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James Turk: The Fed's blueprint for secret market intervention

Section: Documentation

By James Turk
Copyright 2009 by James Turk. All rights reserved.
Friday, January 16, 2009

An important document buried in the Federal Reserve's archives has been discovered by writer and researcher Elaine Supkis. 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:

And at GATA's Internet site here:

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?


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
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" --

-- 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 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 is the founder and chairman of, editor of the Freemarket Gold & Money Report, and co-author of "The Coming Collapse of the Dollar," which has been updated for a newly released paperback version, now entitled "The Collapse of the Dollar" (


The confidential memorandum from the Martin archive can be found here:

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