Was the Washington Agreement on Gold, which was first implemented in 1999, meant to intervene in the gold market, or even to rig it? I have asked Edwin M. Truman about it, a former official of the U.S. Federal Reserve and U.S. Treasury.

By Lars Schall

A few days ago, I saw this article at the web site of the Gold Anti-Trust Action Committee (GATA) related to the Washington Agreement on Gold: “Washington Agreement is another gold rig, former Fed and Treasury official admits“. In order to find out more about it, I wrote to the press department of the Peterson Institute for International Economics, where Mr. Truman serves as a Senior Fellow.

Here’s the request that I sent out yesterday via e-mail:

Dear Mr. Reil, dear Mr. Weisman,
my name is Lars Schall, I am a freelance journalist for finance from Germany (for example, Asia Times Online). Would you be so nice to forward this media request to Mr. Edwin M. Truman, please? Thank you!

Dear Mr. Truman,
recently I came ascross your remarks at the Fourth Joint BIS–World Bank Public Investors Conference in Washington DC, 3–4 December 2012. During your speech you were talking about the Washington Agreement on Gold. Related to this topic, I would have five questions for you.

a) You seem to say that the Washington Agreement is a tool of intervention in the foreign exchange and gold markets. Is this indeed what you want to say?

b) The Gold Anti-Trust Action Committee (GATA) goes a step further by saying that indeed the Washington Agreement on Gold was put in place in order to rig the gold market. What’s your comment on that?

c) Are you absolutely certain that the U.S. Government via the U.S. Federal Reserve / U.S. Treasury Department / Exchange Stabilization Fund hasn’t intervened in the gold market for more than 40 years, as Mr. Paul A. Volcker told me?

d) You have called for more transparency in your speech. Does this call for transparency also apply to the gold reserves that central banks are holding — for example, related to swap and lease arrangements?

e) Do you think that the gold market is an entirely free market?

Thank you for your attention, Sir!

Kind regards,
Lars Schall.

Today, I have received these answers from Mr. Truman:

Dear Mr. Schall,

Please find answers to your questions, to the best of my ability, below.

Ted Truman

a) IT WAS A FORM OF COOPERATIVE INTERVENTION IN THAT MARKET DESIGNED TO LIMIT OFFICIAL SALES.

b) I WOULD NOT AGREE WITH THAT VIEW.  IN ORDER TO “RIG” THE MARKET A LOT MORE THAN LIMITING SALES WOULD HAVE TO HAVE BEEN INVOLVED.

c) FIRST, THE FEDERAL RESERVE DOES NOT HAVE THE POWER TO OPERATE IN THE GOLD MARKET.  SECOND, MR VOLCKER IS NOT QUITE RIGHT: THERE WERE US SALES OF GOLD INTO THE PRIVATE MARKET IN THE MID-1970S AND LATE 1970S. I KNOW OF NO OTHER SALES OF CONSEQUENCE SINCE THAT DATE. I SAY “OF CONSEQUENCE” BECAUSE THE US TREASURY DOES MAKE SMALL PURCHASES AND SALES IN CONNECTION WITH MINTING COINS.

d) CERTAINLY!

e) AS LONG AS THERE IS A SUBSTANTIAL OVERHANG OF OFFICIAL HOLDINGS OF GOLD, THE GOLD MARKET CANNOT BE ENTIRELY FREE.

After I received those answers, I’ve asked Mr. Truman one more question in order to avoid any kind of misunderstanding:

Your speech likened the Washington Agreement to the London Gold Pool, which was very much a device of price control. May I ask you if you agree that the Gold Pool was a device of price control and if you meant to liken the Washington Agreement to a device of price control?

Mr. Truman’s answer to that question was:

Dear Mr. Schall,

In my view there is no real comparison between the London Gold Pool in the 1960s and the Washington Gold Agreement, which was in 2000, I think. The first was an attempt to support the Bretton Woods monetary system by containing the increase in the gold price (private and official) relative to the “official price” of $35 dollars an ounce and at the same time to limit (to a minor degree) reductions in the US gold stock.  The second was an attempt to limit excessive, short-term downward pressure on the price of gold in the private market which would have implications for the valuation of official gold stocks that was unattractive to some large official holders.  The context was entirely different  — gold had effectively been pushed aside in terms of its role in the international monetary system — and the objective of the Washington Agreement was much more limited. The Washington Agreement was interference in the private market, which was one reason why the United States chose not to participate, but that interference was minor and inevitable given the large official stocks of gold which themselves were an interference in the private market then and now.

Ted Truman