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THE CHAIRMAN OF THE
COUNCI L OF ECONOMIC ADVI SERS
WASHINGTON

/
/

August 6, 1966

M E M O R A N D U M F O R T H E PRESIDENT
Subject:

1.

W e ekly Balance of P a y m e n t s Report

F o r the second w e e k in a row, the weekly balance-of-payments
returns m a k e poor reading. In the w e e k ended August 3, w e
registered
a $162 deficit on liquidity and
a $108 million deficit on official settlements.
T he r e is as yet no real explanation for the large deficits of the
last two weeks. This is normally a rough time of the year for
the balance of payments, partly because of tourist travel.
Several w e e k s of especially large deficits w e r e also recorded
in m i d s u m m e r in other recent years.
T h e airline strike m a y be contributing to the deficit by the loss
of T W A ' s trains-Atlantic revenues and by stranding s o m e U.S.
tourists abroad.
While the poor figures are probably not significant, w e can‘
t
rule out the possibility that they point to s o m e m o r e w o r r i s o m e
development.

2.

M a r k e t reactions to the stringent n e w British m e a s u r e s have continued
to be unenthusiastic.




Substantial official support for the pound in foreign exchange
markets w a s still required on M o n d a y and Tuesday, just prior
to the an nouncement of the end-of-July reserve figures.
Curiously enough, the m a r k e t c a lmed d o w n w h e n July losses
w e r e announced as $70 million, even though everyone recog­
nized that the published figure w a s a magnificent tinder statement
of the true loss.

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Since then, the pound has held its own. The price of sterling
wound up somewhat below last week‘s close, but British
reserves approximately broke even for the week.
The new measures have dispelled the storm clouds of c risis.
But they have not generated any gains in reserves, as might
have been hoped.
3.

Skepticism and speculation in the press have complicated the sterling
problem. A possible devaluation is being discussed on the front pages
throughout the world. In that atmosphere, it is not surprising that the
foreign exchange markets remain unsettled.




The London Economist examined the case for and against
devaluation in detail, saying that "the unthinkable has become
very thinkable. " But it stopped short of advocating devaluation.
P a ris ' Le Monde had a way-out story. It alleged that you had
warned Wilson not to count on further U .S. support for sterling.
In turn, Wilson is supposed to have indicated that he favored
a rise in the price of gold.
The U .S. press was well represented in the debate with a
variety of views
Henry Wallich in Newsweek intimating that devaluation
may be inevitable;
Joe Livingston insisting it would do no good;
F irst National City Bank's Monthly Letter taking a very
optimistic (but unconvincing) view of Britain's basic
competitive position; and
the W all Street Journal offering a lead article today on
the consequences "If Sterling Sinks. "
On the other hand, after studying Wilson's restrictive fiscal pro­
gram, European central bankers told our delegation at the Group
of Ten meetings that they were much impressed by Britain*s
determination to defend the pound.

Arthur M. Okun
Acting Chairman

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