Memo To: Alan Greenspan
From: Jude Wanniski
Re: Anti-Semitism in SEAsia
You surely have been advised that Malaysia’s prime minister, M. Mathahir, who last month accused George Soros of driving the Malaysian ringgit into devaluation, now insists there is a Jewish conspiracy on Wall Street to undermine the economies of the Islamic world. It also appears that Indonesia’s Suharto is backing him up. In a letter I wrote Tuesday to Malaysia’s deputy premier, Anwar Ibrahim, I expressed alarm over this turn of events, and suggested a non-conspiritorial scenario to the financial crisis in the region. In addition, I pointed out that there was probably much more money lost by Jewish investors in the region than any speculators gained by betting against the currencies, but I’m afraid that there is taking root throughout the Islamic world the idea that Jewish Americans have fiendishly arranged all these events that are causing the economies of the region to slide toward deep stagflation.
Your talk to the CATO conference on Tuesday was excellent in discussing the one aspect of the financial problems in SE Asia that we identified a year ago -- the advice that came from U.S. economists that these nations put up capital controls. Stanley Fischer of the IMF is one of the primary culprits, but Paul Krugman of MIT was the most visible as his speeches on the subject were widely covered when he toured the region two years ago. I note the WSJournal on Wednesday reported your criticism of capital controls and said you were taking on the IMF and World Bank. Krugman, remember, toured SE Asia two years ago urging the countries there to restrict the convertibility of capital, to discourage “hot money” from coming in. Thailand followed his advice and the stock market advance was halted in its tracks. At the same time, Thailand’s currency was tied to the dollar, which meant it had to import the monetary policy made by you and your fellow Fed governors. Thus, when you allowed the dollar to inflate against gold, to accommodate the 1993 tax increase, gold rose to $385 from $350. The Thais followed in your path and created surplus baht that went into the banking system, which was forced to use them on riskier loans. When last year the demand for dollars increased, and you kept interest rates high rather than supply that liquidity, the gold price fell to $315 from $385, and Thailand had to follow suit. This meant a deflation in Thailand, which, as a small country, threatened its financial system. They could have avoided the devaluation with tax cuts on capital, but nobody thought of that.
Now if we had been on a gold standard, Alan, we would not have allowed the gold price to rise to $385 from $350. We would have had to absorb the Clinton tax increase without accommodation. And countries like Thailand, would not have been put through a serious inflation/deflation cycle. Last Friday, when I was in Washington, I spent five hours with Min. Louis Farrakhan, who knows the Islamic leaders of SE Asia who now suspect the “diabolical hand of American Jews” is behind the sudden wave of economic distress hitting their people. I went over my thesis carefully, so he could see there is not only no Jewish conspiracy, but that the one man in Washington who has argued the case for gold in these terms is a Jew, Alan Greenspan. The Nation of Islam, as you know, has long been in favor of a gold standard, as the entire Islamic world is opposed to the kind of usurious interest rates that result from a floating currency. The New York City Jewish newspaper, The Forward, has been on record favoring a gold standard since 1990. It’s publisher, Seth Lipsky, yesterday advised me of the fact and sent me a copy of the editorial that staked this position. He alerted me to an editorial in the upcoming edition which also cited my letter to Malaysia.
Having said all this, I was disappointed in your CATO speech when you discussed gold as being a possible antidote to the problems that have arisen in Mexico and SE Asia. Specifically, you insisted the only kind of gold standard that would work is the kind that we had prior to the 1930s. If you simply meant by that the fact that the Roosevelt Administration made it illegal for American citizens to own monetary gold, even while the government kept the dollar defined as gold, I accept your argument completely. That was the weakness of Bretton Woods. If you meant that we can’t use the dollar/gold price to dictate Fed policy to immediate good effect around the world, then I not only disagree, but wonder how you could justify that statement.
This is a very good time, Alan, to clear up these fine points. When I was in Washington last week, I stopped by to see Larry Summers at Treasury to give him my take on SE Asia. All along, I’ve been trying to get him to see the important role gold could play in mitigating, if not solving, the problems of these international currency storms. It would be helpful if you would step up to the plate on this, instead of commenting when asked from the grandstand.