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September 16, 1964.

Mr. Allan Sproul
P. O. Box 365 ""*
Kentfield, California


^//° j t * T

Dear M r. Sproul:
I can 'well understand your dismay at the growing complexity of
the exchange operations reported in our last article. Sometimes I feel that
we are trying to play half a dozen poker games at once, although I am con*
soled by the fact that so far we have not wound up pursuing any busted
Hushes. The main problem, of course, is the central role of the dollar in
international finance with the consequence that we are involved not only in
financing our own deficits, but also in adjusting to the flows of dollars be­
tween foreign countries. U money moves from Italy to Switzerland, the
Bank of England and Bank of France couldn’t care less, but we become autoLmatically involved in a problem of what to do about the Swiss dollar surplus
and the Italian dollar deficit. In the past, these shifts of funds between
foreign countries were largely settled by gold transfers, but now we have
reached the stage where the adjustment is often effected through debits and
credits under our swap network, or sim ilar credit operations. This is a
highly useful economy of gold, of course, and in my view provides the best
solution to the so-called international liquidity dilemma, although many
academicians and British and French politicians would disagree. In any
event, the New York Bank has now become virtually the balance wheel of
the international financial machinery and I suspect that the complexity and
magnitude of our operations will continue to grow.
Another difficulty which besets me whenever I sit down to write
these articles is the necessity of providing a complete official record. As
a result, the text tends to get cluttered with a great deal of detail which
obscures the main policy developments. I think, too, that the technical
jargon in the foreign exchange field is not particularly precise, and as we
go along we may well have to develop more specific language. The word
"swap," for example, is employed for lack of any other to describe exchange


operations which may differ very considerably in their nature. For
example, under the central bank swap network, swap drawings are essenti­
ally short-term official credits, whereas when executed in the market to
forestall interest arbitrage they involve simply a spot purchase and forward
sale of foreign exchange. Still a third type of swap appeared during the
latest reporting period in the form of conversion into dollars of a French
franc balance, originally drawn from the IMF, on the understanding that
we could reconvert into francs at the same rate. We did so simply because
the French could not provide us with a franc investment medium and so we
moved back into dollars where we could earn interest until the francs were
I was much interested in your suggestion that the articles might
usefully be rounded out by bringing in the balance of payments accounts,
more particularly, the liquid dollar claims. 1 think that this would be most
helpful to the reader, but I may have to be careful about appearing to poach
on the Commerce Department's private preserve. By introducing in the
last two articles data on the gold pool and U. S. gold operations, I have
already stretched the coverage of the articles quite a bit beyond their
original scope, and perhaps I might let a decent interval pass before reach­
ing out for new territo ry .
With all the best,
f ■



C. A . Coombs


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102