Currency War

by Lawrence B. Lindsey

  “Hold it,” said the President. “What do you mean by our coins and we will start to run out?”

  “The coins are Federal Reserve coins just like the paper in your wallet is a Federal Reserve Note. The Federal Reserve stands behind both. What stands behind the coins is our solemn commitment to buy your coin from you for the specified amount. What stands behind the notes is the assets of the Fed. Right now, that is government debt. But in the future, it will include a lot of gold. Our goal is to be able to tell the American people that the dollar—their money—is as good as gold whether it is in the bank or in their wallet or in a safe place at home.

  “This is the second part of the plan, Mr. President. Right now, the government has about $2 trillion in gold. What I am proposing is that the Fed buy it from you, giving you the highest-yielding bonds we hold as payment. The U.S. national debt goes down by $2 trillion and the currency of the United States is now at least forty percent backed by gold. And the holders of the paper money can get it in real gold anytime they want by buying one of our coins with paper money. It would make the U.S. dollar untouchable in terms of credibility.”

  Secretary of State Reynolds said, “That’s what’s going to give us leverage over the Chinese, right?”

  “Yes,” Ben said.

  “What about Europe?”

  “The Europeans are in a heck of a mess, as you know. But they have enough gold, roughly as much as we do, and about the same amount of money out there. They can either pool it and back the euro or they can go back to their own currencies, which seems to be where they are headed anyway. Even the Italians have enough gold to credibly back a lira, about fifty percent more gold per unit of currency as we have. They will need it, since Italian state finances are not exactly trustworthy.

  “As for China, it depends how they play it. They have about thirty percent more ‘money’ out there than we do and it is in trouble, thanks to the bank runs. They have only seventy-five percent as much gold. So they have less gold backing for their currency than we do. And because their currency already lacks credibility, they are going to need a whole lot more than we will to build confidence. Their bank runs are likely to get worse. Or we could arrange a deal.”

  “What kind of deal?” Reynolds said.

  Ben smiled. “That would be for you and the President to decide.”

  “I’m sure you’d be happy to help if we asked,” the President said.

  “Sir, the only person who can pull this off is the president of the United States. People’s Money—as credible as it comes and backed by gold—will be the legacy of President Will Turner. Not me. Prevailing over China in the currency war they started will be your legacy too. You brought me in to get the best advice I could give, not run the show.” He paused for effect. “Sir, the decision is entirely yours. It’s a big step. But in my opinion, it is the best chance we have to come out of this ahead of the game.”

  “Let’s make sure I get this straight. The government—I assume you mean the Treasury—swaps $2 trillion in gold for $2 trillion in our debt, which is like paying off that debt. Then you issue gold coins that people can buy with dollars that they can always cash in for the purchase price. But if gold goes up in value, they are ahead of the game. This puts a check on you, the Fed, from printing too much money. That builds confidence in the dollar and promises that inflation won’t be a problem in the future. Do I have that right?”

  Ben nodded.

  “Steinway, I assume you’re okay with all this?”

  The Treasury Secretary said, “That’s why I recommended Mr. Coleman as Fed Chairman.”

  “Dianne?”

  “I’m not one to rock the apple cart, and this plan certainly does that. But the apple cart has already been rocked by the Chinese. There’s a lot to take in here. But it makes sense to me. Ben, I assume I can give you a call tomorrow with any questions?”

  “Absolutely, Madame Secretary.”

  The President pressed a button on the table on the right side of his chair. The door opened on the southwest corner of the room that led to his study and a butler walked in with four glasses and an ice bucket. Each glass was about half full.

  The butler said, “I have taken the liberty—”

  “Yes,” said the President. “Thank you. Everyone is going to have their usual. That is an order. But first, a toast. ‘May God bless this country and give us the wisdom to see this plan through.’ ”

  George Steinway raised his glass and chimed in. “To the Metropolitan Plan.”

  This was followed by a round of “Hear, hear!” and each took a sip. One could sense the relief in the room. At least now there was a plan.

  There was a moment of idle chatter as the men sipped at, then ultimately drained their glasses. Dianne took a couple of demure sips.

  “Forgive me,” she said, setting her glass down. “I’ve got one of those rubber chicken banquets at noon. There will be wine.”

  “There’ll be more when we get this thing pushed through,” said the President. He gave a nod to indicate they were through and Dianne picked up her briefcase. “For the time being, let’s keep this between the four of us until we can get our ducks in a row for garnering support.” He looked at Ben. “To that end, I hope you and Bernadette will join my wife and me for dinner tonight. Seven-thirty sharp.”

  “Of course.” Ben gathered up his briefcase, said goodbye to the others, and headed out to where his limo was waiting. He was pleased with himself. He didn’t think he’d oversold it, hadn’t included any extraneous details that could be covered later, and Turner had liked it. In his excited state he thought about calling Bernadette to give her an update, but knew she’d be unavailable.

  He was whistling “Seventy-Six Trombones” from The Music Man when he walked into his office. But hearing the jaunty tune did nothing to wipe the stern look from his secretary’s face.

  “What’s wrong, Peggy?”

  “You’d better turn on the television,” she said.

  * * *

  Christopher Avery was a governor, a title given a member of the FOMC. As he wasn’t its chairman, he ranked neither the time slot nor the time allocation that Ben Coleman had enjoyed due to the media pecking order.

  But Avery was not deterred. He had been trained in academic politics so using backhanded and sometimes underhanded techniques in a battle was not exactly out of his ken. Right after the President’s speech he made sure one of his old colleagues got an op-ed prominently placed in The New York Times. He also gave a background briefing to a Washington Post reporter. The rules of backgrounding were that one could use the information but not the name of the source. Avery had appeared in the reporter’s story as a ‘well-placed official at the Federal Reserve.’ It offered plausible deniability but was clearly a signal that the quotes came from him.

  With both the op-ed and the story running Friday morning, Avery became a hot enough commodity that he could get a six-minute slot on the “Power Lunch” show.

  Joanne Chilton, the female reporter in the tag-team that ran “Power Lunch,” introduced him and then started the conversation. ‘Governor Avery, your old colleague, Professor Louis Greenstein at Harvard, ran an op-ed today that warned of serious domestic repercussions from the President’s China policies. They echo criticisms you have made in the past. What is it that has you worried?”

  “First, Joanne, let me assure you that everyone supports the President’s goal of blocking China’s attempts to undermine the American economy.

  “My concern is that there is an agenda being added to those efforts that will transform American economic policy in ways that have nothing to do with China. The President has already mentioned budget and regulatory reform. No doubt these will roll back the protections of workers and the environment that have been put in place over the years.

  “But there is another part of the agenda that I think is quietly being advanced by my colleague Ben Coleman.”

  Joanne interjected, “You mean the FOMC Chairman?” Even s
he was surprised to hear Ben described as Avery’s colleague. She hardly thought of them as equals.

  “Yes, Ben Coleman and I have an extremely collegial relationship.” Avery wasn’t going to give an inch in making himself Ben’s equal. “We respect each other’s intellect. In fact, it is because he is such a clever fellow that I am a bit suspicious of his plans for changing monetary policy. America is blessed to have a monetary policy that the appointees of the president, confirmed by the president, have control over the nation’s money. They can expand or contract the money supply in order to assure maximum employment with stable prices. That is our mandate at the Federal Open Market Committee.

  “But Ben Coleman has long been critical of this democratic control of our money. He wants to go back to the old way of doing things—using gold or silver for our money or some variant thereof. The period of the gold standard in America is notorious for bank runs and bank failures, for the impoverishment of the nation’s farmers, and the rise of the robber barons.

  “Coleman isn’t a bad man. I don’t mean that. He just has very little faith in the rule of the people, by the people. When you rely on gold and silver, once you get rich, you stay rich. He’s someone who thinks that the country is better off when the rich and the privileged control the money and the people, indirectly through a Federal Reserve that is democratically accountable, are not in charge.”

  “That’s quite a charge, Governor Avery,” said Joanne. “How do you know this? Neither Coleman nor the President has ever said anything like this.”

  “They will,” said Avery. “I’ve known the man too long and know how he thinks. I am here today to blow the warning whistle about what’s ahead. I hope that Congress, the Senate, and the people of the country who think like I do will make their voices heard.”

  * * *

  Across town on Constitution Avenue a shout rang through the office.

  “Son of a bitch!”

  Peggy called into her boss’s office. “Bad news, Mr. Chairman?”

  “How did he know?” He said it loudly, without picking up the phone.

  “Know what, Mr. Chairman?”

  Ben pulled himself together. “Nothing. Sorry I mentioned it.”

  Peggy nodded. It was one of those moments, she knew, where she couldn’t ask, and if she did, Ben couldn’t tell her. And when he was like this, it was best to leave him alone to settle.

  Inside his office, Ben went into a deep reverie. Avery had more than a hunch. But, how? He had a distrust of password-protected or encrypted files, instead relying on paper and pen, using DaVinci’s coding technique of writing in a mirror image. It was remarkably incomprehensible to the untrained eye, but not that hard to do with a little practice. A bit like driving on the left-hand side of the road, as in Britain, rather than on the right, as in America. Once you realized that everything was reversed, including the stick shift, it all made sense.

  So it wasn’t notes that had been left around. It couldn’t have been the President, or Steinway or Reynolds. They wouldn’t leak. Besides, there wasn’t enough time between his meeting with the President yesterday and Avery’s appearance. He wished he had Bernadette’s sense of spycraft.

  Well, he thought, this will certainly be a topic for conversation on the ride into dinner tonight.

  * * *

  The Friday papers all had poll results on the President’s handling of the China crisis. Gallup had asked, “Do you think that the President’s response to China was ‘too tough,’ ‘not tough enough,’ or ‘about right’?” ‘About right’ won the day with fifty-one percent. Thirty-one percent said, ‘not tough enough,’ and fifteen percent said, ‘too tough.’ Only three percent were ‘undecided.’

  Even though it was not technically CIA business, the Chinese had made the poll the Agency’s business. Richard Wei gave the briefing.

  “What the papers don’t say is that the Chinese embassy commissioned the poll,” he said. “And they paid handsomely to triple the usual sample size to get demographics with small margins of error and to ask some more detailed questions that were not in the papers. We, of course, got the details through a cable intercept by NSA. It was appended to an analysis by Ambassador Fan. I will tell you that the folks at NSA think the ambassador wanted us to get what he sent. He used a code we think they know we have broken.

  “We know the ambassador’s position institutionally and as an individual. He is a great believer in improving ties with America, so this is definitely not an easy time for him. His analysis was quite clear. Do not push America too hard. It may be a weak and decadent place, and may appear divided, but it tends to pull together quickly when attacked. He even cited Pearl Harbor as an example and noted what a tactical mistake that was.

  “One of the internals in the poll that was not released publicly was the question, ‘Do you think that China’s actions were primarily motivated by legitimate internal needs or by an effort to gain advantage on the United States?’ Wasn’t even close. Only twenty-nine percent said legitimate internal needs while sixty-four percent said gain advantage. That was referenced right after the Pearl Harbor reminder.

  “Something the ambassador did not mention in his analysis but was in the data was that the only groups who were even vaguely dovish were the elites. ‘Legitimate internal needs’ got a plurality only among people making over $200,000 and those with advanced degrees. They were also the only two groups where the ‘too tough’ response got to thirty percent.”

  “So the doves have the Upper East Side and the Upper West Side,” said Hector Lopez, “plus San Francisco, Beverly Hills, and Cambridge. Richard, if the Chinese do that breakdown they will reach the conclusion that the elites are their natural allies and will move to gain a footing there. They probably overestimate the extent to which elites dominate political thinking here. They use their own domestic perspective on these things and still can’t quite fathom how Will Turner got elected. Remember, they had the same problem with Trump.”

  Wei nodded. “Mr. Director, I think you are right on both counts. The political interpretation that is likely to take hold in Beijing is to go after both the capitalists and the intellectuals. They know how to massage the capitalists; start dangling lucrative contract deals in the air. Boeing aircraft, agricultural imports for the farm belt on the purchase side. Some of the big box stores that sell Chinese products on the export side. The latter group will like the devaluation of the yuan that is going on. It makes the Chinese goods cheaper.

  “As to the intellectuals, the Chinese will tend to use surrogates, what some might call the usual suspects. The common rallying cry will be the same one that has worked for sixty years, ‘America is the belligerent power.’ The cultural and intellectual elite has never really liked our way of doing things.

  “Power is much flatter here. The elites have far more power overseas, and so they are more naturally attracted to elite-based societies. They view the mass marketing of goods here as tasteless, wasteful, and bad for the environment. Obviously, they feel the same way about defense spending.

  “But appealing to our elites will only be half of the response. The other response, advanced by their hawks, is that America is getting ready for war. They will cite the ‘not tough enough’ group as evidence. And in a funny way, they will turn the ambassador’s Pearl Harbor example on its head. It will be proof that America will ultimately respond in a more belligerent way and so China must be strong in order to resist our supposed aggression.

  “It’s still early days, but we seem to be headed back to the Cold War strategy the Soviets employed. A military buildup at home coupled with a propaganda campaign aimed at our chattering classes. They will bet that the President will not have the ability to carry on a sustained struggle. Currency wars don’t carry the same punch as real ones when it comes to mobilizing the country. At least that will be their operating principle.”

  Lopez frowned. “So what advice do I give to the President? ‘Sir, the Chinese don’t believe you have the staying power
for this.’ I know how he’ll react to that one. We’re supposed to be in the business of minimizing the chances of mistakes happening. You do not challenge someone’s manhood unless you want the testosterone to really start flowing.” A long silence followed as everyone awaited the Director’s next thought.

  Bernadette broke the silence. “Hector, you identified the next move earlier. The Chinese are going to overplay their hand. There is little we can do about that. So let them. Some of our intellectuals are going to overplay their hand as well. Let them. Some good ‘America is a warmonger’ commentary will soon start to appear. Both will drive up the ‘not tough enough’ side in the polls because most Americans resent that. If the President is told to expect this response and advised to be patient and let them get way out over their skis, he will understand the strategy. Patience now gives him more freedom to maneuver later.”

  “Perhaps,” Lopez said. “But I don’t have any better plan. You’re telling us to let the inevitable happen. Always sage advice. And I will take your word for it that the President will go along. But somehow that doesn’t sound like a stable equilibrium to me. In the absence of any better ideas—” Hector let a pregnant pause follow. “We’ll go with it. But mark my words, this is the type of thing that generals complain about. ‘No battle plan survives first contact with the enemy.’ ”

  A wicked grin crossed Bernadette’s face. “So we ensure that if the equilibrium tilts, it tilts in our favor. We’ve just discussed how the Chinese are going to try and curry favor among those here who are naturally sympathetic to their cause.”

  “One problem,” said Hector. “If someone over there shows sympathy toward our cause, they disappear in disgrace.”

  “Granted,” said Bernadette. “But as the Chinese try to undermine our position by currying favor, we must undermine their position in the best way we know how.”