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* .%. 131
BOARD DF GDVERNDRS
\

OF THE

/ » >-

FEDERAL RESERVE SYSTEM

Office Correspondence
T o

Chairman Eccles

From

Mr, Gardner I A v '

p a te August 19,1957
Subject:

.

I have finished off this memorandum rather hastily along the lines on
which I had' started before I talked with you today.

It is not in shape to

pass on to others, but I believe you will find in it the material for your
conversation tomorrow with Wayne Taylor.

I forgot to ask when I saw you

whether you had yet obtained from the Treasury a fulj statement of the
Brazilian and Chinese agreements. Some time ago you were planning to do so,
and since these agreements affect gold and capital movements and member bank
reserves it would appear appropriate for the Board to be accurately informed
^C\

in regard to them.




Form ft*JL 131
BOARD OF GDVERNDRS
DF THE

FEDERAL RESERVE SYSTEM

Office Correspondence
To

nhairffifin TTr.nlfta /v

prom

pm* August 19,1957
Subject; Measures t h a t can be taken now

Mr. Gardner i \ N ^ '

t o deal with "hot money11

Measures to curtail the inflow of gold to the United States
fall broadly into three classes: 1) those of an informal character
capable of immediate negotiation with foreign treasuries; 2) those
requiring fresh legislation from Congress; and 3) those requiring
definite international agreements. Measures requiring a definite
international agreement (such as an arrangement looking toward curtailment of new gold production) must be preceded by ample discussion and
can be pushed only when the situation is ripe. Legislative measures
are now postponed until the next session of Congress, when it is hoped
that a comprehensive program can be advanced.

But this is no reason

for postponing those steps which can be taken without formal international negotiations and without asking fresh legislation from Congress.
One important step of this character has already been initiated. The Treasury's letter to the Swiss authorities, which was in preparation at the end of June, states in substance that each central bank (or
exchange fund) should hold its reserves in gold.

The building up of

balances in foreign centers merely throws the problem of sterilizing
gold on the foreign center. In particular the building up of dollar
balances by central banks in this country during the spring accentuated
an already abnormal movement of gold toward the United States.




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2 —

Copies of the Swiss letter were sent to the British and French
Treasuries for their comments.

It is not known what replies were re-

ceived nor whether the letter was sent to the Swiss authorities in the
form in which it was seen by certain Federal Reserve officials. If it
was, it has not been understood and acted upon by the Swiss. They have,
to be sure, kept intact the |35,OOO,OOO of earmarked gold in New York,
which in June they prepared to convert into balances; but far from reducing their abnormal dollar balances already here they have gone on
expanding them week after week.

They had increased these balances

from #2,000,000 at the end of March to #61,000,000 at the end of June.
By August 11 they had built them up to #97,000,000. Other countries
also leave s m t i a to be desired in this respect. The Dutch during
oetig
June and July increased their dollar balances with the Federal from
a negligible amount to $69,000,000, and recently Sweden has shown signs
of starting on the same path. The relevant figures on these countries
are given in the accompanying table.
If the Swiss are under the impression that they are conforming
with the Treasury's policy of refraining from converting this #35,000,000
gold earmarked here into dollars, further steps should be taken to make
that policy clear.

It would also appear appropriate to appise the Dutch

of the policy since they are members of the international currency arrangement.

In fact it should not be difficult to let Governor Rooth of the

1/ That is, they have expanded week after week their dollar balances
handled by the New York Federal Reserve Bank. We do not know to
what extent they may have transferred accounts from other New York
correspondents to the Federal.




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3

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of the Swedish Riksbank know that we consider the acquisition of
balances here by foreign central banks in excess of working needs to
be undesirable under present cirexamstances. If our attitude is made
clear, it is unlikely that responsible central banks abroad will undertake to circumvent it. ^hey will respect our policy in our own market.
Another situation has arisen in recent months, however, in
relation to which it is much harder to define policy, although some
sort of informal understanding appears to be called for. This situation
has largely been created by the handling of the British Fund. On two
occasions in recent months the British Fund has been so handled as to
throw the burden of gold sterilization on the American Treasury.
The first of these occasions was in April. Had it not been
for the British action at that time there is a chance that the gold
movement to the United States would have dwindled away instead of
bursting into still greater activity for a period of three months.
During the first half of the new currency arrangement the force that
had been pulling gold to the United States had been foreign investment
in securities here —

chiefly in American stocks. Argentina had, to

be sure, beaidepositing substantial sums for redemption of called Argentine bonds; but this program had largely been completed. The chief
potential pull left in the situation lay in continued foreign interest
in our stock market. When the stock market started its decline in March,
foreigners began to reduce their purchases. In April they turned sellers.
With the pull of the stock market temporarily out of the way, with little
tendency for European balances here to increase after the substantial




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4

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fall decline, and with an adverse balance of trade, the stage was set
for a rapid ebbing of the gold inflow if not for its reversal.
It was at this point that the British consciously or unconso
sciouslj/played their hand as to check what might have been a reversal
of the gold flow and to turn the tide back to the United States. They
practically stopped buying gold.

The United States with its unlimited

offer to buy gold at $35 an ounce from all comers found itself purchasing
the new supplies on the London market. These supplies were at that time
being augmented by sale of Russian gold, and the demand for sterling resulting from the American gold purchases were a major factor in pushing
up the exchange value of the pound.

As the pound rose, the forward dis-

count on sterling widened since the market did not regard the higher
level of the pound as permanent. The forward discount on sterling made
it more profitable for British banks to place funds in New York than in
London. (See accompanying chart.) Consequently, instead of British funds
returning home as interest in our stock market waned, additional British
money flowed to New York.

A golden opportunity to check the movement

of funds to this country was lost because the British failed to take the
gold that would have come to them had they maintained sterling stable.
Not only did British policy in April lead to a movement of
funds to this country, but it appears to have been one of the largest
factors in the spring gold scare. The patent unwillingness of the British
to buy gold early in April even though sterling was being pushed up on
the exchanges led to a question how much longer it would be before the
United States developed a similar unwillingness. How long before the




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British would force the hands of the American authorities by making them
take all the gold?

The uncertainty became such that American banks

presently decided to cease purchasing gold in London lest the American
authorities should come to imitate the British before the gold could
be delivered in this country.

A wide discount on gold developed in

London and aroused the general public to the fact that important financial interests were uncertain about the future of gold. The United
States Treasury never ceased buying all gold offered at $35 an ounce
and American banks, following the President's statement that he knew
of no plan to change the price of gold, resumed their purchases in London.

But the discussions of the "gold problem" which had been started

did not die down. The potentialities of the situation were too deeply
impressed on too wide a public, and as the various phases of the discussion proceeded, gold dishoarding rose to an extraordinary volume.
It was at this time, also, that the Swiss authorities decided to convert
considerable amounts of gold into dollar balances. Undoubtedly the flow
of funds from Switzerland and other countries, in addition to those from
England, was strongly influenced by the uncertainties as to the future
of gold which British policy had stimulated.
The British resumed substantial gold purchases at the end of
April and for the next two months the pound was held relatively stable,
notwithstanding the continuance of gold dishoarding and the development
in June of a flight of capital from France. As the market became used
to the new level of the pound there was some tendency for the forward
discount to decline. The advantage of holding British funds in New York




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diminished; and at the end of June the readjustment downward of the
franc and the new French financial measures led to a substantial, if
short-lived, backflow of funds to France. The pound was still high
and the French position not very strong, but with dishoarding on the
wane it was at least a situation which might, with proper handling,
have shifted home again some of the foreign deposits piled up here as
a result of the spring movement.
British policy, however, again interfered.

Just as in April

at the end of the investment movement the pound was allowed to rise,
so in July at the end of the dishoarding movement the pound again rose
on the exchanges. It did so in the face of a repatriation of French
funds from London.

The British fund sold gold to the French as necessary

to balance the return of French money and allowed comparatively minor
market forces, such as the movement of Japanese funds, to lift the pound
on the exchanges. The forward discount on sterling, which had shown a
tendency to narrow, widened again, and a return flow of British funds
to London was discouraged.
Thus on two recent occasions the British authorities appear
to have acted at the strategic moment to prevent a return flow of funds
to Europe.

Undoubtedly, if questioned on their policy, they would take

the position that they have never attempted to stabilize sterling at a
fixed rate, that they have always allowed it to move about under the
pressure of the market, and that the Tri-Partite Declaration commits them
to nothing new in that respect. It is hard to avoid the impression, however, that both the April and the July developments were quite unnecessary.
In neither case was the British Fund faced with a market movement that it




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would have been dangerous to combat.

Both appear to have been deliberate

maneuvers to attain some end.
It would seem as if the American authorities should at least
ascertain what that end is. Are the British reluctant to allow their capital
to return home carrying gold with it?

Do they feel that a higher pound more

accurately reflects their present international trade position?

Why do they

let the pound rise to new high levels at this juncture when they have ample
powers to prevent it?

It would seem as if the time had come to raise such

questions as these in a friendly way and arrive at some sort of understanding.
x

he consequences of British policy upon our own situation are too important

for us to disregard.

It may not be possible to set up any clear principle as in

the case of the Swiss, the Dutch, and the Swedish reserves; but if we could
know what the British are after, and they were apprised of the repercussions
here, it should be' possible to create a better working arrangement —

one

more in accordance with what appears to be the spirit of the Tri-Partite
Declaration.




August 13, 1937

DOLLAR BALANCES OF FOREIGN CENTRAL BANKS
HANDLED BY
NEW YORK FEDERAL RESERVE BANK
(In millions of dollars)
3(
jountries

Switzerland

Holland

Sweden

Total Deposits Bills

Total Deposits Bills

Total Deposits Bills

Date
Total Deposits Bills
8

8

—-.

2

2

2
16
30

58
83
110

42
52
79

16
31
31

55
59
61

40
44
46

7
14
21
28

115
126
135
162

84
78
83
108

31
48
52
54

62
71
75
84

August 4
11

170
179

115
118

55
61

92
97

March 31
June

July

1/ Less than #500,000,




6

6

15
15

3
3
3

2
2
2

1
1
1

34
24
29
44

15
25
25
25

4
6
6
9

3
3
4
5

1
3
2
4

44
44

25
25

9
13

4
2

5
11

1/

1/

15
15
15

1/
21
46

1/
6
31

47
51
50
59

15
20
25
25

49
49
54
69

67
72

25
25

69
69