http://www.lewrockwell.com/margolis/margolis114.html
by Eric Margolisby Eric Margolis
PARIS – After a sea of lies and a tsunami of propaganda, the ugly truth behind the Iraq and Afghanistan wars finally emerged into full view this week.
Four major western oil companies, Exxon, Mobil, Shell, BP and Total, are about to sign US-brokered no-bid contracts with the US-installed Baghdad regime to begin exploiting Iraq’s oil fields. Saddam Hussein had kicked these firms out three decades ago when he nationalized Iraq’s foreign-owned oil industry for the benefit of Iraq’s national development. The Baghdad regime is turning back the clock.
This agreement comes as talks are continuing between the Washington and its Baghdad client regime over future US basing rights in Iraq. After some face-saving Iraqi objections, it is expected that Baghdad will sign a compact with Washington giving US forces control of Iraq and its air space in a manner very similar to Great Britain’s colonial arrangement with Iraq.
Interestingly, the same oil companies that used to exploit Iraq when it was a British colony are now returning. As former US Federal Reserve Chairman Alan Greenspan recently admitted, the Iraq war was all about oil. VP Dick Cheney stated in 2003 that the invasion of Iraq was about oil, and for the sake of Israel.
Meanwhile, according to Pakistani and Indian sources, Afghanistan just signed a major deal to launch a long-planned, 1680 km long pipeline project expected to cost $ 8 billion. If completed, the Turkmenistan-Afghanistan-Pakistan-India pipeline (TAPI) will export gas and, later, oil from the Caspian Basin to Pakistan’s coast where tankers will transport it to the west.
The Caspian Basin located under the Central Asian states of Turkmenistan, Uzbekistan and Kazakkstan, holds an estimated 300 trillion cubic feet of gas and 100–200 billion barrels of oil. Securing the world’s last remaining known energy Eldorado is strategic priority for the western powers. China can only look on with envy.
But there are only two practical ways to get gas and oil out of landlocked Central Asia to the sea: through Iran, or through Afghanistan to Pakistan. For Washington, Iran is tabu. That leaves Pakistan, but to get there, the planned pipeline must cross western Afghanistan, including the cities of Herat and Kandahar.
In 1998, the Afghan anti-Communist movement Taliban and a western oil consortium led by the US firm UNOCAL signed a major pipeline deal. UNOCAL lavished money and attention on Taliban, flew a senior delegation to Texas, and also hired an minor Afghan official, one Hamid Karzai.
Enter Osama bin Laden. He advised the unworldly Taliban leaders to reject the US deal and got them to accept a better offer from an Argentine consortium, Bridas. Washington was furious and, according to some accounts, threatened Taliban with war.
In early 2001, six or seven months before 9/11, Washington made the decision to invade Afghanistan, overthrow Taliban, and install a client regime that would build the energy pipelines. But Washington still kept up sending money to Taliban until four months before 9/11 in an effort to keep it "on side" for possible use in a war or strikes against Iran.
The 9/11 attacks, about which Taliban knew nothing, supplied the pretext to invade Afghanistan. The initial US operation had the legitimate objective of wiping out Osama bin Laden’s al-Qaida. But after its 300 members fled to Pakistan, the US stayed on, built bases – which just happened to be adjacent to the planned pipeline route – and installed former UNOCAL"consultant" Hamid Karzai as leader.
Washington disguised its energy geopolitics by claiming the Afghan occupation was to fight "Islamic terrorism," liberate women, build schools, and promote democracy. Ironically, the Soviets made exactly the same claims when they occupied Afghanistan from 1979-1989. The cover story for Iraq was weapons of mass destruction, Saddam’s supposed links to 9/11, and promoting democracy.
Work will begin on the TAPI once Taliban forces are cleared from the pipeline route by US, Canadian and NATO forces. As American analyst Kevin Phillips writes, the US military and its allies have become an "energy protection force."
From Washington’s viewpoint, the TAPI deal has the added benefit of scuttling another proposed pipeline project that would have delivered Iranian gas and oil to Pakistan and India.
India’s energy needs are expected to triple over the next decade to 8 billion barrels of oil and 80 million cubic meters of gas daily. Delhi, which has its own designs on Afghanistan and has been stirring the pot there, is cock-a-hoop over the new pipeline plan. Russia, by contrast, is grumpy, having hoped to monopolize Central Asian energy exports.
Energy is more important than blood in our modern world. The US is a great power with massive energy needs. Domination of oil is a pillar of America’s world power. Afghanistan and Iraq are all about control of oil.
June 24, 2008
Eric Margolis [send him mail], contributing foreign editor for Sun National Media Canada, is the author of War at the Top of the World. See his website.
Tuesday, June 24, 2008
Friday, June 20, 2008
US Secret Prisions
Lost in the System
Posted June 17, 2008
What has happened to Bush’s secret prisoners?
By George Monbiot. Published in the Guardian 17th June 2008
We shouldn’t be surprised to hear that George Bush dined with a group of historians on Sunday night(1). The president has spent much of his second term pleading with history. But however hard he lobbies the gatekeepers of memory, he will surely be judged the worst president the United States has ever had.
Even if historians were somehow to forget the illegal war, the mangling of international law, the trashing of the environment and social welfare, the banking crisis, the transfer of wealth from poor to rich, one image is stamped indelibly on this presidency: the trussed automata in orange jumpsuits. It portrays a superpower prepared to dehumanise its prisoners, to wrap, blind and deafen them, to reduce them to mannequins in a place as stark and industrial as a chicken-packing plant. Worse, the government was proud of what it had done. It was parading its impunity. It wanted us to know that nothing would stand in its way: its power was both sovereign and unaccountable.
Three days before Bush arrived in Britain, the US Supreme Court ruled that the inmates at Guantanamo Bay were entitled to contest their detention in the civilian courts. This is the third time the supreme court has ruled against the prison camp, but on this occasion Bush cannot change the law: the court has ruled that the prisoners’ rights are constitutional.
Symbolically the decision could scarcely be more important. Practically it could scarcely be less. The Department of Defense can transfer its prisoners to an oubliette in another country, where the Constitution’s writ does not run. The public atrocity of Guantanamo Bay has provided a useful distraction from something even worse: the sprawling system of secret detention camps the US runs around the world.
We don’t, of course, know much about this programme. Bush first acknowledged it in September 2006. “Of the thousands of terrorists captured across the world, only about 770 have ever been sent to Guantanamo.”(2) Other suspects, he said, were being “held secretly” by the CIA. “Many specifics of this program, including where these detainees have been held and the details of their confinement, cannot be divulged.” He went on to claim that all the secret prisoners had now been transferred to Guantanamo Bay.
Several lines of evidence suggest that this claim was false. The CIA appears to have overseen or controlled, and in some cases still to be running, black sites in Poland, Bulgaria, Romania, Ukraine, Macedonia, Kosovo, Morocco, Libya, Egypt, Djibouti, Somalia, Ethiopia, Iraq, Jordan, Afghanistan, Pakistan, Thailand and possibly Diego Garcia(3,4,5,6). The US currently appears to be using ships as secret prisons(7). In just two years the CIA ran 283 flights - which the Council of Europe believes were used for transporting secret prisoners - out of Germany alone(8). It admits that it possesses 7000 documents about its ghost detention programme(9). Are we really to believe that all this was done for the 14 men transferred to Guantanamo Bay? In Iraq, the US now admits to holding 22,000 prisoners without charge in its own facilities(10), some of whom are known to be kept away from the Red Cross and other visitors(11).
Apart from those moved to Cuba, hardly anyone, so far, has come out of this system. At the end of last year, salon.com interviewed Mohamed Bashmilah, who was arrested and tortured by Jordanian police, handed to the Americans, then flown to an unknown country in autumn 2003, and held secretly by the CIA until he was transferred to Yemeni custody in May 2005(12). He reports that he was kept in a cell about the size of a transit van throughout the 19 months of his confinement, without any human contact except during interrogation. The lights and a source of white noise were left on permanently. Driven mad by isolation and sensory deprivation, he tried to kill himself several times. Eventually, when it became obvious even to the CIA that he had nothing to do with terrorism, he was handed over to the Yemeni government, who held him for another year until he was released without charge.
Lawyers for some of the men transferred to Guantanamo Bay claim that, while in secret detention, their clients were left hanging from the ceiling by their wrists, beaten with electric cables, yanked around on a dog’s leash, chained naked in a freezing cell and doused with cold water. “The CIA worked people day and night for months,” one prisoner reports. “Plenty lost their minds. I could hear people knocking their heads against the walls and doors, screaming their heads off.”(13)
Could it be worse than this? Yes. In 2003, a US official admitted to the Sunday Telegraph that the CIA was detaining and interrogating children. Discussing two boys aged seven and nine held in secret detention by the CIA, the official explained, “we are handling them with kid gloves. After all, they are only little children, but we need to know as much about their father’s recent activities as possible. We have child psychologists on hand at all times and they are given the best of care.”(14) According to another prisoner, the boys had already been tortured by Pakistani guards(15). A former CIA official told the New Yorker that “every single plan [in the secret detention programme] is drawn up by interrogators, and then submitted for approval to the highest possible level - meaning the director of the CIA. Any change in the plan - even if an extra day of a certain treatment was added - was signed off by the CIA director.”(16)
Never mind detention without trial; this is detention without acknowledgement. When men and women disappear into this system, neither they nor their families know where they are. The Red Cross cannot reach them; they are beyond the scope of the law. They have been disappeared in the Latin American sense of that word.
Do I need to explain that this treatment breaks just about every article in the Geneva Conventions? Do I need to tell you that - without charges, trials, lawyers, scrutiny or even recognition - it is just as likely to net the innocent as the guilty? In 2006, George Bush maintained that “these aren’t common criminals, or bystanders accidentally swept up on the battlefield - we have in place a rigorous process to ensure those held at Guantanamo Bay belong at Guantanamo.”(17) But a new and detailed investigation by the McClatchy newspaper group has found that many of them were indeed either common criminals or bystanders, or men sold to the authorities in order to settle a feud(18). Who knows how many innocent people are going out of their minds in the CIA’s secret prisons today?
Along with its innocent victims, the US government has locked itself into this system. As the Justice Department has argued, these prisoners cannot be released in case they describe the “alternative interrogation methods” (the euphemism it uses for torture) the CIA used on them, which could “reasonably be expected to cause extremely grave damage.”(19) Like almost everything Bush has done, this programme promises to backfire. George Bush will be remembered not only for the lives he has broken, but also for smashing everything he claimed to defend.
www.monbiot.com
References:
1. Sam Coates and Tom Baldwin, 16th June 2008. Leading historians offer President Bush food for thought on writing legacy. The Times.
2. The White House, 6th September 2006. President Discusses Creation of Military Commissions to Try Suspected Terrorists.http://www.whitehouse.gov/news/releases/2006/09/20060906-3.html
3. Dick Marty, 22nd January 2006. Alleged secret detentions in Council of Europe member states. Committee on Legal Affairs and Human Rights, Council of Europe. http://assembly.coe.int/Main.asp?link=/CommitteeDocs/2006/20060124_Jdoc032006_E.htm
4. Amnesty International, 1st January 2006. “Rendition” and secret detention:A global system of human rights violations. http://www.amnesty.org/en/library/asset/POL30/003/2006/en/dom-POL300032006en.html
5. Reprieve and Cageprisoners, 22 March 2007. Mass Rendition, Incommunicado Detention and Possible Torture of Foreign Nationals in Kenya, Somalia and Ethiopia. http://www.reprieve.org.uk/documents/070321HOArenditionreportfinal.pdf
6. Dana Priest, 2nd November 2005. CIA Holds Terror Suspects in Secret Prisons. Washington Post.
7. Duncan Campbell and Richard Norton-Taylor, 2nd June 2008. US accused of holding terror suspects on prison ships. The Guardian.
8. Dick Marty, ibid.
9. The Center for Constitutional Rights, 23rd April 2008. CIA Acknowledges It Has More than 7,000 Documents Relating to Secret Detention Program, Rendition, and Torture http://ccrjustice.org/newsroom/press-releases/cia-foia-documents
10. Jim Michaels, 28th May 2008. Military retools detainee releases. USA Today. http://www.usatoday.com/news/military/2008-05-19-detainees-military_N.htm
11. Amnesty International, 6th March 2006. Iraq: Beyond Abu Ghraib: Detention and torture in Iraq. http://www.amnesty.org/en/library/info/MDE14/001/2006
12. Mark Benjamin, 14th December 2007. Inside the CIA’s notorious “black sites”. http://www.salon.com/news/feature/2007/12/14/bashmilah/
13. Jane Mayer, 13th August 2007. The Black Sites. http://www.newyorker.com/reporting/2007/08/13/070813fa_fact_mayer
14. Olga Craig, 10th March 2003. We have your sons: CIA. Sunday Telegraph.
15. Amnesty International et al, 7th June 2007. Off the Record: US Responsibility for Enforced Disappearances in the “War on Terror”. http://www.amnesty.org/en/library/asset/AMR51/093/2007/en/dom-AMR510932007en.html
16. Jane Mayer, ibid.
17. The White House, ibid.
18. Tom Lasseter, 15th June 2008. America’s prison for terrorists often held the wrong men. http://www.mcclatchydc.com/detainees/story/38773.html
19. Jane Mayer, ibid.
Posted June 17, 2008
What has happened to Bush’s secret prisoners?
By George Monbiot. Published in the Guardian 17th June 2008
We shouldn’t be surprised to hear that George Bush dined with a group of historians on Sunday night(1). The president has spent much of his second term pleading with history. But however hard he lobbies the gatekeepers of memory, he will surely be judged the worst president the United States has ever had.
Even if historians were somehow to forget the illegal war, the mangling of international law, the trashing of the environment and social welfare, the banking crisis, the transfer of wealth from poor to rich, one image is stamped indelibly on this presidency: the trussed automata in orange jumpsuits. It portrays a superpower prepared to dehumanise its prisoners, to wrap, blind and deafen them, to reduce them to mannequins in a place as stark and industrial as a chicken-packing plant. Worse, the government was proud of what it had done. It was parading its impunity. It wanted us to know that nothing would stand in its way: its power was both sovereign and unaccountable.
Three days before Bush arrived in Britain, the US Supreme Court ruled that the inmates at Guantanamo Bay were entitled to contest their detention in the civilian courts. This is the third time the supreme court has ruled against the prison camp, but on this occasion Bush cannot change the law: the court has ruled that the prisoners’ rights are constitutional.
Symbolically the decision could scarcely be more important. Practically it could scarcely be less. The Department of Defense can transfer its prisoners to an oubliette in another country, where the Constitution’s writ does not run. The public atrocity of Guantanamo Bay has provided a useful distraction from something even worse: the sprawling system of secret detention camps the US runs around the world.
We don’t, of course, know much about this programme. Bush first acknowledged it in September 2006. “Of the thousands of terrorists captured across the world, only about 770 have ever been sent to Guantanamo.”(2) Other suspects, he said, were being “held secretly” by the CIA. “Many specifics of this program, including where these detainees have been held and the details of their confinement, cannot be divulged.” He went on to claim that all the secret prisoners had now been transferred to Guantanamo Bay.
Several lines of evidence suggest that this claim was false. The CIA appears to have overseen or controlled, and in some cases still to be running, black sites in Poland, Bulgaria, Romania, Ukraine, Macedonia, Kosovo, Morocco, Libya, Egypt, Djibouti, Somalia, Ethiopia, Iraq, Jordan, Afghanistan, Pakistan, Thailand and possibly Diego Garcia(3,4,5,6). The US currently appears to be using ships as secret prisons(7). In just two years the CIA ran 283 flights - which the Council of Europe believes were used for transporting secret prisoners - out of Germany alone(8). It admits that it possesses 7000 documents about its ghost detention programme(9). Are we really to believe that all this was done for the 14 men transferred to Guantanamo Bay? In Iraq, the US now admits to holding 22,000 prisoners without charge in its own facilities(10), some of whom are known to be kept away from the Red Cross and other visitors(11).
Apart from those moved to Cuba, hardly anyone, so far, has come out of this system. At the end of last year, salon.com interviewed Mohamed Bashmilah, who was arrested and tortured by Jordanian police, handed to the Americans, then flown to an unknown country in autumn 2003, and held secretly by the CIA until he was transferred to Yemeni custody in May 2005(12). He reports that he was kept in a cell about the size of a transit van throughout the 19 months of his confinement, without any human contact except during interrogation. The lights and a source of white noise were left on permanently. Driven mad by isolation and sensory deprivation, he tried to kill himself several times. Eventually, when it became obvious even to the CIA that he had nothing to do with terrorism, he was handed over to the Yemeni government, who held him for another year until he was released without charge.
Lawyers for some of the men transferred to Guantanamo Bay claim that, while in secret detention, their clients were left hanging from the ceiling by their wrists, beaten with electric cables, yanked around on a dog’s leash, chained naked in a freezing cell and doused with cold water. “The CIA worked people day and night for months,” one prisoner reports. “Plenty lost their minds. I could hear people knocking their heads against the walls and doors, screaming their heads off.”(13)
Could it be worse than this? Yes. In 2003, a US official admitted to the Sunday Telegraph that the CIA was detaining and interrogating children. Discussing two boys aged seven and nine held in secret detention by the CIA, the official explained, “we are handling them with kid gloves. After all, they are only little children, but we need to know as much about their father’s recent activities as possible. We have child psychologists on hand at all times and they are given the best of care.”(14) According to another prisoner, the boys had already been tortured by Pakistani guards(15). A former CIA official told the New Yorker that “every single plan [in the secret detention programme] is drawn up by interrogators, and then submitted for approval to the highest possible level - meaning the director of the CIA. Any change in the plan - even if an extra day of a certain treatment was added - was signed off by the CIA director.”(16)
Never mind detention without trial; this is detention without acknowledgement. When men and women disappear into this system, neither they nor their families know where they are. The Red Cross cannot reach them; they are beyond the scope of the law. They have been disappeared in the Latin American sense of that word.
Do I need to explain that this treatment breaks just about every article in the Geneva Conventions? Do I need to tell you that - without charges, trials, lawyers, scrutiny or even recognition - it is just as likely to net the innocent as the guilty? In 2006, George Bush maintained that “these aren’t common criminals, or bystanders accidentally swept up on the battlefield - we have in place a rigorous process to ensure those held at Guantanamo Bay belong at Guantanamo.”(17) But a new and detailed investigation by the McClatchy newspaper group has found that many of them were indeed either common criminals or bystanders, or men sold to the authorities in order to settle a feud(18). Who knows how many innocent people are going out of their minds in the CIA’s secret prisons today?
Along with its innocent victims, the US government has locked itself into this system. As the Justice Department has argued, these prisoners cannot be released in case they describe the “alternative interrogation methods” (the euphemism it uses for torture) the CIA used on them, which could “reasonably be expected to cause extremely grave damage.”(19) Like almost everything Bush has done, this programme promises to backfire. George Bush will be remembered not only for the lives he has broken, but also for smashing everything he claimed to defend.
www.monbiot.com
References:
1. Sam Coates and Tom Baldwin, 16th June 2008. Leading historians offer President Bush food for thought on writing legacy. The Times.
2. The White House, 6th September 2006. President Discusses Creation of Military Commissions to Try Suspected Terrorists.http://www.whitehouse.gov/news/releases/2006/09/20060906-3.html
3. Dick Marty, 22nd January 2006. Alleged secret detentions in Council of Europe member states. Committee on Legal Affairs and Human Rights, Council of Europe. http://assembly.coe.int/Main.asp?link=/CommitteeDocs/2006/20060124_Jdoc032006_E.htm
4. Amnesty International, 1st January 2006. “Rendition” and secret detention:A global system of human rights violations. http://www.amnesty.org/en/library/asset/POL30/003/2006/en/dom-POL300032006en.html
5. Reprieve and Cageprisoners, 22 March 2007. Mass Rendition, Incommunicado Detention and Possible Torture of Foreign Nationals in Kenya, Somalia and Ethiopia. http://www.reprieve.org.uk/documents/070321HOArenditionreportfinal.pdf
6. Dana Priest, 2nd November 2005. CIA Holds Terror Suspects in Secret Prisons. Washington Post.
7. Duncan Campbell and Richard Norton-Taylor, 2nd June 2008. US accused of holding terror suspects on prison ships. The Guardian.
8. Dick Marty, ibid.
9. The Center for Constitutional Rights, 23rd April 2008. CIA Acknowledges It Has More than 7,000 Documents Relating to Secret Detention Program, Rendition, and Torture http://ccrjustice.org/newsroom/press-releases/cia-foia-documents
10. Jim Michaels, 28th May 2008. Military retools detainee releases. USA Today. http://www.usatoday.com/news/military/2008-05-19-detainees-military_N.htm
11. Amnesty International, 6th March 2006. Iraq: Beyond Abu Ghraib: Detention and torture in Iraq. http://www.amnesty.org/en/library/info/MDE14/001/2006
12. Mark Benjamin, 14th December 2007. Inside the CIA’s notorious “black sites”. http://www.salon.com/news/feature/2007/12/14/bashmilah/
13. Jane Mayer, 13th August 2007. The Black Sites. http://www.newyorker.com/reporting/2007/08/13/070813fa_fact_mayer
14. Olga Craig, 10th March 2003. We have your sons: CIA. Sunday Telegraph.
15. Amnesty International et al, 7th June 2007. Off the Record: US Responsibility for Enforced Disappearances in the “War on Terror”. http://www.amnesty.org/en/library/asset/AMR51/093/2007/en/dom-AMR510932007en.html
16. Jane Mayer, ibid.
17. The White House, ibid.
18. Tom Lasseter, 15th June 2008. America’s prison for terrorists often held the wrong men. http://www.mcclatchydc.com/detainees/story/38773.html
19. Jane Mayer, ibid.
Wednesday, June 18, 2008
The sorry list of finance company failures
http://www.nzherald.co.nz/section/12/story.cfm?c_id=12&objectid=10517059&pnum=2
Chronology of the finance company collapses:
1. May 2006: National Finance 2000
The company held deposits of $25.5m on behalf of 2026 investors, and had made loans totalling $27.3m to 3765 individuals or companies. In March this year, receiver said secured investors had received back 40c in the dollar at that stage.
2. June 2006: Provincial Finance
Receivership seen as best way to protect the interests of debenture stock holders, who had invested $300m with Provincial. Last month secured debenture holders received a further return of 7.5c in the dollar bringing the total returned to 65c per dollar invested, or $192 million.
3. August 2006: Western Bay
Tauranga-based finance company Western Bay, owing more than $48m to investors and having lent $53m in around 10,000 of loans. In December receivers announced a second payment to debenture holders, estimating an eventual recovery of 81c to 82c in the dollar.
2007
4. July 2 2007: Bridgecorp
Specialist property financier Bridgecorp, after defaulting on repayments of some term investments due to investors owing about $500m to 18,000 investors. Late in July, investors were told they could receive anything between 25c and 74c for each dollar invested, with the wide range partly due to complex offshore investments. Receivers said at June 30, Bridgecorp's had 69 loans totalling $393m, with many of the better quality loans sold off.
5. August 21 2007: Nathans Finance
Nathans Finance, owing $166m to around 6000 investors. Nathans was a wholly owned subsidiary of vending technology company VTL Group Ltd which the day before the receivership announced it was insolvent due to a Companies Office investigation of Nathans.
6 August 29 2007: Property Finance
Property Finance, which has debentures of over $80m and loans of over $630m. It reported it was in deep trouble and unlikely to be able to honour its debts.Came out of receivership February 8 2008 and resumed payments to investors.
7. August 30 2007: Five Star Consumer Finance
Five Star Consumer Finance, with receivers PriceWaterhouseCoopers (PWC) saying big loans in its $51m lending book were "outside normal lending practices". It said lenders may get as little as 25-40 per cent of their money back. Prospectus showed it owed $57.6m at March 31, 2006, in various dated debentures and had lent out $68.7m.
8. September 4 2007: LDC Finance Ltd
LDC Finance Ltd trustee Perpetual Trust calls in PWC as receivers. The company has 995 depositors and debenture holders owed $19.3m, and assets of $23.8m.
9. September 5 2007: Finance and Investments
Nelson-based car finance firm Finance and Investments was placed in receivership with PWC by principals Andrew Harding and Murray Scholfield, owing 370 investors $16 million. Finance and Investments received funding from LDC.
10. October 4 2007: Clegg and Co Finance
BDO Spicers appointed receivers to Auckland-based financier Clegg and Co Finance. Clegg had around $15m of 500 investors' funds in debentures. Covenant Trustees said Clegg's trust deed had been breached to a "significant extent". The breach of a related party loan meant Clegg had minimal, if any, residual shareholders funds.
11. October 2007: Beneficial Finance (in moratorium)
Auckland company with $24.2m of investors funds.
12. October 16 2007: Geneva Finance (in moratorium)
Geneva Finance stopped taking deposits and put a moratorium on paying interest on all investments until April 2008. The company is dependent on a $50m credit line from the Bank of Scotland. Geneva owes about 3000 creditors over $138 million.
13. November 29 2007: Capital + Merchant Investments
Capital + Merchant Investments placed in receivership. Capital + Merchant Finance Ltd and Capital + Merchant Investments, had breached general security agreements with Australian company Fortress Credit Corp, said receivers from Grant Thornton. Capital + Merchant owes investors around $200m.
14. December 17 2007: Numeria Finance
The small financier with 480 debenture holders and assets to the tune of around $7 million, is associated with Capital + Merchant Finance, which was put into receivership two weeks ago.Numeria Finance failed because of a lack of cashflow, the company's trustee Perpetual Trust said.
2008
15. May 18 2008: MFS Pacific Finance, re-named OPI Pacific Finance (in moratorium)
MFS Pacific Finance became the fourth finance company to enter into a moratorium as its stockholders voted almost unanimously in favour of a three-year plan aimed at paying them back more than $300 million.
16. March 14 2008: MFS Boston (in moratorium)
Finance company MFS Boston staved off receivership after receiving approval from its debenture investors to wind down the business through a 20-month moratorium.Its 1700 investors were asked to allow the company to freeze redemptions and attempt to return the $38.5 million borrowed from them in the form of quarterly instalments.MFS Boston, is an indirectly-owned subsidiary of troubled Australian investment company MFS.
17. April 3 2008: Lombard Finance and Investments
"It is clear from recent events that this is a systematic failure of an entire industry, and from our perspective a moratorium is now the only responsible course of action," Lombard Finance and Investments chief executive Michael Reeves said.Mr Reeves said $111 million was owned to holders of secured debenture stock and $16 million to holders of subordinated notes and subordinated capital notes.
18. April 15 2008 Kiwi Finance
Smaller New Plymouth-based company.
19. May 13 2008: Cymbis New Zealand (re-named Fairview)
Cymbis New Zealand is a small finance company acquired late last year by troubled Australian firm MFS. Owes $6.9m to just under 800 stockholders.
20. May 28 2008: Belgrave Finance
The rapidly cooling property development market is a major factor in the collapse of Auckland-based Belgrave Finance, which became the 20th finance company failure in the last two years, its directors say. The property development financier has a loan book of about $28 million.
21. June 18 2008. Dominion Finance Holdings
Dominion Finance Holdings (DFH) considers a moratorium on payments to debenture holders after becoming concerned about the liquidity of its two subsidiaries, Dominion Finance Group (DFG) and North South Finance Ltd (NSFL). Debenture holders owed $276m at March 31 2008.
Chronology of the finance company collapses:
1. May 2006: National Finance 2000
The company held deposits of $25.5m on behalf of 2026 investors, and had made loans totalling $27.3m to 3765 individuals or companies. In March this year, receiver said secured investors had received back 40c in the dollar at that stage.
2. June 2006: Provincial Finance
Receivership seen as best way to protect the interests of debenture stock holders, who had invested $300m with Provincial. Last month secured debenture holders received a further return of 7.5c in the dollar bringing the total returned to 65c per dollar invested, or $192 million.
3. August 2006: Western Bay
Tauranga-based finance company Western Bay, owing more than $48m to investors and having lent $53m in around 10,000 of loans. In December receivers announced a second payment to debenture holders, estimating an eventual recovery of 81c to 82c in the dollar.
2007
4. July 2 2007: Bridgecorp
Specialist property financier Bridgecorp, after defaulting on repayments of some term investments due to investors owing about $500m to 18,000 investors. Late in July, investors were told they could receive anything between 25c and 74c for each dollar invested, with the wide range partly due to complex offshore investments. Receivers said at June 30, Bridgecorp's had 69 loans totalling $393m, with many of the better quality loans sold off.
5. August 21 2007: Nathans Finance
Nathans Finance, owing $166m to around 6000 investors. Nathans was a wholly owned subsidiary of vending technology company VTL Group Ltd which the day before the receivership announced it was insolvent due to a Companies Office investigation of Nathans.
6 August 29 2007: Property Finance
Property Finance, which has debentures of over $80m and loans of over $630m. It reported it was in deep trouble and unlikely to be able to honour its debts.Came out of receivership February 8 2008 and resumed payments to investors.
7. August 30 2007: Five Star Consumer Finance
Five Star Consumer Finance, with receivers PriceWaterhouseCoopers (PWC) saying big loans in its $51m lending book were "outside normal lending practices". It said lenders may get as little as 25-40 per cent of their money back. Prospectus showed it owed $57.6m at March 31, 2006, in various dated debentures and had lent out $68.7m.
8. September 4 2007: LDC Finance Ltd
LDC Finance Ltd trustee Perpetual Trust calls in PWC as receivers. The company has 995 depositors and debenture holders owed $19.3m, and assets of $23.8m.
9. September 5 2007: Finance and Investments
Nelson-based car finance firm Finance and Investments was placed in receivership with PWC by principals Andrew Harding and Murray Scholfield, owing 370 investors $16 million. Finance and Investments received funding from LDC.
10. October 4 2007: Clegg and Co Finance
BDO Spicers appointed receivers to Auckland-based financier Clegg and Co Finance. Clegg had around $15m of 500 investors' funds in debentures. Covenant Trustees said Clegg's trust deed had been breached to a "significant extent". The breach of a related party loan meant Clegg had minimal, if any, residual shareholders funds.
11. October 2007: Beneficial Finance (in moratorium)
Auckland company with $24.2m of investors funds.
12. October 16 2007: Geneva Finance (in moratorium)
Geneva Finance stopped taking deposits and put a moratorium on paying interest on all investments until April 2008. The company is dependent on a $50m credit line from the Bank of Scotland. Geneva owes about 3000 creditors over $138 million.
13. November 29 2007: Capital + Merchant Investments
Capital + Merchant Investments placed in receivership. Capital + Merchant Finance Ltd and Capital + Merchant Investments, had breached general security agreements with Australian company Fortress Credit Corp, said receivers from Grant Thornton. Capital + Merchant owes investors around $200m.
14. December 17 2007: Numeria Finance
The small financier with 480 debenture holders and assets to the tune of around $7 million, is associated with Capital + Merchant Finance, which was put into receivership two weeks ago.Numeria Finance failed because of a lack of cashflow, the company's trustee Perpetual Trust said.
2008
15. May 18 2008: MFS Pacific Finance, re-named OPI Pacific Finance (in moratorium)
MFS Pacific Finance became the fourth finance company to enter into a moratorium as its stockholders voted almost unanimously in favour of a three-year plan aimed at paying them back more than $300 million.
16. March 14 2008: MFS Boston (in moratorium)
Finance company MFS Boston staved off receivership after receiving approval from its debenture investors to wind down the business through a 20-month moratorium.Its 1700 investors were asked to allow the company to freeze redemptions and attempt to return the $38.5 million borrowed from them in the form of quarterly instalments.MFS Boston, is an indirectly-owned subsidiary of troubled Australian investment company MFS.
17. April 3 2008: Lombard Finance and Investments
"It is clear from recent events that this is a systematic failure of an entire industry, and from our perspective a moratorium is now the only responsible course of action," Lombard Finance and Investments chief executive Michael Reeves said.Mr Reeves said $111 million was owned to holders of secured debenture stock and $16 million to holders of subordinated notes and subordinated capital notes.
18. April 15 2008 Kiwi Finance
Smaller New Plymouth-based company.
19. May 13 2008: Cymbis New Zealand (re-named Fairview)
Cymbis New Zealand is a small finance company acquired late last year by troubled Australian firm MFS. Owes $6.9m to just under 800 stockholders.
20. May 28 2008: Belgrave Finance
The rapidly cooling property development market is a major factor in the collapse of Auckland-based Belgrave Finance, which became the 20th finance company failure in the last two years, its directors say. The property development financier has a loan book of about $28 million.
21. June 18 2008. Dominion Finance Holdings
Dominion Finance Holdings (DFH) considers a moratorium on payments to debenture holders after becoming concerned about the liquidity of its two subsidiaries, Dominion Finance Group (DFG) and North South Finance Ltd (NSFL). Debenture holders owed $276m at March 31 2008.
Tuesday, June 17, 2008
Alan Greenspan's thoughts on Money
Gold and Economic Freedom
by Alan Greenspan[written in 1966]
This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand's Capitalism: The Unknown Ideal
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
###
Alan Greenspan[written in 1966]
by Alan Greenspan[written in 1966]
This article originally appeared in a newsletter: The Objectivist published in 1966 and was reprinted in Ayn Rand's Capitalism: The Unknown Ideal
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
###
Alan Greenspan[written in 1966]
Monday, June 9, 2008
War and Inflation
This talk was delivered at the Future of Freedom Foundation’s conference on "Restoring the Republic: Foreign Policy and Civil Liberties," on June 6, 2008, in Reston, Virginia.
The U.S. central bank, called the Federal Reserve, was created in 1913. No one promoted this institution with the slogan that it would make wars more likely and guarantee that nearly half a million Americans would die in battle in foreign lands, along with millions of foreign soldiers and civilians. No one pointed out that this institution would permit Americans to fund, without taxes, the destruction of cities abroad and overthrow governments at will. No one said that the central bank would make it possible for the U.S. to be at large-scale war in one of every four years for a full century. It was never pointed out that this institution would make it possible for the U.S. government to establish a global empire that would make Imperial Rome and Britain look benign by comparison.
You can line up 100 professional war historians and political scientists and talk about the twentieth century, and not one is likely to mention the role of the Fed in funding U.S. militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions ever devised.
The state has no wealth that is its own. It is not a profitable enterprise. Everything it possesses it must take from society in a zero-sum game. That usually means taxes, but taxes annoy people. They can destabilize the state and threaten its legitimacy. They inspire anger, revolt, and even revolution. Rather than risk that result, the state from the Middle Ages to the dawn of the central banking age was somewhat cautious in its global ambitions simply because it was cautious in its need to steal openly and directly from the people in order to pay its bills.
To be sure, it doesn't require a central bank for a state to choose inflation over taxes as a means of funding itself. All it really requires is a monopoly on the production of money. Once acquired, the monopoly on money production leads to a systematic process of depreciating the currency, whether by coin clipping or debasement or the introduction of paper money, which can then be printed without limit. The central bank assists in this process in a critical sense: it cartelizes the banking system as the essential conduit by which money is lent to the public and to the government itself. The banking system thereby becomes a primary funding agency to the state, and, in exchange for its services, the banking system is guaranteed against insolvency and business failure as it profits from inflation. If the goal of the state is the complete monopolization of money under an infinitely flexible paper-money system, there is no better path for the state than the creation of a central bank. This is the greatest achievement for the victory of power over liberty.
The connection between war and inflation, then, dates long before the creation of the Federal Reserve. In fact, in America, it dates to the colonial era, and to the founding itself. The fate of the Continental currency, printed massively during and after the Revolutionary war, for example, was a very bad omen for our future, and the whole country paid a very serious price. It was this experience that later led to the gold clause in the U.S. Constitution. Except for the Hamiltonians, that entire generation of political activists saw the unity of freedom and sound money, and regarded paper money as the fuel of tyranny.
Consider Thomas Paine: "Paper money is like dram-drinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased…. Paper money appears at first sight to be a great saving, or rather that it costs nothing; but it is the dearest money there is. The ease with which it is emitted by an assembly at first serves as a trap to catch people in at last. It operates as an anticipation of the next year's taxes."
But the wisdom of this generation, subverted by Lincoln, was finally thrown out during the Progressive Era. It was believed that an age of scientific public policy needed a scientific money machinery that could be controlled by powerful elites. The dawn of the age of central banking was also the dawn of the age of central planning, for there can be no government control over the nation's commercial life without first controlling the money. And once the state has the money and the banking system, its ambitions can be realized.
Before the creation of the Federal Reserve, the idea of American entry into the conflict that became World War I would have been inconceivable. In fact, it was a highly unpopular idea, and Woodrow Wilson himself campaigned on a platform that promised to keep us out of war. But with a money monopoly, all things seem possible. It was a mere four years after the Fed was invented under the guise of scientific policy planning that the real agenda became obvious. The Fed would fund the U.S. entry into World War I.
It was not only entry alone that was made possible. World War I was the first total war. It involved nearly the whole of the civilized world, and not only their governments but also the civilian populations, both as combatants and as targets. It has been described as the war that ended civilization in the 19th-century sense in which we understand that term. That is to say, it was the war that ended liberty as we knew it. What made it possible was the Federal Reserve. And not only the U.S. central bank; it was also its European counterparts. This was a war funded under the guise of scientific monetary policy.
Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919 that "One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier."
There is always a price to be paid for funding war through the central bank. The postwar situation in America was a classic case. There was inflation. There were massive dislocations. There was recession or what was then called depression, a direct result of capital dislocation that masked itself as an economic boom, but which was then followed by a bust. The depression hit in 1920, but it is not a famous event in United States economic history. Why is that? Because the Federal Reserve had not yet acquired the tools to manufacture an attempt to save the economy. Instead, neither the Fed nor Congress nor the President did much of anything about it – a wholly praiseworthy response! As a result, the depression was brief and became a footnote to history. The same would have happened in 1930 had Hoover not attempted to use the government as the means of resuscitation.
Sadly, the easy recovery of 1920–1922 tempted the central bank to get back into the business of inflation, with the eventual result of a stock market boom that led to bust, then depression, and finally the destruction of the gold standard itself. FDR found that even fascist-style economic planning and inflation could not restore prosperity, so he turned to the ancient method of looking for a war to enter. Here is where the history of the United States and the Fed intersects with the tragic role of the German central bank.
The German government also funded its Great War through inflation. By war's end, money in circulation has risen fourfold. Prices were up 140%. Yet, on international exchange, the German mark had not suffered as much as one might expect. The German government looked at this with encouragement and promptly attempted to manufacture a complete economic recovery through inflation. Incredibly, by 1923, the mark had fallen to one-trillionth of its 1914 gold value. The U.S. dollar was then equal to 4.2 trillion marks. It was an example of currency destruction that remains legendary in the history of the world – all made possible by a central bank that obliged the government and monetized its war debt.
But did people blame the printing press? No. The popular explanation dealt directly with the Treaty of Versailles. It was the harsh peace imposed by the allies that had brought Germany to the brink of total destruction – or so it was believed. Mises himself had written a full book that he hoped would explain that Germany owed its suffering to war and socialism, not Versailles as such. He urged the German people to look at the real cause and establish free markets, lest imperial dictatorship be the next stage in political development. But he was ignored.
The result, we all know, was Hitler.
Turning to Russia, the untold truth about the Bolshevik revolution is that Lenin's greatest propaganda tool involved the sufferings by the Russian people during World War I. Men were drafted and killed at a horrific level. Lenin called this capitalist exploitation, based on his view that the war resulted from capitalist motives. In fact, it was a foreshadowing of the world that socialism would bring about, a world in which all people and all property are treated as means to statist ends. And what made the prolongation of the Russian role in World War I possible was an institution called the State Bank of the Russian Empire, the Russian version of the Fed.
The Russian war itself was funded through money creation, which also led to massive price increases and controls and shortages during the war. I'm not of the opinion, unlike the neocons, that the Russian monarchy was a particularly evil regime, but the temptation that the money machine provided the regime proved too inviting. It turned a relatively benign monarchy into a war machine. A country that had long been integrated into the worldwide division of labor and was under a gold standard became a killing machine. And as horrific and catastrophic as the war dead were for Russian morale, the inflation affected every last person and inspired massive unrest that led to the triumph of Communism.
At this juncture in history, we can see what central-banking had brought to us. It was not an end to the business cycle. It was not merely more liquidity for the banking system. It was not an end to bank runs and bank panics. It certainly wasn't scientific public policy. The world's major economies were being lorded over by money monopolies and the front men had become some of the worst despots in the history of the world. Now they were preparing to fight each other with all the resources they had at their disposal. The resources they did not have at their disposal they would pay for with their beloved machinery of central banking.
In wartime, the printing presses ran overtime, but with a totalitarian level of rationing, price controls, and all-round socialization of resources in the whole of the Western world, the result of inflation was not merely rising prices. It was vast suffering and shortages in Britain, Russia, Germany, Italy, France, Austria-Hungary, the US, and pretty much the entire planet.
So we can see here the amazing irony of central banking at work. The institution that was promoted by economists working with bankers, in the name of bringing rationality and science to bear on monetary matters, had given birth to the most evil political trends in the history of the world: Communism, socialism, fascism, Nazism, and the despotism of economic planning in the capitalist West. The story of central banking is one step removed from the story of atom bombs and death camps. There is a reason the state has been unrestrained in the last 100 years and that reason is the precise one that many people think of as a purely technical issue that is too complicated for mere mortals.
Fast-forward to the Iraq War, which has all the features of a conflict born of the power to print money. There was a time when the decision to go to war involved real debate in the U.S. House of Representatives. And what was this debate about? It was about resources, and the power to tax. But once the executive state was unhinged from the need to rely on tax dollars, and did not have to worry about finding willing buyers for its unbacked debt instruments, the political debate about war was silenced.
In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population, was reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn't have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars, or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher—perhaps $20,000 per household.
Now, when left-liberals talk about these figures, they like to compare them with what the state might have done with these resources in terms of funding health care, public schools, head-start centers, or food stamps. This is a mistake because it demonstrates that the left isn't really providing an alternative to the right. It merely has a different set of priorities in how it would use the resources raised by the inflation machine. It's true that public schools are less costly in terms of lives and property than war itself. But the inflation-funded welfare state also has a corrosive effect on society. The pipe dream that the inflation monster can be used to promote good instead of evil illustrates a certain naïveté about the nature of the state itself. If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context the choice has always been for war.
It is equally naïve for the right to talk about restraining the government while wishing for global war. So long as the state has unlimited access to the printing press, it can ignore the pleas of ideological groups concerning how the money will be raised. It is also very silly for the right to believe that it can have its wars, its militarism, its nationalism and belligerence, without depending on the power of the Federal Reserve. This institution is the very mechanism by which the dreams of both the fanatical right and the fanatical left come true.
The effect of the money machine goes well beyond funding undesirable government programs. The Fed creates financial bubbles that lead to economic dislocation. Think of the technology bubble of the late 1990s or the housing bubble. Or the boom that preceded the current bust. These are all a result of the monopolization of money.
These days, the American consumer has been hit very hard with rising prices in oil, clothing, food, and much else. For the first time in decades, people are feeling this and feeling it hard. And just as in every other inflation in world history, people are looking for the culprit and finding all the wrong ones. They believe it is the oil companies who are gouging us, or that foreign oil dealers are restricting supply, or that gas station owners are abusing a crisis to profit at our expense.
I wouldn't entirely rule out the possibility that price controls are around the corner. When Nixon imposed them in 1971, neither he nor his advisors believed that they would actually result in controlling inflation. Rather, the purpose was to redirect the target of public anger from the government and its bank over to retailers, who would become scapegoats. In this sense, price controls do work. They make people believe that the government is trying to lower prices while the private sector is attempting to raise them. This is the real political dynamic at work with price controls.
The question is whether you will be taken in by these tactics. It is long past time for us to take note that the cause of the real trouble here is not the manufacturers or even the war as such but the agency that has been granted a legal right to counterfeit at will and lower the value of the currency while fueling every manner of statist scheme, whether welfare or warfare. We need to look at the Fed and say: this is the enemy.
Note that the Federal Reserve is not a political party. It is not a recognized interest group. It is not a famed lobby in Washington. It is not really even a sector of public opinion. It seems completely shielded off from vigorous public debate. If we truly believe in liberty and decry the leviathan state, this situation cannot be tolerated.
I say to the sincere right, if you really want to limit the state, you will have to give up your dreams of remaking the world at the point of a gun. Wars and limited government are impossible. Moreover, you must stop ignoring the role of monetary policy. It is a technical subject, to be sure, but one that we must all look into and understand if we expect to restore something that resembles the American liberty of the founders.
I say to the sincere left, if you really want to stop war and stop the spying state, and put an end to the persecution of political dissidents and the Guantánamo camps for foreign peoples, and put a stop to the culture of nationalism and militarism, you must join us in turning attention to the role of monetary policy. The printing presses must be unplugged. It's true that this will also hit programs that are beloved by the left, such as socialized health care and federalized education programs. But so long as you expect the state to fund your dreams, you cannot expect that the state will not also fund the dreams of people you hate.
And let me say a few words to libertarians, who dream of a world with limited government under the rule of law, a world in which free enterprise reigns and where the state has no power to interfere in our lives so long as we behave peacefully. It is completely absurd to believe that this can be achieved without fundamental monetary reform. And yet, until the most recent Ron Paul campaign, and aside from Murray Rothbard and the 26-year-long work of the Mises Institute, I don't recall that libertarians themselves have cared much about this issue at all.
In 1982, the Mises Institute held a large academic conference on the gold standard, and we held it in Washington, D.C. (There were scholarly papers and Ron Paul debated a Fed governor. Ron won.) Even back then, I recall that D.C. libertarians ridiculed us for holding such a meeting to talk about the Fed and its replacement with sound money. They said that this would make the Mises Institute look ridiculous, that we would be tarred with the brush of gold bugs and crazies. We did it anyway. And all these years later, the book that came out of that conference remains a main source for understanding the role of money in the advance of despotism or resistance to it, and a blueprint for the future.
Of course the Austrian tradition fought paper money and central banking from the beginning. Menger was an advocate of the gold standard. Böhm-Bawerk actually established it as finance minister to the Habsburg monarchy. Mises's book on the topic from 1912 was the first to show the role of money in the business cycle, and he issued dire warnings about central banking. Hayek wrote powerfully against the abandonment of gold in the 1930s. Hazlitt warned of the inevitable breakdown of Bretton Woods, and advocated a real gold standard instead. And Rothbard was a champion of sound money and the greatest enemy the Fed has ever had. But generally, I've long detected a tendency in libertarian circles to ignore this issue, in part for precisely the reasons cited above: it is not respectable.
Well, I will tell you why this issue is not considered respectable: it is the most important priority of the state to keep its money machine hidden behind a curtain. Anyone who dares pull the curtain back is accused of every manner of intellectual crime. This is precisely the reason we must talk about it at every occasion. We must end the conspiracy of silence on this issue.
I was intrigued at how Ron Paul, during his campaign, would constantly bring up the subject. Most politicians are out to play up to their audiences, so they say things that people want to hear. I promise you that early in the campaign, no one wanted to hear him talk about the Federal Reserve. But he did it anyway. He worked to educate his audiences about the need for monetary reform. And it worked. For the first time in my life, there is a large and very public movement in this country to take this topic seriously.
Monetary economist Joseph Salerno was called the other day by C-Span, which wanted to interview him on television on the need to restore gold as the basis of our currency. As I watched this excellent interview, I was struck by what a great triumph it truly is for liberty that this topic is again part of the national debate. In the 19th-century, this was a topic on everybody's minds. It can be again today, provided we do not eschew the truth in the formation of our message.
It might be said that advocating privatization is politically unrealistic, and therefore a waste of time. What's more, we might say that by continuing to harp on the issue, we only marginalize ourselves, proving that we are on the fringe. I submit that there is no better way to ensure that an issue will always be off the table than to stop talking about it.
Far from being an arcane and anachronistic issue, then, the gold standard and the issues it raises gets right to the heart of the current debate concerning the future of war and the world economy. Why do the government and its partisans dislike the gold standard? It removes the discretionary power of the Fed by placing severe limits on the ability of the central bank to inflate the money supply. Without that discretionary power, the government has far fewer tools of central planning at its disposal. Government can regulate, which is a function of the police power. It can tax, which involves taking people's property. And it can spend, which means redistributing other people's property. But its activities in the financial area are radically curbed.
Think of your local and state governments. They tax and spend. They manipulate and intervene. As with all governments from the beginning of time, they generally retard social progress and muck things up as much as possible. What they do not do, however, is wage massive global wars, run huge deficits, accumulate trillions in debt, reduce the value of money, bail out foreign governments, provide endless credits to failing enterprises, administer hugely expensive and destructive social insurance schemes, or bring about immense swings in business activity.
State and local governments are awful and they must be relentlessly checked, but they are not anything like the threat of the federal government. Neither are they as arrogant and convinced of their own infallibility and indispensability. They lack the aura of invincibility that the central government enjoys.
It is the central bank, and only the central bank, that works as the government's money machine, and this makes all the difference. Now, it is not impossible that a central bank can exist alongside a gold standard, a lender of last resort that avoids the temptation to destroy that which restrains it. In the same way, it is possible for someone with an insatiable appetite for wine to sit at a banquet table of delicious vintages and not take a sip.
Let's just say that the existence of a central bank introduces an occasion of sin for the government. That is why under the best gold standard, there would be no central bank, gold coins would circulate as freely as their substitutes, and rules against fraud and theft would prohibit banks from pyramiding credit on top of demand deposits. So long as we are constructing the perfect system, all coinage would be private. Banks would be treated as businesses, no special privileges, no promises of bailout, no subsidized insurance, and no connection to government at any level.
This is the free-market system of monetary management, which means turning over the institution of money entirely to the market economy. As with any institution in a free society, it is not imposed from above, and dictated by a group of experts, but is the de facto result that comes about in a society that consistently respects private-property rights, encourages enterprise, and promotes peace.
It comes down to this. If you hate war, oppose the Fed. If you hate violations of your liberties, oppose the Fed. If you want to restrain despotism, restrain the Fed. If you want to secure freedom for yourself and your descendants, abolish the Fed.
June 9, 2008
The U.S. central bank, called the Federal Reserve, was created in 1913. No one promoted this institution with the slogan that it would make wars more likely and guarantee that nearly half a million Americans would die in battle in foreign lands, along with millions of foreign soldiers and civilians. No one pointed out that this institution would permit Americans to fund, without taxes, the destruction of cities abroad and overthrow governments at will. No one said that the central bank would make it possible for the U.S. to be at large-scale war in one of every four years for a full century. It was never pointed out that this institution would make it possible for the U.S. government to establish a global empire that would make Imperial Rome and Britain look benign by comparison.
You can line up 100 professional war historians and political scientists and talk about the twentieth century, and not one is likely to mention the role of the Fed in funding U.S. militarism. And yet it is true: the Fed is the institution that has created the money to fund the wars. In this role, it has solved a major problem that the state has confronted for all of human history. A state without money or a state that must tax its citizens to raise money for its wars is necessarily limited in its imperial ambitions. Keep in mind that this is only a problem for the state. It is not a problem for the people. The inability of the state to fund its unlimited ambitions is worth more for the people than every kind of legal check and balance. It is more valuable than all the constitutions ever devised.
The state has no wealth that is its own. It is not a profitable enterprise. Everything it possesses it must take from society in a zero-sum game. That usually means taxes, but taxes annoy people. They can destabilize the state and threaten its legitimacy. They inspire anger, revolt, and even revolution. Rather than risk that result, the state from the Middle Ages to the dawn of the central banking age was somewhat cautious in its global ambitions simply because it was cautious in its need to steal openly and directly from the people in order to pay its bills.
To be sure, it doesn't require a central bank for a state to choose inflation over taxes as a means of funding itself. All it really requires is a monopoly on the production of money. Once acquired, the monopoly on money production leads to a systematic process of depreciating the currency, whether by coin clipping or debasement or the introduction of paper money, which can then be printed without limit. The central bank assists in this process in a critical sense: it cartelizes the banking system as the essential conduit by which money is lent to the public and to the government itself. The banking system thereby becomes a primary funding agency to the state, and, in exchange for its services, the banking system is guaranteed against insolvency and business failure as it profits from inflation. If the goal of the state is the complete monopolization of money under an infinitely flexible paper-money system, there is no better path for the state than the creation of a central bank. This is the greatest achievement for the victory of power over liberty.
The connection between war and inflation, then, dates long before the creation of the Federal Reserve. In fact, in America, it dates to the colonial era, and to the founding itself. The fate of the Continental currency, printed massively during and after the Revolutionary war, for example, was a very bad omen for our future, and the whole country paid a very serious price. It was this experience that later led to the gold clause in the U.S. Constitution. Except for the Hamiltonians, that entire generation of political activists saw the unity of freedom and sound money, and regarded paper money as the fuel of tyranny.
Consider Thomas Paine: "Paper money is like dram-drinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased…. Paper money appears at first sight to be a great saving, or rather that it costs nothing; but it is the dearest money there is. The ease with which it is emitted by an assembly at first serves as a trap to catch people in at last. It operates as an anticipation of the next year's taxes."
But the wisdom of this generation, subverted by Lincoln, was finally thrown out during the Progressive Era. It was believed that an age of scientific public policy needed a scientific money machinery that could be controlled by powerful elites. The dawn of the age of central banking was also the dawn of the age of central planning, for there can be no government control over the nation's commercial life without first controlling the money. And once the state has the money and the banking system, its ambitions can be realized.
Before the creation of the Federal Reserve, the idea of American entry into the conflict that became World War I would have been inconceivable. In fact, it was a highly unpopular idea, and Woodrow Wilson himself campaigned on a platform that promised to keep us out of war. But with a money monopoly, all things seem possible. It was a mere four years after the Fed was invented under the guise of scientific policy planning that the real agenda became obvious. The Fed would fund the U.S. entry into World War I.
It was not only entry alone that was made possible. World War I was the first total war. It involved nearly the whole of the civilized world, and not only their governments but also the civilian populations, both as combatants and as targets. It has been described as the war that ended civilization in the 19th-century sense in which we understand that term. That is to say, it was the war that ended liberty as we knew it. What made it possible was the Federal Reserve. And not only the U.S. central bank; it was also its European counterparts. This was a war funded under the guise of scientific monetary policy.
Reflecting on the calamity of this war, Ludwig von Mises wrote in 1919 that "One can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier."
There is always a price to be paid for funding war through the central bank. The postwar situation in America was a classic case. There was inflation. There were massive dislocations. There was recession or what was then called depression, a direct result of capital dislocation that masked itself as an economic boom, but which was then followed by a bust. The depression hit in 1920, but it is not a famous event in United States economic history. Why is that? Because the Federal Reserve had not yet acquired the tools to manufacture an attempt to save the economy. Instead, neither the Fed nor Congress nor the President did much of anything about it – a wholly praiseworthy response! As a result, the depression was brief and became a footnote to history. The same would have happened in 1930 had Hoover not attempted to use the government as the means of resuscitation.
Sadly, the easy recovery of 1920–1922 tempted the central bank to get back into the business of inflation, with the eventual result of a stock market boom that led to bust, then depression, and finally the destruction of the gold standard itself. FDR found that even fascist-style economic planning and inflation could not restore prosperity, so he turned to the ancient method of looking for a war to enter. Here is where the history of the United States and the Fed intersects with the tragic role of the German central bank.
The German government also funded its Great War through inflation. By war's end, money in circulation has risen fourfold. Prices were up 140%. Yet, on international exchange, the German mark had not suffered as much as one might expect. The German government looked at this with encouragement and promptly attempted to manufacture a complete economic recovery through inflation. Incredibly, by 1923, the mark had fallen to one-trillionth of its 1914 gold value. The U.S. dollar was then equal to 4.2 trillion marks. It was an example of currency destruction that remains legendary in the history of the world – all made possible by a central bank that obliged the government and monetized its war debt.
But did people blame the printing press? No. The popular explanation dealt directly with the Treaty of Versailles. It was the harsh peace imposed by the allies that had brought Germany to the brink of total destruction – or so it was believed. Mises himself had written a full book that he hoped would explain that Germany owed its suffering to war and socialism, not Versailles as such. He urged the German people to look at the real cause and establish free markets, lest imperial dictatorship be the next stage in political development. But he was ignored.
The result, we all know, was Hitler.
Turning to Russia, the untold truth about the Bolshevik revolution is that Lenin's greatest propaganda tool involved the sufferings by the Russian people during World War I. Men were drafted and killed at a horrific level. Lenin called this capitalist exploitation, based on his view that the war resulted from capitalist motives. In fact, it was a foreshadowing of the world that socialism would bring about, a world in which all people and all property are treated as means to statist ends. And what made the prolongation of the Russian role in World War I possible was an institution called the State Bank of the Russian Empire, the Russian version of the Fed.
The Russian war itself was funded through money creation, which also led to massive price increases and controls and shortages during the war. I'm not of the opinion, unlike the neocons, that the Russian monarchy was a particularly evil regime, but the temptation that the money machine provided the regime proved too inviting. It turned a relatively benign monarchy into a war machine. A country that had long been integrated into the worldwide division of labor and was under a gold standard became a killing machine. And as horrific and catastrophic as the war dead were for Russian morale, the inflation affected every last person and inspired massive unrest that led to the triumph of Communism.
At this juncture in history, we can see what central-banking had brought to us. It was not an end to the business cycle. It was not merely more liquidity for the banking system. It was not an end to bank runs and bank panics. It certainly wasn't scientific public policy. The world's major economies were being lorded over by money monopolies and the front men had become some of the worst despots in the history of the world. Now they were preparing to fight each other with all the resources they had at their disposal. The resources they did not have at their disposal they would pay for with their beloved machinery of central banking.
In wartime, the printing presses ran overtime, but with a totalitarian level of rationing, price controls, and all-round socialization of resources in the whole of the Western world, the result of inflation was not merely rising prices. It was vast suffering and shortages in Britain, Russia, Germany, Italy, France, Austria-Hungary, the US, and pretty much the entire planet.
So we can see here the amazing irony of central banking at work. The institution that was promoted by economists working with bankers, in the name of bringing rationality and science to bear on monetary matters, had given birth to the most evil political trends in the history of the world: Communism, socialism, fascism, Nazism, and the despotism of economic planning in the capitalist West. The story of central banking is one step removed from the story of atom bombs and death camps. There is a reason the state has been unrestrained in the last 100 years and that reason is the precise one that many people think of as a purely technical issue that is too complicated for mere mortals.
Fast-forward to the Iraq War, which has all the features of a conflict born of the power to print money. There was a time when the decision to go to war involved real debate in the U.S. House of Representatives. And what was this debate about? It was about resources, and the power to tax. But once the executive state was unhinged from the need to rely on tax dollars, and did not have to worry about finding willing buyers for its unbacked debt instruments, the political debate about war was silenced.
In the entire run-up to war, George Bush just assumed as a matter of policy that it was his decision alone whether to invade Iraq. The objections by Ron Paul and some other members of Congress and vast numbers of the American population, was reduced to little more than white noise in the background. Imagine if he had to raise the money for the war through taxes. It never would have happened. But he didn't have to. He knew the money would be there. So despite a $200 billion deficit, a $9 trillion debt, $5 trillion in outstanding debt instruments held by the public, a federal budget of $3 trillion, and falling tax receipts in 2001, Bush contemplated a war that has cost $525 billion dollars, or $4,681 per household. Imagine if he had gone to the American people to request that. What would have happened? I think we know the answer to that question. And those are government figures; the actual cost of this war will be far higher—perhaps $20,000 per household.
Now, when left-liberals talk about these figures, they like to compare them with what the state might have done with these resources in terms of funding health care, public schools, head-start centers, or food stamps. This is a mistake because it demonstrates that the left isn't really providing an alternative to the right. It merely has a different set of priorities in how it would use the resources raised by the inflation machine. It's true that public schools are less costly in terms of lives and property than war itself. But the inflation-funded welfare state also has a corrosive effect on society. The pipe dream that the inflation monster can be used to promote good instead of evil illustrates a certain naïveté about the nature of the state itself. If the state has the power and is asked to choose between doing good and waging war, what will it choose? Certainly in the American context the choice has always been for war.
It is equally naïve for the right to talk about restraining the government while wishing for global war. So long as the state has unlimited access to the printing press, it can ignore the pleas of ideological groups concerning how the money will be raised. It is also very silly for the right to believe that it can have its wars, its militarism, its nationalism and belligerence, without depending on the power of the Federal Reserve. This institution is the very mechanism by which the dreams of both the fanatical right and the fanatical left come true.
The effect of the money machine goes well beyond funding undesirable government programs. The Fed creates financial bubbles that lead to economic dislocation. Think of the technology bubble of the late 1990s or the housing bubble. Or the boom that preceded the current bust. These are all a result of the monopolization of money.
These days, the American consumer has been hit very hard with rising prices in oil, clothing, food, and much else. For the first time in decades, people are feeling this and feeling it hard. And just as in every other inflation in world history, people are looking for the culprit and finding all the wrong ones. They believe it is the oil companies who are gouging us, or that foreign oil dealers are restricting supply, or that gas station owners are abusing a crisis to profit at our expense.
I wouldn't entirely rule out the possibility that price controls are around the corner. When Nixon imposed them in 1971, neither he nor his advisors believed that they would actually result in controlling inflation. Rather, the purpose was to redirect the target of public anger from the government and its bank over to retailers, who would become scapegoats. In this sense, price controls do work. They make people believe that the government is trying to lower prices while the private sector is attempting to raise them. This is the real political dynamic at work with price controls.
The question is whether you will be taken in by these tactics. It is long past time for us to take note that the cause of the real trouble here is not the manufacturers or even the war as such but the agency that has been granted a legal right to counterfeit at will and lower the value of the currency while fueling every manner of statist scheme, whether welfare or warfare. We need to look at the Fed and say: this is the enemy.
Note that the Federal Reserve is not a political party. It is not a recognized interest group. It is not a famed lobby in Washington. It is not really even a sector of public opinion. It seems completely shielded off from vigorous public debate. If we truly believe in liberty and decry the leviathan state, this situation cannot be tolerated.
I say to the sincere right, if you really want to limit the state, you will have to give up your dreams of remaking the world at the point of a gun. Wars and limited government are impossible. Moreover, you must stop ignoring the role of monetary policy. It is a technical subject, to be sure, but one that we must all look into and understand if we expect to restore something that resembles the American liberty of the founders.
I say to the sincere left, if you really want to stop war and stop the spying state, and put an end to the persecution of political dissidents and the Guantánamo camps for foreign peoples, and put a stop to the culture of nationalism and militarism, you must join us in turning attention to the role of monetary policy. The printing presses must be unplugged. It's true that this will also hit programs that are beloved by the left, such as socialized health care and federalized education programs. But so long as you expect the state to fund your dreams, you cannot expect that the state will not also fund the dreams of people you hate.
And let me say a few words to libertarians, who dream of a world with limited government under the rule of law, a world in which free enterprise reigns and where the state has no power to interfere in our lives so long as we behave peacefully. It is completely absurd to believe that this can be achieved without fundamental monetary reform. And yet, until the most recent Ron Paul campaign, and aside from Murray Rothbard and the 26-year-long work of the Mises Institute, I don't recall that libertarians themselves have cared much about this issue at all.
In 1982, the Mises Institute held a large academic conference on the gold standard, and we held it in Washington, D.C. (There were scholarly papers and Ron Paul debated a Fed governor. Ron won.) Even back then, I recall that D.C. libertarians ridiculed us for holding such a meeting to talk about the Fed and its replacement with sound money. They said that this would make the Mises Institute look ridiculous, that we would be tarred with the brush of gold bugs and crazies. We did it anyway. And all these years later, the book that came out of that conference remains a main source for understanding the role of money in the advance of despotism or resistance to it, and a blueprint for the future.
Of course the Austrian tradition fought paper money and central banking from the beginning. Menger was an advocate of the gold standard. Böhm-Bawerk actually established it as finance minister to the Habsburg monarchy. Mises's book on the topic from 1912 was the first to show the role of money in the business cycle, and he issued dire warnings about central banking. Hayek wrote powerfully against the abandonment of gold in the 1930s. Hazlitt warned of the inevitable breakdown of Bretton Woods, and advocated a real gold standard instead. And Rothbard was a champion of sound money and the greatest enemy the Fed has ever had. But generally, I've long detected a tendency in libertarian circles to ignore this issue, in part for precisely the reasons cited above: it is not respectable.
Well, I will tell you why this issue is not considered respectable: it is the most important priority of the state to keep its money machine hidden behind a curtain. Anyone who dares pull the curtain back is accused of every manner of intellectual crime. This is precisely the reason we must talk about it at every occasion. We must end the conspiracy of silence on this issue.
I was intrigued at how Ron Paul, during his campaign, would constantly bring up the subject. Most politicians are out to play up to their audiences, so they say things that people want to hear. I promise you that early in the campaign, no one wanted to hear him talk about the Federal Reserve. But he did it anyway. He worked to educate his audiences about the need for monetary reform. And it worked. For the first time in my life, there is a large and very public movement in this country to take this topic seriously.
Monetary economist Joseph Salerno was called the other day by C-Span, which wanted to interview him on television on the need to restore gold as the basis of our currency. As I watched this excellent interview, I was struck by what a great triumph it truly is for liberty that this topic is again part of the national debate. In the 19th-century, this was a topic on everybody's minds. It can be again today, provided we do not eschew the truth in the formation of our message.
It might be said that advocating privatization is politically unrealistic, and therefore a waste of time. What's more, we might say that by continuing to harp on the issue, we only marginalize ourselves, proving that we are on the fringe. I submit that there is no better way to ensure that an issue will always be off the table than to stop talking about it.
Far from being an arcane and anachronistic issue, then, the gold standard and the issues it raises gets right to the heart of the current debate concerning the future of war and the world economy. Why do the government and its partisans dislike the gold standard? It removes the discretionary power of the Fed by placing severe limits on the ability of the central bank to inflate the money supply. Without that discretionary power, the government has far fewer tools of central planning at its disposal. Government can regulate, which is a function of the police power. It can tax, which involves taking people's property. And it can spend, which means redistributing other people's property. But its activities in the financial area are radically curbed.
Think of your local and state governments. They tax and spend. They manipulate and intervene. As with all governments from the beginning of time, they generally retard social progress and muck things up as much as possible. What they do not do, however, is wage massive global wars, run huge deficits, accumulate trillions in debt, reduce the value of money, bail out foreign governments, provide endless credits to failing enterprises, administer hugely expensive and destructive social insurance schemes, or bring about immense swings in business activity.
State and local governments are awful and they must be relentlessly checked, but they are not anything like the threat of the federal government. Neither are they as arrogant and convinced of their own infallibility and indispensability. They lack the aura of invincibility that the central government enjoys.
It is the central bank, and only the central bank, that works as the government's money machine, and this makes all the difference. Now, it is not impossible that a central bank can exist alongside a gold standard, a lender of last resort that avoids the temptation to destroy that which restrains it. In the same way, it is possible for someone with an insatiable appetite for wine to sit at a banquet table of delicious vintages and not take a sip.
Let's just say that the existence of a central bank introduces an occasion of sin for the government. That is why under the best gold standard, there would be no central bank, gold coins would circulate as freely as their substitutes, and rules against fraud and theft would prohibit banks from pyramiding credit on top of demand deposits. So long as we are constructing the perfect system, all coinage would be private. Banks would be treated as businesses, no special privileges, no promises of bailout, no subsidized insurance, and no connection to government at any level.
This is the free-market system of monetary management, which means turning over the institution of money entirely to the market economy. As with any institution in a free society, it is not imposed from above, and dictated by a group of experts, but is the de facto result that comes about in a society that consistently respects private-property rights, encourages enterprise, and promotes peace.
It comes down to this. If you hate war, oppose the Fed. If you hate violations of your liberties, oppose the Fed. If you want to restrain despotism, restrain the Fed. If you want to secure freedom for yourself and your descendants, abolish the Fed.
June 9, 2008
The Singing Revolution
Movie Review
The Singing Revolution (2007)
The Singing Revolution (2007)
Mountain View
Estonians sang in celebration after a successful non-violent defense of the nation's capitol in May of 1990 from "Revolution."
December 14, 2007
http://movies.nytimes.com/2007/12/14/movies/14revo.html
By MATT ZOLLER SEITZ
Published: December 14, 2007
By MATT ZOLLER SEITZ
Published: December 14, 2007
Can singing change history? “The Singing Revolution,” a documentary by James Tusty and Maureen Castle Tusty about Estonia’s struggle to end Soviet occupation, shows that it already has.
The first part of “Revolution” provides a thumbnail sketch of 20th-century Estonian history, and it’s not pretty. This small nation was a satellite state of the former Soviet Union for much of that time, except for a brief period when the Germans controlled it.
Under the Soviets, especially, Estonian culture was brutishly suppressed, but it welled up every five years in July, when Estonians gathered in Tallinn for the Estonian song festival, which often drew upward of 25,000 people. The images of these festivals are moving already; the force of the singers and the precision of their conductors are stunning to behold.
But the emotion swells further when Estonians defy their occupiers by singing nationalist songs. This bold act reclaimed Estonian identity and set the stage for a series of increasingly daring rebellions under the Soviet President Mikhail S. Gorbachev, who advocated glasnost and got more than he bargained for.
Imagine the scene in “Casablanca” in which the French patrons sing “La Marseillaise” in defiance of the Germans, then multiply its power by a factor of thousands, and you’ve only begun to imagine the force of “The Singing Revolution.”
THE SINGING REVOLUTION
Opens on Friday in Manhattan.
Directed by James Tusty and Maureen Castle Tusty; written by Mr. Tusty, Ms. Castle Tusty and Mike Majoros; narrated by Linda Hunt; director of photography, Miguelangel Aponte-Rios; edited by Mr. Majoros; music by John Kusiak; produced by Ms. Castle Tusty, Mr. Tusty, Bestor Cram, Artur Talvik, Piret Tibbo-Hudgins and Thor Halvorssen; released by Abramorama. At the Village East, Second Avenue at 12th Street, East Village. Running time: 1 hour 34 minutes. This film is not rated.
The first part of “Revolution” provides a thumbnail sketch of 20th-century Estonian history, and it’s not pretty. This small nation was a satellite state of the former Soviet Union for much of that time, except for a brief period when the Germans controlled it.
Under the Soviets, especially, Estonian culture was brutishly suppressed, but it welled up every five years in July, when Estonians gathered in Tallinn for the Estonian song festival, which often drew upward of 25,000 people. The images of these festivals are moving already; the force of the singers and the precision of their conductors are stunning to behold.
But the emotion swells further when Estonians defy their occupiers by singing nationalist songs. This bold act reclaimed Estonian identity and set the stage for a series of increasingly daring rebellions under the Soviet President Mikhail S. Gorbachev, who advocated glasnost and got more than he bargained for.
Imagine the scene in “Casablanca” in which the French patrons sing “La Marseillaise” in defiance of the Germans, then multiply its power by a factor of thousands, and you’ve only begun to imagine the force of “The Singing Revolution.”
THE SINGING REVOLUTION
Opens on Friday in Manhattan.
Directed by James Tusty and Maureen Castle Tusty; written by Mr. Tusty, Ms. Castle Tusty and Mike Majoros; narrated by Linda Hunt; director of photography, Miguelangel Aponte-Rios; edited by Mr. Majoros; music by John Kusiak; produced by Ms. Castle Tusty, Mr. Tusty, Bestor Cram, Artur Talvik, Piret Tibbo-Hudgins and Thor Halvorssen; released by Abramorama. At the Village East, Second Avenue at 12th Street, East Village. Running time: 1 hour 34 minutes. This film is not rated.
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