Elaine Meinel Supkis
The Federal Reserve is releasing a lot of data and old speeches and meeting minutes. Going through this is very instructive. We are going to have two stories about a series of speeches concerning Free Trade and Inflation. Speeches made from 1969 to 1981 are very, very illuminating because they show with fierce clarity, the 'solutions' the Fed chiefs wanted are DIRECTLY responsible for the huge mess we are in today with a giant trade deficit, giant government overspending, wild military adventures, off shoring, outsourcing and the weak dollar. What these guys wanted, they got. This is due to them blaming inflation on workers, not war mongers or crazed bankers. Namely, themselves.
Remarks of Wm. McC. Martin, Jr., Chairman, Board of Governors of the Federal Reserve System, before the 77th General Meeting of the American Iron and Steel Institute
New York City
May 22, 1969
Countries, like individuals, need "rainy day" balances— that is, funds on which they can draw at times when their receipts from abroad may fall short of their payments. Such reserves presently can take only three forms: gold, a foreign currency, or a reserve position in the International Monetary Fund. Soon an additional reserve asset—Special Drawing Rights—will be available, as a supplement to other reserves. At the end of 1963, the official reserves of all countries together—amounting in total to more than $75 billion— consisted of 51 per cent in gold, 40 per cent in foreign exchange and 9 per cent in reserve positions in the IMF. And a large proportion of foreign exchange—that is, national currencies held by other countries as reserves—is in the form of dollars.
The fact that the U. S. dollar is the principal vehicle and reserve currency is not a matter of coincidence or accident. Dollars became useful and convenient to hold because they could buy attractive goods; because large and efficient financial markets are available for investing dollars and earning interest on them; because the United States stands ready to convert dollars into gold and gold into dollars for foreign governments and central banks, and the United States has by far the largest gold reserve in the world; and, as a further point, because there have been relatively few periods of doubt about the dollar price of gold.
Since the national currency of the United States is used in this way as money—in fact, serving both the major functions of money—the United States is in effect a bank to the rest of the world. And it behooves us, for that and other reasons, to take whatever steps are needed to assure one and all that our credit — our money—is good.
Let's go back in time here: in 1969, I just got back from Europe. During the previous 6 years, I was very aware of the degrading of the silver coins we used for spare change. I started working for money in a serious way since 1962 by farming myself out as a domestic when 12 years old. Since I bought much of the things I used or needed or wanted, I was very aware of 'inflation' and since I was paid below the minimum wage, I got paid with a lot of spare change. So a lot of coins went through my hands. I began to hoard the coins that were made before the Vietnam War. These were real silver and obviously had more value than the faker, newer coins. I used these pure silver coins in Europe. Europeans were ecstatic to get real silver. Unlike in America where it was illegal to melt down silver coins, in Europe, they had no restrictions on what they chose to do with the silver content.
This meant, when I took out my silver hoard and began bargaining for stuff in the back country markets, the fact that my coins were real mattered a great deal. It helped close more than one deal for me that was advantageous. So I came home to a world that was, in my eyes, obviously teetering on the edge of destruction. When Burns made this speech, he was desperately 'talking up' the dollar. He wanted the world to know that the US was never ever even going to CONSIDER severing the gold/dollar connection.
One thing we must remember when we read old speeches or hear new ones is, the Federal Reserve bank officials are all LYING BASTARDS. Really, honestly. They lie while keeping a straight face. They set out to deceive other nations, the American people and each other. People sometimes ask me why we should bother tracking all the various secret enclaves and covens run by these people. They attend these things and keep us locked out for a simple reason: they can tell each other the truth behind closed doors! So here we are: we know that Burns was a lying bastard when he gave this public speech. He spoke very plainly unlike the gnome-super bastard, Greenspan. Greenspan speaks in gobbely gook when he talked as a Fed chief. Now that he is outside, he sometimes blurts out the truth and then gets hammered by outraged people who suddenly realized he is a creepy bastard who lied to everyone in the past.
A number of writers who host 'buy gold NOW' web sites often are rather disingenuous about the history of gold and the dollar. The US did NOT drop the dollar/gold peg in 1933. They re-engineered it making the dollar worth less gold than before it was rejiggered suddenly. The sale of gold OUTSIDE of the Fort Knox system was forbidden. This made gold really cheap against the inflated dollar by 1969. I used to buy gold sheets and use them for artwork! It was laughably cheap compared to say, the price of eggs I sold from my collection of hens. From 1964-1970, 70% of the gold hoard at Fort Knox was redeemed by foreign powers who besieged it for gold. The great cave filled with gold was emptying fast when Burns lied about the US never breaking the dollar/gold peg.
Today it is clear — as clear as at any time in our history— that we cannot retain confidence in the dollar among either Americans or foreigners unless we conduct our economic and financial affairs in such a way as to merit confidence. That we do so, now and henceforth, is all the more essential because we have faltered for more than 3 years—the period since the sharp step-up of our commitments to the Vietnam War—with the result that our economy has become overheated, our manpower resources have been strained, and our costs and prices have moved up with dismaying rapidity.
It would be idle to dwell again on the mistakes of these recent years. The adoption in mid-1968 of fiscal measures to raise taxes and restrain government expenditures was perhaps 2 years late, with the result that the budget deficit reached the staggering total of $25 billion in fiscal year 1968 at the very time when inflationary pressures were cumulating. Nor would I wish to overlook the error of an over-hasty—although only temporary—relaxation of monetary restraint by the Federal Reserve last summer.
Wow. $25 billion over budget! Today, this doesn't even cause Congress or the Fed to blink an eyelash. This was during a very hot war, too! Now we shrug as we rack up $500 billion overdrafts. When this speech was made, our government was about $300 billion in the red. In 10 years, it would be a whole trillion dollars in the red! And Reagan exclaimed, if we laid the dollars end to end, they would go to the moon! Then the US government cut taxes and increased spending so we now can make them line up all the way to Mars.
One thing about this speech: this was before the iron wall separating all talk about inflation from talk about wars was yet to be enforced. Back in 1969, Burns could openly say, 'Oops! We went to war and forgot that wars cause inflation!' Being a serial liar, he couldn't trumpet this connection or expand on it but at least mention of this slipped through his lips! But alas, this was probably the last time any Fed chief drew the connection between warmongering and rampant inflation.
I have recited these facts out of realism—but certainly not despair. Much of our heritage of errors has already been corrected in recent months. Monetary and fiscal policy are now working in the same direction and reinforcing each other. I believe that we are, at long last, making some headway in dealing with inflation, in advancing toward what I have described as the goal of "disinflating without deflation." Progress has been slow, but that should be understandable after so much inflationary momentum has been generated by delay in getting the nation's finances in order. From here on, patience, perserverance and persistence will be necessary-- and considerable fortitude as well — to pursue steadfastly economic stabilization policies that bring inflation under control, and to continue those policies as long as needed to ensure that a resurgence of excess demand and upward cost and price pressures does not recur to plague us again.
Far from fixing this pesky inflation problem whilst not creating a depression, inflation accelerated. This was due to the War in Vietnam: it EXPANDED GREATLY after 1969! Nixon involved Cambodia, Laos and other neighboring nations in that grinding war. The secret war raged and this was a very expensive secret war. For the US, back then, began the stupid process of using very expensive planes and very expensive aircraft carriers to drop tremendously expensive bombs and missiles onto rice paddies, dirt trails, peasant huts made of palm fronds, etc. Billion dollar bombing raids that wrecked mud and twigs and destroyed some of the poorest people on earth. I used to joke in 1969 saying, 'Why don't we drop refrigerators, cooking stoves and lots and lots of free food on them? They will happily stop fighting and it will be CHEAPER for us!'
No one listens to a 19 year old. Few people listen to me today [shrugging shoulders]. Since Nixon was determined to have 'Peace with honor,' the war in Asia raged onwards unrelentingly. Even as troops on the ground were withdrawn, the most expensive part of the war expanded, not contracted. Meanwhile, our cities began to burn. The Martin Luther King assassination riots, for example, were fierce. The US needed desperately to spend money on social affairs. But this didn't stop the stupid war. Since the government knew the Vietnam war was VERY unpopular and we students reminded Nixon about this regularly, taxes to pay for this boneheaded war were not levied. Instead, paying for it was pushed into the future and the government and the Federal Reserve conspired to destroy the value of the dollar by making Funny Money™ loans to the government and the Fed began to collect Treasuries which were really war bonds based on future tax collections!
Of course, Burns was a warmonger so he didn't mention all this in his speech. The steel worker's union and the owners of the steel mills all LOVED the Vietnam War! This was making all this Funny Money™ flow into their pockets! They were fiercely pro-war. They hoped this war would rage forever. So long as their sons got good jobs at the mill and were not drafted.
We cannot afford to be priced out of the market by the wage-price spiral: in our private enterprise, employers must remember they are competing with other employers over the world for sales and profits, and employees must remember they are competing with other workers over the world for jobs as well as wages.
Neither can we afford to be priced out of the market by currency inflation: as I have said, in our governmental processes we must be doubly sure that budgetary and monetary operations reinforce rather than undermine the value of our currency, and thus reinforce rather than undermine our international competitive position. To take an opposite course, and attempt to protect ourselves by barriers against competitive products from abroad would be self-defeating in two ways: it would invite similar action by other countries and it would dampen the spur provided by foreign competition to better quality, higher productivity and lower prices for American products.
At this point, the steel workers who were union representatives should have raged up out of their seats and attacked Burns. But they didn't see their dim, pathetic future. They thought this was all a joke. No one was going to undermine THEM! They were patriots who supported the GOP President's wild warmongering! But note how Burns tells them that no barriers will be put up to protect them from cheaper cost steel from the countries we conquered in WWII: Germany and Japan. Both of which were 'peaceful' and working like crazy to dominate world steel markets again. I saw this in the Ruhr when I toured a number of mills on behalf of my father.
The concept of 'free trade' is very obvious: it suppresses WAGES. It destroys UNIONS. It also eats war-created inflation. In speech after speech, we see this same siren song: free trade will drop PRICES and also prevent labor from feeding inflation by running ahead of government-induced war inflation! Period. All the stories about how great free trade is and how it helps America are pure hogwash. Since it is political suicide to raise taxes for warmongering, this alternative method is used with efficient ruthlessness. One way or another, the workers MUST eat all inflation. Not the bankers, not the super-rich, not the patrons of the military/industrial complex.
With the establishment of the two-tier system, and improvement in the U.S.
3. reserve position, talk about the official price of gold has subsided greatly. This is a healthy sign. I want to reassert what I said in a talk some 15 months ago—that an increase in the official price of gold is neither necessary nor desirable as a means of improving the workings of the international monetary system. It is unnecessary because Special Drawing Rights can provide for growth in world reserves in an equitable, systematic, and noninflationary manner. It is undesirable for many reasons, not the least of which is that it would turn back the clock of monetary history. I have no doubt that the present era in international monetary affairs will be viewed by historians as one in which individual nations managed to reconcile their sovereignty with their obvious interdependence by unprecedented progress in international cooperation. Such monetary cooperation takes place in many forums — the International Monetary Fund, the Organization for Economic Cooperation and Development, the Bank for International Settlements and numerous other bodies where groups of country representatives consult.
The silence before the storm! All talk...IN PUBLIC....died down. Everyone was told, the dollar was not going to be revalued vis a vis the value of gold which was artificially set at the same price it was set at in 1933. But of course, inflation already ravaged the value of the dollar and strong arming allies to not raid Fort Knox was faltering. DeGaulle, for example, was itching to get back all the lost gold from WWII. The US was hoping the 'drawing rights' at the IMF would paper over the collapsing dollar. When our allies came knocking at Fort Knox, we would tell them to please get drawing rights instead. Now, DeGaulle went through WWII and he was no fool. He refused to be palmed off. He wanted his gold back. Now. Burns is talking about the New World Order when he mentions 'sovereignty' and 'consultations'. These people talk and talk but they do the obvious: cheat workers, cheat nations, betray trust, lie to their own people, make back room deals that are bad for sovereignty, enable wars and destruction while evading popular support! Now, in contrast, from the end of this super-inflationary cycle, a speech from Volcker:
Remarks by Paul A, Volcker, Chairman, Board of Governors of the Federal Reserve System
Alfred M. Landon Lecture Series on Public Issues
Kansas State University
April 15, 1981
[Al Landon's quote:] "I said inflation was like a whirlpool, it kept growing bigger and bigger all the time. No one benefitted except the nimble speculators, and that's still an issue today." Well, what was still an issue in 1972, when that remark was made, has becoxne the issue in economic policy
My thesis today can be summed up in a few sentences. We need to bring down inflation and restore price stability, not just for its ' own sake but because lack of confidence in our currency' is incompatible with a productive growing economy. Monetary policy and the Federal Reserve have an indispensable role to play in restoring price stability by slowing growth in money and credit. In the near-term, that process can be painful, given the momentum of inflation and the pressures on financial markets resulting from the inflationary process. The period of transition to more stable prices and sustained growth will be greatly speeded and eased to the extent other policies, public and privatef are brought to bear on the same objectives.
Wars in the Far East were finished. The US had to flee with tail behind our legs. Nixon went to China and literally kissed Mao so we could pull out of Vietnam. The Soviet Union was ascendent. The US fell into this 'whirlpool' of inflation after suddenly cutting off the gold/dollar peg. This was done so the US government could force the people of America to eat inflation. How did this nasty game work?
SIMPLE! All Congress and the Presidents had to do was NEVER INDEX TAXES TO INFLATION. To this day, this is not done! Instead, they 'cut' taxes. THIS IS FAKE. It is a convenient lie. It gives the politicians a free ride, an easy 'goodie' to feed to the masses. The more they go to war and create inflation, the more they can 'cut taxes' because the tax collections go UP due to people demanding more pay to make up for inflation. Government revenues rise and so they can cut taxes and then become very popular. Back in 1974-1980, I used to give speeches about this. 'We should keep Congress and the other people in government NO INFLATION PAY HIKES. This way, they get to suffer along with us! And this will goad them into not creating constant inflation.' Well, they always vote pay hikes for themselves. While they conspire to insure we can't escape inflation.
The case for "free trade" depends not just on abstract propositions of comparative advantage and long-run increases in national income/ but on the advantages, here and now, reinforcing pressures toward price stability.
And most important, we, in the Federal Reserve, need to be convincing in our commitment to monetary and credit restraint. We need to build on the consensus that inflation is at the core of our economic problems — that it is public enemy number one. We need to resist temptations to stimulate the economy through money creation, recognizing that, in the end, faster growth of money and credit will impair performance, not improve it.
We have set our course to restrain growth in money and credit. We mean to stick with it.
He certainly did this. The only realistic tool the Fed has to control inflation is to raise interest rates. This forces the government to pay more for debt and encourages them to not vote over the budget. This tool works, as the Chinese can assure us today, only if all the other banks are also raising interest rates, too. For example, in 1981, Japan and Germany both had fairly high interest rates, too. For as today, inflation in the US quickly became a global headache. This is because we are the world's #1 economic force even if it is negative today. Volcker, like Burns and like Greenspan and Bernanke, wanted 'Free Trade' because it made the job of enforcing the erasure of inflation squarely on top of the working class. The workers get cheaper foreign goods but also get pay CUTS. This cuts consumption. Only no one wanted the US worker to stop buying stuff! So a new scheme was cooked up: cheap credit to US workers so they could go deeper and deeper into debt while wages stagnated. The pay off was supposedly the end of inflation. Right!
Only inflation never stopped. It certainly slowed down. But US government overspending never stopped. It accelerated. And something else took off: when we look at any graphs of US trade, the deficits begin when Nixon cut the dollar peg from gold. Then, when the ruling elites convinced everyone that Free Trade would drop prices and fix inflation, it really took off...in 1982. By 1994, when Japan began the Carry Trade nonsense with the near-free money to US speculators and banks, our trade deficit shot upwards catastrophically.
No one who pushed this mess into our laps have been honest about their responsibility for creating this mess! They never will take credit, either. They are all liars. Note that Volcker never mentions going back to the gold standard. Note how Burns lied about the need for the gold standard. Both tried to assure us that the gold standard was old and no good. After all, the US violated it in 1964 when we went to war and refused to pay taxes for this war! Why not just continue doing this? Forever!
This is why the conversation today at most web pages are 'how do I evade this inflation?' The various schemes are put forwards but ALL of them are vulnerable to government fiat and banker manipulations set up to force us to eat the poison of inflation the hard way: by getting much poorer. Either our wages go down. Or our equity vanishes. Or our assets die. Or gold is confiscated or rendered inoperative via high interest rates. One way or another, all avenues of escape will be systematically blocked off as we are herded forwards. It is the only way they can 'fix' inflation. Either that, or they tax us very harshly! See?
They can tax anything at all. Including gold or oil speculators! They will restore balance ruthlessly. But only after securing their political base. The day they can utterly confound voters and detach them from their 'representatives' is when they can do all of this with impunity.
Which takes me to the Supreme Court: they affirmed our right to be ARMED. This was put in the Constitution so the revolutionaries could fight off tyranny. When we lose our other rights including the right to have a voice in Congress, we still have this other right: power, as Mao observed, grows out of the barrel of the gun.