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in The New American that Mexico™s fiscal policy was in some respects
“superior and saner than our own wildly spendthrift Washington
circus.” Mexico received enormous amounts of foreign investment,
after being singled out as the most promising and safest of Latin
American markets. Investors were therefore shocked and surprised
when newly-elected President Ernesto Zedillo suddenly announced a
13 percent devaluation of the peso, since there seemed no valid reason
for the move. The following day, Zedillo allowed the formerly managed
peso to float freely against the dollar. The peso immediately plunged
by 39 percent.5
What was going on? In 1994, the U.S. Congressional Budget Office
Report on NAFTA had diagnosed the peso as “overvalued” by 20
percent. The Mexican government was advised to unpeg the currency
and let it float, allowing it to fall naturally to its “true” level. The
theory was that it would fall by only 20 percent; but that is not what
Chapter 22 - The Tequila Trap

happened. The peso eventually dropped by 300 percent “ 15 times the
predicted fall. 6 Its collapse was blamed on the lack of “investor
confidence” due to Mexico™s negative trade balance; but as Ingraham
observes, investor confidence was quite high immediately before the
collapse. If a negative trade balance is what sends a currency into
massive devaluation and hyperinflation, the U.S. dollar itself should
have been driven there long ago. By 2001, U.S. public and private
debt totaled ten times the debt of all Third World countries combined.7
Although the peso™s collapse was supposedly unanticipated, over
4 billion U.S. dollars suddenly and mysteriously left Mexico in the 20
days before it occurred. Six months later, this money had twice the
Mexican purchasing power it had earlier. Later commentators main-
tained that lead investors with inside information precipitated the stam-
pede out of the peso.8 The suspicion was that these investors were
the same parties who profited from the Mexican bailout that followed.
When Mexico™s banks ran out of dollars to pay off its creditors (which
were largely U.S. banks), the U.S. government stepped in with U.S.
tax dollars. The Mexican bailout was engineered by Robert Rubin,
who headed the investment bank Goldman Sachs before he became
U.S. Treasury Secretary. Goldman Sachs was then heavily invested in
short-term dollar-denominated Mexican bonds. The bailout was ar-
ranged the day of Rubin™s appointment. The money provided by U.S.
taxpayers did not go to Mexico but went straight into the vaults of
Goldman Sachs, Morgan Stanley, and other big American lenders
whose risky loans were on the line.9
The late Jude Wanniski was a conservative economist who was at
one time a Wall Street Journal editor and adviser to President Reagan.
He cynically observed of this banker coup:
There was a big party at Morgan Stanley after the Mexican peso
devaluation, people from all over Wall Street came, they drank
champagne and smoked cigars and congratulated themselves
on how they pulled it off and they made a fortune. These people
are pirates, international pirates.10
The loot was more than just the profits of gamblers who had bet
the right way. The pirates actually got control of Mexico™s banks.
NAFTA rules had already opened the nationalized Mexican banking
system to a number of U.S. banks, with Mexican licenses being granted
to 18 big foreign banks and 16 brokers including Goldman Sachs. But
these banks could bring in no more than 20 percent of the system™s
total capital, limiting their market share in loans and securities

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holdings.11 By 2004, this limitation had been removed. All but one of
Mexico™s major banks had been sold to foreign banks, which gained
total access to the formerly closed Mexican banking market.12
The value of Mexican pesos and Mexican stocks collapsed together,
supposedly because there was a stampede to sell and no one around
to buy; but buyers with ample funds were sitting on the sidelines,
waiting to pick over the devalued stock at bargain basement prices.
The result was a direct transfer of wealth from the local economy to
international money manipulators. The devaluation also precipitated
a wave of privatizations (sales of public assets to private corporations),
as the Mexican government tried to meet its spiraling debt crisis. In a
February 1996 article called “Militant Capitalism,” David Peterson
blamed the rout on an assault on the peso by short-sellers. He wrote:
The austerity measures that the U.S. government and the IMF
forced on Mexicans in the aftermath of last winter™s assault on
the peso by short-sellers in the foreign exchange markets have
been something to behold. Almost overnight, the Mexican people
have had to endure dramatic cuts in government spending; a
sharp hike in regressive sales taxes; at least one million layoffs (a
conservative estimate); a spike in interest rates so pronounced
as to render their debts unserviceable (hence El Barzon, a nation-
wide movement of small debtors to resist property seizures and
to seek a rescheduling of their debts); a collapse in consumer
spending on the order of 25 percent by mid-year; and, in brief, a
10.5 percent contraction in overall economic activity during the
second quarter, with more of the same sure to follow.13
By 1995, Mexico™s foreign debt was more than twice the country™s
total debt payment for the previous century and a half. Per-capita
income had fallen by almost a third from a year earlier, and Mexican
purchasing power had fallen by well over 50 percent.14 Mexico was
propelled into a crippling national depression that has lasted for over
a decade. As in the U.S. depression of the 1930s, the actual value of
Mexican businesses and assets did not change during this speculator-
induced crisis. What changed was simply that currency had been
sucked out of the economy by investors stampeding to get out of the
Mexican stock market, leaving insufficient money in circulation to pay
workers, buy raw materials, finance loans, and operate the country.
It was further evidence that when short-selling is allowed, currencies
are driven into hyperinflation not by the market mechanism of “supply
and demand” but by the concerted action of currency speculators.

Chapter 22 - The Tequila Trap

The flipside of this also appears to be true: the U.S. dollar remains
strong despite its plunging trade balance, because it has been artificially
manipulated up by the Fed. (More on this in Chapter 33.) Market
manipulators, not free market forces, are in control.

International Pirates Prowling
in a Sea of Floating Currencies

Countries around the world have been caught in the same trap
that captured Mexico. Henry C K Liu calls it the “Tequila Trap.” He
also calls it “a suicidal policy masked by the giddy expansion typical
of the early phase of a Ponzi scheme.” The lure in the trap is the
promise of massive dollar investment. At first, returns are spectacular;
but as with every Ponzi scheme, the returns eventually collapse, leaving
the people massively in debt to foreign bankers who will become their
new economic masters.15 The former Soviet states, the Tiger economies
of Southeast Asia, and the Latin American banana republics all
succumbed to these rapacious tactics. Local ineptitude and corrupt
politicians are blamed, when the real culprits are international banking
speculators armed with tsunami-sized walls of “credit” created on
computer screens. Targeted countries are advised that to attract foreign
investment, they must make their currencies freely convertible into
dollars at prevailing or “floating” exchange rates, and they must keep
adequate dollars in reserve for anyone who wants to change from one
currency to another. After the trap is set, the speculators move in.
Speculation has been known to bring down currencies and national
economics in a single day. Michel Chossudovsky, Professor of
Economics at the University of Ottawa, writes:
The media tends to identify these currency crises as being the
product of some internal mechanism, internal political
weaknesses or corruption. The linkages to international finance
are downplayed. The fact of the matter is that currency speculation,
using speculative instruments, was ultimately the means whereby
these central bank reserves were literally confiscated by private
While economists debate the fiscal pros and cons of “floating”
exchange rates, from a legal standpoint they represent a blatant fraud
on the people who depend on a stable medium of exchange. They are
as much a fraud as a grocer™s scales with a rock on it. If a farmer™s

Web of Debt

peso was worth thirty cents yesterday and is worth only five cents
today, his dozen eggs have suddenly shrunk to two eggs, his dozen
apples to two apples. The very notion that a country has to “defend”
its currency shows that there is something wrong with the system.
Inches don™t have to defend themselves against millimeters but
peacefully co-exist with them side by side on the same yardstick. A
sovereign government has both the right and the duty to calibrate its
medium of exchange so that it is a stable measure of purchasing power
for its people. How a stable international currency yardstick might be
devised is explored in Section VI.

The Tequila Trap and “Free Trade”

The “Tequila Trap” is the contemporary version of what Henry
Carey and the American nationalists warned against in the nineteenth
century, when they spoke of the dangers of opening a country™s borders
to “free trade.” Carey said sovereign nations should pay their debts in
their own currencies, issued Greenback-style by their own govern-
ments. Professor Liu also advocates this approach, which he calls
“sovereign credit.” Carey called it “national credit,” something he
defined as “a national system based entirely on the credit of the
government with the people, not liable to interference from abroad.”
Carey also called it the “American system” to distinguish it from the
“British system” of free trade.
Abraham Lincoln was forging ahead with that revolutionary
model when he was assassinated. Carey and his faction, realizing that
the country was facing the very real threat that the banking interests
that had captured England would also capture America, then moved
to form a bulwark against this encroaching menace by planting the
seeds of the American system abroad. In the twentieth century, the
British system did prevail in America; but the American system was
quietly taking root overseas . . . .

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Chapter 23

The Cowardly Lion was much pleased to hear that the Wicked
Witch had been melted by a bucket of water, and Dorothy at once
unlocked the gate of his prison and set him free. They went in together
to the castle, where Dorothy™s first act was to call all the Winkies
together and tell them that they were no longer slaves. There was great
rejoicing among the yellow Winkies, for they had been made to work
hard during many years for the Wicked Witch, who had always treated
them with great cruelty.
“ The Wonderful Wizard of Oz,
“The Rescue”

A ccording to later commentators, Frank Baum™s yellow
Winkies represented the world™s exploited and oppressed. In
the late nineteenth century, the United States was engaged in an im-
perial war with the Philippines, which was vigorously opposed by
William Jennings Bryan, the Populist Lion. The Chinese had also been
exploited in the Opium Wars, and Chinese immigrants worked like
slaves on the railroads of the American West. To Henry Carey, they
were all victims of the “British system,” a form of political economy
based on “free trade” and the “gold standard.” He wrote in The Har-
mony of Interests in 1851:
Two systems are before the world. . . . One looks to underworking
[underpaying or exploiting] the Hindoo, and sinking the rest of
the world to his level; the other to raising the standard of man
throughout the world to our level. One looks to pauperism,
ignorance, depopulation, and barbarism; the other to increasing

Chapter 23 - Freeing the Yellow Winkies

wealth, comfort, intelligence, combination of action, and
civilization. One looks towards universal war; the other towards
universal peace. One is the English system; the other we may be
proud to call the American system, for it is the only one ever devised
the tendency of which was that of elevating while equalizing the
condition of man throughout the world.
In The Slave Trade, Domestic and Foreign, published in 1853, Carey
By adopting the “free trade,” or British, system, we place
ourselves side by side with the men who have ruined Ireland
and India, and are now poisoning and enslaving the Chinese
people. By adopting the other, we place ourselves by the side of
those whose measures tend not only to the improvement of their
own subjects, but to the emancipation of the slave everywhere,
whether in the British Islands, India, Italy, or America.
America had narrowly escaped the fate of the Irish, Indians and
Chinese only because President Lincoln had stood up to the bankers,
rejecting their usurious loans in favor of government-issued Green-
backs. He had sponsored a government program in which the coun-
try would convert its own raw materials into manufactured goods,
funding its own internal development by generating its own money,
avoiding interest payments and subservience to middlemen, foreign
or domestic. When Lincoln was assassinated and the British system
got the upper hand, Carey and the American nationalists saw the
need to develop a network of allies against this imminent threat. They
encouraged political factions in Russia, Japan, Germany and France
to bring their governments in accord with Lincoln™s policies, forming
a potential alliance that could destroy the British empire™s financial
hegemony. That alliance would later be disrupted by two world wars,
but the foundations had been laid.1
The hundredth anniversary of the American Revolution was
commemorated in 1876 with a Centennial in Philadelphia organized
by Henry Carey and his circle. It was a World Fair that celebrated
human freedom and potential through collective efforts to develop
science, technology, transportation and communications. The
Careyites funded Thomas Edison™s “invention factory,” which
displayed its first telegraphic inventions at the Centennial exposition.
Later, Edison was challenged by Carey™s Philadelphia group to develop
electricity; and Edison™s partner introduced electric street cars and
subway trains. Many other countries had their own displays at the


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