent. For the first time since 1917, at least during peacetime, the majority of Russians were plunged into existential poverty. . . . Instead of the hoped-for American-style prosperity, two-cars-in-every-garage capitalism, ordinary Russians were driven into economic misery.1

After the Berlin Wall came down, the IMF was put in charge of the market reforms that were supposed to bring the former Soviet countries in line with the Western capitalist economies that were dominated by the dollars of the private Federal Reserve and private U.S. banks. The Soviet people acquiesced, lulled by dreams of the sort of prosperity they had seen in the American movies. But Engdahl says it was all a deception:

The aim of Washington’s IMF “market reforms” in the former Soviet Union was brutally simple: destroy the economic ties that bound Moscow to each part of the Soviet Union . . . . IMF shock therapy was intended to create weak, unstable economies on the periphery of Russia, dependent on Western capital and on dollar inflows for their survival -- a form of neocolonialism. . . . The Russians were to get the standard Third World treatment . . . IMF conditionalities and a plunge into poverty for the population. A tiny elite were allowed to become fabulously rich in dollar terms, and manipulable by Wall Street bankers and investors.

It was an intentional continuation of the Cold War by other means -- entrapping the economic enemy with loans of accounting-entry money. Interest rates would then be raised to unpayable levels, and the IMF would be put in charge of “reforms” that would open the economy to foreign exploitation in exchange for debt relief. Engdahl writes:

The West, above all the United States, clearly wanted a deindustrialized Russia, to permanently break up the economic structure of the old Soviet Union. A major area of the global economy, which had been largely closed to the dollar domain for more than seven decades, was to be brought under its control.

. . . The new oligarchs were “dollar oligarchs.”

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The Collapse of Yugoslavia and the Ukraine

Things were even worse in Yugoslavia, which suffered what has been called the worst hyperinflation in history in 1993-94. Again, the textbook explanation is that the government was madly printing money. As one college economics professor put it:

After Tito [the Yugoslavian Communist leader until 1980], the Communist Party pursued progressively more irrational economic policies. These policies and the breakup of Yugoslavia

. . . led to heavier reliance upon printing or otherwise creating money to finance the operation of the government and the socialist economy. This created the hyperinflation.2

That was the conventional view, but Engdahl maintains that the reverse was actually true: the Yugoslav collapse occurred because the IMF prevented the government from obtaining the credit it needed from its own central bank. Without the ability to create money and issue credit, the government was unable to finance social programs and hold its provinces together as one nation. The country’s real problem was not that its economy was too weak but that it was too strong. Its “mixed model” combining capitalism and socialism was so successful that it threatened the bankers’ IMF/shock therapy model. Engdahl states:

For over 40 years, Washington had quietly supported Yugoslavia, and the Tito model of mixed socialism, as a buffer against the Soviet Union. As Moscow’s empire began to fall apart, Washington had no more use for a buffer – especially a nationalist buffer which was economically successful, one that might convince neighboring states in eastern Europe that a middle way other than IMF shock therapy was possible. The Yugoslav model had to be dismantled, for this reason alone, in the eyes of top Washington strategists. The fact that Yugoslavia also lay on a critical path to the potential oil riches of central Asia merely added to the argument.3

Yugoslavia was another victim of the Tequila Trap – the lure of wealth and development if it would open its economy to foreign investment and foreign loans. According to a 1984 Radio Free Europe report, Tito had made the mistake of allowing the country the “luxury” of importing more goods than it exported, and of borrowing huge sums of money abroad to construct hundreds of factories that never made a profit. When the dollars were not available to pay back these

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loans, Yugoslavia had to turn to the IMF for debt relief. The jaws of the whale then opened, and Yugoslavia disappeared within.

As a condition of debt relief, the IMF demanded wholesale privatization of the country’s state enterprises. The result was to bankrupt more than 1,100 companies and produce more than 20 percent unemployment. IMF policies caused inflation to rise dramatically, until by 1991 it was over 150 percent. When the government was not able to create the money it needed to hold its provinces together, economic chaos followed, causing each region to fight for its own survival. Engdahl states:

Reacting to this combination of IMF shock therapy and direct Washington destabilization, the Yugoslav president, Serb nationalist Slobodan Milosevic, organized a new Communist Party in November 1990, dedicated to preventing the breakup of the federated Yugoslav Republic. The stage was set for a gruesome series of regional ethnic wars which would last a decade and result in the deaths of more than 200,000 people.

. . . In 1992 Washington imposed a total economic embargo on Yugoslavia, freezing all trade and plunging the economy into chaos, with hyperinflation and 70 percent unemployment as the result. The Western public, above all in the United States, was told by establishment media that the problems were all the result of a corrupt Belgrade dictatorship.

Similar interventions precipitated runaway inflation in the Ukraine, where the IMF “reforms” began with an order to end state foreign exchange controls in 1994. The result was an immediate collapse of the currency. The price of bread shot up 300 percent; electricity shot up 600 percent; public transportation shot up 900 percent. State industries that were unable to get bank credit were forced into bankruptcy. As a result, says Engdahl:

Foreign speculators were free to pick the jewels among the rubble at dirt-cheap prices. . . . The result was that Ukraine, once the breadbasket of Europe, was forced to beg food aid from the U.S., which dumped its grain surpluses on Ukraine, further destroying local food self-sufficiency. Russia and the states of the former Soviet Union were being treated like the Congo or Nigeria, as sources of cheap raw materials, perhaps the largest sources in the world. . . . [T]hose mineral riches were now within the reach of Western multinationals for the first time since 1917.4

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The Case of Argentina

Meanwhile, the same debt monster that swallowed the former Soviet economies was busy devouring assets in Latin America. In Argentina in the late 1980s, inflation shot up by as much as 5,000 percent. Again, this massive hyperinflation has been widely blamed on the government madly printing money; and again, the facts turn out to be quite different . . . .

Argentina had been troubled by inflation ever since 1947, when Juan Peron came to power. Peron was a populist who implemented many new programs for workers and the poor, but he did it with heavy deficit spending and taxation rather than by issuing money Greenback-style.5 What happened to the Argentine economy after Peron is detailed in a 2006 Tufts University article by Carlos Escudé, Director of the Center for International Studies at Universidad del CEMA in Buenos Aires. He writes that inflation did not become a national crisis until the eight-year period following Peron’s death in 1974. Then the inflation rate increased seven-fold, to an “astonishing” 206 percent. But this jump, says Professor Escudé, was not caused by a sudden printing of pesos. Rather, it was the result of an intentional, radical devaluation of the currency by the new government, along with a 175 percent increase in the price of oil.

The devaluation was effected by dropping the peso’s dollar peg to a fraction of its previous value; and this was done, according to insiders, with the intent of creating economic chaos. One source revealed, “The idea was to generate an inflationary stampede to depreciate the debts of private firms, shatter the price controls in force since 1973, and especially benefit exporters through devaluation.” Economic chaos was welcomed by pro-market capitalists, who pointed to it as proof that the interventionist policies of the former government had been counterproductive and that the economy should be left to the free market. Economic chaos was also welcomed by speculators, who found that “[p]rofiteering was a much safer way of making money than attempting to invest, increase productivity, and compete in an economy characterized by financial instability, distorted incentives, and obstacles to efficient investment.”

From that time onward, writes Professor Escudé, “astronomically high inflation led to the proliferation of speculative financial schemes that became a hallmark of Argentine financial life.” One suicidal policy adopted by the government was to provide “exchange insurance” to

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private firms seeking foreign financing. The risk of exchange rate fluctuations was thus transferred from private businesses to the government, encouraging speculative schemes that forced further currency devaluation. Another disastrous government policy held that it was unfair for private firms contracting with the State to suffer losses from financial instability or other unforeseen difficulties while fulfilling their contracts. Again the risks got transferred to the State, encouraging predatory contractors to defraud and exploit the government. The private contractors’ lobby became so powerful that the government wound up agreeing to “nationalize” (or assume responsibility for) private external debts. The result was to transfer the debts of powerful private business firms to the taxpayers. When interest rates shot up in the 1980s, the government dealt with these debts by “liquidification,” evidently meaning that private liabilities were reduced by depreciating the currency. Again, however, this hyperinflation was not the result of the government printing money for its operational needs. Rather, it was caused by an intentional devaluation of the currency to reduce the debts of private profiteers in control of the government.6

Making matters worse, Argentina was one of those countries targeted by international lenders for massive petrodollar loans. When the rocketing interest rates of the 1980s made the loans impossible to pay back, concessions were required of the country that put it at the mercy of the IMF. Under a new government in the 1990s, Argentina dutifully tightened its belt and tried to follow the IMF’s dictates. To curb the crippling currency devaluations, a “currency board” was imposed in 1991 that maintained a strict one-to-one peg between the Argentine peso and the U.S. dollar. The Argentine government and its central bank were prohibited by law from printing their own pesos, unless the pesos were fully backed by dollars held as foreign reserves.7 The maneuver worked to prevent currency devaluations, but the country lost the flexibility it needed to compete in international markets. The money supply was fixed, limited and inflexible. The disastrous result was national bankruptcy, in 1995 and again in 2001.

In the face of dire predictions that the economy would collapse without foreign credit, Argentina then defied its creditors and simply walked away from its debts. By the fall of 2004, three years after a record default on a debt of more than $100 billion, the country was well on the road to recovery; and it had achieved this feat without foreign help. The economy grew by 8 percent for 2 consecutive years. Exports increased, the currency was stable, investors were returning,

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and unemployment had eased. “This is a remarkable historical event, one that challenges 25 years of failed policies,” said Mark Weisbrot in an interview quoted in The New York Times. “While other countries are just limping along, Argentina is experiencing very healthy growth with no sign that it is unsustainable, and they’ve done it without having to make any concessions to get foreign capital inflows.”8

In January 2006, Argentina’s President Nestor Kirchner paid off the country’s entire debt to the IMF, totaling 9.81 billion U.S. dollars. Where did he get the dollars? The Argentine central bank had been routinely issuing pesos to buy dollars, in order to keep the dollar price of the peso from dropping. The Argentine central bank had accumulated over 27 billion U.S. dollars in this way before 2006. Kirchner negotiated with the bank to get a third of these dollar reserves, which were then used to pay the IMF debt.9

That the bank had been “issuing” pesos evidently meant that it was creating money out of nothing; but the result was reportedly not inflationary, at least at first. According to a December 2006 article in The Economist, the newly-issued pesos just stimulated the economy, providing the liquidity that was sorely needed by Argentina’s moneystarved businesses. By 2004, however, spare production had been used up and inflation had again become a problem. President Kirchner then stepped in to control inflation by imposing price controls and export bans. Critics said that these measures would halt investment, but according to The Economist:

So far they have been wrong. Argentina does lack foreign investment. But its own smaller companies have moved quickly to expand capacity in response to demand. . . . Overall, investment has almost doubled as a percentage of GDP since 2002, from 11% to 21.4%, enough to sustain growth of 4% a year.10

When President Kirchner paid off the IMF debt in 2006, he had hoped to get the central bank’s dollar reserves debt-free; but he was foiled by certain “international funds.” One disgruntled Argentine commentator wrote:

Kirchner tried until the last moment to get hold of the [central bank’s] funds as if they were surplus, without contracting any debt, but the international funds warned him that if he did so he would provoke strong speculation against the Argentine peso. Kirchner folded like a hand of poker and indebted the State at a higher rate.11

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