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White House Adventure: Opening the Gold Closet
The second Bush's first administration will enter the White
House with more detailed knowledge of its physical layout and
recent operating procedures than any new administration in modern
U.S. history. But keeping skeletons hidden inside White House
closets is getting tougher, thanks in large measure to the Internet.
Once tightly shut to the outside world, the chamber of presidential
extramarital affairs was forced open during the Clinton administration.
What emerged was no less startling than Sir Thomas Beecham's
description of the harpsichord: "Two skeletons copulating
on a corrugated tin roof." If skeletons rattle for George
W. and his new administration, they are likely to come from a
different and even more secret White House chamber: the gold
closet.
The nation's policies on gold have been set at the White House
since the arrival of the New Deal. They are closeted because
they cannot withstand legal or constitutional scrutiny. But not
until the Clinton administration did manipulation of the free
market price of gold become national policy, all as set forth
in the complaint in the gold price fixing
case. The new President and three of his top cabinet officers
-- Attorney General-designate Ashcroft, Secretary of State-designate
Powell, and Secretary of the Treasury-designate O'Neill -- must
determine how to respond to this complaint. Today, trying to
hide it in the gold closet is more than a bet against the power
of markets. It is a bet, too, against the power of the Internet.
The opening question for the Attorney General is whether the
Department of Justice should represent some or all of the government
defendants, as would ordinarily be expected. However, the Attorney
General is also responsible for enforcement of the antitrust
laws. Under normal circumstances, a price fixing scheme of the
size and scope alleged in the complaint would not just attract
the attention of the DOJ. It would be considered for criminal
prosecution. As one current antitrust treatise notes (T.V. Vakeries,
Antitrust Basics (Law Journal Press, 2000), p. 4-1): "Price
fixing constitutes one of the most serious antitrust offenses.
... Corporate executives involved in horizontal price fixing
agreements face a substantial risk of criminal prosecution....
Justice Department policy is to seek fines against indicted corporations
and prison sentences, as well as fines, against individual executives...."
Thus the Attorney General must resolve at the outset whether
his obligation to enforce the antitrust laws disqualifies the
DOJ from representing any of the alleged government participants,
particularly in circumstances where the private corporate defendants
may assert that their price fixing activities had official sanction
or support. The Attorney General could find himself in a very
awkward position should he try to defend officials of the Exchange
Stabilization Fund or Federal Reserve while at the same time
pursuing price fixing claims against the bullion banks. But to
defend the entire gold price fixing scheme as legal would make
a farce of the Sherman Act's most fundamental prohibition. In
short, unless there are well-founded grounds for denying the
principal factual allegations of the complaint, the Attorney
General has no easy option.
What is more, the Attorney General's responsibilities are
not confined to the antitrust laws. He is the nation's chief
law enforcement officer. The two Federal Reserve defendants are
alleged to have exceeded the scope of their constitutional or
legal authority not just by manipulating gold prices, but also
by assuming seats on the board of the Bank for International
Settlements, effectively making the United States a member of
that organization. Its plan, apparently backed by the Federal
Reserve, to shed the limitations imposed by partial private ownership
of its shares and to become a public international financial
institution akin to the IMF or World Bank raises serious constitutional
issues regarding the conduct and control of U.S. foreign policy.
If the United States is to participate in an international
organization which has broad economic power and influence, should
it do so solely through the relatively independent Federal Reserve?
Does the Constitution require that U.S. participation in any
such organization be subject to direct presidential and congressional
oversight? Indeed, even were it constitutionally permissible,
is it advisable to confer on the Federal Reserve powers which
may bring it into major conflict with the President or Congress
on issues of foreign policy? If their appointments are confirmed
by the Senate, how much authority on international economic or
monetary affairs is General Powell or Mr. O'Neill prepared to
share with the Fed chairman? More importantly, although the President
decides conflicts among his cabinet officers, who resolves policy
disputes between the secretaries of state and of the treasury
on the one hand, and the Fed chairman and his colleagues at the
BIS on the other?
An unlikely alliance of liberals and conservatives, ranging
from Senator Jesse Helms (Rep., N.C.) to the Black Caucus, blocked
congressional approval of proposed gold sales by the International
Monetary Fund in 1999. Proceeds from the sales were marked for
aid to heavily indebted poor countries, many in sub-Saharan Africa
with significant export earnings from gold mining. These prospective
beneficiaries themselves opposed the sales because the damage
from probable lower gold prices threatened to outweigh any benefits
from the IMF's planned aid. What neither these nations nor apparently
their U.S. congressional allies realized was that those pushing
hardest for the sales wanted lower gold prices, and that if they
could not achieve their objective by this means, they would try
another, even if it meant going underground and employing the
facilities of the BIS.
As a result, the foreign policy of the United States as regards
sub-Saharan Africa in general, and South Africa in particular,
has become intertwined with the U.S. relationship to the BIS,
an issue that has never been considered by Congress. But these
issues, important as they are, form only a small part of a much
larger foreign policy mosaic, which in today's global economy
involves a number of difficult and complex issues relating to
international trade and finance.
According to Gerald Seib of The Wall Street Journal ("Bush
as Leader: Like Father, Yes, But Not Entirely," December
13, 2000, p. A28): "In private conversation, [George W.]
is far more interested in foreign affairs than his tentative
public presentations suggest. ... But Mr. Bush has also been
candid in confiding to friends that he has much to learn in the
foreign arena, particularly in international economics."
Good leaders know their own strengths and weaknesses, and seek
to compensate for the latter by choosing competent advisers.
Starting with his choice of running mate and continuing over
the past couple of weeks, George W. looks to be assembling a
strong team well-matched to his own abilities and instincts.
He will need it. So will the country.
The Clinton administration is widely identified with positions
favoring expanded trade, free markets, increased transparency,
and a strong U.S. dollar. A major issue for the incoming Bush
administration is whether that strong dollar -- so vital to the
U.S. economy -- is largely a mirage reflecting covert manipulation
of gold prices carried out over the past several years with the
support of the ESF and the Fed. If the ESF has been intervening
in the gold market as alleged in the complaint, the new President
and his secretary of the treasury cannot avoid a decision on
whether to continue these activities. From noon on January 20,
2001, they are the ESF.
In this connection, their worst fear should be not that the
ESF has worked to hold down gold prices, but that these activities
have constituted part of a broader pattern of market manipulations
aimed at supporting stocks as well as the dollar. Since mid-1994,
a number of analysts and market observers have noted unusually
large purchases of S&P futures when stocks have fallen to
critical levels. Like derivatives on gold, derivatives on equities
provide not just enormous leverage but also an effective tool
for potential market manipulators. The Clinton treasury department
and the Fed have led the campaign for minimal regulation of derivatives,
citing fears that this lucrative business dominated by a handful
of large international banks might otherwise move offshore. The
result, intentional or not, is that they have kept the tools
for manipulating markets close at hand.
As George W. and his new administration determine how to respond
to the gold price fixing complaint, they are confronted with
a major policy dilemma. One path is to open the White House gold
closet, to follow the Constitution and the laws of the land as
best they can interpret them in good faith, and to make an honest
and long overdue effort at real reform of the international monetary
system. It is a hard path, likely when taken at this late date
and through no fault of theirs to produce considerable economic
dislocation and pain, but offering promise over the longer term
for a better -- even a golden -- future.
The other path is the policy of the last three-quarters of
a century: a war on gold, excessive monetary nationalism, and
short run fixes at the expense of other nations. Perhaps this
policy can succeed until the next election. But its continuation
runs ever increasing risk that events may blow the doors clean
off the White House gold closet under conditions of almost unimaginable
crisis. Then, as the skeletons emerge pointing their long accusatory
fingers at administrations that chose to trifle with the monetary
provisions of the Constitution, history will rewrite reputations
while pooh-bahs in finance ministries and central banks around
the world relearn Sir Walter Scott's familiar lines:
O, what a tangled web we weave,
When first we practice to deceive.
Marmion ,6.17(1808)
Reg Howe
row@ix.netcom.com
http://www.goldensextant.com
January 5, 2001
