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

Chapter 46 - Building a Bridge

A New Bretton Woods?

These proposals involve private international currency exchanges, but the same sort of reference unit could be used to stabilize exchange rates among official national currencies. Several innovators have proposed solutions to the exchange rate problem along these lines. Besides Michael Rowbotham in England, they include Lyndon LaRouche in the United States and Dr. Mahathir Mohamad in Malaysia, two political figures who are controversial in the West but are influential internationally and have some interesting ideas.

LaRouche shares the label “perennial candidate” with Jacob Coxey, having run for U.S. President eight times. He also shares a number of ideas with Coxey, including the proposal to make cheap national credit available for putting the unemployed to work developing national infrastructure. LaRouche has launched an appeal for a new Bretton Woods Conference to reorganize the world’s financial system, a plan he says is endorsed by many international leaders. It would call for:

1.A new system of fixed exchange rates,

2.A treaty between governments to ban speculation in derivatives,

3.The cancellation or reorganization of international debt, and

4.The issuance of “credit” by national governments in sufficient quantity to bring their economies up to full employment, to be used for technical innovation and to develop critical infrastructure.7

La Rouche’s proposed system of exchange rates would be based on an international unit of account pegged against the price of an agreed-upon basket of hard commodities. With such a system, he says, it would be “the currencies, not the commodities, [which are] given implicitly adjusted values, as based upon the basket of commodities used to define the unit.”8

Dr. Mahathir is the outspoken Malaysian prime minister credited with sidestepping the “Asian crisis” that brought down the economies of his country’s neighbors. (See Chapter 26.) The Middle Eastern news outlet Al Jazeera describes him as a visionary in the Islamic world, who has proven to be ahead of his time.9 As noted earlier, Islamic movements for monetary reform are of particular interest today because oil-rich Islamic countries are actively seeking alternatives for maintaining their currency reserves, and they may be the first to break away from the global bankers’ private money scheme. In international conferences and forums, Islamic scholars have been vigorously debating

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monetary alternatives.

In 2002, Dr. Mahathir hosted a two-day seminar called “The Gold Dinar in Multilateral Trade,” in which he expounded on the Gold Dinar as an alternative to the U.S. dollar for clearing trade balances. Islamic proposals for monetary reform have generally involved a return to gold as the only “sound” currency, but Dr. Mahathir stressed that he was not advocating a return to the “gold standard,” in which paper money could be exchanged for its equivalent in gold on demand. Rather, he was proposing a system in which only trade deficits would be settled in gold. A British website called “Tax Free Gold” explains the proposed Gold Dinar system like this:

It is not intended that there should be an actual gold dinar coin, or that it should be used in everyday transactions; the gold dinar would be an international unit of account for international settlements between national banks. If for example the balance of trade between Malaysia and Iran during one settlement period, probably three months, was such that Iran had made purchases of 100 million Malaysian Ringgits, and sales of 90 million Ryals, the difference in the value of these two amounts would be paid in gold dinars. . . . From the reports of the Malaysian conferences, we deduce that the gold dinar would be one ounce of gold or its equivalent value.10

At the 2002 seminar, Dr. Mahathir conceded that gold’s market value is an unsound basis for valuing the national currency or the prices of national goods, because the value of gold is quite volatile and is subject to manipulation by speculators just as the U.S. dollar is. He said he was thinking instead along the lines of a basket-of-commodi- ties standard for fixing the Gold Dinar’s value. Pegging the Dinar to the value of an entire basket of commodities would make it more stable than if it were just tied to the whims of the gold market. The Gold Dinar has been called a direct challenge to the IMF, which forbids gold-based currencies; but that charge might be circumvented if the Dinar were actually valued against a basket of commodities, as Dr. Mahathir has proposed. It would then not be a gold “currency” but would be merely an international unit of account, a standard for measuring value.

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The Urgent Need for Change

Other Islamic scholars have been debating how to escape the debt trap of the global bankers. Tarek El Diwany is a British expert in Islamic finance and the author of The Problem with Interest (2003). In a presentation at Cambridge University in 2002, he quoted a 1997 United Nations Human Development Report underscoring the massive death tolls from the debt burden to the international bankers. The report stated:

Relieved of their annual debt repayments, the severely indebted countries could use the funds for investments that in Africa alone would save the lives of about 21 million children by 2000 and provide 90 million girls and women with access to basic education.11

El Diwany commented, “The UNDP does not say that the bankers are killing the children, it says that the debt is. But who is creating the debt? The bankers are of course. And they are creating the debt by lending money that they have manufactured out of nothing. In return the developing world pays the developed world USD 700 million per day net in debt repayments.”12 He concluded his Cambridge presentation:

But there is hope. The developing nations should not think that they are powerless in the face of their oppressors. Their best weapon now is the very scale of the debt crisis itself. A coordinated and simultaneous large scale default on international debt obligations could quite easily damage the Western monetary system, and the West knows it. There might be a war of course, or the threat of it, accompanied perhaps by lectures on financial morality from Washington, but would it matter when there is so little left to lose? In due course, every oppressed people comes to know that it is better to die with dignity than to live in slavery. Lenders everywhere should remember that lesson well.

We the people of the West can sit back and wait for the revolt, or we can be proactive and work to solve the problem at its source. We can start by designing legislation that would disempower the private international banking spider and empower the people worldwide. To be effective, this legislation would need to be negotiated internationally, and it would need to include an agreement for pegging or stabilizing national currencies on global markets.

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A Proposal for an International Currency Yardstick That Is Not a Currency

That brings us back to the question of how best to stabilize national currencies. The simplest and most comprehensive measure for calibrating an international currency yardstick seems to be the Consumer Price Index proposed by Mann, modified to reflect the real daily expenditures of consumers. To show how such a system might work, here is a hypothetical example. Assume that one International Currency Unit (ICU) equals the Consumer Price Index or some modified version of it, multiplied by some agreed-upon fraction:

On January 1 of our hypothetical year, a computer sampling of all national markets indicates that the value of one ICU in the United States is one dollar. The same goods that one dollar would purchase in the United States can be purchased in Mexico for 10 Mexican pesos and in England for half a British pound. These are the actual prices of the selected goods in each country’s currency within its own borders, as determined by supply and demand. When you cross the Mexican border, you can trade a dollar bill for 10 pesos or a British pound for 20 pesos. On either side of the border, one ICU worth of goods can be bought with those sums of money in their respective denominations.

Carlos, who has a business in Mexico, buys 10,000 ICUs worth of goods from Sam, who has a business in the United States. Carlos pays for the goods with 100,000 Mexican pesos. Sam takes the pesos to his local branch of the now-federalized Federal Reserve and exchanges them at the prevailing exchange rate for 10,000 U.S. dollars. The Fed sells the pesos at the prevailing rate to other people interested in conducting trade with Mexico. When the Fed accumulates excess pesos (or a positive trade balance), they are sold to the Mexican government for U.S. dollars at the prevailing exchange rate. If the Mexican government runs out of U.S. dollars, the U.S. government can either keep the excess pesos in reserve or it can buy anything it wants that Mexico has for sale, including but not limited to gold and other commodities.

The following year, Mexico has an election and a change of governments. The new government decides to fund many new social programs with newly-printed currency, expanding the supply of Mexican pesos by 10 percent. Under the classical quantity theory of money, this increase in demand (money) will inflate prices, pushing

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the price of one ICU in Mexico to around 11 Mexican pesos. That is the conventional theory, but Keynes maintained that if the new pesos were used to produce new goods and services, supply would increase along with demand, leaving prices unaffected. (See Chapter 16.) Whichever theory proves to be correct, the point here is that the value of the peso would be determined by the actual price on the Mexican market of the goods in the modified Consumer Price Index, not by the quantity of Mexican currency traded on international currency markets by speculators.

Currencies would no longer be traded as commodities fetching what the market would bear, and they would no longer be vulnerable to speculative attack. They would just be coupons for units of value recognized globally, units stable enough that commercial traders could “bank” on them. If labor and materials were cheaper in one country than another, it would be because they were more plentiful or accessible there, not because the country’s currency had been devalued by speculators. The national currency would become what it should have been all along – a contract or promise to return value in goods or services of a certain worth, as measured against a universally recognized yardstick for determining value.

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Chapter 47

OVER THE RAINBOW:

GOVERNMENT WITHOUT TAXES

OR DEBT

“Toto, I have a feeling we’re not in Kansas anymore. We must be over the rainbow!”

Going over the rainbow suggested a radical visionary shift, a breakthrough into a new way of seeing the world. We have come to the end of the Yellow Brick Road, and only a radical shift in

our concepts of money and banking will save us from the cement wall looming ahead. We the people got lost in a labyrinth of debt when we allowed paper money to represent an illusory sum of gold held by private bankers, who multiplied it many times over in the guise of “fractional reserve” lending. The result was a Ponzi scheme that has pumped the global money supply into a gigantic credit bubble. As bond investor Bill Gross said in a February 2004 newsletter, we have been “skipping down this yellow brick road of capitalism, paved not with gold, but with thick coats of debt/leverage that requires constant maintenance.”

The levees that have kept a flood of debt-leverage from collapsing the economy showed signs of cracking on February 27, 2007, when the Dow Jones Industrial Average suddenly dropped by more than 500 points. The drop was triggered by a series of events like those initiating the Great Crash of 1929. A nearly 9 percent decline in China’s stock market set off a wave of selling in U.S. markets to satisfy “margin calls” (requiring investors using credit to add cash to their accounts to bring them to a certain minimum balance). The Chinese drop, in turn, was triggered by an intentional credit squeeze by Chinese officials, who were concerned that Chinese homeowners were mortgaging their homes and businessmen were pledging their businesses as collateral

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to play the over-leveraged Chinese stock market, just as American investors did in the 1920s.1 Commentators suggested that the Dow fell by only 500 points because of the behind-the-scenes maneuverings of the Plunge Protection Team, the Counterparty Risk Management Policy Group and the Federal Reserve.2 But it was all just window-dressing, a dog and pony show to keep investors lulled into complacency, inducing them to keep betting on a stock market nag on its last legs. The same pattern has been repeated since, with assorted manipulations to keep the band playing on; but the iceberg has struck and the economic Titanic is sinking.

Like at the end of the Roaring Twenties, we are again looking down the trough of the “business cycle,” mortgaged up to the gills and at risk of losing it all. We own nothing that can’t be taken away. The housing market could go into a tailspin and so could the stock market. The dollar could collapse and so could our savings. Even social security and pensions could soon be things of the past. Before the economy collapses and our savings and security go with it, we need to reverse the sleight of hand that created the bankers’ Ponzi scheme. The Constitutional provision that “Congress shall have the power to coin money” needs to be updated so that it covers the national currency in all its forms, including the 97 percent now created with accounting entries by private commercial banks. That modest change could transform the dollar from a vice for wringing the lifeblood out of a nation of sharecroppers into a bell for ringing in the millennial abundance envisioned by our forefathers. The government could actually eliminate taxes and the federal debt while expanding the services it provides.

The Puzzle Assembled

The pieces to the monetary puzzle have been concealed by layers of deception built up over 400 years, and it has taken some time to unravel them; but the picture has now come clear, and we are ready to recap what we have found. The global debt web has been spun from a string of frauds, deceits and sleights of hand, including:

y “Fractional reserve” banking. Formalized in 1694 with the charter for the Bank of England, the modern banking system involves credit issued by private bankers that is ostensibly backed by “reserves.” At one time, these reserves consisted of gold; but today they are merely government securities (promises to pay). The banking system lends

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these securities many times over, essentially counterfeiting them.

yThe “gold standard.” In the nineteenth century, the government was admonished not to issue paper fiat money on the ground that it would produce dangerous inflation. The bankers insisted that paper money had to be backed by gold. What they failed to disclose was that there was not nearly enough gold in their own vaults to back the privately-issued paper notes laying claim to it. The bankers themselves were dangerously inflating the money supply based on a fictitious “gold standard” that allowed them to issue loans many times over on the same gold reserves, collecting interest each time.

yThe “Federal” Reserve. Established in 1913 to create a national money supply, the Federal Reserve is not federal, and today it keeps nothing in “reserve” except government bonds or I.O.U.s. It is a private banking corporation authorized to print and sell its own Federal Reserve Notes to the government in return for government bonds, putting the taxpayers in perpetual debt for money created privately with accounting entries. Except for coins, which make up only about one one-thousandth of the money supply, the entire U.S. money supply is now created by the private Federal Reserve and private banks, by extending loans to the government and to individuals and businesses.

yThe federal debt and the money supply. The United States went off the gold standard in the 1930s, but the “fractional reserve” system continued, backed by “reserves” of government bonds. The federal debt these securities represent is never paid off but is continually rolled over, forming the basis of the national money supply. As a result of this highly inflationary scheme, by January 2007 the federal debt had mushroomed to $8.679 trillion and was approaching the point at which the interest alone would be more than the public could afford to pay.

yThe federal income tax. Considered unconstitutional for over a century, the federal income tax was ostensibly legalized in 1913 by the Sixteenth Amendment to the Constitution. It was instituted primarily to secure a reliable source of money to pay the interest due to the bankers on the government’s securities, and that continues to be its principal use today.

yThe Federal Deposit Insurance Corporation and the International Monetary Fund. A principal function of the Federal Reserve was to bail out banks that got over-extended in the fractional-reserve shell game, using money created in “open market” operations by the Fed.

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When the Federal Reserve failed in that backup function, the FDIC and then the IMF were instituted, ensuring that mega-banks considered “too big to fail” would get bailed out no matter what unwarranted risks they took.

yThe “free market.” The theory that businesses in America prosper or fail due to “free market forces” is a myth. While smaller corporations and individuals who miscalculate their risks may be left to their fate in the market, mega-banks and corporations considered too big to fail are protected by a form of federal welfare available only to the rich and powerful. Other distortions in free market forces result from the covert manipulations of a variety of powerful entities. Virtually every market is now manipulated, whether by federal mandate or by institutional speculators, hedge funds, and large multinational banks colluding on trades.

yThe Plunge Protection Team and the Counterparty Risk Management Policy Group (CRMPG). Federal manipulation is done by the Working Group on Financial Markets, also known as the Plunge Protection Team (PPT). The PPT is authorized to use U.S. Treasury funds to rig markets in order to “maintain investor confidence,” keeping up the appearance that all is well. Manipulation is also effected by a private fraternity of big New York banks and investment houses known as the CRMPG, which was set up to bail its members out of financial difficulty by colluding to influence markets, again with the blessings of the government and to the detriment of the small investors on the other side of these orchestrated trades.

yThe “floating” exchange rate. Manipulation and collusion also occur in international currency markets. Rampant currency speculation was unleashed in 1971, when the United States defaulted on its promise to redeem its dollars in gold internationally. National currencies were left to “float” against each other, trading as if they were commodities rather than receipts for fixed units of value. The result was to remove the yardstick for measuring value, leaving currencies vulnerable to attack by international speculators prowling in these dangerous commercial waters.

yThe short sale. To bring down competitor currencies, speculators use a device called the “short sale” – the sale of currency the speculator does not own but has theoretically “borrowed” just for purposes of sale. Like “fractional reserve” lending, the short sale is actually a form of counterfeiting. When speculators sell a currency short in massive quantities, its value is artificially forced down, forcing down the value

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of goods traded in it.

y“Globalization” and “free trade.” Before a currency can be brought down by speculative assault, the country must be induced to open its economy to “free trade” and to make its currency freely convertible into other currencies. The currency can then be attacked and devalued, allowing national assets to be picked up at fire sale prices and forcing the country into bankruptcy. The bankrupt country must then borrow from international banks and the IMF, which impose as a condition of debt relief that the national government may not issue its own money. If the government tries to protect its resources or its banks by nationalizing them for the benefit of its own citizens, it is branded “communist,” “socialist” or “terrorist” and is replaced by one that is friendlier to “free enterprise.” Locals who fight back are termed “terrorists” or “insurgents.”

yInflation myths. The runaway inflation suffered by Third World countries has been blamed on irresponsible governments running the money printing presses, when in fact these disasters have usually been caused by speculative attacks on the national currency. Devaluing the currency forces prices to shoot up overnight. “Creeping inflation” like that seen in the United States today is also blamed on governments irresponsibly printing money, when it is actually caused by private banks inflating the money supply with debt. Banks advance new money as loans that must be repaid with interest, but the banks don’t create the interest necessary to service the loans. New loans must continually be taken out to obtain the money to pay the interest, forcing prices up in an attempt to cover this new cost, spiraling the economy into perpetual price inflation.

yThe “business cycle.” As long as banks keep making low-interest loans, the money supply expands and business booms; but when the credit bubble gets too large, the central bank goes into action to deflate it. Interest rates are raised, loans are reduced, and the money supply shrinks, forcing debtors into foreclosure, delivering their homes to the banks. This is called the “business cycle,” as if it were a natural condition like the weather. In fact, it is a natural characteristic only of a monetary scheme in which money comes into existence as a debt to private banks for “reserves” of something lent many times over.

yThe home mortgage boondoggle. A major portion of the money created by banks today has originated with the “monetization” of home mortgages. The borrower thinks he is borrowing pre-existing funds, when the bank is just turning his promise to repay into an

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