The invisible hand of influence
By Melvin J. Howard
The U.S. Treasury's $12 billion loan to Mexico back in
January 1995 brought to public a fund many new little about since its
authorization by the Gold Reserve Act of January 31, 1934. The design of the
ESF, as set forth in the statute, contributed to its secrecy and obscurity THE
EXCHANGE STABILIZATION FUND. Its stated mission was to stabilize the exchange
value of the dollar, but it has also assumed other roles that had no mandate,
like lender to favored countries it has since become a unlimited power of purchase over anything. A statistical profile of the ESF accounts for
the growth of its working balance from $200 million in 1934 to $105 billion in assets
in 2009 including $58.1 billion in Special Drawing
Rights (SDR)
from the International
Monetary Fund. Harry Dexter White head of the fund at the time was a
major architect of the International
Monetary Fund and World Bank. White was entrusted with the
management of the U. S. Treasury’s $2 billion stabilization fund. He
represented the Treasury on
the Economic Defense Board, was a trustee of the Export-Import Bank in Washington, D.C. and was a member of the
government’s Committee for Reciprocity Information, which was involved in
reciprocal trade agreements with foreign countries. I
stumbled on this fund when I was in the middle of my NAFTA challenge. What I noticed was that Nafta
included a provision for the North American Financial Group, a consultative group to "stabilize"
exchange rates between signatory countries. Formed as a side agreement to Nafta in early 1994, the NAFG supported the peso's exchange rate with a $6 billion line of credit. That kept the peso massively overvalued and enabled the Mexican central bank to rapidly inflate the money supply.
NAFTA’S TO BIG TO FAIL BAIL-OUT
Nafta made the bailout
inevitable just like the to big to fail banks there was too much at stake
economically, politically, and financially after the treaty's passage in 1994.
The collapse of Mexico’s peso would have meant NAFTA was dead on arrival. In
the end there was no choice the two economies were intertwined in trade, in
commerce, in the movement of people. What made the loan to Mexico so
unique was that it did not require Congressional authorization but could be
made at the discretion of the Secretary of the Treasury, with the approval of
the President. In February 1996, the Treasury Department announced that it was
suspending payment of interest on government securities in the ESF's portfolio
in order to create additional borrowing power for the government under the debt
ceiling that Congress was refusing to raise history has a way of repeating
itself. These actions brought the fund to public notice after it had remained
so long in obscurity. The fund began operations as of April 27, 1934, financed
by $2 billion of the $2.8 billion paper profit that the government realized
from devaluation, that is, from raising the price of gold to $35 an ounce from
$20.67. This sum was deposited to its account with the Treasurer of the United
States (Treasury AR 1935, Exhibit 40, p. 265). The fund was authorized to deal
in gold and foreign exchange in order to stabilize the exchange value of the
dollar, to invest any portion of the fund not currently required for stabilization
purposes in direct obligations of the United States, and to add any earnings
from sales and interest on its investments to the sum available for its use.
Of the $2 billion set aside for ESF capital, only $200
million was made available for its working fund. The $1.8 billion was shown in the gold
asset and liability statement of the Treasurer of the United States as gold credited to
the ESF. The residual $200 million was presumably initially deposited in a special
account at the NewYork Federal Reserve Bank, but by June 1934 the ESF had
reduced the deposit by investing $38 million in U.S. Treasury bonds, $20 million in
gold (the bulk held at the U.S. Assay Office), and $30 million in silver.
The act creating the ESF excluded it from the congressional
appropriation process once its initial capitalization was in place. It was
intended to be self-financing, and was not required to seek annual congressional funding for
its operations. The self-financing arrangement contributed to the secrecy of ESF
actions, since the fund did not have to justify its expenditures during annual appeals
to Congress for appropriations.The fund was conceived to operate in secrecy under the
exclusive control of the Secretary of the Treasury, with the approval of the President,
"whose decisions shall be final and not subject to review by any other officer of
the United States. The intention was to cloak foreign exchange market
intervention. However, the Secretary of the Treasury was willing to reveal
information on stabilization loans to favored countries that the ESF negotiated
loans that had no mandate in the statute yet essentially created a foreign
affairs role for the Treasury.
If you have secrete fund we will match that secrete fund
with our own. The British was the first to start their cloaked fund. So the ESF
could base the secrecy of its operations on the British Exchange Equalisation
Account (EEA), formally initiated July 1, 1932. It was described as "an
anonymous and secret body whose actions are not open to continuous scrutiny and
criticism. The House of Commons did not know and could not be told what the EEA
was doing. Suspicion of the purpose of the EEA was a motive for the
establishment of the ESF. U.S. officials believed that the EEA was used to
depreciate the pound, not to smooth fluctuations in its exchange rates, its
official purpose. Each fund would have liked to know what the other's
intentions and actions were.
Since 1979 the ESF's administrative expenses have been
subject to the budget process. In addition, the ESF is audited annually, with
the report originally submitted to the President, not to Congress. That later
changed so that Congress could also receive reports of the ESF's operations.
Although Congress has required the President to give it information about ESF
transactions, the constitutionality of the ESF has not been challenged. The ESF
in its original design belongs and rest with the Executive Branch, of the
United States (The President).
Your Problem Is My Problem
In September 1936 the United States, United Kingdom, and
French governments simultaneously issued declarations accepting a devaluation
of the French franc and agreeing to use appropriate available resources to
avoid disturbance of international exchanges resulting from the readjustment.
The three governments agreed to guarantee exchange rates for twenty-four hours
at a time, authorities of the stabilization funds announcing each morning the
price at which they would convert into gold at the end of the day on a
reciprocal basis the foreign currency balances the others had acquired. The United States, which had previously sold gold at $35 an
ounce, plus handling charges, only to gold-standard countries, announced it would
sell gold to stabilization funds. The arrangement eliminated exchange risk for the
authorities while preserving exchange-rate flexibility. Belgium, the Netherlands, and
Switzerland were soon added to the nations complying with the Agreement and
eligible to buy gold from the United States. Examination of the list of
countries that have been granted loans over the years, leads doubt that they have resulted in stabilization. The
legacy of the ESF is that lending programs dominate the operation of the IMF.
Support for weak currencies that the IMF provides raises concerns of moral
hazard. Whether IMF lending has good or bad consequences is up for debate or
whether ESF is used as a black ops slush fund or war chest you be the judge I
hereby issue this executive order.
Memorandum on Use of the Department of the Treasury’s
Exchange Stabilization Fund To Support a Guaranty Facility for Certain Money
Market Mutual Funds
December 12, 2011
Memorandum for the Secretary of the Treasury
Subject: Use of the Department of the Treasury’s Exchange
Stabilization Fund To
Support a Guaranty Facility for Certain Money Market
Mutual Funds
Pursuant to section 10(b) of the Gold Reserve Act of 1934,
as amended, 31 U.S.C.
5302(b), I approve the use of funds from the Exchange
Stabilization Fund to provide up
to $50 billion as a guaranty facility for certain money
market mutual funds, consistent with your recommendation to me and the terms
and conditions set out in your memorandum to me dated October 16, 2011.
Melvin J. Howard
Question do you know what I just authorized to be funded?
