The Crash of 1979: Iran and Volcker

have changed the geopolitical map of the entire Anglo-American world, to the clear disadvantage of London and New York.

But on July 31, in Frankfurt, Jürgen Ponto was assassinated by terrorists claiming to belong to the Baader-Meinhof gang. Some weeks later, in Cologne, the chairman of the German employers’ federation, Hanns-Martin Schleyer, was kidnapped and later murdered by the same organization. While the assassins’ trail led back to the East, there was signifi cant reason to believe that certain powerful Western intelligence services had a role in both assassinations. In the event, West Germany was plunged into political chaos and gripped by fear as never before in the postwar period. The possibility of any signifi cant development initiative towards South Africa had been killed along with Ponto and Schleyer. The initiative to break with the dollar imperium had been stalled for the moment.

THE CRASH OF 1979: IRAN AND VOLCKER

One major aspect of what Ponto alluded to in his last interview did come to pass. In June 1978, in response to growing frictions and outright policy clashes with the Carter administration on nuclear energy policy, international monetary policy, the free fall of the dollar, and just about every foreign policy issue of importance to Continental Europe, the member governments of the European Community, on the initiative of France and Germany, took steps to create the fi rst phase of what was seen as a European currency zone, a fi rst attempt to insulate Continental Europe from the shocks of the dollar regime.

German Chancellor Helmut Schmidt and France’s President Giscard d’Estaing proposed the establishment what became Phase I of the European Monetary System (EMS), in which the central banks of nine European Community member countries agreed to stabilize their currencies in relation to one another. With growing trade fl ows concentrated inside the community, the EMS provided a minimal basis for defending intra-European trade and monetary relations.

In early 1979 the EMS became operational and its effect in stabilizing European currencies was notable. But the future possibilities of the EMS were what worried certain circles in London and Washington. It had ominous overtones of becoming a seed crystal for an alternative world monetary order which could threaten the existing hegemony of the ‘petrodollar monetary system.’ Indeed, one German offi cial at the time privately referred to the new EMS as the ‘seed crystal for the

replacement of the International Monetary Fund.’ And the French government openly said as much at the time. The EMS established a European Monetary Fund with initial capitalization consisting of 20 per cent of each member country’s gold and dollar reserves, valued at some $35 billion. Further, Switzerland too linked its currency de facto to the new EMS parities.

As early as 1977, the governments of France and Germany had begun to explore the possibility of an agreement with select oilproducing OPEC states under which western Europe would supply high-technology exports to OPEC, in return for long-term oil supply agreements at a stable price. In turn, under this arrangement, OPEC would deposit their fi nancial surpluses into Continental European banks and, ultimately, into the new EMS, to build a fund which could be used for long-term industrial credits to other developing countries.

London opposed the new EMS concept of France and Germany at every step. Unable to stop its implementation, London refused to join the new stabilization arrangement. The City of London establishment had other ideas.

At a September 1978 Aachen Summit between Giscard d’Estaing and Schmidt, the two countries agreed on plans for joint scientifi c and technical education, as well as joint nuclear energy cooperation. Furthermore, the UDF party of Giscard in France had proposed a $100 billion fi ve-year development program for Continental Europe and the developing sector. A state visit by President Carter to Bonn and West Berlin in July 1978 only reinforced French and German resolve to pursue an independent policy.

Carter had unsuccessfully sought to persuade the Schmidt government, under the Carter administration’s new Nuclear NonProliferation Act, to abandon export of virtually all nuclear technology to the developing sector, on the false argument that peaceful nuclear plant technology threatened to proliferate nuclear weapons, an argument which uniquely stood to enhance the strategic position of the Anglo-American petroleum-based fi nancial establishment.

Thus, despite all efforts since the early 1970s, the ‘danger’ of independent industrial and trade growth which undercut the prized domination of the dollar imperium was clearly becoming real in the minds of policy shapers in Washington and London. Even more drastic shocks were required to stop the determination of nations to pursue scientifi c and industrial development.

Drastic shocks they were.

In November 1978, President Carter named the Bilderberg group’s George Ball, another member of the Trilateral Commission, to head a special White House Iran task force under the National Security Council’s Brzezinski. Ball recommended that Washington drop support for the Shah of Iran and support the fundamentalist Islamic opposition of Ayatollah Khomeini. Robert Bowie from the CIA was one of the lead ‘case offi cers’ in the new CIA-led coup against the man their covert actions had placed into power 25 years earlier.

Their scheme was based on a detailed study of the phenomenon of Islamic fundamentalism, as presented by British Islamic expert, Dr. Bernard Lewis, then on assignment at Princeton University in the United States. Lewis’s scheme, which was unveiled at the May 1979 Bilderberg meeting in Austria, endorsed the radical Muslim Brotherhood movement behind Khomeini, in order to promote balkanization of the entire Muslim Near East along tribal and religious lines. Lewis argued that the West should encourage autonomous groups such as the Kurds, Armenians, Lebanese Maronites, Ethiopian Copts, Azerbaijani Turks, and so forth. The chaos would spread in what he termed an ‘Arc of Crisis,’ which would spill over into the Muslim regions of the Soviet Union.

The coup against the Shah, like that against Mossadegh in 1953, was run by British and American intelligence, with the bombastic American, Brzezinski, taking public ‘credit’ for getting rid of the ‘corrupt’ Shah, while the British characteristically remained safely in the background.

During 1978, negotiations were under way between the Shah’s government and British Petroleum for renewal of the 25-year oil extraction agreement. By October 1978, the talks had collapsed over a British ‘offer’ which demanded exclusive rights to Iran’s future oil output, while refusing to guarantee purchase of the oil. With their dependence on British-controlled export apparently at an end, Iran appeared on the verge of independence in its oil sales policy for the fi rst time since 1953, with eager prospective buyers in Germany, France, Japan and elsewhere. In its lead editorial that September, Iran’s Kayhan International stated:

In retrospect, the 25-year partnership with the [British Petroleum] consortium and the 50-year relationship with British Petroleum which preceded it, have not been satisfactory ones for Iran … Looking to the future, NIOC [National Iranian Oil Company] should plan to handle all operations by itself.

London was blackmailing and putting enormous economic pressure on the Shah’s regime by refusing to buy Iranian oil production, taking only 3 million or so barrels daily of an agreed minimum of 5 million barrels per day. This imposed dramatic revenue pressures on Iran, which provided the context in which religious discontent against the Shah could be fanned by trained agitators deployed by British and U.S. intelligence. In addition, strikes among oil workers at this critical juncture crippled Iranian oil production.

As Iran’s domestic economic troubles grew, American ‘security’ advisers to the Shah’s Savak secret police implemented a policy of ever more brutal repression, in a manner calculated to maximize popular antipathy to the Shah. At the same time, the Carter administration cynically began protesting abuses of ‘human rights’ under the Shah.

British Petroleum reportedly began to organize capital fl ight out of Iran, through its strong infl uence in Iran’s fi nancial and banking community. The British Broadcasting Corporation’s Persian-language broadcasts, with dozens of Persian-speaking BBC ‘correspondents’ sent into even the smallest village, drummed up hysteria against the regime in exaggerated reporting of incidents of protest against the Shah. The BBC gave the Ayatollah Khomeini a full propaganda platform inside Iran during this time. The British government-owned broadcasting organization refused to give the Shah’s government an equal chance to reply. Repeated personal appeals from the Shah to the BBC yielded no result. Anglo-American intelligence was committed to toppling the Shah. The Shah fl ed in January, and by February 1979, Khomeini had been fl own into Tehran to proclaim the establishment of his repressive theocratic state to replace the Shah’s government.

Refl ecting on his downfall months later, shortly before his death, the Shah noted from exile,

I did not know it then—perhaps I did not want to know—but it is clear to me now that the Americans wanted me out. Clearly this is what the human rights advocates in the State Department wanted … What was I to make of the Administration’s sudden decision to call former Under Secretary of State George Ball to the White House as an adviser on Iran? … Ball was among those Americans who wanted to abandon me and ultimately my country.10

With the fall of the Shah and the coming to power of the fanatical Khomeini adherents in Iran, chaos was unleashed. By May 1979,

the new Khomeini regime had singled out the country’s nuclear power development plans and announced cancellation of the entire program for French and German nuclear reactor construction.

Iran’s oil exports to the world were suddenly cut off, some 3 million barrels per day. Curiously, Saudi Arabian production in the critical days of January 1979 was also cut by some 2 million barrels per day. To add to the pressures on world oil supply, British Petroleum declared force majeure and cancelled major contracts for oil supply. Prices on the Rotterdam spot market, heavily infl uenced by BP and Royal Dutch Shell as the largest oil traders, soared in early 1979 as a result. The second oil shock of the 1970s was fully under way.

Indications are that the actual planners of the Iranian Khomeini coup in London and within the senior ranks of the U.S. liberal establishment decided to keep President Carter largely ignorant of the policy and its ultimate objectives. The ensuing energy crisis in the United States was a major factor in bringing about Carter’s defeat a year later.

There was never a real shortage in the world supply of petroleum. Existing Saudi and Kuwaiti production capacities could at any time have met the 5–6 million barrels per day temporary shortfall, as a U.S. congressional investigation by the General Accounting Offi ce months later confi rmed.

Unusually low reserve stocks of oil held by the Seven Sisters oil multinationals contributed to creating a devastating world oil price shock, with prices for crude oil soaring from a level of some $14 per barrel in 1978 towards the astronomical heights of $40 per barrel for some grades of crude on the spot market. Long gasoline lines across America contributed to a general sense of panic, and Carter energy secretary and former CIA director, James R. Schlesinger, did not help calm matters when he told Congress and the media in February 1979 that the Iranian oil shortfall was ‘prospectively more serious’ than the 1973 Arab oil embargo.11

The Carter administration’s Trilateral Commission foreign policy further ensured that any European effort from Germany and France to develop more cooperative trade, economic and diplomatic relations with their Soviet neighbor, under the umbrella of détente and various Soviet–west European energy agreements, was also thrown into disarray.

Carter’s security adviser, Zbigniew Brzezinski, and secretary of state, Cyrus Vance, implemented their ‘Arc of Crisis’ policy, spreading the instability of the Iranian revolution throughout the perimeter around

the Soviet Union. Throughout the Islamic perimeter from Pakistan to Iran, U.S. initiatives created instability or worse.

Then came Brzezinski’s ‘China card’ policy tilt, with U.S. diplomatic recognition of communist China in December 1978, together with U.S. withdrawal of recognition of the nationalist Chinese regime on Taiwan, thereby giving communist China the UN Security Council veto and access to U.S. technology and military aid. At a summit meeting in January 1979, German Chancellor Schmidt delivered a strong protest to President Carter that his new ‘China card’ policy was proving extremely destabilizing for fragile German–Soviet relations, by creating the impression in Moscow that NATO was aggressively encircling the USSR in an arc of chaos and military hostility.

In October 1979, a devastating new Anglo-American fi nancial shock was unleashed on top of the second oil crisis of that year. That August, on the advice of David Rockefeller and other infl uential voices of the Wall Street banking establishment, President Carter appointed Paul A. Volcker, the man who, back in August 1971, had been a key architect of the policy of taking the dollar off the gold standard, to head the Federal Reserve. Volcker, a former offi cial at Rockefeller’s Chase Manhattan Bank, and, of course, a member of David Rockefeller’s Trilateral Commission, was president of the New York Federal Reserve at the time of his appointment as head of the world’s most powerful central bank.

Despite the fact that an oil price of $40 per barrel represented a dramatic increase in dollar terms, the size of the oil crisis, combined with the growing international alarm over the incompetent Carter administration, led to a further weakening of the dollar. Since early 1978, the dollar had already dropped more than 15 per cent against the German mark and other major currencies. The price of gold was rising rapidly and in September 1979 was at the record high of almost $400 per ounce. Arab and other investors were preferring to invest in gold rather than dollars. In September 1978 the dollar fell in a near panic collapse, when it became known that Saudi Arabia’s Monetary Agency had begun liquidating billions of dollars of U.S. treasury bonds. It appeared that Mr. Carter’s presidency was proving too much even for these staunch U.S. allies.

The policy strategists based in the City of London and New York then resolved to impose a Malthusian monetary shock on top of the oil crisis, to tilt the balance of world development decisively to their relative advantage.

In October 1979, Volcker unveiled a radical new Federal Reserve monetary policy. He deceived a shocked Congress and a desperate White House by insisting that his radical monetarist cure was aimed at ‘squeezing infl ation out of the system.’ It was aimed at making the U.S. dollar the most eagerly sought currency in the world and to stop industrial growth dead in its tracks, in order that political and fi nancial power fl ow back to the dollar imperium. Volcker’s cold rationalization to Congress was that ‘restraint on growth in money and credit, maintained over a considerable period of time, must be an essential part of any program to deal with entrenched infl ation and infl ationary expectations.’

The defect in Volcker’s monetary shock therapy was that he never addressed the fundamental origins of the soaring infl ation—two oil price shocks since 1973, which had raised the price of the world’s basic energy and transportation by 1,300 per cent in six years. And Volcker’s insistence on restricting the U.S. money supply by cutting credit to banks, consumers and the economy, was also a calculated fraud. Volcker knew full well, as did every major banker in New York and London, that control of America’s domestic dollar supply was a minor part of a far larger problem. Volcker knew that his actions had little control on the estimated $500 billion outside the United States, circulating in the so-called Eurodollar markets of London and the Cayman Islands and other offshore hot-money havens. At the time of the October 1979 Volcker monetary shock therapy, Morgan Guaranty Trust calculated the gross size of the Eurodollar offshore markets at fully 57 per cent of the entire domestic U.S. money supply. The American citizen was to pay the cost of this rampant offshore money pool, as though it never existed.

In both his objectives, Volcker succeeded. U.S. interest rates on the Eurodollar market soared from 10 per cent to 16 per cent, on their way up to levels of 20 per cent in a matter of weeks, as the world looked on in stunned disbelief. Infl ation was indeed being ‘squeezed’ as the world economy was plunged into the deepest depression since the 1930s. And the dollar began what was to be an extraordinary fi ve-year-long ascent.

The oil crisis and the Volcker shock were further strengthened by a decision of the leading circles of the establishment to ‘take the bloom off the nuclear rose’ once and for all, in order to ensure that the alarming trend of developing worldwide nuclear energy resources to replace reliance on Anglo-American oil was decisively ended.

Unprecedented diplomatic and legal pressures from the White House since 1977 had not succeeded in signifi cantly blunting the attraction of nuclear power. But on March 28, 1979, in a town in the center of Pennsylvania, a bizarre event occurred, which was then portrayed to the world press in fi ctitious terms, as though it were a Hollywood movie script or a remake of Orson Welles’ 1938 War of the Worlds radio broadcast.

Unit 2 of the Three Mile Island nuclear power reactor complex in Harrisburg underwent an improbable sequence of ‘accidents.’ Later investigation revealed that critical valves had been illegally and manually closed before the event, preventing emergency cooling water from entering the reactor’s steam generator system. Within 15 seconds, emergency back-up systems had brought the nuclear fi ssion process to a stop. But a plant operator then violated all procedure and intervened to shut off cooling water into the reactor core. The details of what happened next have been extensively documented elsewhere.

On August 3, 1979, in its offi cial report on the event, the U.S. Nuclear Regulatory Commission posed sabotage or criminal negligence as one of six possible causes for the Three Mile Island event. But even after eliminating the other fi ve possible causes, the government refused to consider the possibility of sabotage seriously.

News to the world’s media during the entire Harrisburg drama was strictly controlled by the newly established White House Federal Emergency Management Agency (FEMA). No government or nuclear plant offi cial was allowed to speak to the press, except when screened by FEMA censors. FEMA had been created by Presidential executive order, based on the blueprint of Trilateral Commission White House adviser Samuel Huntington. Curiously, the agency went into operation on March 27, fi ve days before its stated date of operation, and the day before the Three Mile Island incident. Under the direction of National Security Adviser Brzezinski, FEMA controlled all news at Harrisburg. The agency ordered the evacuation of the surrounding population, although there was no indication of radiation danger, and refused to brief the media for days, permitting panic stories of fi ctitious items such as ‘Gigantic Radioactive Hydrogen Bubble into Atmosphere,’ and worse, to fi ll the headlines. Curiously too, that same month a spectacular Hollywood movie, The China Syndrome, starring Jane Fonda, portrayed a fi ctional account almostly exactly parallel with the Harrisburg events, further fueling public hysteria over the dangers of nuclear energy.

By the end of 1979, the hegemony of the Anglo-American fi nancial establishment over the world’s economic and industrial potentials had been reasserted in a manner never before imagined. Control of world oil fl ows had again been a central weapon of their peculiar brand of Malthusian policy. Out of the chaos of Khomeini’s Iran and Volcker’s dollar shocks, these infl uential policy arbiters virtually saw themselves as gods on Mount Olympus. Within a short decade, however, their lofty mountain was to feel the rumblings of an underlying volcano.