>THE GREATEST CON: THE RUBIN DOLLAR
>
>By Reginald H. Howe
>www.GoldenSextant.com
February 8, 2000
When Robert Rubin resigned last year as U.S. treasury
secretary, the question in Washington was whether he
had been the greatest secretary since Alexander
Hamilton or just the greatest ever. As Rubin himself
noted, the last treasury secretary to retire to such
praise was Andrew Mellon, who served from 1921 to 1932,
when he was appointed ambassador to Britain.
My guess is that history will judge Rubin rather more
harshly than Mellon, and at the other end of the scale
from the man who purged Continental paper with the
Hamilton gold dollar. For it now appears that the Rubin
dollar was based not on real gold but on a new creation
of the Treasury Department's Exchange Stabilization
Fund: virtual gold.
Virtual gold has little to do with virtue. Virtue in
international finance, according to both Rubin and his
successor at the treasury, Lawrence Summers, is market
transparency and avoidance of crony capitalism. Both
appear missing in the ESF. Two 1999 studies, one by the
Joint Economic Committee of the U.S. Congress
(www.house.gov/jec/fed/fed/esf.htm) and the other by
the Federal Reserve Bank of Cleveland
(www.clev.frb.org/research/com99/1201.htm), decry the
almost complete lack of transparency in the ESF,
including its policies on the dollar, activities in
foreign exchange or other (e.g., gold) markets,
financial accounts, and relationships with the Federal
Reserve System and the Federal Reserve Bank of New
York.
Regarding the latter, the Cleveland Fed is worth
quoting, particularly in light of recent market
developments arising out of the Treasury Department's
decision to start buying back the long bond:
"Since the ESF's inception in 1934, the Federal Reserve
Bank of New York has been its officially designated
agent for the ESF intervention operations. In 1962 the
Federal Reserve System's Federal Open Market Committee
(FOMC) authorized open-market transactions in foreign
currencies for the account of the Fed, and since then
the Federal Reserve Bank of New York has acted as agent
for both the Fed and the ESF in such transactions.
Starting in 1976 the ESF and the Fed have almost always
intervened jointly.
"Although the decision to intervene is usually made
jointly by the Treasury and the Fed, it falls primarily
under the Treasury's purview. While the two entities
routinely intervene in the same direction and amounts
for their individual accounts, formal independence is
maintained. In other words, the Treasury can instruct
the Fed to intervene on behalf of the ESF but it cannot
force the Fed to intervene for the Fed's own account."
Congress has thus established a system, ostensibly to
stabilize the dollar, where it is possible for the ESF
and the Fed to intervene in the foreign exchange
markets in opposite directions. What is more, they can
do so while leaving Congress and the American people
completely in the dark about what is transpiring with
their own currency, and the world ignorant of America's
true dollar policy, if any.
Certainly the thought that the Treasury and the Fed
always coordinate their activities cannot have survived
the past week. With the Fed raising short-term rates
(implying sales of government securities) and the
Treasury implementing buy-backs of the long bond, the
yield curve inverted sharply, causing chaos
particularly in bond and interest rate derivatives.
Applying this sort of modus operandi to the dollar and
gold raises all sorts of questions.
But before turning to them, a review of the pending
question to Secretary Summers is in order. Those who
read my last commentary and followed the URL to Fed
Chairman Alan Greenspan's letter to Sen. Joseph I.
Lieberman know that Greenspan was responding to
questions raised by the Gold Anti-Trust Action
Committee in an ad placed in Roll Call, the
congressional weekly newspaper, on December 9, 1999.
Links to GATA and its related site, Le Metropole Cafe,
can be found in my Recommended Links.
GATA and the Cafe, aided by their many members and
supporters, have done more in the last year to open a
window on the secret world of gold than anyone else on
the planet, and in the process provided a stunning
example of how the Internet can put knowledge and power
in the hands of the people. The first question in
GATA's ad (www.egroups.com/group/gata/309.html) read:
"1. Does the Federal Reserve or the Treasury
Department, either on their own behalf or on behalf of
others, including other government agencies, such as
the Exchange Stabilization Fund, lend gold or silver,
facilitate the lending of gold and silver, or trade in
any securities, such as futures contracts and call and
put options, involving gold and silver?"
Here is Fed Chairman Greenspan's answer as contained in
his letter to Senator Lieberman
(www.egroups.com/group/gata/346.html):
As for Question 1, the Federal Reserve does not,
either on its own behalf or on behalf of others,
including government agencies, lend gold or silver,
facilitate the lending of gold and silver, or trade in
any securities, such as futures contracts and call and
put options, involving gold and silver. Thus Questions
2 through 8 are inapplicable because they presuppose an
affirmative answer to Question 1."
For Greenspan the language of the answer seems
refreshingly clear. The Clinton administration's
tortured use of language notwithstanding, my reaction
is to take the Fed chairman at his word without
engaging in minute analysis of the meaning of "agency"
or the perhaps inaccurate use of the conjunctive for
the disjunctive. But what is clear is that he is not
speaking for the Treasury or the ESF.
What could perhaps be argued is that he is trying to
isolate from his answer the Federal Reserve Bank of New
York acting as agent for the ESF, but if that is true,
he is playing a very dangerous word game with a United
States senator.
All of which leads to several tantalizing questions:
>
1) If the New York Fed is not acting as agent of the
ESF in the gold market, who is?
2) Who would be more likely to play this role than the
observed gorilla bullion bank, Goldman Sachs, Rubin's
old firm?
3) What steps were taken to prevent the ESF's agent
from taking advantage of its privileged knowledge and
position?
3) What, if anything, do Greenspan and the Fed know
about the ESF's activities in the gold market?
4) If they know something, when did they learn it?
>
One question now foreclosed, absent a squeaky-clean
bill of health from an outside and independent
investigation and audit, is whether the ESF has been
writing gold call options or otherwise trading in gold
derivatives to the same effect.
>
Prior to placing its ad in Roll Call, GATA's Chris
Powell engaged through Sen. Christopher J. Dodd, D-
Conn., in some correspondence with the Treasury
(www.egroups.com/group/gata/334.html). A key question
put to the Treasury was: "Do the Fed or the Treasury
trade in gold or in securities, futures contracts, or
options that are related to gold, or otherwise seek to
influence trading in gold?"
>
The response from an assistant secretary of the
treasury to Senator Dodd was: "The Treasury Department
does not trade in gold or futures contracts to
influence trading in gold." Unlike Greenspan, the
Treasury did not include the trading of options in its
denial even though options were specifically mentioned
in the question.
>
Accordingly, Secretary Summers' continued silence on
this question should be construed as an admission that
the ESF does in fact trade in gold call options.
Indeed, whatever he may now say, particularly after
last week's disruption in the bond market and spike in
gold, it cannot be given much credence, even if it's as
clear as, for example, "I never had sex with that
woman."
My last commentary noted that any downward manipulation
of the gold price would impair its role as a leading
indicator of inflation, misleading in particular those
members of the FOMC who regard it as such. But the gold
price is far more than a sensitive indicator of
domestic U.S. inflation. It is among the best
indicators of the true health of the U.S. dollar
because, at least until the 1999 introduction of the
euro, gold was easily the dollar's most important
competition as international money. A rising gold price
in 1997 or 1998 almost certainly would have forced a
general decline in the dollar, pressured U.S. interest
rates higher, slowed growth of the U.S. trade deficit,
and in all probability capped the U.S. stock market at
considerably lower levels than now exist.
Secret or clandestine interventions today are quite
different from public gold sales or official transfers
employed in former times to defend fixed gold parities.
Under fixed-parity regimes, even when the gold parity
was in the end successfully defended, the sales or
transfers were public notice of trouble. Market players
were able to make their own judgments about the
likelihood of official success and act accordingly. And
their actions could then inform and instruct public
policy.
Today covert interventions in the gold market,
particularly through derivatives that backstop gold
lending, do not merely hide problems. They augment them
while an apparently quiescent gold market engenders a
false sense of confidence that all is well. "Laissez
les bon temps roulez" may be fine on Bourbon Street in
New Orleans; it should not be the policy of the ESF.
>
Anyone possessing the least familiarity with gold
banking ought to know just how dangerous a scheme to
facilitate too much gold lending can be. In essence, it
is no different than gold banking on an ever-shrinking
percentage of gold reserves. It amounts to the
exponential creation of virtual gold, which -- unlike
real gold -- depends on another's promise to deliver.
The con is as old as gold banking itself, as the
victims of banking panics throughout the centuries have
learned to their distress. This time will be no
different, except that the resurrection of gold could
well spell the demise of the currency built on -- and
billed as -- virtual gold.
Broadly speaking, the ESF has misled everyone who holds
dollars as to their true value relative to gold. As a
result, the world is awash in dollars -- both dollar
currency and dollar-denominated debt. Should a rush to
convert all these dollars to gold ever begin, it is
unlikely to end until an expression known too well to
Alexander Hamilton and the other Founding Fathers takes
a new form: Not worth a Rubin. |
