by Robert Wenzel
February 12, 2015
Robert Wenzel is
Editor & Publisher at EconomicPolicyJournal.com and
at Target Liberty.
He is also author
of The FED Flunks: My Speech at the New York Federal
Follow him on
Federal Reserve Bank of Cleveland earlier this week tweeted out
a notice of a working paper by economists,
Michael D. Bordo
Owen F. Humpage
Anna J. Schwartz
The paper was titled: U.S. Intervention
During the Bretton Wood(s) Era - 1962-1973
At the time the paper was written in 2011,
Bordo taught in the Department
of Economics, Rutgers University
Humpage was an
economist at the Federal Reserve Bank of Cleveland
worked at the National Bureau of Economic Research
The web page containing the paper is now
From the Google search:
Federal Reserve Bank of Cleveland
Apr 8, 2011 -
U.S. Intervention during the Bretton Wood Era: 1962-1973 by
Michael D. Bordo, Owen F. Humpage, and Anna J. Schwartz.
And the tweet about the paper has been
I downloaded a hard copy of the paper, with the Federal
Reserve of Cleveland logo on the front page, before it was taken
There appears to be a very
similar version of
the paper (U.S.
Intervention During the Bretton Woods Era - 1962-1973) at the
National Bureau of Economic Research (NBER), but it,
for one, does not have the typo in the title, Wood instead of
It is probably no surprise that the paper is no longer featured at
the Cleveland FED.
The paper is a detailed 87 page report on the
massive interventions in currency markets that the Treasury and the
Federal Reserve conducted during the era of the
exchange rate system.
The paper is exceptionally critical of the
market manipulations that took place during that period.
This is from the introduction:
In an attempt to neutralize
speculative activity, the U.S. Treasury began intervening in
the foreign exchange market in March 1961, after a 30 year
A year later, the Federal Reserve began intervening for
its own account with a primary focus on providing foreign
central banks with temporary cover for their unwanted dollar
These operations were stop-gap. In
the early 1960s, U.S. administrations believed that much of the
pressure on the balance of payments was transitional and largely
related to the postwar global recovery, so finding a mechanism
to buy time for an inevitable adjustment seemed appropriate.
the late 1960s, however, Bretton Woods' severe structural
problems, which a rising U.S. inflation rate severely
aggravated, were apparent. The maintenance of Bretton Woods
required elected officials in the United States and abroad to
sacrifice domestic economic goals for international objectives,
a trade-off they would not make.
The U.S. closed its gold window
in August 1971, and generalized floating commenced in March
As a delaying tactic, U.S.
foreign exchange operations were often successful. They raised
the potential costs of speculation and provided cover for
unwanted, temporary, and ultimately reversible dollar flows.
They delayed the drain of the U.S. gold stock.
But to the extent that these devises
substituted for more fundamental and necessary adjustments
and postponed the inevitable collapse of Bretton
Woods, they were a failure.
In addition, the institutional
arrangement underlying U.S. intervention operations raised
important, long-lasting issues about Federal Reserve
In addition to the paper's exceptional critique of the exchange
manipulations, the paper offers a valuable insight into how the
Federal Reserve operates during periods of crisis.
Here is what the FED did, according to
the paper, immediately after the assassination of President Kennedy
and what it did at the height of the Cuban Missile Crisis:
U.S. authorities occasionally
intervened to calm developments that, if left unchecked,
might grow to threaten the existing parity structure.
most notable occasion occurred immediately following
President Kennedy's assassination on 22 November 1963. At
this time, trading in the New York market essentially
To prevent panic selling, which seemed to afflict
the stock market at the time, the Foreign Exchange Desk of
the Federal Reserve Bank of New York (FRBNY) placed large
orders to sell all major currencies at the exchange rates
that existed just prior to the assassination.
By the close
of business, the Desk had sold $23.5 million equivalent
German marks, British pounds, Netherlands guilders, Canadian
dollars, and Swiss francs.
On that same day, the Bank of
Canada bought $24.5 million to support the dollar against
its Canadian counterpart. (The System then acquired $14
million from the Bank of Canada through its swap arrangement.)
The European markets were closed at the time of the assassination. When they reopened, foreign central banks
intervened in their spot markets, but by then, markets had
Similarly, news of the Cuban
missile crisis on 22 October 1962 generated large financial
flows out of dollars and into Continental currencies,
especially Swiss francs. If left unchecked, the Desk feared,
these financial flows might raise doubts about the structure
of the exchange rates.
Moreover, by placing unwanted dollars
in the Swiss National Bank, they contribute to a potential
drain on the U.S. gold stock.
The Federal Reserve System
responded by selling $8 million equivalent francs into the
Swiss spot market through the Swiss National Bank and $2.3
million equivalent francs into the New York spot market.
(The Swiss National Bank acquired $50 million through
intervention, and the System drew $20 million equivalent
Swiss francs through its swap line with
the BIS on 31
October 1962 and bought dollars from the Swiss National
The System also sold $700 thousand equivalent Dutch
guilder in the New York spot market at the onset of the
Cuban missile crisis.
Take this as an object lesson.
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 US presidents.
There are many other lessons to be learned from the paper, including
the FED's perspective on price inflation, which in my view is eerily
similar to the present day situation.
Suffice to say for this post, my view is
that the FED will eventually be in a position similar to the early
1970s, when they ignored signs of growing price inflation to help
continue to boost employment and the economy.