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.
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:
- 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.
- 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.
- 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.
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.