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Section: Daily Dispatches

The BIS and Greenspan:
Freezing Out the U.S. Constitution

By Reginald H. Howe
October 27, 2000

With this commentary, The Golden Sextant introduces
another new site feature: quot;BIS: Bank for Intervention
and Subversion.quot; Today, with the U.S. Federal Reserve
occupying and voting its two board seats at the Bank
for International Settlements, both intervention in the
gold market for the purpose of affecting prices and
acts in subversion of the U.S. Constitution are
prohibited activities for both organizations.

This new project will focus on the recently announced
plan of the BIS to freeze-out its private shareholders
at an Extraordinary General Meeting scheduled for
January 8, 2001. The proprietor owns several shares of
the American tranche, making this matter one of
financial as well as academic interest to him. Other
shareholders are advised to seek their own counsel. All
opinions expressed here are those of the proprietor. No
assurance can be given that they will be accepted or
upheld by any particular court or tribunal.

Gold bugs have long considered the BIS an ally. Its
shares, which pay a decent annual dividend, tend to
trade in line with gold prices, making them an
attractive proxy for bullion or mining shares. But
accumulating evidence, to which the proposed freeze-out
adds an important new dimension, suggests that for the
past five years the BIS, with the active support of the
U.S. Federal Reserve, has played a central role in
trying to replicate the London Gold Pool of the 1960s.

Until 1994 the BIS functioned as the principal
organization for cooperation among Europe's major
central banks, of which several were and remain
friendly toward gold. But with the signing of the
Treaty of Maastricht in 1993, and the formation on
January 1, 1994, of the European Monetary Institute, a
predecessor organization to the European Central Bank,
the BIS faced the prospect of playing a rapidly
shrinking role in European monetary affairs. Then,
reversing almost 65 years of prior official non-
involvement, the Fed in September 1994 decided to
occupy the two seats on the BIS's board to which the
American tranche entitled it.

Shortly thereafter the BIS agreed to provide US$10
billion for the Mexican bailout effected mostly with
funds from the U.S. Exchange Stabilization Fund. Since
then, the BIS has been heavily involved in establishing
reporting requirements and bank capital adequacy
standards for derivatives. Their recent use to
manipulate gold prices is the subject of many prior
commentaries at The Golden Sextant. The BIS has also
sought to expand its activities beyond Europe by
opening an office for Asia and the Pacific in Hong Kong
in July 1998.

According to reliable anecdotal reports received by the
Gold Anti-Trust Action Committee, the BIS worked
closely with the Fed and the Bank of England to halt
and then to reverse the rally in gold prices triggered
by announcement of the Washington Agreement in the fall
of 1999. Indeed, a careful review of reports in the
European press about the genesis of the agreement
suggests that BIS officials may have been deliberately
excluded from the negotiations along with the Americans
and the British. In any event, by supporting the Anglo-
American response to the Washington Agreement, the BIS
seems to have turned on its most important European

When the Fed took its two board seats at the Basle-
based bank in 1994, the event passed almost unnoticed.
There were no congressional hearings. Nor was there any
public statement by the President or the Secretary of
State. Indeed, so far as I can determine, there is no
record of any approval or assent to the Fed's action by
the Department of State. Its silence on the matter is
particularly odd. When the BIS was formed in 1930, then
Secretary of State Henry L. Stimson expressly and
publicly prohibited the Fed from participating,
directly or indirectly, in the affairs of the BIS.

The Fed's decision in 1994 was reported in an article
by C.J. Siegman, quot;The Bank for International
Settlements and the Federal Reserve,quot; Federal Reserve
Bulletin, October 1994, (p. 900 ff). This article is an
important resource, but contains no mention of any
legal authority or permission for the Fed's formal
participation in the BIS. Not until almost a year later
did The New York Times in a story by K. Bradsher,
quot;Obscure Global Bank Moves Into the Light,quot; August 5,
1995, Business, p. 1 (report that the Fed had quot;joinedquot;
the BIS).

As the story noted: quot;[T]he bank is beginning to draw
the attention of the same unlikely array of American
populists who have opposed the new World Trade
Organization.quot; It continued: quot;Mr. [Ralph] Nader objects
to the bank's unusual independence under international
law, including an exemption from many Swiss laws. 'It
is outside the rule of law,' he said. 'It's above the

Nader has a point. If the BIS is indeed intervening in
the gold market, either directly or on behalf of its
member central banks, it is operating in opposition to
current U.S. law mandating a free gold market. What is
more, there are serious constitutional issues with
respect to whether the Fed had authority to take its
two board seats without more formal authorization from
the President and the Congress. Should the freeze-out
be effected, these issues become even more troublesome
for the Fed.

Legal and constitutional issues of this nature are
frequently difficult for private parties to raise due
to lack of standing. That is, there is a general
principle of law that in order to complain in court of
legal or constitutional wrongs, parties must have some
direct pecuniary or other interest beyond that of all
citizens in seeing that the laws and the Constitution
are enforced. By attempting to freeze-out its private
shareholders, the BIS has opened the door to potential
litigation by private parties who by virtue of holding
BIS shares have standing to raise any issue directly
affecting the value or ownership of their shares.

Precisely why the BIS has elected to run this risk of
litigation is unclear. One possibility is that it is
planning certain activities that it does not want to
reveal publicly through its financial reports, such as
buying or selling gold for its own account or engaging
in substantial new gold lending for its central bank
clients. In this connection, it can perhaps be argued
that gold deposits by central banks at the BIS are not
ordinary gold lending, thereby enabling organizations
with prohibitions on gold lending, such as the
International Monetary Fund, to permit some of their
gold to reach the market through the BIS without
clearly violating their own rules.

Under Article 54(1) of the Statutes of the BIS,
disputes between it and its shareholders quot;with regard
to the interpretation or application of the Statutes of
the Bank ... shall be referred for final decision to
the Tribunal provided for by the Hague Agreement of
January, 1930.quot; This reference is to an arbitration
tribunal established under Article XV of the Agreement
between Germany et als. Regarding the Complete and
Final Settlement of the Question of Reparations, signed
at The Hague on January 20, 1930, 104 League of Nations
-- Treaty Series (1930) No. 2394. The United States is
not a signatory to this treaty, which it pointedly
refused to enter. The arbitration provision provides in
relevant part (104 L.N.T.S. 252-253):

quot;1. Any dispute, whether between the Governments
signatory to the present Agreement or between one or
more of those Governments and the Bank for
International Settlements, as to the interpretation or
application of the New Plan shall ... be submitted for
final decision to an arbitration tribunal of five
members appointed for five years ....

quot;9. The present provisions shall be duly accepted by
the Bank for the settlement of any dispute which may
arise between it and one or more of the signatory
Governments as to the interpretation or application of
its Statutes or the New Plan.quot;

The so-called quot;New Planquot; for payment by Germany of war
reparations arising out of World War I ended long ago,
and with it any justification for the continued
existence of the arbitration tribunal, which under the
treaty had a mandate only to hear disputes between the
BIS and signatory governments, not between the BIS and
its shareholders. Perhaps when the tribunal was in
existence a claim could have been sustained that it
possessed appropriate ancillary jurisdiction over such
disputes. But to recreate this tribunal today to hear a
dispute not covered by the treaty seems a big stretch.

While U.S. courts regularly honor agreements to
arbitrate, it is difficult to order arbitration before
a tribunal that no longer exists. Conceivably an
argument could be made that the Permanent Court of
Arbitration at the Hague should form a tribunal to
substitute for that originally contemplated. Indeed, it
is rather surprising that the BIS did not long ago
update Article 54(1) along these lines. The PCA has a
modern set of rules for arbitration between
international organizations and private parties. Of
course, even now this alternative is one to which all
parties could agree.

But without a creative judicial order or a voluntary
agreement to arbitrate, the BIS could well find itself
a party defendant in a U.S. court. The United States is
not a party to any of the international agreements or
conventions relating to the BIS, undercutting any
claims that it might assert to immunity here. In the
case of any proceedings to challenge the freeze-out
brought by American citizens who own shares of the
American tranche, strong arguments can be made for
jurisdiction in U.S. courts, particularly if the Fed or
its officials are made parties defendant in addition to
the BIS. Indeed, the presence of important questions of
U.S. constitutional law makes an American court in many
ways the most appropriate forum.

The principal purpose of this new site feature is to
give other private shareholders of the BIS access to
some of my research and analysis as I wrestle with the
problem of how to respond to the freeze-out. Because
the freeze-out raises important constitutional issues
affecting the conduct of both monetary and foreign
policy by the United States, many who are not private
shareholders may also be interested. What is more, any
litigation between the BIS and its private shareholders
is likely to focus considerable scrutiny on recent
official efforts to manipulate gold prices, especially
through the use of derivatives. For this reason, GATA
is considering whether to support this project as a
follow-up effort to its Gold Derivative Banking Crisis,
a document that has now been downloaded over 20,000

For the next month, this project will be very much a
work in progress. Readers should be guided accordingly.
Currently, as indicated by the contents directory, the
finished memorandum is projected to contain ten
chapters or subparts. Initial or partial drafts of the
first nine are being posted at the same time as this
commentary, and the tenth will begin to appear in due
course. All are subject to revision and enlargement as
appropriate. Notations on the current status of each
subpart will also appear in brackets in the contents
directory. This procedure is not ideal, but seems under
the circumstances to be the most efficient way to get
as much material as possible posted quickly while
allowing good opportunity for useful and timely reader