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False Flag Infiltrators: Gold-Hating Fiat Money Inflationists Inside the Libertarian-Conservative Movement

Gary North
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May 25, 2009

A web page by Ellen Brown is making the rounds. It is here:


Ellen Brown is a lawyer. She is anti-Federal Reserve. So, she gets a hearing in conservative circles. This is unfortunate. There is nothing conservative about her. She is an apologist for statism and the United States Treasury (a wholly owned subsidiary of Goldman Sachs).

Her article is about the hyperinflation of Germany, 1921-23. She has no understanding of what happened or why, but she talks as if she does.

If you want the real story on the German hyperinflation, you can get it on the Mises.org site. All of these are available for free.

First, there is Hans Sennholz's article, "Hyperinflation in Germany." http://mises.org/story/2347

Second, there is Adam Fergusson's book, When Money Dies. http://mises.org/resources/4016

For even more detail, read this: The Economics of Inflation (1931), by Constantino Bresciani-Turroni. http://www.mises.org/books/economicsofinflation.pdf

These books show that price inflation in Germany was exclusively the result of the central bank of Germany, which expanded the monetary base.

Ms. Brown offers a different explanation for the German inflation.

Schacht Lets the Cat Out of the Bag

Light is thrown on this mystery by the later writings of Hjalmar Schacht, the The Lost Science of Money by Stephen Zarlenga, who writes that in Schacht's 1967 book The Magic of Money, he "let the cat out of the bag, writing in German, with some truly remarkable admissions that shatter the 'accepted wisdom' the financial community has promulgated on the German hyperinflation." What actually drove the wartime inflation into hyperinflation, said Schacht, was speculation by foreign investors, who would bet on the mark's decreasing value by selling it short.

Short selling is a technique used by investors to try to profit from an asset's falling price. It involves borrowing the asset and selling it, with the understanding that the asset must later be bought back and returned to the original owner. The speculator is gambling that the price will have dropped in the meantime and he can pocket the difference. Short selling of the German mark was made possible because private banks made massive amounts of currency available for borrowing, marks that were created on demand and lent to investors, returning a profitable interest to the banks.

To say that this is economically erroneous does not do justice to how wrong it is.

First, short selling is as legitimate as going long (buying). Speculators forecast future prices; they do not cause those prices. For every long position, there is a short. Those speculators, long or short, who guess wrong lose money. For every gain made by shorting the German mark, there was a loss imposed on a speculator who was long.

Second, she describes short selling on the stock market. She does not mention commodity futures. The rules on the commodity futures market are different. These contracts do not involve borrowing the asset. This woman hasn't a clue about financial markets.

Third, the argument was refuted as long ago as 1931, in the still-definitive book, The Economics of Inflation. The author reports:

The accusation that the collapse of the German exchange was provoked by bold groups of professional speculators seems better founded. The objection to that is that speculation cannot be the original cause of the depreciation of the currency of a country. On the contrary, speculation appears when for certain reasons, such as the Budget deficit, the continual issues of paper money, the disequilibrium of the balance of trade, and the political situation, the exchanges are unstable. Speculation weakens and eventually disappears when the causes which provoked the original depreciation of the currency become less. Speculation in Austrian crowns flourished so long as that currency was unstable; but it disappeared as soon as the stabilization plan was adopted. Directly the monetary reform of November 1923 made the German exchange stable, speculation ceased, after some fruitless attempts to prevent the success of the operation (pp. 100-101).

Fourth, the banks were destroyed with the currency. Bankers suffered along with everyone.

Fifth, Schacht was a fascist economist. He was the Minister of Economics from 1934 to 1937. In short, he ran Hitler's economy.

Sixth, it was central bank policy that caused the inflation. Commercial banks merely lent the money created by the central bank. The head of the central bank, Helfferich, refused to stop printing money. Professor Bresciani-Turroni's analysis has stood since 1931. He began with a quotation from the head of the central banks, Helfferich:

"To follow the good counsel of stopping the printing of notes would mean--as long as the causes which are upsetting the German exchange continue to operate--refusing to economic life the circulating medium necessary for transactions, payments of salaries and wages, etc., it would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants, employees, or workers. In a few weeks, besides the printing of notes, factories, mines, railways and post office, national and local government, in short, all national and economic life would be stopped."

The authorities therefore had not the courage to resist the pressure of those who demanded ever greater quantities of paper money, and to face boldly the crisis which (although painted in unduly dark colours by Helfferich) would be, undeniably, the result of a stoppage of the issue of notes. They preferred to continue the convenient method of continually increasing the issues of notes, thus making the continuation of business possible, but at the same time prolonging the pathological state of the German economy.

Seventh, Schacht served as the currency commissioner of the country, beginning in late 1923. He had tried to get the job as the head of the central bank. He later did take over as the head of the Reichsbank. He was a central banker. So, he wanted to blame foreigners, not the central bank. Those evil speculators! As Hans Sennholz pointed out in 1970, this was the argument of the central bank: the speculators did it. As he wrote:

When all other explanations are exhausted, modern governments usually fall back on the speculator, who is held responsible for all economic and social evils. What the witch was to medieval man, what the capitalist is to socialists and communists, the speculator is to most politicians and statesmen: the embodiment of evil. He is said to be imbued with ruthless and fickle selfishness that is capable of wrecking the national economy, government plans, and, in the case of German inflation, the national currency. No matter how blatantly contradictory this explanation may be, it is most popular with government authorities in search of a convenient explanation for the failure of their own policies.

The same German officials who denied the very existence of inflation lamented the depreciation caused by speculators, or they blamed the Allied reparation burdens and simultaneously denounced speculators for the depreciation. Dr. Havenstein, the President of the Reichsbank, embracing every conceivable theory that exculpated his policies, also pointed at the speculators. Before a parliamentary committee he testified: "On the 28th of March began the attack on the foreign exchange market. In very numerous classes of the German economy, from that day onwards, thought was all for personal interests and not for the needs of the country."

Ms. Brown believes the self-serving explanation by the central bankers who destroyed the German currency.

At first, the speculation was fed by the Reichsbank (the German central bank), which had recently been privatized. But when the Reichsbank could no longer keep up with the voracious demand for marks, other private banks were allowed to create them out of nothing and lend them at interest as well.

Ms. Brown has no understanding of central banking. She repeats the very argument of the head of the German central bank: the bank could not keep up with demand for money. The destroyers of Germany's currency thought they were doing the nation a favor. She believes them.

If Schacht is to be believed, not only did the government not cause the hyperinflation but it was the government that got the situation under control. The Reichsbank was put under strict regulation, and prompt corrective measures were taken to eliminate foreign speculation by eliminating easy access to loans of bank-created money.

Schacht is not to be believed.

The German central bank stopped inflating in 1923 because it had destroyed the currency. The entire nation had gone to barter or foreign currencies. To re-establish central bank control over the economy, the bank reformed the currency. Schacht was one of those in charge of that revaluation. He was an also an apologist for the bank. Yet Zarlenga and Brown praise his understanding!

I really do get weary of what passes for historical and economic analysis in conservative political circles.

Who is Zarlenga? A statist fiat money promoter. Here is a recent interview with him. How free market does this sound?

Stephen Zarlenga: It was understood at the time, and Harvard finally did something valuable in this area and did a study which showed that to coin money meant also the paper. Our colonial period has many examples of fiat paper money.

Thom Hartmann: Right.

Stephen Zarlenga: And in fact that's what built the infrastructure of our country. Until we started using it, the country was in trouble because the Brits and the Dutch did not allow coinage to come over to America. It was against their laws.

Thom Hartmann: Right. And we didn't have that much gold and silver here that we could make our own.

Stephen Zarlenga: No. No, we're not going to make our own, and in fact, the very nature of money, as Aristotle told us in the fourth century BC, money exists not by nature but by law. It's not something that comes out of a mine, it's not something that comes out of a farm, it's an abstract legal power.

Thom Hartmann: Right.

Stephen Zarlenga: So all money is ultimately, all true money is fiat money. And that's what built the colonies.

You want more? I'll give you more.

Thom Hartmann: Right, now I, in reading your work, one of the things that I noted, unless I'm misremembering, but I don't think so, was that you are suggesting that (a) that the Treasury Department should be issuing our money and, if I have this right, and (b) that the value of the money should be defined by the government but it should not be defined by, it should not be an intrinsic value. In other words, we should not go back to gold coins and a gold standard.

Stephen Zarlenga: Yeah.

Thom Hartmann: Why is that? I agree with that, but I know that there are a lot of, particularly the libertarians, this is really big with a lot of conservatives, 'let's go back to the gold standard'.

Stephen Zarlenga: Well, OK, we know how to handle that question with them, and first of all you never did have a gold standard. It was always a fraudulent thing. There were promises to pay gold, it was never really there. But what they've done, and the Ron Paul people especially are tuned into this that we need gold for money, they are confusing an investment with a money. Now, they like gold as an investment, and at certain times gold's a fine investment, other times it's terrible. But you want an investment to go up and up and up. You don't want money to go up and up and up. You want money to be relatively stable. So what you need out of an investment, which might be gold, at a time, and what you need out of money, totally separate. And the Ron Paul people, they understand this when tell them.

And as to the fiat part, any Ron Paul person listening in now will understand the following completely. The problem is not fiat money. The problem is the private issue of fiat money. Then it operates like a tax.

Zarlenga is a greenbacker. The greenbackers were left-wing populists in the late 19th century who attacked the gold standard. They got their name because of their advocacy of Lincoln's fiat paper money, demand notes, which were printed on green paper. When the North went off the gold standard in 1861, the government needed money. The government printed it. The public called the printed notes greenbacks. The greenbackers favored a totally unbacked currency. The Greenback Party began in 1874. It was an inflationist farmer-labor alliance. It promoted the interests of debt-burdened farmers who wanted to steal from their creditors by paying off their debts with paper money. They opposed the re-establishment of the gold standard. They were inflationists. Zarlenga is their ideological heir.

Back in 1965, I wrote an essay for my not-yet father-in-law, R. J. Rushdoony, who had been taken in by these people, briefly, because they opposed the Federal Reserve. I wrote it to convince him these people were believers in centralized government power. Rushdoony grasped this, and never again promoted them. He was teachable. Zarlenga isn't. If you want to read my essay, read chapter 11 of my 1973 book, An Introduction to Christian Economics. Download it here:


Then Ms. Brown continues:

More interesting is a little-known sequel to this tale. What allowed Germany to get back on its feet in the 1930s was the very thing today's commentators are blaming for bringing it down in the 1920s -- money issued by seigniorage by the government. Economist Henry C. K. Liu calls this form of financing "sovereign credit." He writes of Germany's remarkable transformation:

"The Nazis came to power in Germany in 1933, at a time when its economy was in total collapse, with ruinous war-reparation obligations and zero prospects for foreign investment or credit. Yet through an independent monetary policy of sovereign credit and a full-employment public-works program, the Third Reich was able to turn a bankrupt Germany, stripped of overseas colonies it could exploit, into the strongest economy in Europe within four years, even before armament spending began."

Liu is a Keynesian. Schacht was a Keynesian. Germany was a fascist economy. They had government controls on labor unions and businesses. They had operational price controls and shortages. It was during Schacht's tenure as Minister of Economics that John Maynard Keynes write his Foreword to the German Language edition of The General Theory of Employment, Interest and Money (1936). He admitted that his system could be better imposed in Germany's state-run economy. He wrote:

The theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory.

Yet this is what Ms. Brown thinks is a really great system.

I have been dealing with people like her and Zarlenga for over 45 years. They are utterly self-deceived. They think they are conservatives because they don't like the Federal Reserve System. But what is their recommended alternative? Congress and the U.S. Treasury. They trust the state.

The reason why these people get a hearing from free market conservatives is that most conservatives have no real understanding of monetary economics, especially Austrian School monetary economics. They have never read a book on monetary theory by an Austrian School economist. They have not spent an hour reading a short booklet, such as my free Mises on Money. They have not spent a couple of hours reading Murray Rothbard's classic mini-book, also free, What Has Government Done to Our Money?. They are the targeted and intellectually defenseless victims of these fiat money promoters. Conservatives who ought to know better cannot spot these people for what they are: statists, inflationists, and economic ignoramuses. Ludwig von Mises accurately described them as monetary cranks. They are the blind leading the blind into the ditch -- the ditch of National Socialism. Ms. Brown gushes:

While Hitler clearly deserves the opprobrium heaped on him for his later atrocities, he was enormously popular with his own people, at least for a time. This was evidently because he rescued Germany from the throes of a worldwide depression -- and he did it through a plan of public works paid for with currency generated by the government itself. Projects were first earmarked for funding, including flood control, repair of public buildings and private residences, and construction of new buildings, roads, bridges, canals, and port facilities. The projected cost of the various programs was fixed at one billion units of the national currency. One billion non-inflationary bills of exchange called Labor Treasury Certificates were then issued against this cost. Millions of people were put to work on these projects, and the workers were paid with the Treasury Certificates. The workers then spent the certificates on goods and services, creating more jobs for more people. These certificates were not actually debt-free but were issued as bonds, and the government paid interest on them to the bearers. But the certificates circulated as money and were renewable indefinitely, making them a de facto currency; and they avoided the need to borrow from international lenders or to pay off international debts.6 The Treasury Certificates did not trade on foreign currency markets, so they were beyond the reach of the currency speculators. They could not be sold short because there was no one to sell them to, so they retained their value.

Within two years, Germany's unemployment problem had been solved and the country was back on its feet. It had a solid, stable currency, and no inflation, at a time when millions of people in the United States and other Western countries were still out of work and living on welfare. Germany even managed to restore foreign trade, although it was denied foreign credit and was faced with an economic boycott abroad. It did this by using a barter system: equipment and commodities were exchanged directly with other countries, circumventing the international banks. This system of direct exchange occurred without debt and without trade deficits. Although Germany's economic experiment was short-lived, it left some lasting monuments to its success, including the famous Autobahn, the world's first extensive superhighway.

Ah, yes, Hitler the creative economic genius who rescued Germany's economy from the Great Depression. And who was his senior economist? Horace Greeley Hjalmar Schacht.

The fact that this woman gets a hearing among conservatives indicates that thousands of well-meaning conservatives care nothing about economic theory. They are willing to accept the entire fascist economy, just so long as the promoter says a few negative words about central banking, even when she then justifies her fiat money theory by quoting the ideas of the only man who ever served simultaneously as the head of both a national central bank and as Minister of Economics: Schacht. This woman praises Hitler's economics, and conservatives nod their heads and say, "Yes, this is what we need. We'll call it the ownership society." It's pathetic. I have watched this for a generation.

To understand the economy that Schacht built, read The Vampire Economy. It's free.


As soon as Hitler came into power, the head of Sun Oil, J. Howard Pew, began pulling out. He was a Christian and a free marketer. He and his father had competed successfully with the Rockefellers for 50 years. He sold his German holdings to the government. Hitler sent him a letter begging him not to pull out. Pew know it was socialism. He swapped for German steel and pipes. He understood. Ms. Brown does not.

I have shown you her view of the productive wonders of National Socialism. Here are her views on America.

In the nineteenth century, Senator Henry Clay called this the "American system," distinguishing it from the "British system" of privately-issued paper banknotes. After the American Revolution, the American system was replaced in the U.S. with banker-created money; but government-issued money was revived during the Civil War, when Abraham Lincoln funded his government with U.S. Notes or "Greenbacks" issued by the Treasury.

Henry Clay was the intellectual and political heir of Alexander Hamilton, the founder of the First Bank of the United States. Clay was a supporter of the Second Bank of the United States. These were our first experiments in central banking. If you want to know about those corrupt engines of inflation, read Part 1 of Murray Rothbard's great book, A History of Money and Banking in the United States. Download it here: http://mises.org/books/historyofmoney.pdf. For background on Clay's brand of government boondoggle economics, click here.

I raise all this because several of my subscribers have asked me if Ms. Brown's position has any merit. It doesn't.

She is a greenbacker. She is in the tradition of Gertrude Coogan and the other 1950's greenback inflationists whose footnote-free books are kept in print by Omni Books. They all have this in common: they want the American money system to be run by Congress.

If that's conservatism, include me out.

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