How ESF / Bundesbank gold swap caps gold price -- Part 2
By James Turk
The Freemarket Gold & Money Report
This past December in my essay "The Smoking Gun" I
provided proof that the U.S. Treasury Department's
Exchange Stabilization Fund was intervening in the gold
market. From publicly available reports prepared by the
Federal Reserve, I established that the weight of gold
held as a component of the U.S. Reserve Assets has been
changing, and that these changes -- some of which are
of significant size -- result from activity by the ESF.
These Federal Reserve reports conclusively demonstrate
that the ESF has been intervening in the gold market
since at least 1996.
Though these Federal Reserve reports make clear that
the ESF is involved in the gold market up to its
"earmarks," a lot of people remain skeptical. I don't
know why that is. It is worth noting that many of the
most obstinate skeptics who deny U.S. government
involvement in the gold market live overseas and have
little if any experience or understanding of the way
the U.S. government really works. Even Americans find
it difficult to accept that the U.S. government
intervenes in the gold market. Ironically, though,
they readily admit that the government intervenes in
the debt markets, foreign currency markets, and,
according to a growing number of people, even in the
U.S. stock market. It is therefore most baffling that
they do not concede the ESF's involvement in the gold
Maybe people are skeptical because they haven't
bothered to take the time to read the Federal Reserve
reports for themselves. Maybe it's because it's easier
to accept the word of some government bureaucrat who
denies ESF involvement in the gold market than it is to
seek out and look for the truth. Maybe they don't want
to believe that the U.S. government is lying to them
when Treasury Department official after Treasury
Department official denies any involvement by the ESF
in the gold market.
I don't know.
Or maybe it's because they think that government
officials work for the American people -- and not for
vested interests -- in their deliberative sessions
behind closed doors.
Wouldn't it be refreshing if we could peek behind those
closed doors to see what really is being said?
Very little emerges from behind closed doors, and the
minutes and transcripts of closed-door sessions that do
make it into the public domain contain redactions that
blank out the "good parts" -- the revealing statements.
But what if someone forgot to redact one of those "good
parts? Too fantastic to be true?
Well, sit down, take a deep breath, and carefully read
* * *
A few weeks ago Reg Howe contacted me and asked my view
on something he had discovered. He wanted a second
opinion on this discovery, just as I contacted him for
a second opinion after I came across the Federal
Reserve reports showing the ESF's gold-related
When I read what Reg showed me, I was stunned. But at
the same time it was clear to me what I was reading and
what had happened.
A transcript of a meeting of the Federal Reserve Open
Market Committee has been released for which somebody
forgot to get his red pen out. Someone forgot to redact
some very revealing words about the ESF and its
activity with gold. Here's what was said.
* * *
[See the transcript from the January 31, 1995, meeting.]
MR. MATTINGLY. It's pretty clear that these ESF
operations are authorized. I don't think there is a
legal problem in terms of the authority. The [ESF]
statute is very broadly worded in terms of words like
"credit" -- it has covered things like the gold swaps
-- and it confers broad authority.
* * *
Please read the above statement again, and maybe even a
third and fourth time.
This statement, which I can only assume was
inadvertently not redacted by the FOMC Secretariat,
confirms what we already know but what the U.S.
government has all along refused to admit -- that the
ESF is involved in the gold market. In fact, the
authority of the ESF is so broad that "it has covered
things like the gold swaps."
In other words, the authority of the ESF is so broad it
has even been used to authorize "gold swaps."
Before exploring the above quote, some background
information is necessary.
The proceedings of each FOMC meeting are taped. These
tapes are transcribed, and the Federal Reserve releases
these transcripts after five years. Thus, the
transcripts from the 1995 meetings were released this
year, and, having now read through them, I can say they
contain a treasure trove of material, even though there
are many redactions.
The important point is that these transcripts are not
only informative but are an accurate record of what is
going on behind closed doors.
Here is what the Federal Reserve itself says about the
* * *
Beginning with the 1994 meetings, the FOMC Secretariat
produced the transcripts shortly after each meeting
from an audio recording of the proceedings, lightly
editing the peakers' original words, where necessary,
to facilitate the reader's understanding. Meeting
participants were then given an opportunity within the
next several weeks to review the transcript for
For the meetings preceding 1994, the transcripts were
produced from the original, raw transcripts in the FOMC
Secretariat's files. These records have also been
lightly edited by the Secretariat to facilitate the
reader's understanding. In addition, where one or more
words were missed or garbled in the transcription, the
notation "unintelligible" has been inserted. In some
instances, words have been added in brackets to
complete a speaker's apparent thought or to correct an
obvious transcription error or misstatement.
Nonetheless, for the pre-1994 transcripts, errors
undoubtedly remain. The raw transcripts were not fully
edited for accuracy at the time they were prepared
because they were intended only as an aid to the
Secretariat in preparing meeting minutes. The edited
pre-1994 transcripts have not been reviewed by present
or past members of the committee.
* * *
In other words, the 1995 transcripts are accurate.
There are no disclaimers for them, like those made for
the pre-1994 transcripts. Therefore, the above quote by
Mr. Mattingly about the ESF and gold is accurate.
And who is Mr. Mattingly? Virgil Mattingly is general
counsel of the Federal Reserve, its chief legal
That Mattingly's remark passed without comment by
anyone in the FOMC meeting implies that everyone knew
exactly what he was referring to. In other words, to
explain ESF authority, his example was purposefully
chosen. It was one to which the Federal Reserve
governors could all relate because it was something
they saw happen during their watch.
In my imagination I can see them sitting around the big
FOMC conference table nodding their heads in agreement
when Mattingly used this example of the gold swaps to
explain how broad the ESF's authority is.
Recognize too that though he is talking in the past
tense, it doesn't necessarily mean that the swaps had
already happened. They may still be happening because
he may be referring to the authority that approved the
gold swaps and presumably the swap lines, but not
necessarily the date of the actual swaps themselves.
So that this quote of Mattingly is not taken out of
context, let me provide background information. Also, I
invite you to read the full 145-page transcript of this
Jan. 31, 1995, FOMC meeting if you would like to
confirm both the accuracy of the above quote and the
background information I am about to provide. By
reading the entire transcript you will also see how
frequently material was redacted.
Mattingly's comments were made in a discussion by the
FOMC on the rapidly deteriorating financial situation
in Mexico. Crisis conditions had been prevailing since
the peso began tumbling the month before -- that is,
December 1994. You will recall that the Clinton
administration back then had proposed that Congress
provide a $40 billion package of government guarantees
to bail out those who had loaned money to Mexico, and
that Congress had rejected this proposal. So the
administration was scrambling to come up with a way to
get the money thought necessary to "fix" the problem.
Unable to tap the Treasury directly because of the
rebuff by Congress, the administration turned to the
Because the Federal Reserve was to be part of the
proposed bailout, the Federal Open Market Committee was
reviewing what role the Federal Reserve would play in
conjunction with the ESF. A proposal was on the table
for the FOMC's consideration. A Mr. Fix-it who seems to
be the go-between for the Treasury and the Fed was
presenting the proposal.
His name is Ted Truman. And he was responding to
various FOMC members who were questioning whether the
ESF had the legal authority to do what was being
proposed. Hence, the Federal Reserve's legal counsel,
Virgil Mattingly, responded, using the "gold swaps" as
an example of just how broad the ESFs authority
To give you a flavor of the full discussion underway in
the FOMC meeting, here is an excerpt from the
* * *
MR. MELZER. What ability do the Treasury or the ESF
have to take us out of an obligation [i.e., repay the
Federal Reserve] if funds are not appropriated by
Congress? Do they have the ability just to say, we
committed to this and we are going to pay the Fed off?
MR. TRUMAN. Yes, they could.
MR. MELZER. But if they can do that, why can't they
just advance it themselves?
MR. TRUMAN. They could, but I think they feel that it
would be useful to their objectives to have a lot of
people .... [Apparently the rest of his comments are
* * *
The discussion continues on this point, but touches
upon the relationship between the ESF and the Treasury.
These comments also establish that the ESF does not use
"appropriated funds," meaning that the ESF is
answerable only to the secretary of the treasury and
the president. All actions of the ESF are beyond
* * *
CHAIRMAN GREENSPAN. Could I just formally respond to
Governor Lindsey? There is a question here of whether
or not the amount the United States Treasury gives us
has to be appropriated funds, which I think is really
where our examination of the issue has to be. In
examining the takeout, we ought to make certain that we
talk to them with respect to the question of what
happens if they do not get the appropriated funds.
MR. TRUMAN. Mr. Chairman, the Exchange Stabilization
Fund does not have appropriated funds.
CHAIRMAN GREENSPAN. Are we going to be getting a
takeout from the Exchange Stabilization Fund?
MR. TRUMAN. I think that is what is in the program.
CHAIRMAN GREENSPAN. OK.
SPEAKER (?). That is not the same as the Treasury.
MR. TRUMAN. Even if we didn't, the precedent in the
1960s -- I think there was a question then about
whether the Treasury could engage in foreign exchange
operations outside of the ESF -- was the use of Roosa
bonds in the 1960s. The Treasury floated Roosa bonds to
obtain foreign currencies and used some of those
currencies to take us out. That did not involve
appropriated funds. That was treated as a debt-
* * *
The above passage confirms what we already know, but
many people refuse to admit. The ESF is a slush fund
beyond congressional oversight. It can be used to "get
around" most anything (that is, it can skirt normal
governmental procedures). No wonder so many people want
to do away with the ESF. There is no room for it in our
democratic process. It is not subject to the normal
checks and balances carefully crafted by the Founding
Fathers that have proven over time to be so essential
for limiting the power of the federal government.
The ESF is the antithesis of the American foundation of
representative government because it subjects a free
people to an unconstitutional governmental force. Still
not convinced? Here are some more excerpts:
* * *
MR. LINDSEY. My second question has to do with our
credibility. I don't know what questions to ask, and I
hope you will help me out in that regard. I have this
document in front of me, which includes a page entitled
"What is the Exchange Stabilization Fund?" The document
came from Treasury International Affairs. I gather it
was written by them. I have written enough of these to
know what you do, and that is to tell your point of
view. Paragraph 3, not to mention the dots indicating
an omission in Paragraph 2, got me a little nervous.
Paragraph 3 says these holdings in the ESF are used to
enter into swap arrangements with foreign governments,
to finance exchange market intervention, to provide
short-term bridge finance, etc., and all these things
are great. So, basically Paragraph 3 is establishing
that this is not unprecedented. My question would be:
Do we do all these nice things if it's not in support
of the dollar? Is this unprecedented with regard to the
fact that we are supporting another currency?
MR. TRUMAN. The language before the dots is ....
MR. LINDSEY. I am talking about the third paragraph. I
will go to the second paragraph in a second. I'm sorry.
I am running a little out of order. It is saying the
ESF has done all these things.
MR. TRUMAN. The legislation governing the objectives of
the ESF was changed, I think for the most part in the
mid-to-late-1970s. The changes included the language
that the government of the United States and the
International Monetary Fund have the obligation to
promote orderly exchange rate arrangements leading to a
stable system of exchange rates. That was interpreted
to include making loans to Bolivia in helping it
maintain a system of stable exchange rates.
MR. LINDSEY. So that has happened before?
MR. TRUMAN. Yes. They have made loans to or financial
arrangements with at least 31 countries around the
world over the last 50 years.
MR. LINDSEY. I think we all will be asked questions
about this. Can you read this paper and tell me that
there is not something missing that I should know
about, meaning that this is not only the truth but the
MR. TRUMAN. I can only say that Treasury lawyers have
looked into the question of whether these operations
are legal under this broad authorization of what they
can do and what the purpose is....
MR. MATTINGLY. If I can help out?
MR. LINDSEY. Yes.
MR. MATTINGLY. It's pretty clear that these ESF
operations are authorized. I don't think there is a
legal problem in terms of the authority. The statute is
very broadly worded in terms of words like "credit" --
it has covered things like the gold swaps -- and it
confers broad authority. Counsel at the White House
called the Treasury's General Counsel today and asked
"Are you sure?" And the Treasury's General Counsel
said, "I am sure." Everyone is satisfied that a legal
issue is not involved, if that helps.
MR. LINDSEY. Is there anything missing on this page?
MR. MATTINGLY. No, there is not. If you look at the
last paragraph, for example, that is part of the
MR. LINDSEY. About notifying Congress in writing in
MR. MATTINGLY. The statute says that with the
permission of the president they can make loans.