Breaking Up the Western World

From The Daily Bell, Wednesday, January 25, 2012 – by Staff Report

Isn't it just as likely that Britain will hit the rocks and break up? ... In the period immediately after the Costa Concordia hit a rock off the coast of Tuscany, the behaviour of the passengers and crew has given us all sorts of insights into the eternal glories and failings of human nature. Perhaps the most symbolically pregnant gesture took place in the dining room. When the crockery started to slide from the tables, as the ship began to list, the waiters just picked it up and put it back. "It is nothing!" they said soothingly. "It is an electrical fault. Tutto va bene and what would madame like for the antipasto?"... I am like the Concordia waiters, in that I can't really believe, somehow, that we can be set on a course for destruction. But look at the facts, my friends. Look at that submerged reef marked "devo max", or fiscal independence for Scotland. If you can unpick the fiscal union, what is there to maintain the monetary union? And if you unpick monetary union — as George Osborne rightly points out — then political union is dead ... That is the nature of slo-mo disasters: they can change very quickly, from being an outlandish theoretical possibility to a predestined inevitability. – Boris Johnson, UK Telegraph


Dominant Social Theme: Things fall apart. The center cannot hold.


Free-Market Analysis: The Telegraph's Boris Johnson has written an interesting article on the potential break-up of Britain, comparing it to the unexpected Costa Concordia cruise ship disaster.
In a sense this article by Johnson is part of a larger power elite dominant social theme, in our view. The rhetoric of fear-based promotions by various Anglosphere mouthpieces has grown a good deal more shrill of late.
We pointed out just yesterday that George Soros is predicting significant unrest in the United States. His vehicle of choice is Occupy Wall Street and, according to a reporter, he sounded almost gleeful about the prospect.
From our point of view, Soros is a power elite operative, doing the bidding of that select group of powerful families who control the world's central banks and are trying to set up one-world government.
To do this, in our view – a view we have come to only reluctantly as patterns emerge more and more clearly – the elites may be planning to foment an all out chaotic depression that will make the current Great Recession look positively peaceful.
The idea is to deepen chaos around the world so significantly that further solutions – organized by the elites themselves – will seem both tempting and practical. In this way, perhaps, they will advance a one-world currency along with deepening global authorities such as the UN, IMF, etc.
This is simply speculation, of course, based on what we consider to be their dominant social themes. We don't make any apologies, because that's our MO. We speculate about the activities of the world's most powerful people based on what we consider to be the kinds of propaganda that their mouthpieces are unleashing on an unsuspecting world.
George Soros, we figure, is at this point one of the elite's hand-picked minions, a man who is participating fully in the left/right Hegelian Dialectic that the top elites utilize to move the larger sociopolitical and economic conversation in a given direction – almost always toward more state control.
Soros is predicting the proverbial "blood on the streets" but it's not just Soros. The Economic Collapse blog came out with an interesting article recently entitled "Are George Soros, The IMF And The World Bank Purposely Trying To Scare The Living Daylights Out Of Us?" The article quoted from our interview with Gerald Celente at length, as follows:
"I believe that we have to watch out for something along the lines of an economic martial law. The European system is in collapse. The financial system in the United States is just as tenuous, if not more, and I believe they will not admit there will be a financial crash but rather they will use a geo-political issue to get the people in a state of fear and hysteria whereby they'll then call a bank holiday or devaluation of the currency, or a hyperinflation of the currency, and blame it on somebody else."
Here's some more from the article:
George Soros is not the only one issuing these kinds of warnings. Once again, the head of the IMF, Christine Lagarde, has made a speech in which she openly warned that we are heading for a repeat of the "1930s". She told an audience in Berlin on Monday that the globe is facing "a 1930s moment, in which inaction, insularity and rigid ideology combine to cause a collapse in global demand".
During the speech she called for a trillion more dollars to support financially troubled governments, and she made the following statement...."It is not about saving any one country or region. It is about saving the world from a downward economic spiral."
As I wrote about the other day, the World Bank has also been using apocalyptic language about the global financial situation. In a shocking new report, the World Bank revised GDP growth estimates for 2012 downward very sharply, it warned that Europe could be facing financial collapse at any time, and it instructed the rest of the world to "prepare for the worst."
The lead author of the report, Andrew Burns, said that the "importance of contingency planning cannot be stressed enough" and that if there is a major financial crisis in Europe the entire globe will be deeply affected....
This is an important article because it brings together statements of several different individuals to show how there is a mounting chorus of top elite spokespeople predicting disaster.
Now, one can define this messaging as a "warning" – but we're prepared to go even deeper than that, as we did with our Soros article. Having become convinced that the elite operates within the ambit of "directed history," we tend to believe these statements – growing shriller by the minute – may be issued as a kind of self-fulfilling prophecy.
This, unfortunately, is how directed history works, in our view. First, the elites create the groundwork for whatever they have in mind and then, after events have begun to proceed in a planned direction, the mainstream media begins to quote the elite pundocracy and other mouthpieces about the inevitability of what's occurring.
It is important from their point of view that whatever occurs is properly positioned. In this case, a planned worldwide depression is to be accompanied by plenty of fanfare. People are to be made aware of what is about to occur. They are to be warned in some detail.
Again, to many, such an analysis will seem, if not foolhardy, at least paranoid. But in fact, there is really no other way to anticipate what may be headed in our direction other than looking at elite trends and rhetoric.
We would be foolish not to do so (in our humble opinion) because the world's economic system at this point is an entirely artificial one. It partakes of the "free market" only in certain aspects. But between central banking and the various globalist banking and trade entities, there is not much that the elites do not have a direct hand in organizing and purveying.
Central banking is a ruinous enterprise. It begs common sense that those who have built these banks (while hiding in the shadows) do not know exactly what they do and how they do it. Printing money from nothing causes first booms and then great busts.
The globalism that the elites continually try to inflict on this wretched world only magnifies the phony booms and busts of central banking and makes them resonate universally. The entire planet has become a kind of miserable economic echo chamber, quivering as the larger financial industry lurches from disaster to another.
Of course, the news is not all grim. We point out regularly that what we call the Internet Reformation has radically challenged the secretive financial might and conniving of the power elite. What was to have been a seamless transition to world government has now become a lurching and obvious series of clumsy and increasingly brutal ploys.
Having been found out – and the evidence is all over the Internet for anyone to see – the powers-that be have turned increasingly to the tried-and-true playbook of war, authoritarianism and legal force. The laws now being passed in even the freest Western countries are positively Draconian. They are destroying hundreds of years of painfully gained freedoms.
Which brings us back to Boris Johnson's article about Britain's devolution. During the era of the Gutenberg Pressthere was a good deal of schisming within the context of various power structures. Religion obviously comes to mind, but there were political changes as well.
We figure the same kind of schisming could occur as the Internet Reformation continues to have an impact. The world's largest countries are all wracked with either protest movements or outright rebellion, from what we can tell: Europe, the US, China and Russia among them.
To some degree, we believe this unrest is being fomented by the power elite itself. The historical precedent for this, of course, is the French Revolution. The way one deals with outbreaks of information about the Way the World Really Works is to create so much social chaos that people eventually prefer authoritarian government to "anarchy." The child of the French Revolution was Napoleon.
But this strategy has considerable risks. It is taking place within the context of a very powerful information revolution. The various kinds of social chaos that the elites may have in mind fomenting may end up backfiring.
Real secession and valid forms of republican government can certainly result from social upheaval. The Anglosphere power elite may not find it so easy to put the genie of social chaos back in the proverbial bottle.
Conclusion: The elite's mavens and mouthpieces are in full cry about upcoming social and economic chaos. Perhaps they ought to be careful what they wish for.

The Truth Behind the Coming "Regime Change" in Syria

by Shamus Cooke Global Research, January 24, 2012 After meeting again to decide Syria's fate, the Arab League again decided to extend its "monitoring mission" in Syria. However, some Arab League nations under U.S. diplomatic control are clamoring for blood. These countries — virtual sock puppets of U.S. foreign policy — want to declare the Arab League monitoring mission "a failure,” so that military intervention — in the form of a no fly zone — can be used for regime change. The United States appears to be using a strategy in Syria that it has perfected over the years, having succeeded most recently in Libya: arming small paramilitary groups loyal to U.S. interests that claim to speak for the local population; these militants then attack the targeted government the U.S. would like to see overthrown — including terrorist bombings — and when the attacked government defends itself, the U.S. cries "genocide" or "mass murder,” while calling for foreign military intervention. This is the strategy that the U.S. is using to channel the Arab Spring into the bloody dead end of foreign military intervention. For example, the U.S. media and government are fanatically giving the impression that, in Syria, the local population would like foreign militarily intervention to overthrow their authoritarian president, Bashar Assad. But facts are stubborn things. After spinning these lies, The New York Times was forced to admit, in several articles, that there have been massive rallies in Syria in support of the Syrian government. These rallies are larger than any pro-government demonstration that the U.S. government could hope to organize for itself. The New York Times reports: "The turnout [at least tens of thousands — see picture in link] in Sabaa Bahrat Square in Damascus, the [Syrian] capital, once again underlined the degree of backing that Mr. Assad and his leadership still enjoy among many Syrians, nearly seven months into the popular uprising. That support is especially pronounced in cities like Damascus and Aleppo, the country’s two largest." (January 13, 2012). The New York Times is forced to admit that the two largest cities — in a small country — support the government (or at least oppose foreign military intervention). This was further confirmed by a poll funded by the anti-Syrian Qatar Foundation, preformed by the Doha Debates: "According to the latest opinion poll commissioned by The Doha Debates, Syrians are more supportive of their president with 55% not wanting him to resign." (January 2, 2012). If people in Syria do not want foreign intervention — a likely reason that so many attended pro-Assad demonstrations — what about the so-called Free Syrian Army, which the United States has given immense credibility to and which claims to speak for the Syrian people? The Free Syrian Army — like its Libyan counterpart — appears to be yet another Made-in-the-USA militant group, by route of its ally Turkey, a fact alluded to by the pro U.S.-establishment magazine, Foreign Affairs: "Why does the Syrian [government] military not rocket their [Free Syrian Army] position or launch a large-scale assault? The FSA fighters are positioned about a mile from the Turkish border, near enough to escape across if the situation turned dire." The article also quotes a Free Syrian Army member who states: "Every [Free Syrian Army] group in Turkey has its own job," Sayeed said. "[The Turks] gave us our freedom to move." (December 8, 2011). The article also mentions that the Free Syrian Army is calling for a "no fly zone" over certain regions of Syria, which would destroy the Syrian government military; the possible starting locations of this no fly zone are on the Syrian borders of either Turkey, Jordan, or Iraq — all three are either strong U.S. allies or client states. A “no fly zone” is the new euphemism that means the U.S. and its European military junior partners in NATO will intervene to use their advanced fighter jets to destroy the Syrian military, as happened in Libya. In Libya the no fly zone evolved into a “no drive zone” and eventually a “no survival” zone for anything resembling the Syrian military — or anybody who armed himself in defense of the Libyan government. As in Syria, Libya's largest city, Tripoli, never had large anti-government demonstrations. The anti-Libyan government/pro-U.S. paramilitary group that attacked Libyan forces was so tiny that it took months to take power after 10,000 NATO bombing sorties (bombing missions) that destroyed large portions of Libya's infrastructure, as documented by the independent Human Rights Investigations. It's totally unimaginable that any large section of Syrian society would invite a NATO-backed no fly zone, i.e. war, into Syria. The examples of Afghanistan, Iraq, and Libya are too glaring for any Middle Eastern nation not to notice. For the Free Syrian Army to demand a NATO invasion of Syria is enough to label the FSA a U.S. puppet group striving for political power, deserving to be condemned. This strategy of using a proxy army to undermine an anti-U.S. government has a grisly past. This strategy is celebrated in the book Charlie Wilson's War, which tells the true story of the U.S. government sending weapons and cash to Islamic extremists to wage a terrorist campaign against the Afghan government, which was an ally of the Soviet Union at the time. The attacks eventually led to the Afghan government asking for Soviet military re-enforcements, whose presence in Afghanistan created a degree of popular support for the extremists who eventually became known as the Taliban. The same scenario also played itself out in Kosovo, where the tiny, U.S.-backed Kosovo Liberation Army (KLA) began a terrorist campaign against the government of Yugoslavia, intending to separate Kosovo into an independent nation. When the Yugoslav government attempted to defend itself from the KLA — while imitating its violent tactics — the U.S. and other western governments labeled it genocide, and invaded Yugoslavia, calling it a "humanitarian invasion.” To this day the U.S. is one of few nations that recognizes Kosovo as an independent nation while Kosovo faithfully serves the interests of the United States. The same proxy war strategy — by the U.S. and other European powers — played a crucial role in numerous wars throughout Africa, which culminated in the massive Congo War that killed over five million people, as French journalist Gerard Prunier describes in his book, Africa's World War. In Syria history is repeating itself, and some non-U.S. allies are very aware of it. The New York Times reports: "[Russia's Foreign Minister] said that foreign governments [the U.S., Turkey, etc.] were arming ‘militants and extremists’ in Syria." The Foreign minister also gave an accurate description of U.S. foreign policy towards Iran: "Mr. Lavrov offered a similarly grave message about the possibility of a military strike against Iran, which he said would be a “catastrophe.” He said sanctions now being proposed against Tehran were “intended to have a smothering effect on the Iranian economy and the Iranian population, probably in the hopes of provoking discontent.” (January 19, 2012). Most ominously, the Russian Foreign Minister said that U.S. foreign policy in Syria and Iran could lead to a "very big war,” i.e., a war that becomes regional or even international in scope, as other powers intervene to uphold their interests in the region. Russia has offered a way to avoid war in Syria and is pursuing it through the UN Security Council; it is the same path being pursued by the pro-U.S. government in Yemen: maintaining the current government in power until elections are called. Unfortunately, Yemen is an ally of the U.S. and Syria is not — the U.S. and its allies are blocking the same approach in Syria in order to pursue war. The Syrian government opposition bloc inside of Syria, the National Coordination Committee, opposes foreign military intervention. A leader of the NCC is Hassan Abdul Azim, who wisely states; “We refuse on principle any type of military foreign intervention because it threatens the freedom of our country,” (January 19, 2012). This is very likely the prevailing opinion inside of Syria, since the threat of no fly zones will result in the same mass bombings experienced by the citizens of Tripoli in Libya. The fake Syrian opposition outside of the country, The Syrian National Council, is yet another U.S. puppet — now allied with the Free Syrian Army — begging for a military invasion of Syria in order to "liberate" it. Of course the western media tells only the perspective of the pro-U.S. Syrian National Council. The U.S. has proven on multiple occasions that military solutions solve nothing, having torn asunder the social fabric of Afghanistan, Iraq, and now Libya. The working people of Syria and Iran do not desire "help" from the U.S. government and its allies to prevent bloodshed. The working people of these countries could liberate themselves from their authoritarian governments, as did the Tunisians and Egyptians, which is precisely the point: the U.S. is intervening militarily to re-gain control over a region that slipped out of its hands during the Arab Spring. This military approach serves to push the working people of the targeted country into the hands of their government while creating a humanitarian catastrophe for the invaded nation. The working people of the United States have no interest in aggressive war and have a responsibility to learn about U.S. government propaganda so that they can demand its end in the streets. Shamus Cooke is a social worker, trade unionist, and writer for Workers Action ( www.workerscompass.org  ) http://www.nytimes.com/2011/10/13/world/middleeast/syrians-rally-in-support-of-assad.html http://www.thedohadebates.com/news/item/index.asp?n=14312 http://www.foreignpolicy.com/articles/2011/12/08/syria_free_army_rebels?page=0,3 http://humanrightsinvestigations.org/tag/nato-bombing/ http://www.smh.com.au/world/russia-warns-west-it-risks-war-over-syria-iran-20120119-1q8ei.html http://www.nytimes.com/2012/01/19/world/europe/russia-warns-against-support-for-arab-uprisings.html?_r=3&ref=world http://rt.com/news/syria-protests-russia-dialogue-149/

Shamus Cooke is a frequent contributor to Global Research.  Global Research Articles by Shamus Cooke __________- Related: Syria: Repeated terrorist attacks against the population and public infrastructure

India, Iran, Oil, and Gold

From The Mess That Greenspan Made:

The Iran oil embargo and freeze of its central bank assets approved by Europe the other day has had an interesting unintended consequence – and not just another threat by Iran to block the Strait of Hormuz. According to this Debka report, India has agreed to pay for Iranian oil with gold instead of U.S. dollars and China is expected to follow suit.

So far, there has been no official confirmation of this story and, at the moment, I’d have to agree with this commentary at Commodity Online that it’s probably best viewed as a rumor, but, if both India and China dointend to pay for their $25 billion per year in oil purchases from Iran with the yellow metal, that could result in a lot of gold being mobilized.

Of course that wouldn’t necessarily mean that the gold price will rise. India could simply exchange their currency for gold, transfer ownership of the gold to Iran in exchange for oil, and then Iran could exchange that gold for whatever currency they desire, having no net effect on gold demand. But, it certainly won’t hurt the gold price and will surely further diminish the reserve currency status of the U.S. dollar.

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A Swiss Signal to Buy Gold

From Gold News, 25 January 2012:


Shenanigans in Switzerland give clues as to who will win – and lose – from currency devaluation... 
INVESTORS WERE GIVEN a major signal to Buy Gold on December 21 2011,writes Porter Stansberry for the Daily Wealth.


It was on that day that the European Central Bank (ECB) "loaned" roughly €500 billion to Europe's major banks at 1% interest. This capital will allow all the big banks to report adequate capital ratios when they file their annual reports...which is code for "getting a huge bailout."
Whatever you want to call it, simply know this: There will not be a deflationary collapse in Europe. The Euro will not collapse in the near term.
Instead, Europe will see a gigantic increase in its money supply.
When asked by the Financial Times if there was any substantive difference between what the ECB was doing (printing money and "loaning" it at 1%) and what the Federal Reserve has been doing since 2009 (printing money and buying mortgages and Treasury bonds), ECB president Mario Draghi replied:

 "Each jurisdiction has not only its own rules, but also its own vocabulary. We call them 'non-standard measures.' They are certainly unprecedented. But the reliance on the banking channel falls squarely in our mandate."

Let me translate Mario's political blather: "There is little difference. We are printing money to bail out deadbeat borrowers and big banks."
I have been writing, consistently, for almost four years, that the world's gigantic debt bubble will end in a massive inflation. I have long believed sovereign borrowers from around the world would choose to inflate their debts away, rather than suffer the consequences of actual defaults and restructurings. The reluctance of some members of the European Union (Germany, in particular) to do so caused a delay in the realization of my thesis...But it will not change the inevitable result.
Soon, you will see a massive financial-led economic rebound as the credit market re-opens, thanks to government-manipulated, ultra-low interest rates. In the short term, millions of people will cheer these moves, as the risk of any economic pain will have apparently been removed.
But this resolution is a mirage...
Instead of wiping out the bankers, brokers, and politicians who approved these bad debts (and were enriched by them), these bad debts will now be paid for by the millions and millions of people who rely on the two major global currencies – the Euro and the Dollar. The trillions of Dollars in bad loans will be paid for through inflation. It's an invisible, secret tax that not one in a hundred regular people even understand.
Over time, the result of these actions will be a vastly lower standard of living, thanks to declines in purchasing power and increasing commodity prices. Real wages will be much lower, as employers will not readily increase wages to keep up with inflation.
Volatile paper currencies will make it harder for entrepreneurs to invest and source products and services across borders. The so-called "wealth gap" will increase dramatically, as inflation will increase the purchasing power of the rich (whose assets will increase in value), while the poor – who have no ready means to protect themselves from inflation – are further impoverished.
And...in a surprise to the politicians who think easy money and bigger annual deficits are the path to greater centralized power...the coming inflation will cause massive social unrest. Occupy Wall Street is merely a sign of what is to come. Soon, the protesters won't merely march past the homes of the wealthy and the powerful...they will firebomb them.
The stability of our currency – of any nation's currency – is ultimately a reflection of the stability and reliability of our culture. It was the "Corruption of America" that led to the paper money system we use today. Many people forget that until 1971, gold-backed money – sound money – was a privilege every American enjoyed. Not anymore...
Today, under a purely paper system, the entire monetary system is controlled by the political class, which has the power to allocate capital or to deny it. Thus, the world's capital markets, rather than acting as capital allocators, have become merely speculative marionettes, whose strings are controlled by the well-connected and the influential.
Consider the recent case of Philipp Hildebrand, president of Switzerland's central bank, the Swiss National Bank (SNB). The Swiss central bank has long been famed as the world's best strong-currency advocate. It has a long tradition of backing its paper money with gold.
In August, the bank made an extraordinary and uncharacteristic decision. Hildebrand decided to cap the value of the Swiss Franc by deliberately devaluing the currency against the Euro and announcing that the value of the Swiss Franc would never be allowed to rise above a certain point. This immediately eliminated the Swiss Franc as one of the world's few remaining "lifeboat" currencies. Its value plummeted against the Dollar.
Just two days before that stunning change in Swiss policy, either Hildebrand or his wife placed a $512,000 trade into US Dollars from Swiss Francs (Hildebrand says his wife made the trade without his knowledge). 
Hildebrand resigned his post this month after the outcry over his transaction. This kind of petty graft seems remarkably stupid for such a sophisticated political figure. But perhaps it simply speaks to the arrogance of his class. 
This is how the game will be played. While the weak currency policies of the major nation states will impoverish their citizens, they will never be allowed to impoverish the elite...who will only grow richer and far more powerful. The only question is, how long will the game continue before the side effects (higher prices, lower wages, more social unrest) turn over the entire apple cart?
We cannot know. God does not whisper in our ear. But...I can tell you how to avoid becoming the patsy of Western governments and their paper scheme: Instead of storing your wealth in soon-to-be-debased paper currencies like the Dollar and the Euro, store your wealth in gold and silver. Although these "anti-paper money" metals have climbed substantially in the past decade, schemes like the one I've just described ensure they will rise much higher in the coming years.
Looking to Buy Gold?...

Porter Stansberry, 25 Jan '12

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Porter Stansberry is founder and publisher of Stansberry & Associates Investment Research, a private financial publishing company based in Baltimore, Maryland, and editor of the monthly Porter Stansberry's Investment Advisory.
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Detlev S. Schlichter: Paper Money Collapse

The Folly of Elastic Money and the Coming Monetary Breakdown
from FinancialSense.com:

All paper money systems in history have ended in failure. Either they collapsed in chaos, or society returned to commodity money before that could happen. Drawing upon novel new research, Paper Money Collapse  conclusively illustrates why paper money systems—those based on an elastic and constantly expanding supply of money as opposed to a system of commodity money of essentially fixed supply—are inherently unstable and why they must lead to economic disintegration.
These highly controversial conclusions clash with the present consensus, which holds that elastic state money is superior to inflexible commodity money (such as a gold standard), and that expanding money is harmless or even beneficial for as long as inflation stays low. Contradicting this, Paper Money Collapse shows that:

• The present crisis is the unavoidable result of continuously expanding fiat money
• The current policy of accelerated money production to “stimulate” the economy is counterproductive and could lead to a complete collapse of the monetary system
• Why many in financial markets, in media, and in the policy establishment are unable (and often unwilling) to fully appreciate the underlying problems with elastic money

This compelling new book looks at the breakdown of modern economic theory and the fallacy of mathematical models. It is an analysis of the current financial crisis and shows in very stark terms that the solutions presented by paper money-enthusiasts around the world are misguided and inherently flawed.


Click Here to Listen to the Interview

Original audio (fsn2012-0125-1.mp3)

Money and Freedom

From Mises Daily, Wednesday, January 25, 2012 

by Joseph T. Salerno

[This talk was delivered at the Mises Institute conference The History of Liberty, January 29, 2000.]

The historical embodiment of monetary freedom is the gold standard. The era of its greatest flourishing was not coincidentally the 19th century, the century in which classical liberal ideology reigned, a century of unprecedented material progress and peaceful relations between nations. Unfortunately, the monetary freedom represented by the gold standard, along with many other freedoms of the classical liberal era, was brought to a calamitous end by World War I.

Also, and not so coincidentally, this was the "War to Make the World Safe for Mass Democracy," a political system which we have all learned by now is the great enemy of freedom in all its social and economic manifestations.

Now, it is true that the gold standard did not disappear overnight, but limped along in weakened form into the early 1930s. But this was not the pre-1914 classical gold standard, in which the actions of private citizens operating on free markets ultimately controlled the supply and value of money and governments had very little influence.

Under this monetary system, if people in one nation demanded more money to carry out more transactions or because they were more uncertain of the future, they would export more goods and financial assets to the rest of the world, while importing less. As a result, additional gold would flow in through a surplus in the balance of payments increasing the nation's money supply.

Sometimes, private banks tried to inflate the money supply by issuing additional bank notes and deposits, called "fiduciary media," promising to pay gold but unbacked by gold reserves. They lent these notes and deposits to either businesses or the government. However, as soon as the borrowers spent these additional fractional-reserve notes and deposits, domestic incomes and prices would begin to rise.

As a result, foreigners would reduce their purchases of the nation's exports, and domestic residents would increase their spending on the relatively cheap foreign imports. Gold would flow out of the coffers of the nation's banks to finance the resulting trade deficit, as the excess paper notes and checks were returned to their issuers for redemption in gold.

To check this outflow of gold reserves, which made their depositors very nervous, the banks would contract the supply of fiduciary media bringing about a monetary deflation and an ensuing depression.

Temporarily chastened by the experience, banks would refrain from again expanding credit for a while. If the Treasury tried to issue convertible notes only partially backed by gold, as it occasionally did, it too would face these consequences and be forced to restrain its note issue within narrow bounds.

Thus, governments and commercial banks under the gold standard did not have much influence over the money supply in the long run. The only sizable inflations that occurred during the 19th century did so during wartime when almost all belligerent nations would "go off the gold standard." They did so in order to conceal the staggering costs of war from their citizens by printing money rather than raising taxes to pay for it.

For example, Great Britain experienced a substantial inflation at the beginning of the 19th century during the period of the Napoleonic Wars, when it had suspended the convertibility of the British pound into gold. Likewise, the United States and the Confederate States of America both suffered a devastating hyperinflation during the War for Southern Independence, because both sides issued inconvertible Treasury notes to finance budget deficits. It is because politicians and their privileged banks were unable to tamper with and inflate a gold money that prices in the United States and in Great Britain at the close of the 19th century were roughly the same as they were at the beginning of the century.

Within weeks of the outbreak of World War I, all belligerent nations departed from the gold standard. Needless to say by the war's end the paper fiat currencies of all these nations were in the throes of inflations of varying degrees of severity, with the German hyperinflation that culminated in 1923 being the worst. To put their currencies back in order and to restore the public's confidence in them, one country after another reinstituted the gold standard during the 1920s.

Unfortunately, the new gold standard of the 1920s was fundamentally different from the classical gold standard. For one thing, under this latter version, gold coin was not used in daily transactions. In Great Britain, for example, the Bank of England would only redeem pounds in large and expensive bars of gold bullion. But gold bullion was mainly useful for financing international trade transactions.

Other countries such as Germany and the smaller countries of Central and Eastern Europe used gold-convertible foreign currencies such as the US dollar or the pound sterling as reserves for their own domestic currencies. This was called the gold-exchange standard.

While the US dollar was technically redeemable in honest-to-goodness gold coin, banks no longer held reserves in gold coin but in Federal Reserve notes. All gold reserves were centralized, by law, in the hands of the Fed and banks were encouraged to use Fed notes to cash checks and pay for checking and savings deposit withdrawals. This meant that very little gold coin circulated among the public in the 1920s, and residents of all nations came increasingly to view the paper IOUs of their central banks as the ultimate embodiment of the dollar, franc, pound, etc.

This state of affairs gave governments and their central banks much greater leeway for manipulating their national money supplies. The Bank of England, for example, could expand the amount of paper claims to gold pounds through the banking system without fearing a run on its gold reserves for two reasons.

Foreign countries on the gold exchange standard would be willing to pile up the paper pounds that flowed out of Great Britain through its balance of payments deficit and not demand immediate conversion into gold. In fact by issuing their own currency to tourists and exporters in exchange for the increasing quantities of inflated paper pounds, foreign central banks were in effect inflating their own money supplies in lock-step with the Bank of England. This drove up prices in their own countries to the inflated level attained by British prices and put an end to the British deficits.

In effect, this system enabled countries such as Great Britain and the United States to export monetary inflation abroad and to run "a deficit without tears" — that is, a balance-of-payments deficit that does not involve a loss of gold.

But even if gold reserves were to drain out of the vaults of the Bank of England or the Fed to foreign nations, British and US citizens would be disinclined, either by law or by custom, to put further pressure on their respective central banks to stop inflating by threatening bank runs to rid themselves of their depreciating notes and retrieve their rightful property left with the banks for safekeeping.

Unfortunately, contemporary economists and economic historians do not grasp the fundamental difference between the hard-money classical gold standard of the 19th century and the inflationary phony gold standard of the 1920s.

Thus, many admit, if somewhat grudgingly, that the gold standard worked exceedingly well in the 19th century. However, at the same time, they maintain that the gold standard suddenly broke down in the 1920s and 1930s and that this breakdown triggered the Great Depression. Monetary freedom in their minds is forever discredited by the tragic events of the 1930s. The gold standard, whatever its merits in an earlier era, is seen by them as a quaint and outmoded monetary system that has proved it cannot survive the rigors and stresses of a modern economy.

Those who implicate the gold standard as the main culprit in precipitating the events of the 1930s generally fall into one of two groups. One group argues that it was an inherent flaw in the gold standard itself that led to a collapse of the financial system, which in turn dragged the real economy down into depression. Writers in the second group maintain that governments, for social and political reasons, stopped adhering to the so-called rules of the gold standard, and that this initiated the downward spiral into the abyss of the Great Depression.

From either perspective, however, it is clear that the gold standard can never again be trusted to serve as the basis of the world's monetary system. On the one hand, if it is true that the gold standard is fundamentally flawed, that in itself is a crushing practical argument against the principle of monetary freedom. On the other hand, if the gold standard is in fact a creature of rules contrived by governments, and it is politically impossible for them to follow those rules, then monetary freedom is simply irrelevant from the outset.

The first argument is the Keynesian argument and the second the monetarist argument against the gold standard.

Two recent books have elaborated these arguments against the gold standard. The economic historian Barry Eichengreen published a book in 1992 entitled Golden Fetters: The Gold Standard and the Great Depression. Eichengreen summarized the argument of this book in the following words:

The gold standard of the 1920s set the stage for the Depression of the 1930s by heightening the fragility of the international financial system. The gold standard was the mechanism transmitting the destabilizing impulse from the United States to the rest of the world. The gold standard magnified that initial destabilizing shock. It was the principle obstacle to offsetting action. It was the binding constraint preventing policymakers from averting the failure of banks and containing the spread of financial panic. For all these reason the international gold standard was a central factor in the worldwide Depression. Recovery proved possible, for these same reasons, only after abandoning the gold standard.

According to Eichengreen, then, not only was the gold standard responsible for initiating and internationally propagating the Great Depression, it was also the primary reason why the recovery was delayed for so long.

It was only after governments one after another in the 1930s severed the link between their national currencies and gold that their national economies finally began to recover. This was because, unbound by the rules of the gold standard, governments were now able to bail out their banking systems and run budget deficits financed by bank credit inflation without the constraining fear of losing their gold reserves.

Thus, the phrase "golden fetters" in the title of Eichengreen's book is a reference to Keynes's statement in 1931, "There are few Englishman who do not rejoice at the breaking of our gold fetters."

Of course, what Keynes and Eichengreen fail to understand is that the end of the classical liberal era in 1914 caused the removal from government central banks of the "golden handcuffs" of the genuine gold standard. Were these "golden handcuffs" still in place in the 1920s, central banks would have been rigidly constrained from inflating their money supplies in the first place and the business cycle that culminated in the Great Depression would not have taken place.

A second book that inculpates the gold standard as a leading cause of the Great Depression was published in 1998 and is entitled The Great Depression: An International Disaster of Perverse Economic Policies. According to the authors, Thomas E. Hall and J. David Ferguson, one of the most perverse and destabilizing economic policies of the 1920s involved the Fed violating the rules of the gold standard by allegedly "sterilizing" the inflow of gold from Great Britain.

This means that the Fed refused to pyramid inflated paper dollars on top of these newly acquired gold reserves in quantities sufficient to drive US prices up to the inflated level of British prices. This policy would have made US products more expensive relative to British products on world markets and would have helped mitigate Great Britain's ongoing loss of gold reserves through its balance-of-payments deficits.

These deficits were the result of the fact that Great Britain had returned to the gold standard after its wartime inflation at the prewar gold parity, which, given the inflated level of domestic prices, significantly overvalued the British pound in terms of the dollar.

These deficits could have been avoided if the British government had either deflated its price level sufficiently or chosen to return to gold at a devalued exchange rate reflecting the true extent of its previous inflation.

Hall and Ferguson, however, ignore these considerations, arguing that when the United States sterilizes gold,

The impact on the system is that Britain bears the brunt of the adjustment. Since the money supply in the United States did not rise, neither did U.S. incomes and prices as they were supposed to, which would have helped Britain eliminate their payments deficit. Since Britain was not aided by rising exports to the United States, Britain must experience a more severe decline in incomes and prices than would have been the case if the U.S. money supply had gone up. In this way Britain would bear the brunt of the adjustment in the form of a more severe recession than would have occurred if the United States had been playing by the rules. Thus it was critical that each country play fair.

Thus, in Hall and Ferguson's view, the rules of the gold standard dictate that when one central bank irresponsibly engages in monetary inflation and subsequently attempts to maintain an overvalued exchange rate, less inflationary central banks must rush to its aid and expand their own nations' money supplies in order to prevent it from losing its gold reserves.

But if a nation losing gold due to inept or irresponsible monetary policy can always count on those gaining gold to share "the brunt of the adjustment" by expanding their own money supplies, this is surely a recipe for worldwide inflation.

Now, this line of argument indicates that Hall and Ferguson completely misunderstand the true purpose and function of the gold standard. To begin with, a gold standard functions much better without a central bank, because these institutions, as creatures of politics, are inherently inflationary and tend to promote rather than restrain the inflationary propensities of the fractional-reserve commercial banks.

But, second, under a genuine gold coin standard, the choices of private households and firms effectively control the money supply. As I explained above, if the residents of one nation demand to hold more money for whatever reason, they can obtain the precise quantity of gold coin they require through the balance of payments by temporarily selling more exports and buying fewer imports.

This implies that, if a central bank does exist and it wishes to act in accordance with a genuine gold standard, it should always "sterilize" gold inflows by issuing additional notes and deposits only on the basis of 100 percent gold reserves and insisting that the commercial banks do the same. It should not permit these gold reserves to be used as the basis of a multiple credit expansion by the banking system.

In this way, a nation's money supply would be completely subject to market forces. By the way, this is precisely how the distribution of the supply of dollars between the different states of the United States is determined today. There is no government agency charged with monitoring and controlling New Jersey's or Alabama's money supply.

Hall and Ferguson reveal their uneasiness with and lack of insight into the operation of the money supply process under a genuine gold standard with the following example:

Suppose a fad had swept the nation in 1927 because Calvin Coolidge appeared in public wearing one gold earring. Then every teenager in America wanted to wear a gold earring "just like silent Cal".… The result would be an [increase] in the commercial demand for gold. Since more gold would be used in earrings less would be available for money.… It would be beyond the power of government to do anything about this fact. What a scary thought, the teenagers of America would have caused the U.S. money supply to decline.

While it is true that the commercial demand for gold does play a role in determining the supply and value of money under a gold standard, it is hardly cause for alarm. Rather, it highlights the important fact that the gold standard evolved on the market from a useful commodity with a preexisting supply and demand and was not the product of a set of arbitrary rules promulgated by governments.

Now, Hall and Ferguson conclude that by breaking the rules of the game and persisting in sterilizing the gold inflows from 1929 to 1933, the Fed caused a monetary deflation in Great Britain and throughout Europe. The nations losing gold were forced to contract their money supplies and this contributed to a financial collapse and a precipitous decline in real economic activity that marked the onset of the Great Depression.

Thus while the authors blame the initiation of the Great Depression on Fed sterilization policies, they attribute its length and severity to the gold standard. According to the authors, as long as European countries remained on the gold standard and US sterilization continued, there could be no end of the Depression in sight. The US gold stock would become a huge pile of sterilized and useless gold. Starting with the British in 1931, our trading partners began to recognize this fact, and one by one they left the gold standard. The Germans and ironically the United States were among the last to leave gold and so were hurt the worst, experiencing the longest and deepest forms of the Depression.

So although Eichengreen emphasizes the gold standard as a restraint on government monetary policy and Hall and Ferguson the failure of governments to play by its rules, in effect, they reach the same conclusion: the gold standard, and with it monetary freedom, stands indicted as a primary cause of the greatest economic catastrophe in history.

In the face of the historical evidence they adduce, can any defense be mounted in favor of the gold standard? The answer is a resounding "yes," and the defense is as simple as it is impregnable. As I have tried to indicate above, the case against the gold standard is from beginning to end a case of mistaken identity. The genuine gold standard did not fail in the 1920s, because it had already been destroyed by government policies after 1914.

The monetary system that sowed the seeds of the Great Depression in the 1920s was a central-bank-manipulated and inflationary pseudogold standard. It was central banking that failed in the 1920s and stands discredited to this day as the cause of the Great Depression.

A detailed case in support of this view can be found in the works of Murray N. Rothbard, particularly in his book America's Great Depression and a forthcoming book on A History of Money and Banking in the United States: The Colonial Era to World War II.

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In these works you will read that the US money supply, properly defined, increased from 1921 to 1928 at the annual rate of 7 percent per year, a rate of monetary inflation that was unseen under the classical gold standard. You will also learn that during the 1920s the Fed, far from operating as the deflationary force on the money supply portrayed by some monetarists, increased the categories of bank reserves within its control at the annual rate of 18 percent per year.

Finally you will read that from 1929 to 1932, the Fed continued to exercise a highly inflationary impact on the money supply, as it feverishly pumped new reserves into the banking system in a vain attempt to ward off the cyclical downturn entailed by its own earlier inflation of the money supply. The Fed was defeated in this endeavor to pump up the money supply and "reflate" prices in the early 1930s by domestic and foreign depositors who reclaimed their rightful property from an inherently bankrupt US banking system. They had suddenly lost confidence in the Fed-controlled monetary system masquerading as a gold standard, when they perceived at last the dwindling prospect of ever redeeming the rapidly expanding mountain of inflated paper claims for their gold dollars.

Joseph Salerno is academic vice president of the Mises Institute, professor of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics. He has been interviewed in the Austrian Economics Newsletter and on Mises.org. Send him mail. See Joseph T. Salerno's article archives.

This talk was delivered at the Mises Institute conference The History of Liberty