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Section: Daily Dispatches

By Reginald H. Howe
www.GoldenSextant.com
December 30, 2000

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: quot;Two skeletons copulating on a
corrugated tin roof.quot; 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, as set forth in
the complaint in the gold price-fixing lawsuit. 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 against the power of the Internet as well.

The opening question for the attorney general is
whether the Justice Department should represent some or
all of the government defendants, as would ordinarily
be expected. But 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 Justice Department.
It would be considered for criminal prosecution. As one
current antitrust treatise notes (T.V. Vakeries,
quot;Antitrust Basics,quot; Law Journal Press, 2000, p. 4-1):
quot;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....quot;

Thus the attorney general must resolve at the outset
whether his obligation to enforce the antitrust laws
disqualifies the Justice Department 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
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. The bank's plan,
apparently backed by the Federal Reserve, to shed the
limits imposed by partial private ownership of its
shares and to become a public international financial
institution akin to the International Monetary Fund 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 that 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 that 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 are General Powell and
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 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 Sen. Jesse Helms, R-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 to be used 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 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 issues relating to
international trade and finance.

According to Gerald Seib of The Wall Street Journal
(quot;Bush as Leader: Like Father, Yes, But Not Entirely,quot;
December 13, 2000, p. A-28): quot;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.quot;

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 manipulation 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 Samp;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 close at hand the tools for manipulating
markets.

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 and 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 such a 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.
-- quot;Marmion,quot; 6.17 (1808)