Inflation and Terrorism
Jude Wanniski
September 21, 2001


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

In early 1998, I sent several memos to Sen. Jesse Helms [R NC], 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 six-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.

* * * * *

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 he 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 became 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 though 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.

February 19, 1998


Memo To: Chairman Jesse Helms, Senate Foreign Relations Committee
From: Jude Wanniski
Re: Where did Saddam Hussein come from?

In our first part of this thumbnail history, Senator, I took us through the Iran-Iraq war. One of the important pieces I omitted, but should bring to your attention in this second part, is the matter of Iraq’s nuclear power plant, which Israel blew up in 1981. What reminded me of my omission was The Wall Street Journal’s lead editorial yesterday, “Waiting for a Pirate.” I commented on this in a client letter I sent out yesterday, the 18th:

WALL STREET JOURNAL: The Journal this morning finally decided to join the bombers, in an editorial, “Waiting for a Pirate,” that dispenses with any serious intellectual analysis and says it has come down to this: “Who’s in charge here, Iraq or the United States?” One might ask “Who’s in charge of the editorial page?” The Journal’s editor, Robert L. Bartley, obviously gave some junior member of the staff responsibility for beating the war drums. The author fondly remembers: “In 1981 Israel bombed and destroyed an Iraqi nuclear reactor under construction, no doubt delaying Saddam’s expansionist instincts. Oh yes, critics of the moment said the Begin government had ruined Iraq’s ‘drift toward the West.’” What really happened was that Iraq, a signator to the Nuclear Non-Proliferation Treaty, had built a power plant at the urging of western governments, including the United States, which said the world was running out of oil. At a cost of several billion dollars, mostly spent on western engineering and material, the plant was supervised by the International Arms Control Agency, which signed off on the plant and would monitor it into the future to make sure it wasn’t producing bomb stuff. Israel’s spymasters, the Mossad, decided it was too much of a threat anyway and blew it up. The UN General Assembly condemned the action, but the United States vetoed a Security Council resolution condemning Israel. Saddam immediately began secret work on nuclear weapons. Boys will be boys.

You may dispute me, Jesse, but you have far greater resources than I to get precise information. At the time of the Israeli action in 1981, I supported it when told it was justified by our government. As more information has emerged, I don’t think there was justification. I wish you would get a serious report from your staff on the circumstances of the 1981 terrorist act of Mossad. (I hope you agree that blowing up someone else’s power plant is at the least a criminal political act.) I said in yesterday’s report that at the end of the Iran-Iraq war in 1987, Saddam was in serious financial distress. The cost of the war was enormous, and nobody doubts that Iraq was doing its best to neutralize the forces of Islamic fundamentalism threatening the Middle East, and Israel. The figures vary, but he seemed to owe at least $50 billion in hard currency and had run up debts in Kuwait and Saudi Arabia, which were happy to have poor Iraqis die on the battlefield to save the monarchs of the Middle East. Alas, the price of oil was slumping and of no help to him. The living standards that had climbed in the good years had fallen back with the war-time austerity programs. Saddam was in a survival mode, not an expansionist mode. Every $1 to the price of oil was worth $1 billion to him, and he observed his fellow OPEC members selling more oil than they had agreed upon, driving down the price to his oil, in order to keep the sheiks and playboys of the “moderate” states in the style to which they had become accustomed. He was demanding OPEC agree to a higher oil price so he could pay his post-war bills, which would mean Kuwait would have to produce less.

Remember that the Iraqi invasion of Kuwait was on August 2, 1990. “On 12 April 1990 Saddam met with five US senators: Robert Dole, Alan Simpson, Howard Metzenbaum, James McClure and Frank Murkowski; the US ambassador [April Glaspie], soon to be famous for her ‘green light’ to Saddam, was also present. No-one reading the various transcripts of this meeting can doubt the general placatory tone. The US senators even criticized the American press in their attempts to propitiate Saddam, emphasizing that there was a difference between the attitudes of the US government and those of the journalists.”

This account appears in the 1996 edition of “Iraq: From Sumer to Saddam,” published in London by the St Martin’s press. You and your staff should read it, not for further evidence of Saddam’s readiness to use force himself, but for the evidence of gross stupidity by our government at various moments in this unfolding history. In the account cited, author Geoff Simons, a respected British journalist, noted that during the meeting Howard Metzenbaum, the only Democrat, spoke up (‘I am a Jew and a staunch supporter of Israel’) who “then decided to pay Saddam a compliment: “‘...I have been sitting here and listening to you for about an hour, and I am now aware that you are a strong intelligent man and that you want peace... If... you were to focus on the value of peace that we greatly need to achieve peace in the Middle East then there would not be a leader to compare with you in the Middle East.’”

In the period between this meeting and the Kuwait invasion, the record indicates that the Bush administration bent over backwards to indicate that it was thrilled to pieces with Saddam, especially as he was using his oil money to buy what we permitted him to buy to reduce our trade deficit. On May 1, Secretary of State James Baker III was asked by a Senate committee if Iraq should be put back on the list of terrorist states, having been removed the year before. Baker said “It is a bit premature of me to sit here and make that determination. [If we cut Iraq from our credits] in all probability our allies will be very quick to move in there and pick up our market share.” The record is clear that the Bush administration argued against the imposition of sanctions, as the Simons book notes, and “it emerged that the US Attorney General Richard Thornburgh had blocked the Atlanta investigation into Saddam’s laundering of $3 billion through the Atlanta branch of Italy’s Lavoro Bank for the acquisition of American weapons, including components for nuclear devices.”

At this point, Saddam Hussein had his back to the financial wall, he thought of how much treasure he had expended on a war with Iran that left both sides exactly where they were eight years earlier, and observed that Kuwait, run by a spoiled little emir with several hundred wives, was pumping more oil than he was supposed to be pumping from the fields along the Iraq border. It was even shown that the western companies were slanting their drilling into Iraq, under the border, to steal Iraqi oil. The fact that Kuwait was part of Iraq until the British after WWI decided to simply give it to the playboy princelings of that Iraqi province was also weighing on his mind. His people had lost several hundred thousand of their children in a war fought for the west and the monarchs. Now they were cheating him on his oil receipts. He began to argue that the monarchs had declared economic war on Iraq.

On 24 July 1990 two Iraqi armoured divisions moved from their bases to take up positions on the Kuwaiti border. Later the same day the US State Department spokeswoman, Margaret Tutwiler, asked whether the US had any military plans to defend Kuwait, replied: ‘We do not have any defense treaties with Kuwait, and there are no special defense or security commitments to Kuwait.’ The next day Saddam Hussein summoned US Ambassador April Glaspie to his office in what was to be the last official contact between Baghdad and the United States before the invasion of Kuwait. Even at this late stage, with an obviously deteriorating situation in the Gulf, Glaspie still made efforts to placate Saddam Hussein. She emphasized that President Bush had rejected the idea of trade sanctions against Iraq, to which Saddam replied: ‘There is nothing left for us to buy from America except wheat. Every time we want to buy something, they say it is forbidden. I am afraid that one day you will say, “you are going to make gunpowder out of wheat”.’ Glaspie was quick to reassure the Iraqi leader : ‘I have a direct instruction from the President to seek better relations with Iraq.’ And she emphasized that a formal apology had been offered to Iraq for a critical article that had been published by the American Information Agency: ‘I saw the Diane Sawyer programme on ABC...what happened in that programme was cheap and unjust...this is a real picture of what happens in the American media -- even to American politicians themselves. These are the methods that the Western media employ. I am pleased that you add your voice to the diplomats that stand up to the media....’ Later Glaspie added that “President Bush is an intelligent man. He is not going to declare an economic war against Iraq...’; and then the ambassador produced the much-quoted comment that was perhaps the biggest ‘green light’ of all: “I admire your extraordinary efforts to rebuild your country. I know you need funds. We understand that, and our opinion is that you should have the opportunity to rebuild your country. But we have no opinion on Arab-Arab conflicts like your border disagreement with Kuwait. [Author’s italics].”

On July 31, two days before the invasion, Assistant Secretary of State John Kelly testified before Chairman Lee Hamilton of House Foreign Affairs. Asked repeatedly if we would come to the defense of Kuwait if it were attacked, he insisted there was no obligation on our part to do so. Meanwhile, Iraq prepared for a meeting the following day with Kuwait to negotiate a deal on the oil issues. The talks ended badly, with the Kuwaiti emir refusing to attend and Saddam refusing to attend because the emir would be absent. The Iraqi demand for $10 billion was clearly made under the threat of force and constituted blackmail, but Iraq’s arguments were that the payment was justified for services rendered in the Iran/Iraq war. It was at this point that Saddam decided to go into Kuwait.

At the time, I was not happy with the idea of the United States intervening to counter the invasion. This is because I observed that Kuwait’s neighbors did not seem concerned, even when Iraq did not stop at the Rumailah oil fields, which Iraq had claimed as its own since 1922, but went on to Kuwait City. It was in 1922 that a British diplomat, Percy Cox, drew a line on a map dividing up the Ottoman Empire as part of the fallout of WWI. There had as yet been no oil produced in the swatch of desert he gave to the new emirate of Kuwait, but Kuwait got the swatch apparently because it offered better oil concessions to the British oil companies. In 1980, a decade before the invasion, Iraq staged a major propaganda campaign reasserting its rights over the Rumailah fields. In that last-ditch meeting prior to the August 2 invasion, the Kuwait representative was not permitted to offer Iraq more than $1 billion to settle the dispute.

I did alter my position, Senator, when our former UN Ambassador, Jeanne Kirkpatrick, and I, attended a briefing at the Saudi Embassy in Washington by its ambassador, Prince Bandar. He told us that his government was not worried about the invasion at first, and that it in fact had good relations with Baghdad. King Fahd changed his mind when shown photos by U.S. Naval Intelligence that the Iraqi army had bypassed Kuwait City and had taken up positions on the Saudi border. President Bush had persuaded the King in several phone calls that Iraq might very well be bent on swallowing up Saudi Arabia. If Saudi Arabia was persuaded, I was more open to the idea that it was U.S. responsibility to counter Saddam with force. When Egypt’s Hosni Mubarak dropped his opposition to intervention and said his country would join the coalition, I became a solid supporter of the U.S. intervention. I have to say I was still suspicious, wondering how Saddam could possibly have thought he could get away with an invasion of Saudi Arabia or even a determination to swallow all of Kuwait instead of the Rumailah oil fields. If he could not defeat Iran in an eight-year war, how could he expect to engage the allied powers in a grab for Middle East oil?

In the years since, I’ve concluded that Saddam had no intention of invading Saudi Arabia. I later learned, as did you, of the “green light” that April Glaspie gave Saddam in their July 24 meeting. I also learned that Ms. Glaspie was subsequently “surprised” when the Iraqi army did not stop at the oil fields, but went on to Kuwait City. Of course, if you consider that Kuwait is only 13% the size of your home state of North Carolina, and Iraq is 10,000 square miles larger than California, you will see that it did not take much for tanks to overshoot Kuwait City and appear to be menacing Saudi Arabia. In his invasion of Iran, remember that Saddam did stop when he got what he wanted, and was later criticized for not pushing as far as he could so that he would have a better bargaining position.

Indeed, there is in the historical record evidence that on August 3, the day after his forces waltzed into Kuwait City virtually unopposed by the emir’s handful of soldiers, Saddam announced that he would be prepared to leave Kuwait as soon as it was determined the security of Iraq or Kuwait was not threatened. This was two days before President Bush announced Iraqi aggression “will not stand.” In the Simons book, the case is made that Baghdad repeatedly offered to negotiate its departure from Kuwait prior to the hostilities of Desert Storm. Perhaps these accounts are in error, but Simons is a respected journalist and the book is endorsed by British MP Tony Benn, who was the most active British politician in that period in trying to negotiate a peace before the U.S. bombing campaign began. It is Simons’ argument that George Bush put together the coalition against Iraq by fabricating a crisis that did not exist, by pressuring King Fahd into a request for military assistance (“all but demanding a Saudi request for American protection”) and then asking Morocco and Egypt to back up the Saudi request. At first Egypt resisted, but then:

In 1990 Egypt had massive debts, the largest in the whole of Africa and the Middle East. Almost $50 billion was owed to the World Bank, and Secretary of State James Baker... proposed a bribe (or ‘forgiveness’) of some $14 billion. At the same time Washington pressured other governments, including Canada and Saudi Arabia, to ‘forgive’ or delay much of the rest of the Egyptian debt. And where the tactic of bribery worked well with President Mubarak, it could be exploited to equal advantage with other national leaders.

Indeed, the consensus was built with money and arms. Turkey, Syria, even Iran joined the coalition with sudden fountains of credit produced by the World Bank. It does appear in my readings that there came a point where there had to be a war to justify all that had been done. In the last weeks before the bombing of Iraq began on January 16, it is clear with hindsight that there was no interest in talking to Baghdad because Iraq had to be taught a lesson. Several hundred thousand Iraqis died as a result of the bombing. The reason we lost only 148 men was that Iraq was attempting a retreat throughout the 100 hours of battle. If it had put up any resistance, they would have been completely slaughtered. As it was, Colin Powell called off the “turkey shoot” after it had accomplished partial slaughter.

Now I am not trying to argue here, Senator, that what Saddam Hussein did was right and what we did was wrong. I’m saying this thumbnail history of Saddam Hussein’s intersection with our national interest demonstrates a different picture than we now are presenting to the American people. If you want to go ahead with another massive bombing campaign “to teach the Iraqi people another lesson on who is boss,” perhaps that too will be justified by history. I’m only trying to make sure you have all the information you need before you throw in with the President, our commander-in-chief.