Is 'Operation Bernhard' about to restart?

Sunday 9th September 2007

A fine example of an Operation Bernhard banknote forgery.

Firstly, we would like to apologise to our readers that we have not been able to post any new NZ Gold updates since Sunday July 8th. However, we have been steadily working towards a target of providing weekly updates and finalising the website design. With NZ Gold now appearing - largely to our satisfaction - in Explorer, Safari, and Firefox we hope to be in a position to deliver on our objective of  weekly commentaries from now on. Certainly, these are exciting and challenging times in both the financial markets and the area of politics! Indeed, we perceive New Zealand's slide towards an authoritarian state gathering a momentum that might even challenge the European Union. Perhaps 'the apprentice will surpass the master'?

Of course, our respect for history at NZ Gold leaves us unsurprised, at what we perceive, as the ever more dictatorial and strident attitude of the New Zealand Prime Minister and the chorus line of 'yes men' (sorry 'yes persons') with which she appears to surround herself. The only remarkable thing about all this is that, in a sense, it is so unremarkable! Easy money, and especially insanely easy money, allows cynical politicians and their corporate backers to progressively rob populations - who have been rendered intoxicate and undiscerning by such follies as rising house prices - of their freedoms. This brings us conveniently to the subject of Operation Bernhard - a cynical plot by Adolf Hitler and his inner circle to flood Britain with vast numbers of forged banknotes.

We would suggest that Hitler owed a great deal to the business of 'fiat currency' - that wonderful phenomenon in which new money appears by magic at the decree of politicians and bureaucrats various. Had it not been for the almost incomprehensible monetary expansion that occurred during the Weimar Republic - and the excruciating hardships that it delivered to ordinary Germans - the peculiar conditions that allowed him to rise to power would probably not have existed. As William L. Shirer noted in 'The Rise and Fall of the Third Reich', Weimar Germany was "a society which encouraged savings and investment and solemnly promised a safe return from them and then defaulted. Was this not a fraud upon the people?". Disturbingly, in his 1988 book 'Into The Upwave' [Milestone Publications] London based American financial commentator Bob Beckman notes: "We live in a world where you have to pay back borrowed money. But in the case of Germany following World War 1, paying back what they owed would have meant immediate hardship for the people". At NZ Gold we are inclined to ask, are there not parallels between the appalling indebtedness of Germany following the first world war and our own flabbergasting contemporary penchant for borrowed money. Could the requirement to pay back what is owed not deliver "immediate hardship for the people?" Beckman goes on to incisively explain the various shenanigans that followed - in order to allow the government and other vested interests to dishonestly repudiate their responsibilities through unprecedented inflation! In a sense Hitler put it perfectly in 'Mein Kamph': "the state itself has become the biggest swindler and crook. A robbers state!...if the horrified people notice they can starve on billions, they must arrive at this conclusion: we will no longer submit to a state which is built on the swindling idea of the majority. We want a dictatorship".

We can thus conclude that Adolf Hitler understood the phenomenon of unlimited fiat money and - more importantly - its ultimate consequences. It is then probably unsurprising that he endorsed what became the greatest counterfeiting operation in history, named after its director - SS officer Major Bernhard Krueger. The plan was essentially simple, if technically challenging. Millions of banknotes - predominantly British pounds - were to be meticulously forged in a rebirth of the previously abandoned 'Operation Andreas'. Bernhard Krueger was finally able to work out how to match the paper, printing, and impressive design of Britain's banknotes. Remember, this was a period not that far removed from when Britain was still on the gold standard. As such banknotes of the time displayed a certain 'mana' (compare with what passes for 'money' today) and to handle the forgery shown above is to appreciate the astonishing skill of the Jewish craftsmen. Incarcerated in concentration camps - and marked for death when the operation was completed - SS Reich fuehrer Heinrich Himmler was only to pleased to give Major Krueger ready access to their counterfeiting genius.

It would appear, that from 1942 to 1945, banknotes worth almost £135,000,000 were forged - thus surpassing the total reserves in the vaults of the Bank of England! The extraordinary scale of the counterfeiting operation delivered a volume of forgeries said to be equal to around fifteen per cent of all genuine British pounds in circulation. (A potential expansion in the supply of money of fifteen per cent! - we shall return to this later in the article).

Of course, the potential payoff from such an elaborate fraud would be the undermining of confidence in the British currency - if only the banknotes could be slipped into circulation undetected.  Presumably, when counterfeiting was first muted in 1939, Adolf Hitler, Heinrich Himmler, Reinhard Heydrich, and others from history's rogues gallery were drooling at the prospect of delivering to Britain a touch of the 'Weimar experience' - an exercise in financial chaos that had done so much to lay the foundations for their own rise to power. Yet ultimately, as with so many of Nazi Germany's grandiose schemes, things did not work out as expected. The Bank of England became aware of the forgeries and the practical difficulties of getting sufficient newly created notes into Britain, and thence into widespread circulation, became progressively more onerous - especially as the once mighty Luftwaffe was steadily annihilated. To a large extent Major Krueger had to be content with seeing his millions used for financing clandestine operations rather that delivering a hyperinflationary maelstrom to Britain. Nevertheless, the Bank of England felt it necessary to enhance the security of its notes with an integral metal thread and to both withdraw and cease further issue of all denominations above £5 in 1943. £10, £20, and £50 notes were subsequently reintroduced in 1964, 1970, and 1981 respectively. A testament perhaps to the remarkable skill of the forgers who carried out operation Bernhard under such duress.

So what has all of this to do with contemporary financial and political events. Well at NZ Gold we first had the idea for this article whilst writing our Sunday 3rd June update 'Thoughts on the gold and silver markets'. In that article we offered the following observation:

 "If politics ultimately triumph and it becomes necessary to slash interest rates, in order to try and save the ruinously indebted consumer both here and overseas, then a loss of confidence in fiat currencies might follow".

Moreover, in our inaugural article from 20th May 2006 'Why we believe you must hold gold' we anticipated the possibility of an attempt to destroy debt via inflation - warning our readers:

"Maybe hyperinflation will effectively wipe out the burden of your mortgage, but that's not much use if the cost of feeding your family has moved way beyond your reach!"

In essence we have, at NZ Gold, always been suspicious that a contemporary 'Operation Bernhard' was waiting - apparition-like in the wings - to be summoned by vested interests when the great 'easy money con' began to unwind. Well that 'unwinding' is now underway and - as we anticipated - an Operation Bernhard of Byzantine proportions is emerging. So let us stop and reflect. The original operation involved a dastardly plot - by some of the most odious characters in recorded history - to wreak havoc on the British wartime economy. These were people who understood the potentially disastrous consequences of flooding a nation with vast quantities of newly created money. They were the enemy! Yet today it is not some external power, bent on megalomaniac conquest, that is festooning sovereign nations with lunatic quantities of newly created fiat currency. Rather it is the nations themselves (or more correctly the vested interests that run them) that have recently opened the monetary spigots - especially in the United States and Europe - to a flabbergasting degree.

In his August 17th 2007 commentary "The Fed Blinks" James Turk, who founded the innovative GoldMoney facility, (www.goldmoney.com) offers a highly astute enquiry: 

"Is a German-style hyperinflation really our future? Central banks in the past week created 1/3rd of a trillion dollars out of thin air in the blink of an eye. Does this sit right with you?

At NZ Gold we would respond to Mr Turk's question with a resounding no and we would take the debate further. How can it be that the new money created by Nazi Germany, with which they planned to flood Britain, could be a potential 'weapon of mass financial destruction' when an essentially similar contemporary process of new money creation by central banks is deemed to be solving a crisis? Don't tell us - the German banknotes were forgeries. Forgive us, but in terms of likely disastrous effects where is the difference between the Operation Bernhard notes and a central bank just 'creating money out of thin air'?  Is all this new money not - in reality - a forgery? The point of difference must reside in the fact that, as we have indicated before, there was still some respect for the integrity of money in 1940s Britain. In consequence, although the operation Bernhard notes were virtually impossible to distinguish from the real thing, they were understood for what they were - a monetary malignancy! Today, in the financial fantasy world that our masters have created, Major Krueger's forgeries would probably have been welcomed by Britain's myopic politicians because of their potential to 'boost spending' -  however fraudulently!

Ultimately, a cold, hard, flirtation with logic must surely tell us that it is just not possible to build lasting prosperity on the basis of simply creating new money. Were such a thing achievable then the latter days of the Roman empire, Weimar Germany, and contemporary Zimbabwe (to name just a few examples) would represent images of monetary paradise rather than financial Hades. It must be understood that a credit based prosperity - rather than a real prosperity - is a transient phenomenon! It is one that relies on an ever greater extension of new money to an ever more impecunious population of financial illiterates so that consumption can be maintained and asset prices bid to ridiculous multiples of annual income. The unfolding consequences are what we are witnessing now. Circumstances in which recklessly extended loans cannot be repaid and where - surprise, surprise, - those hitherto doyens of the free market who loaned the money out - and those to whom they on sold the liabilities - now expect a 'bailout'. This brings us back to our inaugural article from May 2006, where we warned our readers of the consequences of simply 'creating' money:

"Contemporary politicians may want you to believe that they have somehow discovered a unique formula - easy money - that will deliver permanent prosperity but we urge you to be more discerning. Stop and reflect that centuries ago Rome's Emperors became experts on debasing the value of money as they battled to meet the demands of the military and the citizenry for ever more spending - sound familiar? They simply reduced the amount of gold and silver in the coins, or produced vast numbers out of base metals. Horrific inflation was the ultimate outcome. Is this really so different to our contemporary 'creation' of paper money that is backed - by what?".

Perhaps, living in New Zealand, we can console ourselves that we never quite sank into the abyss of 'sub prime mortgage lending' in the same way that the United States has done. Yet to harbour such comforting thoughts is potentially dangerous in our view since, in many respects, New Zealand's position is arguably much worse. Households have accumulated simply incomprehensible levels of debt - courtesy of foreigners - and our money supply has been expanding at an annual rate that would make Major Bernhard Krueger's efforts look derisory in comparison. That underlying monetary debasement is evidenced in the need of many Kiwis - especially those on fixed incomes - to seek higher compensating interest rates for their often very modest 'nest eggs'. Presumably, we do not need to elaborate on how that is playing out with this country's unfolding 'finance company debacle'.  We would suggest that the practical experience of many New Zealanders, in trying to keep their 'heads above financial water', confounds claims that our love affair with credit has not, hitherto, been inflationary. At NZ Gold we tend to treat official inflation figures with incredulity but even we would admit they have some merit. If you don't eat, don't need somewhere to live, don't drive, don't get sick, don't have children to educate, don't pay rates and have no social life - but instead spend your entire existence as a hermit buying DVD players and RAM for your computer - you are probably pretty happy about the consumer price index!

At NZ Gold we cannot know the future - we leave that to soothsayers, quacks, and politicians. Yet we can know something of the past and what it is telling us is that the unwinding of the greatest credit bubble in history is unlikely to be pleasant. With so much new money being created, in what we suspect will be an ultimately futile attempt to save the situation, (although it may save the financial interests of the ruling elite) the odds would seem to favour a hyperinflationary outcome. Yet markets have a habit of behaving in an unexpected way. It is possible that the authorities will overplay their hand and destroy confidence in fiat money completely - then the consequence might be a savage deflation. Remember, hyperinflation and deflation are simply the polar extremes of the same 'disease of money'. It is why we have asked before, and why we ask again - with burgeoning anxiety - are you holding gold?

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