The U.S. government wouldn't rig markets this way anymore, would it?

Section:

10p ET Thursday, February 12, 2015

Dear Friend of GATA and Gold:

Robert Wenzel of the Economic Policy Journal notes today that the Federal Reserve Bank of Cleveland has withdrawn its posting of and publicity for a 2011 study by the economists Michael D. Bordo, Owen F. Humpage, and Anna J. Schwartz that is critical of the U.S. government's increasingly frequent intervention in the currency markets from 1962 to 1973:

http://www.economicpolicyjournal.com/2015/02/cleveland-fed-accidentally-...

But Wenzel also notes that the Cleveland Fed's removing the study from its Internet site has not suppressed it, since a very similar version of it was published by the National Bureau of Economic Research, for which Schwartz worked. Economic Policy Journal has posted it and GATA has copied it to its own Internet archive here:

http://www.gata.org/files/USInterventionDuringBrettonWoodsEra1962-1973.p...

A copy of the Cleveland Fed's version is posted at GATA's Internet site here:

http://www.gata.org/files/USCurrencyIntervention1962-1973-ClevelandFedCo...

"Take this as an object lesson," Wenzel writes. "The Fed does intervene in markets during crisis periods and it is very likely that the definition of 'crisis' has broadened since the 1960s to cover a lot more than assassinations of U.S. presidents."

... Dispatch continues below ...



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The Bordo-Humpage-Schwartz study is 88 pages long but a quick reading produces these conclusions:

1) The U.S. interventions in the currency markets were meant to defend the U.S. dollar's standing as the world reserve currency while reducing the drain on U.S. gold reserves, since prior to 1971 the U.S. dollar was formally convertible to gold at an official price. U.S. interventions also were meant to minimize the advantages from a rising gold price that would accrue to the two biggest gold-producing countries, South Africa and Russia, whose regimes were considered hostile to U.S. interests.

2) Participating with the Federal Reserve in currency market intervention, the U.S. Treasury Department's Exchange Stabilization Fund used futures contracts rather than outright sales and purchases of currencies because futures contracts could achieve just as much manipulation while preserving capital.

3) In 1961 the Federal Reserve and the German Bundesbank entered an arrangement in which they rigged the dollar-mark exchange rate and split the profits of the operation.

4) While currency market intervention was undertaken to stabilize exchange rates, it prompted concerns that it could become counterproductive.

For as Bordo, Humpage, and Schwartz write: "Some Federal Open Market Committee members, however, were concerned that prolonged intervention might actually interfere with balance-of-payments adjustment and actually prolong disequilibrium. [Federal Reserve] Governor Mitchell argued that if a foreign country had a balance-of-payments surplus and wanted to acquire gold, the United States should accommodate that country. The United States, therefore, needed a policy to facilitate an orderly loss of gold. Intervention might prevent a sudden loss of gold, but the danger was that absent a fundamental policy change, the demand for gold would grow and eventually worsen confidence in the official gold price.

"Similarly, Governor King feared that 'people would be likely to put too much reliance on these operations to guard the dollar. ...' (FOMC, Minutes, 13 September 1961, p. 55). Governor Roberts also feared that if the Fed repeatedly disrupted the private market's pricing process, the willingness of private market participants to make a market in foreign exchange might deteriorate (FOMC, Minutes, 5 December 1961, p. 60).

"For these reasons, the FOMC favored only temporary interventions that would offset transitional, disequilibrating disruptions in the foreign-exchange market and that would not attempt to avoid fundamental market adjustments. As time would tell, however, distinguishing between temporary, disequilibrating developments and those of a more fundamental nature was extremely difficult."

Or as a high school graduate told GATA's conference in Washington seven years ago --

http://www.gata.org/node/6241

-- three years before Bordo, Humpage, and Schwartz wrote their study:

"The problem with central banking has been mainly the old problem of power -- it corrupts.

"Central bankers are supposed to be more capable of restraint than ordinary politicians, and maybe some are, but they are not always or even often capable of the necessary restraint. One market intervention encourages another and another and increases the political pressure to keep intervening to benefit special interests rather than the general interest -- to benefit especially the financial interests, the banking and investment banking industries. These interventions, subsidies to special interests, increasingly are needed to prevent the previous imbalances from imploding.

"And so we have come to an era of daily market interventions by central banks -- so much so that the main purpose of central banking now is to prevent ordinary markets from happening at all."

There seem to be two ways of looking at the Bordo, Humpage, and Schwartz study:

1) While its time frame ends in 1973, the study remains valuable, as Wenzel suggests, for demonstrating government interests that endure and policy mechanisms that remain available to governments today.

Or 2) the study is irrelevant, just ancient history, because, as Casey Research founder Doug Casey suggests --

http://www.gata.org/node/15090

-- governments long ago lost all interest in how their currencies might be valued against gold and against other currencies and never intervene in the gold market to suppress its price to support their currencies -- that governments have lost their desire for power, that nations no longer have interests in regard to the rest of the world, and that liberty and free markets are triumphant now and forever.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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USInterventionDuringBrettonWoodsEra1962-1973.pdf561.61 KB
USCurrencyIntervention1962-1973-ClevelandFedCopy.pdf505.1 KB