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Monetary Reform!

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Geolibertarian
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« on: August 25, 2010, 11:56:20 am »

Schacht is telling us that the excessive speculation against the mark -- the short selling of the mark -- was financed by lavish loans from the private Reichsbank. The margin requirements that the anti-mark speculators needed and without which they could not have attacked the mark was provided by the private Reichsbank! ....

Thus it was a privately owned and privately controlled central bank, that made loans to private speculators, enabling them to speculate against the nation's currency. Whatever other pressures the currency faced (and they were substantial), such speculation helped create a one way market down for the Reichsmark. Soon a continuous panic set in, and not just speculators, but everyone else had to do what they could to get out of their marks, further fueling the disaster. This private factor has been largely unknown in America.

-- Stephen Zarlenga, The Lost Science of Money

In the interest of preventing history from repeating itself at our expense, I offer the following two excerpts from Ellen Brown's Web of Debt -- the first from Chapter 21, the second from Chapter 46.

(Note: So that relative newcomers don't get confused, it should be stressed that, in the context of international trade, the "gold standard" refers merely to an agreed-upon unit of account, whereas, in the context of domestic monetary policy, it refers to a gold-"backed" currency, whereby a nation's currency is "redeemable" in gold, and whereby a nation's entire money supply is hence limited to the physical supply of gold. The U.S. rightfully abandoned the domestic gold standard in 1933, but it was not until 1971 that it was forced to abandon the international gold standard. The latter is often referred to as the gold "exchange" standard to distinguish it from both the gold specie and gold bullion standards.)

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Chapter 21
GOODBYE YELLOW BRICK ROAD: FROM GOLD RESERVES TO PETRODOLLARS


”Once,” began the leader, “we were a free people, living happily in the great forest, flying from tree to tree, eating nuts and fruit, and doing just as we pleased without calling anybody master. . . .[Now] we are three times the slaves of the owner of the Golden Cap, whosoever he may be.”

-- The Wonderful Wizard of Oz,
“The Winged Monkeys”


The Golden Cap suggested the gold that was used by international financiers to colonize indigenous populations in the nineteenth century. The gold standard was a necessary step in giving the bankers’ “fractional reserve” lending scheme legitimacy, but the ruse could not be sustained indefinitely. Eleazar Lord put his finger on the problem in the 1860s. When gold left the country to pay foreign debts, the multiples of banknotes ostensibly “backed” by it had to be withdrawn from circulation as well. The result was money contraction and depression. “The currency for the time is annihilated,” said Lord, “prices fall, business is suspended, debts remain unpaid, panic and distress ensue, men in active business fail, bankruptcy, ruin, and disgrace reign.” Roosevelt was faced with this sort of implosion of the money supply in the Great Depression, forcing him to take the dollar off the gold standard to keep the economy from collapsing. In 1971, President Nixon had to do the same thing internationally, when foreign creditors threatened to exhaust U.S. gold reserves by cashing in their paper dollars for gold.

Between those two paradigm-changing events came John F. Kennedy, who evidently had has own ideas about free trade, the Third World, and the Wall Street debt game.

Kennedy’s Last Stand

In Battling Wall Street: The Kennedy Presidency, Donald Gibson contends that Kennedy was the last President to take a real stand against the entrenched Wall Street business interests. Kennedy was a Hamiltonian, who opposed the forces of “free trade” and felt that industry should be harnessed to serve the Commonwealth. He felt strongly that the country should maintain its independence by developing cheap sources of energy. The stand pitted him against the oil/banking cartel, which was bent on raising oil prices to prohibitive levels in order to entangle the world in debt.

Kennedy has been accused of “reckless militarism” and “obsessive anti-communism,” but Gibson says his plan for neutralizing the appeal of Communism was more benign: he would have replaced colonialist and imperialist economic policies with a development program that included low-interest loans, foreign aid, nation-to-nation cooperation, and some measure of government planning. The Wall Street bankers evidently had other ideas. Gibson quotes George Moore, president of First National City Bank (now Citibank), who said:

    With the dollar leading international currency and the United States the world’s largest exporter and importer of goods, services and capital, it is only natural that U.S. banks should gird themselves to play the same relative role in international finance that the great British financial institutions played in the nineteenth century.

The great British financial institutions played the role of subjugating underdeveloped countries to the position of backward exporters of raw materials. It was the sort of exploitation Kennedy’s foreign policy aimed to eliminate. He crossed the banking community and the International Monetary Fund when he continued to give foreign aid to Latin American countries that failed to adopt the bankers’ policies. Gibson writes:

    Kennedy’s support for economic development and Third World nationalism and his tolerance for government economic planning, even when it involved expropriation of property owned by interests in the U.S., all led to conflicts between Kennedy and elites within both the U.S. and foreign nations.

There is also evidence that Kennedy crossed the bankers by seeking to revive a silver-backed currency that would be independent of the banks and their privately-owned Federal Reserve. The matter remains in doubt, since his Presidency came to an untimely end before he could play his hand; but he did authorize the Secretary of the Treasury to issue U.S. Treasury silver certificates, and he was the last President to issue freely-circulating United States Notes (Greenbacks). When Vice President Lyndon Johnson stepped into the Presidential shoes, his first official acts included replacing government-issued United States Notes with Federal Reserve Notes, and declaring that Federal Reserve Notes could no longer be redeemed in silver. New Federal Reserve Notes were released that omitted the former promise to pay in “lawful money.” In 1968, Johnson issued a proclamation that even Federal Reserve Silver Certificates could not be redeemed in silver. The one dollar bill, which until then had been a silver certificate, was made a Federal Reserve Note, not redeemable in any form of hard currency. United States Notes in $100 denominations were printed in 1966 to satisfy the 1878 Greenback Law requiring their issuance, but most were kept in a separate room at the Treasury and were not circulated. In the 1990s, the Greenback Law was revoked altogether, eliminating even that token issuance.

Barbarians Inside the Gates

Although the puppeteers behind Kennedy’s assassination have never been officially exposed, some investigators have concluded that he was another victim of the invisible hand of the international corporate/banking/military cartel. President Eisenhower warned in his 1961 Farewell Address of the encroaching powers of the military-industrial complex. To that mix Gibson would add the oil cartel and the Morgan-Rockefeller banking sector, which were closely aligned. Kennedy took a bold stand against them all.

How he stood up to the CIA and the military was revealed by James Bamford in a book called Body of Secrets, which was featured by ABC News in November 2001, two months after the World Trade Center disaster. The book discussed Kennedy’s threat to abolish the CIA’s right to conduct covert operations, after he was presented with the secret military plans code-named “Operation Northwoods” in 1962. Drafted by America’s top military leaders, these bizarre plans included proposals to kill innocent people and commit acts of terrorism in U.S. cities, in order to create public support for a war against Cuba. Actions contemplated included hijacking planes, assassinating Cuban emigres, sinking boats of Cuban refugees on the high seas, blowing up a U.S. ship, orchestrating violent terrorism in U.S. cities, and causing U.S. military casualties, all for the purpose of tricking the American public and the international community into supporting a war to oust Cuba’s then-new Communist leader Fidel Castro. The proposal stated, “We could blow up a U.S. ship in Guantanamo Bay and blame Cuba,” and that “casualty lists in U.S. newspapers would cause a helpful wave of national indignation."

Needless to say, Kennedy was shocked and flatly vetoed the plans. The head of the Joint Chiefs of Staff was promptly transferred to another job. The country’s youngest President was assassinated the following year. Whether or not Operation Northwoods played a role, it was further evidence of an “invisible government” acting behind the scenes. His disturbing murder was a wake-up call for a whole generation of activists. Things in Emerald City were not as green as they seemed. The Witch and her minions had gotten inside the gate.

Bretton Woods: The Rise and Fall of an International Gold Standard

Lyndon Johnson was followed in the White House by Richard Nixon, the candidate Kennedy defeated in 1960. In 1971, President Nixon took the dollar off the gold standard internationally, leaving currencies to “float” in the market so that they had to compete with each other as if they were commodities. Currency markets were turned into giant casinos that could be manipulated by powerful hedge funds, multinational banks and other currency speculators. William Engdahl, author of A Century of War, writes:

    In this new phase, control over monetary policy was, in effect, privatized, with large international banks such as Citibank, Chase Manhattan or Barclays Bank assuming the role that central banks had in a gold system, but entirely without gold. “Market forces” now could determine the dollar. And they did with a vengeance.”

It was not the first time floating exchange rates had been tried. An earlier experiment had ended in disaster, when the British pound and the U.S. dollar had both been taken off the gold standard in the 1930s. The result was a series of competitive devaluations that only served to make the global depression worse. The Bretton Woods Accords were entered into at the end of World War II to correct this problem. Foreign exchange markets were stabilized with an international gold standard, in which each country fixed its currency’s global price against the price of gold. Currencies were allowed to fluctuate from this “peg” only within a very narrow band of plus or minus one percent. The International Monetary Fund (IMF) was set up to establish exchange rates, and the International Bank for Reconstruction and Development (the World Bank) was founded to provide credit to war-ravaged and Third World countries.

The principal architects of the Bretton Woods Accords were British economist John Maynard Keynes and Assistant U.S. Treasury Secretary Harry Dexter White. Keynes envisioned an international central bank that had the power to create its own reserves by issuing its own currency, which he called the “bancor.” But the United States had just become the world’s only financial superpower and was not ready for that step in 1944. The IMF system was formulated mainly by White, and it reflected the power of the American dollar. The gold standard had failed earlier because Great Britain and the United States, the global bankers, had run out of gold. Under the White Plan, gold would be backed by U.S. dollars, which were considered “as good as gold” because the United States had agreed to maintain their convertibility into gold at $35 per ounce. As long as people had faith in the dollar, there was little fear of running out of gold, because gold would not actually be used. Hans Schicht notes that the Bretton Woods Accords were convened by the “master spider” David Rockefeller. They played right into the hands of the global bankers, who needed the ostensible backing of gold to justify a massive expansion of U.S. dollar debt around the world.

The Bretton Woods gold standard worked for a while, but it was mainly because few countries actually converted their dollars into gold. Trade balances were usually cleared in U.S. dollars, due to their unique strength after World War II. Things fell apart, however, when foreign investors began to doubt the solvency of the United States. By 1965, the Vietnam War had driven the country heavily into debt. French President Charles DeGaulle, seeing that the United States was spending far more than it had in gold reserves, demanded that it convert 300 million of France’s U.S. dollar holdings into gold. That request was honored, but it was followed by one that would have “broken the bank.” Great Britain, having incurred the largest monthly trade deficit in its history, had been turned down by the IMF for a $300 billion loan and had tried to cash in its gold-backed dollars for the gold they supposedly represented. The sum amounted to fully one-third the gold reserves of the United States. The problem might have been alleviated in the short term by raising the price of gold, but that was not the agenda that prevailed. The gold price was kept at $35 per ounce, forcing President Nixon to renege on the gold deal and close the “gold window” permanently. To his credit, Nixon did not take this step until he was forced into it, although it had been urged by economist Milton Friedman in 1968.

The result of taking the dollar off the gold standard was to finally take the brakes off the printing presses. Fiat dollars could now be generated and circulated to whatever extent the world would take them. The Witches of Wall Street proceeded to build a worldwide financial empire based on a “fractional reserve” banking system that used bank-created paper dollars in place of the time-honored gold. Dollars became the reserve currency for a global net of debt to an international banking cartel. It all worked out so well for the bankers that skeptical commentators suspected it had been planned that way. Professor Antal Fekete wrote in an article in the May 2005 Asia Times that the removal of the dollar from the gold standard was “the biggest act of bad faith in history.” He charged:

    It is disingenuous to say that in 1971 the US made the dollar “free floating.” What the US did was nothing less than throwing away the yardstick measuring value. It is truly unbelievable that in our scientific day and age when the material and therapeutic well-being of billions of people depends on the increasing accuracy of measurement in physics and chemistry, dismal monetary science has been allowed to push the world into the Dark Ages by abolishing the possibility of accurate measurement of value. We no longer have a reliable yardstick to measure value. There was no open debate of the wisdom, or the lack of it, to run the economy without such a yardstick.

Whether unpegging the dollar from gold was a deliberate act of bad faith might be debated, but the fact remains that gold was inadequate as a global yardstick for measuring value. The price of gold fluctuated widely, and it was subject to manipulation by speculators. Gold also failed as a global reserve currency, because there was not enough gold available to do the job. If one country had an outstanding balance of payments because it had not exported enough goods to match its imports, that imbalance was corrected by transferring reserves of gold between countries; and to come up with the gold, the debtor country would cash in its U.S. dollars for the metal, draining U.S. gold reserves. It was inevitable that the U.S. government (the global banker) would eventually run out of gold. Some proposals for pegging currency exchange rates that would retain the benefits of the gold standard without its shortcomings are explored in Chapter 46.

The International Currency Casino

If the gold standard was flawed, the system of “floating” exchange rates that replaced it was much worse, particularly for Third World countries. Currencies were now valued merely by their relative exchange rates in the “free” market. Foreign exchange markets became giant casinos, in which the investors were just betting on the relative positions of different currencies. Smaller countries were left at the mercy of major players -- whether other countries, multinational corporations or multinational banks -- which could radically devalue national currencies just by selling them short on the international market in large quantities. These currency manipulations could be so devastating that they could be used to strong-arm concessions from target economies. That happened, for example, during the Asian Crisis of 1997-98, when they were used to “encourage” Thailand, Malaysia, Korea and Japan to come into conformance with World Trade Organization rules and regulations….

The foreign exchange market became so unstable that crises could result just from rumors of economic news and changes in perception. Commercial risks from sudden changes in the value of foreign currencies are now considered greater even than political or market risks for conducting foreign trade. Huge derivative markets have developed to provide hedges to counter these risks. The hedgers typically place bets both ways, in order to be covered whichever way the market goes. But derivatives themselves can be very risky and expensive, and they can further compound market instability.

The system of floating exchange rates was the same system that had been tried briefly in the 1930s and had proven disastrous; but there seemed no viable alternative after the dollar went off the gold standard, so most countries agreed to it. Nations that resisted could usually be coerced into accepting the system as a condition of debt relief; and many nations needed debt relief, after the price of oil suddenly quadrupled in 1974. That highly suspicious rise occurred soon after an oil deal was engineered by U.S. interests with the royal family of Saudi Arabia, the largest oil producer in OPEC (the Organization of the Petroleum Exporting Countries). The deal was evidently brokered by U.S. Secretary of State Henry Kissinger. It involved an agreement by OPEC to sell oil only for dollars in return for a secret U.S. agreement to arm Saudi Arabia and keep the House of Saud in power. According to John Perkins in his eye-opening book Confessions of an Economic Hit Man, the arrangement basically amounted to protection money, insuring that the House of Saud would not go the way of Iran’s Prime Minister Mossadegh, who was overthrown by a CIA-engineered coup in 1954.

The U.S. dollar had formerly been backed by gold. It was now “backed” by oil. Every country had to acquire Federal Reserve Notes to purchase this essential commodity. Oil-importing countries around the world suddenly had to export goods to get the dollars to pay their expensive new oil import bills, diverting their productive capacity away from feeding and clothing their own people. Countries that had a “negative trade balance” because they failed to export more goods than they imported were advised by the World Bank and the IMF to unpeg their currencies from the dollar and let them “float” in the currency market. The theory was that an “overvalued” currency would then become devalued naturally until it found its “true” level. Devaluation would make exports cheaper and imports more expensive, allowing the country to build up a positive trade balance by selling more goods than it bought. That was the theory, but as Michael Rowbotham observes, it has not worked well in practice:

    There is the obvious, but frequently ignored point that, whilst lowering the value of a currency may promote exports, it will also raise the cost of imports. This of course is intended to deter imports. But if the demand for imports is “inelastic,” reflecting essential goods and services, contracts and preferences, then the net cost of imports may not fall, and may actually rise. Also, whilst the volume of exports may rise, appearing to promise greater earnings, the financial return per unit of exports will fall. . .Time and time again, nations devaluing their currencies have seen volumes of exports and imports alter slightly, but with little overall impact on the financial balance of trade.

If the benefits of letting the currency float were minor, the downsides were major: the currency was now subject to rampant manipulation by speculators. The result was a disastrous roller coaster ride, particularly for Third World economies. Today, most currency trades are done purely for speculative profit. Currencies rise or fall depending on the quantities traded each day. Bernard Lietaer writes in The Future of Money:

    Your money’s value is determined by a global casino of unprecedented proportions: $2 trillion are traded per day in foreign exchange markets, 100 times more than the trading volume of all stock markets of the world combined. Only 2% of these foreign exchange transactions relate to the “real” economy reflecting movements of real goods and services in the world, and 98% are purely speculative. This global casino is triggering the foreign exchange crises which shook Mexico in 1994-5, Asia in 1997 and Russia in 1998.

The alternative to letting the currency float is for a national government to keep its currency tightly pegged to the U.S. dollar, but governments that have taken that course have faced other hazards. The currency becomes vulnerable to the monetary policies of the United States; and if the country does not set its peg right, it can still be the target of currency raids. In the interest of “free trade,” the government usually agrees to keep its currency freely convertible into dollars. That means it has to stand ready to absorb any surpluses or fill any shortages in the exchange market; and to do this, it has to have enough dollars in reserve to buy back the local currency of anyone wanting to sell. If the government guesses wrong and sets the peg too high (so that its currency will not really buy as much as the equivalent in dollars), there were be “capital flight” out of the local currency into the more valuable dollars. (Indeed, speculators can induce capital flight even when the peg isn’t set too high, as we’ll see shortly.) Capital flight can force the government to spend its dollar reserves to “defend” its currency peg; and when the reserves are exhausted, the government will either have to default on its obligations or let its currency be devalued. When the value of the currency drops, so does everything valued in it. National assets can then be snatched up by circling “vulture capitalists” for pennies on the dollar.

Following all this can be a bit tricky, but the bottom line is that there is no really safe course at present for most small Third World nations. Whether their currencies are left to float or are kept tightly pegged to the dollar, they can still be attacked by speculators. There is a third alternative, but few countries have been in a position to take it: the government can peg its currency to the dollar and not support its free conversion into other currencies. Professor Henry C. K. Liu, the Chinese American economist quoted earlier, says that China escaped the 1998 “Asian Crisis” in this way. He writes:

    China was saved from such a dilemma because the yuan was not freely convertible. In a fundamental way, the Chinese miracle of the past half a decade has been made possible by its fixed exchange rate and currency control . . . .

But China too has been under pressure to let its currency float. Liu warns the country of his ancestors:

    The record of the past three decades shows that neo-liberal ideology brought devastation to every economy it invaded. . . .China will not be exempt from such a fate when it makes the yuan fully convertible at floating rates.

There is no real solution to this problem short of global monetary reform….

Setting the Debt Trap:  “Emerging Markets” for Petrodollar Loans

When the price of oil quadrupled in the 1970s, OPEC countries were suddenly flooded with U.S. currency; and these “petrodollars” were usually deposited in London and New York banks. They were an enormous windfall for the banks, which recycled them as low-interest loans to Third World countries that were desperate to borrow dollars to finance their oil imports. Like other loans made by commercial banks, these loans did not actually consist of money deposited by their clients. The deposits merely served as “reserves” for loans created by the “multiplier effect” out of thin air. Through the magic of fractional-reserve lending, dollars belonging to Arab sheiks were multiplied many times over as accounting-entry loans. The “emerging nations” were discovered as “emerging markets” for this new international financial capital. Hundreds of billions of dollars in loan money were generated in this way.

Before 1973, Third World debt was manageable and contained. It was financed mainly through public agencies including the World bank, which invested in projects promising solid economic success. But things changed when private commercial banks got into the game. The banks were not in the business of “development.” They were in the business of loan brokering. Some called it “loan sharking.” The banks preferred “stable” governments for clients. Generally, that meant governments controlled by dictators. How these dictators had come to power, and what they did with the money, were not of immediate concern to the banks. The Philippines, Chile, Brazil, Argentina, and Uruguay were all prime loan targets. In many cases, the dictators used the money for their own ends, without significantly bettering the condition of the people; but the people were saddled with the bill.

The screws were tightened in 1979, when the U.S. Federal Reserve under Chairman Paul Volcker unilaterally hiked interest rates to crippling levels. Engdahl notes that this was done after foreign dollar-holders began dumping their dollars in protest over the foreign policies of the Carter administration. Within weeks, Volcker allowed U.S. interest rates to triple. They rose to over 20 percent, forcing global interest rates through the roof, triggering a global recession and mass unemployment. By 1982, the dollar’s status as global reserve currency had been saved, but the entire Third World was on the brink of bankruptcy, choking from usurious interest charges on their petrodollar loans.

That was when the IMF got in the game, brought in by the London and New York banks to enforce debt repayment and act as “debt policeman.” Public spending for health, education and welfare in debtor countries was slashed, following IMF orders to ensure that the banks got timely debt service on their petrodollars. The banks also brought pressure on the U.S. government to bail them out from the consequences of their imprudent loans, using taxpayer money and U.S. assets to do it. The results were austerity measures for Third World countries and taxation for American workers to provide welfare for the banks. The banks were emboldened to keep aggressively lending, confident that they would again be bailed out if the debtors’ loans went into default.

Worse for American citizens, the United States itself ended up a major debtor nation. Because oil is an essential commodity for every country, the petrodollar system requires other countries to build up huge trade surpluses in order to accumulate the dollar surpluses they need to buy oil. These countries have to sell more goods in dollars than they buy, to give them a positive dollar balance. That is true for every country except the United States, which controls the dollar and issues it at will. More accurately, the Federal Reserve and the private commercial banking system it represents control the dollar and issue it at will. Since U.S. economic dominance depends on the dollar recycling process, the United States has acquiesced in becoming “importer of last resort.” The result has been to saddle it with a growing negative trade balance or “current account deficit.” By 2000, U.S. trade deficits and net liabilities to foreign accounts were well over 22 percent of gross domestic product. In 2001, the U.S. stock market collapsed; and tax cuts and increased federal spending turned the federal budget surplus into massive budget deficits. In the three years after 2000, the net U.S. debt position almost doubled. The United States had to bring in $1.4 billion in foreign capital daily, just to fund this debt and keep the dollar recycling game going. By 2006, the figure was up to $2.5 billion daily. The people of the United States, like those of the Third World, have become hopelessly mired in debt to support the banking system of a private international cartel.

-- Ellen Brown, Web of Debt, pp. 205-216

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"For the first years of [Ludwig von] Mises’s life in the United States...he was almost totally dependent on annual research grants from the Rockefeller Foundation.” -- Richard M. Ebeling

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