Inflation and Terrorism Jude Wanniski February 21, 2003

Memo To: SSU Students
From: Jude Wanniski
Re: Inflation & Terrorism

In early 1998, I sent several memos to Jesse Helms [R NC], then chairman of the Senate Foreign Relations Committee, trying to get him to understand the origins of the Iran/Iraq war and the struggle we were having with Saddam Hussein. Helms and I had a cordial relationship because we were not only fellow warriors in the Cold War, but also advocates of a gold standard. I thought I could get him to see how the inflation that began when President Nixon left the gold standard in 1971 led to the turbulence in the capital markets, the quadrupling in the gold price to $140, followed by the quadrupling of the oil price, to $12 bbl. If we could see that the Arab/Islamic world was convulsed by that turbulence, leading to the eight-year war between Iran and Iraq, we might be able to sort things out before the problem escalated into more terrorism against the United States than we had seen up to that point. I wrote this memo to Helms, “Where Saddam Hussein Came From,” on Feb. 18, 1998. I followed it up a few days later with the memo we ran here on Sept.11, the day of the attack on America, “The Mind of a Terrorist.”

The reason I have been so accurate in forecasting economic and political events is because I have viewed the break with gold in 1971 differently than everyone else in the world. This semester’s lessons were to have been concentrated on money, and today’s is all about money and could not be more basic. At the time war broke out between Iran and Iraq, I believed it was the result of the financial turbulence that followed the de-linking of the dollar from gold, which Robert Mundell then predicted would lead to a dramatic rise in the price of oil and all other commodities. As President Bush prepares to war with Iraq in the very near future, it is instructive to go over this historical perspective. Students should also note the daily movements in the dollar price of gold as news comes to the market on the prospects of such a war, gold rising when the hawks seem to be winning, gold falling when the likelihood of war diminishes. If President Bush “pulls the trigger” without support of the UN Security Council, we should expect another dramatic rise in the price of gold and oil and all other commodities. This is because the slumping dollar economy would have less need for money and the central bank, the Federal Reserve, is not positioned to withdraw the surplus in the absence of a gold standard. If a diplomatic solution is found, which I believe more likely, there will be increased demand for dollar liquidity and the price of gold will decline.

Here, though, is my Feb. 18, 1998 letter to Senator Helms, who is now of course retired from the Congress. Senator Richard Lugar [R IN] is now chairman of Senate Foreign Relations:

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Dear Jesse:

Thanks for your nice note of February 2, in response to my last memo. I know I’m giving you a lot to mull over, Senator, but there is a lot at stake. We are already spending dollars into the billions as we prepare for another carpet bombing of Iraq. Unless you get behind Jack Kemp’s initiative, which is the only way I can visualize a peaceful and reasonable way out of the swamp we are in, we will start measuring the cost in bodies, foreign and domestic. In the Gulf War, we lost 148 lives, a significant percentage by "friendly fire," but it still counts that as many as 300,000 Iraqi lives were lost before we decided to end the slaughter. It also counts that another 1.4 million Iraqi civilians died since the war ended as a result of the destruction of water and sanitary facilities, which could not be repaired because we will not permit Iraq to sell goods or buy what is needed for their repair. Remember that even before Iraq invaded Kuwait on August 2, 1990, we were keeping such a tight hold on what he could buy that Saddam complained to April Glaspie, our ambassador, that they are only permitted to buy wheat, and pretty soon you will argue that gunpowder can be made out of wheat. We do tend to bury the past, especially when it becomes inconvenient to our present and future intentions. Here is a thumbnail account, my own analysis, of how we have arrived at this pretty pass. Please bear with me, Jesse.

First of all, Saddam came to full power as president of Iraq in 1979, a very important year, as I will explain, in that it was also the year of the Iranian revolution. He had been vice president since 1974, when he was 37, and essentially ran the government under a titular leader. The biggest influence on his life was that of his stepfather, a man who despised Persians and Jews, who became mayor of Baghdad, and who inspired Saddam to become an Arab nationalist in the new Ba’ath (or Renaissance) Party. The Ba’ath Party grew out of the Great Depression, the way the New Deal surfaced in the Democratic party here. Its three component parts were (Arab) unity, liberation (from colonialism) and (economic) socialism. Saddam’s various biographers more or less agree that his central core has been the acquisition of personal power and the retention of personal power. He has no moral or spiritual compass, no particular ideology. There is actually no evidence that he despises Persians or Jews as a class, but assesses them at different times according to whether they will add or detract from his secure political position. His biographers agree he is not megalomaniacal or irrational, but is certainly cold-blooded when it comes to dealing with any direct threat to his station.

When he came to power in this pre-Reagan era, capitalism was not held in high regard throughout the world. It is not surprising that Saddam attempted to manage the Iraqi economy with socialist schemes mixed in with capitalist markets. He began his leadership of Iraq in the Jimmy Carter years, which saw the price of gold rise from $140 to as high as $850, settling to $625 in 1980 going through election day. These were marvelous days for the oil-producing states of the Middle East, particularly Iran and Iraq, as the price of oil rose to as high as $35 a barrel, more than ten times the price before President Nixon ended the gold standard in 1971. There were great differences, though, in the way Iran and Iraq managed this new wealth.

In Teheran, the Shah assumed the dramatic rise in the oil price was due to energy shortages that would continue indefinitely. He decided to spend not only the cash coming in, but also borrowed heavily against future receipts, with a dream of building a modern Iran as his legacy. He did not anticipate the fact that the general price level would soon be catching up with gold and oil, and that the Iranian business community would have to catch up with wages and prices too. When the inflation rate soared as he pumped up the economy on top of the monetary inflation, the Shah decided to crack down on profiteers who violated his decrees of price controls. His ignorance of macroeconomics was not unusual at the time, and he never did make the connection of why ordinary people began to demonstrate against him in early 1978. The inflation was not only wrecking the creditor class and strangling the business community, it also was causing a breakdown in morality, as the linkages broke between effort and reward. Opposition to the Shah developed through an amalgam of business and religious leaders.

The religious leader who came to power when the Shah was finally kicked out was the Ayatollah Khomeini, who had spent a good part of the 1970s watching the economic expansion and moral degradation of his country from exile, in Baghdad. As in Iran, these were exciting years for the Iraqi economy, but instead of building an expensive memorial to himself, Saddam Hussein directed the cascade of oil wealth into the improvement of the lives of ordinary Iraqi citizens. Our ambassador to Iraq in these years, Edward Peck, tells me there is no question that as much as ordinary people in Iran came to hate the Shah, the ordinary people of Iraq came to love Saddam. The wealth went into free education, K through university, modern hospitals, water and sewer facilities, and the greatest expansion of living standards in the history of modern Iraq. His biographers agree he was conscious of the need to share the benefits of the oil wealth as widely as possible in order to keep the support of the masses. There had been anti-Israel episodes in the earlier period, but in this period under Saddam, Israel saw a man who clearly had no wish to disturb a nation that could cause him trouble. He recognized the state of Israel and generally showed respect for its ability to cause him trouble.

Trouble commenced when the Shah of Iran began to see his regime crumble, and understood the source of his trouble was sitting in Baghdad. Saddam bowed to the pressure from Teheran and invited the Ayatollah to take up residence in Kuwait. When Kuwait turned him down, Saddam assisted him in finding exile quarters in Paris, but the Ayatollah was not a happy camper. Remember, Iraq is dominated by Shi’ite Muslims, who account for 60% of the population, Sunni Muslims counting for 20%. The Ayatollah is also Shi’ite, as are the great majority of Iranians. When the Ayatollah replaced the Shah, Saddam Hussein immediately began courting his own Sh’ia population, donning their traditional religious garb at ceremonies up and down Iraq, and spending lavishly from state coffers on construction of places of worship. There was plenty of money. Oil revenues were up forty times their level of the 1960s.

As the Ayatollah began to call for an uprising of Sh’ia fundamentalists all over the Middle East, including his old neighbors in Iraq, Saddam also spent lavishly on a military buildup. The United States, Israel, and the NATO powers were happy to sell him anything it wanted. When we hear the President remind us that Saddam invaded Iran, we should remember that he did so "out of fear, not out of greed," which is how one of his biographers puts it. The historians also agree that he believed the war would be a quick one, because he was not interested in gobbling up Iran, a country with three times the population and land mass of Iraq. His military machine quickly knocked down the Iranian army in the western province, and instead of advancing toward Teheran, Saddam stopped when he had incorporated only the segment of the population that was pro-Iraq, anti-Ayatollah. He later saw the mistake in not increasing his hold until his forces had run out of steam. The Iranian forces turned out to be stronger than he had been led to believe by Israeli intelligence. They struck back, and the war dragged on for eight years. Each side suffered several hundred thousand dead, with most reports indicating Iran losing more. The total cost of the war was easily $1 trillion. The war ended when Iraq began to win back territory it had lost to the Iranian forces and the Iranians finally accepted a UN resolution of truce.

In that period, his biographers agree that Iraq used poison gas several times that we can be sure of. From my readings, I’ve gotten the impression that except in one instance, they were used as a last resort, when his forces were about to be overwhelmed by Iranian forces. In those cases where he used poison gas against his own people, the most egregious example was in 1988, when the city of Halabja was gas bombed in the Kurdish area. The UN estimates that 5,000 Iraqis were killed and 10,000 wounded, the bombing occurring after the city had surrendered to the Iranians. There were other Iraqi villages gassed in the Kurdish region, but my impression is that they were given warnings of several weeks to evacuate as Baghdad was relocating some significant portion of the Iraqi Kurds for reasons not clear to me. Even those historians clearly hostile to Saddam will point out that the western powers kept him supplied with the materials needed for chemical weapons right up to the invasion of Kuwait in 1990, including material cleared by the U.K.

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Please note that since February 1998 I have spent much more time investigating Iraq’s “gassing of the Kurds” at the end of the Iran/Iraq war. I’ve written extensively on my findings that while Iraqi Kurds undoubtedly died of Iraqi mustard gas in the battle over Halabja, there was no genocide involved as President Bush still seems to think. The CIA last year put the number of dead in the “hundreds” while the Defense Intelligence Agency continues to support its contemporaneous finding that the photos of the grotesque deaths that horrified the world were caused by a cyanide-based gas used by the Iranians, not the Iraqi army. Where I said in 1998 it was not clear to me why Kurdish villages had been evacuated in 1988 by the Iraqi army, I since found the primary reason was Iraq’s decision in 1987 to clear a 10-mile strip along the Iranian border for a few hundred miles to prevent the Iranian army and its Kurdish supporters from easy movement back and forth across the border. Poison gas was not used, but where there was resistance, tear gas was undoubtedly used.