Submitted by Robert Wenzel via Economic Policy Journal,

The Federal Reserve Bank of Cleveland earlier this week tweeted out a notice of a working paper by economists, Michael D. Bordo, Owen F. Humpage and Anna J. Schwartz.



The paper was tiltled: U.S. Intervention during the Bretton Wood [sic] 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 and Schwartz worked at the National Bureau of Economic Research.



The web page containing the paper is now empty. From the Google search:

US Intervention during the Bretton Wood Era: 1962-1973 www.clevelandfed.org/.../wp1108.pdf?... 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. By the early 1960s, ..

And the tweet about the paper has been deleted. I downloaded a hard copy of the paper,with the Federal Reserve of Cleveland logo on the front page, before it was taken down,

There appears to be a very similar version of the paper at the National Bureau of Economic Research, but it, for one, does not have the typo in the title, Wood instead of Woods.



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 Bretton Woods exchange rate system. The paper is exceptionally critical of the market manipulations that took place during that period.



This is from the introduction (my bold):

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 hiatus. 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 exposures. These operations were stop-gap. In the early 1960s, U.S. administrations believed thatmuch 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. By 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 1973. 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 independence.

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. The most notable occasion occurred immediately following President Kennedy’s assassination on 22 November 1963. At this time, trading in the New York market essentially stopped. 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 settled down. 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 Bank.) 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. (I discuss this in much greater detail in the EPJ Daily Alert). 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.