While mucking around the Federal Reserve’s online archives, I stumbled upon this interesting report after putting in random dates and random, interesting words. Like ’secret’. This report from 1961 popped up. Many people say many things about the history of gold and the Federal Reserve but many of these statements are not backed up by hard information. We know that the Presidents of the United States, ever since 1914, have had a queer relationship with the Federal Reserve and both entities have manipulated our currency and gold, outrageously, in the past.
The goal, of course, is to increase and enable global trade and to make allies stronger. The worry is, degrading the dollar, draining Fort Knox of all its gold and having recessions in America that might anger the voters. The document here is secret because it is discussing how the Treasury and the Federal Reserve can secretly manipulate currency relative values vis a vis the dollar and how to use our gold reserves to basically, increase inflation and the speed which money moves through the systems.
1961 CONFIDENTIAL REPORT TO FEDERAL RESERVE CHAIRMAN McCHESNEY MARTIN Jr
U. S. Foreign Exchange Operations: Needs and Methods
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 later.
national financial structure, characterised 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. Similar problems have been faced by monetary authori-
ties abroad, in both the recent period and in earlier years. Solutions to
problems relating to shifts in capital flows aad their impact on national
balances of payments, together with the relationship of each international
flows to domestic monetary policies are perhaps best approached through
joint action by central banks. It is no accident that individual European
central banks have developed highly sophisticated techniques of operating
in the foreign exchange market, aad have supplemented individual opera-
tions by joiat measures of both a formal and an informal, ad hoc, character.
Monetary authorities ia 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. 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.
The basic purpose of such operations would be to maintain confidence
in the dollar. 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 server as a highly useful and flexible addition to
other monetary and fiscal policy measures. The continuation and expan-
sion 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. 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 pay-
ments and hence contribute to an expansion of the movement of goods and
services among countries.
1. Federal Reserve Operations for Its Own Account
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 sub-
sequently need 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 ex-
The BIS account was opened in 1931 in the sum of$10 million. 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.
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.
Authorization for the opening of accounts abroad it contained in
Section 14(e) of the Federal Reserve Act. Such accounts are subject to
Regulation N and to other rules prescribed by the Board of Governors as
contained im the MStatement of Procedure With Respect to Foreign
Relationships of Federal Reserve Banks. M Under Section 12A of the
Federal Reserve Act, the investment of funds im 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 im 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 circum-
scribed. Thus, in a tetter 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 Beard of Governors at or near the figures shown;
they could not be increased (except for minor adjustments) without the
prior approval of the Board of Governors.If 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.
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.
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 Treasures account with the Federal Reserve Bank in a manner
similar to the current practice with regard to the acquisition of gold
certificates. 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
NewYork and other participating Reserve Banks. Some of the technical
arrangements made by the System in the twenties and thirties might well
be adaptable to current needs. 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 need to operate in
the exchange market, or, as occasion warranted, to “buy out” some por-
tion of the Bundesbank dollar reserve or to meet other objectives.
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 reserve 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.
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 circum-
stances, add desirable flexibility to System policy. 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 eases 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 opera-
tions. 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.
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 necessi-
tate redeposits in “C” 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 need DM 100 million to buy $25 million from
the Deutsche Bundesbank, simply by utilizing book entries for the trans-
action, 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 eel! Treasury Mile from it investment account in order to replen~
ish 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.
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. It is,
therefore, necessary that published statements and data be appropriately
devised. 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 avail-
able for use in the exchange market.
The immediate problem of publication involves the weekly state-
ment of the Federal Reserve Bank of New York. 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 email 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, $40 million or more) might lead
to rather immediate questioning and close analysis would probably reflect
foreign exchange dealings with perhaps embarrassing promptness. 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 he so readily evident.
Net operations would also be reflected in the statements of condi-
tion published as of month’s end in the Federal Reserve Bulletin with a
month’s 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.
Evaluation ol Fed Operations For Its Own Account
A major advantage to be gained by Federal Reserve operations on
its own account is the foreign exchange market arises from the fact that
the Federal Reserve Bank cam create dollars while the Treasury is re-
stricted to the use of funds held by it. 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 willing-
ness of central banks to deal directly by providing local currency against
dollars (or “vice versa). la substance, the creation and destruction of
Federal Reserve credit would provide vast resources for foreign exchange
operations and defense of the dollar.
If the decision should be made to conduct Federal Reserve opera-
tions 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 deemed
appropriate. Finally, there la a subsidiary problem of arranging our
weekly statements so as to avoid or delay publication of the details of our
foreign exchange operations.
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. Stabilisation 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 Stabilisation 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. There
would, for example, seem to be considerable obstacles toward enlarging
the Stabilisation 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 Stabilisation Fund.
Within the resources, the holdings of (and operations in) foreign
currencies could he readily handled. Operations could be either in the spot
or forward market, although there would ha some real advantage in favor
of forward transactions since such operations tend to afford maximum use
of the Stabilisation Fund’s resources. Insofar as forward contracts involved
parallel operations with foreign central banksv 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 an under present arrangements, it would ha 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 tike 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 data on the day the purchase
would have to be made. 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 for 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
provise that the reserve would be adequate to cover total obligations under-
taken 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 expounded by some multiple of the amount
currently available. Thus, under parallel contracts, the $179 million noted
aa available in the table above might cover forward contracts of up to, say,
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.
Supplementing Stabilisation 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 Stabilisation 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 Stabilisation Fund could not readily boe supplemented by
Meeting Requirementsof Secrecy and Anonymity
Insofar as Treasury statements are concerned, details of like
Stabilisation 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 la the Treasury Bulletin. Thus, there seems to be sufficient
publication delay from the Treasury aide to meet requirements. With respect
to Stabilisation Fund assets in the form of securities or foreign exchange,
information in 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 re-
flect Stabilisation Fund holdings of dollars and gold. Dollar assets are
included in “Other Deposits” on our weekly statement and tike System’s con-
solidated statement. The over-all category includes a range of other items
each as nonmember bank clearing accounts, Regulation K reserves, deposit
accounts of the IADS, IBRD, IDA, IFC, IMF, UN No. 1, etc. There is some
nominal variation in tibia 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.
Hold holdings of the Stabilisation Fund may be obtained with about a
one-month delay from the Federal Reserve Bulletin, which shows tike total
gold stock and so-called Treasury stock. Moreover, a gold sale or purchase
would be reflected in earmarked gold, bat again with about a month to a six-
week delay (the February Federal Reserve Bulletin shews data for January
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 Stabilisation 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 1st
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 ol the Fund would tie 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 minimise immediate analysis ol 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
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 pro-
tection of the dollar, such risks–minimised by careful management–
would seem a relatively small price to pay. Once a basic choice is made
as between operations lor 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 bo 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 utilising resources that are not
directly limited by a required cash position.
April 5, 1961
Now, to take a look at what was going on back then, we go into the Time Machine:
Now that everyone seemed to be taking for granted that the recession has reached its low point. Government economists began nervously eying the quality of the recovery. Aside from a quickening of business confidence, they had a few definite signs to go by—a slight increase in steel orders, department store sales up 5% in Easter week, auto sales for March up 15%. Of the twelve leading indexes, e.g., raw-material prices, that the National Bureau of Economic Research uses to measure the business cycle, nine have already turned upward. Said Walter Heller, chief of the President’s Council of Eco nomic Advisers: “We assume that the leveling-off is near at hand. But that’s the beginning, not the end of our problem. All along, we have felt that the performance of the economy during the recovery phase will determine whether we can get the economy back to full production.”
Cautious Forecast. The chief fear among Government planners is that the recovery will be as moderate as the recession, which was the mildest since World War II (gross national product dropped less than i%). Now they anticipate, at least for 1961, even less of an upturn than the one that followed the 1958 recession, when the G.N.P. jumped $50 billion in the year after the recession ended—but still got poor marks for vigor from the economists. In a cautious economic fore cast, Government economists predict that the G.N.P. will rise from its present estimated $500 billion to $502 or $503 billion in the second quarter, may reach $520 billion by year’s end. That would make the year’s average $509 billion.
As confidence in the recession’s end spreads, much of the boost will come from businessmen curtailing their inventory liquidation, the biggest factor in the G.N.P. slump. In the next quarter, the rate of inventory liquidation is expected to ease to about $2 billion, providing a solid lift for the economy. But that turnaround would not be as great as in 1958, when the inventory rate swung from minus $7 billion in the first quarter to plus $3 billion in the fourth. Nor do economists look for any strong spurt in housing starts, which have helped pave the way for all previous postwar recoveries.
Observing all this bustle, New York Stock Exchange President Keith Funston decided that it was time to pin a red cross on speculators lest they get hurt. Disturbed by reports that many investors were scrambling to buy shares in firms “whose names they cannot identify, whose products are unknown to them and whose prospects are, at best, highly uncertain,” Funston delivered a sharp warning: “It is impossible to get something for nothing. Stock prices go down as well as up. Don’t invest on the basis of tips and rumors.”
Most brokers believed that the heavy speculation was being done by semipro investors who were switching from sound to risky investments (often in the more volatile over-the-counter market) in the hope of a quick killing in the rising mar ket. Bankers, also concerned about the speculative spree, reported a startling number of fund transfers from savings accounts to brokerage firms. Funston’s warning slowed the market down a bit; volume slacked off and prices steadied. But by week’s end the market was off and running again. It gained 7.05 points for the week to close at 683.68 (on the Dow-Jones industrial average), less than 2 points below its alltime high.
1961: Cosmonaut Yuri Gagarin becomes the first human to enter space and orbit the Earth, helping boost the Soviet space program and intensify the space race with the United States.
The diminutive Gagarin, who stood a mere 5-foot-2, appeared ready to pursue a career as an industrial worker but found his passion for flying while attending technical school. He entered military flight training and earned his pilot’s wings at the controls of a MiG-15. In 1960, he was selected as one of the Soviet Union’s first class of 20 cosmonauts. He excelled in the training and so was chosen to be the first man to enter space — and perhaps partly because the Vostok-1 capsule was so cramped.
The space race heated up greatly when the Russians beat us, yet again. The US was just beginning to pull out of a bad recession and Kennedy just entered his office and was presented with a heating up of the Cold War as well as the Space Race and the point was to boost US consumer spending which was mainly internal since we still had an American-owned industrial base back then.
In only TEN YEARS, Fort Knox was being drained of gold, the silver currency we used as coins was repeatedly debased so that today, it is virtually all base metals and the US began its long, long reign of ever-widening trade and government budget deficits. The only way to kill the trade deficit was to have horrible recessions and when these ended, foreign-based factories flourished even more and US industries shrank or were taken over by our ‘allies’.
The seeds of this process is quite clear in this secret document. I am glad the Fed released this…with NO FANFARE, as you can see. I spent several hours, fixing this transcript so it would be easier to read. A real pain in the ass. So here it is: have fun figuring out how this screwy document helped kill the gold/dollar standard!
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