Is the SNB on New York’s leash?

“Is the SNB on New York’s leash?” this is the question once rethorically asked by well known Swiss banker, financial adviser and author of ‘Gold Wars’ Ferdinand Lips, who believed that Switzerland had been put under enormous foreign pressure and duress to sell half of its gold reserves, saying that “In my opinion, the once strong, proud and independent SNB has been degraded to an ‘Off-shore Branch’ of the U.S. central bank (the Federal Reserve) and reports directly to Alan Greenspan and his cohorts in New York.”

In two weeks time, on november 30, Switzerland holds a referendum on whether the Swiss National Bank (SNB), Switzerland’s central bank, should hold 20% of its currency reserves in gold. If the swiss vote “yes”, the SNB will be forced to buy around 1500 tons of gold in 5 years (annual gold demand is about 4000 tons per year). This referendum has implications beyond the amount of gold that would have to be bought if the swiss voted “yes”, as it is seen as a vote against the European Union (the SNB pegged the Swiss Frank (CHF) at a rate of 1,2 CHF per Euro in 2011 in order to stem the CHF appreciation), and against the coordinated policies of the western world’s central banks to print money, inflate asset prices and continually debase all currencies.

In the article from Goldcore,  “‘Gold Wars’ – Swiss Gold Shenanigans Intensify Prior To November 30 Vote”, that we reproduce, you can read and understand the process by which a country that had its currency backed by gold ended up letting its central bank, the SNB turn itself into a vulgar fiat worshipping entity, manipulating the world’s markets and destroying the world’s currencies, first of all its own: the Swiss Frank.

The article:

‘Gold wars’ are intensifying with just 16 days left to polling day in the Swiss Gold Initiative.

The Swiss National Bank (SNB) and establishment parties went “all in” during the week and intensified their campaign. They suggested that passing the Swiss Gold Initiative would be a ‘fatal’ for Switzerland and would be positive only for speculators.

The ‘yes’ side countered by saying the SNB’s assertions were alarmist and over the top. They say that it is not an invitation to speculators as there would be a five year transition to gold being 20% of Swiss reserves. They warned that there is a real risk of another debt crisis and a global currency crisis and that gold reserves would protect the Swiss franc and the Swiss economy.

If the Swiss vote to revert to having 20% of currency reserves in gold, the Swiss National Bank will be forced to make huge purchases of gold bullion. Switzerland  and its ‘Gold Initiative’ would contribute to driving the price of gold higher – likely in the short term and contributing to higher prices in the long term.

Understanding the important recent past and what has led to the forthcoming Swiss Gold Initiative is important and why we look at it today. This context is all important and is essential reading for all who wish to understand the key issues in the debate, for all who invest in and own gold internationally and for all Swiss people.

‘Gold Wars’ – The All Important Context and Gold Wars Today

By Ronan Manly,

Introduction
Golden Constant: Unchanging Swiss Reserves from 1971 to 2000
IMF Threat To Swiss Constitutional Gold
SNB Working Group  – Begins Gold Lending
Solidarity Fund Confusion
SNB ‘Expert Group’ Pre Planned Sale Of “Excess” Gold Reserves?
Low Turnout Gold Referendum and New Constitution
Swiss Gold Expert Ferdinand Lips Speaks Up
Jean-Pierre Roth’s Important 20% Diversification ‘Rule of Thumb’

Introduction
Much of the background to the sale of Swiss gold reserves in the early 2000s relates back to a number of distinct episodes in Swiss monetary history in the 1990s.

A lot of this period was characterised by what in hindsight looks like coordinated planning on the part of the Swiss National Bank (SNB) to push through a specific figure of 1,300+ tonnes of Swiss gold sales, but which back then looked like an unconnected but bungled series of unrelated changes to Switzerland’s gold and monetary landscape.

Furthermore, it is only by reviewing this series of events that it’s possible to appreciate the genesis  of the current Swiss Gold Initiative and the motivation of the proponents to call a halt to and try to reverse some of what they see as the unwise sale of Swiss gold due to decisions made in the 1990s.

Golden Constant: Unchanging Swiss Reserves from 1971 to 2000
Historically the Swiss Federal Constitution specified a gold backing for the country’s circulating currency. It did not specify a price at which to value the Swiss Franc in relation to gold.

This price was specified in related legislation. When the Bretton Woods system of fixed exchange rates collapsed in 1971 following the suspension by the US of dollar convertibility into gold, the Swiss parliament enacted legislation that linked the Swiss Franc to gold at an official price of SwF 4,590 per kilo (or SwF 142.90 per ounce). This price, at that time, was chosen as a realistic valuation price to enable the preservation of the gold backing for the Franc above a 40% limit (i.e. the value of the Swiss gold holdings at the official price exceeded, by a comfortable margin, 40% of the value of the circulating Swiss Franc currency).

Currency rules also stated that the Swiss National Bank (SNB) was only permitted to buy or sell gold within 1.5% of this official price. Therefore, from 1971 onwards, as the price of gold rose far above this official price, the Swiss National Bank (SNB) was unable to buy or sell gold. This is why Swiss gold reserves remained virtually unchanged at 2,590 tonnes between 1971 to 2000.

IMF Threat To Swiss Constitutional Gold
In 1992, after a concerted political campaign spearheaded by some of the country’s political parties, Switzerland joined the International Monetary Fund following a national referendum.

Under IMF rules, adopted in the latter part of the 1970s, IMF member countries cannot link their currencies to  gold. After joining the IMF, Switzerland was therefore constrained in how it could subsequently revalue its gold reserves since IMF Articles of Association prohibited IMF member countries from linking their currencies to gold.

In June 1995, at a gold conference in Lugano, Switzerland, Jean Zwahlen, one of the three members of the Governing Board of the SNB at that time, told the conference that “to state it bluntly, the Swiss National Bank has no intention whatsoever to sell or mobilise its gold reserves.(1)” At the end of April  1996, Zwahlen left the SNB to take up various private sector board positions (2).

However, in April 1996, Governing Board Chairman, Markus Lusser, set the Swiss gold reserve changes in motion, when he referred to the 40% gold cover as a ‘relic of the past’. (3) Lusser, who been SNB chairman since 1988, then also left the bank at the end of April 1996. (4)

SNB Working Group – Begins Gold Lending
In June 1996, an eight member ‘Working Group’ was appointed by the SNB and Ministry of Finance to purportedly examine the SNB’s investment policy, and to come up with ways of increasing the profitability of the Bank’s reserves. The group appointed consisted exclusively of SNB and Swiss Ministry of Finance officials, and was co-chaired by Peter Klauser, chief legal counsel at the SNB, and Ulrich Gygi from the Swiss Finance Ministry.

Gold sales were supposedly outside the terms of reference of this group.

This group targeted the gold cover rules so as to free up part of the gold reserves in order to start gold lending / leasing operations. By 1996, the gold cover of the Swiss Franc note issue had fallen to just a few percentage points above the minimum 40% level (i.e. the value of the Swiss gold reserves using the old official valuation price only just exceeded 40% of the value of outstanding Swiss Franc currency in circulation).

A change to this cover level only needed legislative and not constitutional approval, so in November 1996, the working group indicated that the gold cover should be reduced from 40% to 25%, and they published these recommendations in a report in December 1996. The portion of the gold reserves not earmarked to cover the note issue could therefore be targeted for gold lending. The group recommended a maximum of 10% of gold reserves to be used in this way, which worked out at a maximum of 259 tonnes of the total 2,590 tonnes.

These changes were ultimately reflected in legislation in November 1997, and as soon as the legislation went through the SNB began its gold lending operations, presumably out of London where most gold lending takes place in conjunction with the LBMA bullion banks.

Solidarity Fund Confusion
On 5th March 1997, the Swiss government announced that they intended to create a humanitarian Fund or Solidarity Fund, to be funded by Swiss gold. This proposal was said to have been conceived by SNB President Hans Meyer for what looks like no compelling reason, and communicated to Swiss President Arnold Koller and Federal Councillor Kaspar Villiger, who then echoed it back as if it had been their idea (5)(6).

On the same day, 5th of March 1997,  the SNB announced that they supported this move by the Swiss government. The proposal was to transfer between 400 and 600 tonnes from the Swiss gold reserves to this Swiss Solidarity Fund, and then sell the gold over a 10 year period.

Note that this Solidarity Fund was not specifically related to US led pressure at that time for Swiss compensation for WWII related incidents, but in the confusing political climate at that time in the 1900s and the pressure on the Swiss banks, it was sometimes confused with WWII related compensation.

At the April 1997 SNB annual general meeting, Hans Meyer, the new chairman of the SNB governing board (7) talked in terms of a 400 tonne transfer of gold to the Solidarity Fund, and even suggested that this gold could stay in the care of the SNB but be administered on an executor basis. This was the first time that Swiss gold sales were quantitated and only 400 tonnes was mentioned.

However, behind the scenes and just over the horizon, the SNB had more substantial plans for the gold reserves.

This Solidarity Fund idea never really gained momentum in Switzerland; in fact it was received by the Swiss public with a lot less than enthusiasm and eventually fizzled out. But what it did do was confuse the citizenry about Swiss gold sales and about referenda during a period in which there were multiple different proposals being discussed by the Swiss political and monetary establishment in and around the topics of gold and currency.

SNB ‘Expert Group’ Pre Planned Sale Of “Excess” Gold Reserves?
A second joint group called the ‘Expert Group’ was appointed in April 1997, again the appointment was by the SNB and the Ministry of Finance and again the group was co-headed by the SNB’s Peter Klauser, and the MinFin’s Ulrich Gygi.

This was a ten member group but five of the members had also been on the first ‘Working Group’. This time around three university academics with constitutional experience were thrown in for good measure but the rest of the panel were from the SNB and the Finance Ministry. The brief of this group was to recommend ways to reform the Swiss monetary system. After supposedly analysing and deliberating, this group’s recommendations included the following:

– Remove the reference to gold backing from the constitution thereby severing the constitutional link between the Swiss franc and gold. Revalue the gold reserves to a higher level but below market value.

– Officially grant the Swiss National Bank total independence by writing this stipulation into the constitution. This independence proposal from the SNB was despite the fact that the Bank had been, de facto, independent since its formation in 1906.

– Make price stability the main priority of the SNB, above and beyond other objectives.

It’s hard to believe that this Expert Group did any independent analysis, since it ended up arriving at conclusions in 1997 uncannily like the SNB’s Peter Klauser had listed in a speech he gave in 1996. As the World Gold Council put it in a 1998 publication:

“Indeed, Dr. Klauser laid out a similar plan to the one proposed by the Expert Group in a speech he gave the day after the Working Group issued its report (18 November 1996) – that is, six months before the appointment of the Expert Group (April 1997).”


Swiss Gold Initiative Logo

The fact that this Expert Group came up with recommendations in 1997 that were in line with what the SNB was trying to push in 1996, to a large extent shows that this entire exercise was pre-planned by the SNB from at least as early as 1996.

The Expert Group also specifically recommended on what they called ‘excess’ gold reserves, and this is crucial to understanding how the subsequent massive gold sales plan of 1300 – 1400 tonnes was put on the table. In what looks very like a classic case of reverse engineering, the Expert Group recommended an upward revaluation in the price of gold from the old official price of SwF 4,590/kg ($96.40 per ounce) to SwF 9,000 / kg, ($189 per ounce).

This SwF 9,000 price was 60% of the market price at that time but there was no specific ‘scientific’ reason why this price was chosen above any other price. Basically, the ‘Experts’ stated that Switzerland needed SwF 10.7 billion in gold as part of its total reserves, which, at a price of SwF 9000, would be equal to 1,200 tonnes. So that left 1,400 tonnes in excess that could be labelled as saleable.

Shockingly, the Expert Group’s recommendations for the wording of the new constitution did not even mention gold, so there was some push back from the Swiss Parliament who made the Expert Group insert a reference to gold in the wording of the new Constitution in relation to reserves. But in the new wording there was no quantification of the amount of gold that should be held in future, it just referred to “a part of it in gold”.

Low Turnout Gold Referendum and New Constitution
The above changes required a new constitution and a national referendum and also changes to Swiss legislation. At the end of May 1998, the Swiss Federal Ministry of Finance published  a press release announcing constitutional changes to reflect the above, stating that “the link between the Swiss franc and gold, written in the constitution, limits the possibility of gold sales for the SNB and should therefore be dropped”.

In a revealing sentence, the Finance Ministry also stated that “According to the SNB, other than current foreign exchange reserves, management of monetary policy only requires about half the current level of gold reserves”. This statement is revealing since it indicates that the Finance Ministry perceived the Expert Group essentially to be the SNB (8) grouping, and not a more diverse representative grouping.

To coincide with the above press release, the World Gold Council (WGC) also released analysis at the end of May 1998 stating that over the previous two weeks they had engaged in “extensive interviews with principal Swiss monetary and financial officials”. The WGCs actions were partially to allay fears in the market over what at the time was a lot of uncertainty surrounding the size and timing of any Swiss gold sales.

The WGC stated at the time that, based on their discussions, the definition of total excess gold was roughly 1400 tonnes, that if any gold was sold then it would be over a 10-20 year period, and that this would work out at between 50 and 100 tonnes per year.

The national referendum on the new Swiss constitution went ahead in April 1999, and was passed by just under 60% of voters in what was a very low turnout of 36% of the electorate.

From 1400 Tonnes to 1300 Tonnes and CBGA

Sometime between mid-1998 and early 1999, the SNB’s target of an excess 1,400 tonnes of gold reserves somehow became a discussion focusing on an excess of 1,300 tonnes of gold.

Why this figure changed is not clear, however, a World Gold Council study at the time in April 1999 stated that “1,400 tonnes was the figure first mentioned. However, in Switzerland, the discussion has since been firmly fixed on 1,300 tonnes. For consistency we have followed Swiss practice.”

Surprising as it may sound now, as of April 1999, there was no clarity amongst gold market observers as to whether there would be any Swiss gold sales and if so, when this would happen. The Swiss Federal Government was still confusing Swiss citizens with the apparent red herring about a Swiss Solidarity Fund funded by Swiss gold sales.

Then suddenly on 26 September 1999, an agreement on coordinated gold sales between 15 European central banks, known as the Central Bank Gold Agreement (CBGA), or Washington Agreement, was announced out of the blue in a move that surprised the gold market. The signatories to the agreement were the 11 Eurozone economics at that time, as well as Switzerland, the UK, Sweden and the European Central Bank.

It was known as the Washington agreement since it had been signed at the annual IMF/World Bank meeting which was held in Washington DC that year.

The Agreement, which would likely have taken months to plan, allowed for the sale of up to 2000 tonnes of gold over a five year period from 2000 until 2004, amongst the signatory central banks. Within the agreement, Switzerland was conveniently given a full allocation of the 1,300 tonnes of gold that it had unscientifically deemed to be in ‘excess’. At the time, it was said that the Washington Agreement was to be monitored by the Bank for International Settlements (BIS) in Basel, Switzerland.

What the CBGA was purportedly drawn up for was to create gold price stability in a market where talk of gold sales by various central banks, including Switzerland, was said to have created a destabilising influence.

What the agreement did do however, especially in the case of Switzerland, was to allow the Swiss National Bank to plough full-steam ahead into an accelerated five year sales program of 1,300 tonnes of gold sales (some 260 tonnes per year) that a few months previously was still being debated and which the Swiss Finance Ministry had said would take place over 10-20 years at 50-100 tonnes per year if it actually went ahead at all.

Swiss Gold Expert Ferdinand Lips Speaks Up

Critics of the SNB’s rush to sign the Washington Agreement in September 1999 point to the fact that the Swiss Parliament hadn’t even passed legislation to authorise Swiss gold sales until December1999, and also that, under Swiss law,  there was a possibility that a referendum could have been scheduled for April 2000 to question these sales.

This referendum did not take place and so the SNB was then unfettered to commence gold sales in May 2000, which it promptly did. The SNB officially then went on to sell 1,300 tonnes of Swiss gold between 2000 and 2004.

This was a very substantial amount of gold – some 325 tonnes per year and likely contributed to gold’s weakness in the early part of the decade.

Well known Swiss banker, financial adviser and author of ‘Gold Wars’ Ferdinand Lips believed that Switzerland had been put under enormous foreign pressure and duress to sell half of its gold reserves, and he wrote in 2002 questioning “Is the SNB on New York’s leash?”, saying that “In my opinion, the once strong, proud and independent SNB has been degraded to an ‘Off-shore Branch’ of the U.S. central bank (the Federal Reserve) and reports directly to Alan Greenspan and his cohorts in New York.”

Lips added that “It is a given that the Swiss gold sales will help New York money center banks to survive a bit longer. It will help them manipulate the gold market. But, gold’s time is still to come. If the SNB does not stop its sales, Switzerland will have to buy back its gold one day but at a higher price. The question is: With what?”(10)

Lips’ question still seems as relevant today as it did in 2002, and may need an answer sooner than anyone thought possible depending on the outcome of the 30 November referendum.

Jean-Pierre Roth’s Important 20% Diversification ‘Rule of Thumb’
One final point to note is that with the upcoming Swiss Gold Initiative referendum stipulating that the SNB should be required to hold at least 20% of its reserves in gold, it’s worth noting that in June 2000, Jean-Pierre Roth (11), the then deputy governor of the SNB, told the World Gold Council that this exact percentage, 20% of reserves in gold, made a lot of sense from a reserve diversification perspective.

Roth said:
“The down-sizing of our gold reserves is limited to 1,300 tonnes. We have no intention to go further than that. At the end of our sales programme, the remaining 1,290 tonnes of gold in our possession will be appropriate in several respects: our gold reserves will represent about 20 per cent of our total assets, which makes a great deal of sense from a diversification point of view. It also meets our constitutional obligation to maintain our gold reserves.

Also, they will back about half of the currency in circulation in Switzerland. A strong gold backing still plays an important role in fostering the public’s confidence in money. They will form a sizeable ‘second line of defence’ without credit, transfer or political risks, to be used in case of emergencies.(12)

Roth went on to become chairman of the governing board of the Swiss National Bank for nine yearsbetween January 2001 and December 2009.

Conclusion
With the SNB now in full media mode arguing against a 20% gold holding in the reserves, perhaps some of the Swiss media might care to interview Dr. Roth who can now be found sitting on the boards of Nestlé, Swiss Re and Swatch.

Given that the 1,300 tonnes of gold sales appear to have been pre-planned by the SNB from approximately the mid-1990s, and given that the gold initiative referendum is about to be put to a public vote in just 16 days, it would be valuable at this juncture to now pose some questions to former Swiss National Bank executives in an effort to understand exactly what went on  with the gold sales plans and negotiations during the late 1990s.

Notes

[1] Gold Wars, Page 184 http://www.fame.org/PDF/Gold%20Wars%200-9710380-0-7%20%20-%2001.21.02.pdf
[2] Jean Zwahlenhttp://www.snb.ch/en/mmr/reference/hist_bios_dm_zwahlen/source/hist_bios…
[3] World Gold Councilhttp://www.gold.org/download/file/2917/GDT_19_Q1_1997.pdf
[4] Markus Lusser:http://www.snb.ch/en/mmr/reference/hist_bios_dm_lusser/source/hist_bios_…
[5] Gold Wars: http://www.fame.org/PDF/Gold%20Wars%200-9710380-0-7%20%20-%2001.21.02.pdf
[6] WGC via USA Gold http://www.usagold.com/swissgoldwgc.html
[7] Hans Meyer:http://www.snb.ch/en/mmr/reference/hist_bios_dm_meyer/source/hist_bios_d…
[8] World Gold Council http://www.gold.org/download/file/2795/280598.pdf
[9] Switzerland’s gold: Ten key questions about Switzerland’s gold – An examination by the World Gold Council. April 2009, Reprinted at USAGOLD:http://www.usagold.com/swissgoldwgc.html
[10] Freedom Is Lost in Small Steps – Ferdinand Lips  http://lips-institute.ch/en/wp-content/uploads/file/articles_pdf/FreedomIsLost.pdf.pdf
[10] Jean-Pierre Roth:http://www.snb.ch/en/mmr/reference/hist_bios_dm_jpr/source/hist_bios_dm_…
[12] WGC –

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Dark Belgian Chocolate

In his  article, Who Is The New Secret Buyer Of U.S. Debt?, Brandon Smith tries to solve one of the mysteries of recent events in financial markets: the enormous increase in US Treasury Bonds reserves held by Belgium. As you can appreciate in the chart above, Belgium has, in a few months, increased its reserves of US Treasury Bonds by more than 70%. This, for a country like Belgium, does not make any sense and it is suspected that those bonds belong to somebody else. Mr. Smith floats the theory that the real buyers of US Bonds would be the International Monetary Fund (IMF) and the Bank for International Settlements (BIS), as part of a long term plan to displace the US Dollar and introduce the IMFs Special Drawing Rights (SDR) as the New World Order’s new global currency. Of course, he cannot prove his case, but the article is interesting nevertheless.

TYReads “One hundred years is long enough. End the Fed”

On the 100th anniversary of the creation of the Federal Reserve (FED), designed in secrecy by a group of Wall Street bankers and voted into existence by the American Congress on december 23 1913, Ron Paul publishes this article arguing that its creators have succeeded beyond their wildest dreams, and that the FED has taken total control of the american economy, and not for the good.

To illustrate Ron Paul’s message we include 2 charts. In the first one we can see the loss in purchasing power of the US Dollar from around 1900 until today. In the second one we can see the percentage silver content in the Roman Denarius from around 180 AD to 280 AD, after the government of the Antonines, when Rome went into rapid decline.

devaluation_dollar1

devaluation_denarius

The article:

After 100 Years Of Failure, It’s Time To End The Fed!

A week from now, the Federal Reserve System will celebrate the 100th anniversary of its founding. Resulting from secret negotiations between bankers and politicians at Jekyll Island, the Fed’s creation established a banking cartel and a board of government overseers that has grown ever stronger through the years. One would think this anniversary would elicit some sort of public recognition of the Fed’s growth from a quasi-agent of the Treasury Department intended to provide an elastic currency, to a de facto independent institution that has taken complete control of the economy through its central monetary planning. But just like the Fed’s creation, its 100th anniversary may come and go with only a few passing mentions.

Like many other horrible and unconstitutional pieces of legislation, the bill which created the Fed, the Federal Reserve Act, was passed under great pressure on December 23, 1913, in the waning moments before Congress recessed for Christmas with many Members already absent from those final votes. This underhanded method of pressuring Congress with such a deadline to pass the Federal Reserve Act would provide a foreshadowing of the Fed’s insidious effects on the US economy—with actions performed without transparency.

Ostensibly formed with the goal of preventing financial crises such as the Panic of 1907, the Fed has become increasingly powerful over the years. Rather than preventing financial crises, however, the Fed has constantly caused new ones. Barely a few years after its inception, the Fed’s inflationary monetary policy to help fund World War I led to the Depression of 1920. After the economy bounced back from that episode, a further injection of easy money and credit by the Fed led to the Roaring Twenties and to the Great Depression, the worst economic crisis in American history.

But even though the Fed continued to make the same mistakes over and over again, no one in Washington ever questioned the wisdom of having a central bank. Instead, after each episode the Fed was given more and more power over the economy. Even though the Fed had brought about the stagflation of the 1970s, Congress decided to formally task the Federal Reserve in 1978 with maintaining full employment and stable prices, combined with constantly adding horrendously harmful regulations. Talk about putting the inmates in charge of the asylum!

Now we are reaping the noxious effects of a century of loose monetary policy, as our economy remains mired in mediocrity and utterly dependent on a stream of easy money from the central bank. A century ago, politicians failed to understand that the financial panics of the 19th century were caused by collusion between government and the banking sector. The government’s growing monopoly on money creation, high barriers to entry into banking to protect politically favored incumbents, and favored treatment for government debt combined to create a rickety, panic-prone banking system. Had legislators known then what we know now, we could hope that they never would have established the Federal Reserve System.

Today, however, we do know better. We know that the Federal Reserve continues to strengthen the collusion between banks and politicians. We know that the Fed’s inflationary monetary policy continues to reap profits for Wall Street while impoverishing Main Street. And we know that the current monetary regime is teetering on a precipice. One hundred years is long enough. End the Fed.

TYReads The End Of German Hyperinflation

Today 90 years ago, on the 15 of November 1923, by fixing the value of the recently created Rentenmark at a rate of 1 trillion (1.000.000.000.000) Papermark per 1 Rentenmark, and one month later, by setting the rate of the Rentenrmark against the US Dollar at a rate of 4,2 Rentenmark per 1 US Dollar, the exchange rate that had prevailed between the Reichsmark and the US dollar before World War I, Hjalmar Schacht, the then new president of the Reichsbank, ended the German Hyperinflation of 1922-1923, a monetary phenomenon that it is often argued paved the way for the later onset of Nazism. Thorsten Polliet of The Ludwig von Mises Institute has written this article about it.

90 Years Ago: The End Of German Hyperinflation by Thorsten Polleit @ The Ludwig von Mises Institute

On 15 November 1923 decisive steps were taken to end the nightmare of hyperinflation in the Weimar Republic: The Reichsbank, the German central bank, stopped monetizing government debt, and a new means of exchange, the Rentenmark, was issued next to the Papermark (in German: Papiermark). These measures succeeded in halting hyperinflation, but the purchasing power of the Papermark was completely ruined. To understand how and why this could happen, one has to take a look at the time shortly before the outbreak of World War I.

Since 1871, the mark had been the official money in the Deutsches Reich. With the outbreak of World War I, the gold redeemability of the Reichsmark was suspended on 4 August 1914. The gold-backed Reichsmark (or “Goldmark,” as it was referred to from 1914) became the unbacked Papermark. Initially, the Reich financed its war outlays in large part through issuing debt. Total public debt rose from 5.2bn Papermark in 1914 to 105.3bn in 1918. In 1914, the quantity of Papermark was 5.9 billion, in 1918 it stood at 32.9 billion. From August 1914 to November 1918, wholesale prices in the Reich had risen 115 percent, and the purchasing power of the Papermark had fallen by more than half. In the same period, the exchange rate of the Papermark depreciated 84 percent against the US dollar.

The new Weimar Republic faced tremendous economic and political challenges. In 1920, industrial production was 61 percent of the level seen in 1913, and in 1923 it had fallen further to 54 percent. The land losses following the Versailles Treaty had weakened the Reich’s productive capacity substantially: the Reich lost around 13 percent of its former land mass, and around 10 percent of the German population was now living outside its borders. In addition, Germany had to make reparation payments. Most important, however, the new and fledgling democratic governments wanted to cater as best as possible to the wishes of their voters. As tax revenues were insufficient to finance these outlays, the Reichsbank started running the printing press.

From April 1920 to March 1921, the ratio of tax revenues to spending amounted to just 37 percent. Thereafter, the situation improved somewhat and in June 1922, taxes relative to total spending even reached 75 percent. Then things turned ugly. Toward the end of 1922, Germany was accused of having failed to deliver its reparation payments on time. To back their claim, French and Belgian troops invaded and occupied the Ruhrgebiet, the Reich’s industrial heartland, at the beginning of January 1923. The German government under chancellor Wilhelm Kuno called upon Ruhrgebiet workers to resist any orders from the invaders, promising the Reich would keep paying their wages. The Reichsbank began printing up new money by monetizing debt to keep the government liquid for making up tax-shortfalls and paying wages, social transfers, and subsidies.

From May 1923 on, the quantity of Papermark started spinning out of control. It rose from 8.610 billion in May to 17.340 billion in April, and further to 669.703 billion in August, reaching 400 quintillion (that is 400 x 1018) in November 1923.[2] Wholesale prices skyrocketed to astronomical levels, by rising by 1.813 percent from the end of 1919 to November 1923. At the end of World War I in 1918 you could have bought 500 billion eggs for the same money you would have to spend five years later for just one egg. Through November 1923, the price of the US dollar in terms of Papermark had risen by 8.912  percent. The Papermark had actually sunken to scrap value.

With the collapse of the currency, unemployment was on the rise. Since the end of the war, unemployment had remained fairly low — given that the Weimar governments had kept the economy going by vigorous deficit spending and money printing. At the end of 1919, the unemployment rate stood at 2.9 percent, in 1920 at 4.1 percent, 1921 at 1.6 percent and 1922 at 2.8 percent. With the dying of the Papermark, though, the unemployment rate reached 19.1 percent in October, 23.4 percent in November, and 28.2 percent in December. Hyperinflation had impoverished the great majority of the German population, especially the middle class. People suffered from food shortages and cold. Political extremism was on the rise.

The central problem for sorting out the monetary mess was the Reichsbank itself. The term of its president, Rudolf E. A. Havenstein, was for life, and he was literally unstoppable: under Havenstein, the Reichsbank kept issuing ever greater amounts of Papiermark for keeping the Reich financially afloat. Then, on 15 November 1923, the Reichsbank was made to stop monetizing government debt and issuing new money. At the same time, it was decided to make one trillion Papermark (a number with twelve zeros: 1,000,000,000,000) equal to one Rentenmark. On 20 November 1923, Havenstein died, all of a sudden, through a heart attack. That same day, Hjalmar Schacht, who would become Reichsbank president in December, took action and stabilized the Papermark against the US dollar: the Reichsbank, and through foreign exchange market interventions, made 4.2 trillion Papermark equal to one US Dollar. And as one trillion Papermark was equal to one Rentenmark, the exchange rate was 4.2 Rentenmark for one US dollar. This was exactly the exchange rate that had prevailed between the Reichsmark and the US dollar before World War I. The “miracle of the Rentenmark” marked the end of hyperinflation.

How could such a monetary disaster happen in a civilized and advanced society, leading to the total destruction of the currency? Many explanations have been put forward. It has been argued that, for instance, that reparation payments, chronic balance of payment deficits, and even the depreciation of the Papermark in the foreign exchange markets had actually caused the demise of the German currency. However, these explanations are not convincing, as the German economist Hans F. Sennholz explains: “[E]very mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.” Indeed, the German hyperinflation was manmade, it was the result of a deliberate political decision to increase the quantity of money de facto without any limit.

What are the lessons to be learned from the German hyperinflation? The first lesson is that even a politically independent central bank does not provide a reliable protection against the destruction of (paper) money. The Reichsbank had been made politically independent as early as 1922; actually on behalf of the allied forces, as a service rendered in return for a temporary deferment of reparation payments. Still, the Reichsbank council decided for hyperinflating the currency. Seeing that the Reich had to increasingly rely on Reichsbank credit to stay afloat, the council of the Reichsbank decided to provide unlimited amounts of money in such an “existential political crisis.” Of course, the credit appetite of the Weimar politicians turned out to be unlimited.

The second lesson is that fiat paper money won’t work. Hjalmar Schacht, in his 1953 biography, noted: “The introduction of the banknote of state paper money was only possible as the state or the central bank promised to redeem the paper money note at any one time in gold. Ensuring the possibility for redeeming in gold at any one time must be the endeavor of all issuers of paper money.” Schacht’s words harbor a central economic insight: Unbacked paper money is political money and as such it is a disruptive element in a system of free markets. The representatives of the Austrian School of economics pointed this out a long time ago.

Paper money, produced “ex nihilo” and injected into the economy through bank credit, is not only chronically inflationary, it also causes malinvestment, “boom-and-bust” cycles, and brings about a situation of over-indebtedness. Once governments and banks in particular start faltering under their debt load and, as a result, the economy is in danger of contracting, the printing up of additional money appears all too easily to be a policy of choosing the lesser evil to escape the problems that have been caused by credit-produced paper money in the first place. Looking at the world today — in which many economies have been using credit-produced paper monies for decades and where debt loads are overwhelmingly high, the current challenges are in a sense quite similar to those prevailing in the Weimar Republic more than 90 years ago. Now as then, a reform of the monetary order is badly needed; and the sooner the challenge of monetary reform is taken on, the smaller will be the costs of adjustment.

Mr. Draghi & the “european banking union”

ECB on collision course with Germany on banking union @ Financial Times

Financial Times publishes this article about the reluctance of Germany to the intent of the ECB to get total supervisory and resolution control over all banks in the eurozone. The so-called “european banking union” plans seek to place eurozone banks under the overarching supervision of the ECB, followed by the creation of a bank resolution scheme for the bloc and, eventually, a common deposit scheme.

“In the 32-page opinion to EU institutions in Brussels, the ECB said the new agency, known as the single resolution mechanism, should be “strong and independent” with clear, unitary powers to force failing banks to either recapitalize or shut down.”

“The stance puts Mario Draghi, ECB president, in direct conflict with Wolfgang Schäuble, the German finance minister, who has repeatedly said the EU’s new bank bailout system should instead start as a “network” of national authorities because EU treaties do not allow for a single decision maker for all of Europe.”

“Differences between Brussels and Berlin over the way forward for a new EU bank executioner – which many officials believe is the biggest shift in sovereignty for the eurozone since the creation of the single currency itself – has slowed progress towards banking union to a crawl.”

Mr. Draghi’s haste in trying to get total control of the european banking system, something well beyond what was envisioned both in the intentions and the written law of the EU and ECB treaties, is another, perhaps the definitive, step towards protecting the banking industry from accountability and democratic (even if very mild and imperfect at present) control.

Germany’s reluctance is very logical, since once the ECB gets supervisory and resolution authority over all banks in the eurozone, it will have all the tools to perpetuate a “dual economy”, with a financial sector that not only finances itself at rates (basically zero) that have nothing to do with the rates at which citizens and small and mid enterprises have to finance themselves (if at all), but whose supervision would be in “friendly hands”. Friendly hands to them, banks, but unfriendly to citizens, whose savings are being constantly debased by a zero-interest-rate-policy that increasingly looks no longer like a temporary fixture but as a permanent feature of a new neo-feudal financial architecture.

It is a pity that such aspects are seldom mentioned when discussing the implications of the innocently named “european banking union”. One would hope that Germany would stand firm (even if partially for selfish reasons), but fear it will not. The “european banking union” is not a positive development for those who believe in a democratic Europe and a restrained and accountable financial sector.

Germany says “Ja” to Bitcoin

Despite strong opposition by the american government, Bitcoin appears to be winning some important battles. You can read more about the virtual currency in Bitcoin a virtual currency that defies the NWO.

Bitcoin recognized by Germany as legal tender @ >CNBC.com Some excerpts:

“Virtual currency bitcoin has been recognized by the German Finance Ministry as a “unit of account”, meaning it is now legal tender and can be used for tax and trading purposes in the country.”

“Bitcoins is not classified as e-money or a foreign currency, the Finance Ministry said in a statement, but is rather a financial instrument under German banking rules. It is more akin to “private money” that can be used in “multilateral clearing circles”, the Ministry said.”

” “We should have competition in the production of money. I have long been a proponent of Friedrich August von Hayek scheme to denationalize money. Bitcoins are a first step in this direction,”said Frank Schaeffler, a member of the German parliament’s Finance Committee, who has pushed for legal classification of bitcoins.”

Bitcoin: the Berlin streets where you can shop with virtual money @ The Guardian Some excerpts:

“Florentina Martens has had the same experience since opening her Parisian-style cafe Floor’s two months ago just a couple of streets away. “There is not a prototype Bitcoin payer,” she said. “It’s random people. Not only nerds, let me put it that way.” ”

” “It’s an easier way of digital payment than credit cards, which cost me a lot of money as a business and to which I’m forced to sign up for years,” she says.”

”  “The truth is, I really want to believe in it. And I like the fact that Bitcoin scares people in suits, because if this thing were to really take off, it would bankrupt a lot of bankers.” ”

“Crypto-currency experts meeting Patzer at a recent Bitcoin soiree in the back of Floor’s cafe prefer to talk of the recent dip as a correction rather than a crash, which has brought Bitcoin back to a realistic price while it has retained its underlying value.” ”

” “I would look at these spikes and corrections as the birth pangs of an entirely new system,” said Mike Gogulski, a Bitcoin developer. “It represents an opportunity to transform the way we deal with the flows of wealth and human energy.” “

“He who controls the spice controls the universe.”

Guild Navigator - Dune (1984)

If you are a science fiction fan you’ll probably remember Dune, the excellent novel (a series of them actually) by Frank Herbert, and the film by David Lynch based on the same book. In it, one of the villains, Baron Vladimir Harkonnen, utters “He who controls the spice controls the universe”, the spice being a rare substance harvested in desert and desolate planet Arrakis and without which the universe would would grind to a halt (if you want to know why and have not read the book or seen the movie…just do it!). Instead of “spice” use “credit” and you’d have an adept metaphor of our universe, our western societies.

This week Spiegel Online interviewed Carmen Reinhart, an american economist known for being the co-author, with Kenneth Rogoff, of the book This Time Is Different: Eight Centuries of Financial Folly, in which they study debt crisis and their aftermaths in the last 800 years.

In this interview Ms. Reinhart gives very clear hints as to what the aftermath of the present debt crisis in western societies might be: inflation and impoverishment of savers and the general population. She also mentions the methods by which such an outcome will be achieved: financial repression and monetization of debt (aka Quantitative Easing aka QE).

Ms. Reinhart holds the thesis that governments have forced Central Banks to relinquish their independence in order to finance government deficits that can no longer be addressed via fiscal policies. What she does not say, be it because she does not believe it or because she does not dare, is that governments are themselves subservient to financial markets, an issue that we addressed in TYR reads “… a de facto coup d’état by Wall Street”. Ms. Reinhart utters some truths and chooses to ignore some other ones. The interview is both illuminating and mystifying, but well worth reading.

At the end of the interview…

…Spiegel asks “That sounds like a perpetual motion…”

…and Ms. Reinhart answers…”Of course it is!”.

It is perpetual motion because credit is the spice of our financial universe, a spice created by Central Banks, where decisions are taken by unelected officials, that channel it, at a very low or no cost, thru the private banking system, that multiplies and redistributes it, at a cost, to the rest of the economy. Ms. Reinhart tries to convince us that it is governments that control money, credit. No, Frank Herbert knew better. It is the Guild, the banking industry and their owners, who control the spice…credit…Central Banks…and in the end governments. How do we know?…ask yourself…Cui Bono? “He who controls the spice controls the universe.”

Some excerpts from the interview:

“So what happens is that money is transferred from savers to borrowers via negative interest rates.”

“If central banks try to accommodate and buy debt, there are risks associated with it. Somewhere down the road you are going to wind up with higher inflation.”

No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold.”

“…after World War II austerity was easier to pursue, because you had a younger population and therefore less entitlements. Furthermore, military expenditure was easier to reduce. So, the build-up in debt we have seen since the crisis is very rare. Usually you get that kind of build-up when there is a war.”