The Great Gold Conspiracy

Alan Greenspan nervously awaited the results of the day's work. And what a day it had been! His furrowed brow and haggard expression were manifest tokens of the exasperation he felt. The day was Monday, October, 19, 1987. The Dow Jones Industrial Average, which was coming off of one of its best performances in history, had collapsed 23% from its previous close, and over 33% intra-day. "Black Monday" the press was calling it, a day in which one trillion dollars invested in the U.S. stock market evaporated as the Dow Jones plunged 508 points of its total value. It marked the single largest drop in the history of the market.

Alan Greenspan, newly appointed chairman of the Federal Reserve, the man who had appeared on the cover of Fortune Magazine in an Up-With-America article entitled "Why Greenspan is Bullish," was faced with a crisis of unimaginable proportions. The still-fresh Fed Chairman was taking heat from all quarters over the Fed's apparently drastic mistake of embracing a hawkish interest rate posture. In the past three months the Fed had raised the rate of interest by nearly one full percent, a move which had proven costly. In doing so, the Fed was restricting the ability of borrowers to obtain credit in a fast-moving, credit-hungry financial environment. And now it seemed as if the entire financial edifice of the United States would topple because of it.

The headlines in the financial press reflected the mounting sense of concern of the financial community and the investing public as millions of investors saw the size of their investments decline significantly in the days leading up to that day of infamy. Greenspan well knew that many of those headlines were written as if he were to blame for what was befalling the financial markets in that month of October. He had a collage of those headlines mounted on his office wall as a constant reminder that they eyes of the investment community were all looking to him:

Stocks Plunge 508 Amid Panicky Selling;
Percentage Decline Greater Than in 1929

--Wall Street Journal, 9/30/87

Stocks Ease as Trading Pace Slows;
Interest Rate Rise Prompts Selling
--Wall Street Journal, 9/30/87

Stocks Plunge, Partly in Reaction
to Sell Signals From Forecasters

--Wall Street Journal, 10/8/87

Stock Prices Decline as Sharp Rise
In Short-Term Rates Spurs Selling

--Wall Street Journal, 10/9/87

Industrials Post a Record Drop;
Trade Data, Interest Rates Cited

--Wall Street Journal, 10/15/87

Stocks Plunge in Heavy Trading
as Selling Intensifies Late in Day

--Wall Street Journal, 10/16/87

A Repeat of '29?

Wall Street Journal, 10/20/87

The Market Debacle Rouses
Worst Fears of Little Investors

--Wall Street Journal, 10/20/87
 

Greenspan gazed intently at the profusion of headlines. They seemed to cascade down his wall, cascading much like the market itself was doing at this very minute. His thoughts were momentarily interrupted. "It's George Friedman of Goldman Sachs, Mr. Greenspan." Greenspan looked up to see the secretary at his door. "He's on line four." Greenspan sighed and picked up the receiver. "This is Greenspan." "Alan, I've arranged a meeting for today. Meet me in the conference room in the downtown office at 4:30 p.m. sharp."

Of course, Greenspan knew what this meeting was about. As the front man and spokesman for the world's leading central bankers, he was to briefed on how the central banks-and the financial institutions they controlled-would respond to this potentially catastrophic crisis. His input would be sought, but for the most part he would be expected to merely relay to the investing public the sentiments of his masters, words calculated more at soothing the agitated public than at actually fixing the problems behind it. The actual fixing part would be done by the leading bankers themselves through their collective, not to say frantic, efforts.

Their efforts at ameliorating the crisis would mostly involve the liberal lending of funds from the coffers of the Fed's core banks to the major money center banks and important lending institutions throughout the country. Through the Fed's Discount window, the loans made to its fifty or so core banks, which held one-third of all the nation's bank deposits, and by extension to its six thousand member banks. In turn, the desperately-needed liquidity would be diffused across the 14,000 banks which made up the nation's banking landscape. A few timely applications of credit, a lowering of the prime lending rate, and hopefully the crisis could be averted and everything would return to normal.

Greenspan knew this. He just wanted it all to be over. He closed his eyes and his thoughts took him back to his days as a jazz saxophonist while studying at the New York University's School of Commerce. "Ah, to be 19 again," sighed wistfully. But now he had more pressing matters to attend to.

Greenspan boarded the elevator and rode down to the lobby of the Federal Reserve building in downtown New York. He was greeted by a black limousine and promptly whisked to his 4:30 meeting with Friedman and the other members of the Fed Financial Affairs Committee, which members often referred to as the "FACE." "How ironic," Greenspan had often remarked to himself, "that the acronym we use to describe this committee is thought of in the context of being out in the open, yet everything we do is in secret."

Indeed, the FACE committee was one of the most secretive high-power groups in the country. Members of the FACE steered the course of the entire financial system through their policies and directives. The fate of the United States credit system, and ultimately the stock market itself, rested firmly in its hands. On this day they would gather to determine how to approach the crisis confronting the stock market, a crisis that threatened at any moment to sweep across national boundaries and topple the financial systems of the world's industrial nations.

As the limo made its way down Broad Street and through the Wall Street financial district, Greenspan collected himself and prepared for this important meeting. He knew he would be stepping into the room for the first time as acting Chairman of the all-important Federal Reserve. Although he was well acquainted with virtually every member of the FACE from his days as a banker, he was unsure of how he would be received on this day; consequently, he was a little nervous.

Unbeknownst to most, the Federal Reserve is owned and controlled by several constituent banks, most of which are not even headquartered in the U.S. Greenspan, as Fed Chairman, took his marching orders from the directors of these controlling banks. His job was to serve as the front man for members while giving the appearance that he was actually calling all the shots.

Greenspan himself could not believe the controlling entities behind the vast financial system that he formally headed up. The list read like a "who's who" of international finance: the Rothschild Banks of London and Berlin; Lazard Brothers Bank of Paris; Israel Moses Seif Banks of Italy; Warburg Bank of Hamburg and Amsterdam; Lehman Brothers Bank of New York; Chase Manhattan Bank of New York; Kuhn, Loeb Bank of New York; and Goldman, Sachs Bank of New York. Not even he was informed of the true ownership of the Fed during his years as a central banker. Only when he became a part of the elite "inner circle" through his appointment to chair the Fed was this secret made known.

The limo came to a halt outside the Goldman Sachs building. The chauffeur opened the door and Greenspan stepped out onto the sidewalk and was escorted into the building and taken quickly to the room where the meeting would be held. He stepped through the doors of the meeting room and was met by a collection of familiar, faces. He was directed to a prominent seat in front of the solid oak table, and for a few nervous moments, he scanned the somber faces seated around him, each one of them looking at him.

The silence was broken by the abrupt entrance of Mr. Friedman, who immediately took his seat at the head of the table and, laying down a stack of documents, began to address the assemblage. "Gentleman, I'm sure you all know why we are gathered here this afternoon," he began. "We are here to find the solution to the problem that has lately seized our financial system." Friedman always spoke in simple, direct, yet penetrating, statements. A tall, distinguished-looking man in his early fifties, Friedman had always had the respect and obedience of his fellow bankers, of whom he was chief. Even Greenspan couldn't help but admire his straightforward and eloquent manner of doing things. More importantly to Greenspan and the other bankers in the room, Friedman always had the right answers no matter what the problem. And today, more than ever before, his wisdom would be sought by his colleagues.

"Now the first order of business is the market itself," continued Friedman. "The eyes of the financial community and of the entire country are focused on the Dow Jones Industrial index, and we need to dam the breach in the Dow before we do anything else. Otherwise, we risk a crisis in confidence unlike anything we've ever experienced." He paused long enough for the profundity of his statement to sink in. "Ferguson," he called out to the Fed's chief market technician, Charles Ferguson. Every major stock brokerage had one, but few were aware that the Fed kept one on staff. It was for times such as these that his expertise would pay off.

"Ferguson, you'll be expected to shore up the market by letting our floor traders know where to place their buy orders for the Dow's major component stocks. I want you to watch that chart carefully and let them know immediately when and where the right times to buy come up. I want you to watch IBM and General Electric especially closely-everything depends on those two. By the way, what's the status on the Dow right now?"

"The Dow closed at just under 1,800, sir," replied Ferguson, the youngest of those in the room. Though not a banker, Ferguson was nonetheless respected by the FACE as being one of the top market analysts in the country, a man who had worked his way through the corporate hierarchy of Merrill Lynch with his uncanny ability to predict market movements. From there, he served as the chief market analyst for a major Fed member before being promoted to his current position with the Fed. "I noticed today there was a failed attempt at testing the 1,600 level. We think we can build a supporting floor between 1,600 and 1,800 over the next few weeks and hopefully improve things from there."

"Good," replied Friedman. "If we can hold the Dow above 1,800 for more than a couple of months we'll know we've got a good chance of reversing the tide."

"Right chief, if we can keep the market from falling below 1,800 until December, then the traders will have a very good technical reason for coming back into the market to buy, because we'll have effectively broken a critical trendline. The chart players won't be able to resist getting long when that happens."

"Now on to the next order of business," said Freidman. "We've got our gold market correspondents in London on alert. They've been given special instructions on how to fix the gold price so as not to disturb the international financial markets. They assure us they've got everything under control. As for the gold market here at home, we'll have our floor specialists see to it that the price of gold won't be allowed to go past $500 an ounce. The gold market has been soaring since the beginning of this year and we can't afford to let this thing get out of control."

Out of control. The words rang in Greenspan's head over and over as he sat through the meeting. Of course, he knew there would be many other areas in the nation's financial framework in need of attention in the critical days ahead, especially in the area of short-term credit instruments. And he knew he would be expected to convey to Wall Street and to the nation at large a complete confidence that the crisis would soon pass and that the nation would recover to proceed in its commercial affairs as it had up until now.

The next few days would indeed be critical, and just as critical as keeping the Dow from falling below $1,600 was keeping the price of gold from rising above $500/oz. Gold played an extremely important role in the nation's financial and economic affairs, and the Federal Reserve that he was a part of was quite active in this market. Greenspan knew well that if the price of gold were allowed to escalate on its own, through nothing more than the unencumbered forces of supply and demand by the processes of the free market, that the subsequent rise in gold's price would flash warning signals abroad and eventually wreak havoc upon the credit markets.

Credit-it was here where the Fed's interest laid more than anything else. The market value of all corporate equities in 1987 was about $3 trillion-compared to $6.2 trillion in the credit markets. But more important than even this to the Fed was the market for gold. If ever its price were allowed to get too far out of line with the price the Fed had in mind for it, there was always the ever-present reality that the credit markets would crash-just as the stock market had that fateful fall in 1987. Greenspan knew that the price of gold represented the ultimate barometer of confidence-or lack thereof-in the soundness of the nation's money system. If ever a crisis in confidence were to occur-like the one Greenspan and the Fed were faced with right now-there would be a mass exodus out of the "paper" credit markets and into gold, the most reliable form of tangible wealth.

It had been 20 years since Greenspan had written his famous chapter in Ayn Rand's Capitalism, the Unknown Ideal extolling the virtues of the gold market as a financial safe haven and the ultimate gauge of economic soundness. Yet here he was, 20 years later, performing actions in direct contradiction to the beliefs he espoused in the Rand book.

Greenspan's mind flashed back to those poignant statements of his youthful idealism. "An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire-that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the others.

"If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society's division of labor and specialization. Thus a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

"A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy."

"When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth."

Twenty years had elapsed since these words were written, and much to his chagrin, the veracity of this premise, a premise he had long since abandoned as hopelessly antiquated and unrealizable in the world of modern banking in which he was now a leading member, was coming back to haunt him.