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An important document buried in the Federal Reserve's archives has
been discovered by writer and researcher Elaine Supkis.
This document is posted on her blog at:
http://emsnews2.wordpress.com/2009/01/15/1961-top-secret-fed-reserve-gol...
The document, which is marked "Confidential," is from the
papers of William McChesney Martin Jr., and this
collection is held by the Missouri Historical Society. A scanned image of the
original document is posted by the Federal Reserve Bank of St. Louis at the following link:
http://fraser.stlouisfed.org/docs/historical/martin/23_06_19610405.pdf
Martin was the longest-serving chairman of the Board of Governors of
the Federal Reserve System, and worked there under five U.S.
presidents from April 1951 to January 1970. It was during his tenure that the
dollar devolved from "as good as gold" to a perennially inflated
fiat currency backed by nothing but government promises, which makes one
ponder what could have happened to the dollar had Martin been an advocate of
sound money dedicated to preserving the dollar's link to gold. Instead,
during his tenure the U.S. Gold Reserve declined by nearly one-half from
633.2 million ounces to 339.5 million ounces, while M3, the total quantity of
dollar currency, soared more than three-fold from $190.0 billion to $616.1
billion.
The author of this Federal Reserve document is not clear, but was
obviously written by a senior staffer who was not only familiar with the
Fed's operation and that of the Treasury, but also well attuned to their
policies and procedures. It appears to have been written by someone in the
Federal Reserve Bank of New York,
given the obvious familiarity and extensive knowledge of the writer with that
branch's trading desk that executes trades for the Federal Reserve and the
Treasury, which explains why this document is so interesting and important.
It was written in April 1961, and the run on the dollar had already
begun. It was becoming increasingly clear that the U.S. government was not managing
the dollar according to the rules and the intended goals of the 1944 Bretton Woods Agreement. The dollar was being debased
under Martin's chairmanship, and as a consequence, gold had begun to flow out
of the U.S. Treasury as dollar holders realized that one ounce of gold was
worth more than $35, the fixed exchange rate then in place. By April 1961,
the U.S. Gold Reserve had already declined significantly from the beginning
of Martin's tenure to 498.1 million ounces.
So the warning signs for the dollar were already apparent, not only to
dollar holders, but also to the U.S. government. As this document
makes clear, the government realized that the monetary course it was pursuing
could not be sustained. Consequently, policy makers realized that something
would need to be done, and this "confidential" Federal Reserve memo
was obviously prepared to analyze one of the alternatives available to policy
makers.
The document does not explain the alternatives, but there were three. It
is the same three alternatives all governments have when deviating from the
rules of the gold standard.
First, the government could follow the aims intended from Bretton Woods and raise interest rates to reduce new loan
creation and the quantity of dollars. This action would dampen economic
activity, and reverse the outflow of gold, thereby enabling the gold standard
to be maintained.
Second, it could devalue the dollar as Franklin Roosevelt had done. In
this way, the remaining weight of gold in the U.S. Gold Reserve would provide
sufficient backing to the dollar, which would stop the redemption of dollars
for gold.
Third, it could try experimenting with a course not taken before --
government intervention to force the market to bend to government will. This
alternative was the worst of the three, and unfortunately it is the one
chosen by the government, which brings me back to this newly discovered
confidential document of the Federal Reserve.
In short, it lays out what the Treasury and Federal Reserve needed to
do in order to begin intervening in the foreign exchange markets, but there
is even more. This document plainly shows what happens when government
operates behind closed doors. It also makes clear the motivations of the
operators of dollar policy long described by the Gold Anti-Trust Action
Committee and its supporters -- namely, that the government would pursue
intervention rather than a policy of free markets unfettered by government
activity. The run to redeem dollars for gold had put the government at a
crossroads, forcing it to make a decision about the future course of dollar
policy. This paper describes what the government would need to do by choosing
the interventionist alternative.
This document provides primary, original source supporting evidence
that GATA has been right all along.
I have long hoped that a "confidential" document like this
one would eventually emerge. There are no doubt countless more like it, as
evidenced by the Federal Reserve's and the Treasury's refusal to provide all
the documents requested by GATA under its recent Freedom of Information Act
request. Maybe those documents will eventually see the light of day too.
In the meantime, this newly discovered document is all we have. And a
close reading of if is warranted because it is so revealing.
To analyze this document, I have copied it below in its entirety in
italics, with my occasional comments embedded in the text in order to
highlight key points.
Confidential -- (F.R.)
I assume F.R. stands for Federal Reserve, but it could also be the
author’s initials.
U.S. Foreign Exchange Operations:
Needs and Methods: Introduction
The current international position of the United States clearly
demonstrates the advantages that would exist if the United States had at its
disposal the resources and techniques for undertaking foreign exchange
operations as a permanent feature of public policy. The present international
financial structure, characterized by convertibility of the major currencies,
relatively free short-term capital markets, and the existence of large dollar
holdings by foreigners (both public and private), has greatly enhanced the
possibility of large recurring movements of capital out of and into the
United States. Such movements of short-term capital, as the Federal Reserve
System has learned from its experience of the past year, can greatly
complicate the execution of an appropriate domestic monetary policy.
Not really. What the Fed says can "complicate" simply means
that the market process was moving in a direction different from what the Fed
would like to see.
By 1961 the mechanisms of the gold standard were well understood,
there being over 250 years of experience with it since its invention by Sir Issac Newton around 1700. What this document is really
saying is that the Fed wants to let the banks extend credit and make greater
profits by leveraging their balance sheets to take greater risk, without any
consequences to the value of the dollar. That aim is of course an impossible
task because credit extensions by banks eventually become too large and
therefore imprudent, which debases the dollar. This debasement of the dollar
had already begun by April 1961, which explains why dollars were being
redeemed for gold.
Similar problems have been faced by monetary authorities abroad, in
both the recent period and in earlier years. Solutions to problems relating
to shifts in capital flows and their impact on national balances of payments,
together with the relationship of such international flows to domestic
monetary policies are perhaps best approached through joint action by central
banks.
So-called "coordinated" central bank action was not
practiced or needed under the gold standard. Gold simply flowed in or out of
a country, depending on its monetary policy. So central banks only needed to
look at the flows of gold to or from their own vault to see what they should
be doing.
It is no accident that individual European central banks have
developed highly sophisticated techniques of operating in the foreign
exchange market, and have supplemented individual operations by joint
measures of both a formal and an informal, ad hoc, character.
The European Common Market had already been created, so central banks
there were learning to operate in a new environment with new circumstances. The
European experience was not a reason to jettison U.S. monetary policy or ignore
the precepts of Bretton Woods.
Monetary authorities in the United States, on the other hand, have
not, until recently, operated in the foreign exchange market, but have
maintained the stability (and primacy) of the dollar in the international
currency structure by standing ready to buy gold from, and sell it to,
foreign monetary authorities who either need or acquire dollars for exchange
purposes. There can be little question that the interconvertibility
of gold and the dollar at a fixed price will have to remain the keystone of
the international currency structure.
If it didn't remain the keystone, the United States would be abrogating
its commitments under the Bretton Woods Agreement.
At the same time, foreign exchange dealings by the United States
monetary authorities, when judiciously applied, can serve to reduce capital
flows, to dampen speculation, to minimize potential reserve effects, and
hence, to minimize the impact on the United States gold stock.
So a way would have to be discovered to prevent the U.S.
government from defaulting on its commitment to redeem $35 for one ounce of
gold while still enabling the banks to expand credit imprudently in order to
make greater profits.
The basic purpose of such operations would be to maintain confidence
in the dollar.
This statement confirms one of the basic planks of much of the work by
me and others that has been published by GATA over the years. The efforts to
cap the gold price have one aim. It is to make the dollar look worthy of
being the world's reserve currency when in fact it is not.
Foreign exchange operations would, of course, not be a substitute for
other appropriate and basic actions to maintain the integrity of the dollar,
but would serve as a highly useful and flexible addition to other monetary
and fiscal policy measures.
There are other measures used by central banks that are not mentioned.
These include propaganda and jawboning. Central banks only tell you what they
want you to hear. If that weren't true, they would not operate behind closed
doors, or as the Treasury and Federal Reserve have done, deny FOIA requests.
The continuation and expansion of such operations as have recently
been executed respecting the German mark could make the United States an
important factor in the exchange market and thus help to enhance its
bargaining position in any international approach to currency problems.
Their objective was to make certain that the dollar remains the
principal currency, to enjoy the power that comes with that privileged role.
Moreover, the holding of foreign currencies by the United States
might strengthen confidence in such currencies and add to their usefulness in
international trade and payments and hence contribute to an expansion of the
movement of goods and services among countries.
I. Federal Reserve Operations for Its Own Account
Previous Experience
The Federal Reserve Bank of New
York has had a number of accounts abroad, of which
three with nominal sums remain at present. The three accounts are with the
Bank of England, the Bank
of France and the Bank of Canada.
The reasons for opening the various accounts differ
somewhat but maintenance of the accounts over recent years has been
largely a matter of courtesy.
The account with the Bank of England was opened in 1917 and
subsequently used for a number of transactions involving exchange operations,
investments and the purchase and earmark of gold. The account at the Bank of France was
opened in 1918 in
order that we might establish a sight account for possible use in
transactions for the stabilization of exchange rates.
The Federal Reserve began operation in December 1913. It was
envisioned to provide an "elastic currency" by providing credit
during the bust that follows the boom that results from easy credit policies
of banks. Its focus was domestic. There was nothing in its mandate to begin
opening accounts with other central banks, but it didn't take long before the
Fed did so.
The BIS account was opened in 1931 in the sum of $10 million.
The BIS is the Bank of International Settlements. It is noteworthy
that the Fed chose to transact with the BIS, even though the U.S.
government's participation in it was rejected by Congress.
In a letter from Mr. Harrison to Chairman Eccles in September 1936 it
was stated that "The deposit was made for the same purpose, essentially,
as the credits which the Federal Reserve Banks extended to foreign central
banks during 1931. It was made in lieu of our having to respond to requests
for assistance on behalf of various smaller European central banks." It
was then used for the purchases of prime commercial bills for our account and
finally closed in 1946.
Much is unclear here -- for example, why the Fed was extending credit
to foreign central banks. But here's one way the Fed can hide its
interventions. The BIS was buying "commercial bills" for the
account of the Fed. If these were booked on the BIS's
balance sheet and only guaranteed by the Fed, these bills would not be
visible on the Fed's own balance sheet. The Fed would have only a contingent
liability, which would only be recorded off-balance sheet in a memorandum
account.
An account with the Bank of Canada was opened in 1943, almost
entirely as a courtesy measure. Other accounts included those with Iran, Egypt,
and India
which were opened in our name in order that the Treasury would not be
identified with certain transactions. These latter accounts have been closed.
Not only does the Fed want to hide its tracks, but so does the
Treasury. We can only speculate why the Treasury would not want to be
identified, but here's an interesting possibility. Was it to hide the money
going from the CIA to fund the U.S.
puppets in Iran, Egypt, and India?
Authority
Authorization for the opening of accounts abroad is contained in
Section 14(e) of the Federal Reserve Act.
As noted above, the Federal Reserve Act was amended to grant the power
to open these foreign accounts once the Fed was created, presumably because
the Fed asked for this power even though it was not part of its original
mandate. There were amendments made by acts of Sept. 7, 1916 (39 Stat. 754);
June 21, 1917 (40 Stat. 235); and April 7, 1941 (55 Stat. 131).
Such accounts are subject to Regulation N and to other rules
prescribed by the Board of Governors as contained in the "Statement of
Procedure With Respect to Foreign Relationships of Federal Reserve
Banks." Under Section 12A of the Federal Reserve Act, the investment of funds in the accounts are also subject to
decision by the FOMC. Basic authority was granted in a November 13, 1936,
resolution which authorized each Federal Reserve Bank to "purchase and
sell at home and abroad cable transfers and bills of exchange and bankers
acceptances payable in foreign currency to the extent that such purchases and
sales are deemed necessary or advisable in connection with the establishment,
maintenance, operation, increase, reduction or discontinuance of accounts of
Federal Reserve Banks in foreign countries." Since at least 1944, the
resolution has been reviewed regularly by the FOMC and, in each instance, the basic authority has not been rescinded. Finally,
it should be noted that "due from" accounts with foreign banks may
be participated among other Federal Reserve Banks; in the event of such
participation, the operating bank make weekly reports to the participating
banks.
Previous operation of the accounts has been carefully circumscribed. Thus,
in a letter dated May 8, 1944, from Mr. Sproul to
Mr. Peyton (President, Minneapolis Reserve Bank), it was stated that
"The balances of the Bank of England, the Bank of France, and the BIS
were approved by the Board of Governors at or near the figures shown; -- I guess to achieve something
that is "at or near" is close enough for government accounting -- they
they could not be increased (except for minor
adjustments) without the prior approval of the Board of Governors." In
substance, operations by the Federal Reserve Bank of New York are possible
with the approval of the Board of Governors, the FOMC, and after
participation has been offered to the other Federal Reserve Banks.
A Proposal
One approach would be for the Federal Reserve Bank of New York to
purchase foreign exchange, either in the market or from the Treasury in
connection with the repayment of foreign official debt or a drawing on the
International Monetary Fund. Purchases of exchange in the market would, in
view of current pressure on the dollar, be quite limited; favorable
balance-of-payments developments, however, would make such operations
possible in the future.
We are now
starting to get into the substance of this document. The implications of
government intervention begin to be explored.
In the case of transactions with the Treasury, the foreign exchange
could be acquired by the Reserve Bank against the credit of dollars to the
Treasury's account with the Federal Reserve Bank in a manner similar to the
current practice with regard to the acquisition of gold certificates.
The U.S. Gold Reserve had by 1961 already been turned into dollar
currency (i.e., "monetized") by the Federal Reserve. While the
Treasury still nominally controls the gold because most of it is stored
within facilities it manages, nominal ownership of the gold reserve has been
transferred to the Federal Reserve.
The reserve effects of such operations would be similar to those
involved in purchases of gold certificates and would require coordination
with System open market operations as discussed below. Arrangements for the
conduct of operations would have to be worked out among the FOMC, the Board
of Governors, the Federal Reserve Bank of New York and other participating Reserve
Banks. Some of the technical arrangements used by the System in the twenties
and thirties might well be adaptable to current needs.
The 1920s and 1930s was a period when the classical gold standard had
already been replaced by a gold exchange standard, where central banks
intervened in gold and foreign exchange markets to prevent
("neutralize" in central bank words) gold flows between countries.
In the immediate instance, for example, the proposed German debt
repayment of some $700 million could be made partially in dollars and
partially in Deutsche marks (DM). The portion received by the Treasury in DM
could be sold immediately to the Federal Reserve Bank against dollar credit
to the Treasury. This procedure might serve to meet any requirement that the
United States receive dollars in connection with the payment of foreign debt
while, at the same time, furnishing foreign exchange resources for market
operations and adding leverage to the conduct of United States international
financial policy. The holdings of foreign money could then be used to operate
in the exchange market, or, as occasion warranted, to "buy out"
some portion of the Bundesbank dollar reserve or to
meet other objectives.
In other words, if you intervene in foreign exchange markets, you need
ammunition to do so. The easiest way to acquire the necessary ammunition is
to create more credit.
In the above example, the Bundesbank would
create Deutsche marks to repay a dollar loan, and these marks would then be
turned into dollars by the Fed. The Bundesbank and
Fed in effect create on their respective books entries that simply offset
each other but do not get settled. These new credits remain outstanding. The
net result is an expansion in the quantity of marks and dollars. It's easy to
"repay" loans when you can simply create money "out of thin
air" in this way with bookkeeping entries.
If operations were to be conducted by the Federal Reserve Bank on its
own account, some provision would have to be made for protection against
changes in the value of the currencies held, at least until such time as
reserves had been accumulated. This could be provided by an agreement under
which the United States
would hold the Federal Reserve Bank harmless against loss arising out of
devaluation of the foreign currency; appropriate legislation might be
required in this connection.
Here is another principle contention by me and other GATA supporters. The
above makes clear that the federal government acts as a backstop for any
losses taken as a result of market intervention. Thus the gold cartel can act
with abandon, knowing that it will be made whole by the federal government.
We are also seeing this principle being used in the numerous bank
bailouts being regularly handed out by the federal government. For example,
just today the Bank of America chairman said one reason he offered to buy
Merrill Lynch when it was insolvent was for the "good" of the
country, as if that was an excuse for a bad business decision. But it is
being used as an excuse by it to get the federal government to backstop the
transaction by bailing out Bank of America.
Federal Reserve Coordination of Open Market Operations
Federal Reserve operations in foreign exchange would require the
closest coordination with open market operations. Indeed, they might become
an integral part of such operations and could, in some circumstances, add
desirable flexibility to System policy.
In other words, the Fed is grasping for excuses to broaden the scope
of its market interventions.
On other occasions, the reserve effects of foreign exchange
transactions might have to be offset by other open market operations in order
to implement the Federal Open Market Committee's policy. Such offsetting
operations would not represent an undue complication of System open market
operations since in most cases the foreign exchange operations are likely to
be alternatives for exchange operations by foreign monetary authorities, the
timing and size of which have recently complicated the conduct of open market
operations. System operations in foreign exchange, by permitting closer
coordination as to timing and amounts, could have beneficial effects on
over-all System operations in relation to the money market.
Here again there is blatant promotion of the heretofore rudimentary
idea of coordinated central bank intervention.
To illustrate the effect on reserves, assume, for example, a German
payment of $300 million in DM equivalent to the Treasury. The sale of these
Deutsche marks by the Treasury to the Federal Reserve Bank would increase the
Treasury's balance at the Reserve Bank and perhaps reduce the need for calls
upon tax and loan accounts, or necessitate redeposits
in "C" banks.
"C" banks is unclear, but probably means banks
affected by Regulation C, or less likely, central banks.
Expenditures (or redeposits) by the Treasury
would, of course, add reserve dollars to member bank accounts. Sales by the
Federal Reserve Bank of DM in the market for dollars would directly reduce
member bank reserve balances. Even in a strictly inter-central bank
transaction important effects would be evident. Thus, if the Federal Reserve
Bank used DM 100 million to buy $25 million from the Deutsche Bundesbank, simply by utilizing book entries for the
transaction, the account of the Deutsche Bundesbank
on the books of the Reserve Bank would be reduced by $25 million; the
Deutsche Bundesbank might have to sell Treasury
bills from its investment account in order to replenish its deposit account
with the Reserve Bank. A sale of Treasury bills in the market would
immediately affect bank reserves. Clearly, all operations would require close
and continuing coordination.
We read above that the implications of new intervention methods are
being considered. This process becomes particularly important when the desire
to operate in secret is discussed next.
Meeting Requirements of Secrecy and Anonymity
It is of fundamental importance that foreign exchange transactions
generally be subject to public analysis only with
some delay.
Don't be misled here by the high-sounding note that disclosure will be
made eventually. Assertions later in the memo make clear the desire to
conduct these interventions without any disclosure, therefore to presumably
enable the Fed to act without any accountability.
It is, therefore, necessary that published statements and data be
appropriately devised.
This is an interesting choice of words. According to Webster's,
"devise" means "to plan to obtain or bring about: plot,"
and Webster's defines "plot" as "a secret plan for
accomplishing a usually evil or unlawful end."
I think the choice of "devise" speaks clearly to the mindset
of the author of this memo and reflects the environment in which he was
operating. Namely, central banks want secrecy and seek ways of operating as
if they are above the law to achieve whatever ends they seek. We see this
same attitude today in policy makers who imply that they are acting in the
"national interest," even if they are taking actions that
manifestly are unconstitutional.
Some thoughts should first be given, however, to the question of
immediate publicity if foreign funds are acquired in connection with official
debt repayment. In all probability, the paying country as well as the United States
will immediately announce the payment. Perhaps, however, no mention would
need to be made of the fact that some part or all of such repayments did not
take the form of dollars. On the other hand, if circumstances warranted, it
might be useful to let it be known that a local currency repayment was made
and that such funds were available for use in the exchange market.
The phrase "let it be known" illustrates one of the Fed's
basic tools -- propaganda. The Fed uses the media to tell us what they want
us to know, even if it is just a half-truth.
The immediate problem of publication involves the weekly statement of
the Federal Reserve Bank of New
York.
The memo now starts to consider the accounting implications of market
intervention, and the resulting public disclosure.
At present, foreign exchange holdings are included in "Other
Assets," a category which includes in addition to such "due
from" accounts, loans and securities past due three months; assets
acquired account (industrial loan and closed banks); reimbursable expenses
and other items; accrued interest; premium on securities; overdrafts;
deferred charges; currency and coin exhibits, etc. Generally, on the weekly
statement of the New York Reserve Bank, "Other Assets" is a relatively
small item ranging between $30 million and $100 million. (On the consolidated
statement for the System, the item generally ranges between $125 million and
$400 million.) Substantial fluctuations in the item (say, $50 million or
more) might lead to rather immediate questioning and close analysis would
probably reflect foreign exchange dealings with perhaps embarrassing
promptness.
In other words, though the Fed wants to hide its interventions in this
grab-bag entry of "Other Assets," it may not be able to do so
effectively because it contemplates interventions that are too large, and
therefore too noticeable for this accounting line item.
There should be some way to avoid this adverse result. Possibly
"Other Assets" might be grouped into a broader category so that the
net impact of foreign exchange dealings would not be so readily evident.
The obvious intent here is dishonest and deceitful accounting. Central
banker hollow rhetoric is high on transparency but their practices aim for
secrecy. They prefer to operate in darkness.
Net operations would also be reflected in the statements of condition
published as of month-end in the Federal Reserve Bulletin with a month delay,
and in the statement on earnings and expenses (under the items "other
income" and "other expenses") reported in the February
Bulletin covering the previous year. These data, however, are published with
some delay and pose no problem.
With respect to forward operations, disclosure could be avoided if
such commitments were carried simply as memorandum accounts and thus not be
made available in any published data; before adopting such a method, it would
be necessary to consider to what extent a contingent liability should be
shown.
Today the so-called "forward operations" would be called derivative
trades, which is another important element of GATA's
discoveries over the years. The gold cartel prefers to deal in "paper
gold," namely derivatives, as these contingent liabilities on central
bank balance sheets can be hidden from public view.
Evaluation of Fed Operations For Its Own Account
A major advantage to be gained by Federal Reserve operations on its
own account in the foreign exchange market arises from the fact that the
Federal Reserve Bank can create dollars while the Treasury is restricted to
the use of funds held by it.
In other words, the Fed believes it can create dollars "out of
thin air," while the Treasury has to follow the law. The Constitution
prevents the Treasury from creating "bills of credit," which is the
framers' terminology for creating currency "out of thin air." But
the Fed believes it can lawfully do so.
This does not mean that there are no limits on what the Federal
Reserve could or should do. There are very practical limitations upon such
operations, the more important revolving about the need to meet other
objectives of open market policy, current pressures in the exchange market,
and/or the willingness of central banks to deal directly by providing local
currency against dollars (or vice versa).
The limits on the Fed of course disappear with its desire and aim to
have opaque accounting.
ln substance, the creation and
destruction of Federal Reserve credit would provide vast resources for
foreign exchange operations and defense of the
dollar.
The "defense of the dollar" is a
high-sounding phrase, but is terribly misleading here. There is only one
possible defense of the dollar, and that is not
market intervention. It is following the mandate of the Constitution that the
dollar is defined as a weight of gold or silver.
If the decision should be made to conduct Federal Reserve operations
of this kind, there would be a vital need for sufficient latitude so that
operations could be conducted effectively and promptly under such rules and
regulations as the Board of Governors and the FOMC [Federal Open Market
Committee] deemed appropriate. Finally, there is a subsidiary problem of
arranging our weekly statements so as to avoid or delay publication of the
details of our foreign exchange operations.
The key words here are "avoid ... publication." The Fed does
not want anyone to see what it is doing.
II. Operations as Fiscal Agent for the Treasury
Federal Reserve Bank of New York operations as fiscal agent of the Treasury
operating through the Stabilization Fund involve an area in which
considerable experience has already been gained.
The "Stabilization Fund" referred to above is of course the
supra-governmental Exchange Stabilization Fund, which operates at the discretion
of the secretary of the treasury and the president and without Congressional
oversight. The ESF has been labeled a "slush
fund" for the Treasury by Anna J. Schwartz, who co-authored with Milton
Friedman their monumental "Monetary History of the United States."
The ESF is another important part of my work as well as that of
others, which shows that government intervention in the gold market is from
the ESF. It has been a basic plank of various writers and analysts published
by GATA that the ESF has been the centerpiece of
the manipulation of the gold market.
Because the Federal Reserve at the time was not yet intervening in the
foreign exchange market, the "considerable experience" gained by
the Federal Reserve Bank of New
York must clearly come from its intervention in the
gold market. In this regard, note the amount of gold "in play" on
the balance sheet of the ESF presented in the Fed's memo below. At the
$35-per-ounce rate then in effect, the ESF held 2.7 million ounces of gold,
an amount which equaled about 7.2 percent of annual
production at the time.
Gross resources of the Stabilization Fund amount to about $336
million. The composition of these resources and the amount that in practice
would be available are approximately as follows:
.................................(In Millions of Dollars)
........................New York.....Washington (A) ...... Total
Dollars..................170.0...............1.5............171.5
Gold......................94.7.................0...........(B) 94.7
Securities................26.5..............25.0........(C) 51.5
Foreign Exchange.....18.0 ...............0
........... 18.0
.............................309.2 ............ 26.5 ......... 335.7
Total Resources........................... 335.7
Less Argentine pesos held ............ 18.0
................................................. 317.7
Less Stabilization Commitments
(Argentina, Mexico, Chile).......(C) 122.0
.................................................. 95.7
Less Working Balance for Fund .... 25.0
Net Available Resources ............. 170.7
(A) As of January 31, 1961 -- little change since that date.
(B) An additional support order of $45 million is on hand -- advance
refunding.
(C) Argentina can draw an additional $32 million, thus making total
drawings $50 million. Mexico
and Chile
can draw $75 million and $15 million, respectively.
These footnotes show that the ESF was hard at work with its various
interventions back then. I am uncertain why any of those interventions would
be required if the ESF's sole aim was to defend the
dollar.
The above resources provide some latitude for operation, although
exchange purchases in the market face at present the obstacle of current
pressure on the dollar. Stabilization Fund operations are provided for under
Section 10 of the Gold Reserve Act which grants wide-ranging authority to the
Secretary of the Treasury, with the approval of the President. Use of the
Stabilization Fund, however, would be limited to current resources since it
appears that permanent additions to, or reductions in, assets of the Fund
would require Congressional approval and appropriation.
Again, here is another example of the Fed's desire to work outside
congressional oversight, and indeed, outside any accountability to the
public.
There would, for example, seem to be considerable obstacles toward
enlarging the Stabilization Fund by turning over to it, directly, official
debt repayments from abroad. If, however, prepayments -- particularly in
local currencies -- are contemplated, such prepayments might be sufficiently
attractive so that Congress would approve allocation of those resources to
the Stabilization Fund.
Within the resources, the holdings of (and operations in) foreign
currencies could be readily handled. Operations could be either in the spot
or forward market, although there would be some real advantage, in favor of forward transactions since such operations tend
to afford maximum use of the Stabilization Fund's resources.
In other words, off-balance sheet derivative contracts that enable
tremendous leverage would enable the ESF to have a greater impact in its
market interventions than by dealing in an unleveraged way in the spot
market.
Insofar as forward contracts involved parallel operations with foreign
central banks, it would be sufficient for the Fund to hold a partial reserve
adequate to cover any possible loss in the event of default. Thus, for
example, if the Bundesbank were to fail to honor its contracts with us under present arrangements,
it would be necessary for the Fund actually to buy spot marks for delivery to
meet the contract at maturity. The Fund would have to have dollars to pay for
the spot marks but it would immediately receive dollars when it delivered the
spot marks to the purchaser under its forward contract. The possibility of
loss would lie in the difference between the original contract price and the
spot rate on the day the purchase would have to be made.
The notion of a central bank default is quaint, and speaks to the
simple and undeveloped nature of this different path of government
intervention being analyzed in this memo. We know today that governments and
central banks don't default under their local currency (as opposed to foreign
currency) obligations because they simply create more of their local currency
"out of thin air" to meet any obligation. Inflation is the result.
If the foreign central bank were not under a parallel commitment, then
a partial reserve would need to be held to cover possible losses in buying
spot currencies (or shorter forward currencies) to meet contractual
obligations. If parallel contracts were held, a reserve equal to 10 per cent
of total obligations would seem desirable, subject to the proviso that the
reserve would be adequate to cover total obligations undertaken for any given
day. If no parallel contract was involved, a reserve somewhat larger than 10
per cent would probably be needed. Use of Fund resources would then actually
be expanded by some multiple of the amount currently available. Thus, under
parallel contracts, the $170 million noted as available in the table above
might cover forward contracts of up to, say, $1 billion.
Today of course the leverage is much greater. For example, we saw how
Long Term Capital Management was leveraged by more than 100-1, and it wasn't
even a central bank with a printing press.
Spot operations would undoubtedly be necessary on occasion. Obviously
such purchases would deplete the reserve by the dollar equivalent. Operations
accordingly would be restricted to the amounts actually available in the Fund
as noted above.
Here is another key point. This explanation of spot market transaction
highlights exactly the point of many GATA writers that intervention in the
spot market is done only sparingly and as a last resort because gold in
central bank vaults is a diminishing resource.
Once it leaves the vault, the gold will likely be impossible to
retrieve at current prices because it is being absorbed by "strong
hands" in the markets around the world. These "strong hands"
would rather own physical metal than any national currency.
Supplementing Stabilization Fund Resources
Added foreign exchange resources might be made available from a
drawing on the International Monetary Fund or foreign debt repayments if such
receipts were deposited in a special account of the Treasury which might be
called the "Special Foreign Exchange Account," with transactions
being channeled through the Stabilization Fund and
with the Federal Reserve Bank of New York acting an agent. Such a procedure
might be feasible if -- as seems likely -- the resources of the Stabilization
Fund could not readily be supplemented by direct allocation.
This accounting treatment is clearly intended to hide the transaction
in the ESF balance sheet. Secrecy is always a paramount objective of central
banks, which is made clear by the following section.
Meeting Requirements of Secrecy and Anonymity
Insofar as Treasury statements are concerned, details of the
Stabilization Fund are published quarterly with a delay of five months or so.
Published figures are for end-of-quarter. Operations during the period are
also shown on a net basis in the detailed statements of income and expense
contained in the Treasury Bulletin. Thus, there seems to be sufficient
publication delay from the Treasury side to meet requirements.
There is here not only some publication delay but a clear intent to
hide. Note that operations are shown on a "net basis," which
obviates the disclosure that would otherwise occur if each activity were
identified and reported on a gross basis.
With respect to Stabilization Fund assets in the form of securities or
foreign exchange, information is available only from the above sources with
the noted delay; these assets do not appear in data published by this Bank or
the Board. Current statements by this Bank and the Board, however, do reflect
Stabilization Fund holdings of dollars and gold. Dollar assets are included
in "Other Deposits" on our weekly statement and the System's
consolidated statement.
This point makes clear that the ESF operates through the Federal
Reserve Bank of New York.
That is where the ESF keeps its dollar assets. In other words, that is where
the ESF keeps its operating account (what individuals or companies might call
a checking account).
The over-all category includes a range of other items such as nonmember bank clearing accounts, Regulation K reserves,
deposit accounts of the IADB, IBRD, IDA, IFC, IMF, UN No. 1, etc.
It looks like UN No. 1 means that the United Nations keeps its
operating account at the Federal Reserve Bank of New York too.
There is some nominal variation in this amount over weekly periods,
but if net transactions in foreign exchange were of a substantial nature
(say, $50 million or more), fairly close analysis of foreign exchange
operations could be gained from these figures. Again, some regrouping of
categories or use of special accounts would be necessary.
More to the point, the "regrouping of categories or use of
special accounts" would be used to hide from the public and any
congressional oversight the interventions by the Federal Reserve.
Gold holdings of the Stabilization Fund may he obtained with about a
one-month delay from the Federal Reserve Bulletin, which shows the total gold
stock and so-called Treasury stock. Moreover, a gold sale or purchase would
be reflected in earmarked gold, but again with about a month to a six-week
delay (the February Federal Reserve Bulletin shows data for January 31,
1961).
This disclosure confirms the conclusions in my article "The
Smoking Gun" --
http://www.fgmr.com/smokegun.htm
-- published in December 2000, which used this reporting anomaly
described above to illustrate ESF intervention in the gold market.
I should add that my article illustrated ESF intervention "for a
time" because shortly after my article was published, the Federal
Reserve Bulletin was changed. All ESF references were removed, once again
hiding government intervention in the gold market, as explained in my
article, "What Is Happening to America's Gold?""
http://www.fgmr.com/whatgold.htm
Published data may be illustrated as follows, bearing in mind that
figures would be net, and hence any individual transaction might be offset. For
illustration, assume that the Stabilization Fund purchases DM 50 million in
the market with dollars currently in the account.
1. Effect on Fund's foreign exchange account: would not appear in
Federal Reserve Bank or System data but would be reflected in the quarterly
data of the Treasury, with a six to eight-month delay.
2. Fund's dollar account: the item "Other deposits" on our
weekly statement would show a decline, and the transaction also would be
reflected in the Treasury's quarterly report, but with delay.
3. Reserve accounts: would show an increase in member bank reserves on
the Federal Reserve Bank weekly statement.
Essentially, the only real problem related to the foreign exchange
position of the Fund would lie in our weekly statement which would show a
direct impact on the Fund’s dollar holdings, as reflected in the item
"Other Deposits." In order to minimize immediate analysis of
operations over the short-run, it would be desirable to include a wider range
of items in these categories. However, operations could under present
conditions be masked to some extent by careful supervision of the account and
a selective use of "swaps."
Here are two more important admissions. First, the accounting will be
changed to make the Federal Reserve's balance sheet more opaque, which not
only flies in the face of generally accepted accounting practices but also
runs roughshod over prudent public policy requirements for close scrutiny of
government operations.
Second, and just as importantly, is the mention of swaps. Several GATA
supporters, including me, have written about the ways that swaps have been
used to intervene in the gold market. Here we learn that swaps were a tool of
the Federal Reserve (and presumably the ESF and Treasury) as far back as
1961. Because these entities were not yet intervening then in the foreign
exchange market, we can only conclude that up to the writing of this
"Confidential" memo, the swaps were being used in the gold market.
III. Conclusion
The approaches discussed above to foreign exchange dealings are
suggested possibilities. Whatever the technique used, the United States
will run some risk of changes in currency values. To have effective
protection of the dollar, such risks -- minimized by careful management --
would seem a relatively small price to pay. Once a basic choice is made as
between operations for the account of the Federal Reserve Banks and
operations by the Reserve Bank for the Treasury as fiscal agent, detailed
investigation of coordinating techniques and the requirements of secrecy can
be made. It may be that fiscal agency operations offer some advantages in the
way of speed and simplicity. However, there are distinct benefits to be
gained from Federal Reserve operations for its own
account. Foreign exchange operations by central banks are considered a normal
part of their activities, and there is much to be said for utilizing resources
that are not directly limited by a required cash position. April 5, 1961.
This Federal Reserve memo discovered in William McChesney
Martin's papers is another important piece of evidence that monetary policy
in the United States
has run amok. It is one of the formative documents that have put U.S. monetary
policy in general and dollar policy in particular on the wrong path. It
clearly describes the intent of the Federal Reserve to pursue a dollar policy
that was not only hidden from public view but also contrary to the law at the
time, which defined the dollar as a weight of gold and required the
maintenance of this standard of value. It was also contrary to the
international obligations of the United States under the Bretton Woods Agreement that required the dollar'’s link to gold.
Rather than acknowledging that the dollar by 1961 had become debased,
which would lead to a tightening of monetary conditions by raising interest
rates (the traditional central bank response to maintain the gold standard)
or a devaluation of the dollar to reflect its debased state (the approach
taken by Franklin Roosevelt), the aim in 1961 was to pursue a different path.
I purposely don't say it was a "new" path, because it wasn't. It
had been tried before countless times by many governments and their central
banks, and it has never worked. It is a path to the fiat currency graveyard,
and the dollar was put on it by bureaucrats in the Federal Reserve serving
their masters, the banks.
Today's problems with the dollar and countless insolvent banks thus
began decades ago. Bankers got what they wanted, a license for the unbridled
extension of credit. As a result, we see clearly today what they have
wrought. They have nearly collapsed their banks and the dollar as a
consequence. So the emergence of this "Confidential" memo from the
Federal Reserve is timely, and hopefully today's policy makers can learn from
it.
James Turk
Goldmoney.com
James Turk
is the founder of GoldMoney (www.goldmoney.com) and
the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).
Copyright © 2007 by James Turk. All rights reserved.
Published by
GoldMoney
Copyright © 2008. All rights reserved.
Edited by James Turk, alert@goldmoney.com
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