"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?”
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 US 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 was 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 US’s international obligations 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."
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