To a degree, the motivation was for the US gold industry to cash in on the demand for investment gold coins that the Krugerrand had demonstrated. After all, in 1979, the Canadian government introduced its one-ounce Maple Leaf coin, which within a few years displaced the Krugerrand as top-selling gold coin in North America. And in this sense, the pro-gold forces in the United States had a valuable ally in the form of the antiapartheid movement which, by the mid-’80s, had been tremendously effective in targeting the Krugerrand. Organized on college campuses and in churches, the movement’s economic goals had close support from a handful of Democratic members of Congress, notably Stephen Solarz of Brooklyn, who used his seat on the House Foreign Affairs Committee to put pressure on South Africa’s apartheid government. In 1983, Solarz added a measure to the authorization of the State Department’s budget that required US companies doing business in South Africa to adhere to a set of equal-opportunity labor practices, and also prohibited the importing of Krugerrands. US sales of the South African coins had remained reasonably strong, subject to fluctuations in the broader gold market.
The Reagan administration opposed most congressional antiapartheid measures, in part because it viewed the uninterrupted flow of South African gold as vital to the global economy, and in part because South Africa president P. W. Botha threatened retaliation in the form of cutting off exports to the United States of chromium which, he said, could threaten a million jobs in the United States. But protests throughout the United States got larger and more vociferous. In Boston in late 1984, antiapartheid activists specifically targeted Deak Perera, the largest precious-metal trader in the country, and demanded that the company stop selling Krugerrands until apartheid was ended; some occupied the office until they were arrested. By 1985 legislative sentiment against apartheid was too powerful for the Reagan administration to stop. That summer, both houses of Congress passed, by veto-proof majorities, bills to impose economic sanctions against South Africa. The version of the bill in the Republican-controlled Senate (SB 995), however, was weaker, and would have delayed by two years any consideration of banning Krugerrand imports.
It seemed obvious that a major break in the economic relationship between the United States and South Africa was going to occur—the questions were when and how profound. As the inevitability of antiapartheid action sank in, many in Congress and in the administration began to realize that, at least where gold was concerned, South Africa could move from being an ally to a competitor. Tacked onto the Senate bill, for example, was an amendment authorizing the US government to mint its own coin to compete with the Krugerrand. In the meantime, President Reagan issued an executive order declaring a national emergency because “the policies and actions of the Government of South Africa constitute an unusual and extraordinary threat to the foreign policy and economy of the United States.”21 Reagan deliberately singled out the country’s signature coin: “The Krugerrand is perceived in the Congress as an important symbol of apartheid. This view is widely shared by the US public. I am directing this prohibition in recognition of these public and congressional sentiments.” Among other measures, the order authorized the government to seek out the views of other GATT nations about a ban on Krugerrand imports, and directed Treasury “to conduct a study to be completed within sixty days regarding the feasibility of minting and issuing gold coins with a view toward expeditiously seeking legislative authority to accomplish the goal of issuing such coins.”
That same year, Congress authorized Treasury to mint gold coins in face-value denominations between $5 and $50, the first general circulation gold coins in the United States for more than half a century—and the gold in the coins was required to come from sources within the United States. Known as the “American gold eagle” series, they became available in 1986 and began to sell in numbers that rivaled the early US sales of Krugerrands.
The issue of South Africa’s gold continued to haunt American policymakers, and led even prominent Republicans to advocate ideas that in the 1960s and 1970s would have been unthinkable. In the summer of 1986, for example, the Senate Foreign Relations Committee overwhelmingly passed a bill to impose a variety of sanctions against South Africa, from denying landing rights to South African aircraft to cutting off imports of South African coal and uranium. But one provision, offered by the committee’s chairman Richard Lugar, authorized the president to sell off large quantities of gold, in order to suppress the price of gold and thereby hurt South Africa’s economy. The idea, a Lugar aide told the press, had come from an editorial in The Economist magazine. The magazine reckoned that there was just under a billion ounces of gold held in the vaults of the world’s central banks, more than a quarter of which was in the United States. The mere announcement that the government would begin selling gold on a specific date would, The Economist asserted, “make a large cut in South Africa’s earnings within one hour, because private hoarders from Bombay to Brittany would be rushing to sell their gold at crashing prices before the central-bank selling began.”22
The changes implied here were profound. During the postwar period the very idea of the United States selling off gold in any significant quantity would have been laughed off the table; no prominent Democrat or Republican would have proposed it. Now, the idea of a gold selloff was not only coming from a senior senator, but a Republican who wanted to use gold sales to drive down the market price in order to punish a long-standing ally of the United States. On top of that, he borrowed the idea from a magazine that made its argument in the name of free markets!
Reflected in Lugar’s proposal was a tremendous shift that had taken place in the global gold market. Throughout the 1970s and early 1980s, the United States (and the global economy) needed South Africa’s gold—an important reason why the United States was relatively late to cut economic ties to the apartheid regime. But beginning in the early 1980s, the American gold industry began a boom that rivaled, and by many measures surpassed, the California-Colorado gold rushes of the 1840s and 1850s. Between 1980 and 1990, US gold production shot up more than 500 percent, to some 300 metric tons per year, and continued to grow. As a result, some in the United States began to look at South Africa as less of a vital ally and more of a competitor. The US-minted gold coins captured the rivalry starkly, and contributed modestly to the domestic revival of the industry—Congress made certain to guarantee that the metal in them had to be mined in the United States.
Improved technology, too, was a factor. Some of the mining processes touted by Operation Goldfinger’s architects in the 1960s (minus the nuclear explosives and the particle-accelerator alchemy) had indeed proven effective. Mines that had been abandoned in the early twentieth century were given new life through expanding a procedure that allowed the metal to be extracted from ore that had previously been considered to have marginal gold content. The process involves pulverizing the ore into a very fine powder, and then soaking it in liquid cyanide, which changes the gold chemically. A carbon electrode is then inserted into the solution. Most of the gold will stick to it and can then be melted off. Beginning in 1965 at the Carlin mine in Nevada operated by the Newmont Mining Corporation, this technique was used to produce bars from gold that, in its ore form, could not be seen, even with a microscope. As a consequence, massive amounts of ore had to be used—three tons to produce a single ounce of gold.23 The increasing use of these massive “open-pit” mines was a major contributor to the ’80s gold boom, although they brought with them considerable environmental damage.
It was reasonable to expect that, once Krugerrands and other affordable, easily traded gold investment vehicles became the standard way for Americans to invest in gold, the type of fraud in the gold trade that government authorities found in the 1970s with the rise of coin exchanges would subside. Yet the opposite seems to have occurred. More Americans interested in buying more gold meant more shady dealers and a larger potential group of consumers to bilk. The most prominent and spectacular fraud was the International Gold Bullion Exchange (IGBE). I
t had started as a jewelry store in Fort Lauderdale, Florida, run by two brothers, James and William Alderdice, both of whom were legally blind from early childhood. They took advantage of legal gold ownership to build their business at breakneck speed. In 1983, after just three years in business, they had annual sales of nearly $100 million, 1,000 employees, and branch offices in Dallas and Los Angeles; they claimed to be the largest gold and silver dealer in the United States. In advertisements (“Profit from the ’80s Gold Rush!”) in the New York Times and the Wall Street Journal and on television, IGBE touted gold at discount prices.
Gold experts were puzzled. When Forbes magazine asked veteran gold traders how IGBE could make a profit by selling gold at or below market price, the responses ranged from “It’s impossible!” to “If you find out how they do it, let me know.”24 One major catch was that customers had to wait several months for delivery; in the interim, the Alderdice brothers had access to the money they’d been paid and would wait for dips in the market to get metal at a price below what their clients had paid. Across the country, IGBE customers began complaining, starting in 1982, that the deliveries never came at all. A Connecticut church lost $278,000 that had been intended as an investment to build a new chapel. A 52-year-old divorced woman living in a trailer home in Texas lost $46,000, telling a magazine: “I’m in a terrible financial bind. I sent them my life savings, but evidently they are a bunch of crooks.”25
Some 25,000 would-be gold and silver buyers were defrauded. The attorney general of Florida descended, the company declared bankruptcy, and the brothers were arrested and charged with fraud. When a court-appointed attorney opened the vault in the company’s Fort Lauderdale office, he found wooden blocks that had been painted to look like gold. While the brothers were initially in prison, they met a man who ended up living with them when they got out on bail; that man, James Doyle, stabbed William to death with a kitchen knife in 1984 and was convicted of third-degree murder. In a bizarre coda to the case, a judge granted James Alderice the right to try to pay off IGBE creditors by digging for gold in a mine off the shore of Alaska.
Another company engaged in a widespread rip-off was the Bullion Reserve of North America. In radio ads (which happened to catch the attention of the New York State attorney general) the company boasted that it held title to some $60 million in gold that was stored in a mountain vault in Utah that was supposedly also used by the Mormon Church. The chairman had no background in metals trading, and he liked to spend lavishly; he bought a Maserati and leased a Lear jet monthly. He paid for his $500,000 divorce settlement with company checks.26 Bullion Reserve went to great lengths to project an image of integrity. It enlisted the endorsement of Jerome Smith, an established metal-market analyst who published a best-selling book in 1980 called The Coming Currency Collapse. “I say unequivocally and without hesitation that you can trust Bullion Reserve of North America completely and without reservation,” Smith wrote in a letter to 90,000 precious-metal investors. “I put my name and reputation—and my future—on the line in saying this.” Bullion Reserve paid Smith $5,000 to write the letter and had promised him another $27,000 for additional letters. Before any further batches had been mailed, the company had filed for bankruptcy. The Utah storage vault contained no more than $1 million worth of gold. The chairman of the company committed suicide by running a hose from the exhaust pipe of a motorcycle into a sauna in his home in Venice, California. Between the two firms, more than $100 million in investments from tens of thousands of customers evaporated.
Is there something intrinsic to trading gold that lends itself to fraudulent activity more than, say, trading pork-belly futures? Some law enforcement officials, novelists, and psychologically inclined economists have hinted as much, although the question is impossible to answer definitively. Part of the apparent rise in gold fraud in the 1980s may have been due to lax enforcement and confused lines of regulatory jurisdiction—familiar culprits in economic busts from Black Friday to the mortgage-backed securities crisis that triggered the Great Recession of the twenty-first century. A law review article from the mid-1980s labeled precious-metal trading “the last frontier of unregulated investment.”27 The SEC had long taken the position that precious metals were not securities and thus did not fall under its domain. The Commodity and Futures Trading Commission (CFTC) had jurisdiction over some gold-selling arrangements, but not others, and couldn’t begin to take on the hundreds of thousands of transactions that gold legalization had enabled. The CFTC had been powerless during the late ’70s attempted takeover of the silver market by the Hunt brothers,28 and showed little more promise in taking on the “boiler room” operations that were dominating the precious-metals market. In a Senate hearing, William Roth was blunt: “Frankly, during this time, the principal enforcement agency, the CFTC, has been seriously outgunned by its opposition. The CFTC, with its roughly 25 lawyers and 10 investigators charged with protecting the public, the investing public, has been no match—no match—for the avalanche of schemes.”29 Many argued that the laissez-faire advocates running the executive branch preferred an agency that didn’t interfere with futures markets. In a news story noting that the Reagan administration had invited the Chicago-based commodity exchanges to take a leading role in naming the CFTC chair and all of its commissioners, the Wall Street Journal said that the “commodities watchdog is often more like a friendly puppy.”30
When fraud is sufficiently brazen and widespread, it can interfere with markets anyway by making consumers wary to participate. A Senate investigation took testimony from convicted commodity fraudsters who described boiler-room operations in which the company had no expectation that any customer would ever make a profit. The volume and prominence of these scandals at times affected the price of gold, and created what one metals trade journal called a “black eye” for the industry. Trade groups began proposing an insurance system for gold coins and bullion that would guarantee delivery within sixty days of purchase.31 These were unwelcome developments for those who argued that the gold market represented a culmination of human freedom. For tens of thousands of fleeced consumers, Senator Roth’s description of a “floating crap game” seemed more apt.
In addition, even though the entire record of the Gold Commission made it clear that the Reagan administration had no genuine interest in actually restoring a gold standard, the publicity that the Commission generated for a gold standard did coincide with the early stages of a shift in the economic thinking of some prominent Republicans. Through the Nixon and Ford administrations, the economic policies of the twentieth-century Republican Party were broadly aligned with the interests of America’s elite class, as defined by Wall Street and the executives of big business. National Republicans could generally be relied on to support a balanced budget; to be skeptical of government spending, particularly on antipoverty or similar social programs, and regulation; to seek minimal influence of organized labor; and to fear inflation more than unemployment. Establishment Republicans were usually content to give key economic positions to corporate CEOs or banking/brokerage executives. Conservative criticism about the wisdom of mainstream Republican economic thinking was largely confined to elements of the “Old Right”—including some, like Howard Buffett, associated with Taft and isolationism—and outsider groups like the John Birch Society.
The “Reagan Revolution” changed this perspective, by adding and institutionalizing a populist element to conservative economic thought. The most prominent member of the team who wanted to move forward with the gold standard was Kemp. Although Kemp’s participation in Republican politics dates as far back as his football career in the 1960s, he does not appear to have embraced gold as a pet political cause in the beginning of his congressional tenure—not in the way that he embraced, say, tax cuts. As noted in chapter 10, Kemp voted against the 1974 bill that restored legal gold ownership. A few years later, Kemp seemed to warm to the gold cause. In 1979, when introducing the landmark Kemp-Roth tax-cut bill, Kemp said that the United State
s needed to return to “a monetary standard of some fixed value behind the currency,” presumably referring to a gold standard. A Kemp biography cites his greater passion that same year. In a 1979 Marriott Hotel hallway encounter between Kemp and future congressman Dan Coats, Kemp pulled a gold coin out of his pocket and shouted, “We’ll never be back where we need to be as a country until we get back on the gold standard!”32
But the issue really began to gain traction for Kemp after Reagan took office in 1981. His supply-side colleagues who’d taken positions within the administration had largely sided with the monetarists, leaving Kemp and his allies fearful that the official medicine would not be strong enough to fix the country’s ailing economy. Kemp, according to columnists Evans and Novak, began pressing the gold-standard issue at a Republican gathering in May of that year, to broad indifference. But once the House passed his tax-cut legislation in late July, Kemp’s advisers urged him to become a kind of gold-standard-bearer, a role he accepted that fall. There were others within the GOP who supported the gold standard, including Phil Crane. But none would attain the same political prominence as Kemp, who became the party’s vice-presidential nominee in 1996 without ever moving publicly away from his gold-standard position.33 And even if, in practice, a Republican president was wary of implementing a gold standard, the party recognized that it made good politics. The 1984 Republican platform was more explicit than before: “The Gold Standard may be a useful mechanism for realizing the Federal Reserve’s determination to adopt monetary policies needed to sustain price stability.” Yet to this day, even if they are as popular as ever with a segment of Americans, these remain earnest words on paper.
CHAPTER 12
God, Gold, and Guns
One Nation Under Gold Page 32
