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1. Renewal of serious weakness in French exchange revives possibility
of early abandonment of franc's present gold parity.
2, Not clear what steps could or might be taken by French authorities
without action by Chamber of Deputies, not now in session. Chamber must authorize
devaluation or embargo on gold exports, but it is believed Minister of Commerce
could place prohibitive tax on export of gold, or Bank of France might raise minimum amount (now fr. £15,000) of francs which it will redeem in gold to prohibitive

(This latter procedure rests on a convention between Minister of Finance,

representing government, and Governor of Bank of France, representing bank.) In
any event, it is believed that if French want to prevent further loss of gold they
will find a way to do it, and this will result in lowering external value of franc.

Our immediate policy, in the event of such action by France, should

be to take whatever steps we can to minimize disturbances to the foreign exchange
market^ which probably would follow such action, leaving basic longer range
questions of policy for subsequent consideration.

Suggested policy of United States, in immediate situation, if France -

in effect - leaves gold standard:


Liberalization of restrictions on acquisition of gold for
export or earmarking in order to assure effective maintenance
of the existing gold value of the dollar as an exchange market
influence. The Treasury should declare its willingness to
permit the sale of gold, for earmarking or export, to any foreign
central bank or monetary authority willing and able to pay the
established price in dollars. The fact that the Treasury is


willing to buy imported gold at a fixed price places
a limit upon upward movements of the external value of
the dollar in terms of gold.

If there were no one to whom

the Treasury would sell gold at a fixed price, which would
be the situation if France and the other remaining gold
standard countries were to "go off gold", there would be no
check upon doW&ward movements of the external value of the
dollar in terms of gold.

Removal of obstacles to operations in dollars by British
Equalization Account.

The task of preventing undue disturb-

ance in the foreign exchange market, if the French franc is
turned adrift (which would probably result in serious unsettlement in other gold bloc currencies) will fall upon the United
States and Great Britain. It is assumed that the British
authorities v/ould no longer be able to control the external
value of the pound through operations in francs, and it is not
believed that the pound could be successfully stabilized solely
through operations in the London gold market, nor through
operations in belgas or any other currency which might remain
on gold.

There would remain the possibility of operations in

dollars, with our blessing.

The British Equalization Account

recently has been unwilling to operate in dollars, partly because, in so far as its direct operations are concerned, the
dollar and gold are not interchangeable, and partly because
the British are keenly aware of the disfavor with which its
operations in dollars, during 195£ and early 1935, were regarded in some quarters in this country.


- sThe first of these obstacles to official British
operations in dollars would be partially removed by the
liberalization of our policy with respect to the sale of
gold suggested in (A) above. This would not meet the immediate situation, hovrever, if the pound were weak and the
British wished to sell dollars and buy sterling - they haven't
dollars to sell.

To overcome this difficulty, arrangements

should be made whereby the British authorities could receive
dollars promptly, either by sale or pledge of gold which they
might earmark for us in England, or by sale of gold which they
would ship to the United States - loans on gold in transit.
(One step already has been taken in this direction, by the renewal of the Treasury's offer to buy gold in London, to be earmarked in its name at Bank of England.

If such purchases are

made from British Equalization Account, the British immediately
will be provided with dollars available for support of sterling.)
The second obstacle to official British operations in
dollars - the dislike of some of our people for "foreign meddling
with our currency" and their belief that the British play us for
suckers - has already been removed to some extent by the darelopments of the past three years, during which there has been an
opportunity to observe British currency management in action. It
should now be possible, if we are working upon the basis of an
understanding with the British, to remove this second obstacle,
although there would have to be sharp watchfulness as v/ell as
good faith on both sides.

- 4 -


Operations in sterling by American Stabilization Fund.

This prob-

ably would not be a question of immediate policy so long as the
British have an ample supply of gold, by the sale of which they
could obtain dollars, and, in any case, should only be done in
cooperation with the British, unless we want to engage in
a currency war. The job of moderating or preventing fluctuations of sterling in terms of gold and gold currencies has
been and should continue to be the responsibility of the
British authorities. They are now equipped to operate


either direction. They can sell sterling when it is strong;
they can sell gold for foreign currencies, and buy sterling,
when it is weak.

If, in the future, because of inadequate gold

holdings, the British are not able to support the pound and if,
in consultation v/ith the British, our temporary intervention
in the sterling market appears to be necessary to prevent wide
movements of dollar-sterling rates, this should be done.
The question naturally arises here as to why we should
do everything we can to make it convenient for the British
authorities to operate in the dollar market, even to the extent
of altering our gold policy so that the British can obtain gold
for dollars (this does not, however, remove all exchange risk from
their operations - they still have a position in sterling) when we
must be so careful about operations in sterling and must run the
hazards of holding a paper currency if we do so operate. The answer,
it seems to me, is that we profess to be on the international gold
standard and the British profess to be on a managed currency basis.

- 5 Under these circumstances, the British should assume the task of
management of their currency - including operations in dollars - and
vr should act the way a country on the international gold standard
is supposed to act, especially as we can afford to do it, and should
be the gainer thereby.

The end to be sought in both countries, in

this particular sphere, is international monetary stability. Each
country, working along its own lines, can move toward that
end if the two countries know they are working together and
are persuaded that their domestic interests, no less than the
more abstract interests of the world at large, will thereby be

Federal Reserve Bank
of New York,
April 8, 1956.