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FOMC
Minutes from 1967 Illuminating Central Bank Gold Price Suppression, Currency
Swaps, Assorted Market Manipulations & Interventions
The issue before us here is not so much the mechanics
of deception, but the tenacity and conviction of the banking cartel to use any
means to protect themselves! Expect nothing less on this present
go-round forty-four years later.
 
MEMORANDUM
OF DISCUSSION
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington, D. C., on Monday, November 27, 1967, at 9:30 a.m.,
at the call of Chairman Martin.
"'The Governors of the Central Banks of
Belgium, Germany, Italy, Netherlands, Switzerland, United Kingdom and the
United States convened in Frankfurt on November 26, 1967.
"'They noted that the President of the United States has stated:
"'"I reaffirm unequivocally the commitment of the United States
to buy and sell gold at the existing price of $35 per ounce."' (Footnote
continued on next page) 11/27/67 -5
As yet, Mr. MacLaury noted, the recent huge gold sales by the pool had not
been reflected in gold losses by member countries. That was because the Bank
of England provides the supply of bars to the London market from its own
stocks during the month, with settlement by the other members of the pool
early in the succeeding month. Thus, while the Treasury might get through
this month without showing any reduction in its gold stock (and with perhaps
$50 million in the Stabilization Fund), it would face the prospect of selling
$434 million of gold to the Bank of England early in December, representing
the U.S. share of the pool's losses of $723 million thus far in November.
That figure made no provision for the possibility that France might convert
all or part of its November dollar gains into gold, as reported in the press
last week. Such conversion could cost another $200 to $300 million of gold,
judging by the New York Bank's estimate of French reserve gains. Obviously,
statements of central bank solidarity such as that issued yesterday
(Footnote continued from previous page)
"'They took decisions on specific measures to ensure by coordinated
action orderly conditions in the exchange markets and to support the present
pattern of exchange rates based on the fixed price of $35 per ounce of gold.
"'They concluded that the volume of gold and foreign exchange reserves
at their disposal guarantees the success of these actions; at the same time
they indicated that they would welcome the participation of other central
banks.'"
11/27/67 -6 in Frankfurt would help calm market fears temporarily, and it was
his hope that last week's surge of demand would not be repeated this week.
But it would take more than statements to calm the market if the Treasury's
published figures began to indicate U. S. gold losses of several hundred
million dollars. In the short run the Treasury might be able to limit the
size of the losses shown by the published figures by borrowing gold from the BIS
through a temporary gold-dollar swap. Such a palliative would be futile,
however, unless action was being taken at the same time to deal with the
problem of gold losses through the London market. Such action was what the
U.S. representatives were now working toward at the current meeting in
Frankfurt. It went without saying, however, that the ultimate restoration of
confidence in the dollar would await action to correct the U.S. balance of
payments deficit.
Before leaving the subject of gold, Mr. MacLaury said, he should mention that
with the cooperation of the U.S. Air Force the Treasury and the Federal
Reserve were involved in a crash program to airlift gold from this country to
London. Although under normal circumstances the Bank of England supplied market
demand during the course of the month from its own reserves, private demand
had been so heavy this month that the Bank of England's readily available
supplies in London had been exhausted with last Thursday's transactions.
Arringements had been made to have gold held in London by the German federal
Bank and the BIS placed at the disposal of the Bank of England, in sufficient
quantity to meet immediate demands, while "operation airlift" got
into gear. While he would not go into the details, it was a formidable task
to ship hundreds of tons of gold across the Atlantic and process them at the
other end.
Turning to sterling, Mr. MacLaury noted that the New York Bank had provided a
fairly detailed account of the final days of the $2.80 parity in its written
report on recent foreign currency operations. As Mr. Coombs had mentioned at
the previous meeting of the Committee on November 14, various types of credit
packages were being discussed just prior to and at the time of the last Basle
meeting on the weekend of November 12.
In essence, the impasse was that continental central banks refused to provide
credit to the British in the form of guaranteed sterling holdings although
some of them were prepared to provide credit in the form of currency swaps;
the Bank of England, however, was not prepared to take on any more short-term
debt. At the initiative of Governor Carli of the Bank of Italy, a proposal
for a $3 billion British standby credit from the Fund was considered, only to
be rejected by the Fund itself, and possibly by the British Government as
well, since it feared that unacceptable conditions might be attached to
long-term credit in any form other than guaranteed sterling.
The New York Bank's written report had quoted from Prime Minister Wilson's
explanation to the British public of the reasons for devaluing the pound. He
(Mr. MacLaury) would be remiss if he did not add that President Stopper of
the Swiss National Bank, echoing a similar statement attributed to the German
Federal Bank, had said explicitly last week that the British could have had
additional credit if they had wanted it, and that insofar as central bank
credit was involved, no unacceptable conditions would have been attached. The
blunt fact was that the British Government made the decision to devalue on
its own accord.
Prior to the devaluation, Mr. MacLaury continued, personnel at the New York
Bank were awaiting word of completion of a credit package as anxiously as was
the market. On Thursday of that week, however, their hope for maintenance of
the existing sterling parity began to fade fast when the news ticker carried
a report that Chancellor Callaghan had refused in Parliament to confirm or
deny rumors of a credit package. Market participants similarly interpreted
that refusal as confirmation of their worst fears, and they sold sterling
from morning till night on Friday at an unbelievable rate, draining more than
$1 billion from British reserves on that single day. Less than half that
amount was promptly reflected in reserve gains of major countries, and the
presumption was that much of the difference was placed temporarily in the
Euro-dollar market or represented short selling.
On Monday following devaluation, Mr. MacLaury said, the exchange markets
were, of course, stunned and there was little real trading, especially since
London was closed.
Market participants were preoccupied with trying to assess the damage,
keeping track of what other currencies were being devalued, straightening out
trading positions in sterling (a subject to which he would return in a moment), and, of course, watching developments in the
gold market. Tuesday was the first day of real trading, and even then
quotations for most currencies were wide and forward quotations non-existent.
Sterling, however, was at the new ceiling of $2.42 and the Bank of England
took in $500 million. During the final three days of the week, however,
British reserve gains were not very large, given the circumstances; they
aggregated about $250 million, excluding the dollars taken in against market
sales of gold. Thus, in the first week following devaluation the British had
recouped less than three-quarters of what they lost on the preceding Friday
alone. Although it was too early to tell, the British might have some uneasy
times before they were out of the woods, despite the 14.3 per cent
devaluation and apparently stringent domestic measures.
As the Committee knew, Mr. MacLaury remarked, last Tuesday the Bank of
England drew the full $500 million still available under its swap line with the
System to make payments against their purchases of sterling on the preceding
Friday. At the same time the British liquidated their remaining holdings of
U.S. agency securities, paying out the proceeds. He expected that the Bank of
England would be repaying some amount of its swap drawings today. Although he
did not know that amount at the moment, part of it probably would be financed
by use of dollars taken in against market gold sales. If so, the British
would need additional dollars by the date of the pool settlement, and
hopefully they would have acquired them in market transactions.
Mr. MacLaury then said that he would digress from his report on market
developments at this point to discuss the sales of sterling to U.S.
commercial banks on a short-term (two- or three-day) swap basis on Tuesday
and Wednesday of last week, for System and Treasury account respectively. A
separate memorandum on that technically complicated question was in
preparation and would be distributed to the Committee as soon as Mr. Coombs
had had a chance to review it. However, since the Committee would be asked to
ratify and confirm those transactions today, he would do his best to explain
the matter succinctly.
On the Friday prior to sterling's devaluation, Mr. MacLaury observed, banks
were inundated with offers of forward sterling from their commercial
customers and correspondent banks. Since for all practical purposes it was
impossible for the banks in turn to lay off those offers in the forward
market, they had two alternatives: they could refuse to quote a rate to their
customers, or they could lay off sterling in the spot market where the Bank
of England was a steady buyer. Even in normal market circumstances, the
latter was the method used by the banks to keep their over-all positions
even, adjusting the time spectrum of their "books" subsequently.
Under the highly abnormal circumstances that day, the banks found they had no
choice but to sell out cash sterling balances they did not have, anticipating
that they could buy in those balances on Monday in time to meet delivery
commitments Tuesday. It was worth emphasizing that the banks were not going
short on sterling; rather, they were acting to avoid being long as a result
of customer sales of sterling to them.
When the British suddenly declared Monday to be a bank holiday in London,
many of the U.S. banks in question found that they were not going to be able
to deliver on their sterling commitments on Monday in the manner they had
anticipated. Their predicament was brought to the attention of the New York
Reserve Bank on Sunday and it was taken up by the Foreign Exchange Committee
the following morning. That Committee, composed mainly of the heads of the
foreign departments of the major New York banks, recommended that the Federal
Reserve survey banks to ascertain the dimensions of the problem, and that it
act to prevent defaults or losses by those banks that could certify that
their short cash positions were attributable to transactions undertaken at
the initiative of their commercial customers or correspondent banks and were
not the result of over-all short positions undertaken by the banks
themselves.
The New York Reserve Bank staff was convinced that the case put to it was
legitimate, Mr. MacLaury noted. It was also convinced that failure on its
part to act would be detrimental to the reputation of the New York foreign
exchange market and--unjustly--to the banks involved, and would also threaten
to produce disorderly conditions in the exchange markets when sterling
trading opened on Tuesday. Because of the limited time available, the New
York Bank's staff simultaneously surveyed the positions of foreign exchange
banks throughout the country with the assistance of the other Reserve Banks,
sought the views of the Bank of England--which concurred in a proposal that
the System use holdings of guaranteed sterling for the operation--and
submitted the proposed transaction for approval to the Subcommittee of the
Federal Open Market Committee established by paragraph 6 of the authorization
for System foreign currency operations. The Subcommittee's approval was
sought because an operation of the type under consideration was not
explicitly authorized by the foreign currency directive, and there was
insufficient time to consult with the members of the full Committee...
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