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Form F. R. 131



December 1. 1956
Chairman Eccles ^


Here is the brief statement you requested yesterday with regard to
recent Stabilization Fund operations* I attach a clipping I have just
received from this morning's Herald Tribune that shows the press has already caught on to what's happening. Henceforth the Treasury will have
no secrecy unless it changes its methods*


1. The picture with regard to Stabilization Fund operations appears
to be as follows, although in the absence of direct Treasury information,
it is partly guesswork:
For three weeks the Stabilization Fundfs account at the New York
Federal Reserve Bank has been down to a bare working minimum.
dollar resources are practically exhausted*

That is, its

It is not in position to buy

any more gold. When the British Fund wishes to exchange gold for dollars
in order to support the pound, our Fund must sell an equivalent amount of
domestic gold to the Federal Reserve Bank of New York in order to acquire
dollars with which to buy the British gold.

On November 9 it sold $21,000,-

000 of gold to the bank. Last week it appears to have sold about $28,000,000 more in three installments.
2. Since gold sold by the Fund to the Federal Reserve bank gets into
reported monetary gold stock, this stock rises without corresponding imports,
for the gold obtained from the British Fund is earmarked abroad.

The press

has been slow to raise any questions about thisj but the questions are now
beginning, and it will not be long before the conclusion is drawn that these
unexplained increases in monetary gold stock represent Stabilization Fund
operations. At this point the Treasury may want to restore the secrecy it
formerly enjoyed.
3. There are certain steps the Treasury might take to obtain secrecy
that would be undesirable from the standpoint of the Federal Reserve System.
One would be the purchase of #500,000,000 or $1,000,000,000 of Treasury bills
with Stabilization Fund gold, so that the Fund could thereafter sell Treasury

- 2 bills to the market whenever it had to acquire dollars for additional purchases
of gold*

Such a move, while it would enable the Fund thereafter to operate

in secrecy, would immediately add #500,000,000 or #1,000,000,000 to member
bank reserves and leave the Fund with a great open-market portfolio that
could be used for any purpose the Treasury saw fit. Such a move would, therefore, not only intensify the excess reserve problem but might seriously interfere with the work of the Open Market Committee.
A far more constructive type of Treasury bill operation would be for the
Treasury to borrow initially from the market in order to buy gold. A question
may, however, be raised whether the Treasury could justify increasing the
public debt for the purpose of buying an unproductive asset —

such as gold.

A procedure that would provide the Fund with ample dollar resources and
prevent subsequent gold purchases from affecting monetary gold stock would
be for the Fund to sell say #500,000,000 of gold certificates to the Federal
Reserve Bank of New York, taking the proceeds in an account with the bank,
either directly or through various channels that would serve to conceal the
nature of the operation. Gold movements would then have their usual effect
of increasing or decreasing member bank reserves, but the Fund would engage
in no open-market operations. This procedure would appear to be satisfactory
from the standpoint of the Federal Reserve System.
4. It would be useful to know if the Fund has already been dealing in
Treasury bills. There is some reason to believe that it has.

- 5 It would also be useful to know if the Fund has any way of obtaining
additional resources other than that of converting its gold into dollars.
Can the Treasury appropriate or lend cash to it for use in stabilizing the
dollar, or can the Fund itself borrow from the public?

There is some evi-

dence that transactions of this character have already occurred.

If such

sources can be freely tapped without further Congressional authorization,
then there is a real possibility of handling a gold inflow so as not to affect
member bank reserves.