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THE SE C R E T A R Y OF THE T R E A SU R Y
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F i n a l Report o n the Balance o f P a y ments

T h e w e e k e n d i n g W e d n e s d a y s h o w e d another surplus, the fifth.
i n a r o w i n the r o u g h w e e k l y data w e receive f r o m the F e d e r a l
R e s e r v e B a n k in N e w York. The latest surplus w a s c o n s i d e r a b l y
l a r g e r th a n e a r l i e r ones.
These reports f o r the t h r e e w e e k s
s i n c e M a r c h 3 r d n e w sho w a c u m u l a t i v e surplus of $25 0 mi l l i o n .
I n addition, t h e w e e k ending M a r c h 3 r d sh o w e d an e x c e p t i o n a l l y
l a r g e surplus o f $270 million. However, since this w e e k c o v e r e d
a p o r t i o n o f F e b r u a r y there is no x>;ay of knowing, u n t i l w e g e t
t h e m o n t h l y f i g u r e s f o r M a r c h later in April, h o w m u c h o f that
s u r p l u s is a t t r i b u t a b l e to M a r c h a n d h o w m u c h m a y h a v e a l r e a d y
b = e n i n c l u d e d in the m o n t h l y figures for February.
S i n c e the
f i n a l f i g u r e s f o r F e b r u a r y show a d e f icit of $475 m i l l i o n ,
s o m e w h a t l a r g e r than I h a d expected, m y guess is t h a t a g o o d
p o r t i o n of t h e $27 0 m i l l i o n surplus f o r the w e e k e n d i n g M a r c h 3 r d
w i l l turn o u t to b e M a r c h t r a n s a c t i o n s and w i l l a d d to the size
o f the suro l u s w e s e e m to b e r u n n i n g this month. W h i l e these
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w e e k l y f i g u r e s a r e c r u d e and r e p r e s e n t onl y a s a m p l e o f the
total, they a r e u s e f u l in p r o j e c t i n g the g e n e r a l trend. .In v i e w
o f t h e s t e a d y n a t u r e of the surplus o v e r the p a s t f i v e we e k s ,
i c is l i k e l y tha t b a n k s n o t c o v e r e d in the w e e k l y s a m p l e su r v e y
a r e a l s o r e c o r d i n g surpluses. Therefore, the m o n t h l y f i g u r e
f o r M a r c h c o u l d w e l l tur n out to b e even m o r e f a v o r a b l e than
o u r w e e k l y totals indicate.
T h e s e f a v o r a b l e w e e k l y figures, the g e n e r a l s t r e n g t h of the
d o l l a r in f o r e i g n e x c h a n g e m a r kets a n d the rise in r a t e s in the
E u r o d o l l a r m a r k e t all a r e c l ear e v i d e n c e that o u r v o l u n t a r y
p r o g r a m is w o r k i n g as w e l l o r b e t t e r than w e c o u l d p o s s i b l y h a v e
hoped.
This is n o w g e n e r a l l y r e c o g n i z e d in f i n a n c i a l c i r c l e s
b o t h h e r e a n d abroad.




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C O P Y
Lyndon Baines Johnson Library

- 2 T h i s i m p r o v e m e n t may , h o w e v e r , h a v e c o m a j u s t in tha n i c k o f
time.
S t a r l i n g h a s b a a n w e a k o v e r tha p a s t c o u p l e o f w e e k s as
t h a i m p r e s s i o n h a s g r o w n that the U n i t e d K i n g d o m b u d g e t , w h i c h
i s n o w d u e to b a p r e s e n t e d o n A p r i l 6, w i l l t u r n o u t to b e
inadequate.
This impression has bean reinforced b y tha speech
g i v e n last w e e k b y the official British representative at the
I n t e r n a t i o n a l M o n e t a r y Conference o f tha A m e r i c a n Bankers
Association at Princeton.
S h o u l d th i s p r o v e t o b e t h a c as e ,
i t is h i g h l y p o s s i b l e that, p r i o r to t h e f i r s t o f J u n e , t h e
E u r o p e a n cou n t r i e s w i l l join in forcing tha B r itish Government
to c h o o s e b e t w e e n s u b s t a n t i a l f u r t h e r r e s t r i c t i v e a c t i o n , s u c h
a s i n c r e a s e d s a l e s t a x e s o n c o n s u m e r items, o r a d e v a l u a t i o n o f
sterling.
T h e y h a v e t h e c a p a c i t y to do th i s s i m p l y b y r e f u s i n g
t o a g r e e to r e n e w t h e s u p p o r t w h i c h t h e y g a v e s t a r l i n g l a s t
N o v e m b e r a n d w h i c h runs-out i n May.
I t h a d b e e n e x p e c t e d that
t ha U n i t e d K i n g d o m w o u l d m a k e another drawing from tha Monetary
F u n d in M a y f o r tha purpose o f paying off tha bilataral support
r e m a i n i n g f r o m last winter's exercisa. W i t h an inadequate budget
i t is d o u b t f u l i f t h e I n t e r n a t i o n a l M o n e t a r y F u n d w o u l d , o r co u l d ,
a g r e e to a n a d d i t i o n a l d r a w i n g b y t h e U n i t e d K i n g d o m . .
W h i l e i t i s i m p o s s i b l e t o r e n d e r a n y f i n a l j u d g m e n t o n tha
r
a b o v e u n t i l t h e B r i t i s h b u d g e t has b e e n s u b m i t t e d a n d r e a c t i o n s
to it ar e available, a strong speculative atta c k w a s launched
a g a i n s t s t e r l i n g y e s t e r d a y (Friday) b y t he F r e n c h .
R u m o r s that
s t e r l i n g w o u l d b e d e v a l u e d o v e r the w e e k e n d w e r e s p r e a d t h r o u g h
P a r i s a c c o m p a n i e d b y substantial sales o f starling b y French
b a n k s s o m e o f w h i c h m a y have b e e n short sales. T h i s atta c k forced
t h e p r i c e o f s t e r l i n g b e l o w $2. 79 f o r t h e f i r s t t i m e s i n c e l as t
November.
T h e f e a r s o o n s p r e a d to o t h e r c e n t e r s o n t h e c o n t i n e n t
o f E u r o p e a s w e l l as to N e w Y o r k .
T h e B r i t i s h w a r e f o r c e d to
support sterling heavily.
I do n o t h a v a the final figure for
t h i s s u p p o r t b u t a p p a r e n t l y i t a m o u n t e d to a b o u t $ 7 5 m i l l i o n .
T h a B r i t i s h tell us that they are p r e p a r e d to c o n t i n u e s u c h
support at least until aftar their budget has been published and
t h e r e a c t i o n to i t is a v a i l a b l e .
I t is h a r d to u n d e r s t a n d the r e a s o n s f o r t h a F r e n c h a t t a c k
o n s t e r l i n g u n i ass t h b y f i g u r e that in this w a y t h e y c a n i n d i r e c t l y
a t t a c k the d o l l a r .
A d e v a l u a t i o n o f s t e r l i n g w o u l d t h r o w tha
f o r e i g n e x c h a n g e m a r k e t s of the w o r l d into a turmoil at least f o r
a period.
H o w e v e r , *p r o v i d e d t h e d e v a l u a t i o n is n o t t o o extreme,
I f e e l c o n f i d e n t t h a t t he d o l l a r is n o w i n a p o s i t i o n to ride o u t
the s t o r m w i t h o u t too m u c h difficulty. - P r i o r to the immediate
p r e s e n t , this w o u l d not have been the case and a sterling devaluation
w o u l d h a v a p o s e d the g r a v e s t o f .d i f f i c u l t i e s ? f o r t h e do l la r .



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L y n d o n B a in e s J o h n s o n L ib r a

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S h o u l d It: a p p e a r i n t h e c o m i n g w e e k s that a d e v a l u a t i o n is
i n e v i t a b l e , it is h i g h l y i m p o r t a n t fo r us a n d o t h e r s t h a t i t n o t
b e too drastic.
I t is a l w a y s a s e v e r e t e m p t a t i o n to a d e v a l u i n g
c o u n t r y to g o v a r y f a r o n c a th e b a s i c d e c i s i o n to d e v a l u e h a s
b e e n made.
The general feeling in continental European circles
is that a n appropriate figure for a devalued pound sterling
w o u l d b e $2.5 0* a s c o m p a r e d to t h e p r e s e n t r a t e o f $ 2. 8 0 .
This
w o u l d b e a d e v a l u a t i o n o f 1 0 . 7 p e r c e n t . W e a g r e e that, i f
d e v a l u a t i o n o c c u r s , a n d w e h o p e it w o n ’ i t s h o u l d n o t g o b e y o n d
t,
t h e $2.50 level.
A n y .gr e at e r d e v a l u a t i o n w o u l d p u t h e a v y a n d
p o s s i b l y u n b e a r a b l e strains o n the entire international m o n e t a r y
system.
S h o u l d i t a p p e a r t hat t h e B r i t i s h a r e s e r i o u s l y
c o n s i d e r i n g d e v a l u a t i o n , i t is i m p o r t a n t t h a t x*a c o n c e r t c l o s e l y
x?ith t h e m an d , i f n e c e s s a r y , i n t e r c e d e a t t h e h i g h e s t l e v e l s ,
i n c l u d i n g conversations b e tween yourself and the Prime Minister,
i n o r d e r to h o l d a n y d e v a l u a t i o n to the $ 2 . 5 0 level.
I a m a t t a c h i n g a c l i p p i n g f r o m the C o m m e r c i a l a n d F i n a n c i a l
C h r o n i c l e w h i c h is i n t e r e s t i n g in c o n n e c t i o n w i t h this w h o l e
matter.
I t w a s w r i t t e n p r i o r to F r i d a y ' s a t t a c k o n s t a r l i n g .
I do n o t k n o w the a u t h o r .
I n t h e C a b i n e t m e e t i n g I s a i d that, e v e n i f o u r b a l a n c e of •
p a y m e n t s p r o g r a m w a s s u c c e s s f u l , v e c o u l d l o o k f o r w a r d to the
l o s s o f $ 3 0 0 to $ 3 5 0 m i l l i o n m o r e g o l d in t h e s e c o n d quarter..
$ 1 7 5 to $ 2 0 0 m i l l i o n o f t h i s c a n b e e x p e c t e d in A p r i l .
T h i s is
l a r g e l y d u e to a o n e - t i m e $30 m i l l i o n p u r c h a s e b y I t a l y .
When
t h e I t a l i a n s w e r e i n t r o u b l e l a s t y e a r t h e y w e r e f o r c e d t o sell
$ 2 0 0 m i l l i o n of t heir gold.
B e g i n n i n g last sum m e r they h a v e b e e n
doing very T
.vell i n t h e i r b a l a n c e o f p a y m e n t s a n d h a v e buT.lt b a c k
th e i r dollar holdings.
T h e y n o w f e e l i t n e c e s s a r y to r e c o n s t i t u t e
t h e i r g o l d h o l d i n g s t o t h e t o t a l o w n e d p r i o r to l a s t s p r i n g ' s sale.
T h e B a n k o f I t a l y has a p p a r e n t l y b e a n able to f i n d in t h e i r own
c o m m e r c i a l b a n k i n g s y s t e m a l l b u t $30 m i l l i o n o f t h e a m o u n t n e e d e d
to reconstitute their holdings.
T h e a n n u a l report o f the B a n k of Italy w i l l b e p u b l i s h e d in
M a y a n d t h e y w i s h t o s h o w t h e i r g o l d h o l d i n g s u p a t t h a t time.
T h e y i n t e n d to e x p l a i n i n this r e p o r t t ha t t h e y h a v e s i m p l y
r e c o n s t i t u t e d t h e i r s t o c k a n d w i l l e x p r e s s l y d i s a s s o c i a t e t h em ­
selves f ro m F r e n c h policy and express their faith and confidence
in the dollar.
I t a l y n o w h o l d s a b o u t $ 1. 7 b i l l i o n o f t h e i r r e s e r v e s
in dollars.
T h e i r g o l d r a t i o is a b o u t 55 p e r c e n t , t he l o w e s t of
a n y of the m a j o r E uropean powers.
The Italians h a v e be e n very
c o o p e r a t i v e a n d c a n n o t b e c r i t i c i z e d in' a n y w a y f o r t h e i r f o r t h c o m i n
g o l d purchase.



I h a v e xva m a d m y c o l l e a g u e s h e r e in the T r e a s u r y o f t h e
p o s s i b i l i t y t h a t th e F r e n c h n a y w a l l d e c i d e t h a t t h e i r c u r r e n t
w o r k i n g b a l a n c e s o f $4 0 0 to $450 m i l l i o n a r e l a r g e r than t h e y
n e e d a n d m a y t h e r e f o r e d e c i d e to p u r c h a s e a n o t h e r $150 m i l l i o n
i n g o l d a t a n y time.
T h e p r e s e n t f i g u r e w a s g i v e n to m e o r a l l y
b y the F r e n c h F i n a n c e M i n i s t e r w i t h n o on e else present.
.
A l t h o u g h t h e F r e n c h h a v e s i n c e p u b l i c l y i n d i c a t e d that t h e i r
obj a c t i v e w a s t o l i m i t t h e i r d o l l a r h o l d i n g s to t h e a r e a o f
$ 1 , 0 5 0 m i l l i o n to $ 1 , 1 0 0 m i l l i o n , t h e w o r k i n g b a l a n c e i n c l u d e d
i n t h i s f i g u r e is c o n s i d e r a b l y l a r g e r t h a n r e q u i r e d a n d c o u l d
e a s i l y b e r e d u c e d b y $150 million.

While it looks like w e may be heading into a stormy-period
f o r the i n t e r n a t i o n a l m o n e t a r y s y stem in v i e w of possible
de v a l u a t i o n i n the U n i t e d K i ngdom a n d the current F r e n c h attitude,
1 f e e l c o n f i d e n t tha t y o u r p r o g r a m h a s g i v e n t h e d o l l a r a l l the
s t r e n g t h n e e d e d to w e a t h e r t h e s t o r m a n d m o r e b e s i d e s . Ho w ev e r ,
s h o u l d there b e a B ritish devaluation, there w o u l d undoubtedly b e
a t l e a s t t e m p o r a r y r e p e r c u s s i o n s o n the dollar.
In such circumstances
a n d i n o r d e r to i n d i c a t e t h e i r d e t e r m i n a t i o n to d e f e n d t h e dollar,
I w o u l d n o t b e a t a ll s u r p r i s e d i f the F e d e r a l R e s e r v e B o a r d w e r e
to i n c r e a s e t h e i r d i s c o u n t r a t e to 4 - 1 / 2 p e r c e n t f r o m t h e p r e s e n t
4 percent level.
The w i s d o m or n e c essity for such action would
—
ciepend o n t h e f o r c e o f t h e i n t e r n a t i o n a l r e a c t i o n to a s t e r l i n g
devaluation.
Hen-/ever, s h o u l d a d i s c o u n t r a t e i n c r e a s e b e n e c e s s a r y
i t w o u l d b e b e t t e r to h a v e it c o m e s o o n r a t h e r t h a n l a t e as was
c l e a r l y i n d i c a t e d b y t h e B r i t i s h e x p e r i e n c e la s t fall.




C O P Y
L y n d o n B a in e s J o h n s o n L ib r a r

I n tha e v e n t suc h an Incraasa in the discount rata w e r a to
taka placa, it w o u l d b a m y feel i n g that it s h o u l d b a r e s c i n d e d
i n a f e w months, o n c e tha e x c h a n g e m a r kets h a d s e t t l e d down.
I am n o t aware o f any intention of the Federal R e s e r v e B o a r d
i n t h i s c o n n e c t i o n , a n d I do n o t e v e n k n o w i f t h e y h a v e
d i s c u s s e d the matter.
H o w e v e r , this w o u l d b e s u c h a n o b v i o u s
r e a c t i o n to a s t e r l i n g devaluation that I felt I s h o u l d b r i n g
i t to y o u r a t t e n t i o n b e f o r e l e av i ng .
I
ain a t t a c h i n g a t a b l e s h o w i n g t h e b r e a k d o w n o f o u r f i r s t
q u a r t e r g o l d losses.
The Austrian purchases are tha first portion
o f a n e ight m o n t h $100 m i l l i o n program.
The Belgium purchases
ara in accord w i t h their long-standing policy of keeping all
thair reserves in gold except for minimal working balances.
T h e s a m e a p p l i e s to t ha D u t c h a n d S w i s s p u r c h a s e s , a l t h o u g h t h a
S w i s s h a v e a l l o w e d t h a i r d o l l a r b a l a n c e s to i n c r e a s e c o n s i d e r a b l y
ab ov e w h a t h a d pr eviously b ea n thair normal practice. T h e S panish
p u r c h a s e is t h e 2nd, 3 r d a n d 4 t h i n s t a l l m e n t of a $ 2 1 0 m i l l i o n
p r o g r a m t hat w i l l b a c o m p l a t a d in J u n e .
The United Kingdom
p u r c h a s e s a r e to c o v e r o u r s h a r e o f t h e r e c a n t l o s s e s i n t h e
L o n d o n gold pool.
T h e T u r k i s h p u r c h a s e is p a r t l y t h a r e v e r s a l
o f a t e m p o r a r y s a l e to us, b u t t h a y h a v e p u r c h a s e d a b o u t $10
m i l l i o n f o r reasons that are unexplained.
The o t h e r small
p u r c h a s e s , e x c e p t f o r S a l v a d o r , w a r e to m a k e p a y m e n t s d u e to
the I n t e r n a t i o n a l M o n e t a r y Fund.
Except f o r the F r e n c h figure,
the g e n e r a l dimensions of w h i c h are public knowledge, these
indi vi du al figures should b e h e l d in graat confidence until
t h e i r p u b l i c a t i o n in June.
I n v i e w o f t h a e x t r e m e s e n s i t i v i t y o f t h e c o n t e n t s o f this
m e m o r a n d u m , n o c o p i e s a r e b e i n g c i r c u l a t e d o u t s i d e o f the T r e a s u r y .

Attachments
Treasury Department interposes no
abjection to declassification
providing the secord paragraph on page
four is deleted. The second
__»»r
- ;
paragraph on page four is exempt
From declassification schedule of

Executive Order 11652, per authority
http://fraser.stlouisfed.org/
>f Reserve Bank Widman. Exemption Category:
FederalF. Lisle of St. Louis

• -.1 LiJli.
.
C O P Y

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