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