“Didn’t you find your president’s speech last night a bit warlike? He openly criticized the internal affairs of my country. Why would someone do such a thing? We can’t have a shouting match between the two sides. We need to reinforce the dignity of each other if we are going to maintain a dignified relationship.”
“Xue,” Ben said, making sure to use his first name, “I am all for a dignified relationship. I didn’t think the President shouted last night.”
“He was very undignified about the things he said about China. He basically accused my colleagues in government of stealing from the people!”
“He didn’t actually say that. He said that your nation’s savings had been mismanaged because decision-making on capital allocation had been driven by politics, not by economics. Tell me, do you as a central banker consider that to be untrue?”
There was a long silence on the other end. Finally Li said, “Surely you are not asserting that China is unique in that regard?” Ben recognized that phrase. It was from The New York Times editorial. Li was phrasing what he had seen in the American press as the best way to approach him.
“Xue, America has long had a capital allocation decision making process that is far too political. And we have paid a big price for that. The President admitted that last night. That is why he called for us to make reforms. At least he indirectly thanked your country for having shown what can happen when politics has too much power over markets. We definitely do not want to walk in your footsteps.” Ben knew that he was pushing back hard, but his gut told him it was the right thing to do. Li Xue would now have to consider another line of attack, one that would carry more risks for Li personally as it would depart from the Party line.
“We are going to have to disagree about that,” Li said. “But you and I must be facing a similar dynamic. There are those in both our countries who would like to see our current disagreement spill out from being merely a conflict that takes place in markets. You have your war hawks, we have ours. You and I have a similar challenge. We must keep this conflict contained. Neither of us, and neither of our nations, will benefit from things getting out of hand.”
“Be assured. And tell your colleagues the President feels the same way. However you may have interpreted him, that is clearly the message he was intending to send. He hopes the best for the people of China. That is his genuine sentiment. It is certainly my sentiment as well, that of Secretary Steinway, and to my knowledge, all of the President’s advisors.”
“Thank you for that, Governor Coleman. I will convey that sentiment to my colleagues on this end. I must tell you, however, that most of them will probably not believe you. They were very concerned, as I was, about the approach that your president took. It is not that I disbelieve you. It is just that your president was so crude, so warlike, in his tone that it is hard to read what he said in any other way.”
So the charm offensive was over. Li was back to the party line. He had signaled it quite plainly and in a way Ben would pick up on, switching to the more formal method of address. That was for the benefit of everyone listening on his end. His conversation would be recorded and reported throughout the Politburo. Ben was also not so naïve as to believe that the conversation had also not been recorded on this end. But it would not be circulated. It would be kept private, used only as a source of intelligence.
Li had played his role. He had likely been ordered to try a charm offensive and attempt to drive a wedge between Turner and his subordinates. That had failed. He then tried to play the hawks and doves game, trying to establish a rapport with Ben that labeled them both as doves against the hawks who would drive the world to war. That, too, had failed, so he had no choice but to revert back to the original script and signal to his minders that he was only playing his part, not actually agreeing with the Americans.
Ben decided to help Li out. “Governor, I am sorry you feel that way. I can only assure you that America wants a friendly, peaceful, and mutually beneficial relationship with the People’s Republic. One point on which we do agree is that we central bankers need to keep this avenue of open and frank conversation going. I do hope that you will feel free to call me with your concerns at any time.” Bernadette had told him that Li might be running into trouble and that he should be prepared to help his counterpart when asked. He could only hope that he had sent that signal.
After a set of formal goodbyes, Ben called George Steinway. He wanted to convey the conversation with Li and hear the Secretary’s thoughts about the speech and what the President’s mood was. He got them, along with some marching orders.
“Ben, that speech gave us some breathing room. Now we wait, watch, and prepare. Prepare is your job. I think we need to get on the President’s schedule to discuss your thoughts about financial and monetary reform. And soon. I will try and set that up. This is not to leak. Not to Congress. Not even to the FOMC until the President has signed off. I am going to try for Friday or Saturday. Will you be ready?”
“Of course.”
“I know you will be. You have been since our dinner at the Metropolitan Club. That is what convinced me to recommend you for the job. We both know something has to be done and your idea is the most straightforward and elegant around.”
“Thank you, George, that means a lot. Give the word and I’ll be there.”
CHAPTER ELEVEN
“GOOD MORNING, LADIES AND GENTLEMEN.”
The President stood from behind his desk, placed his coffee down and moved toward Ben, George Steinway, and Dianne Reynolds as they entered the Oval. “I understand that we have some preparing to do today.” He motioned for each of them to sit on one of the couches that flanked his chair.
Today indeed, thought Ben. Since his phone call with Steinway on Wednesday, he knew he’d have to dust off his thoughts from the plan he’d presented two years ago at the Metropolitan Club. And when George had called back ninety minutes later to let him know the meeting with POTUS would be Friday morning, he barricaded himself in his office and got on his computer. He went through the notes he had made in the intervening time, updating, adjusting for the various changes the economy and the times had introduced. He had laughed to himself, remembering how he had so studiously kept the plan current, dreaming of the time when he would be standing before “Someone Who Mattered” in the hopes of making it a reality. Now the moment was upon him, and he realized that the last time he felt these rising nerves was as he waited for Bernadette Murphy to walk down an aisle to meet him and a priest in front of an altar. As he took his seat, he found himself wishing he could have a shot or three of something strong before starting.
The President took his seat. “I’d like to preface this by saying that half an hour ago I got off the phone with Cheryl Atkins at General Motors. She couldn’t stop singing Ben’s praises. That appearance on ‘Squawk Box’ as well. Sounded to me like they are thinking of introducing a new car line: the GM Coleman. You’re not thinking of challenging me in the primaries next time around?”
Ben knew the President was trying to build him up in front of Dianne, who had been a doubter about his appointment as Chairman, but also knew that he’d better do a formal rejection. “Sir, to quote General Sherman, if nominated I will not accept, if elected I will not serve.”
“Oh, Ben that is such bullshit. If Bernadette and Cynthia decide to replace me on the ticket with you neither one of us will have any choice in the matter. And if the two of them say you will serve, then God help you if you don’t.” The President let out a belly laugh, not a frequent event, but memorable when he did.
“I don’t think either of us have much to worry about Mr. President. Bernadette adores you.”
“Is that why she gives me such a hard time?”
“Do you think I get away scot-free at home? Sir, she actually does what you tell her. I get the push back and then she does what she wants, which may or may not have anything to do with what I suggested.” Ben glanced over at Dianne Reynolds, who had a bemused look on her face.
>
“Well, I know why she and Cynthia get along so well,” the President said. “But seriously, Ben, it wasn’t just Atkins who said you’re taking the pressure off and giving them some pricing power. At least a dozen of my old business friends have told me the same thing over the last few days. They’re all happy about it. But to me that sounds like inflation. And while I used to love being able to raise my own prices, I never much cared for it when everyone else could as well. I don’t think the voters will like it much either.”
George Steinway cut in. “Mr. President, believe it or not, Ben and I discussed this very issue before you were elected. I think he has a great plan that will put us on the side of the angels and restore trust in the integrity of the dollar. The Chinese won’t stand a chance.”
Secretary Reynolds said, “Before you gentlemen build up Ben’s ego to the point where we can’t all fit in this room, I want you to know that some of our embassies are getting complaints about an intentional devaluation of the dollar. So your actions are far from being universally applauded. Cheryl Atkins and I were at Harvard at the same time. Great person. Hope you reminded her, Mr. President, that GM sells twice as many cars in China as it does in the U.S. It is no longer true that what is good for General Motors is good for the country. At least just this country.”
“I stand corrected, Dianne,” said the President. “Like most Americans I never knew that was the case. I will be sure to use it next time she asks a favor—which she does about every six weeks or so. But are you saying what Ben has been doing is a mistake?”
“Not at all, Mr. President. I just want to remind all of us that there is no free lunch. Isn’t that the phrase, Ben?”
Ben decided that straight and businesslike was the only way to proceed with the conversation. “Madame Secretary, you’re right. There is no free lunch. We policymakers have been acting like there is for quite some time. The Chinese were calling us on that fact. They have been playing the free lunch game as well, even more so, only they thought they would be immune because their view is that power grows out of the barrel of a gun, not the ballot box.
“Properly used, the ability to print money is an incredibly powerful tool. Abused, it can lead to ruin in less than a generation. Dianne, you were spot-on about the ego issue and central bankers, and dare I say, finance ministers. We love to be glorified as masters of the universe. Probably the high point came in early 1999 when the Chairman of the Fed, the secretary of the Treasury, and the deputy secretary were on the cover of TIME magazine with the headline “The Committee to Save the World.” And I’m sorry to say, all three probably believed the headline, at least to some degree.
“So there is a natural tendency for central bankers and finance ministers to want to print, to push the envelope on what is sound policy. I believe they—should I say ‘we’—must be checked. But taking away all discretion regarding money creates problems as well. That is why we must strike the right balance.”
“And from what you’ve been telling me these last couple of weeks,” the President said, “simply using gold doesn’t work either. Remind me why.”
“Two problems, Mr. President. First, gold can be too rigid. In theory, when there isn’t enough gold, the price rises, and there’s incentive to go out and dig it. To put it simply, at the current rate the supply of gold is going up only one and a half percent a year. But the world economy is growing between three and a half to four without any inflation. In the long run, you would need prices to fall two percent a year to finance three and a half percent more economic activity with one and a half percent more gold.
“So we’d go from an inflationary economy to a deflationary economy. And periods of sustained falling prices discourage people from investing in, say, a new machine, because the price of the output that comes out of the machine is dropping two percent a year. That means I don’t want to pay full price now to produce things that go on sale next year and every year after that.
“The second problem is supply. The U.S. has the single biggest gold reserve in the world—a bit over 8,000 tons, or nearly 300 million ounces. Now the Federal Reserve has a balance sheet—think of it as roughly the total money supply—of about $4.5 trillion. That means for gold to cover the whole money supply, it would have to run $15,000 an ounce.”
The President said, “So whoever has gold is going to get rich if we went on the gold standard because there isn’t enough of it.”
“That’s why FDR confiscated all the gold before he revalued it,” Ben said.
“And that’s not just true within the country,” Dianne Reynolds said. “It’s true between countries as well. If we’ve got more gold, relative to our economy, than everyone else, the U.S. would gain enormous prestige and power.”
Ben continued. “I wish it were that easy. Other countries might decide not to go on a gold standard. Their currencies would drop sharply. Their people would be a lot poorer internationally, but the goods they exported would also be a lot more competitive.”
Dianne finished the thought. “That would cause problems for our manufacturers.”
“So this would all work more smoothly if everyone did it together,” said Ben. “Gold is kind of a tyrant that way.”
The Secretary of State immediately went to the logic of where her job would take her. “But that would require a huge international conference. Getting everyone on the same page would take years. And we can’t force anyone to do what they don’t want to do.”
“But we can lead by example,” Ben said, “and let them figure it out for themselves. The Chinese already have. They’ve been acquiring gold worldwide for over a decade. In 2019 they had less than a quarter as much gold as we had, and that was after having bought some on the market and keeping their own gold production to themselves. Today they have three-quarters as much as we do, and that number is growing all the time.”
“Are you saying that in ten years or so they would be well ahead of us?” the President said.
“That’s what they were planning,” Dianne said. “For industrial and military world domination as well.”
“The good news is that their leadership moved too quickly,” Ben said. “They saw a chance to disrupt our markets and drive us down that way. I know that Governor Li urged them to be patient, but they weren’t.”
The President said, “So you plan to exploit that?”
“Well, yes,” said Ben. “But I want to do it by disrupting things as little as possible. Remember that $15,000 per ounce figure? That’s at least twice what it is today, and you’ve already heard the talk about speculators making all the money. Do you want to run next time as the guy who let the speculators double down again?” Ben could see the President grimace and wondered if he had gone too far.
“And I assume you have a way around that,” said the President.
“An idea hit me in the aftermath of witnessing that bank run in Beijing. I think we want to establish the concept that gold is ‘the people’s money,’ while cash and checks are ‘the banks’ money.’ So what’s going to happen is that President Will Turner will bring the people’s money to America.”
“Now you’re sounding like a politician,” the President said. “But if it’s going to be me, you’d better give me more details.”
Ben continued. “Money serves two functions. It is a medium of exchange, a thing we use to facilitate transactions. It is also a store of value. It is a way of holding everything you’ve saved your entire life so that if times get tough, you have a reserve. The people weren’t rioting outside the banks to get money to go grocery shopping. They had that in their wallets. They were rioting to get their life savings. They wanted their hard-earned share of the store of value money represents, not the medium of exchange.
“So we create and circulate gold coins that can be ‘People’s Money.’ They don’t have to put it in the bank, unless it’s in a safe deposit box. More likely it is going to be tucked away someplace as secret and safe as possible within their homes. It is their money in
a place that they control.
“The banks are great for the money that is needed as a medium of exchange. They provide cash services, checking services, wire transfers, credit cards, debit cards, business loans, car loans, mortgages, the whole nine yards. That is the bank’s version of money. Gold won’t get in the way of that. No one is going to take a stack of gold coins down to the showroom to buy a new car.”
“Why don’t gold coins and things like Bitcoin do that now?” asked the President.
“Because they have no guaranteed value in terms of being a medium of exchange. The holder has to sell it and has no idea what price he or she is going to get. People’s Money is going to have a guaranteed value that President Turner is going to give it.
“Under this plan, we are going to put out gold coins with guaranteed values that are close to the value of their gold content. They won’t be $50 coins. More likely $5,000. The number will be stamped right on them. And under the Turner Monetary Reform Act—or whatever you choose to call it—those coins will be legal tender. A bank or the government must turn over fifty crisp $100 bills in return for one of those $5,000 coins anytime the holder wants. You can’t do that with Bitcoin.”
“And if the gold in the coin is worth more than $5,000?”
“Then the holder would be foolish to turn it in. The coin is worth at least $5,000, it could be worth more.”
“And it only costs $5,000 at your local bank?”
“Yes. To start with there would be less than $5,000 worth of gold in it. But the buyer could always turn it in for $5,000. If gold goes up—or the dollar goes down—the buyer makes a profit.”
The President said, “Sounds like quite a deal.”
“That’s why it’s People’s Money. People will hold the coins as a store of wealth. Regular money and bank deposits will be used for transactions, like now. If gold rises in value, then there’s a signal to us at the Fed to start tightening monetary conditions. If we don’t, folks will be lining up to buy our coins and we will start to run out.”
Currency War Page 17