The Smoking Gun On Fed Gold Manipulation

Zero Hedge reports about the Smoking Gun on Fed gold manipulation.

(emphasis mine) [my comment]

Exclusive Smoking Gun: The Fed On Gold Manipulation


Zero Hedge has recently presented several declassified documents from the pre-1971 "Nixon Shock" days, that endorse the case for gold as a major historical factor in US monetary and foreign policy, as demonstrated by State Department and CIA disclosure. Gold's special status in policy and administrative decision-making was a direct factor in Nixon's choice to abolish the gold reserve at a time of an exploding budget deficit.

Yet what about the days after 1971, and specifically, how did that critical "behind the scenes" organization, the Federal Reserve, perceive and manipulate gold in the post Bretton-Woods world? Was gold, freed from its shackles to the dollar, once again merely a symbolic representation for money?

Zero Hedge presents the smoking gun that may provide responses to all the various open questions, courtesy of a declassified memorandum, written by none other than the then Fed Chairman, addressed to the president of the United States.

On June 3, 1975, Fed Chairman Arthur Burns, sent a "Memorandum For The President" to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon's actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971. In a nutshell Burns' entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would "easily frustrate our efforts to control world liquidity" but also "dangerously prejudge the shape of the future monetary system." Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. The problem with accounting for gold at fair market value: the risk of massive liquidity creation, which in those long-gone days of 1975 "could result in the addition of up to $150 billion to the nominal value of countries' reserves." One only wonders what would happen today if gold was allowed to attain its fair price status. And the threat, according to Burns: "liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, out efforts and those of other prudent nations to get inflation under reasonable control." Aside from the gratuitous observation that even 34 years ago it was painfully obvious how "massive" liquidity could and would result in runaway inflation and the Fed actually cared about this potential danger, what highlights the hypocrisy of the Fed is that when it comes to drowning the world in excess pieces of paper, only the United States should have the right to do so.

Another notable observation is that despite a muted antagonism between the Fed and the US Treasury persisting for decades, the fuse is and always has been short, and the conflict can promptly hit a crescendo, with the Fed ultimately always getting the upper hand
[complete bullshit. Throughout its history, the Fed has been completely dominated by the Treasury]. In the case of the Burns memo, the Fed's position was diametrically opposed to what the Treasury proposed was the proper approach [In 1975, there existed a rare situation where normal relationship between the treasury (normally on the irresponsible side of things) and the fed (normally on the responsible side of things) was reversed. More info below]. The result: full on assault by the Federal Reserve over the Treasury's credibility and even then, more than three decades ago, a veiled threat by the Fed involving escalating problems if the recommendation of the Treasury was picked over that of the Fed. "Severe criticism on the part of prominent and influential financiers would inevitably follow if the Treasury's present position prevailed." It is not surprising that the Fed's modus operandi has not changed one bit since 1975: it is our way or virtually assured destruction/embarrassment way. [Zero Hedge gets this wrong, the treasury/Fed situation in 1975 was abnormal. Bill Simon was one of our best Bill Simon secretary of the treasury, and Arthur F Burns was probably our worst Fed chairman]

Additionally, a curious tangent of the Burns memo is the fact that gold was explicitly used as an engine to enact political doctrine: "If the United States took a stand on the gold question that failed to satisfy the French in current international negotiations, would there be adverse economic or political consequences? I doubt it... If we do ever accede to French views on gold, we should at least use our bargaining leverage to achieve some major political advant age." And while gold as a policy mechanism was unable to satisfy its role this time, one wonders on how many subsequent occasions was global democracy trampled over in order to placate the US Federal Reserve:

"I have consulted Henry Kissinger as to whether there is some political quid pro quo we might want to extract from the French in exchange for acceding to some part or all of their desired position on gold. But Henry tells me there is none at this time."

At some point governments of advanced nations will say "enough" to the covert domination of their controlling bodies by the Federal Reserve
[the Treasury], which through manipulation of its gold and money interests, effectively has control over not just the French, but every government which has a monetary basis to its respective economy and a relationship to the US "reserve" currency... Which means virtually every country in the world. The backlash, if and when it occurs, will be memorable.

Lastly, the memo presents a useful snapshot into the cloak-and-dagger, and highly nebulous world of CB negotiations and gold price manipulation:

"I have a secret understanding in writing with the Bundesbank that Germany will not buy gold, either from the market or from another government, at a price above the official price."

So to all conspiracy theorists claiming that gold is being manipulated on a daily basis by the Federal Reserve
[the Treasury]: when it occurs over and over, and is so well documented, it is no longer a theory, it is merely sad. And the fact that the US government goes to great lengths to hide the illicit dealings of the Federal Reserve, which through its monetary tentacles, has prima facie control over not just US policy but also over sovereign governments, is an unprecedented failure in the checks and balances system that the founding fathers had planned when they created the United States of America. Yet saddest is that the United States no longer pursues strategic goals that are in the best interest of the majority of its citizens, but merely manipulates other, less powerful nations into a servile existence that only provides gain to a very limited subset of the American financial [political] oligarchy. It is time for the Fed's unprecedented control over affairs, both global and domestic, to end.

Full memo from Arthur Burns presented, compliments of Geoffrey Batt who collaborated in the creation of this post.

Below is the memo.

CHAIRMAN OF THE BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
June 3, 1975

MEMORANDUM FOR THE PRESIDENT
FROM: Arthur F Burns

[Some background. In 1975, there existed a rare situation where normal relationship between the treasury and the fed was reversed.

Arthur F Burns (fed chairman) = for wage controls, for irresponsible tax cuts, unwilling to take unpopular actions, gave in easily to political pressure, etc

Bill Simon (secretary of the treasury) = against deficits, against wage controls, against irresponsible tax cuts, willing to take unpopular actions, resisted political pressure, etc
]


In preparing for the June 10-11 meeting of the International Monetary Fund's Interim Committee, Reserve have agreed on all aspects of a U. S. the Treasury and Federal position except for one point. But that one point is of fundamental importance. The manner in which it is resolved may well determine the shape of the world's monetary arrangements, and therefore affect our economic and political interests over the next generation.

The broad question at issue is whether central banks and governments should be free to buy gold, from one another or from the private market, at market-related prices. (Market prices have recently been in the range of $160 to $175 per ounce; the official price is $42. 22 per ounce.) The Treasury is willing to accept a large measure of freedom for such transactions. The Federal Reserve is opposed.

The specific point of controversy is whether to allow individual governments to increase their gold holdings above a specified ceiling (for example, actual holdings as of May 1, 1975). The Treasury is willing to agree to the position, taken strongly by the French Government, that there should be no ceiling on the gold holdings of an individual government. The Federal Reserve believes that individual country ceilings are essential, and that the United States should not agree to any new international arrangements on gold unless they incorporate such ceilings.

The January 1975 communiqué of the International Monetary Fund's Interim Committee, an internationally agreed document, stated that freedom for national monetary authorities to enter into gold transactions should "ensure that the role of gold in the international monetary system would be gradually reduced." Individual country ceilings on gold holdings, which the Federal Reserve favors, would contribute to this objective. The Treasury's position, on the other hand, will be interpreted by many as a withdrawal from the January understanding.

There are four basic elements in the Federal Reserve's stand on gold:

First, there is no compelling practical problem that requires early action on gold issues. Sizable borrowing facilities exist to help countries tide over emergency needs for balance-of-payments financing. Countries needing to use their gold holdings can either sell some gold in the market or arrange to use their gold as collateral for loans. Hence, there is no economic reason for being concerned about deferring a resolution of outstanding gold issues.

Second, until we and other countries have forged a genuine consensus on the desired shape of the future world monetary system, we should not isolate the gold question and deal with it apart from other critical issues of monetary reform. Moving ahead on gold in the absence of such a consensus may inadvertently and dangerously prejudge the shape of the future monetary system.

Third, early removal of the present restraints on inter governmental gold transactions and on official purchases from the private market could well release forces and induce actions that would increase the relative importance of gold in the monetary system [and decrease the dollar's importance]. In fact, there are reasons for believing that the French, with some support from one or two smaller countries, are seeking such an outcome. Countries such as France that are opposed to ceilings on their individual gold holdings undoubtedly want the freedom to buy in the private gold market so as to support the market price. It is an open secret among central bankers that, at a later date, the French and some others may well want to stabilize the market price within some range. In my judgment, therefore, there is a significant risk that the Treasury's recommended position would inadvertently foster, or at least permit, an increase in the relative importance of gold in the monetary system.


Fourth, a large measure of freedom for governments to trade in gold at a market-related price may easily frustrate efforts to control world liquidity. For example, such freedom would provide an incentive for governments to revalue their official gold holdings at a market-related price. (France has already done so.) This in turn could result in the addition of up to $150 billion to the nominal value of countries' reserves. Liquidity creation of such extraordinary magnitude would seriously endanger, perhaps even frustrate, our efforts and those of other prudent nations to get inflation under reasonable control. This is a matter of great concern to Mr. Witteveen, the head of the IMF, and to many other financiers.

As our government's policy on gold has evolved, the Federal Reserve has sought to avoid taking a rigid position. I have gone some distance to try to conciliate the French view:

First, I have reluctantly agreed to a partial return of the International Monetary Fund's gold holdings to member countries; this action, strongly desired by France, would augment the gold stocks of France and other countries, but would weaken the IMF itself.

Second, I have proposed the important concession that a government may buy gold from another government, irrespective of its established ceiling, if the purchase will accommodate an emergency need by the selling government to mobilize its gold holdings;
also that a government which had made a sale under emergency conditions could repurchase that amount from another government without involving the emergency provision.

Third, in view of a desire to come closer to the French view, I have suggested some lifting of the ceiling that would apply to an individual country's gold holdings (e. g., from 100 per cent to 105 per cent of the actual holdings as of May 1, 1975).

Indeed, I have even been willing to go further. I have consulted Henry Kissinger as to whether there is some political quid pro quo might want to extract from the French in exchange for acceding to some part or all of their desired position on gold. But Henry tells me there is none at this time. Resolution of gold issues in their preferred manner is very important to the French, and they will probably be willing to pay a lot to get their way. If we do ever accede to French views on gold, we should at least use our bargaining leverage to achieve some major political advantage.

If the United States took a stand on the gold question that failed to satisfy the French in current international negotiations, would there be adverse economic or political consequences? I doubt it, for two reasons. First, some other European countries (most importantly, the Germans and the British) are unlikely to participate with the French in a European, go-it-alone policy on gold. I have a secret understanding in writing with the Bundesbank -- concurred in by Mr. Schmidt -- that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce. Second, there is in my judgment a reasonably good chance of a "successful" negotiation in Paris next week, even if it proves impossible to win French acceptance of individual country gold ceilings and other aspects of the U.S. position on gold issues. The political pressures to reach agreement on increases in IMF quotas are great. A package that included these quota increases and some other relatively uncontroversial matters, but did not include agreement on gold, seems feasible and should be an acceptable outcome for the United States.

All in all, I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market related price. It is my understanding that this position is supported by Japan, the United Kingdom, by some other developed countries, and by most if not all developing countries. This position also commands strong support in our own country among those of the financial and academic communities that are sensitive to these issues. Severe criticism on the part of prominent and influential financiers would inevitably follow if the Treasury's present position prevailed.


Finally, I must point out that the Treasury's position on gold will have to be aired in Congressional Hearings when changes in the IMF Articles of Agreement come up for approval. In my judgment, Mr. Reuss, who is a leader on issues of this type, will denounce the Treasury's position on gold once he understands it. This is one more reason why you should ponder the gold is sue very carefully.

Copy to:
Secretary Simon
Secretary Kissinger
Mr. Oreenspan
Mr. Lynn
Mr. Seidman

Wikipidea's entry on Arthur F. Burns (February 1, 1970 — January 31, 1978)

Burns served as Fed Chairman from February 1970 until the end of January 1978. He has a reputation of having been overly influenced by political pressure in his monetary policy decisions during his time as Chairman and for supporting the policy, widely accepted in political and economic circles at the time, that Fed action should try to maintain an unemployment rate of around 4 percent. (See also: Phillips curve)

When Vice President Richard M. Nixon was running for President in 1959—1960, the Fed, under the Truman-appointed William McChesney Martin, Jr., was undertaking a monetary tightening policy that resulted in a recession in April 1960. In his book Six Crises, Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chairmanship in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972.

Later, when Burns resisted, negative press about him was planted in newspapers and, under the threat of legislation to dilute the Fed's influence, Burns and other Governors succumbed. Inflation resulted, which Nixon attempted to manage through wage and price controls while the Fed under Burns maintained an expansive monetary policy. After the 1972 election, price controls began to fail and by 1974, the inflation rate was 12.3 percent. Burns also had to cope with t he 1973 oil crisis.

Another factor contributing to inflation under the Burns Fed was the belief among Burns and other Fed Governors that "the country" was not willing to accept rates of unemployment in the range of six percent as a means of quelling inflation. From the Board of Governors meeting minutes of November 1970, Burns believed that:

...prospects were dim for any easing of the cost-push inflation generated by union demands. However, the Federal Reserve could not do anything about those influences except to impose monetary restraint, and he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6 percent. Therefore, he believed that the Federal Reserve should not take on the responsibility for attempting to accomplish by itself, under its existing powers, a reduction in the rate of inflation to, say, 2 percent... he did not believe that the Federal Reserve should be expected to cope with inflation single-handedly. The only effective answer, in his opinion, lay in some form of incomes policy.

During Burns' tenure, the consumer price index rose from 6%/year in early 1970 to over 12%/year in late 1974 after the Arab Oil embargo, and eventually falling to under 7%/year from 1976 to the end of his tenure in January, 1978, with an annual average rate of consumer price inflation of approximately 9% during his term. Negative economic events included multiple oil shocks and heavy government deficits arising in part from the Vietnam War and Great Society government programs. The high interest rates set by Paul Volcker were able to mitigate certain policy outcomes derived from the earlier actions of Burns and the FOMC under his leadership.

The verdict of history

Economics historian Bruce Bartlett gives Burns poor marks for his tenure as Fed chairman because the inflationary forces that began in 1970 took more than a decade to resolve. "The only disagreement among economists is whether Burns fully understood the mistakes he was making, or was so wedded to incorrect Keynesian theories that he didn't realize what he was doing. The only alternative is that he was under irresistible political pressure from Nixon and had no choice. Neither explanation is very favorable to Burns.
Economists now recognize the Nixon era as Exhibit A in how the adoption of bad economic policies in pursuit of short-term political gain eventually turns out to be bad politics as well."
[I like this quote]

This entry was posted in Uncategorized. Bookmark the permalink.

3 Responses to The Smoking Gun On Fed Gold Manipulation

  1. E. Honda says:

    How can it be that the "official" price of gold is 42 dollars, that Bundesbank is willing to pay? I would like to buy guld from Bundesbank at that price, but I guess they wouldn't sell.

  2. Kevin says:

    Good work Eric.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>