“But it does not have to end this way. Today we have asked you here to present a plan that will address all three of these problems—too much debt, too much paper money, and an aggressive China.”
Ben paused again to draw breath. Here we go, he thought. All that planning, all that refining. This is the moment.
And then he began to describe the Metropolitan Plan, beginning with the meeting with Steinway and describing how the Fed and the government would swap debt for gold—with the Fed authorized to mint the gold into proprietary gold coins that would become a superior form of currency, with a guaranteed worth no matter the price of gold. And along with that half of the U.S. debt would be paid down.
“Now,” Ben said, coming to the cautionary note, “this is not a free lunch. Not for us at the Fed, not for you guys. This system will preclude us from running an inflationary policy. If the price of gold rises too much, people will demand our face value gold coins and give us our paper money back. Remember, paper money is designed to be spent. These gold coins, not so much. So this will lower the amount of cash outstanding relative to the size of the economy and cool off any inflationary pressures. While the Fed is losing some option value, the people of this country—the ones who worry about gas prices and making the mortgage, about putting their kids through college and being bankrupted by medical bills—will now have the assurance that their currency will hold its value and not see its value washed away by some future Federal Reserve action. Ladies and gentlemen, we call that confidence, and in economics, confidence is everything.”
Ben smiled. “Now the part you’ve been waiting to hear. For our good friends the Chinese, this system creates a bit of a problem. Remember, they are telling their people that the yuan is backed up by gold holdings. They are far short, but they still have about fifty percent gold coverage for their currency. That usually is enough to build a lot of confidence. But that is at the current record price of gold. The Metropolitan Plan is going to cause them two problems.
“First, when the Fed takes the gold, the Treasury now has and mints gold coins, we are increasing the supply of gold available to the market. Meaning all that treasury gold sitting in Fort Knox or similar depositories. As things currently stand, it never goes on the market. Now some of it is going to hit the market. Supply is increased. And when supply is increased the price goes down. Simple as that. When the price goes down, the Chinese ability to cover their money supply with gold is reduced.
“The second effect is potentially even bigger. We are going to be issuing a gold coin that is superior to gold in its raw form—with an option value. The holder might be able to sell it for more than he paid and will never get less in terms of dollars than the face value.
“This will leave Chinese workers and peasants with three options. They can keep their money in yuan in cash or in the bank knowing full well that the government’s ability to cover it is dropping because the value of the gold they hold is dropping. Or they can, as they now do, take that money across the border to Hong Kong or Macau and trade it in for another currency. Typically this is Hong Kong dollars—which are tied to the U.S. dollar. Or they might buy U.S. dollars directly or some other currency. When things start to unravel, they will want to be in anything except yuan. So their third option will be to buy these newly created Federal Reserve-backed gold coins with a guaranteed face value that is superior both to gold and dollars.
“Note that as this process continues, the value of raw gold will continue to fall as people switch into U.S. gold coins. The longer it goes on, the worse the Chinese situation gets as the gold coverage of their currency continues to drop along with the international value of their currency. The chances of a snowball effect begin to grow. They will stop being focused on destroying the U.S. dollar and start focusing on saving themselves.”
Ben stopped. The room was silent. Finally, the Speaker of the House broke the silence.
“Bravo. Couldn’t happen to nicer people!”
Chuckles went up around the room which turned into outright laughter. The pall that the recent crisis had created was lifted. There was a way out. Not a costless one, but they now knew that the light at the end of the tunnel was not an oncoming train. Looking around the room, Ben saw the reaction was bipartisan. Even the ranking members of the House and Senate Financial Services Committees, both of whom were women who didn’t care much for Ben, were nodding along with their colleagues.
Sensing the positive reaction, the Speaker continued. “What do you need from us?”
Secretary Steinway, speaking on behalf of the President, handled the query. “The courts are all over the map on what can and cannot be done by executive order. I know the President feels strongly that this is a time to show national unity in the face of the Chinese threat. And I must say that Chairman Coleman and I agree with that judgment. So the President would like to seek enabling legislation to accomplish this as a package. And I would like to add that this is a matter of some importance, so going into deadlock is not an option. Neither is padding out the legislation with pork. Under the circumstances, neither is acceptable.
“To your question, first the Congress is going to need to authorize the swap of the gold the Treasury owns for the bonds the Fed holds.
“This will involve a number of details. Our recommendation is that Congress authorize the price of gold for purposes of the exchange and that benchmark will be the basis for determining how much gold will ultimately be in the coins the Fed will issue. Our suggestion is that we select $400 per gram as the exchange price of gold. Note that we will not buy or sell gold to all comers at this price. It is simply for purposes of the exchange between the Treasury and the Fed and to set a benchmark for sizing the gold coins. It is a de jure price for this transaction only.
“The second detail will be determining the price at which the bonds in the Fed portfolio will be reacquired by the Treasury. We suggest that it be face value. Currently most of those bonds are underwater. But the Fed carries them on their books at face value and that face value supports the current money stock. Moreover, when they are reacquired by the Treasury it will reduce our debt outstanding by the face value, not market value. This seems the most logical price between the buyer and seller.”
The chairman of the House Budget Committee interrupted. “Why aren’t we using market values for everything? Seems to me the Treasury is losing out by paying above market for the bonds.”
Ben stepped in. “That’s a good question, Mr. Chairman. Like you I am a believer in market prices. But this plan has a number of objectives including minimal disruption to the U.S. economy and maximum disruption for the Chinese.
“So let’s start with the price of the bonds. It is true that the Treasury is paying over market for the bonds. Remember, the reason the bonds are pricing below market is that the economy has revived since they were purchased and as a consequence interest rates have gone up. The Fed bought those bonds to support the economy and if we hold them to maturity, it will get repaid at face value. If the Fed were to sell them below face value, we would have to reduce the money supply by an amount equal to the difference because those bonds back the money we issue. There is no reason to cut the money supply at this time and if we did, it would likely harm the U.S. economy.
“The other thing that I would remind you is that this is not a market-based transaction. It is a deal between two parts of the government. The Fed and the Treasury pretend to have separate balance sheets just like two divisions of a large, diverse company might. In reality, the Fed and the Treasury are part of the same balance sheet. The United States government owns the Fed and the Congress authorizes its existence and can change that authorization at any time. The government uses the Fed as its fiscal agent, buying and selling its bonds. So think of this as a deal between two divisions of the same company.
“In effect, the Fed is paying well over market value for the gold. We will carry that gold on our books at the contract price. This will help our monetary operations. But
more important, the power of what we are going to be doing is enhanced by maximizing the difference between the face value of the coins we issue and market price of gold. We have agreed on $400 per gram, or about $11,200 per ounce even though the current market price is just $300 per gram.
“The coins we are offering have an option value in case the price of gold goes up and a guaranteed value if the price of gold goes down. So it makes sense that the market valuation of the gold be less than the face value of our coins. Right now the market value of the gold is about seventy-five percent of the face value of the coin. We think that is a fair option value.
“But the bigger this differential, the more trouble the Chinese will have in trying to wreck our currency. As investors rush to hold our coins with a minimum face value, they will sell their raw gold. More gold on the market will drive the price of raw gold down and increase the value on our coins, a sign of confidence in the U.S. dollar. The Chinese, who lack public confidence, will therefore be seeing the value of their holdings drop along with their ability to support their currency.
“This is not an arms-length transaction. It is between two people on the same side—the Treasury and the Fed. They can pick any price they want for a deal. We are picking a price that protects America the most and hurts the Chinese the most.”
Steinway took up the narrative. “The second piece of legislation we will need from Congress authorizes the Federal Reserve to issue gold coins at a given face value. It comes straight from the Article I grant of enumerated powers to the Congress to ‘coin money and regulate the value thereof.’ So the value of the gold in the coins will be determined by Congress.
“We will be embedding a special security chip in the coin to prevent counterfeiting. Obviously if the market value of the gold in the coin is less than the face value of the coin there is money to be made turning gold into coins. But only the United States government by the actions of the Federal Reserve can do that. Our security agencies say that the technology behind the embedded chip will not be able to be replicated for at least twenty years, but we will be updating as we go along.”
The Senate Minority Leader asked, “How fast does this have to happen? We are a deliberative body after all. We will need to hold hearings, get committee approval, pass resolutions on the floors of both the House and the Senate, then go to conference and get the conference committee’s legislation through both houses. Nothing is done quickly.”
The Speaker of the House was quick to respond. “We recognize the truth in what the distinguished leader from the other body says. But we would remind him and his colleagues that Congress can act very quickly when it needs to. Declarations of war, for example, have been passed by both houses in a single day. I don’t see why the leaders in both parties in both houses can’t sit down and iron out things privately with the help of the administration and move the legislation expeditiously. I don’t think the analogy to a declaration of war is all that far-fetched.”
Ben decided to underscore the point. “Mr. Leader, Mr. Speaker. I recognize that the structure of the Congress was created by the Founding Fathers to be deliberate. And I support the value of deliberation. But as I said earlier, we are on the precipice and have months—perhaps only weeks—before we will be in the midst of a financial crisis. We have an adversary who is provoking the crisis in order to gain power, so I agree with the Speaker that this is not unlike a declaration of war. I can assure you that when the Chinese find out about it, they will view it that way.”
The Minority Leader decided to push back. “Chairman Coleman, I recognize that you are an authority on monetary policy, and I will admit that I do find merit in your plan. But I am less certain that your background qualifies you to be an expert on Chinese politics. So let me raise a very delicate question within the confines of this room. My distinguished colleagues on the Intelligence Committee have learned that your wife has been spending a lot of time over at the CIA. I thought she was a housewife who wrote good action novels. She is certainly not recorded as an employee of CIA. Is she going there to get some background for her next book? I think not.
“Congress has not been briefed on this matter and I think it is untoward for the spouse of the Chair of the Federal Reserve to be consorting with our foreign intelligence agency at a time of national crisis. There are lines of demarcation of responsibility that must be adhered to. Let me be blunt. Is she your personal mole at CIA and are you and Director Lopez in cahoots to force certain policy choices on the country?”
Hector Lopez spoke. “Mr. Leader. Let me say that I fully appreciate the concerns that lie behind that question. But in order to answer it, I would have to divulge some highly classified information that is ranked above Top Secret as it involves human intelligence. In a normal Committee hearing I would leave it at that and not answer the question.
“But because of the special nature of this meeting and the urgency of action, I am going to divulge some information on a need-to-know basis to the people in this room and to them only. If any of what I say leaks I will ask the FBI to do a full-scale investigation of the source of the leak and will prosecute the violator to the full extent of the law regardless of whom he or she might be. Am I clear?”
Sensing that heads were nodding around the table, Hector continued. “Bernadette Coleman, Chairman Coleman’s wife, had a long and very distinguished career in the intelligence community before she got married. She was the top analyst of Far Eastern and Near Eastern affairs for MI6. Her father was also an MI6 operative who ran British intelligence interests in Hong Kong during a very delicate period. She gained her knowledge of Mandarin at that time and went on to study the patterns of organizational behavior within the People’s Republic.
“I will spare you the details, but she was widely considered not only the best in MI6 but probably the best in the world at what she does, and despite her retirement from that world when she married Ben, is still considered the best.
“When the current crisis broke out, I asked Bernadette to assist us at the Agency. She is not an employee. She is doing this as a volunteer, and, may I add, as a patriot. I consider her services to be invaluable. She is not the Fed’s mole at the Agency, and she is not the Agency’s mole at the Fed. As a professional she is very well versed in the lines across which information should and should not pass.”
The Minority Leader wasn’t pacified. “That’s all well and good, Director Lopez,” he said, “and I am not questioning her motives or yours. But it is highly irregular. And what is more irregular, you permitted a foreign intelligence service to bug the home of an American citizen and did nothing to prevent it. What should have happened is that our domestic agencies, not you, should have gotten involved. There was no report of this to the Congress or to the Intelligence Committee. Moreover, we understand that the bugs in the Coleman house were numerous and included their bedroom.” A slight smile came over the leader’s lips, his way of warning them that he would be prepared to spill the beans if he was not satisfied.
“Mr. Leader,” Ben said, “I want to thank you for the concern you expressed in defense of the privacy of the American people, including mine. From your comments I can tell that you are very well informed, so I will be blunt. When this crisis began to develop, I had no idea how deeply I would become involved. And when I learned of the matter you are referring to, I will admit to being shocked.
“But I had a choice to make. Frankly, the country is at risk and our way of life is at risk. If I was going to do my duty to everything that I believe in, I was going to have to play the role of good solider and put up with things that would not ordinarily meet with my approval. So, sir, you are right on all counts. Like me, you are going to have to weigh the values of privacy and liberty that you hold dear against other highly valued goals such as our nation’s security and our way of life.”
He paused as he worded the coup de grâce in his head. “The reason I consented to having the Chinese maintain listening devices in my home was that it provided a w
ay of providing disinformation to them. That is why CIA wanted them there and my wife handled the information flow beautifully. Her background left her far more able to compartmentalize the issues of our private lives and national security than I could.”
The minority leaded nodded. “Thank you, Mr. Chairman, for your honesty and candor. I must say that I am aware of recent revelations about your reputation and will spare this room the details. But you appear to be a man of many accomplishments.”
Ben felt himself blush.
“One of those accomplishments,” the Minority Leader continued, “appears to be a deep and abiding faith in what you are proposing to do. There are many on my side of the aisle who would look quite skeptically at all that is going on here. Invasion of privacy, secretive meetings, failures to properly inform Congress. And I cannot assure you that whatever legislation the President might send up will get the acquiescence of even a majority of my caucus. But I can assure you that as Minority Leader, I will not use my various powers to obstruct that legislation and will actually vote for it.
“The reason is simple. You, sir, have done what most people in Washington never do. You have not only talked the talk, you have walked the walk. You have made real personal sacrifices to advance the cause which you bring before us today. I value that. It is a rare commodity in today’s world.
“But let me make it clear to the Secretary and the Director that I do not countenance their actions. And if this flagrant violation of America’s values is ever repeated, I will use my full power to expose the culprits.”
“Thank you, sir. That is most generous.” It was all Ben could manage.
The Speaker took over. “Ladies and Gentlemen, thank you very much for your time and your candor at briefing the leaders of the Legislative Branch. I share the distinguished Senate Minority Leader’s view that this is a very unusual set of circumstances. At this point, we need to discuss these matters privately among ourselves. We also look forward to the legislation that the President will send up and will do our best to act on it as expeditiously as possible.”
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