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July 30, 1962



Summary of the meeting of the "Quadriad,1 July 2.5, 1962

The following were present: The President, C h a irm a tf^ a rt^ ^ )
Secretary Dillon, Roosa, Director Bell, Turner, Chairman Heller,
Tobin, and Ackley. The meeting began around 6:00 and lasted about
an hour.
The President led off by asking about differences between CEA
and the Fed on "hard money and soft money and ail that. n Heller
responded that there were no differences in direction but only in degree.
Short-term rates must be maintained higher than might otherwise be
desirable, for balance of payments reasons, but they have recently
been allowed to rise; moreover, the rise has spread to long-term rates.
This seems particularly inappropriate in view of the weak state of the
economy. We should keep our power {of higher rates) dry for possible
use in event of a tax cut, when that might be appropriate. Even the
balance of payments effect of short-term rate increases would be lost
if it induced European central banks to raise their rates, as Germany has
recently done.
Martin was asked by the President for comment. In his discussion
he first said there had been no change in policy, just a technical "sopping
up" of loose funds. There was certainly no danger that Europeans would
match the very slight rate increases that had been permitted. But,
asked by the President when the change in policy had occurred, he
promptly replied "June 19. " Asked why, he referred to European
developments. Our policies were getting the worst press ever. A sso ­
ciated with this last week was the worst run yet on the dollar. The
President's Telestar appearance, however, had completely reversed
the picture. There was reference in this connection to the $50 million
gold loss to England.

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In response to the President's questions regarding this loss,
Rooea explained the Bank of England's role in selling gold in the
London Market to hold its price, and the mechanic* of the operation.
The actual loss by the British was $70 million^ and although they were
entitled under the agreement to take it all from us, they were taking
only $50 million. Had the sales not been made, the price would have
gone much higher and speculation might have been attracted which would
have meant much larger losses. We were standing the entire loss be­
cause under the Consortium agreement we would do so when the raid
was only against the dollar, not against other currencies. This was
the case here. He implied that from now on all further losses would
be shared* and we would only stand half, but this was not clear. It
was agreed that a ll of the dollars sold eame from Switeerland.
Roosa explained that it would not be possible to avoid publishing
this loss {and others which would add up to $90 million) on Friday,
but said it would be carefully explained that all this happened before
the President's press conference comments, which had completely
reversed the picture.
The President then asked Martin how domestic restriction would
help the situation. Martin replied there was no real restriction. Its
effect on the economy would be minor. In fact, money was going begging.
The President then asked why if its domestic effect would be minor, its
effect abroad would not also be minor. Dillon and Martin replied, "No,
major. " Tobin wondered why it would make any difference, since the
loss was based on speculative movements. The reply referred to the
European interpretation of our willingness to keep our house in order by
drying up some of the money "sloshing around. u It would also make it
technically easier for us to act fast and dramatically if that were needed,
e .g ., through a rise in the discount rate, which would really show that
we m£an business. This might be necessary, although for the present
the President's press conference had taken care of the situation. In the
discussion it was brought out that the interest rate differential between
UK and US had widened not because of a rate increase there but because
improved confidence in the pound had reduced the cost of forward cover.


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The President then asked Martin his view o£ the domestic
economy. He admitted that the majority of his staff was bearish,
based on the indicators, etc. But he was less so. Of course, July
was the worst month to figure out. Dillon referred to encouraging
news on retail sales.
In response to the President’s question, Dillon reviewed
the British progress since the IM F advance and associated actions.
Net, they had gained about $600 million.
Reverting finally to the press and public opinion on the
dollar there was discussion of the worst offenders and of ways
to improve the situation. Tobin suggested a statement by
Minister Giscard d'S staing. Dillon said Giscard was very much
encouraged by the President's statements and thought the problem
was licked. He would certainly reassure the British, who - - if
they wanted to — could control their financial press. Regarding
the Herald Tribune's role, the President asked Roosa to talk with
I*, c Cloy, who might work on Whitney.

Walter W, Heller

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