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BRETTON WOODS AGREEMENTS ACT AMENDMENT
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
ON
H.R. 10162
A BILL TO AMEND THE BRETTON WOODS AGREEMENTS ACT,
TO AUTHORIZE THE UNITED STATES TO PARTICIPATE IN
LOANS TO THE INTERNATIONAL MONETARY FUND TO
STRENGTHEN THE INTERNATIONAL MONETARY SYSTEM
FEBRUARY 27 AND 28, 1962
Printed for the use o f the Committee on Banking and Currency
U.S. GOVERNMENT PRINTING OFFICE
808070
WASHINGTON : 1962
COMMITTEE ON BANKING AND CURRENCY
BREN T SPENCE, Kentucky, Chairman
CLARENCE E. KILBURN, New York
W RIG H T PATM AN, Texas
GORDON L. MCDONOUGH, California
ALBE R T RAINS, Alabama
W ILLIAM B. W IDNALL, New Jersey
ABRAH AM J. M ULTER, New York
EUGENE SILER, Kentucky
HUGH J. ADDONIZIO, New Jersey
PAUL A. FINO, New York
W ILLIAM A. BAR R ETT, Pennsylvania
FLORENCE P. D W YE R , New Jersey
LEONOR K. SULLIVAN, Missouri
E DW ARD J. DERWINSK1, Illinois
H EN RY S. REUSS, Wisconsin
SEYMOUR BALPE R N , New York
THOMAS L. ASHLEY, Ohio
JAMES H ARVEY, Michigan
CHARLES A. VANIK, Ohio.
TOM V. M OOREHEAD, Ohio
W ILLIAM S. MOORHEAD, Pennsylvania
JOHN H. ROUSSELOT, California
CLEM M ILLER, California
W ILLIAM W. SCRANTON, Pennsylvania
E DW ARD R. FINNEGAN, Illinois
R OBERT G. STEPHENS, Jr ., Georgia
FERNAND J. ST. GERM AIN, Rhode Island
HUGH L. CAREY, New York
H EN RY B. GONZALEZ, Texas
HAROLD M . RYAN, Michigan
T h o m as A. K e n n e d t , Clerk and General Counsel
J o h n E. B a r e ie r e , Majority Staff Member
O r m a n S. F in k , Minority Staff Member
R o b e r t R .; P oston , Counsel
n
CONTENTS
H.R. 10162, a bill to amend the Bretton Woods Agreements Act to author
ize the United States to participate in loans to the International M onetary Fund to strengthen the international monetary system....................
1
Special report of the National Advisory Council, committee print..............
3
Statement of—
Champion, George, chairtnan, the Chase Manhattan Bank. New
York, N .Y .................. ............................. ............................................
161
Dillon, Hon. Douglas, Secretary of the Treasury..................................
33
v'Martin, William McChesney, Jr., Chairman, Board of Governors of
the Federal Reserve System........................... .................. ....... ......... .
89
Patman, Hon. Wright, a Representative in the Congress of the United
States from the State of Texas..............................................................
39
Ruttenberg, Stanley H., director of research, American Federation of
Labor & Congress of Industrial Organizations..................................
136
Additional data submitted to the committee by—
. Federal Reserve System:
Documents relating to foreign-exchange operations:
Memorandum, Paper No. 6........................................ ...............
143
Legal authority for Federal Reserve foreign exchange opera
155
tio n s.-.................................................................... - .................
Letter of Robert H. Knight, General Counsel of the Treasury,
dated January 8, 1962.......................................................... 156
Letter of William McC. Martin, Jr., Chairman, Board of
Governors, dated February 16, 1962....................................
158
Action by the National Advisory Council, dated February 28,
1962...................... ....................... ............... ......... - ............... 160
Time deposits at all commercial banks.................... ............... .......
134
131
U.S. drawing rights on the International Monetary F u n d -.........
Patman, Hon. Wright:
Letter to Hon. Douglas Dillon, Secretary of the Treasury, dated
February 28, 1962, and reply dated March 5, 1962................ 56, 57
Letter from President John F. Kennedy to Hon. Sam Rayburn,
dated March 14, 1961_________ _______ __________ _____ _____
I25
Attachment to the President’s letter, addressed to the President
of the Senate and to the Speaker of the House, dated March 8,
1961, and draft of bill from Douglas Dillon, Secretary of the
Treasury..... ................................... ............. ................................. 125,126
. Letter to Hon. William McC. Martin, Jr., Chairman, Board of
Governors of the Federal Reserve System, dated February 28,
1962, and reply dated March 13, 1962--------------- - r -------------- 95,96
U.S. balance of payments and gold outflow from United States,
House Document No. 84, 87th Congress, 1st session-------------113
Rousselot, Hon. John H.:
Letter to Hon. Douglas Dillon, Secretary of the Treasury, dated
February 23, 1962,_________________________________ _____ 72
Responses to questions submitted by Mr. Rousselot -----------------73
Scranton, Hon. William W.:
Annual gold review___________________________________________
76
Estimated gold production in 1961 (table)------------------------77
Estimated gold supplies and uses (chart)---------------------- **
Changes in official gold stocks, October 1960-Sept ember
1961 (ta b le )............................................... ..............- ......... £9
Official gold stocks (chart)________________________________
gJJ
1958-61 decline in U.S. gold stock (table)-------------------------International liquidity (chart)-------- --------------------------------.'“ Monetary Policy in a Competitive World,” excerpt from re
marks of Alfred Hayes, president, Federal Reserve Bank of
Np\VVrtrlr
____________
ni
CONTENTS
Additional information—Continued
Spence, Hon. Brent:
National Foreign Trade Council,. Inc., New York, N.Y., letter of Page
WilliajnVS. Sw ingle, president, dated February 27, 1962---------164
sasirty^Department:
-'Efalance^f-payments deficit results partly from outflow of gold
from the United States----- ------------------------------------------------- 70
Foreign deposits in the United States and U.S. deposits in for
eign countries----------------------- - ---------------. . . ..............................
61
Permissible draw ing limits by less developed countries from the
Fund--------------------- '------- ------------------------------- ----------------- 56
Section III— Preliminary details by countries________ ______ 62
Table 1.— Short-term banking liabilities to foreigners as of
December 31, 1961___________________________________ _
62
Table 2.— Short-term banking claims of foreigners as of De
cember 31, 1961__ 1_______ ___________________________ _
64
Section IV— Supplementary data by countries__________ _______
66
Table 1.— Short-term liabilities to and claims on foreigners
reported by nonfinancial concerns___________ - ___________
66
Widnall, Hon. William B.:
“ I. T. & T phone company seized by Brazilian State,” article from
the Washington Post, dated February 17, 1962_________ _____
50
BRETTON WOODS AGREEMENTS ACT AMENDiMENT
TUESDAY, FEBRU ARY 27, 1962
H o u se o f R e p r e s e n t a t iv e s ,
C o m m it t e e o x B a n k in g a n d C u r r e n c y ,
Washington, D.C.
The committee met at 10 a.m., Hon. Brent Spence (chairman of
the committee) presiding.
Present: Messrs. Spence (presiding), Patman, Rains, Multer, Addonizio, Barrett, Mrs. Sullivan, Reuss, Ashley, Vanik, Moorhead of
Pennsylvania, Miller, Finnegan. Stephens, St. Germain, Carey, Gon
zalez, ICilburn, McDonough, Widnall, Siler, Fino, Mrs. Dwyer,
Messrs. Derwinski, Halpem, Harvey, Moorehead of Ohio, Rousselot,
and Scranton.
Mr. S p e n c e . The committee will come to order.
We are honored this morning to have the Secretary of the Treasury
to testify on H.R. 10162.
(H.R. 10162 and committee print, Special Report of the National
Advisory Council, are as follows:)
[H .R. 10162, 87th Cong., 2d sess.]
A B ILL T o amend the Bretton W oods Agreements Act to authorize the United States to
partic’ pate in loans to the International Monetary Fund to strengthen the international
monetary system
Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled, That the Bretton Woods Agreements Act,
as amended (22 U.S.C. 286-286k-l), is amended by adding at the end thereof
the following new sections:
“ S e c . 17 (a) In order to carry out the purposes of the decision of January 5,
1962, of the Executive Directors of the International Monetary Fund, the
Secretary of the Treasury is authorized to make loans, not to exceed $2,000,000,000 outstanding at any one time, to the Fund under article VII, section
2 (i), of the Articles of Agreement of the Fund. Any loan under the authority
granted in this subsection shall be made with due regard to the present and
prospective balance of payments and reserve position of the United States.
“ (b) For the purpose of making loans to the International Monetary Fund
pursuant to this section, there is hereby authorized to be appropriated $2,000,000,000, to remain available until expended to meet calls by the International
Monetary Fund. Any payments made to the United States by the International
Monetary Fund as a repayment on account of the principal of a loan ma^e
under this section shall continue to be available for loans to the International
Monetary Fund.
“ (c) Payments o f interest and charges to the United States on account of
any loan to the International Monetary Fund shall be covered into the Treasury
as miscellaneous receipts. In addition to the amount authorized in subsection
(b), there is hereby authorized to be appropriated such amounts as may be
necessary for the payment of charges in connection with any purchases of
currencies or gold by the United States from the International Monetary
Fund.
1
2
BRETTON WOODS AGREEMENTS ACT AMENDMENT
“ S ec . 18. Any purchases of currencies of gold by the United States from the
International Monetary Fund may be transferred to and administered by the
fund established by section 10 of the Gold Reserve Act o f 1934, as amended
(31 U.S.C. 822a), for use in accordance with the provisions of that section.
The Secretary of the Treasury is authorized to utilize the resources of that
fund for the purpose of any repayments in connection with such transactions.”
S ec. 2. The last sentence of section 7 (c) o f the Bretton Woods Agreements
Act (22 U.S.C. 286e) is amended to read as follow s: “ The face amount of special
notes issued to the Fund under the authority of this subsection and outstanding
at any one time shall not exceed in the aggregate the amount of the sub
scription of the United States actually paid to the Fund and the dollar equivalent
of currencies and gold which the United States shall have purchased from the
Fund in accordance with the Articles of Agreement, and the face amount of
such notes issued to the Bank and outstanding at any one time shall not exceed
in the aggregate the amount of the subscription of the United States actually
paid to the Bank under article II, section 7 (i), of the Articles o f Agreement
of the Bank.”
[COMMITTEE PRINT]
NATIONAL ADVISORY COUNCIL
ON
INTERNATIONAL MONETARY AND
FINANCIAL PROBLEMS
MESSAGE
FROM
THE PRESIDENT OF THE UNITED STATES
RELATIVE TO
SPECIAL BORROWING ARRANGEMENTS
OF THE
INTERNATIONAL MONETARY FUND
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
EIGHTY-SEVENTH CONGRESS
SECOND SESSION
JANUARY 1962
Printed for the use of the Committee on Banking and Currency
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON ; 1962
3
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
5
LETTER OF TRANSMITTAL
T he W
h it e
H
ouse,
Washington, February 2, 1962.
Hon. J o h n W. M cC o r m a c k ,
Speaker of the House oj Representatives,
Washington, D C.
D e a r M r . S p e a k e r : Transmitted herewith for the consideration
of the Congress is legislation which would implement the recommenda
tions of the National Advisory Council on International Monetary
and Financial Problems relating to “ special borrowing arrangements
of the International Monetary Fund.” A copy of the report of the
Council is attached.
The legislation takes the form of an amendment to the Bretton
Woods Agreements Act and authorizes the United States to participate
in loans to the International Monetary Fund in order to strengthen
the international monetary system.
The International Monetary Fund has been a vital force for eco
nomic stability in the free world ever since it was formed in 1946. Its
transactions have supported the currencies of free world nations which
encountered balance of payments or other monetary difficulties, and
it helped maintain confidence in the currencies of its members. The
leadership of the United States in the establishment and support of
the Fund has been a source of pride and satisfaction.
In my message of last February 6 , 1 discussed the imbalance in our
international payments and called for a series of related measures to
correct it. A number 6f these measures have been adopted. But the
problem is stubborn and complex and will require additional action
over a number of years.
Meanwhile, we can strengthen the monetary system in general and
the position of the United States in that system by augmenting the
resources and flexibility of the International Monetary Fund to permit
the Fund to be utilized more effectively in supporting a healthy and
growing world economy.
To accomplish this purpose, intensive negotiations have gone for
ward, with the active participation of the Fund, among the major in
dustrial nations of the free world. These negotiations culminated in
the proposals described and recommended in the National Advisory
Council's report calling for the addition of $6 billion to the resources
of the Fund. This addition would strongly reinforce the international
monetary system of the free world.
It would, in particular, greatly enhance the ability of the Fund to
assist the United States in coping with its international payments
problems. Today, the Fund has on hand only $1.6 billion of the
currencies of other major industrial countries—exclusive of the United
Kingdom, which has itself made a large drawing from the Fund to
meet a possible need for a drawing by the United States. The new
6
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
arrangements would permit an additional $3 billion increase in
available resources of these other major currencies, and would thus
assure the Fund the assets needed to meet a request for a drawing by
the United States should such a request ever be necessary. At a
time when the confidence in the dollar is of utmost importance to the
free world, the $6 billion addition to the Fund will be especially
significant. It will greatly enhance our own financial resources and
greatly reduce any possibility of a serious drain upon dollar balances.
The very existence of the new standby credits will be an assurance of
stability of major currencies.
The new. borrowing arrangements would require amendment of the
Bretton Woods Agreements Act by authorizing the United States to
lend up to $2 billion to the Fund. The other nine participants in the
arrangement would commit themselves to provide up to $4 billion.
The commitment of nearly $2.5 billion by members of the European
Common Market—Belgium, France, Germany, Italy, and the
Netherlands—would represent an amount about equal to the present
aggregate of their Fund quotas. By contrast the United States and
the United Kingdom would provide amounts equal to orly about
half their present quotas. The United States would not be expected
to lend to the Fund in the absence of a substantial'improvement in
its balance-of-payments position.
The new proposals would strengthen the position of the dollar as
the world's major reserve currency; They would also provide new
armament for the defense of the currencies of the free world and for
reinforcing the entire international monetary system.
I urge, therefore, that the Congress promptly consider this legisla
tion. participation by the United States in the proposed arrange
ments is in the national interest.
Sincerely,
J o h n F. K e n n e d y .
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
NATIONAL ADVISORY COUNCIL
ON
INTERNATIONAL MONETARY AND
FINANCIAL PROBLEMS
SPECIAL REPORT
TO THE PRESIDENT AND TO THE CONGRESS
ON SPECIAL BORROWING ARRANGEMENTS
OF THE
INTERNATIONAL MONETARY FUND
JANUARY 1962
7
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
CONTENTS
I. Introduction______________________________________________________
II. The need for International Monetary Fund borrowing arrangements.
Status of fund resources______________ _______________ ________
U.S. drawing rights on the fund_______________________________
III. Terms of the special borrowing arrangement____- __________________
Participants__________________________________________________
Amounts______________________________________ ______________
Initial procedures________________ ____________________________
Consultations. _______________________________________________
Agreement among the participants_____ ________________________
Drawing transaction_________ ________________________ _________
Terms of loans_________ _______ ■,_____ _________________________
Other provisions___ ____ _______ ______________________________
Entry into force and duration,________________________________
IV. Proposed legislation____________________ ___________________________
V. Conclusions and recommendation__________________________________
Recommendation_____________ ___________ ^ ___________ - - - - - TABLES
Table No.
1. Official gold and foreign exchange holdings_________________________
2. U.S. balance of payments, 1958-61__________ _____________ ________
3. Participants in the special borrowing arrangements and their po
sition in the International Monetary Fund, as of November 30,
1961....................................... ............ ............... ...................................
4. International Monetary Fund currency sales and repayments,
through November 30, 1961.____________________________________
6. International Monetary Fund quotas and holdings of gold and
member currencies______________________________________________
Page.
1
3
7
10
11
11
11
12
13
13
13
14
14
15
15
15
^
4
6
7
8
9
APPENDIXES
A. Text of the decision of the Executive Directors of the International
Monetary Fund, January 6, 1962______________ —___ ______ _____ _
B. Exchange of correspondence between M. Wilfrid Baumgartner, France,
and Douglas Dillon, Secretary of the Treasury______ ______________
C. Letter from M. Wilfrid Baumgartner, France, to Douglas Dillon,
Secretary of the Treasury_________________________________________
17
22
24
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
9
SPECIAL REPORT OF THE NATIONAL ADVISORY COUNCIL
ON SPECIAL BORROWING ARRANGEMENTS OF THE INTERNATIONAL MONETARY FUND
I . I n t r o d u c t io n
President Kennedy, in his message to the Congress on the balance
of payments and gold (H. Doc. 84, 87th Cong., 1st sess.), pointed to
the need for increased cooperation among the industrialized nations
of the world and the harmonization of their policies in the interest
of maintaining the growth and stability of the free world. He said,
in part:
We must now, in cooperation with other lending countries, begin to consider
ways in which international monetary institutions— especially the International
Monetary Fund— can be strengthened and more effectively utilized, both in
furnishing needed increases in reserves and in providing the flexibility required
to support a healthy and growing world economy.
The problems affecting the international monetary system have
been given intensive consideration both in the International Monetary
Fund and in intergovernmental discussion in which the U.S. Govern
ment has actively participated. The Managing Director of the Fund,
Mr. Per Jacobsson, made a proposal for a borrowing arrangement to
the Executive Board early in 1961 which was intensively studied in
the succeeding months. At the annual meeting of the Board of
Governors of the International Monetary Fund, held at Vienna in
September 1961, the U.S. Governor took the initiative in arranging a
series of exploratory conversations with other Governors, and a num
ber of Governors referred to the problem in their formal statements.
It was the general consensus of the Governors that concrete steps
should be taken to devise an acceptable arrangement for providing
supplementary resources to the Fund. Subsequent to the Vienna
meeting, the Executive Directors of the Fund gave further considera
tion to the matter. The interested governments consulted with each
other on the terms and conditions under which they would be prepared
to lend to the Fund, and reached agreement at a meeting held in Paris
in December 1961.
The proposal which has emerged from these discussions in the Fund
and among the governments is intended to deal with the special prob
lems which have emerged in the last few years. Currencies other than
the dollar have become stronger, particularly in the European coun
tries, which have accumulated large reserves and improved greatly
their position in the world market. Thus, these countries were able to
proceed with considerable liberalization of trade and allow greater
freedom for capital movements, and to make their currencies con
vertible. Accordingly, there is less direct control over balances^ of
payments, and they have become subject to wider swings. ^ An im
portant factor has been the movement of short-term capital from
l
10
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
country to country in response to balance-of-payments situations,
opportunity for investment, interest rate differentials, and, to some
extent, speculation.
In order to assist its member countries in countering adverse move
ments in their balances of payments and reserves under these condi
tions, the Fund requires adequate resources in the currencies of the
principal industrial countries. The experience of the last few years
has shown that the Fund lacks these resources in adequate amount,
although it has available resources which are probably sufficient to
deal with the balance-of-payments problems of most of its membership.
Under the proposed arrangements, the 10 principal industrial coun
tries will agree to lend up to stipulated amounts of their currencies to
the Fund, if the Fund requires additional resources in these currencies
to forestall or cope with an impairment of the international monetary
system. The Fund would then borrow these currencies and use them
in drawings by the participating countries under the usual terms and
conditions, which require repayment to the Fund within a period of
3 to 5 years. When one of the participating countries wishes to draw
from the Fund, or to enter into a standby arrangement with the Fund,
the Managing Director and the country proposing the drawing will
consult with the other participating countries to determine the appro
priate amount of borrowing. The understandings among the partici
pating countries will assure prompt consideration and decision on any
request. When the currencies are loaned to the Fund, in accordance
with these decisions, the Fund will be obligated to the particular
lenders and will repay them in a period not to exceed 5 years.
The proposal is embodied in the documents reproduced in the
appendixes. The first is a decision by the Executive Directors of the
Fund, adopted on January 5, 1962. This decision is reproduced below
as appendix A. The second group of documents is an exchange of
letters between the French Minister of Finance, who presided over the
Paris meeting, and the Secretary of the Treasury, dated the 15th of
December, 1961 (reproduced below as app. B). Similar letters were
exchanged between the French Minister of Finance and the financial
officers of Belgium, Canada, Germany, Italy, Japan, Netherlands,
Sweden, and the United Kingdom. As is shown in the Annex to the
Fund decision, the amounts of the commitments to lend total the
equivalent of $6 billion, divided as follows:
Units of
participant's
currency*
(millions)
Participant
United 8tates____ __________________
Deutsche Bundesbank..................................................................................
TTnited Kingdom____ _________ ___________
Japan......................................................................... ...
Canada........... __________________
Netherlands___ _____ ________
Belgium.................................................
Sweden..................... ...............................
US$ 2,000.0
D M 4,000.0
£
357.1
NF
2,715.4
Lit 343,750.0
Yen 90,000.0
Cant
208.9
f.
724.0
BP
7,500.0
SKr
517.3
Equivalent
in U.S.
dollars
(millions)
$2,000
1,000
1,000
550
550
250
200
200
150
100
Throughout the negotiations culminating in these docum ents, the
National Advisory Coupejl has been consulted by the Treasuiy and
by the U.S. ExecutivelDirector of the Fund, arid has approved the
2
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
11
positions taken in the negotiations at various stages. The National
Advisory Council strongly recommends the congressional action which
is necessary to enable the United States to participate in these standby
arrangements for strengthening the International Monetary Fund.
It believes that the successful operation of the proposed arrangement
will be beneficial to the economy of the free world and can prove to
be of considerable importance to the United States particularly. The
required legislation would authorize the Secretary of the Treasury
to loan up to $2 billion to the Fund. In considering any loan to
make available dollars needed to supplement the Fund's resources,
the Secretary would give due regard to the existing and prospective
balance of payments and reserve position of the United States. An
explanation of the legislation is given in chapter IV of this Report.
II. T
he
N
eed
for
I n t e r n a t io n a l M o n e t a r y F u n d B o r r o w in g
A rrangem ents
The International Monetary Fund was organized to promote inter
national cooperation among its members through consultation and
collaboration on foreign exchange and monetary problems. It has
been provided b}^ its 75 members with resources in gold and currencies
which it uses to provide short-term assistance to deal with temporary
balance-of-payments difficulties. The National Advisory Council has
reported to the Congress on the activities of the Fund and the U.S.
participation therein semiannually and has submitted to the Congress
seven Special Reports on the policies and operations of the Fund.
These Reports have all agreed that the Fund has played a most val
uable role in promoting strong and well-coordinated financial relations
among its member countries and that the operations and policies of
the Fund have been consistent with the interests of the free world
and the United States.
In February 1959, the Council submitted a t(Special Report on
Increases in the Resources oj the International Monetary Fund and
of the International Bank for Reconstruction and Development” (H.
Doc. 77, 86th Cong., 1st sess.). In this Report, the Council recom
mended an increase in the U.S. quota in the Fund as part of a general
increase in the Fund quotas. Those additional resources in gold
and convertible currencies have enabled the Fund to meet recent
heavy demands for assistance, including the provision, in August
1961, of S2 billion to the United Kingdom, of which $1.5 billion
was drawn in various currencies. But the balance-of-payments
developments in the last few years have shown that under some
circumstances the Fund is likely to need additional resources to
deal effectively with the pressures to which the international mone
tary system may be subject. Wide and rapid variations in the
balance-of-payments position of major countries have become more
evident possibilities since 1959, and have shown the need for the
Fund to have access on a standby basis to additional resources, par
ticularly in currencies other than dollars and sterling. The proposed
arrangements will provide these resources in the form of Fund borrow
ings from countries having a strong position in their international
accounts.
3
12
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
In the last 10 years a number of strong currencies have emerged
in continental Europe, as is shown by the shift in world reserve posi
tions. (See table 1.) The most notable increase in reserves occurred
in continental Europe. Official gold and foreign exchange holdings
of the continental European countries increased from $7.4 to $23.1
billion in the 10-year period. The most conspicuous cases have been
Germany, whose reserves in this period increased from $518 million
to $6,437 million; Italy, which moved from $774 million to $3,369
million; and France from $616 million to $2,816 million.
T a b l e 1.—
Official gold and foreign exchange holdings, 1951 and 1968-61
[End of period: millions of XT.S. dollars]
Country
1961 *
1951
1958
1959
1960
United States.**......................
United Kingdom....... ..............
Germany....... ...........................
France................ : .....................
Italy..........................................
Belgium...................................
Netherlands..............................
C an ad a.,........ ........................
Sweden................ ....................
Japan.........................................
22,873
2,374
518
616
774
1,054
554
1,826
484
>979
20,582
3,105
5,732
1,050
2,082
1,497
1,470
1,948
473
861
19,507
2,750
4,533
1,720
2,953
1,222
1,339
1,876
434
1,322
17,804
3,239
6,737
2,070
3,080
1,422
1,742
1,836
' 488
1,824
17,063
3,318
6,437
2,816
3,369
1,552
1,723
1,933
662
1,611
Total of listed countries *
World total....................
32,052
49,020
38,800
57,285
37,656
57,040
40,242
59,700
41,182
61,060
i For United States and United Kingdom, data are for Dec. 31; for other countries, and the totals, data
are as of Sept. 30.
» Holdings on Dec. 31,1952.
* Participants in the special borrowing arrangements.
Source; International Monetary Fund.
These changes in reserves were related to the U.S. balance-of-payments deficit over this period, which enabled Europe and Japan to
accumulate dollar reserves, either from transactions with the United
States directly or with third countries which have settled their deficits
by drawing down their gold and dollar reserves or transferring dollar
earnings to other countries. In September 1961, foreign official hold
ers (governments, central banks, and other official institutions) held
about $10.9 billion in short-term dollars, while private holdings of
short-term liquid dollars amounted to $7.6 billion.
The dollar and sterling are the key currencies in world trade and
finance. These are the currencies in which trade and financial trans
actions are generally denominated, and the money markets of the
United States and the United Kingdom provide the largest and best
■developed credit facilities for financing trade and other international
transactions. Foreign countries may also readily invest their excess
foreign exchange earnings in liquid obligations in the United States
and British markets, chiefly in the form of Treasury securities or ac-r
ceptances. While similar facilities exist in the leading countries of
Western Europe, they are available to a much smaller extent. .
The improvement in the balance-of-payments situation of the conti
nental countries and of the United Kingdom and their accumulation
of reserves were important factors in the moves to convertibility
which culminated in the adoption of defacto convertibility for current
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
13
international transactions in 1958 by the United Kingdom and the
principal European countries. This substantially ended the complex
exchange controls in the industrial countries which had existed since
the beginning of World War II, although some countries retained re
strictions on capital movements.
In February 1961, the principal European countries took the addi
tional step of accepting the obligations of article VIII of the Fund
Agreement. The technical convertibility resulting from this step
gave formal recognition to a situation which had been practically in
effect for over a year preceding. In accepting the conditions of article
VIII, the members agreed not “ to impose restrictions on the making
of payments and transfers for current international transactions”
without the prior approval of the Fund, in contrast to the restrictions
and discrimination permitted under the “ transitional” provisions of
article XIV under which they had previously operated. As a conse
quence of the reestablishment of external convertibility, transactions
among currencies became easier than they had been before, and the
years 1960 and 1961 began an era of relatively free exchange markets
in the main industrial countries such as had not existed for decades.
As has been noted, this freedom in the exchange markets has been
associated with liberalization of trade and other current payments
and greater freedom of capital movements, made possible by the
increasing economic strength of the European countries. The bal
ances of payments of the industrial countries have always reflected
swings in trade movements during the business cycle. In the boom
stage of the business cycle, imports of raw materials and industrial
goods increase, while in recession imports generally slacken. Cur
rency convertibility has made it possible for balance-of-payments
swings to become larger than they had been previously, and to occur
more rapidly, especially because short-term funds can now move more
easily from country to country under the impetus of such factors as
interest differentials, arbitrage, and currency speculation.
The effect of short-term capital movements on the balance of pay
ments of the United States is shown in table 2, which compares the
basic and the overall balance of payments of the United States. The
basic balance results from trade and service transactions, long-term
investment, foreign assistance, and military expenditures. ^ The over
all balance, however, reflects the movement of recorded private short
term capital, foreign commercial credits to the United States, and
changes in the item of “ errors and omissions,” a considerable part of
which is probably unrecorded capital movements. In 1960, for
example, the recorded short-term capital outflow from the Lnited
States was $1.3 billion, while the “ errors and omissions” item had
shifted from a positive figure of $528 million in 1959 to a negative
figure of $648 million. Tnus, the fluctuations of the overall balance
of payments may be different from the basic balance since the overall
may be reduced by an inflow of short-term capital, as in 1958 and
1959, or increased by a short-term capital outflow as in 1960.
5
14
T
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
ab l e
2. — U.S. balance of payments, 1958—61.
Difference between the basic and
overall balances
fin millions of dollars]
1958
Errors and omissions___________________________
Overall balance_____________________________
____
____
-3,551
-306
-5 1
+380
—3,528
S fS S a '
■’* ++C3
1
J
Basic balance_______________ ___________________
U.S. private short-term assets abroad (increase (—)) ............
Foreign commercial credits to U.S. (increase (+ )) ................
1959
1960
-1,872
“ 1,312
-9 7
-648
—a om
1961 (9
months)1
* -542
-903
+148
-309
i —l
i Seasonally adjusted data.
* Excludes U.S. subscription of $1,400,000,000 to International Monetary Fund.
* Excluding $649,000,000 in foreign debt prepayments to the U.S. Government.
Source: Based on data from the Survey of Current Business, Department of Commerce.
The situation in the United Kingdom is somewhat similar since
sterling is also widely used in international transactions and the
British money market provides facilities for investment in short-term
obligations and deposits. In 1960 weakness in the basic balance of
payments of the United Kingdom was offset by a large inflow of funds,
while in the first half of 1961 a speculative outflow caused considerable
difficulty.
The stability of the dollar and of the pound sterling are fundamental
to an orderly and stable international financial system, since these are
the key currencies, holdings of which constitute an important part of
world monetary reserves. The movements in and out of these cur
rencies emanate in large part from the other industrial countries which
have an important stake in the stability of the two major reserve
currencies. It is largely in recognition of this common interest in the
smooth functioning of the international monetary system that the 10
main industrial countries are now willing to participate in an arrange
ment on a standby basis which will provide resources to the Fund
which it can use to forestall or counteract adverse movements affecting
major currencies.
In sum, there is a need for additional resources in the major cur
rencies to forestall or cope with an impairment of the international
monetary system affecting these currencies. This need results espe
cially from the greater freedom of movement of funds because of the
liberalization of trade, the growing freedom of capital movements, and
the adoption of convertibility. More fundamentally, the relative
financial strength and reserve positions of industrial countries other
than the United^ States and the United Kingdom have markedly
increased, and this has not been adequately reflected in the amounts
of their currencies available in the International Monetary Fund.
Consequently, in the proposed credit arrangements these countries
provide a larger share of the funds to be loaned relative to their quotas
than do the United States and the United Kingdom.
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
15
T able 3.— Participants in the special borrowing arrangements and their position in
the International Monetary Fund as of Nov. 80, 1961
(Expressed in millions of U.S. dollars]
New credit
arrangement
Participant
Fund
quota
Fund holdings of
currency
Amount
Germany............................................................
France............................ .......... .........................
Italy...............................................................
Belgium ............................... _...........................
Netherlands.........................................................
1,000
550
550
150
200
787.5
787.5
270.0
337.5
412.5
Subtotal...................... ..............................
2,450
2,595.0
889.5
200
250
100
550.0
500.0
150.0
337.9
320.0
87.5
Canada..........................................
Japan............................
Sweden...................
......
Subtotal...............................
.....
150.2
361.1
27.2
181.1
169.9
550
1,200.0
745.4
1,000
2,000
1,950.0
4,125.0
2,508.2
2,445.1
Subtotal...................
3,000
6,075.0
4,953.3
Grand total..........
MOO
9,870.0
6,588.2
United Kingdom......................
United States.......................................................
Percent of
quota
19
46
10
54
41
61
64
58
129
58
Source: International Monetary Fund.
STATUS OF FUND RESOURCES
The Fund's financial operations consist of providing the currencies
needed by a member in exchange for its own currency. The Fund
obtains the needed currencies by cashing the non-interest-bearing
notes denominated in those currencies which it holds or, more rarely,
by buying them with gold. These transactions occur when the
drawing country is in temporary balance-of-payments difficulties.
Subsequently, the drawing country reverses the transaction, repur
chasing its own currency from the Fund with other convertible cur
rencies or gold.
Until recent years, the bulk of the Fund's transactions consisted
of sales of U.S. dollars against other currencies since the dollar was
the most useful currency and the only important currency which
was convertible and could be used in repayment. Of the total
transactions of the Fund through November 30, 1961, total currency
sales amounted to the equivalent of $6.2 billion, of which $4.0 billion
were U.S. dollar transactions. Sales of other currencies amounted
to $2.1 billion, of which $1.8 billion were sold in the last 2 years.
With the emergence of strong European currencies, there has been
greater use of these currencies, which may now also be used in repur
chase from the Fund. In 1961, 67 percent of total Fund sales of
currencies to members drawing from the Fund were in currencies
other than U.S. dollar^, and included deutsche marks, French francs,
Belgian francs, Italian lire, J a p a n e s e 1y e n , 'Netherlands guilders,
pounds sterling, Canadian dollars, and Swedish kronor.
A member drawing from the Fund generally repurchases its cur
rency from the Fund within a period of 3 to 5 years and the rate ol
repurchase may be accelerated if a country's gold and foreign exchange
reserves increase before that time. The Fund is a revolving pool ol
7
16
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
currencies, and to the present time some $3.6 billion of the original
Fund sales of currency have been repurchased, either by the drawing
members directly or through other countries drawing the currency of
a country which had previously drawn upon the Fund. To Novem
ber 30, 1961, $2.7 billion had been repurchased in dollars, $185
million in other currencies, and $397 million in gold. (See table 4.)
Net drawings outstanding on November 30 amounted to $2.5 billion,
including $1.1 billion outstanding on the United Kingdom drawing of
the equivalent of $1.5 billion in 1961.
T able 4.— International Monetary Fund currency sales and repayments, through
Nov. 30, 1961
[Expressed in millions of U.S. dollars]
Sales
Calendar years
Repayments*
U.S.
dollars
Other
curren
cies
Total
In
gold3
In U.S.
dollars
Total..................................... 6,161.0
4,023.7
2,137.3
3,579.3
397.0
2,695.9
185.0
301.4
1961 (11 months)__ ____ 2,477.5
1960..................................
279.8
179.8
1959..................................
1958..................................
337.9
1957...................... ..........
977.1
1956........- ........... ............
692.5
1955..................................
27.5
1954..................................
62.5
1953 .............................
229.5
1952 .................
85.1
34.6
1951..................................
1950................... ..............
1949............ . ..............
101.5
1948........*.............- ..........
208.0
1 9 4 7 ...............................
467.7
821.0
148.5
138.5
252.2
977.1
677. a
27.5
62.5
67.5
85.1
6.6
1,656.5
131.3
41.3
85.7
762.5
681.0
607.5
368.9
63.8
113.3
232.5
209.9
320.5
101.5
73.8
23.9
2.6
11.4
6.1
31.4
32.4
131.2
76.8
51.6
-4 .1
58.5
-3 9.3
-8 .6
48.2
14.8
3.0
1.0
530.1
621.7
442.0
270.9
12.2
117.4
174.0
249.2
171.4
53.3
31.0
20.9
1.6
185.0
16.0
26.9
34.3
21.2
Total
101.5
196.6
461.7
isfo"
162.0
28.0
11.4
6.1
lii other By other
curren coun
tries'
cies
drawings
157.6
28.0
11.4
6.1
* Includes approximately $6,000,000 arising from settlement of account with respect to a drawing by
Czechoslovakia, a former member, in 1948. Excludes member's repurchases on subscription account.
* Negative figures reflect adjustments to earlier repayments. Entries for 1953 and 1960 include the
counterparts of those repayments by others' drawings in currencies of members whose net drawings were
zero, but for whom (owing to the subscription account) Fund holdings of their currencies were in excess
of 75 percent of quota.
Source: International Monetary Fund.
As noted above, the emergence of a number of strong currencies in
addition to the U.S. dollar, the greater freedom in exchange and trade
transactions, and the increased movement of short-term capital had
made possible wider swings in the balances of payments of. the^ in
dustrial countries, particularly the United States and the United
Kingdom, whose currencies are held by other countries as monetary
reserves. This raises the possibility of relatively large drawings on
the Fund by the reserve currency countries. To offset deficits in the
balance of payments of these countries occasioned in part by capital
movements, large amounts of foreign currencies may be needed to
avoid undue declines in reserves.
While on November 30, 1961, the Fund had available to it $2.9
billion in gold and $11.6 billion in member currencies, a large part of
these currencies consist of currencies of the less developed countries
which cannot readily be used by the Fund. The Fund’s holdings on
that date of the currencies of the 10 main industrial countries
amounted to the equivalent of about $6.6 billion, of which holdings of
dollars and sterling amounted to $5 billion. (See table 5.)
8
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
17
T able 5.— International Monetary Fund quotas and holdings of gold and member
currencies
[Expressed in million U.S. dollars]
June 30, 1961
Member
Aug. 31,1961
Nov. 30, 1961
Quota
Currency Per Currency Per Currency Per
holdings cent of holdings cent of holdings cent of
quota
quota
quota
United States......................................
United Kingdom............. ..................
4.125.0
1.950.0
2,606.1
1,419.0
Subtotal.....................................
6,075.0
4,025.1
Germany...........................................
France............................ .....................
Belgium................................
Netherlands.........................................
787. 5
787.5
270.0
337. 5
412.5
344.7
557.6
159. 5
253.1
276.9
Subtotal....... ............................
2,595. 0
1.591.8
Canada.........................
Sweden...............................................
Japan.........................
550.0
150.0
500.0
387.9
112.5
375.0
Subtotal................
Total of selected currencies___
Total member currency holdings___ *
Total gold holdings 1............
63
73
2.119.5
2.877.5
51
147
4,997.0
44
71
59
75
67
92.7
350.6
43.2
193.1
186.9
71
75
75
362 9
92.5
345.0
2.445.1
2.508.2
58
129
4,953.3
12
45
16
57
45
866.5
150.2
361.1
27.2
181.1
169.9
19
46
10
54
41
889.5
66
62
69
337.9
87.5
320.0
1,200.0
875.4
800.4
745.4
9,870.0
6,492.3
10,961.3
3,281.5
6,663.9
11,453.9
2,842.1
6,588.2
11,561.2
2,859.4
61
58
64
1Includes investment of $309,000,000 in U.S. Government securities for which the same quantity of gold
can be reacquired upon termination.
Source; International Monetary Fund.
The impact of the United Kingdom drawing in August 1961 on Fund
resources serves to highlight the Fund’s need for additional access to
the currencies of the major industrial countries. As shown in table
5 the Fund had available to it on June 30, 1961, $2.6 billion in U.S.
dollars, and $2.5 billion in the currencies of other participants 1other
than sterling. At the same time there were outstanding commitments
on standby arrangements aggregating $552 million. To deal with the
heavy pressures to which sterling was being subjected, the United
Kingdom drew currencies totaling the equivalent of $1.5 billion, and at
the same time entered into a standby arrangement witb the Fund for
an additional $500 million. This was the largest transaction in the
Fund's history and slightly exceeded the entire British quota. To
obtain the currencies needed for the cash transaction of $1.5 billion,
the Fund sold the United Kingdom the equivalent of $1 billion of its
holdings of the currencies of the nine other participating countries.
The remainder was bought with $500 million of the Fund's gold,
each member receiving from the Fund in return for its currency an
amount of gold equal to one-half the amount of currency the Fund had
used from its holdings. After this large transaction, the Fund's
“ fjjdings of the nine currencies were reduced from $5.1 billion to $3.8
billion, of which $2.1 billion were in U.S. dollars. The Fund's holdings
of deutsche marks and Italian lire were reduced to 12 and 16 percent of
quota, respectively. At this date, the Fund's aggregate holdings of
the principal industrial currencies, other than dollars or sterling, had
i
deduced to a point where large drawings were practically precluded without large sales of the Fund's gold. Against the Fund s
afrangement “ particIpants” refers to the 10 industrial countries taking part In the proposed borrowing
9
18
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
total gold and currency holdings there were standby commitments
of $1.2 billion.
U .S. D RAW IN G RIGHTS ON THE FUND
The President, in his balance-of-payments message, included U.S.
drawing rights on the Fund as a secondary source of monetary reserves
for the United States which could, if necessary, be used to make
payments abroad and to restore our reserve position and so check the
drain on gold. The U.S. quota in the Fund is $4,125 million, which
the United States paid to the Fund, one-quarter in gold and threequarters in dollars. Under normal Fund procedure, a member
country is given the overwhelming benefit of the doubt in relation
to requests to draw currencies equivalent to its gold payment on
subscription to the Fund—the so-called “ gold tranche”—and also is
entitled to draw an additional amount equal to outstanding amounts
of that currency reflecting past drawings. As of November 30, 1961,
these drawing rights of the United States amounted to $1.7 billion.
The Fund's attitude to drawings of the next 25 percent of quota—
equivalent to $1 billion in the case of the United States—is a liberal
one when a member itself is also making reasonable efforts to solve its
problems. Larger drawings are permitted under Fund policy by
countries which are undertaking programs for stabilization of their
monetary systems and taking important measures for rectifying their
balance-of-payments deficit. Successive drawings of the “ credit
tranches” are generally accompanied by comprehensive programs of
reform.
But the figures given above show that the Fund lacks the resources
in the currencies of the main industrial countries, and particularly
of the European countries whose reserves have been increasing, to
meet any such large drawing as the United States would be entitled
to request in time of need. The standby borrowing arrangement is
precisely designed to mend this weakness in the Fund's ability to cope
with balance-of-payments difficulties. These standby arrangements
may be particularly important for the United States since difficulties
surrounding the dollar would exemplify the impairment of the inter
national monetary system cited in the preamble to the Fund Decision.
But the arrangements could be brought into operation in the case of
any other serious disturbance of the world monetary system. They
are intended to make available to the Fund the currencies most
needed in international transactions and particularly the currencies
of countries which at a given time are in balance-of-payments surplus.
With this arrangement in force, the Fund, in addition to its holdings
of usable currencies and gold, would be able to borrow currencies to
cope with any impairment in the world payments system which
caused any 1 of the 10 participating industrial countries to come
to the Fund for assistance.
10
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
III.
T
erms
of t h e
19
S p e c ia l B o r r o w in g A r r a n g e m e n t
The special borrowing arrangement constitutes an action under
the authority of article VII of the Fund's Articles of Agreement,
section 2(i) of which reads as follows:
The Fund may, if it deems such action appropriate to replenish its holdings of
any member’s currency, take either or both of the following steps:
(i)
Propose to the member that, on terms and conditions agreed between the
Fund and the member, the latter lend its currency to the Fund or that, with the
approval of the member, the Fund borrow such currency from other source
either within or outside the territories of the member, but no member shall be
under any obligation to make such loans to the Fund or to approve the borrow
ing of its currency by the Fund from any other source.
The present proposal to replenish the Fund's holdings of currency
by means of borrowing represents an agreement (in the form of a
Fund Decision reproduced as app. A) between the Fund and 10 of
its members on the terms and conditions governing the lending of
their currencies to the Fund. These Fund members also entered into
understandings among themselves on the procedures governing their
joint consideration of any proposal by the Managing Director to
borrow from them. These additional understandings are embodied
in the,exchange of correspondence between the French Minister of
Finance and the representatives of the other participating countries.
Copies of the correspondence between the French Finance Minister
and the Secretary of the Treasury are reproduced in appendix B.
PARTICIPANTS
Ten industrial countries, including the United States, have agreed
to participate in the new borrowing arrangements. Five 01 the
participating countries—the Federal Kepublic of Germany, France,
Italy, the Netherlands, and Belgium—are members of the European
Economic Community. Other participants are Canada, Japan,
Sweden, the United Kingdom, and the United States. With the ex
ception of Japan, all of the participating countries have currencies
which are convertible within the meaning of article VIII of the Fund's f
Articles of Agreement. Japan has made its currency externally con-,,
vertible, and thus any Japanese yen used under the new arrangements
will also be convertible in fact.
Switzerland, although it plays a substantial role in the international
monetary system, is not represented among the group of original
participants because Switzerland is not a member ol the Fund.
cussions are underway, however, between the Fund and the Swiss
authorities with a view toward working out a means of obtaining
owiss participation in specific transactions which may arise.
The Federal Republic of Germany is participating in the borrowing
yrangement through its central bank, the Deutsche Bundesbank,
specific provision for such participation through the central bank is
mcluded in the Fund Decision.
AMOUNTS
The potential replenishment of the Fund's resources made possible
by the special borrowing arrangements is of substantial magnitude,
is shown by the tabulation on page 2. The amounts agreed upon
11
20'
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
may be reviewed from time to time during the life of the arrange
ments, but may be changed only with the agreement of the Fund and
of all the participants.
The $6 billion of supplementary resources represents an increase of
42 percent in the Fund's present resources of gold and currencies of
its members (as measured by quotas), and 61 percent of the currencies
of the participating countries. The supplementary resources are the
equivalent of 91 percent of the Fund's present holdings of the cur
rencies of these countries.
The increase in the Fund's resources is proportionately greater
in the case of the five industrial countries of the European Economic
Community (EEC). The lending commitments of these countries,
amounting to $2,450 million, are in the aggregate almost as large as
the sum of their present quotas in the Fund. By contrast, the com
mitments of the united States and the United Kingdom are approxi
mately one-half the size of their existing Fund quotas. Moreover,
the lending commitments of the five EEC members are the equivalent
of about 275 percent of the Fund's present holdings of the currencies
of those five countries. The relatively greater share of the European
Economic Community in the provision of supplementary resources
to the Fund reflects the increased strength of the balance-of-payments
and reserve positions of the EEC countries, and the greater responsi
bility which they can now assume in defense of the stability of the
international monetary system.
IN ITIAL PROCEDURES
The Fund's “ Decision of Executive Directors on General Arrange
ments to Borrow" states that participants will stand ready to lend
their currencies to the Fund when needed “ to forestall or cope with
an impairment of the international monetary system" in the “hew
conditions of widespread convertibility, including greater freedom for
short-term capital movements." Participating countries experienc
ing balance-of-payments difficulties such as might lead to use of the
supplementary resources would approach the Fund in the usual way
for a drawing or purchase of needed currencies or standby arrange
ment entitling it to draw. The Fund's existing policies and pro
cedures on the use of its resources would also apply.
If the Managing Director of the Fund, after consultation, considers
that the situation which has given rise to the participating country's
request for Fund assistance is such as to qualify for a drawing under
criteria of the special arrangements, he will consider whether the
Fun<Fs resources need to be supplemented by borrowing in order to
provide the requested assistance. If he decides that Dorrowing is
necessary, he will, after consultation with the participating countries,
make a proposal for calls for an exchange transaction, indicating the
amounts of specific currencies to be lent to the Fund. No such pro
posal of the Managing Director of the Fund will become effective
unless and until it is accepted by the participants and then approved
by the Fund's Executive Directors.
12
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
21
CONSULTATIONS
The exchange of letters of December 15, 1961, describes the con
sultation procedure which the participants have agreed to. They will
use the facilities of the international organizations to which they
belong to keep themselves continuously informed of developments in
balances of payments and in the international monetary system as a
whole. This will greatly assist the participants to decide what their
reaction should be to any proposal of the Managing Director to make
a call for loans.
When the Managing Director of the Fund makes a proposal, the
participants will consult among themselves, and for this purpose a
meeting will be held among their designated representatives. Recog
nizing the need for prompt and decisive action, these representatives
will be empowered to act on the proposal during the consultative
meetings. The Managing Director would be invited to participate
in these meetings.
AGREEM ENT AMONG THE PARTICIPANTS
As a result of their consultations, the participants will decide
whether to accept the proposal of the Managing Director of the
Fund, which must take account of the present and prospective balanceof-payments and reserve positions of each participant.
The participants have agreed to aim at reaching unanimous agree
ment, and in practice it should be possible to do so. Nevertheless,
in order to provide assurance that a decision will be reached promptly,
a voting procedure has been established. This procedure provides
for decision by a two-thirds majority of the participants voting and
a three-fifths majority of the votes of the participants voting, weighted
on the basis of their commitments to lend supplementary resources.
The prospective drawer on the Fund will not participate in the vote.
Abstentions may be justified only by reason of the balance-of-payments
and reserve position of an individual participating country.
A participant may give notice that, in its opinion based on its
present and prospective balance-of-payments and reserve position,
calls should not be made on it or that they should be for a smaller
amount. In this event the Managing Director and the other partici
pants will consult further to determine how the total agreed amount
can be provided. Since the Fund Decision requires the Managing
Director to take full account of the capabilities of the participants
before formulating his proposal for calls, there should seldom be
occasion for any participant subsequently to withdraw itself from the
list of lenders. It should be noted that there is no other basis on
which a participant may refuse to lend once the participants as a
group have agreed to the Managing Director's proposal.
DRAW IN G TRANSACTION
Upon completion of the procedures described above, and after
each participant concerned has notified the .Managing •Director- of
the amount it will lend, the proposed borrowing transactions will be
submitted for the approval of the Executive Directors of the Fund.
13
22
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
Once approved by them, the Fund will borrow the agreed amounts
of the currencies of the participants and will accordingly be in a
position to honor the request for a drawing of these currencies from
the Fund, together with any amounts of them which the Fund may
use from its regular resources. The transaction may also take the
form of a standby arrangement, and the agreement to lend to the
Fund may relate to this. A standby arrangement gives the Fund
member the right to purchase, without further review, stated amounts
of currencies within a specified time period, in accordance with the
provisions of the given arrangement.
A participant j&awing on the Fund must pay the regular service
charge of one-hmf of 1 percent of the amount drawn, or a charge of
one-quarter of 1 percent on the amount of a standby arrangement.
In addition the Fund charges an amount on drawings which varies
with the size of the drawing in relation to quota and the period during
which the drawing is outstanding.
TERMS OF LOANS
Lenders to the Fund will acquire nonnegotiable instruments in
dicating the Fund's indebtedness to the participant. The Fund will
pay a transfer charge of one-half of 1 percent to lenders, and will pay
interest at the rate of \% percent per annum, subject to revision if the
charges on Fund drawings are changed.
Loans to the Fund, in addition to their high quality, will be en
dowed with a high degree of liquidity. The maximum duration of
loans is 5 years. But they will be repaid by the Fund immediately
upon completion of a repurchase by the drawer for whose benefit the
Fund originally borrowed the money. Moreover, any loan will be
subject to repayment if the lender at any time represents that it has
a balance-of-payments need for repayment of all or a part of the
loan. The Fund will give the overwhelming benefit of any doubt to
such representations, which in practice assures any lender of prompt
repayment if it, in turn, gets into difficulty. If the United States, for
example, should lend to the Fund, and subsequently experience
balance-of-payments difficulties^ this provision would insure that the
United States could secure repayment of its loan.
OTHER PROVISIONS
The commitment of the participants to lend to the Fund is stated
in their owii currencies. The value of any loan made to the Fund will
be determined in terms of gold as of the date of the transfer, and
the Fund will be required to maintain this value and to repay an
equivalent value to the lender. This corresponds to established pro
cedures and requirements relating to the maintenance of the value of
currencies held by the Fund.
Repayment to a lender by the Fund will be made in the currency
of the lender, m gold, or, after consultation with the lender, in other
currencies which are convertible in fact.
14
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
ENTRY
IN T O
FOR C E A N D
23
D U R A T IO N
The arrangements will become effective when at least seven partic
ipants with commitments totaling $5.5 billion, of the total $6 billion,
have adhered to the Fund Decision, and have taken all necessary steps
in accordance with law to enable carrying out the terms and condi
tions of the Decision. The arrangements could not, therefore, become
effective without the participation of the Federal Republic of Ger
many, France, Italy, the United Kingdom, and of the United States,
since the commitment of each of these countries exceeds $500 million.
The arrangements will remain in force for a period of 4 years from
the effective date of their entry into force, but may be extended for
such period or periods as may be agreed. During its life, the Fund
Decision may be amended only with the unanimous consent of the
participants.
IV. P r o p o se d L e g is l a t io n
The Council believes that legislation should be enacted in the present
session of the Congress to authorize the United States to participate
in the lending arrangements. While there is no immediate expecta
tion that the United States will be called upon to make a loan to the
Fund, in adhering to the Fund Decision tne United States must in
dicate that it has taken all steps necessary to carry out the terms and
conditions of that Decision, and without the adherence of the United
States the arrangement will not come into operation.
Accordingly, it will be necessary to amend section 5(e) of the Bret
ton Woods Agreements Act (which authorized U.S. adherence to the
International Monetary Fund) which provides that “ unless Congress
by law authorizes such action, neither the President nor any person
or agency shall on behalf of the United States * * * (e) make any
loan to the Fund * *
The legislation to be proposed will author
ize the Secretary of the Treasury to make loans to the Fund, not to
exceed $2 billion outstanding at any one time, under article VII,
section 2(i) of the Articles of Agreement. In connection with any
purchases of currency from the Fund that the United States may
inake, non-interest-bearing notes may be issued and supplied to the
Fund in substitution for U.S. currency, as the Fund articles permit.
It is further proposed that any purchases of currency effected by the
Secretary of the Treasury from the International Monetary Fund
*&ay be transferred to and administered by the Exchange Stabilization
-Kund of the Treasury.
It should be noted that there will be no gold payment to the Fund
by the United States as a consequence of our adherence to the pro
posed arrangement. Also, additional non-interest-bearing notes
Would not be issued to the Fund unless at some later date the United
. tates might make a drawing from the Fund which called for such
issuance.
V. C o n c l u s io n s a n d R e c o m m e n d a t io n
The balances of payments of the leading industrial countries with
convertible currencies are from time to time subject to particularly
large fluctuations. Pressures ina3r arise from changes in exports
and imports, shifts in the movement of long-term capital, or other
Payments abroad. The liberalization of trade and capital move-
24
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
ments and the emergence of strong convertible currencies in the last
few years have facilitated wide swings in the payments position of
major countries, in response to large flows of short-term capital and
other temporary factors.
As a consequence, the principal currencies in which the bulk of the
world’s transactions are carried out and in which monetary reserves
are held have at various times come under severe, though temporary,
pressures. It is in the interest of the international community to
prevent these unusual pressures on the principal currencies from
impairing the stability of the international monetary system. ^The
International Monetary Fund's present holdings of the currencies of
the main industrial countries are not adequate to finance the large
drawings which might be needed to deal with unusual pressures on
the dollar, or on sterling at a time of relative dollar weakness.
A proposal has therefore been worked out after considerable dis
cussion and negotiation under which the 10 main industrial countries
would stand ready to lend their currencies to the Fund if the Fund
required additional amounts of currency for use to “ forestall or cope
with an impairment of the international monetary system.” It is
the view of the Council that this provision of supplementary resources
to the Fund is desirable in the interests of the free world and particu
larly of the United States. Although there is little prospect that
the United States will be called upon to lend to the Fund in the
immediate future, U.S. participation in the proposed arrangements is
essential for the plan to go into effect and for the United States to
become eligible to benefit therefrom.
RECOMMENDATION
Tlie National Advisory Council strongly recommends to the Presi
dent and to the Congress that the United States participate in the
proposed borrowing arrangements of the International Monetary
Fund. The general terms of these arrangements are set forth in the
decision of the Executive Directors of the Fund of January 5, 1962,
and the exchange of letters between the French Minister of Finance
and the Secretary of the Treasury dated December 15, 1961. The
Council believes tha t the proposal is in the best interests of the United
States and the stability of the international monetary system.
To permit U.S. participation, amendment of the Bretton Woods
Agreements Act is necessary. Accordingly, legislation should be pro
posed authorizing the Secretary of the Treasury to make loans, not
exceeding $2 billion outstanding at any one time, to the International
Monetary Fund.
This legislation will enable the United States to participate in the
proposed borrowing arrangement and to bring it into operation. The
proposed arrangements are, in the view of the Council, well adapted
to dealing with the monetary situation that has emerged in recent
years and will contribute significantly to the maintenance of sound
international monetary conditions.
16
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
25
APPENDIXES
A PPE N D IX A
T e x t o f t h e D e c i s io n o p t h e E x e c u t i v e D ir e c t o r s o f t h e I n t e r n a t io n a l
M o n e t a r y F u n d , J a n u a r y 5, 1962
in t e r n a t io n a l m o n e t a r y fu n d
Executive Board Decision No. 1289-(62/l).
Subject: General Arrangements To Borrow.
Preamble
In order to enable the International Monetary Fund to fulfill more effectively
its role in the international monetary system in the new conditions of widespread
convertibility, including greater freedom for short-term capital movements, the
main industrial countries have agreed that they will, in a spirit of broad and willing
cooperation, strengthen the Fund by general arrangements under which they will
stand ready to lend their currencies to the Fund up to specified amounts under
Article VII, Section 2 of the Articles of Agreement when supplementary resources
are needed to forestall or cope with an impairment of the international monetary
system in the aforesaid conditions. In order to give effect to these intentions,
the following terms and conditions are adopted under Article VII, Section 2 of
the Articles of Agreement.
Definitions
As used in this Decision the term:
(i) “ Articles” means the Articles of Agreement of the International Mone
tary Fund;
(ii) “ credit arrangement” means an undertaking to lend to the Fund on
the terms and conditions of this Decision;
(iii) “ participant” means a participating member or a participating
institution;
(iv) “ participating institution” means an official institution of a member
that has entered into a credit arrangement with the Fund with the consent
of the member;
(v) “ participating member” means a member of the Fund that has entered
into a credit arrangement with the Fund;
(vi) “ amount of a credit arrangement” means the maximum amount
expressed in units of its currency that a participant undertakes to lend to the
Fund under a credit arrangement;
(vii) “ call” means a notice by the Fund to a participant to make a transfer
under its credit arrangement to the Fund's account;
(viii) “ borrowed currency” means currency transferred to the Fund's
account under a credit arrangement;
(ix) “ drawer” means a member that purchases borrowed currency from
the Fund in an exchange transaction or m an exchange transaction under a
stand-by arrangement;
_ , ,
(x) “ indebtedness” of the Fund means the amount it is committed to re
pay under a credit arrangement.
P a r a g r a p h 2 . Credit Arrangements
A member or institution that adheres to this Decision undertakes to lend its
currency to the Fund on the terms and conditions of this Decision up to the
amount in units of its currency set forth in the Annex to this Decision or estab
lished in accordance with Paragraph 3(b).
P a r a g r a p h 3. Adherence
(a)
Any member or instutution specified in the Annex may adhere to this
Decision in accordance with Paragraph 3(c).
17
P a r a g r a p h 1.
26
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
(6)
Any member or institution not specified in the Annex that wishes to become
a participant may at any time, after consultation with the Fund, give notice of its
willingness to adhere to this Decision, and, if the Fund shall so agree and no
participant object, the member or institution may adhere in accordance with
Paragraph 3(c). When giving notice of its willingness to adhere under this
Paragraph 3(b; a member or institution shall specify the amount, expressed
in terms of its currency, of the credit arrangement which it is willing to enter
into, provided that the amount shall not .be less than the equivalent at the date
of adherence of one hundred million United States dollars of the weight and
fineness in effect on July 1, 1944.
(c)
A member or institution shall adhere to this Decision by depositing with
the Fund an instrument setting forth that it has adhered in accordance with its
law and has taken all steps necessary to enable it to carry out the terms and
conditions of this Decision. On the deposit of the instrument the member or
institution shall be a participant as of the date of the deposit or of the effective
date of this decision, whichever shall be later.
Paragraph 4. Entry into Force
This Decision shall become effective when it has been adhered to by at least
seven of the members or institutions included in the Annex with credit arrange
ments amounting in all to not less than the equivalent of five and one-half billion
United States dollars of the weight and fineness in effect on July 1, 1944.
Paragraph 5. Changes in Amounts of Credit Arrangements
The amounts of participants’ credit arrangements may be reviewed from time
to time in the light of developing circumstances and changed with the agreement
of the Fund and all participants.
Paragraph 6. Initial Procedure
When a participating member or a member whose institution is a participant
approaches the Fund on an exchange transaction or stand-by arrangement f^ng)
the Managing Director, after consultation, considers that the exchange transaction
or stand-by arrangement is necessary in order to forestall or cope with an impair
ment of the international monetary system, and that the Fund’s resources need
to be supplemented for this purpose, he shall initiate the procedure for making
calls under Paragraph 7.
P a r a g r a p h 7. Calls
(a) The Managing -Director shall make a proposal for calls for an exchange
transaction or for future calls for exchange transactions under a stand-by ar
rangement only after consultation with Executive Directors and participants.
A proposal shall become effective only if it is accepted by participants and the
proposal is then approved by the Executive Directors. Each participant shall
notify the Fund of the acceptance of a proposal involving a call under its credit
arrangement.
(b) The currencies and amounts to be called under one or more of the credit
arrangements shall be based op the present and prospective balance of payments
and reserve positions of participating members or members whose institutions are
participants and on the Fund’s holdings of currencies.
(c) Unless otherwise provided in a proposal for future calls approved under
purchases of borrowed currency under a stand-by a rra n g em en t
shall be made in the currencies of participants in proportion to the amounts in
the proposal.
j a participant on which calls may be made pursuant to P a r a g r a p h 7(a)
for a drawer s purchases under a stand-by arrangement gives notice to the Fund
that m the participant s opinion, based on the present and prospective balance
o f payments and reserve position, calls should no longer be made on the participant
or that calls should be for a smaller amount, the Managing Director may propose to
other participants that substitute amounts be made available under their credit
arrangements, and this proposal shall be subject to the procedure of P a r a g r a p h
originally approved under Paragraph 7(a) shall remain ef^rith Para^aph 7 (a) * propo8al for substitute amounts is approved in accordance
»>,«??
F? n d “ *ke8 a, caP pursuant to this Paragraph 7, the participant,
snail promptly make the transfer m accordance with the call.
18
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
27
Evidence of Indebtedness
(a) The Fund shall issue to a participant, on its request, nonnegotiable instru
ments evidencing the Fund’s indebtedness to the participant. The form of the
instruments shall be agreed between the Fund and the participant.
(b) Upon repayment of the amount of any instrument issued under Paragraph
8(a) and all accrued interest, the instrument shall be returned to the Fund for
cancellation. If less than the amount of any such instrument is repaid, the
instrument shall be returned to the Fund and a new instrument for the
remainder of the amount shall be substituted with the same maturity date as in
the old instrument.
P a r a g r a p h 9. Interest and Charges
(a) The Fund shall pay a charge of one-half of one percent on transfers made
in accordance with Paragraph 7(e;.
(b) The Fund shall pay interest on its indebtedness at the rate of one and one*
half percent per annum. In the event that this becomes different from a basic
rate determined as follows:
the charge levied by the Fund pursuant to Article V, Section 8(a) plus the
charge levied by the Fund pursuant to Article V, Section 8(c) (i), as changed
from time to time under Article V, Section 8(e), during the first year after
a purchase of exchange from the Fund, minus one-half of one percent,
the interest payable by the Fund shall be changed by the same amount as from
the date when the difference in the basic rate takes effect. Interest shall be
paid as soon as possible after July 31, October 31, January 31, and April 30.
(c) Interest and charges shall be paid in gold to the extent that this can be
effected in bars. Any balance not so paid shall be paid in United States dollars.
(d) Gold payable to a participant in accordance with Paragraph 9(b) or Para
graph 11 shall be delivered at any gold depository of the Fund chosen by the
participant at which the Fund has sufficient gold for making the payment. Such
delivery shall be free of any charges or costs for the participant.
P a r a g r a p h 8.
Use of Borrowed Currency
The Fund’s policies and practices on the use of its resources and stand-by
arrangements, including those relating to the period of use, shall apply to
purchases of currency borrowed by the Fund.
P a r a g r a p h 11. Repayment by the Fund
(a) Subject to the other provisions of this Paragraph 11, the Fund, five years
after a transfer by a participant, shall repay the participant an amount equivalent
to the transfer calculated in accordance with .Paragraph 12. If the drawer for
whose purchase participants make transfers is committed to repurchase at a fixed
date earlier than five years after its purchase, the Fund shall repay the participants
at that date. Repayment under this Paragraph 11(a) or under Paragraph 11(c)
shall be, as determined by the Fund, in the participant's currency whenever
feasible, or in gold, or, after consultation with the participant, in other currencies
that are convertible in fact. Repayments to a participant under the subsequent
provisions of this Paragraph 11 snail be credited against transfers by the partici
pant for a drawer's purchases in the order in which repayment must be made
under this Paragraph 11(a).
„
, „
lx .
(b) Before the date prescribed in Paragraph 11(a), the Fund, after consultation
with a participant, may make repayment to the participant, in part or in full*
with any increases in the Fund^B holdings of the participant’s currency that
exceed the Fund’s working requirements, and participants shall accept such
repayment.
(c) Whenever a drawer repurchases, the Fund shall promptly repay an equiva
lent amount, except in any of the following cases:
(i) The repurchase is under Article V, Section 7 (b) and can be identified as
being in respect of a purchase of currency other than borrowed currency.
(ii) The repurchase is in discharge of a commitment entered into on a
purchase of currency other than borrowed currency.
. . .
(iii) The repurchase entitles the drawer to augmented
®
stand-by arrangement pursuant to Section II of Decision ?so. 876-(59/15) of
the Executive Directors, provided that, to the extent that the drawer does not
exercise such augmented rights, the Fund shall promptly repay an equivalent
amount on the expiration of the stand-by arrangement.
«
..
(d) Whenever the Fund decides in agreement with a drawer that the problem
for which the drawer made its purchases has been overcome, the drawer shall
complete repurchase, and the Fund shall complete repayment and be entitled to
P a r a g r a p h 10.
19
28
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
use its holdings of the drawer's- currency below 75 percent of the drawer's quota
in order to complete such repayment.
(e) Repayments under Paragraph 11 (c) and (d) shall be made in the order
established under Paragraph 11(a) and in proportion to the Fund's indebtedness
to the participants that made transfers in respect of which repayment is being
made.
(f) Before the date prescribed in Paragraph 11(a) a participant may give notice
representing that there is a balance of payments need for repayment of part or all
of the Fund's indebtedness and requesting such repayment. The Fund shall give
the overwhelming benefit of any doubt to the participant’s representation*
Repayment shall be made after consultation with the participant in the currencies
of other members that are convertible in fact, or made in gold, as determined by
the Fund. If the Fund's holdings of currencies in which repayment should be
made are not wholly adequate, individual participants shall be requested, and wilL
be expected, to provide the necessary balance under their credit arrangements.
If, notwithstanding the expectation that the participants will provide the neces
sary balance, they fail to do so, repayment shall be made to the extent necessary
in the currency of the drawer for whose purchases the participant requesting
repayment made transfers. For all of the purposes of this Paragraph 11, trans
fers under this Paragraph 11(f) shall be deemed to have been made at the same time
and for the same purchases as the transfers by the participant obtaining repay
ment under this Paragraph 11 (f).
(g) All repayments to a participant in a currency other than its own shall be
guided, to the maximum extent practicable, by the present and prospective
balance of payments and reserve positions of the members whose currencies are
to be used in repayment.
(h) The Fund shall at no time reduce its holdings of a drawer's currency
below an amount equal to the Fund's indebtedness to the participants resulting
from transfers for the drawer's purchases.
(i) When any repayment is made to a participant, the amount that can be
called for under its credit arrangement in accordance with this Decision shall be
restored pro tanto but not beyond the amount of the credit arrangement.
P a r a g r a p h 12. Bates of Exchange
(a) The value of any transfer shall be calculated as of the date of the transfer
in terms of a stated number of fine ounces of gold or of the United States dollar
of the weight and fineness in effect on July 1, 1944, and the Fund shall be obliged
to repay an equivalent value.
(b) For all of the purposes of this Decision, the equivalent in currency of any
number of fine ounces of gold or of the United States dollar of the weight and fine
ness in effect on July 1, 1944, or vice versa, shall be calculated at the rate of ex
change at which the Fund holds such currency at the date as of which the calcula
tion is made; provided however that the provisions of Decision No. 321-(54/32) of
the Executive Directors on Transactions and Computations Involving Fluctu
ating Currencies, as amended by Decision No. 1245-(61/45) and Decision No*
1283~(61/56), shall determine the rate of exchange for any currency to w h ic h that
decision, as amended, has been applied.
P a r a g r a p h 13. Transferability
A participant may not transfer all or part of its claim to repayment under a
credit arrangement except with the prior consent of the Fund and on such terms
and conditions as the Fund may approve.
P a r a g r a p h 14. Notices
Notice to or by a participating member under this Decision shall be in writing
or by cable and shall be given to or by the fiscal agency of the participating m e m b e r
designated m accordance with Article V, Section 1 of the Articles and Rule G -l
of the Rules and Regulations of the Fund. Notice to or by a participating instiinstitution
m wri^m® or ^ ca^le and shall be given to or by the participating
15. Amendment
This Decision may be amended during the period prescribed in Paragraph 19(a)
only by a decision of the Fund and with the concurrence of all participants.. Such
concurrence shall not be necessary for the modification of the D e cis io n on its
renewal pursuant to Paragraph 19(b).
P aragraph
20
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
29
16. Withdrawal of Adherence
A participant may withdraw its adherence to this Decision in accordance with
Paragraph 19(b) but may not withdraw within the period prescribed in Paragraph
19(a) except with the agreement of the Fund and all participants.
P a r a g r a p h 17. Withdrawal from Membership
If a participating member or a member whose institution is a participant with
draws from membership in the Fund, the participant's credit arrangement shall
cease at the same time as the withdrawal takes effect. The Fund’s indebtedness
under the credit arrangement shall be treated as an amount due from the Fund for
the purpose of Article X V, Section 3, and Schedule D of the Articles.
P a r a g r a p h 18. Suspension of Exchange Transactions and Liquidation
(a) The right of the Fund to make calls under Paragraph 7 and the obligation
to make repayments under Paragraph 11 shall be suspended during any suspension
of exchange transactions under Article XVI of the Articles.
(b) In the event of liquidation of the Fund, credit arrangements shall cease
and the Fund’s indebtedness shall constitute liabilities under Schedule E of the
Articles. For the purpose of Paragraph 1(a) of Schedule E, the currency in which
the liability of the Fund shall be payable shall be first the participant’s currency
and then the currency of the drawer for whose purchases transfers were made
by the participant.
P a r a g r a p h 19. Period and Renewal
(a) This Decision shall continue in existence for four years from its effective
date.
(b) This Decision may be renewed for such period or periods and with such
modifications, subject to Paragraph 5, as the Fund may decide. The Fund shall
adopt a decision on renewal and modification, if any, not later than twelve months
before the end of the period prescribed in Paragraph 19(a). Any participant
may advise the Fund not less than six months before the end of the period pre
scribed in Paragraph 19(a) that it will withdraw its adherence to the Decision
as renewed. In the absence of such notice, a participant shall be deemed to
continue to adhere to the Decision as renewed. Withdrawal of adherence in
accordance with this Paragraph 19(b) by a participant, whether or not included
in the Annex, shall not preclude its subsequent adherence in accordance with
Paragraph 3(b).
(c) If this Decision is terminated or not renewed, Paragraphs 8 through 14,
17 and 18(b) shall nevertheless continue to apply in connection with any indebt
edness of the Fund under credit arrangements in existence at the date of the
termination or expiration of the Decision until repayment is completed. Tf a
participant withdraws its adherence to this Decision in accordance with Paragraph
16 or Paragraph 19(b), it shall cease to be a participant under the Decision, but
Paragraphs 8 through 14, 17 and 18(b) of the Decision as of the date of the
withdrawal shall nevertheless continue to apply to any indebtedness of the Fund
under the former credit arrangement until repayment has been completed.
P aragraph
Interpretation
Any question of interpretation raised in connection with this Decision which
does not fall within the purview of Article X V III of the Articles shall be settled
to the mutual satisfaction of the Fund, the participant raising the question, and
all other participants. For the purpose of this Paragraph 20 participants shall
be deemed to include those former participants to which Paragraphs 8 through
14, 17 and 18(b) continue to apply pursuant to Paragraph 19(c) to the extent
that any such former participant is affected by a question of interpretation that
is raised.
P aragraph 20.
21
80807 0
-
62 - 3
30
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
A nnex.
Participants and Amounts of Credit Arrangements
Units of Participant’s Currency
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
United States of America________________ ___________ US$
2, 000, 000, 000
Deutsche Bundesbank_____ _________________________ D M
4, 000, 000, 000
United K in g d o m .----_______________________________ £
357,142,857
France................. ......................... .......................................... NF
2, 715, 381, 428
Italy............ ............ - ___________ - _______________ - ____ Lit 343, 750, 000, 000
90, 000, 000, 000
Japan_______________ ______ __________________________Yen
Canada______ - _____ __________ ________ ____ _______Can$
208,938,000
Netherlands__ ________ ______________________________ f.
724,000,000
Belgium_______________________ _____ ____________ BF
7, 500, 000, 000
Sweden..... .............___________ ________ _________ _______ SKr
517, 320, 000
The foregoing is the text of a decision of the Executive Board taken at Meeting
62/1, January 5, 1962.
R oman L. H orne , Secretary.
A P P E N D IX B
E xchange of C orrespondence B etween M. W ilfrid B aumgartner , M inis*
ter of F inance and E conomic A ffairs of F rance , and D ouglas D illon,
Secretary of the T reasury , Paris , F rance, D ecember 15, 1961
MiNisTimE
des
F inances ,
Le Ministre, Le 15 Dicembre 1961.
The Honorable D ouglas D illon,
Secretary of the Treasury.
D ear M r. Secretary : The purpose of this letter is to set forth the under?
standings reached during the recent discussions in Paris with respect to the pro
cedure to be followed by the Participating Countries and Institutions (hereinafter
referred to as “ the participants” ) in connection with borrowings by the Interna
tional Monetary Fund of Supplementary Resources under credit arrangements
which we expect will be established pursuant to a decision of the Executive Di
rectors of the Fund.
This procedure, which would apply after the entry into force of that decision
with respect to the participants which adhere to it in accordance with their laws,
and which would remain in effect during the period of the decision, is as follows:
A. A Participating Country which has need to draw currencies from the
International Monetary Fund or to seek a stand-by agreement with the Fund in
circumstances indicating that the Supplementary Resources might be used, shall
consult with the Managing Director of the Fund first and then with the other
participants.
B. If the Managing Director makes a proposal for Supplementary Resources
to be lent to the Fund, the participants shall consult on this proposal and inform
the Managing Director of the amounts of their currencies which they consider
appropriate to lend to the Fund, taking into account the recommendations of the
Managing Director and their present and prospective balance of payments and
reserve positions. The participants shall aim at reaching unanimous agreement.
C. If it is not possible to reach unanimous agreement, the question whether the
participants are prepared to facilitate, by lending their currencies, an exchange
transaction or stand-bjr arrangement of the kind covered by the special borrowing
arrangements and requiring the Fund’s resources to be supplemented in the general
order of magnitude proposed by the Managing Director, will be decided by a poll
of the participants.
The prospective drawer will not be entitled to vote. A favorable decision shall
require the following majorities of the participants which take part in the vote, it
being understood that abstentions may be justified only for balance, of payments
reasons as stated in paragraph D :
(1) a two-thirds majority of the number of participants voting; and
(2) a three-fifths majority of the weighted votes of the participants voting,
weighted on the basis of the commitments to the Supplementary Resources.
D. If the decision in paragraph C is favorable, there shall be further consulta
tions among the participants, and with the Managing Director, concerning the
amounts of the currencies of the respective participants which will be loaned to
22
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
31
the Fund in order to attain a total in the general order of magnitude agreed under
paragraph C. If during the consultations a participant gives notice that in its
opinion, based on its present and prospective balance of payments and reserve
position, calls should not be made on it, or that calls should be for a smaller amount
than that proposed, the participants shall consult among themselves and with the
Managing Director as to the additional amounts of their currencies which they
could provide so as to reach the general order of magnitude agreed under
paragraph C.
E. When agreement is reached under paragraph D, each participant shall
inform the Managing Director of the calls which it is prepared to meet under
its credit arrangement with the Fund.
F. If a participant which has loaned its currency to the Fund under its credit
arrangement with the Fund subsequently requests a reversal of its loan which
leads to further loans to the Fund by other participants, the participant seeking
such reversal shall consult with the Managing Director and with the other
participants.
For the purpose of the consultative procedures described above, participants
will designate representatives who shall be empowered to act with respect to
proposals for use of the Supplementary Resources.
It is understood that in the event of any proposals for calls under the credit
arrangements or if other matters should arise under the Fund decision requiring
consultations among the participants, a consultative meeting will be held among
all the participants. The representative of France shall be responsible for calling
the first meeting, and at that time the participants will determine who shall be
the Chairman. The Managing Director of the Fund or his representative shall
be invited to participate in these consultative meetings.
It is understood that in order to further the consultations envisaged, participants
should, to the fullest extent practicable, use the facilities of the international
organizations to which they belong in keeping each other informed of develop
ments in their balances of payments that could give rise to the use of the Supple
mentary Resources.
These consultative arrangements, undertaken in a spirit of international
cooperation, are designed to insure the stability of the international payments
system.
I shall appreciate a reply confirming that the foregoing represents the under
standings which have been reached with respect to the procedure to be followed
in connection with borrowings by the International Monetary Fund under the
credit arrangements to which I have referred.
I am sending identical letters to the other participants—that is, Belgium,
Canada, Germany, Italy, Japan, The Netherlands, Sweden, the United Kingdom.
Attached is a verbatim text of this letter in English. The French and English
texts and the replies of the participants in both languages shall be equally
authentic. I shall notify all of the participants of the confirmations received in
response to this letter.
m ^
W. B a u m g a r t n e r .
P a r is ,
December 15, 1961.
Monsieur W i l f r i d B a u m g a r t n e r ,
Ministre des Finances et des Affaires Economiques,
93, rue de Rivoli, Paris (1 .r).
D ear M r . M inister : This is in reply to your letter of December 15, 1961,
setting forth the understandings reached during the recent discussions in Paris
with respect to the procedure to be followed by the Participating Countries and
Institutions in connection with the borrowings by the International Monetary
Fund of Supplementary Resources under credit arrangements which we expect
will be established pursuant to a decision of the Executive Directors of the Fund.
On behalf of the United States of America, I am pleased to confirm that we are
in agreement with the statement of understandings as set forth in your letter of
December 15, 1961. I am attaching, in accordance with your suggestion, the
French text of this letter of confirmation.
Sincerely yours,
(Signed) Douglas DiUon
D
23
ouglas
D
il l o n .
32
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
A PP E N D IX C
L e t t e r f r o m M . W il f r i d B a u m g a r t n e r , F r e n c h M i n i s t e r o f F i n a n c e ,
D o u g l a s D i l l o n , S e c r e t a r y o f t h e T r e a s u r y , J a n u a r y 9, 1962
M
in is t e r s
des
to
F in a n c e s ,
Le Ministre, January 9, 1962.
The Honorable D o u g l a s
Secretary of the Treasury,
Washington, D.C.
D
il l o n ,
D e a r M r . S e c r e t a r y : Y o u have been kind enough to confirm to me your
agreement regarding the procedure to be followed in connection with borrowing
by the International Monetary Fund of Supplementary Resources from the Par
ticipating Countries and Institutions.
I have the honour to inform you that I have received similar confirmations
from the Minister of Finance of Belgium, the Minister of Finance of Canada, the
President of the German Federal Bank, the Minister of the Treasury of Italy,
the Minister of Finance of Japan, the Minister of Finance of the Netherlands, the
Governor of the National Bank of Sweden and the Chancellor of the Exchequer
of the United Kingdom.
I should also like to confirm to you the agreement of the French Government
regarding the terms of my letter of December 15, 1961*
I am notifying the other participants, as well as the International Monetary
Fund, of the general agreement thus realized with respect to the understandings
reached during the recent discussions in Paris.
W . B
24
aum gartner.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
33
Mr. S p e n c e . Mr. Secretary, we are very happy to have you here
this morning to give us the benefit of your views on the very impor
tant national and international legislation.
Mr. Widnall, I will ask you, as Mr. Dillon’s Congressman, to intro
duce the Secretary.
Mr. W id n a l l . Mr. Secretary, Mrs. Dwyer and I would certainly
like to welcome you here before the committee. It is a real pleasure
not only to have you here, as a fellow Jerseyan but also because for
many, many years you have contributed so much in the way of public
service, and community service, as an outstanding ambassador and in
two important administration posts in Washington, under Presidents
Eisenhower and Kennedy, and we know how valuable your work has
been.
We are very fortunate to have you as Secretary of the Treasury, and
we certainly will be pleased to hear your testimony before the
committee.
Mr. S p e n c e . We are meeting this morning to hear testimony on
H.R. 10162, “A bill to amend the Bretton Woods Agreements Act to
authorize the United States to participate in loans to the International
Monetary Fund to strengthen the international monetary system/’
You may proceed, Mr. Secretary, with your statement, and you will
not be interrupted until you have completed it and will oe subjected to
interrogation at the conclusion.
Secretary D il l o n . Thank you, Mr. Chairman.
Before my opening statement I would like to express my deep ap
preciation and humility at the very fine unexpected introduction which
I have received from my two friends in New Jersey, Mr. Widnall,
and Mrs. Dwyer. It is a great pleasure to be here in Washington as
a representative of my State, working for the country with such fine
members of Congress as those two are.
STATEMENT OF HON. DOUGLAS DILLON, SECRETARY OP THE
TREASURY
Secretary D il l o n . Mister Chairman and Committee members:
I am glad to appear before the committee this morning in support
of H.R. 10162. This legislation will enable the United States, m co
operation with nine other industrial countries^ of the free world, to
take a major step in support of a strong international monetary system.
An amendment to the Bretton Woods Agreements Act authorizing the
United States to lend up to $2 billion to the International Monetary
Fund is a prerequisite for United States participation in proposed
arrangements which will make $6 billion of additional resources avail
able to the Fund.
. . . .
Five members of the European Common Market are participating in
the special arrangements with an aggregate lending commitment of
$2.45 billion. Germany’s commitment is $1 billion; France and
Italy have agreed to lend up to $550 million each; while the Nether
lands is participating with $200 million, and Belgiuip with $150 mil*
lion. The United Kingdom is to lend up to $1 billion. Other par
ticipants are Japan, which is to lend up to $250 million, Canada, par
ticipating with $200 million, and Sweden, with $100 million. In all,
the nine participating countries other than the United States will
34
BRETTON WOODS AGREEMENTS ACT AMENDMENT
stand ready to lend their currencies to the Fund up to a total of $4
billion.
These additional resources have potentially great importance for the
United States. The Fund has on hand today only a limited supply
of currencies that could be used if the need for a drawing by the
United States should ever arise. The lending commitments of the
major countries other than the United States and the United King
dom—which amount to $3 billion—are approximately twice as large
as the Fund’s current holdings of their currencies. These supple
mentary resources would greatly enhance the Fund’s ability to assist
us should it ever become necessary.
As you know, the International Monetary Fund was etablished in
1945, at the same time as the World Bank. U.S. membership
in the Fund was authorized by the Bretton Woods Agreements
Act. The Fund’s purpose is to promote exchange and monetary sta
bility among its 75 member nations. It does so principally by pro
viding short-term assistance to deal with temporary balance-of-pay
ments difficulties, pending the results of longer range corrective
measures.
With the growth of world trade and the increase in the size of
monetary reserves, the resources of the Fund have been called upon to
a greater and greater extent. To keep pace with these requirements,
the quotas of the Fund’s members, including the United States, were
increased in 1959.
Since that time new problems have arisen, largely as a result of the
recent heavy strains placed upon the two principal world reserve cur
rencies—thp dollar and the pound sterling.
t The proposed legislation, which would authorize U.S. participa
tion in the new Fund borrowing arrangements, is designed to help
deal with these problems, which arose partly as a result of the restora
tion of currency convertibility among the industrialized countries.
With the advent of full economic recovery in Europe, these countries
have improved their trade and payments positions and have accumu
lated large monetary reserves.
In the 4-year period from the end of 1957 through the end of 1961,
the reserves in gold and foreign exchange—mostly dollars—of the
major industrial countries other than the United States and the United
Kingdom increased from $12.1 billion to about $201 billion.
As a result of the improvements in the payments positions of other
industrial countries, chiefly in Western Europe,, they were able to make
their currencies freely convertible, with the consequence that move
ments of short-term capital from country to country were greatly
increased. Wider investment opportunities, the attraction of interest
rate differentials and, to some extent, speculation, all contributed to
these movements of capital.
Increases in foreign monetary reserves were largely the counterpart
of overall deficits in the balance of payments of the United States.
Our deficits totalled approximately $13,5 billion during the 4-year
period 1958—61 and were financed by a gold outflow of $5.5 billion
and an increase in U.S. dollar liabilities of $8 billion.
The basic part of our deficit has been made up of trade transactions,
long-term investment and expenditure for military and econom y aid
programs. But since the miadle of 1960 a large part has also resulted
from movements of short-term capital.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
35
In 1958, 1959, 1960, and 1961, our basic deficit—which is the net
of all of our international transactions except short-term capital move
ments and unrecorded transactions—was $3.6, $4.3, $1.9, and $0.6
billion, respectively, while we incurred total deficits, including short
term capital movements and unrecorded transactions, of $3.5, $3.7,
$3.9, and about $2.4 billion, respectively.
The stability of the dollar is essential not only to the economy of
the United States but to that of the entire free world. The dollar is
the major reserve currency of the free world. Much of world trade
and other transactions is carried out in dollars, and settlements of
payments, surpluses, or deficits between foreign countries to a large
extent are made in dollars. It is for these reasons that other nations
have a vital interest in these new Fund arrangements which will be
so important as an added resource to deal with stresses in the inter
national payments system.
In his message of February 6, 1961, President Kennedy referred
to the drawing rights of the United States on the International Mone
tary Fund as a secondary line of reserves which we could call upon
to maintain the strength of the dollar, in addition to our own holdings
of gold and foreign currencies.
The U.S. quota in the Fund is $4,125 million, one-quarter of which
the United States has paid to the Fund in gold and three-quarters in
dollars. A member country is normally entitled to draw currencies
freely from the Fund up to the amount of its gold payment, plus an
amount equal to the outstanding amounts of the member’s currency
which have been drawn by other countries.
As of December 31, 1961, these virtually automatic drawing rights
of the United States amounted to $1.7 billion. In addition, the Fund
treats liberally requests for additional drawings up to 25 percent of a
member’s quota, if the member itself is making reasonable efforts to
solve its balance-of-payments problems. In the case of the United
States, this would be the equivalent of another $1 billion. #Larger
drawings are permitted by the Fund if a member is undertaking pro
grams of monetary stabilization and measures for rectifying balanceof-payments deficits.
t The total amount, therefore, that the United States would have the
right to draw from the Fund almost automatically would be $1.7
billion; another $1 billion could be drawn with relative ease; and
additional amounts could be drawn depending upon the seriousness
of the situation and the measures which the United States was taking
to cope with it.
However, the resources of the Fund to meet a U.S. request for a
large drawing are not at present adequate.
On December 31, 1961, the Fund had available to it $2.1 billion in
gold and $11.5 billion in member currencies. But a large part of
these currencies consisted of currencies of the less developed coun
tries which for the time being are not suitable for use by the Fund.
The Fund's holdings of the currencies of the major industrial coun
tries amounted on that date to the equivalent of about $6.6 billion;
however, of this amount $4.9 billion was in dollars and sterling and
only $1.6 billion was in currencies of the other industrial countries.
The currencies of the member countries of the European Economic
Community accounted for only $890 million of this $1.6 billion. On
36
BRETTON WOODS AGREEMENTS ACT AMENDMENT
the same date, the Fund’s outstanding commitments under existing
stand-by arrangements, with the United Kingdom and other mem
bers, amounted to the equivalent of $1.4 billion.
It is clear, therefore, that the Fund now lacks the resources in gold
and the currencies of industrial countries other than dollars and
sterling which would be needed to meet a large drawing such as the
United States would be entitled to request.
At their Vienna meeting last September, there was general agree
ment among Fund Governors that ways should be found to increase
the resources available to the Fund. The arrangements finally worked
out are embodied in the Fund decision of January 5, 1962, and in the
exchange of letters initiated in Paris, in December 1961, at the con
clusion of discussions among the 10 governments concerned. The
Fund decision and the related Paris arrangements are reproduced in
the “Report of the National Advisory Council” which is now before
you. (Seep. 3.)
^
The proposed new arrangements can be described very simply. The
10 participating countries would lend stated amounts of their cur
rencies to the Fund if required to permit drawings from the Fund
bjr any one of the participant countries in order to “ forestall or cope
with an impairment of the international monetary system.” These
commitments to lend would be invoked only if and when the Fund
needs the additional resources.
The proposed arrangement is intended to remedy the shortage of
the Fund’s current holdings of currencies of industrial countries,
especially those of countries having surpluses in their balance-of-pay
ments and increasing reserves. The participating European Com
mon Market countries—Belgium, France, Germany, Italy, and the
Netherlands;—would commit an amount of their currencies almost
equal to their present quotas in the Fund, while the com m itm ents of
the United States and the United Kingdom would be only about half
of their present quotas. The effect of the new arrangement would be
to increase by about 275 percent the present availability to the Fund
of the currencies of the surplus countries of the European Economic
Community.
The proposed agreement is designed so that countries which are
in a surplus position and which are gaining reserves may lend their
own currencies to the Fund, which in turn can supply them to other
participating countries which might need additional resources. Thus,
if the United States were to draw on the Fund, the Fund would be
able to obtain the currencies which we could use. On the other hand,
a country which itself faces serious balance-of-payments problems,
and whose reserves are declining, would not be expected to lend to
the Fund. This would mean that the United States, for example?
would not be expected to lend dollars to the Fund under present cir
cumstances. In any event, since the Fund still has available in dol
lars almost $2% billion from the regular United States quota, it Is
highly unlikely that a- need for borrowing from the United States
will arise.
%The agreement set forth in the Paris letters establishes the interna
tional machinery necessary for the 10 participating countries to meet
and act upon requests for loans to the Fund.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
37
If 1 of the 10 participating countries wishes to draw from the Fund,
or to enter into a standby arrangement with it, in order to forestall
or cope with a situation that might lead to impairment jf the inter
national monetary system, that country would consult with the Man
aging Director and with the other participants.
The Managing Director would then propose to the participants the
total amount which he believes the Fund should borrow, and the
amounts which should be supplied by each participant in its own
currency. The participants would try to reach unanimous agreement
on their response to the Managing Director’s proposal. If they could
not reach unanimous agreement, the question of lending to the Fund
would be decided by a vote of the participants. The country propos
ing to draw would not vote. A decision would require a two-thirds
majority of the other voting participants and a three-fifths majority
of their weighted votes.
Since the countries concerned are in constant close communication
regarding their balance-of-payments position, not only in the Fund
but also through the Organization for Economic Cooperation and
Development, and bilaterally, a decision can be reached very rapidly.
The procedure established balances the right of each country to safe
guard its own interests with the collective judgment of the group as
to the needs of the international monetary system. Such safeguards
are appropriate and necessary since it is impossible to foresee what
the situation of any particular country may be at an unspecified
date in the future when a borrowing may be needed.
Loans to the Fund by participating countries would cany a transfer
charge of y2 of 1 percent, plus annual interest of lVo percent. Loans
to the Fund would mature in 5 years, but would be repaid sooner if
the drawing country repaid the Fund sooner. Also, if a lending
country should itself encounter* balance-of-payments difficulties, it
may obtain prompt repayment from the Fund.
Drawings of the additional resources from the Fund would conform
to the Fund’s normal procedures: that is to say, the drawing member
would purchase from the Fund currencies of other participating
countries with its own currency, and would pay a service charge of
V2 of 1 percent on the amount of the drawing, plus interest. The rate
of interest would vary with the size of the drawing and the period for
which it would be outstanding. The drawing member would usually
have to repay the Fund by repurchasing its currency within 3 to 0
years, but would be expected to repay eanier if its payments situation
improved.
The whole arrangement would be effective for an initial period of
4 years, subject to renewal by the Fund, but it could not be modified
within that period except with the consent of all the participants.
I wish to emphasize the great advantage to the United States of these
borrowing arrangements. It may be that the Fund will never need
to borrow. Vfe hope this will be the case. But the commitments will
stand as a reserve to be used if and when necessary, and they will pro
vide the Fund with the currencies which would be needed by the
United States if it were ever to draw 011 the Fund. Thus the very
existence of this large supplementary pool of usable resources should
act as a strong deterrent to speculation against the dollar or other cur
rencies, since it will be well known that there are ample resources
38
BRETTON WOODS AGREEMENTS ACT AMENDMENT
available to counteract serious disturbances of the international mone
tary system. The arrangements will benefit not only the participating
countries but all countries of the free world. The stability of the
dollar and of the other major currencies are of vital importance to
the smooth functioning of the international trade, and payments
system.
■;
The legislation which is before you would amend the Bretton Woods
Agreements Act, which now prohibits any loan by the United States
to the Fund without the specific approval of Congress, and grant the
authority to lend up to $2 billion. The legislation would also authorize an appropriation of $2 billion, to remain available until expended,
for the purpose of making loans to the International Monetary Fund.
As I have pointed out, we will not be called upon to make a loan to
the Fund under present conditions and, in any event, the question of
a loan would not arise until the Fund’s resources in dollars— currently
about $2i£ billion—had been exhausted. This is to be a standby com
mitment to the Fund. There will not be an expenditure of the funds
authorized until such time as we might actually make a loan to the
Fund. In considering any request to lend under the commitment,
we would of course take into consideration our balance-of-payments
position at the time and the level of our reserves, as well as the special
circumstances which led to the request to lend.
. ,
I should like to em phasize that the amount of the appropriation
must be in the full amount of $2 billion, in order to bring into effect
our agreement with the other nine participants. The entire arrange
ment is contingent upon the participating countries h a v i n g authority
to take action promptly. The amount of each country’s commitment
is part of the arrangement, and any change in this amount would re
quire a renegotiation. It is thus necessary to have the full authority
to provide the necessary financing if we should be called upon, even
though in practice we ao not expect to have to use this authority in
the foreseeable future.
A section of the legislation before you includes a technical amend
ment designed to clarify existing legislative authority, so as to permit
the use of non-interest-bearing notes—and thus save us interest
costs—in an amount of any U.S. drawings on the Fund. If the
United States were to draw on the Fund, it would have to do so by
purchasing foreign currencies from the Fund with dollars, The
Fund’s Articles of Agreement, however, permit these dollars to be
paid to the Fund in tne form of non-interest-bearing notes, without
any use of cash from current receipts or any debt operations which
would involve the United States in an interest cost. T h e Bretton
Woods Agreements Act authorized the issuance of such non-interestbearing notes to the Fund up to the amount of our quota subscription,
which is $4.1 billion. As of December 31, 1961, notes outstanding
under this authority amounted to $2.4 billion. I f the United States
were now to make a drawing from the Fund in excess of the $1**
billion balance of this authority, it is not clear, under existin g legisla
tion, that we could issue non-interest-bearing notes in the amount of
m is excess. The proposed legislation would make entirely clear the
Treasury's authority on this matter.
In conclusion, M r. Chairman, I should like to say that the present
proposal before the committee is one which is in the best interests
BRETTON WOODS AGREEMENTS ACT AMENDMENT
39
of the United States and of the free world as a whole. It is essential
to us and to other countries that the dollar be maintained as a sound
and reliable currency at its present parity. If necessary to defend the
dollar, as President Kennedy said in his balance-of-payments mes
sage, we will use our drawing rights in the International Monetary
Fund as a supplementary form of reserves. The bill before you will
enable the United States to participate in arrangements which will
provide the International Monetary Fund with an adequate supply
of the currencies which we ourselves might some day need. It will
rovide significant assistance to the United States in dealing with the
alance-of-payments problem.
The arrangement can be used by the Fund to assist any other par
ticipating countries as well. The other nine countries also have a
stake in the maintenance of a stable international monetary structure
in the free world, and this is why they are all now cooperating in this
new arrangement. We should join with them in strengthening the
International Monetary Fund by giving it authority to borrow, if
needed, the currencies which are most essential to cope with an im
pairment of the monetary system of the free world.
Thank you, Mr. Chairman.
Mr. S pf.x c e . Thank you, Mr. Secretary, for an excellent statement.
Mr. Kilbura, do voit have any questions ?
Mr. K ilbtjrx . M r. Chairman; Mr. Secretary, has the United States
ever borrowed from this Fund ?
Secretary D illon-. The United States has never made a borrowing
on the Fund; no.
Mr. K il b u r x . We have never used it?
Secretary D il l o n . We have never used it; no.
Mr. K il b u r x . Has there ever been a loss? Has the Fund ever
sustained a loss?
Secretary D i l l o x . Xo; the Fund has never sustained a loss.
Mr. K ilbtjrx . I thought the United States did borrow from the
Fund.
Secretary D il l o x . No: the United States has not borrowed fro m
the Fund.
Mr. K ilbtjrx . That is all, Mr. Chairman.
Mr. S p e x c e . Mr. Patman.
Mr. P a t m a x . Mr. Chairman, I ask unanimous consent to insert in
the record, at this point, a statement about the bill and about Mr.
Dillon’s test imony, and I will also ask some questions.
Mr. S p e x c e . W ith o u t o b je ctio n , th a t m a y b e done.
S
STATEMENT OP HON. WRIGHT PATMAN, A REPRESENTATIVE IN
THE CONGRESS OF THE UNITED STATES FROM THE STATE OP
TEXAS
Mr. P a t m a x . This bill would authorize the Secretary of the Treas
ury to make loans, not to exceed $2 billion outstanding at any one
time, to the International Monetary Fund, such loans to be made
“with due regard to the present and prospective balance of payments
and reserve position of the United States.”
Stated objectives of H.R. 10162:
40
BRETTON WOODS AGREEMENTS ACT AMENDMENT
The apparent objective of this legislation is to make it possible
for the International Monetary Fund to minimize pressures on the
balance of payments of leading industrial ccmntries arising from
short-term fluctuations in the balance of payments* The “ Special
Report of the National Advisory Council” accompanying H.R. 10162
indicates the objectives of the bill in the following words:
It is in the interest of the international community to prevent these unusual
pressures on the principal currencies from impairing the stability of the inter
national monetary system. The International Monetary Fund's present holdings
of the currencies of the main industrial countries are not adequate to finance
the large drawings which might be needed to deal with unusual pressures on
the dollar, or on sterling at a time of relative dollar weakness.
A proposal has therefore been worked out after considerable discussion and
negotiation under which the 10 main industrial countries would stand1ready to
lend their currencies to the Fund if the Fund required additional amounts of
currency for use to “forestall or cope with an impairment of the international
monetary system.”
Thus, the primary purpose of the bill is to prevent an impairment
of the stability of the international monetary system. This is, un
doubtedly, a very laudable objective.
However, in my view, neither the bill nor the report accompanying
it sufficiently spell out the necessity for operating the International
Monetary Fund in such a way as to make possible the insulation of
the American economy, as well as other participating countries, from
short-term balance-of-payments problems, and to make it possible to
promote our domestic recovery and growth program without impair
ment from a tight money—high-interest policy.
The balance-of-payments problem is undoubtedly a serious one.
It should not, however, be permitted to interfere with the economic
growth of the United States. After all, the United States balanceof-payments deficit, in the magnitude of $2 to $ 4 billion in various
periods in recent years, compares with an anticipated U.S. gross
national product in a magnitude of $570 billion.
It is obvious that the balance-of-payments “ tail” cannot be p®r'
.mitted to wag the huge U.S. GNP “ dog.” More concretely, if ^
fall into the error of permitting the emergence of a new u p ’ward
cycle of interest rates, we may well run into the same difficulties
faced in 1957-58 when the recovery was cut short and converted into
a recession.
Two recent developments, point up the way in which the use of
“blunt instruments” for the avowed purpose of assisting our balanceof-payments situation, carry the seeds of damage to our domestic
recovery and growth program.
(1)
Increased interest on savings and time deposits: Effective Janu
ary 1, 1962, the Federal Reserve amended regulation Q so as to pernw
member banks to increase interest rates on savings and time depositsOne of the justifications given by the Federal Reserve was to moderate
pressures on the balance of payments. T h is is the way the Feu
explained it:
Another effect of immediate significance will be to enable member banks so
desiring to compete more vigorously to retain foreign deposits that might other
^ ls® nV?v? abroad in search o f higher returns and thereby intensify an outflp
f°¥
ld ^ other countries. Thus, today’s action is in line>witfi
previous steps taken to moderate pressures on this country's international
ance of payments.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
41
In my view this was a poor device—indeed a blunt device utilized
by the Fed—one of limited value in the context of our balance-ofpayments program.
First of all, increasing interest on commercial bank savings and
time deposits, standing alone, will have little favorable effect on the
balance of payments. So-called “hot money” will not stand still
long enough in American banks to earn the liigher interest rates of
member banks.
Second, it is in the New York City banks that most of the foreign
deposits are concentrated. To increase interest payments across the
board, throughout the country, merely to make more favorable inter
est rates for foreign deposits in the New York financial center, seems
to be a blunt action.
Let me quote from the London Economist concerning this ('’‘Bait
for Hot Money/’ Dec. 9,1961, p. 1026) :
The Government’s decision to raise the ceiling and permit a special premium
for long-term deposits was prompted primarily by a desire to discourage an
outflow of “ hot money*' and to avoid the damage that this would inflict on the
balance o f international payments. At the same time the Government hopes,
by keeping credit readily available, to avoid any check to economic growth at
home. The New York banks—the ones most likely to hold foreign deposits—
welcome the move.
The London Economist then makes the following pertinent ob
servation :
The banks which are not enthusiastic about the new higher rates of interest
that they may pay are those with heavy savings deposits, such as the Bank of
America. The squeeze on their profits will be particularly painful.
This latter observation turned out quite prophetic, for shortly after
the Fed lifted the ceiling on rates commercial banks could pay on
savings and time deposits, the president of the Bank of America pro
claimed the need for commercial banks to raise the prime loan rate.
(2)
Threatened increase in prime loan rate: Thus we find that the
blunt instrument the Federal Reserve employed for the purpose of
moderating pressure on balance of payments threatens to set into
motion a chain reaction. If the prime loan rate—the fee charged the
biggest borrowers with the best credit ratings—is raised, bank lend
ing charges on loans to businesses, large and small, throughout the
country may be expected to increase.
Purpose should be to protect dollar without impairing growth:
Without dwelling further on this situation, I would urge that H.R.
10162 should cany a preamble to the effect that the International
Monetary Fund would utilize the $2 billion authorized by the bill for
the purpose of mitigating balance-of-payments problems so as to
enable the United States and other countries to pursue economic
growth without increases in interest rates.
In short, it should be firmly written into the legislative history of
this bill that the primary objective is to make it possible to ease bal
ance-of-payments problems without impairing domestic growth by
resort to a nigh interest, tight-money policy.
Mr. P a t o ia n . Mr. Dillon, we have invested now* how much in the
International Monetary Fund ?
Secretary D illon. $4,125 million.
Mr. P a t m a x . That is in addition to this $2 billion.
42
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Secretary D illon . That is what we have presently invested.
Mr. P a t m a n . And that would make 6 billion and a quarter?
Secretary D illon . $6,125 million.
/
Mr. Patman. Yes, sir. How much do the other countries have in
vested? Approximately, that is.
Secretary D illon . I think it is approximately $15 billion, lotal
quotas are $15,043 million.
Mr. Patman. And we have about 40 percent of it ?
Secretary D illon . No; we have something under 30 percent of it.
Mr. Patman. 30 percent now?
Secretary D illon . Yes, sir.
Mr. Patman. And with this $2 billion, the other countries will put
in how much ?
Secretary D illon . Four more.
Mr. Patman. So it will be $6 billion ?
Secretary D illon . Yes, sir.
Mr. P a t m a n . So we will still have about a third of the entire
amount?
Secretary D illon . We’d have about 30 percent; yes, sir.
Mr. P a t m a n . About 30 percent. Now suppose we should have a
problem with our balances with other countries, and we needed to
actually get some money from the International Monetary Fund to
prevent an embarrassing situation. Can we just make application and
get the money, or would some board have to pass on it?
Secretary D illon . Under the rules of the Monetary Fund, Mr. Pat
man, we have what amounts to an automatic right to draw as much as
$1,700 million. In addition, there is another billion dollars which the
Fund almost automatically grants to any country which shows that
it has need and which states that it is undertaking a stabilization ef
fort. The Fund does this without inquiring into the detail of that
stabilization effort.
That would make a total of about $2,700 million. Beyond that, the
Fund requires the presentation of a program to be sure that the
stabilization effort has a good chance of success, so that the Monetary
Fund can look forward to being repaid within the 3 to 5 years which
the loans are for.
Mr. Patman. What is the approximate total amount of our gold
now, Mr. Dillon ? About $17 billion ?
Secretary D il l o n . The Treasury gold stock is $16,790 million.
Mr. P a t m a n . Suppose we should have a run in the next few months
which would aggregate about the amount that we are allowed to bor
row from the International Monetary Fund, and then we should need
some more quickly. We would have to leave it up to the board, would
we not?
Secretary D i llo n . Over and above this figure of about $ 2.7 billion)
that is right.
Mr. P a t m a n . In other words, if our gold reserves were reduced to
about $13 billion, and we needed more money to take care of that
situation, the Board of the International Monetary Fund would have
to pass on it, and that Board is composed of—what is our ratio on
the Board? How much voting strength do we have?
,
Secretary D illon . We have under 30 percent, approximately the
same as our percentage of money in the Fund.
?
BRETT0N WOODS AGREEMENTS ACT AMENDMENT
43
Mr. P a t m a x . Can you conceive of a situation where it would pos
sibly be of interest to certain countries that are pretty powerful, to
block our efforts to protect our gold, and not be willing to go along
with us 011 an additional loan ?
Secretary D i l l o x . I can’t foresee that now, because it is in the
interest of practically the entire world community to have a stable
monetary system, and their monetary systems are tied to the dollar.
There is no alternative system available, and any disruption of the
dollar would mean disruption for their own trade and commerce. So
I think their interest is to do everything possible to cooperate and
work with us to preserve a stable dollar.
Mr. P a t m a x . Would you say that the principal reason for our
further participation in "this Fund is to protect our balance-of-payments position ?
Secretary D il l o x . I think that that is correct. That is the end
result. The problem with the Fund now is that it does not have
adequate funds readily available to meet the demands which we have
the right to make on it. By this borrowing arrangement they will
obtain the use of these funds, so that we could exercise our rights,
which at the moment are somewhat theoretical, because the Fund does
not have adequate resources to meet them in full.
Mr. P a t m a x . During World War II, Mr. Dillon, this committee
handled all bills relating to the Office of Price Administration which
involved 8 million different commodities and prices, and also had an
open rule before the House of Representatives. We never had a closed
rule involving these 8 million prices and commodities.
And at one time we wanted more copper produced, and it was in
sisted that we should raise the price to about 24 or 30 cents per pound.
The going price was 12 cents per pound. We agreed that we would
give a subsidy to the marginal producers, above 12 cents a pound and
that way we increased the production of copper enormously, at the
same time saving the taxpayers millions of dollars by not having to
pay a subsidy to large producers who did not need it and who could
profit on the 12 cents.
Now I could say that is a comparable situation to what I under
stand you recommended recently, that our balance-of-trade position
is what is worrying us. And it is my understanding that the Treasury
recommended that you be allowed to pay more interest than the going
rate on foreign balances, for the purpose of preventing people all
over the Nation from increasing their interest rates just to take care
of a situation in a few banks in New York, carrying foreign accounts.
Am I correct in that statement, or not?
Secretary D il l o x . Yes, sir, Mr. Patman, that was a recommenda
tion made by the President in his balance-of-payments message of
February 1961.
. Mr. P a t m a x . Why won’t that be preferable ? Don’t you consider
it unfair to the people of the United States to have to raise their inter
est rates all over the Nation in order to keep a rate sufficiently high
in New York to take care of an increased rate on a foreign balances?
Secretary D i l l o x . That was our original idea. We agreed with
you, Mr. Patman. But Congress apparently was not receptive to
this.
44
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. P a t m a n . Why do you say Congress was not receptive? I was
not consulted about it. If the chairman of the committee or other
jnembers were consulted, I have no knowledge of it. All 1 know is,
it was presented, and I don’t know anybody who was asked to intro
duce a bill. I wasn’t. I would have been glad to introduce a bill.
It should be brought out in the open here, because it involves mil
lions of dollars a year increased interest rates on the people, that coula
be saved. Why do you say that Congress turned it down.
Secretary D il l o n . The President made the request and m neither
the Senate nor the House were hearings scheduled.
Mr. P a t m a n . When was the request made ?
Secretary D il l o n . In the President’s balance-of-payments message
of February 6,1961.
Mr. P a t m a n . 1961?
Secretary D il l o n . Yes, sir.
Mr. P a t m a n . Over a year ago?
Secretary D il l o n . Yes, sir.
#
Mr. P a t m a n . Were bills prepared and sent up to be introduced.
Secretary D il l o n . Yes.
A
Mr. P a t m a n . Well, I think you ought to renew that, Mr. Dillon, ana
I think our committee should take it up immediately. Now, I under
stood that there was some talk that you were afraid to take it up for
the fear that the question of gold would come up, and that it is a very
delicate subject and you didn’t want to discuss it. But I think_we
ought to have it right out in the open, just like the astronauts. We
ought to tell the world, and we can defend our position.
Secretary D il l o n . I did not understand that that was the reason.
I understood the reason for the objection was a feeling among some
Members, at least, that this would be some sort of a measure of favor
itism toward foreign depositors, who would be allowed to receive
a higher interest rate than the American depositor, and therefore
that it would be something that they wouldn’t care to do.
Now, we didn’t feel that that was a very good argument. But I un
derstood that was the argument. It wasn’t the question of gold.
Mr. P a t m a n . I am sorry that you didn’t urge it, Mr. Dillon. A
think you ought to renew it. It would at least favor the foreign bal
ances in New York, just like the copper subsidy favored the marginal
producers during the war, but it would save the taxpayers several
times that much m money.
And where we would be paying an increased rate in New York on
these foreign balances, it would save the borrowers all over the Nation,
on all loans of all kinds, millions of dollars a year. So are you willing
to renew that request, Mr. Dillon ? .
’
Secretary D i l l o n . Well, I think the request still s ta n d s , because
is in the President’s balance-of-payments message, and certainly if th©
Congress were willing to give the authority for this, that would be
something that we would be glad to see done.
,
Mr. P a t m a n . Well, I want to request that you send it up again, and
if you have a bill, I wish you would send one to the chairman of this
committee, and also furnish each member of the com m ittee a copy
it, and I am sure the bill will be introduced and hearings insisted upon*
I consider that preferable to this particular position, a l t h o u g h not
antagonistic to it, and not as an alternative, but 1 consider it something
BRETTON WOODS AGREEMENTS ACT AMENDMENT
45
that we should consider at once, because the interest rate burden of
this country is tremendous. And it goes into the price of all goods
and commodities and services.
Take, for instance, interest burden on our national debt. It is $0
billion a year. That is an enormous amount, and it is certainly unfair
to make the people of America pay an increased interest rate just for
the purpose of protecting a few foreign balances in the New York
banks. I am not saying oecause it is New York, but any banks.
So I am glad that vou still believe that to be a good thing. I f you
had that, you wouldn't need this so much, would you ?
Secretary D i l l o n . Well, I think this would be helpful. I think
we would still need this, because I think it is important that the world
know that the Monetary Fund has the necessary resources to meet a
drawing from the United States if it ever should be necessary.
Mr. P a t m a n . I would like to ask the chairman of the committee
if Mr. Dillon will send up a bill on that subject, would the chairman
be willing to call the committee together and have a hearing on it?
Mr. S p e n c e . I would be willing to consider the bill. I don’t know
when I should call the committee in meeting.
Mr. P a t m a n . I said, would you give it consideration ?
Mr. S p e n c e . I said I would. You know I would.
Mr. P a t m a n . That is enough. I will stop right now.
Secretary D i l l o n . Mr. Patman, for the record, last March we did
formally send to the Congress the draft of a bill on this subject.
Mr. P a t m a n . Will you send us another one, Mr. Dillon? If the
others don’t want it, send me one.
Secretary D i l l o n . All right, Mr. Patman.
Mr. P a t m a n . That is all."
_
Mr. S p e n c e . Needless to say, the chairman would consider any bill
that came up from any department of the Government with the ap
proval of the administration.1
Mr. M c D o n o u g h . Mr. Secretary, I appreciate your statement. It
is a complex problem for the average layman to know the procedures
that may be necessary in qualifying one country with its currencies,
to borrow a loan from the Fund, in order to stabilize the monetary
system on an international basis.
I would like to refer to the letter of transmittal. Do you have a
copy of the Monetary Advisory Council report before you?
Secretary D i l l o n . Yes, sir.
Mr. M c D o n o u g h . In the President’s letter of transmittal to the
Speaker of the House, in the last paragraph on the first page, the
President says, “ Today the Fund has on hand only $1.6 billion of
the; currencies of other major industrial countries, exclusive of the
United Kingdom, which has itself made a large drawing from the
Fund,” and so forth.
.
I don’t understand that language. Would you explain it ?
Secretary D i l l o n . I think I can, Mr. McDonough.
I f the United States required assistance from the Fund, what it
would want or need would be convertible foreign currency that was
strong currency, which it could have in substantial amounts, and
the conclusion of the hearings it was foundthe d r n f t o f t h e V i
legislation introduced by Mr. Multer of New York, May
and
12 of H.R. 6900, 87th Cong., and the bill was referred to Mr. Multer ft subcommittee.
80807— 02----- - 4
46
BRETTON WOODS AGREEMENTS ACT AMENDMENT
which it could use to offset and to buy up extra dollars held by others
who now have claims on us, which they would otherwise want to turn
into gold.
In effect what this would be doing would be consolidating a portion
of our dollar liabilities in the International Monetary Fund, steriliz
ing it from the market so it would 110 longer be held by private
individuals or foreign official holders.
Now, of these types of currencies, the International Monetary Fund
has presently available in its coffers, $1,600 million worth. We do not
count sterling in that total, because the British are at present sub
stantially in debt to the Fund. They had a very big drawing from the
Fund last summer and they are in the process of trying to pay this off.
So, sterling at the moment would not be a currency that other peo
ple would like to have in preference to dollars. They would accept
any of these others.
Now, once the British have paid off their loan to the Monetary Fund
and they are in good shape, then sterling would become a currency
that would be helpful to draw.
So, what we are trying to do here—and the main objective of this
whole operation—is that these other countries, which presently only
have $1,600 million of their funds available in the Fund, would agree
to put up another $3 billion of their funds, making a total of $4.6
billion, almost three times the present availability, which would be
substantially enough to meet any drawing the United States would
want to make.
Mr. McDonough. As I understand your answer, the drawing made
by the United Kingdom, if that is repaid, then the possibility of the
United States, or the necessity of the United States drawing from the
Fund will be made more possible if that money is repaid?
Secretary D illon. No; I don’t think so. All I said is that if that is
repaid, that would mean that sterling, which is the United Kingdom
money, would again be a currency that might be available or could be
used if the United States needed to draw on the Fund. Therefore, to
the extent that the British are successful in repaying this, there would
be less need for this sort of a borrowing arrangement, because sterling?
whatever the holdings of the Fund would be in it, which would prob
ably be the equivalent of something over a billion dollars, maybe a
billion and a quarter, could then be added to this billion six and there
would then be $2.8 billion of good currencies available for the United
States to draw on.
.
McDonough. What would be the circumstances, in your opin
ion, that would make the necessity for the United States to draw from
the Fund? And if that necessity was immediately present today, is
there enough money m the Fund for the United States to draw, with
out making this additional $2 billion authorization ?
Secretary D illon. To answer the second part first, no. That is the
reason for this operation.
*
circumstances that would require a drawing are hard to specify
uv detail, but they would be something akin to. maybe greater than,
what happened in the fall of I960, when, as you recall, tremendous
1
°t
left this country and there was a general fear for the
( stability of the dollar.
6
What happened to the United Kingdom last year may be an ex
ample. In the period between, I would say, about the middle of
BRETTON WOODS AGREEMENTS ACT AMENDMENT
47
March and the middle of July, they lost about a billion and a half
dollars. Foreigners tried to convert a billion and a half dollars of
their sterling into other currencies and to buy gold with it. That
created a very serious situation, that much loss in that short time,
for England, and that was the reason they had to have a drawing of
a billion and a half dollars from the Monetary Fund.
It would be a similar thing, possibly on a larger scale, with the
United States.
"
1
j
Mr. M cD onough. Do you think we have recovered our balance of
payments and our gold reserve to a point where it is not now as
precarious as it was in 1900 ?
Secretary D illon. Well, the speculative fever against the dollar
that was present at the end of I960 and the first month, January, of
1901, has certainly jessed. We have not by a long shot solved' our
balance-of-payments problems. Those we are continuously working
on, and it has to be done by such things as promoting exports, re
ducing the cost of our troops abroad, and getting foreign countries
where our troops are stationed to make larger purchases from the
United States of military equipment, which would offset the balanceof-payments cost, of our troops abroad. We have done that already
in the case of Germany and are trying to do it with other countries.
We are tieing our aid expenditures to U.S. goods, so that
they will not affect our balance of payments. We have to keep on
working at measures of that nature. We are on the way. We are
better off than a year ago, but we still have a good way to go.
Mr. McDoxortiii. Just one more question, Mr. Chairman.
Mr. Secretary, what is your opinion of the relationship of the In
ternational Monetary Fund and the stabilization of world currencies,
which is its function, what is the relationship of that to the presently
operating various international banks and other funds, including
the Export-Import Bank of the United States?
I am trying to reconcile the relationship of the two. Here Aye have,
as you know, a number of funds, many of which I think are, in some
instances, duplicating the facilities of one or another. There are so
many of them that I think there is a little competition as to who is
going to get a loan in a certain country and under what circumstances.
Now, of course, this all has to do with our balance of payments, it
has to do with the stabilization of our monetary funds, and so forth.
Now, with the question before us in this legislation today, and the
authorization of an additional $*2 billion, what relationship does that
have to those other funds ?
Secretary D i l l o x . I would be glad to answer that. I don t think
in the case of the International Monetary Fund that there is any
overlappiiig at all, because it is quite different from all the others.
Mr. M cD onough. Yes, sir, I agree with you.
Secretary D i l l o n . Its job is to provide funds over a temporary
period—3 to 5 years is the usual period—to countries that have gotten
into balance-of-payments difficulties, so as to give them time to right
their balance-of-payments difficulties by one means or another and
get themselves back into shape where they can deal and trade freely
with the world community.
So, the funds provided are temporary; it has nothing to do with
development loans or anything of that nature; it just gives backing
48
BRETTON WOODS AGREEMENTS ACT AMENDMENT
to currency for a relatively brief period to give the country concerned
time to put its own house in, order.
Now, these other organizations are generally, in one way or an
other, connected with the business of providing development loans to
build projects, and that is quite different.
Mr. M cD onough. Except that it does have an effect on our balance
of payments and our increase in exports?
Secretary D illon. That is right.
Mr. M cD onough. And the recovery of our gold balance.
Secretary D illon. That is right.
Mr. M cD onough. Thank you, Mr. Chairman.
Mr. Spence. Mr. Barrett.
Mr. B arrett . No questions.
Mr. Spence. Mr. Widnall.
Mr. W idnall. Thank you, Mr. Chairman.
Mr. Secretary, on page 11 of your testimony you speak about
weighted votes.
What is our weighted vote in the International Monetary F u n d .
Secretary D illon. Yes, sir, our weighted vote, in the International
Monetary Fund now is 24.53 percent.
Mr. W idnall. What are the weighted votes of the five European
Common Market countries?
. .
I have in mind what is needed to obtain that three-fifths majority.
Secretary D illon. Oh, that is different. For the three-fifths ma
jority in the supplementary resources it is not their weighted vote
in the Fund that counts. It is their weighted vote in this group of
participants, which would be different from the figures I have just
given you.
.
,
The figure of 24.53 percent is our weighted vote in the Fund itself,
for actions that are taking place in the Fund Board.
,
Mr. W id n a l l . What I am primarily interested in is, what would
be the weighted votes of these two groups, as a result of the new par
ticipation ? Do you have that ?
Secretary D illon. Yes, sir, I have found those figures, The voting
power in the Fund of most of these other countries is relatively minor.
In this new arrangement, we would have put up one-third of the
funds, and the voting power would be different, depending on the
participant that wished to make a drawing. It is provided that a
country that is making a drawing, asking for funds, will not vote on
whether it should get funds itself, which seems to be an elementary
and proper conclusion.
Therefore, if we have a total of $2 billion here, if one of the larger
countries, such as England or Germany, each of which has a billion
dollars in this total, should decide to make a drawing, it would not
vote. So there would be $5 billion in total lending commitments.
Tt would require a $3 billion total for a favorable vote, and the U nited
States woiild have $2 billion of that.
Contrariwise, of the $5 billion total, if the United States voted
against, it would require the unanimous vote of all the other countries
to make a loan to either the United Kingdom or Germany.
Now, if a very small participant, such as Belgium or Sweden was
the country that wished to make a drawing, then the amount that
would not vote would only be $100 million. So, the U .S . proportion
of the vote there would be somewhat less.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
49
Mr. W idnall. I think I understand the system better now. Let's
not go into that any further.
Just recently it was reported in the paper that the total debt of
the United States exceeded $208 billion, and that was higher than
the debt, limit then in eifec-t. Xow, in all fairness the article pointed
out, that debt figure included some figures that were not subject to
the debt limit.
My question is this: If the United States participates in this bor
rowing to the extent of $2 billion, wouldivt that $2 billion be charged
against the debt limit?
Secretary D illon. Most certainly, if we ever actually had to bor
row the money, but not just by joining the agreement. We have a
great many such contingent commitments—in fact, we have one to
the "World Bank for something like $5 billion, which is our guarantee
commitment 111 case the World Bank is unable to repay its loans. We
have one for the Federal Deposit Insurance Company, for some
thing like $3 billion. Those are not part of our overall debt until
such time as we. may have to draw on them, when they do become part
of it.
So, the Treasury, in m aking its recommendations for a debt ceiling,
would have to take into account, and always does take into account,
these possibilities.
That, I think, is one of the reasons why the Congress, in figuring out
a debt ceiling, has always, so far, arrived at a figure that provides
about $0 billion for contingencies and flexibility over and above what
the Treasury thinks the debt will actually be.
Mr. W idnall. There is a potential of $2 billion ?
Secretary D illon. Yes, sir.
Mr. W idnall. Early this year, AID, and the Export-Import Bank
loaned $45 million to Brazil, and I think also last year there was a
stabilization loan agreement for the benefit of the Brazilian currency
granted by the Exchange Stabilization Fund of the Treasury. ^
On February IT of this year, I read 011 the front page of the Wash
ington Post that I.T. & T. Phone Co. had been seized by the Govern
ment of Brazil, and expropriated. They were going to give $400,000
for what was valued at $8 million.
Is our lending of dollars down there going to promote the takeover
of services that are being provided by one section of the country ?.
Secretary D illon. Certainly it should not. The facts in this, just
to make them clear, are that all our dealings have been with the
Central Government of Brazil, and this action was an action taken
by one of their state governments, the State of Rio Grande do Sul.
which is a state in the far south of Brazil. In Brazil, under their
constitution, I understand their individual states have a great deal
of authority independent from the Central Government.
So, this was not an action of the Central Government, and I don't
think was in any way condoned by the Central Government. But
certainly I quite" agree that it does not help matters when there is
such an action, even of a subordinate bodv like a state, particularly
when the price offered, as I understand, is so far below the real value
of the property.
Mr. W i d n a l l . Mr. Secretary, in the alliance for progress, the ef
fort was to provide, or to rely on, private investment. If this con
50
BRETTON WOODS AGREEMENTS ACT AMENDMENT
tinues, how can you get private investment in these countries, if they
are able to expropriate at will ?
Secretary D il l o n . I don’t think that you can. All I would say
is that I would hope and expect that this action is not typical either
of feelings throughout Brazil or elsewhere in South America.
I might mention one aspect to illustrate that, which you might
find interesting.
,
At the time I was down at the Conference of Punta del J^ste, alter
Mr. Che Guevara made his speech, which was violently opposed to
the United States, there was no applause from anywhere in the room
except from the Cuban clique, and from one other individual. Inat
one other individual was the Governor of the State of Rio Grande
do Sul.
So I think he is not typical, and that shows his leanings.
Mr. W id n a l l . I think that the American people, as you well know,
are getting a little tirecl of shoving out money in some directions and
not getting cooperation. I f we see any more instances like that, it
is going to be tough going in the Congress for some of these programs
in the future.
Secretary D il l o n . I agree with that.
.
' Mr. W id n a l l . I would like to insert in the record the article irom
the Washington Post of February 17,1962, Mr. Chairman.
Mr. Spence. Without objection, that may be done.
(The Washington Post article, dated February 17, 1962, is as
follows:)
I.T. & T.
P h o n e C o m p a n y S e iz e d
by
B r a z il ia n State
P orto A l e g r e , B r a z i l , February 16 (A P ). — Leonel Brizola, brother-in-law of
President Joao Goulart and Governor of Rio Grande do Sul state, today ex
propriated the U.S.-owned National Telephone Co. here. B r iz o la , a
outspoken leftist, said the takeover was carried out in the public interest an
that the owners—International Telephone and Telegraph—would be paid Cr$i
million (about $400,000 at the open market rate) in compensation.
.
I.T. & T. has operated the company in this southernmost Brazilian state ana i
nearby Parana state since 1927. The two divisions have about 70,000 P110^
(In New York I.T. & T. President Harold S. Geneen called B r iz o la ’ s actio
unjustified and said expropriation “is repugnant to the ideals and aims of ta
alliance for progress.** He added in a statement that I.T. & T. has a sk ed tn
State Department “ to take immediate steps with the Government of BrazilL io
a rescinding of the order of expropriation.” A company spokesman sa id tn
expropriated subsidiary is valued at $8 million.)
, in
The expropriation decree, signed by Brizola and his cabinet, was published
the official state newspaper.
The paper quoted Brizola as saying the expropriation “ is the result of mor
than 3 years of studies and of the best intentions of the state g o v e rn m e n t
which tried to conciliate and at the same time seek a solution in the puouc
interest.”
.
Brizola sp ok esm en ch arge d a m o n g other, th in g s that National T e le p h o n e fail©0
to p ro v id e sufficient se rv ic e .
Two years a go Brizola took
p
over the Rio Grande do Sul subsidiary of
t
American Foreign Power Co.
The Brazilian constitution permits expropriation of private firms and P1^
erty when the action is “brought about by public need or use, or is in tn
interest of the community,” Just compensation is required.
Brizola said National Telephone had been operating in the state as a m on opo y
for more than 30 years, possessing only “ the simple permission o f eta
authorities.”
Mr. S p e n c e . Mrs. Sullivan..
Mi's. S u l l iv a n . I have no questions, Mr. Chairman.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
51
I think the Secretary answered iny questions when he answered
Congressman McDonough.
Mr. S p e n c e . Mr. Fino.
Mr. F i n o . Mr. Secretary, mention was made earlier this morning
that, if it were necessary for the U.S. Government to borrow from
the Fund, that the amount of $1,700 million would be available to
us on a borrowing basis.
Is that $1,700 million from the present $4 billion, or is it from the
proposed $6 billion ?
Secretary D i l l o x . Our borrowing rights as such are not affected
by the proposed increase. The amount that would bo available to
us automatically at present is $1,700 million: $1 billion—or a little
over that—represents the 25 percent portion of the $4 billion pres
ently subscribed; and the other $650 million represents the amount
of our cuiTency that the Fund has presently loaned to other countries
and has outstanding, and we have the automatic right, as does any
country in similar circumstances? to draw down that much. That
would not be considered a borrowing at all. It would just be getting
us back to where we started.
In other words, the Fund has used $650 million, or is currently
using $650 million, of our funds in their operations around the world,
so a drawing of that amount by the United States would not be con
sidered something that had to be repaid. But a billion dollars, or
a billion and one million, which would be the equivalent of what we
paid in gold as part of our $4 billion subscription, would be a borrow
ing and would have to be repaid.
Mr. F in o . This would be based on the present $4 billion ?
Secretary D il l o x . Yes. sir.
Mr. F in o . So that we would be putting in another $2 billion and
not getting any additional borrowing power?
Secretary D il l o n . Oh, no; we don’t get any additional borrowing
power. Our borrowing power now is a total of something over $5
billion. You can borrow a hundred percent of what your quota is,
which would be the $4,125 million in our case plus the amount you
paid in gold, which would bring ns up to the five billion, one hundred
and some million dollars, and we can get back this extra $650 million
that the Fund has used, so the maximum we could expect from the
Fund, under present circumstances, is something around $5,800 mil
lion.
Mr. F in o . Just to refresh my recollection, we have not borrowed
from the Fund.
Secretary D il l o n . N o : we have not.
Mr. F i n o . Thank you.
Mr. S pe n c e . Mr. Reuss.
Mr. R euss . Mr. Secretary, I want to congratulate you and your
associates for the leadership vou have shown in bringing this proposed
agreement to fruition. While it may not be everything that some of
us would want, it represents, I think, a very adroit feat of negotia
tion and is quite clearly in the national interest, and I want to say at
the outset that I hope Congress will speedily ratify it.
I now have some questions that go mainly to the limitations on
the agreement rather than to the great good of the agreement itself.
52
BRETTON WOODS AGREEMENTS ACT AMENDMENT
/" >
Let me ask this: you testified that/we have approximately $2.7 bil
lion of almost automatic borrowing: power under the present fund,
derived in part from the so-called(B))ld Slice and in part from our
first round, semiautomatic 25-percent draw.
In the event that this 10-nation payments agreement is ratified, am
I right in the assumption that we would, in the event we needed it to
protect the dollar, first pursue our drawing rights as to the $2.7
billion, before we availed ourselves of such additional rights as might
be made available by this new payments agreement ?
Secretary D illon. I think the answer to that, Mr. Eeuss, is that we
would have the right to do that. Whether it would actually work
that way or not would be something for the Managing Director of the
Monetary Fund and the other participating countries to consider.
We would make application to the Managing Director, and under
the agreement there is no suggestion that a participant should make
any loans to the Fund until such time as he feels he needs extra
resources to meet a legitimate demand.
Now, he might feel that rather than pretty well exhaust all the
funds that he has that are usable now, and sell a substantial part of
the gold which the Fund owns, it would be a better procedure all the
way around to try to activate this fund for some portion of that^—not
for the whole amount, but for some portion of the $2.7 billion you were
talking about.
If there was any problem, however, I think our rights are clear.
There is a clear understanding that we would be able to get the gold
and currencies available, up to the extent that the Fund has them.
We could get them without starting this borrowing arrangement.
But, I think it probably would be more practical, under the present
circumstances, if tomorrow we were asking for $2.7 billion—if it could
be arranged rapidly and I think it could—to use this new arrange
ment for some of these funds.
Mr. E euss. Let me say that I have the highest admiration for the
Managing Director of the International Monetary Fund, Per
Jacobsson, whom I consider a great international public servant.
However, is it not true that to the extent that we depart from the
practically automatic drawing rights we have, in the amount of $2-7
billion, and instead rely wholly or partially on the new arrangements
envisaged by the measure now before us, we would be declining to
avail ourselves of an automatic procedure under which we were sure
of support, and relying instead on a much less than automatic pro
cedure, in which there is many a slip ’twixt the cup and the lip.
Secretary D illon. Well, it is very clear that we don’t give up any
of our rights by entering into this type of arrangement. And I cer'
tainly think that if there were any slips, or if this worked slowly, that
then we would have the right to avail ourselves automatically of what
is presently in the Fund, which would scrape the bottom of the barrel.
Since we have an interest in the overall international monetary sys
tem too, and in keeping the Fund reasonably well stocked with cur
rencies^so that it is in good operating condition, I think it would be
m our interest, too, from that point of view, to see that some of these
funds came from this other arrangement providing there was no delay
and it did not hurt our immediate problem^
Mr. E euss. I am reassured by your answer on that.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
53
Let me ask yon a question having to do with the adequacy of the
amounts provided.
In the world we now live in, I suggest to you that the principal
balance-of-payments problem is that we seem to be running deficits
on the order of $3 billion a year, and Western Europe seems to be run
ning surpluses on roughly that order.
Having in mind the fact that we now have short-term capital obliga
tions of around $10 billion to foreign Central Banks, and to foreign
private persons of around $7 billion; having further in mind the fact
that our gold supply is around $16% billion and that the statutory
gold cover now requires that we sterilize close to $13 billion of that
gold-----Secretary D it j -o x . About $ 1 1 % billion.
Mr. R e u ss . Having in mind all that arithmetic, and I know you
have it very much in your mind all the time, and further looking at
the fact that under this agreement there is made available, outside
of dollars and sterling, only $3 billion of additional currencies, do
you think that the amounts thus made available, of nonsterling and
nondollar currencies, are likely to prove ample for the protection of
the free world monetary system, for the next 3 or 4 years, which is the
initial life of this agreement, and which is as far in the future as I
would ask anyone to gaze?
Secretary D il l o x . Well, I might answer that slightly differently.
I do think that the amount of funds made available here, the $3
billion which are made available from nonsterling countries, plus the
present holdings of these currencies, which bring you to over $4 bil
lion, plus the Fund’s free gold reserves, which bring you to the sum
of $6,100 million, are ample enough to cover the largest kind of a
U.S. drawing that one could imagine and that is allowed under the
present Fund’s procedures, which would be, as I say. about $5.8 billion.
And that is assuming that no use whatsoever of the any of the ster
ling resources of the Fund were made.
So, I think this Fund is adequate to meet any of the commitments
which the Fund has, or any activities which the Fund itself, as pres
ently constituted, could enter into.
Now, the only way the Fund could use any more funds would be to
change the basic rules of the Fund, either by an increase in quotas
or some other change in the basic mechanism of the Fund, which I
don’t think under present circumstances anyone would feel was either
desirable or feasible, because the Fund so far has worked well.
Now, we all know, the Fund, and recourse to the Fund, are not the
answers to an overall and continuing balance-of-payments problem.
We have to put our own house in order, and we can not continue to
indefinitely run $3 billion deficits in our balance-of-pavments year m
and year out and expect this sort of arrangement with the Fund or
any other arrangement to take care of the situation.
This does give adequate funds to give us the time, if we come under
sudden and extreme pressure, to give us the 2 or 3 or 4 years that are
needed to put our house in order, and that is what we are trying to
do now.
So, I think the present arrangement is reasonably adequate for
anything that one can foresee under the present Fund setup.
54
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. R e u ss . Another question: From the standpoint of the domestic
goals of the Employment Act of 1946—namely, maximum employment
and maximum economic growth without inflation—let us assume
that a given set of monetary and fiscal policies are desirable. In the
event that Congress passes the legislation now before us, and which
you have just described as being adequate to the purpose of safe
guarding against international monetary crises, do you believe that
it will not be necessary to depart from sound policies of bringing about
maximum employment and economic growth without inflation, be
cause of so-called balance-of-payments difficulties ?
To rephrase the question, it is sometimes said, today, that there are
balance-of-payments constraints upon us which cause us to tolerate
more unemployment and a slower rate of growth than we would like
to have. Am I right in assuming that if Congress enacts the legisla
tion here requested, those assumed balance-of-payments constraints,
whether they are valid or not, would disappear and we would be able
to pursue whatever policies seemed sound to bring about maximum
employment and growth without inflation ?
Secretary D il l o n . Well, I certainly feel there should not be any
conflict between the policy you have described to bring about maximum
employment and growth without inflation and a policy that would
aim at improving our balance of payments.
We are taking many actions m this field. The tax bill presently
before the Ways and Means Committee has a number of different
items in it that are directly connected with this, such as the invest
ment credit and the increased taxation on foreign investment abroad
in American subsidiaries, so as to equalize it with that of American
companies at home.
There is a situation that is different now from that which we
had prior to convertibility. There is a trend, I would say, for interest
rates, worldwide, in the convertible countries, to gradually come to
gether and be more stable rather than to be all over the place and
apart, because these funds can flow rapidly back and forth.
This particularly applies to the shorter-term rates, and I think that
that has happened during the past year in a way which we would
have liked to have seen, because, generally speaking, interest rates in
all the European countries have fallen, with the exception of the
United Kingdom, which got into a very serious temporary difficulty
of its own. But I think even the long-term trend there is probably
toward lower rates.
I have recently had the opportunity to talk with some visiting
British bankers, and they say that for the first time since the war,
really, their big insurance companies are beginning to think that longterm interest rates are going permanently to move lower there, and
they are interested in beginning to buy these British consols, which
they have never touched for a long time.
Mr. R euss. This is good news.
Let me ask this additional question: Let us suppose—and God for
bid—that your budgetary projections for the upcoming fiscal year
prove erroneous to the extent of, let us say, our revenues being $2
billion less than anticipated.
I f this is so, and everything else runs true to form, we would then
have a budgetary deficit for fiscal 1963 of around $2 billion.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
55
Ironically, this would happen to be the same amount that is put into
Hie budget, to permit this agreement.
Let us suppose, then, that the president of some European central
bank, or a European finance minister, makes a speech expressing grave
concern and worries about the American budget, which turns out not
to have been technically in balance, though lie probably neglects to
say that it is technically out of balance because of the $2 billion we
have put in there to help him. I gather then, from what you say about
the insulation against the constraints of the balance-of-payments dis
cipline that we would get from this payments agreement now before
us, that we could pretty well afford, if this bill is passed, to disregard
the outcries of the European official, because we would know that we
have this arrangement in being whereby we could secure backing for
the dollar if such unjustified criticism of our domestic economy caused
speculation against the dollar ?
Secretary D illon. I would think so.
In any event, I think that at least the great majority of European
officials and central bankers are primarily concerned not with whether
we have a budget, a small budget deficit of the size that you have men
tioned, but whether or not we have inflation, price inflation, with our
prices going so high that we cannot maintain our competitive position
in world markets, either with exports or imports.
As a matter of fact, as I think you know, I understand there was
introduced in the record of the hearings of the Joint Economic Com
mittee by Senator Douglas a very interesting tabulation showing that
if European budgets are compared on a strictly comparable basis to
the way we keep our budgetary accounts, that the U.S. record over
the last 10 years has been far more conservative than that of any of
the European countries.
France, for instance, had a deficit every year for the last 10. And
yet France is the epitome of fiscal soundness at the moment, gaining
gold, and everybody looks to France as the ideal of a country that has
put its affairs in order.
Germany, which is similar, has had a budget deficit in each of those
years except, I think, two.
Similar things are true for the United Kingdom.
So, I think it is a question, to some extent, of how you keep your
accounts. I think that meetings we have been haying in the OECD,
and the much greater exchange of information going back and forth,
has led to a much clearer understanding of this situation.
And what Europeans are concerned with is price inflation. They
are concerned with budgets in the sense of whether they think they are
out of control, and we don’t know what is going to happen—that there
might be a big deficit one year and a bigger one the next, and so forth.
Then they are very, very deeply concerned. If they think it is a mod
erate amount that is going to be corrected or held m check thereafter,
the same way they have done with their own, I don’t think they are
particularly concerned.
Mr. R euss. I have already taken up too much time. I do have one
more question, and I would like to ask it, but I would tisk you, Mr.
Secretary, to perhaps answer it for the transcript of this testimony
later on.
56^
BRETTON WOODS AGREEMENTS ACT AMENDMENT
The final question I have, for which I won’t ask an immediate
answer, is the following:
The IMF now has, as I understand, around $2% billion of L.b.
dollars in its resources. I f this agreement is passed, it will have a
potential availability of another $2 billion of U.S. resources.
Will not the existence of this additional availability of $2 billion
likely make the International Monetary Fund more ready to disburse
the $2% billion it already has, not to the 10 industrial countries,
are in on this agreement, but to underdeveloped countries, which
would then use these dollars to finance their deficits, vis-a-vis Western
Europe ? And would this not tend to worsen our balance-of-payments
problem?
I would appreciate your and your associates’ answer to that lor
the record. I think the answer probably will take considerable time,
and I don’t need it now.
^
Secretary D il l o n . The answer is that it won’t have that effect, but
I will give you a detailed answer as to the reasons why.
(The data referred to is as follows:)
There is nothing in the new arrangements which would directly or indirectly
increase the resources available to the Fund for lending to the underdeveloped
areas or alter in any way the lending rules or procedures of the Fund, which
constitute the significant limiting factor on the extent to which the under
developed countries may borrow from the Fund.
The permissible limits of drawings by the less developed countries are estab
lished not only by the size of their quotas, which are not altered in any way
by the new standby, but also by the criteria established by the Fund Board
under its weighted voting procedures, which also are not altered by the new
standby. In short, the new $6 billion standby would neither increase the
regular resources of the Fund for lending to the less d e v e l o p e d countries nor
widen the access of these countries to these regular resources:
Mr. P a t m a n . I ask unanimous consent to file a question of Mr. Dil
lon for him to answer when he looks at the transcript.
Mr. D e r w in s k i . Reserving the right to object, I don’t think we
should adopt a policy of asking questions and inserting answers which
are not developed in full hearing. I am not making a point of this,
but I do not believe it would serve the purposes of an open hearing.
Mr. P atim an . It is only because I don’t have the time to ask it.
(Mr. Patman’s letter to Secretary Dillon and reply, referred to
above are as follows:)
C ongress
of t h e
H ou se
U n it e d
of
Sta t e s,
R e p r e s e n t a t iv e s ,
W ashington, £>.(?., February 28, 1062.
Hon. C. D o u g l a s D il l o n ,
Secretary o f the Treasury,
W ashington, D.C.
D e a r M r . D il l o n : Pursuant to the h e a r in g s before the Banking and Currency
Committee on H.R. 10162, could you prepare an estimate of (a ) the total
amount of additional in te re st, in dollars, wrhich member banks will pay in 196*
as a result of the raise in the ceiling on savings and time deposits, and (&) the
dollar amount of this additional interest that will be paid on foreign d e p o s its /
I understand that the record will be held open until M o n d a y , March 5, so I
would appreciate receiving this information by that time, if p o ssib le .
Sincerely yours,
W
r ig h t
Patm an.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
The
S k c k e t a k y ( if t i i e T k k a s t k y ,
IVufihhitfton, Murcli
Hon.
W
r ig h t
Patm an,
House of Representatives
Washiny ton, D.C.
57
1902.
,
D e a r 31 k . P a t m a n : I regret that we are unable to furnish you, as requested
in your letter to me of February 28, an estimate of («) the total amount of ad
ditional interest, in dollars, which member banks will pay in 1002 as a result
of the raise in the ceiling on savings and time deposits, and ( b) the dollar
amount of this additional interest that will be paid on foreign deposits.
No such information is in existence at the present time, nor is there any basis
upon which reliable estimates could be made. The only information available
at this time is the results of the sample survey conducted by the Federal Reserve
Board relative to rate changes as of mid-January 1002 which were published
in a special article on the subject in the February issue of the FRB Bulletin
(pp. 147-131), a copy of which I am enclosing. Further rate changes on time
and savings accounts will be occurring throughout the year. However, the
extent of such changes is not foreseeable at this time.
Sincerely yours.
(S) Douglas Dillon,
D o u g l a s D il l o n ,
Secretary.
Mr. Spence. We have Mr. Martin scheduled for tomorrow, and
I would like to get through with the Secretary today. I don’t want
to prevent anyone from asking their question, but I do think we
should proceed expeditiously to get the bill considered by the House.
Mr. D e r w i n s k i . Mr. Secretary, I would like to return for a moment
to the question that Mr. Widnall asked in regard to the problem in
Brazil.
You did express your disagreement with the action taken and you
did express the fact that the Governor of the State in question has a
past record which did not make his action surprising. You did not
say, however, what action was being taken by the administration to
try to see that a fair payment is made for the expropriated property,
or that the action might be rescinded by the Brazilian Federal
Government.
Secretary D il l o n . I don’t know that the Brazilian Federal Gov
ernment has the authority to rescind the action. I think they do not.
But. I do know that our Department of State has expressed its feel
ings in this matter to the Brazilian Federal Government, and indi
cated that they didn’t think that this sort of action was helpful to the
Alliance for Progress.
I think there was a public statement that Mas made by the press
officer of the State Department.
Mr. D e r w in s k i . It is then a proper assumption that should this
action go through without any corrective steps on the part, of the
Brazilian Government, it would be a severe blow to the hopes for
private investment that is needed in Latin America.
Secretary D il l o n . Certainly in Brazil, and to a certain extent that
would be felt in other countries, I would imagine.
Mr. D e r w i n s k i . Mr. Secretary, referring to your statement, may
f presume that the other nine nations involved in this special borrow
ing arrangement have committed their funds, or will commit their
funds?
58
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Secretary D il l o n , No, the operation does not enter into effect
until $5% billion of these funds out of the $6 billion have been com
mitted. So that means that all the large countries and a majority
of the smaller ones would have to subscribe.
Mr. D e r w i n s k i . And to your knowledge, the other nations have
indicated they will participate?
Secretary D il l o n . They have every intention, as far as I know,
yes, sir.
Mr. D e r w in s k i . N o w this special fund is being developed in the
event that the United States has a need to draw from it. You have
also indicated that you don’t really anticipate this, but the very fact
that we are preparing for the contingency would lead us to believe
that it is more than just a remote possibility.
Secretary D il l o n . I think it more than a remote possibility; yes, sir.
And I think the main thing is that being prepared for the contingency,
in itself, makes the contingency less likely to happen, because the
short-term pressures have behind them much that is speculative. And
if the speculative community knows that there are funds in the Mone
tary Fund to meet a drawing, they are less likely to speculate against
the dollar because they know they wouldn’t be successful.
Mr. D e r w in s k i . Y ou indicated, that a large part of the currencies
held by the International Monetary Fund are the unstable currencies
of less developed countries. Do you have any statistics that would in
dicate, in terms of dollars, the amount of currency of that type?
Secretary D il l o n . Yes, sir; about $5 billion, and that represents
the portion of the quotas of the underdeveloped countries in the Fund
that were not paid in gold.
Mr. D e r w in s k i . That is what we generally call soft currency?
Secretary D il l o n . Yes, sir.
Mr. D e r w in s k i . N o w , Mr. Secretary, in effect, the British sterling
and the American dollar are under pressure at this time. You have
indicated repeatedly the problem that the British sterling is having.
Is there any indication that there will be substantial international
faith in the dollar or the sterling, unless conditions in both the United
States and Britain change, with regard to the imbalance of payments ?
Secretary D il l o n . Well, I think there still is full confidence in the
dollar and full confidence that we are now embarked on a course that
will lead to a rectification of the large payments imbalances that char
acterized the years 1958, 1959, and 1960. It was improved in 1961, ana
we hope to improve the picture still more this year and move toward
a rrS?gh balance maybe by the end of 1963.
^ That is our objective. You can’t do these things too rapidly. That
is what we are working toward, and I think the rest of the world
i
they have confidence in our ability to succeed.
_ But certainly, if we continue to have $3 billion deficits every year,
they won t have confidence in the dollar.
Mr. D e r w i n s k i . Mr, Secretary, at the Conference i n V i e n n a last
September, winch was the Conference which resulted in the develop
ment or this phm, was it not a fact that some pointed suggestions
were made by European monetary authorities to the effect that we
BRETTON WOODS AGREEMENTS ACT AMENDMENT
59
should put our own house in order and balance our Federal budget
and correct our imbalance of payments ?
Secretary D il l o n . N o ; I don’t think so. I was there and we were
talking with all these people. We knew about what they were going to
say ahead of time. There were some reports that that was the case,
but I don’t think so. I think what these people were saying was some
thing slightly different.
There had been several different types of projects mentioned as
possible ways of changing the international monetary system, and
some of them were rather automatic, and would involve also lending
to underdeveloped countries, and these people did not feel that this
should be done. They felt that this should just be more resources
utilizing the regular procedures of the International Monetary Fund,
with which we agreed.
I think they were addressing themselves primarily to this effect
in all these statements, that they were under the regular Monetary
Fund, that a Monetary Fund loan couldn’t take care of a continuing
balance-of-payments deficit, that the individual country had to fix it,
and to show that this was not meant to be a sort of investment fund for
underdeveloped countries.
I don’t think any of them realized at the time they made these state
ments that they were going to be construed as lecturing the United
States. Indeed, a number of them expressed considerable anguish to
me afterward that that interpretation was put on their remarks.
Mr. D e r w i n s k i . The budget submitted by the President has a paper
surplus of a half billion dollars. However, it is an accepted fact that
the budget will wind up with a deficit in the vicinity of $4 to $5 billion*
What effect would that substantial deficit have on the condition of the
dollar in world markets ?
Secretary D il l o n . I don’t think that is an established fact, and I
don’t think it will happen. But a deficit as large as $4 or $5 billion,
I think, following a deficit of about $7 billion this past fiscal year,
and in a year which looks as prosperous as 1962 looks to be, I think
would be a cause for concern.
Mr. D e r w i n s k i . Thank you, Mr. Secretary.
.
Mr. S p e n c e . I think it would be essential to adopt the 5-minute rule,
if the committee doesn’t object, in order to keep on our schedule.
Mr. R otjsselot. Mr. Chairman, I have no objection.
I think we should apply this equal-time rule in the future for all
members of the committee, instead of waiting until now to do it. You
put the people at the end of the line at a disadvantage.
Mr. S p e n c e . Maybe so. If you object, we will go on. But we have
a schedule which provides that Mr. Martin will be here tomorrow,
and we would like to get through with the Secretary today.
Mr. R otjsselot. I am not objecting. I am suggesting that, in the
future, it would be fair for all members of the committee to have an
equal opportunity to question those testifying as a few of the members
of the committee have today. I just do not believe m filibuster ques
tioning by a few.
„
.
Mr. S p e n c e . I agree with that, I am merely expressing the exigency
of the case, and that is why I suggest it now. Is there objection to
that? I hear none. S o proceed. Mr. Ashley ?
60
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. A s h l e y . Mr. Secretary, in your statement you said that the
need for this legislation arises as a result of growth in world trade,
increase of monetary reserves, and strains made upon the two prin
cipal world currencies, dollar and pound sterling; also, as a result of
restoration of currency convertibility in the industrialized countries.
If this legislation is adopted, would you consider this to be in the
nature of a reasonably permanent solution to the problems of the
Fund ? Or can we expect this to be only in the nature of a stopgap
remedy ?
Secretary D il l o n . Well, this action will make the Fund whole on
any demands that may be made on it under its present operations.
It is very hard to look more than a few years ahead in the world
payments situation at any one time.
There has been a good deal of economic writing and thought given
to the possibility that as trade expands in the world, that the amount
of gold available is not enough to provide a basis of liquidity for all
the transactions that will be needed, and that some new and different
way of creating and using reserves might be needed.
That was the type of thing that some people were discussing and
some members of the Fund were opposing when they made those
statements in Vienna. I can’t say though, and I don’t think any of
them would say, that at some time in the future, 5 or 10 or 15 years,
something rather radical further may not have to be done.
But short of something like that, this action, which is all that is
needed now, will put the Fund in a position to meet all its obligations,
and the Fund, as it is functioning now, is perfectly adequate, I think,
for any immediately foreseeable future that we can see.
Mr. A s h l e y . That is very helpful. I notice in the report that we
have that last year 67 percent of the total currencies of the Fund were
in currencies other than the dollar, and I am wondering: Is this
essentially the basis of the proposal for the $2,600 million proposed?
Secretary D il l o n . N o ; I think this is one of the reasons, though,
why this whole agreement is necessary. In the early days of the Fund,
all the drawings were in dollars because dollars were the only con
vertible currency. In the last few years, when other curencies have
become convertible and useful in international trade, this coincided
with a period of pressure on the U.S. balance of payments. There*
fore, the Fund adopted the policy of making their advances in cur
rencies other than dollars wherever possible, so as to put no additional
strain on the United States. That is the reason they used up the
bulk oi these other currencies, and that is the basic reason why there
^ i on of currencies of the Common Market countries
still leit m the Fund, and why it was so necessary to substantially
mcrease the availability of their currencies in particular. That is
what this agreement does, because it adds almost $2% billion more
of those currencies.
Mr. A s h l e y . Wliat percent are they going to contribute?
i r ^ T - n ry*i?ILL0? ‘ Tlie ^ve Common Market countries are putting
up $2,4o0 million of it.
Mr. A s h l e y . Roughly half?
BRETTON WOODS AGREEMENTS ACT AMENDMENT
61
Secretary D il l o x . Yes, sir; $3 billion is the total contribution of
all the countries other than the United States and the United
Kingdom.
Mr. A s h l e y . I should know this. There are 10 participating coun
tries in this special program. Are these the 10 major countries whose
currency is convertible?
Secretary D il l o x . I think that is true in the free world with one
exception, which is Switzerland. Switzerland has never been a
member of the International Monetary Fund and, therefore, it was
not possible to include them in this arrangement, though they were
helpful at the time of the British difficulties and made parallel loans
to the United Kingdom, and I think in case we had any problems
that something similar would happen.
Mr. A s iil e y . That is all, Mr. Chairman.
Mr. S p e n c e . Mr. Ilalpern.
Mr. H a l p e r x . I want to commend the Secretary for his excellent
testimony this morning; I had several questions I intended to ask.
Like all the members of this committee, I am concerned with our
balance of payments and America’s role in international finance insti
tutions. But the Secretary, through his testimony, and through the
answers to questions asked by members of this committee, clarified
what I had in mind. I feel much more reassured and enlightened
considerably on our responsibilities in this Fund.
For that I thank you and I wish to compliment you, Mr. Secretary,
for your fine presentation this morning.
Mr. S p e x c e . Mr. Vanik.
Mr. V a x i k . Mr. Secretary, I would like to get right to some
questions.
What is the extent of foreign deposits, both individual and corporate,
in the United States, and as a corollary to that, what, is the extent
of deposits in foreign countries by American nations, both individual
and corporate ?
.
In order to conserve my time, the answer could be included 111 the
record.
Secretary D il l o x . I will be glad to.
(The information requested is as follows:)
F o r e ig n D e p o s i t s i n t i i b U n it e d S t a t e s a n d
U.S. D e p o s i t s
in
I*o r l i g x
C o u n t r ie s
Attached are certain tables regularly presented in the Treasury Bulletin show
ing sliort-term banking liabilities to and claims on foreigners as well as short
term liabilities to and claims on foreigners reported by non financial concerns.
In section III. table 1, the column marked “ Deposits’’ under the heading "io all
other foreigners” represents deposits held with banks in the I nited States b>
foreign individuals and corporations, other than banks Deposits held with
banks in the United States by foreign banks are included in the iigures in the
column marked “Deposits” under the heading “To foreign banks and official
Institutions.” Deposits in foreign countries by banks in the T nited States and
their domestic customers, individual and corporate, are included in two places m
table 2, section I I I : Those deposits payable in dollars are included in the figures
in the column marked “Other” under “ Short-term claims payable in dollars ,
those deposits payable in foreign currencies are shown separately m the next to
last, column.
_ .
_
The data in section IV, table 1, relating to short-term daims on fJ>rei»nera
reported by nonfinancial concerns, include deposits held d irecti j with b‘l|iks
abroad, but these data are not collected on a basis which permits isolating
such deposits.
80807—62------5
05
to
S e c t io n
III —
P r e lim in a r y D e t a i ls
by
C o u n tr ie s
BRETTON
T a b l e 1 .—
Short-term banking liabilities to foreigners as of Dec. 31, 1961
[Position in thousands of dollars]
Short-term liabilities payable in dollars
Total
short-term
liabilities
T o foreign banks and official institutions
T otal
Finland.......................................
246,014
241,704
459
19,635
51,448
264,843
237,340
30,153
174,148
125,616
60,994
6,335
61,402
1,206
123,121
114,227
410,737
24,397
4,551
936,161
9,661
67,080
10,315,872
9,424,354
2,753,857
2,465,526
Total
4,706
33,611
131
1,622
770
40,870
480,126
48
176,750
10,317
6,465
430
3,559
58
7,087
30,089
181,368
9
4,352
39,637
261
7,055
1,301
48,925
49,034
13,999
26,390
24,524
32,082
440
34,316
243
21,998
8,939
107,303
1,530
Deposits
U.S.
Treasury
bills and
certificates
Other
’""75,'847
57,102
1,135
154,326
329,035
795
10,520
4,339
36,536
261
6,724
1,301
43,802
42,947
13,999
22,705
21,031
31,507
440
32, 220
243
20,264
8,491
71,040
1,510
192
117,234
795
10,158
3,211,232
5,022,455
1,190,667
762,871
487,739
109,464
165,668
128,647
1,759,899
696,151
9,476
279,206
217,967
29,121
32,118
9,125
12,695
23,200
37.300
631,589
2,072,900
23,000
855,063
56.300
5,500
253,000
119,068
856,993
88
too
43
13
3,058
12
1,141
"314
17
53
3,059
2,093
2,064
3,994
2,467
2,031
2,940
785
745
2,708
406
1,772
143
112
1,880
6
32
395
13,898
1,702
53
22,365
150
180
55,149
85,520
126,281
45,806
....... 362
“l9,~625
20
AMENDMENT
Total Europe.,
Canada.................
250,720
288,010
590
44,457
89,518
937,302
2,790,366
53,201
1,205,961
192,233
72,959
6,765
64,961
1,264
130,208
397,316
711,173
24,406
4,639
1,850,256
10,796
297,253
Other
ACT
Trance................. .........................
Germany, Federal Republic of..
Greece...........................................
Italy................. ... ..........................
N eth erla n d s.,..............................
N orway............... ..........................
Poland............... .......... .................
Portugal........................................ .
Rum ania................ .........................
Spain_________________________ _
Sweden......... ......... .......... .............
Switzerland.....................................
T urkey...
TJ.S.S.R.,
iTnited K ingdom .
Yugoslavia............
Other E urope___
255,084
328,788
851
51,505
00,819
988,694
!, 841,431
67,200
234,123
216,900
105,153
7,205
99,283
1,507
152,356
406,435
873,625
25,936
4,831
!, 225,097
11,591
327,398
U.S.
Treasury
bills and
certificates
AGREEMENTS
Europe:
Austria........................ ................
Belgium.........................................
Czechoslovakia......... ................. Denmark.......................................
Deposits
Short-term
liabilities
payable in
foreign
currencies
T o all other foreigners
WOODS
Country
Guatemala........................................
Mexico..................................................
Netherlands Antilles and Surinam.
Panama, Republic of_.......................
Peru.......................................................
El Salvador..........................................
Uruguay........................... ................
Total Latin A m erica..
India....................
Total A s i a -
250
30,951
5,226
3,056
2,105
7,038
28
305
3,383
99,613
96,701
1,134,952
1,089,358
9,487
36,107
4,453
181,811
44,224
4, 513
176
2,078
20,402
98,086
2,505
13,496
636
7,491
20,421
5,742
25,651
5, 816
%740
6,340
4,739
18,706
1,116
20,062
7,069
2,702
35,336
5,736
24, 726
5,489
2,740
6,340
4,716
18,241
1,116
19,475
7,069
2,693
34,480
1,976,553
602,768
174,483
136,019
132,821
922
92,134
32,624
28,027
13,754
171,037
50,591
25,033
27,655
11,076
141,275
38,600
485
25,658
2,943
7,591
372
1,293
4.104
3,485
1,236
2,978
567
36,466
3,474
1,027
2,877
567
34, 958
~m
42,903
2,405,191
1,265,786
1,069,472
34,645
55,394
77,710
75,632
31,342
63,015
.,590,440
199,462
184,086
91,963
264,442
222,905
28,903
29,594
71,261
72,892
24,998
58,276
, 571,719
198,346
164,805
84,894
261,720
186,396
28,820
24,915
28,948
61,886
22,920
34,724
1,148,923
195,691
151,309
84,248
72,418
121,751
2,891,936
2,753,804
97,843
33,860
31,726
14,523
209,202
1,061
10,112
200'
2,300
42,000
6,572
500
83
37,800
10,830
324,710
150
10
1
286
1,330
4,679
Total other countries..
387,154
337,576
256,530
64,743
16,303
44,732
International..........................
3,803,775
3,803,730
390,601
3,405,401
7,728
45
Grand total..................
22,557,785
20,050,776
8,664,287
9,891,131
1,495,358
2,357,825
866
55
3
109
42
11
1
78
6
366
925
27
192
23
273
348
149,160
... 4
"is
"ii9
9
780
1,173
2,276
2,113
20
2,224
11
10
149
633
209
1
'"721
202
1,498
1,699
1,708
4,846
237,877
149,184
AMENDMENT
Other countries:
Australia.........................................
Congo, Republic of tho................
South Africa...................................
United Arab Republic (E gypt)..
All other..........................................
410
28
17,000
....... 90
ACT
Indonesia....... ...........
Iran........................... .
Israel.— .................. .
Japan........................ .
Korea, Republic o f ..
Philippines...............
Taiwan.....................
Thailand.................. .
Other Asia................
70
189
169
3,411
4,276
3,585
2,246
147,193
9,346
85,900
54,080
74,444
2,070
6,338
19,261
255,078
37,458
11,347
34,078
4,143
25,243
182,116
121,377
AGREEMENTS
Asia:
China mainland.......
Hong Kong-------------
34
13
235
114
3
95
57
65
513
1,046
970
165,254
9,347
96,102
54,366
75,974
2,070
6,384
28,232
331,936
54,060
12,751
34,261
5,684
27,726
182,383
179,256
WOODS
Venezuela___________ ____ ________
Other Latin America.........................
67,015
16, 768
125,153
50,404
70,117
40,298
16,205
17,307
170,228
29,417
69,356
47,368
16,252
25,892
230,870
96,708
2,303
37
6,555
46
6,671
34,858
10,030
1,404
813
1,041
2,483
267
26,928
69,352
16,818
131,943
50,886
70,819
40,463
16,451
17,541
174,152
34,739
73,911
49,614
16,252
29,198
233,841
108,972
234,661
26,168
228,154
105,294
146,804
42,533
22,835
45,773
506,498
88,827
86,663
83,953
21,936
56,952
416,529
291,611
BRETTON
Latin America:
Argentina...................- ........................
Bolivia............................................. ...
Brazil....................................................
Chile......................................................
Colombia.............................................
C u b a ....................................................
Dominican R epublic-........................
O
00
05
BRETTON
Table 2.— Short-term banking claims o f foreigners as o f December 31, 1961 1
IPosition in thousands of dollars]
Short-term claims payable in dollars
Loans to
Total short
term claims
Total
Other
4,860
1,499
17,206
3,872
1,205
1,142
9,844
269
24,588
621
37,018
3,263
140,436
38,242
5,835
370
30,125
6,512
46,536
6,023
25,213
2,044
7,627
4,484 ............~2,2(S7~
4
4
10,587
3,196
2,112
17,723
9,824
40,615
13,253
16,099
141
1
65,202
20,555
4,870
8,553
8,460
833
499
3,210
2
2,409
56
5,903
50,205
1,650
5,773
28,536
911
691
2
1,652
7,228
61
2,814
1,892
12,121
25,784
3,773
13,290
10,518
2,475
1,059
1,727
1,598
4G0
18,768
25
3,102
703
4,052
1,991
6,333
6,911
2,821
139
14,847
2,108
2,963
Total E urope....................................................
766,800
522,361
120,772
128,555
541,544
292,264
9,095
205,655
Canada------------------------------------------------------- .1 .
Other
1,210
2,896
155
2,758
155
2,729
29
4,352
22,019
15,731
26,205
42
4,550
1,459
19,783
5,877
488
980
58
3,193
25,057
980
58
3,126
24,397
67
660
4,889
7,818
1,0S2
4,576
7,797
555
313
21
527
56
56
3,802
8,818
5,112
526
17,252
64,461
5
525
17,230
48,326
5
1
26,698
872
612
115,612
82,505
537
533
4
122,507
150,527
244,439
193,553
60,886
12,418
65,096
249,280
106,276
143,004
I
99
16,135
33,107
AMENDMENT
5,015
19,964
1,205
10,824
24,646
40,211
165,493
5,835
35,014
54,354
26,295
7,627
4,540
4
11,113
34,975
105,076
16,104
141
180,814
8,553
8,997
Deposits of re
porting banks
and domestic
customers
with
foreigners
Total
ACT
Europe:
A u s tria ,...................... - .....................................
Eelgium................................................................
Chechoslovakia__ ______ - ________ ________
D enm ark.. - ........................................................
Finland.................... ............. .............................
Franco............................. — ................................
Germany, Federal Republic of........................
Greece_____________________________________
Italy........................................................ -----------N eth erlands,.................................... ..............
N orw ay.................. ............................................
Poland_____________________________________
Portugal.............................................. .................
Rumania__________________________________
♦Spain...... ............... ............. ........... ..................
Sweden..................................................................
Switzerland........................................................
Turkey______ _____________________________
U S .S .R ................................................................
United K indom ...................................................
Yugoslavia. _
_______ _________________
Other, Europe............................................ - ___
Other
AGREEMENTS
Foreign
banks and
official
institutions
Collections
outstanding
for own
account and
domestic
customers
WOODS
Country
Short-term claims payable in foreign
currencies
Latin America:
Argentina.......... - ...........................
Bolivia..............................................
Brazil....................................................
Chile................................................
Colombia.............................................
Cuba................................................
333,657
497,623
52,819
49,011
2,964
1,419
2,523
364
1,085
730
5
10
548
237
2,347
3,495
289,581
9
105,872
2,358
13,434
80,256
12
4,197
6,714
2,621
5,141
262
26,813
3,632
117,701
3,882
642
1,079
2,960
21,012
6,682
6,281
15,941
3,437
210
118
1,773,498
503,403
25,422
185,746
1,058,927
33,200
32,778
28,790
0,029
10,290
13,184
20,636
25,167
6,029
8,684
13,025
20,129
841
4,428
76
6,028
4,181
2,438
1,711
4
4,203
12,989
1,595
8,364
806
15,862
3,623
112
132
6,187
1,883
"1,606"
159
507
1,527
159
183
324
84,929
79,034
15,554
6,763
39,616
17,101
3,580
2,315
4,711,185
4,125,552
1,013,802
628,532
693,944
1,789,274
385,198
200,435
1,674
9,203
8,202
262
31,223
35,742
.,444,722
3,801
114,407
9,720
34,140
113,512
1,669
9,193
7,654
262
30,456
35,742
1,413,065
3,891
114,404
9,720
34,140
113,302
Total Asia.
Total other countries..
1,208
2
1,805
8,597
6
1
1,284
24,418
1
13
3,572
1,366
11
12
fl
600
335
26
67
5
1,287
28
5
10
311
767
31^657
......T
"15
International..........................
Grand total............... .
i Excludes convertible currencies held b y U.S. monetary authorities.
AMENDMENT
Other countries:
Australia................ .......... .............
Congo, Republic of the................
South Africa............... _.................
United Arab Republic (E gypt).
All other............. ................ - ........
1,668
215
119
15
19
ACT
Taiwan......................
Thailand....... ......... .
Other Asia................
262,137
1,458,391
21
AGREEMENTS
Philippines--..........
364,974
1,511,210
11
4,938
12
48
96
5
6
1,887
9,371
3
35,018
WOODS
Total Latin America..
Asia:
China mainland____
Hong K ong________
India..........................
Indonesia...................
Iran..................... ......
Israel--......................
Japan........................
Korea, Republic of..
10,029
3
35,233
140
16
32
4,700
3,148
178,200
5,334
764
4,117
328
6,822
14,091
4,108
83,539
541
57,290
35,969
58,576
3
1,312
7,659
127,178
8
4,201
32, 956
10,256
38,033
17,625
22,477
BRETTON
Dominican Republic..........................
Guatemala...........................................
Mexico................ ................................
Netherlands Antilles and Surinam.
Panama, Republic of-........................
Peru...... ...............................................
El Salvador.........................................
Uruguay...............................................
Venezuela............................................
Other Latin America......... ...............
45,188
5,048
26,761
16,031
26,681
17,532
5,524
7,753
36,244
2,334
5, 999
25,147
5, 582
5,659
71,897
30,277
181,524
5, 904
151,036
126,794
125,236
19,149
12,721
19,715
418,286
13,437
31,805
73,400
17,079
54,705
127,455
80,145
29,041
108
37,480
47,831
28,902
658
23,756
207
29,505
26,963
11,077
1,614
1,185
1,155
76,664
5,761
20.841
11,180
913
4,191
23.842
23,283
191,553
5,907
186,2G9
126, 934
125,252
19,181
12,721
19,72G
423,224
13,449
31,853
73,496
17,084
54, 711
129,342
SO, 508
as
Oi
BRETTON WOODS AGREEMENTS ACT AMENDMENT
66
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4,847
2,397
2,604
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2,651
' 12,986
3,627
159
6,847
4,810
5,753
4,313
162
3,976
' 13, C36
r 3,400
252
5,590
6,653
2,322
4,227
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' 13,024
4,091
322
6,553
6,654
2,327
4,262
176
959
' 14,380
4,170
207
5,995
4,101
2,756
5,350
222
1,617
' 16,248
' 7,268
92,391
101,553
967
2,530
6,169
10,881
T5,014
4,375
r 57,392
218
6,824
1,849
3,031
7,449
986
2,557
6,180
10,892
5,341
4,376
57,880
219
6,829
1,865
3,031
7,936
1,450
2,575
5,369
9,660
5,209
2,175
67,465
265
7,313
307
2,905
9,078
r 106,729
108,092
113,771
Total Latin America.....................................
Asia:
China mainland................................................
Hong Kong.......................................................
India............................................ ..................
Indonesia..........................................................
Iran..................................................................
Israel.................................................................
Japan.................................................................
Korea, Republic of....... .............. ............... —
Philippines.......................................................
Taiwan.............................................................
Thailand...........................................................
Other Asia.......................................................
2,243
4,008
3,655
, 3,091
1,089
' 18,551
209
6,747
' 1,717
2,547
' 4,192
958
2,731
4,400
3,822
'3,630
3,226
' 17,495
242
7,534
r 2,018
2,723
4,283
959
2,607
6,024
3,009
' 4,053
4,742
'26,763
254
5,400
3,092
3,106
5,373
959
2,608
6,668
3,149
r 5,833
4,771
' 28,985
261
5,427
3,109
3,141
8,041
«•53,062
7,925
984
6,178
1,384
5,423
11,637
1,137
970
1,453
r 5,372
13,633
1,444
963
1,536
5,190
13,636
1,543
983
1,559
6,815
14,726
1,338
2,251
1,546
9,963
14,730
1,356
2,263
1,547
10,049
14,509
334
3,210
1,369
11,199
30,621
Total other countries....................................
21,894
T20,569
22,766
24,536
29,824
29,945
International......................................................... .
45
33
25
25
31
31
56
Grand total...................................................
519,191
r 583,896
601,153
674,975
See footnotes at end o f tabic, p. 69.
AM ENDM ENT
r 48,973
ACT
Total Asia.....................................................
Other countries:
Australia...........................................................
Congo, Republic of the....................................
South Africa........... .........................................
United Arab Republic (Egypt)......................
All other...........................................................
AGREEMENTS
191
6,068
6,130
6,310
2,198
184
2,471
22,941
9,568
WOODS
258
6,087
4,213
2, 775
6,212
222
1,756
22,776
7,293
BRETTON
Guatemala.......................................................
Mexico..............................................................
Netherlands Antilles and Surinam..................
Panama, Republic of.......................................
Peru..................................................................
El Salvador.......................................................
Uruguay............................................................
■Venezuela.................................... .....................
Other Latin America........................................
05
T a b l e 1.— Short-term
liabilities to and claims on foreigners reported by nonfinanctal concerns 1— Continued
c l a im s o n f o r e ig n e r s
§5
O
G
»
[Position at end of period in thousands of dollars]
Second revised series3
June
«- 348,786
' 362,085
r 862,037
' 879,728
' 519,461
530,151
506,054
' 124,204
' 165,141
' 160,302
' 187,456
«■296,952
328,150
421, 559
20,342
24,951
*■3,173
77,822
11,562
11,577
7,889
2,863
3,998
38,923
2,633
60,443
13,911
12,873
6,220
2,868
3,814
45,205
25,818
29,195
11,956
' 2,869
18,805
' 1,824
64,888
8,823
10,644
20,168
2,456
3,874
30,349
69,241
9,186
11,270
17,871
2,016
3,956
30,731
19,543
r 3,086
76,309
11,310
11,373
7,765
2,512
3,869
35,661
2,640
60,862
14,512
13,530
6,379
2,911
4,069
47,452
4,491
34,631
937
4,984
2,053
39,796
67,505
2,510
35,019
21,515
7,131
274
3,378
28
9,754
18,918
19,125
4,916
272
225,339
1,566
1,912
2,476
73,376
18,121
12,698
5,485
2,493
4,652
42,370
AMENDMENT
4,866
11,136
1,001
11,984
1,777
45,334
40,629
2,427
34,314
16,787
6,632
130
3,798
23
7,216
26,361
24,985
4,966
1,164
279,376
2,180
3,065
ACT
4,787
10,836
965
11,773
1,653
' 44,891
*■37,711
2,328
r 32,857
' 16,451
6,523
129
3,738
23
7,151
25,660
22,586
4,878
992
r 278,360
2,165
3,004
June 1961 *
' 9, 678
26,999
19,495
7,285
832
r 162,076
1,225
' 2,103
Total Europe..
March 1961
7, 556
12,382
807
11,830
1,576
r 38,747
' 38,593
2,042
' 29,744
' 17,153
6,395
277
3,278
6
10,724
26,396
17,800
7,076
392
642,395
1,343
3,216
Canada.......................
Mcxieo_____________
M arch 1961
6,562
11,990
787
11,761
1,502
T37,300
' 33,835
2,001
' 25,997
' 15,807
6,342
235
3,227
6
10, 518
26,244
17,310
6,944
392
>'639,064
1,319
2,894
4,877
'11,145
853
' 5,497
1,314
' 32,703
' 27,858
2,392
' 19,007
' 14,948
6,212
202
3,939
6
'10,786
26,521
20,491
' 9,117
177
' 147,413
1,357
1,971
Latin America:
A rgen tin a ....................
Bolivia............- ..............
Brazil............................ .
Chile............................. .
C olom bia.......................
Cuba— .......................
Dom inican RepubUc.
Guatemala.................
December
1960
AGREEMENTS
6,173
9,542
786
8,384
1,668
' 35, 767
25,544
2,649
*•20,963
r 11,412
6,290
313
2,989
December
WOODS
Europp:
Austria.............................................
Belgium............. .............................
Czechoslovakia...............................
Denmark........................... ..............
Finland.......................................—
France................................ ...........
Germany, Federal Itepublio of- Greece_________________________
Italy..................................................
Netherlands....................................
N orw a y .—............................... .......
Poland.............................................
Portugal...........................- ..............
Rumania..........................................
Spain................................................
Sweden......................... ..................
Switzerland.....................................
T u r k e y ...........................................
U .S.S.R -__............. ........... ............
United Kingdom ............................
Yugoslavia.....................................
Other Europe................. __............
September
BRETTON
First revised series3
1960
Country
Netherlands Antilles and Surinam.
Panama, Republfc o f.........................
Peru.......... .................... ......................
El Salvador..........................................
Uruguay-.,............................... ......
Venezuela............................. ...............
- Other Latin America...... ...................
China M ainland___
Hong K ong________
India..................
Indonesia-............... .
Israel................ .........
Total Asia..
Other countries:
Australia__________________ ____
; Congo, Republic of the a_............
.. South Africa..................................
~United Arab Republic (E gypt).
AH other...................................... .
1,607
7,3 05
' 8,552
2,073
' 3,356
' 33, 555
' 19,125
2,013
8,556
8,595
2,156
' 3,873
' 35,831
' 20,930
2,064
8,830
10,193
2,184
4,029
38,229
21, 663
1,721
7,102
10,901
3,056
4,097
35,174
25,061
' 231,493
' 235, 581
' 245,352
' 253.722
' 254, 872
265,365
277,978
108
1, 502
7,071
1,314
' 7,526
9, 501
r 31,867
1,288
7,219
' 1,426
4,289
18,286
88
1,420
10,555
1,285
7,480
8,742
' 31,850
1,140
8,558
' 1,465
3,833
17,122
65
2,256
12,385
1,383
' 8,369
11,285
' 45,291
989
7,235
' 1,370
3,543
16,725
65
2,310
15,417
1,423
' 8,480
11,347
r 53,934
997
8,502
' 1,455
3,550
20,209
74
% 725
10,401
4,127
9,050
7,475
* 51, 458
592
8,373
r 2,912
3,125
17,144
74
3,020
10, 649
4,128
9,193
7,570
52,312
597
8,524
3,281
3,203
17, 785
19
2,621
11,088
2,902
7,232
7,741
55,453
640
7,171
1,606
2,525
17,719
' 91,397
' 93,538
' 110,896
' 127,689
' 117,456
120,336
116,717
15,830
1,055
8,342
5,572
' 10,453
19,434
1,189
8 ,104
5,183
T10,398
20,890
2,647
6,370
6,375
' 12,524
21, 614
2, 650
6,618
6,666
-14,639
19,407
1,903
8,890
7,133
13,492
20,101
1,921
9,191
7,192
14,088
19,416
2,329
11,066
7,196
15,589
55,596
- 41,252
' 44,308
' 48, 806
' 52,187
50,825
52,493
288
240
372
372
626
626
187
Grand total........ ........
' 837,420
r 900,893
' 1,427, 765
' 1, 501,154
' 1,240,192
1,297,121
1( 378,091
-
1 As reported b y exporters, importers, industrial and commcrcial firms, and other nonflnancial concerns in the United States. Data exclude claims held through U.S. banks
and intercompany accounts between U.S. companies and their foreign affiliates.
* Data for the period covered b y this table reflect substantial revisions received from
reporting firms; data for earlier periods published in previous issues do not include com
parable revisions.
, * ,
„ ,
.
» Under a continuing program instituted at the end of I960 to enlarge coverage and to
improve reporting b y nonflnancial concerns, data arc included from a number of Arms
reporting for the first time as of Dec. 31, 1960 (first revised series) and also those firms
reporting for the first time as of Mar. 31,1961 (second revised scries). Data shown under
the first revised series (for December I960 and March 1961) include those from the addi
tional firms reporting initially as of Dec. 31, I960, as well as those from firms reporting
previously. In the second revised series, data (for March and June 1961) include those
from the additional firms first reporting as of Mar. 31, 1961. Changes in liabilities and
claims between quarter-ends can thus bo computed based on comparable coverage,
p Preliminary.
r Revised.
AM ENDM ENT
Total other countries.
International..........................
ACT
1,603
7,262
' 8,397
2,039
' 3,283
>•32,663
' 18,672
AGREEMENTS
. Korea, Republic of..
Philippines.............. .
; T a iw a n .....................
Thailand........... ........
/O th er A s ia ...............
1,334
4,394
' 13,166
2,145
r 2,882
' 28, 642
' 18,118
WOODS
Iran........................
Japan...................... .
1,596
12,061
' 8,025
1,982
' 3, 378
' 30,114
' 18,310
BRETTON
Total Latin America.
.[
a*
70
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. V a n i k . What are the advantages to the depositor of such
international deposit over and beyond the attraction of interest rate
differentials ? Are there tax advantages to the depositor ?
Secretary D illon. Not particularly as opposed to having his deposit
in any other country that I know of. Certainly, a deposit by a central
bank here is tax free.
t
Mr. V anik . And will the tax bill that is currently being considered
by the Ways and Means Committee tend to increase or reduce the in
centive for foreign deposits in this country ?
Secretary D illon. I don’t think it will have any effect on it. The
only thing that it has to do with is to try to reduce the tax incen
tives to U.S. capital to move abroad.
Mr. V anik . There is another question which I would like to have
you answer for the record.
What proportion of the demand of foreign creditors or depositors
for repayment in other currencies is being made by foreign corporate
nationals substantially owned by Americans ?
.
In other words, how many of our own citizens are involved in this
flow of gold out of the country ?
Secretary D illon. We will try to give you an answer on that.
(The information requested is as follows:)
I t should be noted that only a part of our balance-of-payments deficit results
in an outflow of gold from the United States (the balance being financed almost
entirely b y increased dollar holdings by foreigners). One factor a ffectin g our
overall deficit is the outflow of private capital from the United States for direc
investment a b ro a d . About $1% billion went a b ro a d during 1961 in the form o
direct investments, and an important portion of these in v e s tm e n ts was m ade
foreign subsidiaries of U.S. corporations. I n this connection, it should be
that to the extent capital funds move abroad as a result of the special incentiv
offered by so-called tax-haven countries, there is an unnecessary and undesirao
adverse impact on our balance of payments. It is for this reason that the
ury has been seeking legislation to eliminate, through changes in tax laws a
regulations, the special incentives which distort the capital flow th a t wou
normally be expected. The House "Ways and Means Committee is now considering
legislation designed to block the tax-haven gap in our present laws.
.
In addition to this outflow of U.S. capital in the form of U.S. direct in vestm e »
it is estimated that the outward movement of U.S. capital included substantia
amounts of purchases of long-term foreign securities and about $1.4 billion o
short-term capital, making a total recorded outflow o f U.S. capital of about
$3.8 billion. Unrecorded transactions, amounting to another $600 million, wou
add further to this figure.
The dollar holdings of foreign countries on private rather than official ac
count include an indeterminate amount that may be owned by foreign subsiaiaril
of U.S. corporations. Like other private dollar claims on the United “ tat »
such holdings represent a potential claim on our gold reserves, but only becau
o f the possibility that they can be converted into official holdings of f o r e i g n
monetary authorities. The U.S. Treasury converts dollar balances into goia
only for official monetary authorities.
#M r. V a n i k . The next question: One of the purposes of this addi
tional authority is to buy currencies of other countries, apparently to
pay off the demands as you indicated, of foreign currencies with credits
in this country.
As we use our taxpayers’ funds to make response to these demands*
is there any danger that our public funds may be used to pay off the
private debt of debtors and deposit institutions in this country s
Secretary D e l l o n . No, because I think the only difference is these
people have the right to transfer their deposits to a foreign government
BRETTON WOODS AGREEMENTS ACT AMENDMENT
71
account and that foreign government has the right to buy gold from
us. And this arrangement would work to prevent that.
Mr. V anik . Aren’t we in effect using our resources to pay off this
demand, which is really a demand-----
Secretary D illon. It is a demand against our gold stock.
Mr. V a n i k . Yes, sir.
Secretary D illon. We are using our resources to defend our gold
stock.
Mr. Vanik. In view of this gold problem, which I consider very
serious, and I am deeply in sympathy with this legislation, how can
we justify a billion and a half dollars that we spend in offshore pro
curement in our foreign aid program ?
Secretary D illon. Personally I think we should make every ef
fort to reduce the amount. The total figure that shows up in our
balance-of-payments for 1961 so far, and it is a preliminary figure,
indicates a total of a billion, $400 million. This includes contribu
tions to international organizations; such as the Inter-American Bank
and International Development Association; undoubtedly part of
which comes back to the United States of America.
But a policy that we have been following very closely is to try to
reduce these amounts and I think we will have some good results.
The new loans that are being made, with, for instance, AID funds,
are tied very closely. During the last 6 months, I think I saw a figure
that of the development loans that were made, something like 98 per
cent were tied to procurement in the United States.
The actual figures of expenditures are something quite different be
cause we are still paying out funds on loans that were made 2, 3, and
4 years ago. I think the payout of those loans that were made before
the change of policy, 'which took place in the fall of 1959, will be
pretty well completed during the course of this calendar year. And
then we ought to see a real improvement in that figure.
Mr. Vanik. Unless we approach this problem with the deeper ap
proach of restricting offshore procurement both under the foreign
aid program and under the military program, this proposal would
be more in the nature of a sedative rather than a cure.
Secretary D illon. That is right. This ^proposal is not a cure.
The proposal we are talking about here is just something that gives
us time to put our house in order fundamentally, and we have to do
the things you are talking about to achieve that.
Mr. Spence. The gentleman’s time has expired.
Mr. V a n i k . Mr. Chairman, again, may I have the responses to my
questions in some other form later ?
Secretary D illon. I will be glad to.
Mr. Spence. Mr. Rousselot.
.
Mr. Rotjsselot. Mr. Secretary, as I understand this bill, if
’
H.R. 10162 is basically in authorization by this committe for $2 billion;
Is it the definite intent of the administration, upon finding that
the International Monetary Fund needs the $2 billion, to go through
the Appropriations Committee and not take them out of contingency
Secretary D i l l o n . Yes, sir; we are asking* under this bill, the au
thority to ask for an appropriation. It is not an appropriation itself.
So we do intend, and will nave to ask for an appropriation from the
Appropriations Committee.
72
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. R o u s s e l o t . In other words, there will be no intention on the
part of the administration, as there sometimes has been in the past,
to go around the Appropriations Committee by taking it out of some
contingency fund ?
Secretary D illon. Oh, no.
Mr. R ousselot . Following up Mr. Patman’s questioning about the
Board and its ability to refuse our rights under this Monetary Fund,
did I understand you to say that the United States or any nation which
wishes to make a withdrawal from this Fund is not able to vote on
its own withdrawal ?
Secretary D il l o n . That is not true with respect to the regular re
sources of the International Monetary Fund, but it is for this extra
loan fund that we are talking about here today, this extra $6 billion.
And the principle of that simply was that if you were asking someone
to lend you some money, it didnt’ seem quite proper for the fellow who
is asking to borrow the money to tell the other people they had to lend
it to him.
So, we thought it perfectly proper, and it has always been our view,
that the borrower should not vote in determining whether a loan is
proper.
Mr. R ousselot . Mr. Chairman, I have three additional questions, but
I think they can be answered in writing. I will submit these to the Sec
retary and ask that they be included in the record.
Mr. S p e n c e . Without objection, it will be done.
(The data referred to above is as follows:)
F e b r u a r y 28, 1962.
Hon. D
ouglas
D il l o n ,
Secretary o f the Treasury, Washington, B.C.
D e a r M r . S e c r e t a r y : May I take this opportunity to thank you for your
willingness to answer additional questions for the official record concerning H.»*
10162, to amend the Bretton Woods Agreements Act, presently pending before
the Banking and Currency Committee. Tour agreement to the idea of answer
ing additional questions by mail helped in keeping your participation as a witness
going beyond the 1 day of testimony.
^
I wish to submit the following questions, the answers of which will be S13D‘
mitted in the regular testimony:
1. On page 10 of your written statement before the committee you made't e
following statement: “ In any event, since the Fund still has available in dollars
almost $2Ms billion from the regular U.S. quota, it is highly unlikely tna*
a need for borrowing from the United States will arise.” I f this is true,
why is it necessary to authorize an additional $2 billion when the need for o\v
country to utilize this is very unlikely? If we are going to authorize an a(\
tional $2 billion to be granted to this Fund at some future date, wouldn’t it be_wi
also to ask for our fair share of potential borrowing authority f r o m the j u
whether we need it or not, simply as a matter of emergency protection?
2. I know that the subject was covered very thoroughly by you that y
personally were convinced this additional authority granted to the ^ on^resS/ll<i
the International Monetary Fund would be very unlikely to jeopardize our g
reserve position. Can you further substantiate your reasons, other than
o eb was included in your testimony?
3. On page 11 of your statement you commented: “ Since the countries concern
are in constant close communication regarding their balance-of-payments posino ,
not only in the Fund but also through the Organization for E c o n o m ic Coope
uon and Development, and bilaterally, a decision can be reached very rapid y*
/Grf
two Parts ° f my question as it relates to this statement:
v
(<y What is the present relationship between the International Monetary
the Organization for Economic Cooperation and Development?
(&) Are the agreements with the United States as they relate to each of
organizations constructed in such a way that our gold reserve situation in tn
BRETTON WOODS AGREEMENTS ACT AMENDMENT
73
country will not be jeopardized by conflicting actionfe of each group? In addi
tion, are our commitments to each of these organizations such that it makes it
extremely difficult to maintain a strong gold reserve in this country?
I am looking forward to hearing from you; thank you sincerely for your
cooperation.
Kind regards.
J o h n H. R o u s s e l o t .
R e s p o n s e s to Q u e s t i o n s S u b m it t e d b y M r .
RoussEurr
(1) It is unlikely that the Fund would need to borrow from the United States
to have dollars available for drawings by other participating countries. On the
other hand, if the United States should ever need to draw a large amount, it is
almost certain that the Fund would need to borrow from the other participating
countries to obtain the currencies the United States desires. Since this is a
cooperative and reciprocal arrangement, it would have been unreasonable to
expect the other participating countries to undertake to lend their currencies to
the Fund in the event of our need without ourselves undertaking to lend our
currency to the Fund in the event of their need, even though the Fund is now
already adequately supplied with dollars. In any event, unless we accept the
terms of the agreement as drawn, we will not be able to benefit from the sub
stantial contributions other countries are prepared to make.
Our commitment to lend to the Fund does not diminish in any way our
already ample borrowing rights. In fact, the new arrangements provide that,
should we ever lend to the Fund, we would, upon encountering balance-ofpayments difficulties, be entitled, without question, to obtain prompt repayment
of the loan.
(2) The major point should be reemphasized that the IMF borrowing ar
rangements are expressly designed to strengthen the international payments
system and to buttress the international resources at the disposal of the major
currency countries for coping with severe balance-of-payments difficulties, par
ticularly those relating to large short-term movements of funds. The very
existence of these new facilities should add substantially to the confidence in
the financial communities of the world. In a healthy atmosphere of confidence
in the smooth functioning of the payments system, the likelihood of speculative
pressures on the dollar, and consequently the likelihood of sudden threats to our
gold reserve position, is diminished.
# (3) The IMF and the OECD are independent entities and are not formally
linked, except to the extent that the countries may have common membership.
The 20 members of the OECD, other than Switzerland, are members of the
IM F; the Fund’s total membership is 75 nations, including many of the lessdeveloped nations, whereas the OECD consists of the countries of Western
Europe, the United States and Canada.
We have every reason to expect continued harmonious relationships between
these two organizations. Far from affecting the international monetary system
adversely, this cooperation has been of very positive help. The marked enhance
ment of financial cooperation and mutual understanding that has characterized
our participation in the OECD has eased, rather than made more difficult, the
maintenance of a strong gold reserve in this country.
Mr. S p e n c e . Mr. Moorhead.
Mr. M o o r h e a d of Pennsylvania. Mr. Secretary, I would like to ask
you a question which may be asked on the floor of the House.
The question is: Isivt this just another $2 billion U.S. foreign give
away program?
Secretary D i l l o n . The answer is “No,” because, in the first place,
this is just a standby authority that we do not see any real possibility
of using.
In the second place, if it ever is used, it is a hard loan that is f>aid
back in a maximum of 3 to 5 years.
.
.
In the third place, if we make such a loan, and then get into balanceof-payments difficulties thereafter, it is immediately repayable on
demand, if we are in trouble.
74
BRETTON WOODS AGREEMENTS ACT AMENDMENT
So, I don’t think this is the case at all.
And, in addition to this, we have $2 billion that Ave are committing,
and other countries are committing $4 billion, which is quite different
from most of our foreign aid programs, where the proportions are
quite different.
Mr. M oorhead of Pennsylvania. Mr. Secretary, would you say that
this proposal is unique in that the United States is one of the prime
beneficiaries of the agreement, rather than one of the prime contribu
tors to it, in the light of economic facts of today %
Secretary D illon. I would say you are exactly a hundred percent
correct in that statement.
Mr. M o o r h e a d of Pennsylvania. Mr. Secretary, as I understand it,
this $2 billion of our contributions will be by way of an appropriation,
and is in the budget this year, is that correct?
Secretary D il l o n . Well, it is by way of an appropriation, but it is
not an expenditure, so there is nothing in the budget as an expendi
ture. It would go in as an authorized expenditure which would be
the same thing as our guarantee authority for the World Bank, our
guarantee authority for the Federal Deposit Insurance Company, and
others of that nature.
What this would actually be when we go to the Appropriations
Committee, since the request is for appropriation to remain available
until expended, we would in effect be going- for borrowing authority
which would be approved by the Appropriations Committee* So it
would be what you would call front-door borrowing authority, rather
than what has been called back-door borrowing authority.
It is similar to what was done recently by the Congress in the case
of our guarantee authority for the Inter-American Developm ent Bank.
M r . M oorhead of Pennsylvania. There would be no fund of $2 bil
lion. It would merely be an authorization ?
Secretary D il l o n . That is right.
Mr. M oorhead of Pennsylvania. Mr. Secretary, what do you think
the likelihood is of any call on the United States for any of this §2
billion within the next 2 to 4 years?
Secretary D il l o n . I can’t see any likelihood. The only possibility
that would be needed that one could foresee would be if all of tnp
countries of Europe simultaneously got into extreme balance-ofjmyments difficulties, and since they are all in just the opposite condi
tion now, that seems highly unlikely, unless there was some political
development in the world to completely upset the world as we know
it today.
, Mr. M oorhead of Pennsylvania. Mr. Secretary, would you be wiM"
mg to make any estimate or guess, for 1962, as to our basic deficit n*
balance of payments, or our overall deficit in balance of payments,
or both?
Secretaiy D il l o n . I think it is a little early to do that. Certainty
our hope is that our overall balance will be as good or better than
last year, largely because we hope there will be smaller movements
of short-term capital.
For our basic deficit, which was only $600 million last year, whether
we can do that well or not, I don’t know, because last year that was
reduced by $700 million of special advance repayments of debts to
us, which we are unlikely to get in any such quantity this year.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
75
.if, may well be that the basic deficit would be somewhat larger than
that $600 million figure.
Mr. M oorhead of Pennsylvania. Thank you, Mr. Secretary.
Mr. S p e n c e . Mr. Scranton.
Mr. S c r a n t o n . Mr. Secretary, I congratulate you on the clarity
and thoroughness of your testimony. I have a couple of questions.
In the first place, there are 10 nations involved in this agreement.
There are 75 in the Fund. As I understand it, the plan is that these
10 nations would be allowed to borrow from the Fund if they needed
to. Is there any tying down in the agreement that the other 65 cannot
so borrow?
Secretary D il l o n . Yes, sir, this $6 billion is only available to
participating countries in this arrangement, and there is a further
provision that should the United States, for instance, make a draw
ing—and the way that is done, the United States gives dollars to the
Fund which holds them, in return for the foreign currency we get—
there is a further provision that those dollars which are given to the
Fund must, in effect, be sterilized, and they can’t be loaned to any
other country.
Mr. S c r a n t o n . Both in your testimony and in the comments of the
National Advisory Council there are a lot of assurances that it is
remote, if possible at all, that we would have to lend this money. I
understand completely what the present situation is in view of our
balance*of-payments problems and the fact that there are two and a
half billion dollars in the Fund at the moment.
But would you comment on this new factor that has come up in
the last couple of years in our balance-of-payments problem; namely,
these short-term capital movements, which frankly concern me and
have been of very sizable proportions? Can we expect them in the
future ? This is a 4-year agreement, as I understand it.
Secretary D il l o n . That arrangement is for 4 years from the day
in which it enters into effect, and then it can be automatically ex
tended thereafter at the Fund’s initiative, provided there is no objec
tion from any member. Any member could withdraw at the end of
4 years. But, my idea is, it would continue to be extended.
Mr. S c r a n t o n . You do not expect a tremendous mass of short-term
capital movement as we have been experiencing in the last couple
of years, in the next few years ?
Secretary D il l o n . I would hope that our trade would be more m
balance, and that these large movements of short-term capital, some
of them speculative in nature, would subside.
.
Mr. S c r a n t o n . Secondly, with the United Kingdom having taken
$2 billion out of the Fund as of last summer, have you every reason
to expect that this will not reoccur in the near future ?
Secretary D il l o n . The United Kingdom drew a billion and a half
dollars last summer, which is pretty much all they were entitled to,
and they did then take certain actions. And their situation has im
proved and as of now they have repaid $420 million of that to the
Fund. And I assume that they will very soon continue to make further
additional repayments.
The United Kingdom has a situation just sort of the contrary to
ours last year, where their basic balance of payments has not been
in good condition, and where they have attracted by very high interest
76
BRETTON WOODS AGREEMENTS ACT AMENDMiENT
rates a lot of short-term capital to offset that situation. That is all
right for a time. But they are working very hard, and that is why
they always talk so much about their balance of payments because
they can’t feel safe until they have rectified their basic position, -which
means their exports have to be larger.
Mr. S c r a n t o n . No chance of getting Switzerland into the Fund?
Secretary D il l o n . Apparently that is not in the cards, because
while they have joined the OECD, and we do work with them there,
and we do work with them in this cooperation of central banks, they
have, right from the beginning, felt for some reason, that they would
like to stay apart from both the Fund and the World Bank, although
they cooperate with them.
Mr. S c r a n t o n . They have been in back of much of this short-term
capital movement?
Secretary D il l o n * I think a lot of the short-term capital movement
has gone to Switzerland.
,,
Mr. S c r a n t o n . I have one technical question that perhaps you could
answer in the record later.
r
It is my understanding that under the administration of the
change Stabilization Fund that we have been purchasing some Latm
.American currencies and I am interested to know' under what power
we are able to do this in view of the fact that section 10 of the act
says that the purpose of it is to stabilize the exchange value of the
dollar only.
Secretary D il l o n . Yes, sir. I think it is rather easy to explain
these transactions, because the stability of the dollar depends also
on the stability of other currencies, and many of them are those ot
these Latin American countries.
The Stabilization Fund, under this authority, has made these stabi
lization loans for many years.
I think the first'one was about 1936, and, at the time the Stabiliza
tion Fund was made permanent by the Bretton Woods A g r e e m e n t s
Act of 1945. This committee of the House in its report stated lh®
smaller Stabilization Fund will continue to be extremely usexui
in supplementing the work of the IMF with respect to those countlie
that have close economic ties with the United States and particular ^
those with which we now have bilateral stabilization agreements.
And over the years before it became permanent, the authority oi tiu
Fund was continued a number of times by the Congress. E a c h tune a■.
these stabilization loans were fully explained. And so, Congie
has in effect said that this is proper.*
,
Mr. S c r a n t o n . Mr. Chairman, may I ask unanimous Perm ^ssl2 ^ _ t
enter in the record at this stage, the Annual Gold Review by the r irs
National City Bank of New York, and some comments by Mr. Hay ?
of the Federal Reserve Board ?
Mr. S p e n ce . Without objection they may be entered.
(The information referred to is as follows:)
A
nnual
G old R
e v ie w
Following the widely publicized gold rush on the London market in
1960, interest in the metal has revived to an extent not seen f o r a quarjter
a century. The U.S. stock is now at its lowest level since 1939. C o n t i n u e b
purchases by f o r e i g n central banks and governments attest to the prestige S01
BRETTON WOODS AGREEMENTS ACT AMENDMENT
77
commands in the minds o f those responsible for national monetary reserves. In
the world around us, gold retains its traditional attribute as a highly desirable
store of wealth.
While gold figures prominently in the news, it is sometimes difficult to fit
isolated facts into a coherent and intelligible pattern. The U.S. gold position
can be appraised sensibly and realistically only within the framework of inter
national gold flows and policies. At the turn of the year, it is therefore
helpful to review once again the world gold picture.
In 1961, world gold output (excluding Russia, Mainland China, etc.) reached
a new postwar peak—for the eighth consecutive year. Worth somewhat over
$1,200 million, last year’s output was 3 percent above 1960. It was some 43 per
cent higher than in 1953, before the postwar rise in output began, and only 3
percent short of 1940, the alltime high.
Estimated gold production in 1961
Increase from—
In millions
of dollars
1960
Percent
South A frica .................... ......................... .....................................
Canada.........................
United States.......
......................................................................
Australia.....__
..........
........
..........
Ghana...............
Southern R hodesia..................... . _ _ ......................... ...........
Philippines*.......................................................................................
All others1- . ......... .
...........
............................
Total L ..
1953
...................................... ..........___........
7
-4
-9
Percent
92
9
-2 3
$802
155
53
38
31
21
15
100
7
4
-4
20
20
-10
-1 9
1,215
3
43
1 Excluding Russia, Mainland China, and countries in their spheres, for which figures are not reported.
$ MILLIONS
f.500
i i n
i n
i i M
n
i "i
1,000
500
INDUSTRIAL USES AND ADDITIONS
TO PRIVATE STOCKS'
O I M
46
'48
M
'50
II
'52
I 11 M
*54
*56
'58
I.-LI
'60
'62
Estimated G old Supplies and Uses
* Excluding Russian output but Including reported Russian
sold sales.
f Excluding Russia, etc.
Note; Plottings for 1961 are annual rates based on the first
nine months*
$0807— 62------ 6
78
BRETTON WOODS AGREEMENTS ACT AMENDMENT
As in earlier years, the rise in world gold output was attributable basically
to the increase in South Africa, which now accounts for two-thirds of world
production outside of Russia. Rich new discoveries, improved techniques, and
production in association with uranium explain the expansion. Elsewhere,
production tended to fall. In Canada, the drop was small. Output jn the
United States slipped off 9 percent, mainly in Alaska and California, to $53 mil
lion, lowest since 1946.
_
Russia’s output is variously estimated by Western observers at $350-600
million annually. We are better informed about the gold Russia sells in Western
Europe to balance its international accounts. Import statistics of the United
Kingdom show gold imports from Russia of $194 million during the first 11
months of 1961, compared with $105 million in the entire year 1960; during
1957-59, the figures had been averaging $250 million annually. W h i l e London
is the principal gold market of the world, larger and more frequent Russian gold
shipments were also reported on the Continent. Guesses on Russian gold reserves
run from $4 to $9 billion.
For the first time in many years, Mainland China reportedly sold gold in
Western Europe, covering a balance-of-payments deficit.
A N IND EX OF INFLATIO N FEARS
A comparison of new gold supplies—from free world output and e s t im a t e d
purchases from Communist countries—with year-to-year increases in the tota
of official gold stocks makes it possible to get an approximate idea of the varying
amounts absorbed by the arts, industry, and private holders.
.
In the United States, uses in the arts and industry have been e x p a n d i n g i
recent years. Net consumption in 1960 amounted to $105 million,
with $50 million as recently as 1957; since 1958, such uses have exceeded our
current output. As is well known, there is no gold coinage in this country a
residents are not allowed to hold gold in monetary form except for coins
recognized numismatic value minted before April 5,1933.
t
Abroad, there are free markets for gold coins and bars. Even thougn
“ money,” gold is desired by people as a store of value. Since the demand ru_
and falls with increases or decreases in fears of inflation, the fig u r e s on
amount of new gold production going into industrial uses and additions
private stocks provide a kind of index of inflationary fears. For the won
a whole, as the chart shows, less gold moved into private tises or holdings
year than in I960. The figure for the first 9 months of 1961 works out
annual rate of $700 million, or approximately half o f current s u p p l i e s ; the^ngu
for 1960— t h e greatest ever recorded—was over $1 billion, t h r e e - f o u r t h s or t ‘
new supplies. The reduction in 1961 coincided with an i m p r o v e m e n t in .
U.S. balance of p a y m e n t s and firm assurances of the new a d m i n i s t r a t i o n
the dollar would not be devalued; market observers abroad attributed it^
to gold sales by U.S. holders in compliance with the Executive order i
last January under which gold held abroad was to be disposed of by Jlin®
e
More recently, demand for gold from private quarters, especially in M j »
apparently strengthened, partly because of the Berlin crisis and partly nee^
of the renewed weakening in the U.S. balance of payments. In the
market, the price had retreated from $35.78 per fine ounce on J a n u a r ;y
»
1901, to as low as $35.06 in May. Firming tendencies became a p p a r e n t au
the autumn but, helped by offerings of the Bank of England, the Pn ce,r ^
time exceeded $35.20. The authorities' grip on the price has been strengtn
by arrangements enabling the Bank to replenish in the United States met
sells on the London market.
n_
In the broad perspective shown in the chart, the two waves of g r e a nreSlarged private demand correspond to two periods of renewed inflationary P _
sures and uncertainties about currencies—1951-52 and 1959-60. ^IL eaI to
postwar years, attempts were made by the International Monetary
e
protect official stocks by asking member nations to refrain from selling
markets, but this proved unenforceable. Private gold trading p e r s i s t e d . * ra
and some other member nations found it necessary to legitimize and aea
free markets to stabilize the price o f gold and encourage confidence in P*U
currencies.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
79
SUSTAINED OFFICIAL BUYING
New production has quite regularly exceeded absorption of the metal into
industrial usage and additions to private stocks. The excess of supply is
dependent for a market on purchases by governments and their central banks
for monetary reserve purposes. Since the United States buys and sells gold
at $35 per ounce minus or plus a % -percent commission, this price sets
the general level for the world price. The United States in recent years has been
getting little of the new production; the main official buyers have been Continen
tal European countries using surplus dollars acquired as a consequence of the
deficit in the U.S. balance of payments. Other surplus dollars have been
used to buy gold from the U.S. Treasury.
The following table traces the magnitude and the origin of changes in official
gold stocks during October 1960-September 1061; a similar table for January
3958-September 1960 was published in this letter a year ago.
Changes in official gold stocks, October 1960-September 1961
[In millions of dollars]
Through transactions with—
United
States
Continental Europe ........................... ..............
Common Market. ...........
Germany ,..................... .........................
I t a ly .................
France..................
.............................
N etherlands................
. . . ____
__
_____
Bolsnum_____
Switzerland........... ....................... ..............
Spain__
Other.......... _
. . .
................ .
United Kingdom .........
...............................
.......................................
All foreign countries
International Monetary Fund . .
__________ ______
United States________
$952
350
57
-100
117
130
146
285
197
120
3 275
1,687
-450
IM F
Other 1
2 $300
290
90
40
90
40
30
10
5 68
450
Gold stock,
Sept. 30,
1961
$1,033
957
. 608
99
290
65
-105
207
-1 8
-114
3-550
440
5—68
-1,717
$14,870
10,739
3,644
2,225
2,124
1,581
1,165
2,472
277
1,382
3 2,400
21,596
2,046
17,458
1 Residual figures; including gold from new production, Russian sales, etc.
2 Gold purchases made in August 1961 in connection with the British drawing.
3 Through June 1961. Additional $55,000,000 of gold was purchased from the United States m the 3d
quarter of 1961.
4 Excluding Russia, etc.
* Total change in IM F stock less sales to the United States.
Source: Derived from data in Federal Reserve Bulletin and International Financial Statistics.
During the 12 months ended September 1961, governments and central banks
of continental Europe converted $2.3 billion and other currencies into gold.
The largest additions to gold stocks were made by Germany, France, and Switzer
land. Germany, the largest holder of the metal outside the United States and
Russia, raised the percentage of its reserves in gold from 44 percent at the be
ginning of 1961 to 59 percent at the end of October. The proportion of gold,
nevertheless, remains below those of the Netherlands and Switzerland (above
90 percent), the United Kingdom (87 percent as of June), and Belgium and
France (75 percent).
About three-fifths of the $2.3 billion added to continental European gold stocks
in the 12 months ended in September came from sources other than the U.S.
Treasury. Decisions by individual countries as to where to buy— whether in
New York, London, Switzerland, or South Africa—depend partly on the price
and partly on other considerations, including the location of the gold and costs
of shipping.
In addition to normal offerings by producers on the London market, large
amounts of gold were sold out of Britain’s official reserves to support sterling
during March-July 1961. Beginning with early August, however, after the bank
rate rise to 7 percent and massive assistance by the International Monetary
Fund, short-term capital flows were dramatically reversed. Britain’s reserves
recovered rapidly, permitting sizable repayments to the Fund and also con
versions of surplus dollars into gold. In late November, when the U.S. stock
fell by $300 million in a single week—the largest weekly reduction on record—
80
BRETTON WOODS AGREEMENTS ACT AMENDMENT
the U.S. Treasury took the unusual action of issuing an explanatory statement
attributing the fall mainly to a purchase by the United Kingdom “ in accordance
with its policy that sterling * * * be supported by reserves predominantly held
in gold.”
The midyear weakness of sterling affected international gold flows in yet
another way. To acquire additional amounts of currencies to meet Britain’s $1.5
billion multicurrency drawing last August, the International M o n e t a r y Fund
sold $500 million of gold, of which $300 million went to Europe, $150 million to
the United States, and the remainder to Canada and Japan.
T H E U .S . GOLD P O SIT IO N
During 1961 (through December 20) the U.S. Treasury’s gold stock declined
$877 million or, if the transaction with the IMF is omitted, $1,027 million. This
approximates the loss in 1959, but is decisively smaller than those in 1958 ana
1960, as the table shows.
1958-61 decline in TJ.S. gold stock
Adjusted
to exclude
[In millions of dollars]
19581959.
19601 9 6 1 1.
5,891
Total
1 Through Dec. 20.
$ BILLIONS
5 0 .------i------ r
40
30
20
10
'50
'52
■’•
'5 4
'56
* Excluding Russia, etc.
Note: Latest plotting September 1961.
'58
Official Gold Stocks
'60
'62
6,297
BRETTON WOODS AGREEMENTS ACT AMENDMENT
81
The U.S. gold stock on December 20 amounted to $16,890 million, lowest since
1939, but still 41 percent of the free world’s monetary gold stock. The gold
stock remains adequate by any reasonable standard; it is the rate of loss, and
rate of accumulation of short-term debts to other nations, that is disturbing.
This is just another way of saying that we have a balance-of-payments problem.
As President Kennedy noted last month in his address in New York before
the National Association of Manufacturers, our present gold stock still repre
sents a “far larger” proportion in the world total than our share of international
trade. We have sufficient reserves “ to tide us over a temporary deficit period—
and I emphasize the word ‘temporray’ deficit period—while we mount an offen
sive to reverse these trends.”
The President, having outlined the ways in which the administration plans
to deal with the payments deficit, emphatically rejected “negative short-term
remedies” and stated unequivocally that the administration has “no intention
of imposing exchange controls, devaluing the dollar, raising trade barriers or
choking off our economic recovery.”
Calling on businessmen to be “competitive” and “ export-minded,” he promised
fiscal restraint: “The Government must not be demanding more from the savings
of the country, nor draining more from the available supplies of credit, when
the national interest demands a priority for productive, creative investment—
not only to spur our growth at home, but to make sure that we can sell, and
sell effectively, in markets abroad.”
$ BILLIONS
International Liquidity
* E xcluding International Monetary Fund (and also Russia,
e t c .). | H oldings o f official institutions, (except IM F ) and com
m ercial banks.
Note:
Latest plotting September 1961.
INTERNATIONAL LIQUIDITY TODAY
The world’s official gold stocks were increased last year by less than 2 per
cent out of new production—a rate that has prevailed, on the average, over
the past decade. International trade, even at constant prices, has been ex
panding at a rate two or three times as high. It is this discrepancy that gives
rise to fears that there may not be enough gold to go around.
Looking at international liquidity in this way, however, belittles the contribu
tion made by reserves held in the form o f foreign exchange and the elasticity
provided to the world payments system by the IMF.
82.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
The dimensions of liquidity in the world today emerge from the chart. Gen*
tral banks and governments (excluding the IMF and, of course, Russia, etc.)
held at the end of last year $39 billion in gold. Holdings of convertible foreign
exchange (mostly dollars and sterling) amounted to $21 billion for central
banks and governments and a further $7 billion for commercial banks. In the
aggregate, gold and convertible foreign exchange thus amounted to some $67
billion.
Then there are the resources of the IMF, of unique value because they can
be directed to support the international monetary structure at its weakest point
at any particular time* Drawing rights on the Fund thus represent a secondary
line of reserve for each member. The IMF calculates the value of the “borrow
ing potential” of its members at the equivalent of $17 billion. Less than S
years ago the Fund's resources were greatly enlarged on an across-the-board
basis and currently consideration is being given to increases through borrowing
from Fund members having payments surpluses.
Beyond this, it should not be forgotten that a creditworthy country can ar
range borrowings outside the IMF, either from governmental or private sources.
The world’s governments and central banks have never been better equipped
to economize on gold tSan they are today. The United States is the only comtry that operates a gold standard, and even this is of a qualified nature.
nations, while holding gold as well as dollars in official reserves, have free goia
markets in which demand and supply record the trusts and distrusts of peoPle
in paper money. There is no question but that the metal, as a commodity,
retains its age-old prestige as the ultimate standard of value. Nor is there
any question but that the United States, with its far-flung international com
mitments and the key position of the dollar as the leading equivalent for goia,
needs an abundant stock in reserve.
#
,
In a series of lectures before the American Philosophical Society, deliverea
last spring and recently published in book form, the Managing D i r e c t o r or tn
International Monetary Fund, Dr. Per Jacobsson, weighed the importance o
gold in “ this complex and suspicious world” :
.
.mv
4‘In the first place, the alinement of currencies to gold gives a certain stab:in y
to the world’s monetary system \^?hich cannot be ignored. * * *
be arbitrarily created as credit can, and, from the point of view of
the guarantee given by gold is therefore felt to be superior to that of creai
as a means of payment.
_
“ Secondly, when international liabilities are settled in gold, this is a denn:it
and final settlement, leaving no credit nexus as is the case when settlement
made in other ways. Gold payments are less complicated, and this is
advantage.
“ Thirdly, in the world in which we live with so many beliefs and, I mns
admit, prejudices inherited from past generations, the p o s s e s s io n of gold
spires confidence in a way that the possession of no other monetary asset c •
G iv e n human beings as they are, they need props for their confidence to
sustained, and gold still proves useful in this respect.
„v
“ Fourthly, the use of gold as the well-nigh universal b a s is of m01?ey-\,n*_
not by itself give cohesion to the world’s monetary system but it greatly la
tates the task and it would not be easy to establish the same degree of cones
in any other way.
,
f
“ And fifthly, the current gold output, insofar as it becomes a v a ila b le
monetary purposes, gives a certain impetus to financial expansion and an
crease in international liquidity, which is helpful as far as it goes.”
a
These are “ real advantages” for which gold should be retained— ‘ not
master but as an auxiliary in the world's monetary system.”
M onetary
P o l ic y
in
a
C o m p e t it iv e W
okld
(Excerpt from remarks o f Alfred Hayes, president, Federal Reserve
New York, before the 34th a n n u a l midwinter meeting of the New York »
Bankers Association, Waldorf-Astoria Hotel, New York City, J a n u a ry
1062)
Above all, we shall have to be mindful of balance-of-payments developments
and it is to this topic that I wish to address most o f my remaining c0I? IIl^nCe
I must say, first of all, that the latest statistics in this area are on bai
disappointing, even though they have some encouraging aspects. On the
BRETTON WOODS AGREEMENTS ACT AMENDMENT
83
couraging side, our international payments showed only a small deficit in the
first half of 1961, after excluding the effects of special debt repayments. But
this marked improvement over the substantial and persistent deficits of the
previous 3 years was partly a fortuitous result of different business cycle
phasing here and abroad; our own imports were held down by recession while
booming conditions abroad boosted the demand for our exports. It is also en
couraging that in the most recent half year our exports have performed exceed
ingly well despite some slowing down of the European boom, but our own im
ports naturally have risen as our economy gained strength. I am informed, too,
that preliminary fourth-quarter data indicate an improvement in our combined
trade, Government, and long-term capital accounts as against the third quarter.
At the same time, however, there has apparently been a substantially increased
outflow of short-term capital with the result that the overall deficit widened
again in the fourth quarter following the substantial deficit that had emerged
in the third quarter. While part of the recent worsening—perhaps much of
it—appears to reflect temporary, reversible factors, the situation certainly is
one that requires the most careful watching, with the Federal Reserve and, I
am sure, all other branches of the Government as well, prepared to take resolute
action if there should be developments ahead that represent more than a tem
porary setback on the road to our goal of balance-of-payments equilibrium.
Monetary policy clearly must pay increasingly close attention to this problem,
and it will be increasingly free to do so as the domestic business situation
strengthens. Let me emphasize, however, that there is no simple solution to
our international monetary problem. The causes of our balance-of-payments
deficits are complex and there are other vital objectives in the international
area that must not be neglected while the balance-of-payments deficit is being
corrected. Nor would I want to give the impression that there is any basic
or irreconcilable conflict between policies designed to achieve sturdy economic
growth at home and those aimed at maintaining a viable international balance.
In the short run there will certainly have to be compromises among our ob
jectives from time to time, but over the long pull the same policies are needed
to achieve both our internal and external goals.
Indeed, the more competitive world in which we now live, and which makes
our day-to-day monetary problems considerably more difficult, is in my judg
ment already proving itself to be a greatly improved world from the standpoint
of our own national interest. We in the United States are already benefiting,
through broader export markets and greater domestic price stability, from in
creased two-way trade with larger and stronger partners in the free world. We
have much to gain from the building of a still broader and freer trading area
among the advanced nations—one which should permit more effective mobiliza
tion of aid to the less-developed countries and, more important, a better market
for the raw materials produced by those countries. Without question, to
achieve the superior growth rates needed to give the free world its full eco
nomic and military strength depends in good measure on a substantial further
lowering of national barriers to international trade and investment.
In the face of these considerations it would be inexcusable to seek a solution
of our troublesome balance-of-payments problem through such measures as im
port restrictions, higher tariffs, or exchange controls. Even if balance in our
international accounts could be achieved in such a manner—and frankly I be
lieve that retaliatory measures would more than offset potential gains—this
would be small return for the inevitable loss in our real income and world
position, political and military as well as economic. But if we firmly reject, as
we must, solutions o f this kind, we must also accept the burdens and responsi
bilities inherent in the new environment in which we live. We must be willing
not merely to recognize foreign competition as an economic fact but also to
make an aggressive effort to compete more effectively in all markets, both with
new and improved products and with lower costs. And regarding the latter,
let me say that while the role of monetary policy in helping to hold back in
flationary pressures is difficult and unpopular—particularly when those pres
sures originate elsewhere than in excessive demand—the responsibility is none
theless one that cannot be shrugged off. Of course, this is not the job of mone
tary policy alone, nor even o f monetary policy primarily; wholehearted co*
operation from Government, industry, and labor is a necessity in this area.
Success along these lines, together with more skillful and effective export
promotion, will enable us to achieve a trade surplus high enough to take care
of our heavy net military outlays abroad, our economic assistance payments, and
84
BRETTON WOODS AGREEMENTS ACT AMENDMENT
the outflow of private long-term investment. At the same time, we must make
sure that the drains from these latter sources are no larger than necessary.
In this connection, I am much heartened by the progress which the Govern
ment has already made in arranging for our allies to purchase in this country
more of the military equipment for mutual defense. Progress has also been
made in achieving a better sharing of the foreign-aid burden. In my opinion,
more can surely be done along these lines. It might also be worthwhile to
give further study to the question whether our existing tax laws now make it
unnecessarily attractive to invest in relatively well-developed foreign countries.
Measures of this kind are of the utmost importance to achieve the basic pay
ments equilibrium that we must have. Of course, even after such an e q u ilib r iu m
is achieved there wil be swings from time to time in response to different
business developments in this country and abroad. But to some extent we
could expect to see such cyclical swings in trade offset by opposite s w i n g s in
capital movements, largely short term, which would be influenced by relative
levels of interest rates and credit availability here and abroad. In fact, the
proper role of our monetary reserves— including our drawing privileges at the
International Monetary Fund as well as our gold—is to cushion the effects of
such swings in payments.
It follows, too, that the closer we come to equilibrium in our balance of pay
ments the greater scope we have for adjusting our monetary policy more largely
to our domestic needs, relying on various measures of international c o o p e r a t io n
to absorb the disequilibrating force of capital flows moving in the wrong direc*
tion. The difficulty today is that we do not enjoy a sufficient margin of salety
in our balance of payments to give monetary policy the desirable degree of free
dom to act without inviting excessive risks. Even a gold stock as large as
ours cannot withstand an indefinite stream of losses, nor can we depend on a
unlimited willingness of foreign countries to build dollar balances. Hence
there is a real need for monetary policy to remain entirely u n c o m m i t t e d a
flexible, ready to move if necessary in ways that will help to remedy any s i g m
cant worsening in our balance-of-payments position.
I
would like, finally, to comment on some o f the steps taken in the past yea
which have made 1961 a real milestone in the history of international mon
etary cooperation. Goaded by the urgent need to minimize the danger of m a s s iv e
speculative forays against one currency or another—a danger greatly increases
by the major payments imbalances o f several leading industrial c o u n t r i e s , in
cluding the United States—we have made notable progress in a number of areas.
As has often been pointed out, the gold exchange standard has b r o u g h t great
benefits; to the postwar world by making possible striking economies in the us
of a limited supply of monetary gold. But in building the banker role of tne
key currency countries, which in effect means the United States and B r i t a i n , w e
have also increased the vulnerability of these currencies and countries to wiae
swings in capital movements.
This vulnerability was strikingly demonstrated by the speculative
sterling which followed the German and Dutch revaluations last March, i^es
changes in parities left the foreign exchange markets in a state of
so that they were easy prey to speculative rumors o f further changes id panc ■
Within a few days, many hundreds of millions o f dollars in various cu£r\\
cies moved across the exchanges, with particularly heavy speculative flows tr
London to Zurich and Frankfurt. At this critical moment, the c e n t r a l ^ a
meeting each month at the Bank for International Settlements in Basle an
nounced that they were cooperating in the exchange markets. As subseque 9
revealed, this cooperation took the form of short-term loans, ultimately rea
ing a total of $910 million, to the Bank of England from other E u r o p e a n c e n t r a l
banks. In this connection, I should like to pay tribute to the decisive and stal
manlike approach taken by the various European central banks involved P
ticularly the National Bank of Switzerland and the German B u n d e s b a n k , wn
received the bulk of the hot money outflow from London. This s o - c a l l e d
Agreement” which provided emergency credit facilities o f a n e c e s s a r i l y
.
term nature will stand, I hope, as a first big milestone on the road towar
creating a truly formidable first line of defense for the world's major currenci ■
The lessons of the March revaluation were not lost upon the u* •
Government. Since then much time and effort has been spent in exploring a
developing techniques, in cooperation with foreign monetary authorities, to
fend the dollar against similar speculative flows of hot money. Those New xo
banks which are active in the exchange markets will recall that shortly an
BRETTON WOODS AGREEMENTS ACT AMENDMENT
85
the German revaluation the Federal Reserve Bank of New York, as agent for
the U.S. Treasury, began to provide forward marks. This action, which
was undertaken in cooperation with the Bundesbank, was designed to deal with
an abnormally high premium on the forward mark and, more generally, to
exert a stabilizing effect on both the spot and forward markets. At the end of
June, more than 1 billion marks of such forward sales were outstanding, but
the speculative tide had already begun to recede before the Berlin crisis and,
by mid-December, the entire volume of forward contracts had been liquidated at
maturity and the market was again operating smoothly with only token inter
vention. In effect, the German forward mark operation helped to bridge the
gap between heavy speculative buying of marks and the subsequent restoration of
a more balanced payments position.
Sizable operations have also been carried out in the forward Swiss franc mar*
ket, where cooperative measures undertaken with the Swiss National Bank have
succeeded in reducing the unduly high premium on the forward Swiss franc which
had been one of the factors impeding outflows, of capital from Switzerland. In
connection with these operations, the U.S. Treausry supplemented its holdings
of Swiss francs by issuing short-term Treasury obligations denominated in
that currency. This technique has proved effective and may well be employed
in other situations, if this seems desirable.
At the moment, operations in other European currencies are being given serious
consideration and will serve, I hope, to extend still further the perimeter of the
first line of central bank defenses against speculative capital movements. Inci
dentally, I should also like to mention the effective cooperation of various foreign
central banks in cushioning exchange market pressures generated by the heavy
repatriation of short-term funds to foreign markets for yearend window-dressing
purposes. In contrast with the experience of earlier years, such foreign central
bank cooperation at the end of 1961 effectively minimized the potentially disturb
ing effects of these operations upon both market rates and actual reserves.
One important obstacle to a fuller use of such cooperative exchange operations
by the United States is that the Treasury's resources for such purposes are quite
limited. We may need to consider, therefore, whether the problems in this area
may not require that the Federal Reserve System also enter into foreign exchange
operations. The last few years have shown that monetary policy does not stop
at the water’s edge. Short-term capital now can, and does, move across national
frontiers in the hundreds of millions of dollars within a span of a few weeks.
And indeed, such movements can have marked repercussions on our own money
and capital markets in addition to their impact on our gold and exchange re
serves.
Effective as they are, measures of immediate conteraction to speculative pres
sures in the exchange markets clearly have to be backed up by a "second line”
of even sturdier defenses since one cannot always count upon an early reversal
of such pressures. In this connection, the already large lending facilities of the
International Monetary Fund are in the process of being augmented further.
Through a network of standby credit arrangements, the Fund will be in a posi
tion to obtain an additional $6 billion of the world’s leading currencies if and
when any major crisis endangers the world payments system.
The successful completion of these negotiations by the 10 major industrial
countries involved must be a great source of satisfaction to all who are interested
in seeing our international monetary mechanism bolstered to withstand any fore
seeable contingencies. One may reasonably expect, therefore, that the required
legislative approval can be obtained promptly in all countries concerned, includ
ing the United States. Of course, it is also to be hoped that the mere existence
of these facilities will make it unnecessary to use them.
The progress of the past year has involved and indeed has required, increas
ingly close personal contacts, in the financial area, between representatives of
this country and those of the leading countries of Europe. I am thinking of the
regular attendance of Federal Reserve representatives at the monthly meetings
of the BIS in Basle, Federal Reserve participation in U.S. delegations to various
working groups of the OECD in Paris, and ever more frequent and cordial bi
lateral meetings with representatives of the other principal trading nations to
exchange information and discuss mutual interests. These frank interchanges
have brought us a much deeper understanding of the domestic and international
economic problems not only of our trading partners, but also of ourselves, as we
have seen our own problems ranged alongside those of other countries. If the
momentum of all these moves can be maintained, 1962 should produce further
86
BRETTON* WOODS AGREEMENTS ACT AMENDMENT
noteworthy gains in this vital area of international cooperation. Yet, I would
be remiss if I did not remind you once more, at the end of my remarks, of the
continuing reality and urgency of our balance-of-payments problem. While the
initial development of close international cooperation can be and has been stimu
lated through the very strains it is designed to combat, the ultimate responsi
bility of each nation for its own finances is still recognized both here and
abroad.
I
am aware that time has allowed me only to touch very lightly some of the
high spots of the very broad subject I selected for this talk. But I hope you
will agree that we are pursuing goals which all Americans feels are worth seek
ing, and that the seriousness of the problems we face together in the monetary
sphere calls for the patient understanding and cooperation of all elements in our
society. If we can work together effectively, as I believe we can, we can have
confidence that our economy will measure up to its full potential and that the
dollar will retain its key position in the arch through which the trade and in
vestments of the free world move.
Mr. V a n i k . Mr. Chairman.
Mr. S p e n c e . Mr. Vanik.
Mr. V a n i k . I notice, according to the way the testimony is ar
ranged, that we have two Government witnesses, and that no other
witnesses are immediately scheduled. I ask unanimous consent, that
any other persons who have a point of view to express be allowed to
place a statement in the record and, if possible, be allowed to appear
before the committee before this is considered.
Mr. S p e n c e . Before permission is given to insert in the record, we
should know something in regard to who desires to insert the state
ment and the organization he represents.
Mr. V a n i k . I just wonder if there is anyone present who has a
statement to make. I think we ought to have the benefit of such ex
pressions when considering this legislation.
,
Mr. S p e n c e . I think that is a little too broad, Mr. Vanik. I think
we should know who the people are who want to put in statements.
Do you know anybody who wants to put in a statement ?
Mr. V a n i k . At this moment, I do not, Mr. Chairman. I may con
sider renewing my request tomorrow-, if there is someone who turns up
with a statement.
.Mr. S p e n c e . I f he will identify himself, I think we would consider
putting his statement in the record. I would not want to throw it open
that wide.
,
Mr. V a n i k . I can see the chairman’s point. I just want to make
sure we have the benefit of any other opinion that is available.
Mr. S p e n c e . I think we have had a very comprehensive explana
tion of the bill, very able and very enlightening to everybody.
Mr. Gonzalez.
Mr. G o n z a l e z . Thank you, Mr. Chairman. I also wish to add my
thanks to the Secretary for his explanation, and, to show how clea
it is, I have no questions.
Secretary D il l o n . Thank you.
Mr. S p e n c e . Mr. Secretary, this is but a ratification of an agre
ment. It would not be subject to any amendments in the House.
Secretary D il l o n . That is correct. Any amendment to the agree
ment itself would have to be renegotiated like any other interna
tional agreement, with the other members, and I don’t think that
would be practical.
.,
Mr. S p e n c e . Therefore, if we want this to go into effect, we shoul
vote out the bill as it has been introduced ?
BRETTON WOODS AGREEMENTS ACT AMENDMENT
87
Secretary D illox. That is correct.
Mr. Spence. I f we enact this bill, will not that Fund have a great
effect from a psychological standpoint? Don’t you think the psy
chological effect of it would be great ?
Secretary D illox. I think the psychological effect would be very
great, Mr. Chairman, because it would show, to all the people who
might wish to speculate, that the Monetary Fund has adequate re
sources to stop any speculation.
Mr. S pence. How many members signed the original Bretton Woods
Agreement ?
Secretary D illon. I am afraid I don’t have that figure here. I
know there are 75 members now. I don’t know how many signed
at Bretton Woods.
Mr. Spence. I think there were about 39 at that time.
Secretary D illon. That sounds reasonable.
Mr. S pence. And now all the nations of the free world are mem
bers of the Fund; isn’t that true 1
Secretary D illon. Most of them. Switzerland is not. There are
75 members.
Mr. S pence. And that is evidence of confidence in the Fund and
its purposes?
Secretary D illon. That is correct.
Mr. S p e n c e . Thank you very much, Mr. Secretary, for your very
able testimony. We are delighted to have had your comprehensive
and enlightening statement, and I feel confident that the Congress
will pass this bill.
Secretary D illon. Thank you, M r. Chairman. It has been a great
pleasure to appear before you and this whole Banking and Currency
Committee.
Mr. S pence. The Government has a very fine advocate when it
sends you up here to speak for it.
The committee will adjourn to meet tomorrow morning at 10 o’clock.
(Thereupon, at 12:25 p.m.. the committee adjourned, to reconvene
at 10 a.m., Wednesday, February 28,1962.)
BRETTON WOODS AGREEMENTS ACT AMENDMENT
WEDNESDAY, FEBRUARY 28, 1962
H ouse of R epresentatives ,
C o m m it t e e o n B a n k in g an d C urrency ,
Washington, D.C.
The committee met at 10 a.m., Hon. Brent Spence, chairman of the
committee, pi'esiding.
Present: Messrs. Spence (presiding), Patman, Multer, Addonizio,
Barrett, Mrs. Sullivan, Reuss, Vanik, Moorhead of Pennsylvania, Mil
ler, Stephens, St. Germain, Gonzalez, Kilburn, Widnall, Mrs. Dwyer,
Halpern, Harvey, Moorehead of Ohio, Rousselot, and Scranton.
Mr. S p e n c e . We are going to adopt the rule we adopted yester
day—the 5-minute rule. On the first round each member will be
allotted 5 minutes.
We have with us this morning Mr. Martin, Chairman of the Federal
Reserve Board, and we will resume hearings on H.R. 10162.
We are always ghul to have Mr. Martin with us, because of his
great ability and comprehensive knowledge on the subjects on which
he testifies.
We are glad to have you here toda^, Mr. Martin.
Mr. M a r t in . Thank you, Mr. Chairman.
STATEMENT OP WILLIAM McCHESNEY MARTIN, JR., CHAIRMAN,
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. M a r t in . It is a pleasure to be here today, at the invitation of
Chairman Spence, to discuss with you why the Federal Reserve sup
ports H.R. 10162, and how the proposed special IMF borrowing ar
rangements contemplated under H.R. 10162 would fit in with other
actions the Federal Reserve is taking to help preserve the strength
of the dollar in the international payments system.
I f we are to maintain vigorous, growing economies in the free world,
we must have a system of international payments that permits coun
tries to finance the goods and services they exchange with a minimum
of risk and cost, whether payment is made in cash or on credit. We
have come a long way since World War II toward the achievement of
this goal. Western Europe has made a remarkable recovery. It has
restored convertibility of its principal currencies, eliminated most of
^trade controls, and reduced its tariff barriers.
These favorable developments have, however, brought with them
new problems, as well as new opportunities. As it became easier to
exchange one currency for another, flows of short-term funds between
countries have increased. Holders of liquid funds have become in
creasingly aware of opportunities to benefit from interest-rate dif
ferentials and exehange-raf
e arbitrage.
»
»
orv
90
BRETTON WOODS AGREEMENTS ACT AMENDMENT
International flows of funds in response to profit opportunities are
useful features of a free world economy, and an increase in such flows
should not, as a general matter, give rise to any concern.
In recent years, however, the continuing deficits in this country’s
international payments and the persisting surpluses of some Euro
pean countries have created recurrent uneasiness in foreign-exchange
markets and have added an element of destabilizing speculation to
the profit considerations that ordinarily influence international flows
of short-term funds.
H.R. 10162 would put the United States in a better position to deal
with some of the problems arising out of this development. With
this same object in view, the Federal Reserve has recently decided
to reenter the field of foreign-exchange transactions. The Federal
Reserve, therefore, is particularly interested in the enactment of tins
legislation.
In order to bring both II.R. 10162 and the recent decision of the
Federal Reserve into proper focus, we must remember that neither
action will correct the underlying difficulty, which is our international-payments deficit.
Regardless of the methods chosen to deal with problems of inter
national flows of short-term funds, the United States must achieve
a balance between the amounts we spend, lend, and invest abroad ana
the amounts foreigners spend, lend, and invest here.
,
Until equilibrium is achieved in our payments accounts, there wil
be a risk that the flow of dollars into the hands of foreigners migh,
become larger than they would be willing to hold. This state °
affairs could lead to recurrent drains on our gold stock. And even
if the dollars are not presented by foreign central banks to our Treas
ury for redemption in gold, the feeling of the financial communi J
that the dollar balances of foreigners may be excessive could aitec
dollar rates adversely in foreign-exchange markets.
.
We must, therefore, work steadily to reduce, and finally elimma,
the deficit in our international payments. Among other things,
must seize every opportunity, major or minor, to build an even larS®
export surplus. And, as other countries grow and prosper, we shou
expect them to take a greater share of the necessary costs of mutu
defense and aid to underdeveloped areas.
,
- of
Your committee has recognized these n e e d s in its c o n s id e r a tio n
recent legislation, such as the International Development A s s o c ia t e
Act and last year’s authorization for an expanded export guaran
deviously, the present proposal to supplement the resources
IMF will not reduce our payments deficit. But it will be of ^mP?^a0f
help in maintaining orderly exchange markets during the period ^
adjustment and avoiding speculative forays against the dollar pencnn^
correction of our deficit. It will make possible an increase
v
national liquidity that would be available for meeting extraordma j
movements of funds due to temporary factors.
.11
The borrowing arrangements contemplated by H.R. 10162 w
help to achieve this purpose in two ways. First, the knowledge
the existence of a mechanism that can mobilize, in addition to Presei*
IMF resources, about $4 billion in major foreign convertible cu
BRETTON WOODS AGREEMENTS ACT AMENDMENT
91
rencies in support of tlie dollar will in itself restrain speculation
against the dollar.
Second, if any adverse developments should nevetheless occur, re
sulting in offers to sell more dollars than the normal dealings in the
market would absorb, these facilities, together with our other resources
could be called upon to deal with any consequent disruption of ex
change markets.
In case of established need, the IMF would sell to the United
States for dollars the major foreign convertible currencies that the
IMF would borrow from the other participating countries. The
United States could then use these currencies to buy up dollars offered
in the market by private holders, and to redeem dollars acquired
by foreign central banks in excess of the amounts they are willing
to hold. This would tend to prevent dollar holdings of foreign
central banks from becoming a drain on our monetary gold stock.
The dollars acquired by the IMF in the course of these transactions
would be kept by the IMF for 3 to 5 years, unless in the meantime
our reserve position, as we might hope, had so improved that we
would no longer need to continue the arrangement.
The contemplated Federal Reserve operations in convertible for
eign currencies would complement the proposed IMF arrangements
in two ways.
The Federal Reserve would help to deal with minor pressures
before they reach a scale commensurate with IMF action. And it
could take prompt action in more serious circumstances while IMF
arrangements are being worked out.
In accordance with established reserve banking practice, however,
the System would not enter into long-term foreign exchange com
mitments. That is to say, it would not make arrangements under
which the United States would acquire foreign exchange for a period
of 3 to 5 years, as under IMF procedures.
Federal Reserve foreign-exchange transactions and the proposed
IMF arrangement would, therefore, complement each other. Both
would play important roles in maintaining an efficient international
payments system.
While reserve banks in other countries customarily engage in for
eign-exchange operations, the Federal Reserve has not done so for
its own account for many years. Until recently the U.S. dollar has
been the only fully convertible currency widely used in international
transactions.
Accordingly, the United States has been settling its international
accounts exclusively by transfers of dollars and by sales and pur
chases of gold. The Federal Reserve Bank of New York has, how
ever, continued to deal in foreign exchange for accounts of its foreign
correspondents and as fiscal agents for U.S. Government agencies. ^
For the last year or so, it has also been operating for the account of |
the Treasury stabilization fund.
The Federal Reserve has recently acquired small amounts of sevoral
convertible currencies widely used in international transactions from
the Treasury Stabilization Fund and has opened accounts with several
European reserve banks. We plan to acquire further amounts through
open-market purchases of cable transfers or bills of exchange at home
or abroad, when conditions on foreign-exchange markets are favor
92
BRETTON WOODS AGREEMENTS ACT AMENDMENT
able, and also through reciprocal transactions with foreign reserve
banks.
While in time it may be desirable to recommend amendment of the
Federal Reserve Act to provide greater flexibility than we now have
under the act in carrying out these operations* it would be impractical
to request such legislation before operating experience under existing
authority has provided a clear guide as to the need for it.
The System will, of course, coordinate its foreign exchange opera
tions with those of the Treasury Stabilization Fund. The relatively
modest resources of the Stabilization Fund have been used recently
to counteract speculative pressures in the exchange markets. The
System operations will be conducted not only with broader resources
than those of the Stabilization Fund, but also with an additional
puipose.
Necessarily, operations of either the Fund or the System in foreign
exchange will influence exchange rates in some degree. In d e e d , one
of the purposes of these operations will be to correct or avoid disor
derly movements of exchange rates, which might otherwise spark
disruptive flows of funds internationally.
But the System will also have this additional purpose: to improve
the international payments system by cooperative arrangements with
foreign reserve banks that would permit the financing of sudden large
movements of volatile funds without impairing the role of the dollar
v as a medium for international transactions.
In the case of an outflow from the United States, these arrange
ments would permit us to moderate its impact on our gold stock; in the
case of an outflow from other countries to the United S tates, they
would permit those countries to moderate its impact on their gold and
dollar reserves. This would be one way in which the System
carry out its responsibilities for providing the U.S. economy with a
sound dollar.
I f we want cooperation from others, we must be prepared to cooper
ate with them. This principle is applicable also to the present pro
posal to strengthen the resources of the IMF. I f we want
countries to lend additional support to the IMF, so that it will D
better able to offset possible adverse pressures on the dollar, we mus
be prepared to lend dollars to the IMF, so that it will be better aDi
to offset adverse pressures on other major c o n v e r t i b l e currencies.
In conclusion, we can look to these new arrangements in the lllte/
national payments system to give us time to correct our ba la n ce-o
payments position. But we must clearly understandi that they w
not be substitutes for a basic cure.
■
Mr. S p e n c e . Are you aware of any opposition by any of the tma
cial interests of America to the passage of this bill?
Mr. M a r t i n . None that I know of, Mr. Chairman.
..
Mr. S p e n c e . Certainly none would be opposed to what we are tryi &
to achieve?
n
is
; Mr. M a r t in . I think that world understanding 011 this prob.
better than it has been for some time, and that our efforts to han ^
the situation are appreciated more clearly than they have been toi *
long time; yes, sir.
Mr. S p e n c e . Mr. Kilburn.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
93
Mr. K il b u r n . Mr. Martin, it is always a pleasure and profitable to
have you testify before this committee.
I just want to pursue for 1 minute, Mr. Spence’s question.
I remember the British loan when that was up. There was a vio
lent difference of opinion between the First National Bank of New
York and the First National Bank of Chicago.
Now, this field, of course, is way up in the stratosphere, as far as
I am concerned. Do you know of anyone who is an authority on
foreign exchange and who knows the subject, who is opposed to this
bill?
Mr. M a r t in . I can't say that I do, M r. Kilburn. But there may be
some. I don’t known them, though.
Mr. Spence. We have never heard from any foreign interests to the
effect that they are opposed to this bill.
Mr. M a rtin . I have not heard of it.
Mr. K il b u r n . And you are strongly for it?
Mr. M a rtin . I am indeed, I support this bill strongly. I think
those of us who attended the conference in Vienna understand the
background of the bill more clearly perhaps than some others. But
it is certain that that understanding came out of that meeting and
was generally agreed to.
Mr. K il b u r n . I attended the conference in Vienna, but I am still
learning. There is a lot I don’t know about it.
That is all, Mr. Chairman.
Mr. Spence. Mr. Patman.
Mr. Patm an. Mr. Chairman, I ask permission to extend my re*
marks commenting on Mr. Martin’s remarks.
Mr. Spence. Without objection.
Mr. P atm an. Mr. Martin, I am concerned about this situation. I
know that the imbalance of payments is the greatest problem that
we have and I do not want to do anything that would interfere with
the satisfactory solution of it. I have just two or three things that
bother me about it.
One is I don’t want to turn things over to what can probably be
called the International Banking Group and get it away from our
national sovereignty. I f we turn everything over to these interna
tional groups, and we just have 30 percent of the votes, we are in
somewhat of a helpless position in case of dire need. And that is_
something that bothers me a great deal.
Another is that Mr. Kennedy, in his message of February 11^1
believe it was, last 3rear, recommended that we permit a difference in
interest rate on foreign balances from domestic balances.
Did you approve of that? You were consulted, I know.
Mr. M artin ; Y es, sir; I approved.
.
Mr. P atm an . Y o u are in favor of paying a higher amount in £se\v
York for these balances, in order to help our imbalance-of-payments
situation ? You think it would be helpful ?
Mr. M a rtin . I had some question on whether we ought to do it only
for foreign deposits and not also for domestic.
,
Mr. P atm an . W e ll, I think it is justified, because during the war
as I brought out here yesterday—have-you seen yesterdays testimony
Mr. M a r tin . No.
S0S07— 62------ 7
94
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. P a t m a n . I brought out that we needed more copper produced.
The copper price was 12 cents, and we decided, instead of increasing
the price of copper to 24 cents, which would be a 100-percent wind
fall for the big companies that didn't need it and which were mak
ing a substantial profit on 12 cents, we decided to give a subsidy to
copper producers, the marginal producers, which had to have more.
And, in that way, we increased the production of copper enormously
and saved enormous amounts of money for the taxpayers. And this
appeal's to be somewhat of a comparable situation.
Here the imbalance of payments caused principally by these deposits
in a few banks in our country, and if we justify the payment of what
we will call a “ bonus7’ or “subsidy"—I don’t care what you call it—
so long as it is in the public interest—then we can save the interest
rates being increased all over the Nation.
Don’t you think that makes sense ?
M r. M a rtin . W e ll, are you assuming that interest rates will be
increased all over the Nation ?
M r. P a t m a n . Y ou have kept them that way, M r . Martin. You
have, by your actions, kept high the short-term rate, have you not .
Havent’ you deliberately done that I
Mr. M a r t in . We have tried to disperse our activities in the open
market, as I have explained on a number of occasions through all
maturities, in order to minimize pressures on the short rate.
Mr. P a t m a n . I know, Mr. Martin. I heard what you said. But
you can answer me one way or the other. Now, you can either say
you have or you haven’t. That is all I am asking.
Mr. M a r t in . We have operated in order to try to-----Mr. P a t m a n . Keep interest rates up ?
M r. M a r tin . I am talking about overall interest rates.
1
Mr. P a t m a n . Well, Mr. Martin, you and I have had lots of coloquies in the past, and I happen to know your policy pretty well.
And I only have 5 minutes, subject to the order of the chairman)
which is all right. I am all for that. We will go around for
minutes and then have a longer time when we come back, but I waS
hoping we could get the material points by asking a few questions
:and getting categorical replies.
.
-r
It seems like a categorical reply is impossible, Mr. Martin,
thought you would admit what I know you have admitted over t
^country in public speeches, that you have deliberately kept the sJior
term rate up to help the balance of payments.
. T
Mr. M a r t in . We have endeavored to do that, but the point 1 am
trying to make, Mr. Patman, is that your inference that lon g-ter
interest rates----xr1*' ^at:man* ^ didn’t say anything about long-term rates.
M r. M artin . But it is all part o f the same spectrum.
M r. P a t m a n . Y o u are bringing it u p ; I am not.
I asked you a very simple question:
Whether you have deliberately kept short-term rates up and not*
you are mentioning long-term.
M r. M a rtin . A s you say, we have been through this many tim^*
B u t that is a diif erence o f opinion.
X don t think they can be separated and you do.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
95
Mr. P a t m a n . But I am only asking you about one. If you cairt
answer, I will just have to give up.
Mr. Martin. I will say we have been gratified that short-term in
terest rates have remained as high as they have.
Mr. P a t m a n . I am not pleased with that type of service, Mr.
Martin. I will just have to break down and confess that I am not.
You are advocating something that will cost the borrowers of this
Nation billions of dollars a year extra, because of that, when you
could do it just as we did for the copper prices.
On this hot money, if you want to call it that, or money that is in
ioreign accounts, you can pay them a subsidy or bonus and save all
the people all over America this increased interest rate, and that is
billions of dollars a year.
So, I think you ought to urge that.
Now, you made a good suggestion—whoever suggested that—but
vou didn’t follow through. The President followed through, but his
supporters, you and the Secretary of the Treasury, have made a very
feeble effort to carry out the will of the President.
I say that respectfully. But I say it from the bottom of my heart
because I believe it. I think the President suggested something
that is wonderful, would save the people billions of dollars a year.
But his lieutenants, or helpers, or assistants, whatever you want to
call them, have not followed through, and have not tried to carry out
what would have been of so much help to the people on that. And
I am sorry and I hope you will get with Mr. Dillon and will get
up some plan of operation and send the chairman of this committee
a copy of the bill; ask him to introduce it, tell him it is the admin
istration’s bill and he will give you a hearing on it. That will do
more good than this bill will do.
This bill turns it over to the foreign international banks.
We have only 30 percent of the votes. They have 70 percent.
And I don’t look with favor on it.
I am not going to try to stop it because I don’t want to do any
thing that would interfere with your activities. I don’t agree with
you but at the same time it is better than nothing at all.
I sure hope you will try on this other deal, Mr. Martin. At this
point I should like to insert in the record a letter to Mr. Martin,
dated February 28,1962, and reply.
(The letters referred to are as follows:)
C o n g r e s s of t h e U n it e d S t a t e s
H o u s e of R e p r e s e n t a t iv e s ,
Washington, D.C., February 28, 1962.
H on. W
il l ia m
M
cC h e s n e t
M a r t i n , J r.,
Chairman, Board o f Governors o f the Federal R eserve System,
Washington, D.C.
D e a r M b . M a r t i n : Pursuant to the hearings before the Banking and Cur
rency Committee on H.R. 10162, could you supply me with the following in
formation :
1. Bata as to the dollar volume of foreign deposits in U.S. commercial (or
member) Tjanks, as of the following dates: September 1, 1961; October 1,
1961; November 1, 1961; December 1, 1961; January 1, 1962; February 1, 1962;
February 28,1962.
_ , _
2. Same infromation, broken down by location, as follows: New York City,
Boston, Philadelphia, Chicago, San Francisco, Los Angeles, any other major
cities with sizable quantities of foreign deposits.
96
BRETTON WOODS AGREEMENTS ACT AMENDMENT
3. The volume of savings and time deposits o f all member banks, as of the
following dates:
January 1, 1961; February 1, 1961; December 1, 1961; January 1, 1962; Febru
ary 1,1962; February 28,1962.
4. To tlie best of your knowledge and judgment, to what extent has any
increase in savings and time deposits since the lifting of the ceiling on interest
payments,
(a ) represented a transfer from demand deposits,
(b) represented a transfer from accounts in savings and loan and
other thrift institutions, and
(c) represented new savings withdrawn from consumption expenditures
as a result of the higher interest rates permitted.
In your reply please indicate the extent to which data are not available, ana
it would be appreciated if you would undertake such surveys as are necessary
to supply such information to me in the near future.
Sincerely yours,
W
r ig h t
Patm an*
B oard of Governors op the
Federal Reserve System,
W ashington, M arch 13, 190t
Hon. W right Patman ,
H o u se o f R ep resen ta tives, W ash in gton , B .C .
D ear Mr. Patman : As requested in your letter
of February 28,1962, the Board s
staff has prepared estimates o f foreign deposits and o f savings and time deposits
on selected dates and has analyzed recent changes in savings and time deposits.
We are glad to enclose this material which we trust will be helpful to you.
Sincerely yours,
_
( Signed) W m . McC. Martin, Jr.
B oard of Governors of the F ederal R eserve System
M arch 13,1962.
(Information prepared in response to letter of Feb. 28, 1962, from
Hon. Wright Patman)
1.
Data as to the dollar volume of foreign deposits in U.S. commercial (or
member) banks, as of the following dates:
September 1, October 1, November 1, and December 1,1961.
January 1, February 1, and February 28,1962.
Table I .— F oreign deposits in com m ercial banks in the U nited States
selected dates
[In millions o f dollars.
Tartly estimated]
r
Sept. 1, 1961_______________________________ ____________________________ 5,341
Oct. 1, ------------------------------------------------------------------------------------------------Nov. 1, 1961----------------------------------------------------------------------------------------- 5,49i
Dec. 1, 1961______________________ ________ __________________________I’ i f .
Jan. 1, 1 9 6 2 -._ ______________________ I________________________________ 5,766
Feb. 1, 1962..________________ ________________________________________
Feb. 28,1962________;_________________________ __________ ______________
Table I shows the estimated dollar volume of foreign d e p o sits In commercial
banks In the United States at the beginning of each month for the period September
through Febru^y 1962 and as of Feb. 28, .1962^ These figures were preparedly
ments, \
leading
me
I, TTCUUCSUilV U1 catu UlUULli, UUU t&l txic
' „ oiipV K L
due to foreigners other than official institutions and banks as reported in the Treasury.
statement, “ Liabilities to Foreigners" as o f the end of each month. Amounts repor
these series have been adjusted upward to include estimated foreign deposits at
weekly reporting commercial banks and downward for nonbank Institutions that repo
the Treasury in the B .l Beries.
^
B.l
Both the Federal Reserve weekly reporting member bank series and the Treasury
series include banks In the United States that hold the bulk of foreign deposits. *
figures shown are considered to be representative of the amount of such deposits a
f
foreigners held by U.S. commercial banks and a valid Indication of changes in the am
of such deposits.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
97
2. Some information, broken down by location, as follows:
New York City, Boston, Philadelphia, Chicago, San Francisco, Los Angeles,
any other major cities with sizable quantities of foreign deposits.
II.— D eposits o f foreign official institutions and foreign banks at
commercial banks in leading cities in the United States— selected dates
T a b le
[In millions of dollars]
Date
mi
Sept. l .......................
Oct. 1_______ _____
Nov. 1____
Dec. 1_......................
New
York
C ity
Boston
Phila
delphia
Chicago
San
Fran
cisco
Los
Angeles
All other
leading
cities
2,755
2,897
2,873
2, 916
73
72
80
77
69
71
73
77
131
137
141
145
434
424
432
410
22
22
28
26
45
40
47
44
152
128
140
146
3,094
2,927
2,863
79
77
SI
78
80
81
158
162
170
430
426
426
27
26
26
50
48
44
149
148
151
1962
Jan. 1..........
F e b .l_______
Feb. 28.........
Wash*
ington.
D .C.
N ote .—Table II shows the amount of deposits due to foreign official institutions and foreign banks by
cities; these amounts are also included in table I. Table II does not include deposits due to other foreigners
which are not available to us b y cities; however, on a national basis the total amount of such deposits has
been fairly stable between September 1961 and February 1962. The cities shown include the 6 cities listed
in your letter and Washington, D .C ., which reported a substantial amount of foreign deposits. No other
city in the series reported a sizable volume of such deposits.
3.
The volume of savings and time deposits of all member banks, as of the
following dates:
January 1, February 1, and December 1,1961.
January 1, February 1, and February 28,1962.
T a b le
Jan.
Feb.
Dec.
Jan.
Feb.
Feb.
III.— Savings and time deposits at all Federal R eserve member banks—
selected dates
[I n m illion s o f d olla rs.
P a r t ly estim ated ]
l, 1961_________
__ ______
______________________________
1, 1961_________________________________________________________
_________________________________
1, 1961_________________
1, 1962__________________________________________________________
1, 1962____________________
_______________________________
28, 1962________________________________________________________
5S,912
59,234
66,685
67,153
69,194
70,624
N o t e .— T a b le I I sh ow s the to ta l am ou nt o f savings and oth er tim e deposits held by all
F ederal R eserve m em ber banks on selected dates In 1961—62. T hese da ta are published
m onthly a s o f the la st W ednesday o f each m onth in the B o a rd ’s G.7 series, “ A ssets ana
L ia bilities o f A ll B a n k s," and are con sidered to be reliable a lth ough they are partly
estim ated.
4.
To the best of your knowledge and judgment, to what extent has any
increase in savings and time deposits since the lifting of the ceiling on interest
payments—
(a) represented a transfer from demand deposits,
(&) represented a transfer from accounts in savings and loan and other
thrift institutions, and
(c ) represented new savings withdrawn from consumption expenditures
as a result of the higher interest rates permitted.
, ■.
Despite sharp gains in time and savings deposits at commercial banks since
the end of 1961 the flow of savings into savings and loan associations and
mutual savings banks appears to have continued in substantial volume. Data
for January 1962, the latest available, indicate that the net increase in deposits
at mutual savings banks and share capital at savings and loan associations,
after adjustment for seasonal variation, totaled $865 million. This compared
with an average monthly increase (seasonally adjusted) of $961 million in the
last quarter of 1961, as shown in the following table:
98
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Net seasonally adjusted monthly increases in :
[In millions of dollars]
Comm er
cial bank
and savings
deposits
1961—October...................... ..... ....................................................
N ovem b er._____________ ____ __________ ________ _
December_______ __________ ________ ____________ ___
4th quarter average_________________________________
1962—January..................................................................................
goo
1,100
100
667
2,200
Savings
Mutual
and loan
savings
association
bank
share
deposits 1
capital2
128
152
174
151
216
823
891
717
810
3 649
Total
1,751
2,143
991
1,628
3,065
1 National Association of M utual Savings Bank data; seasonal adjustment b y Federal Reserve.
4 Federal Savings and Loan Insurance Corporation data (January preliminary); seasonal adjustment Dy
Federal Reserve.
3Preliminary.
In the absence of widespread increases in savings rates announced by com
mercial banks, the inflow of savings into the mutual savings institutions might
well have been somewhat larger in January 19(52 than in late 1061. Even after
allowing for this possibility, and taking into consideration the erratic nature or
the monthly series, it seems doubtful that more than a small proportion of the
$2.2 billion January increase in commercial bank time and savings deposits
(after seasonal adjustment) represented net transfers or diversions of funds
from mutual savings banks and savings and loan associations, the two principal,
types of competing savings institutions.
The January pattern of savings flow to major financial institutions shown
in the above table represents only an initial response to the changed structure
of interest rates on savings. The January figures themselves concealed widely
different but largely offsetting experiences by geographic areas. A lth ou g h tnc
mutual savings banks in total reported a slightly larger inflow in January lJothan in January 1961, savings banks in New York State had sharply
gains which were more than offset by substantial year-to-year increases in other
States such as Connecticut and New Jersey. Similar regional differences oc
curred among the savings and loan associations; while in aggregate, antl.1
most parts of the country, the net inflow to associations was moderately smaiie
this January than last, equal or larger net gains were reported in the Boston,
Greensboro, Topeka, and Indianapolis home loan bank districts. This diverge i
pattern would suggest a competitive situation still in a state of flux, althoug
information permitting a detailed area-by-area analysis of interest rate chang
and savings flow responses is not yet available.
As the foregoing indicates, reductions in net savings flows to competing
financial intermediaries were not a substantial source of the large January
increase in commercial bank time and savings deposits. For the three ^yP^
savings institutions combined, the January inflow was about $1.4 billion lar&
than the average increases experienced in other recent months. It seelIls^ 2S
likely that any substantial share of this large increase in institutional savi
flow represented a sudden increase in the savings rate, although not mucn
dence on aggregate personal saving since year-end is yet available. Pers
income in January, though slightly lower than in December, was $l**>
above the fourth quarter 1961 average, at annual rates, but personal conslim^tt1iv
expenditures also probably advanced slightly from the late 1961 mon v
average.
.
. k
A plausible explanation for much of the January increase in commercl? hnnds
time and savings deposits is that some holders switched out of stocks and d
or reduced demand deposit balances. Little direct evidence is available on pr
ence shifts in the security markets, since sales by some holders must of nece
be matched with purchases by others (including banks), but the r e la tiv e
^
ness in stock prices during January is not inconsistent with this Prel” 1£!f.,is0ij
fall in demand. As for demand deposits, total balances declined $ 1 - 1 I
seasonally adjusted, between the last half of December and the last nauJanuary, following sharp earlier increases. The fact that the seasonally
justed rate of deposit turnover outside New York and other financial ceI? ^Lfer
creased from December to January (from 25.9 to 27.4) also suggests some^ l n0t
from idle demand balances to time deposits. This by itself, however, does
BRETTON WOODS AGREEMENTS ACT AMENDMENT
99
necessarily mean that the increase in time deposits came directly out of demand
deposits, since individual holders may have switched from stocks and other
securities into time deposits, while other nonbank investors drew down their
cash holdings to buy the securities sold.
Mr. S p e n c e . The gentleman's time has expired. Mr. Widnall.
Mr. W id n a l l . Mr. Martin, as always, you have given a very lucid
statement and one that is readily readable and understandable.
We all appreciate your appearance here before the committee.
I would just like to make a comment on the previous colloquy.
Isn’t copper one of the items that we have stockpiled in the surplus,
that the President is so worried about ?
Mr. M a r t in . I believe that is correct, Mr. Widnall. But I am not
too familiar with the stockpile program.
Mr. W id n a l l . Actually there has not been such a profitable opera
tion, that I can see, as far as the country is concerned.
I would like to make this one comment.
In reading over your statement, twice you have emphasized one
item of extreme importance.
On page 2, you say:
In order to bring both II.R. 101G2 and the recent decision of the Federal Re
serve into proper focus, wo must remember that neither action will correct
tlie underlying difficulty, which is our international payments deficit.
Then you end up your statement by saying:
In conclusion, we can look to these new arrangements in the international
payments system to give us time to correct our balance-of-payments position.
But we must elearlv understand that they will not be substitutes for a basic
cure.
I believe this is in line with what you recently testified to before the
Joint Economic Committee?
Mr. M a r t in . That is correct.
Mr. W id n a l l . That we have some very basic things to do and this
is just a palliative, for the present ?
. Mi*. M a r t in . That is right. This is in the nature of lubrication and
is not a cure.
Mr. W id n a l l . On page 2, also, you say “With this same object in
view, the Federal Reserve lias recently decided to re-enter the field
0fi ? rei^ exchange transactions.”
That is for the purpose of the stabilization of the dollar; isivt it?
Mr. M a r t in . That is correct. We are not insensitive to the world
payments mechanism, but it is the position of the dollar as a key cur
rency in that payments mechanism to which we are directing our entire
snort. We are not trying to stabilize the other currencies of the
world, except incidentally. Our primary purpose is the dollar.
vr 37n>XALL- That is all. Thank you.
Mr. Spence. Mr. Multer.
M r. M u l te r . Thank you, Mr. Chairman.
. Mr. Martin, because of your friendships and contacts with central
Jankers throughout the world, your attendance at the last Interna*
lonal Monetary Conference was certainly very helpful to our counand particularly to Secretary Dillon, in working out the agree
ment as a result of which we have this legislation before us today. .
6 of your statement, Mr. Martin, you refer to the possibility]
i desirability of recommending an amendment of the Federal Reserve
100
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Act at some future time. We should not draw the inference from
that that wliat you have done thus far in these operations are not
authorized by the act?
Mr. M a r t in . They are, in our judgment, Mr. Multer. We studied
that very carefully. What I was trying to convey was the fact that
there are some things that we might want to do because of changed
circumstances, that we would not think we had authority to do, and
W e would certainly be very careful to hue to our authority,
j I f we wanted to do those things we would come up for legislation.
1 Mr. M u l t e r . You don’t think the time is ripe to ask for such amend
ments at this time?
. .
v Mr. M a r t in . No, we think we ought to experiment with our existing
authority before coming up for more.
U. Mr. M u l t e r . I think that you and the Treasury Department and
everybody in Government, and certainly the Congress, find it desir
able to bring about a balance-of-payments so as to improve the situa
tion created by the present imbalance-of-payments. I think you have
indicated, this bill will not be the answer to it, but another tool to be
used in solving that problem.
Wouldn’t another tool—after all, what we are doing is trying to
continue confidence in the American dollar—and wouldn’t another
tool in that regard be to repeal the now obsolete provision of the act
which requires a gold reserve, having in mind that no American today
can hold gold, either at home or abroad?
i
Isn’t the time here when we can repeal that provision for the gold
reserve for our Federal Reserve currency ?
Mr. M a r t in . Mr. Multer, it is a matter of timing, I think, on that.
I would think that we ought to make more progress in correcting
our balance-of-payments deficit than we have made before re p e a lin g or
revising the gold reserve requirement. I don’t think it is a matter oi
urgency.
#
.,
Mr. M u l t e r . Isn’t this the time to tell the international financia
world that we don’t need this provision at home, and now you can
look to our gold reserve to back up any foreign demands. W e don
need it at home, we haven’t used it, we don’t intend to use it, ana to
show that all of this gold can be used to back up our foreign demand
we have repealed that section ?
, -r
Mr. M a r t in . I think that is well enough understood today, and
think the President’s balance-of-payments speech last M arch was a
very splendid document in pinpointing this, and my visit at y ie?n+
convinced me that most of the foreign financial people accepted wna
he said and felt that our entire gold was at their disposal m tni
matter.
_
. 1
Mr. M u l t e r . I had the same reaction from all of the Internationa
bankers that I talked to in Vienna at that time, also. That is w y
I thought, while confidence is at its height, in the dollar and not loo
ing to gold as such, that this would be the time to do it.
■.1
Mr. M a r t in . I think it is a matter of judgment. I think we w°n
do better to have made more progress on our basic problem than
have before doing it.
.
u
Mr. M u l t e r . One other thing I would like to touch upon with y
briefly, and that is the question of the interest on time d eposits an
on thrift accounts in this country.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
10 1
It was my impression that the interest on these thrift accounts was
increased primarily to keep foreign funds here. I understood you to
say a little while ago that Americans as well as foreigners can now
get this increased rate.
Mr. M a rtin . I think that was one of the major factors. I think
the other factor is to encourage savings for the growth and develop
ment which we all anticipate and which we are going to need in this
country.
Mr. M ulter . D id you anticipate that the commercial banks would,
to the extent they did, increase the interest rate to the extent they
have done ?
Mr. M a rtin . A number of them went faster than I thought they
would, because this is permissive. This is not mandatory. But I
have been very much encouraged by talking to bankers, to mortgage
lenders, and to some people seeking mortgages, that the flow of addi
tional savings that seems to be generated over and above shifting from
one institution to another, has tended to supply additional funds for
mortgage lending as well as for municipalities and others, and has
not put any upward pressure on their interest rates generally.
Mr. Spence. The gentleman’s time has expired. Mrs. Dwyer.
Mrs. D w yer. N o questions, Mr. Chairman.
Mr. Spence. Mr. Barrett.
Mr. B a r r e tt. Mr. Martin, it is ceriainly nice to have you here again
Mr. M a rtin . Thank you, M r. Barrett.
Mr. B a r r e tt. You indicated that there was no opposition to this
bill from an international standpoint. I was wTondering if you ex
pected some opposition since you previously indicated that you
wanted to have your guns cocked in the event that some developed.
W ould you explain that?
Mr. M a rtin . Well, I didn’t intend to suggest that any opposition
would crop up. I merely meant in the paragraph that I believe Mr.j
Multer referred to also, to say that, for example, in our Federal Re-j
serve Act, I would see no way in which we could buy foreign Treas-j
ury bills as an investment. I wouldn’t think we would have the^
authority to do that, and we wouldn’t do it.
\
But it might be of value to us to be able to buy foreign Treasury \
bills at some time. I don't think we have authority to do so at the ;
present time, so we will certainly abide by the letter of the law as it ;
is now drawn. But if we felt that it was desirable for us to do that, *
we would expect to come up with legislation.
Mr. B a r r e tt. That is all, Mr. Chairman.
Sir. Spence. Mr. Halpern.
Sir. H a lp e rn . I have no questions, Mr. Chairman; but I would like
to say that it is always informative, enlightening, and enriching, if
I may say, to hear Mr. Martin.
Mr. M a rtin . Thank you, sir.
Mr. Spence. Mrs. Sullivan.
Mrs. S u lliv a n . No questions, Mr. Chairman. But I would like
to yield my 5 minutes to Mr. Multer and Mr. Reuss to pursue that
part of the questioning on the gold problem, if they care to.
M r. M u lte r . I wrill take part of it.
Mr. Spence. Mr. Reuss.
102
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. Reuss. Thank you, Mr. Chairman, I will accept such part of
the gracious offer of Mrs. Sullivan as my colleague Mr. Multer may
not wish to take.
Mr. M u lte r . I suggest we proceed in order and I will pick it up
on the second time around.
Mr. Reuss. Thank you, Mr. Chairman. Mr. Martin, I am delighted
to see you here and looking so well today, as my other colleagues are,
but I am not so happy at what you have said.
I am delighted that you support H.R. 10162, the bill before us,
which will authorize the Treasury to enter into a new IMF arrange
ment and which I think will be helpful.
However, you go on to tell us about a highly independent, largescale operation, which the Federal Reserve has designed to do the
same thing in a bigger way. What you are saying is that you con
sider the nearly unlimited money creative powers of the system avail
able for not only operations in the foreign exchange market, but for
a broader purpose, and I am quoting from page 7, “ to improve the
international payments system by cooperative arrangements with
foreign Central and Reserve Banks, that would permit the financing
of some large movements of volatile funds.”
Then you go on to say that in the case of other countries, these
arrangements would permit those countries to moderate the impact
on their gold and dollar reserves.
You apparently assert the right to do this independently of the
President or the Secretary of the Treasury, though you say something
about consulting him occasionally. Much of the operation that you
are doing under this seems to me to duplicate the foreign exchange
stabilization operation that the Secretary of the Treasury has very
properly undertaken pursuant to the Gold Reserve Act of 1034.
To me this is a tremendous power you have taken upon yourseli,
and I must serve notice on you right now that I consider this an
usurpation of the powers of Congress. I don’t think you are author
ized to do this at all, and you give us only the vaguest generalities
about what kind of arrangements you are going to make with foreign
Central Banks.
The Treasury, when it comes up here with H.R. 10162, gives us a
very detailed, iawyerlike act of what it proposes to do. You come
up with an open-end proposal, the objects and purposes of which i
<?anJt even guess. I frankly have never had explained to me ]us
what these spot and forward exchange operations which you con
template are, or, indeed, what these broader “cooperative arrange
ments” are.
. ,
Let me ask you this: What do you propose to do under tins by
way of informing, either publicly or in executive session, the duly con
stituted committees of Congress, including this committee, the Hons
Committee on Banking and Currency ?
M r. M ar tin . W e intend to make reports in our statem ents per
odically.
Mr. Reuss. Once a year ?
,,
M r. M a r tin . No. Our statements come out weekly and
, V/'
We have a bulletin. We will try to report as fully as we think tn
public interest requires every transaction that will be useful.
103
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. R euss . A re you willing to report to us as fully as we think the
public interest requires or are you the judge of that ?
Mr. M a rtin . W e ll, I think we have to make the judgment on the
basis of our present authority. I would be perfectly willing to come
up here in executive session and discuss any aspect of it with you at
any time.
Mr. R euss . Is there any reason whv you cant make, to each mem
ber of the Banking and Currency Committee who passes whatever
security clearance you propose to set up, a monthly report which tells
him in understandable language just what it is you are doing, what
you bought and sold, and what you propose to do ? And, particularly,
what these vague cooperative arrangements are that you propose to
make with foreign central and reserve banks ?
Mr. M a rtin . I doivt believe, in the absence of more experience,
that we would be justified in doing that. If we open an account with
a bank of X country, they are entitled to some consultation with respect
to their end o f the transaction. I think that our reporting what
we are doing, and our holdings, similar to the way we report our open
market transactions, is about all we could be asked to do at the
present time without defeating the purpose of what we are driving
tit,
Mr. S pence . The s^ntlemnn’s time has expired.
Mr. R eu ss . Mr. Chairman, will there be a second round of ques
tioning?
Mr. S p e n c e . Yes, sir: we will have a second round.
Mr. Martin, this bill does not delegate any authority to the Federal
Reserve System, does it?
Mr. M a rtin . Xone whatsoever.
Mr.
it?
S p en c e .
And it does not take anv existing powers away from
Mr. M artin . Nothing whatever.
Mr. S p e n c e . There is nothing in the bill with reference to the sub
ject you are discussing ?
Mr. M a r t in . Nothing whatever, Mr. Chairman; that is correct.
Mr. S p e n c e . Mr. Moorehead.
Mr. M oorehead of Ohio. Mr. Martin, }Tou are speaking of dollar
stabilization. How is the position of the dollar now in the world
markets?
Mr. M a r t in . Well, again, in terms of various currencies, the situa
tion differs. I would say, however, that the dollar is doing reason
ably well in all of the markets of the world today.
. .
Mr. M oorehead ° f Ohio. Would you say that in some markets it is
nt a discount ?
Mr. M a r t in . It is. It has a tendency that way; yes, sir.
Mr. M oorehead of Ohio. Then, I note that, in reference to the
Treasury Stabilization Fund, you say the “modest resources of the
Treasury Stabilization Fund.”
W o u ld vou care to say what they are ?
^
I don’t really think I ought to disclose. The Treasury
might be willing to disclose what their resources are; but they are
under $500 million, let me say that, just to give you some idea of the
magnitude. That is a part of the Gold Reserve Act, and at one time
you know it was a very large amount.
M r. M a r t in .
104
BRETTON WOODS AGREEMENTS ACT AMENDMENT
It has been paid down and some of the funds have been used for
stabilization of South American currencies, the Philippines, and other
operations like that. I don’t think I ought to take over the Secretary
of the Treasury’s functions. I know something about it because I was
Assistant Secretary of the Treasury, once, in charge of it, but gen*
erally it is his province.
Mr. M o o r e h e a d of Ohio. Thank you very much. That is all.
Mr. S p e n c e . Mr. Moorhead.
Mr. M o o r h e a d of Pennsylvania. Thank you, Sir. Chairman.
Mr. Martin, first, under present international financial conditions*
which 1 of the 10 countries participating in this arrangement would
be the primary beneficiary of the agreement ?
Mr. M a r t i n . Well, I think it is hard to say which one would. I
think it is obvious that there is a change—there has been a change*
Mr. Moorhead, in the fact that the United States is now another bor
rower instead of the principal lender in the world. That has been a
basic change. So, the United States, which is a major contributor
here, also stands to be a major beneficiary.
Mr. M o o r h e a d of Pennsylvania. So the United States would be a
major beneficiary of this arrangement ?
M r. M ar tin . I t would indeed, in the event o f trouble.
Mr. M o o r h e a d of Pennsylvania. Mr. Martin* I am also interested
in this foreign exchange operation which the System is carrying on.
As I understand, in order to engage in the process of stabilizing the
dollar through the use of foreign currencies, it would be necessary
first for the System to acquire such funds, would it not ?
Mr. M artin. That is correct.
,
Mr. M o o r h e a d of Pennsylvania. And won’t the purchase of sucn
foreign currency by the System, using dollars, presumably, have the
immediate effect of weakening the dollar abroad?
Mr. M a r t i n . Well, it depends. I f you had a currency th at was
under par, for example, it would just d o good business, in th e short
run. The only risk you would run would be devaluation of that
currency.
Mr. M o o r h e a d of Pennsylvania. I meant the use of dollars to pur
chase, let’s say, marks. Would not that, in th e marketplace, tend to
strengthen the mark and weaken the dollar ?
Mr. M a r t i n . Yes, sir, but we would not engage in that, you see,
unless there was—the only form in which we would do that ^ouJ,
be to take a reciprocal agreement with the Deutsch Bundes
in which they would give us dollars for deutch mark for 30, 60 or
90 days, and the interest rate differential would be the same for bo
sides.
So that it would merely be something that could be undone by eithei
party during the period of time, against pressure on e it h e r side an
m which either side could unwind the transaction.
, *
That would be the only way, on a strong currency like that, tna
we would do it, or else we would be weakening the dollar by doing
it.
Mr. M o o r h e a d of Pennsylvania. I understand from your testimony,
Mr. Martin, that the System now owns some foreign c u r r e n c ie s ; i
that correct?
Mr. M a r t i n . Yes, sir; that is correct.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
105
Mr. M o o r i i e a d of Pennsylvania. Would you be willing to tell the
committee, in terms of dollars, approximately how much foreign
currency the System now owns?
Mr. M a rtin . I would rather not give it other than to use the phrase
that they are in modest amounts.
Mr. Moorhead of Pennsylvania.
The next question is, what arrange
ments are there for coordinating your operations with the operations
of the Treasury? Are these statutory, or just friendly cooperation
between individuals ?
Mr. M a r tix . They are completely cooperative at the moment, but
I want to point out that the Treasury uses the Federal Reserve Bank
of New York as their fiscal agent, and the operations for the Treas
ury Stabilization Fund are conducted by the same people that would
conduct our operations. The only difference would be that the letter
“A ” might be used for a Stabilization Fund transaction, and the
numeral “ 1” for a transaction for System account, or vice versa.
Mr. M ooriiead of Pennsylvania. But the Treasury has no control
over your independent operations. You could—I don’t say you would
obviously—but you could be working at cross purposes with the Treas
ury if you so chose to do ?
Mr. M a rtin . We could indeed. And we have been working very
carefully to draw up guidelines. Obviously the Treasury and the
Federal Reserve are working for the same purpose, but we could over
lap and we could have difficulty, and we have been trying to work
out some guidelines between the two of us, as to how we would co
ordinate.
But I think it takes some experience before you can determine what
these guidelines ought to be. We have a completely cooperative ar
rangement at the present time, and the Treasury and ourselves are
working steadily in this. And obviously for the same purpose, so that
I am not worried about the lack of specific guidance. I am not wor
ried about their interfering with our independence or our trying to
make it difficult for them by asserting our independence.
Mr. Mooriiead of Pennsylvania. Mr. Martin, as you look ahead to
the next 2 or 4 years, what would you say the likelihood is of a call
being made on the United States tor any substantial amount of the
United States’ $2 billion contribution or arrangement under this new
special lending program of the International Monetary Fund?
Mr. M a r tix . Mr. Moorhead, I would hope we would not have to
make a call on it at all during that period, but I would not want to
say.
Mr. M oorhead of Pennsylvania. I said a call being made oil the
United States.
M r. M a r t ix . T o borrow?
M r. M oorhead of Pennsylvania. To contribute
Mr. M a r tix . I would hope we would neither
to this Fund?
be borrowing from
the Fund nor lending to it.
Mr. M oorhead of Pennsylvania. Thank you.
Mr. Spence. Mr. Rousselot.
. . . .
Mr. R ou sselot. Mr. Martin, since you twice indicate m your state
ment that the measure before us only gives us time to correct the
balance-of-payments and is not a basic cure, do you generally feel
that this legislation is really necessary ?
106
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. M a r t i n . That is a difficult question, Mr. Rousselot. I believe
that it is necessary. I started out on this believing that we ought to
make our adjustments without any additional crutch, but after at
tending the meeting at Vienna and talking to a good many of my
associates in this field, I came to the conclusion that we are in a rela
tively new area as regards the payments mechanism of the world.
There have been shifts there. And that we ought to have all the
crutches we can have, without obscuring the necessity of doing funda
mental things.
And I think that this is a crutch which might be unnecessary. But
I think it is very desirable for us to have it with the uncertainties
that there are in the world today, and I emphasize this by saying that
dealing in foreign exchange, dealing in a broad way in speculation
in foreign exchange, is something that has begun to achieve an im
portance only since convertible currencies were achieved, following
1958, and I think it is going to take us some time in the world, to de
termine how to handle the overall payments mechanism.
Mr. R ou sselot. You would not call this need pressing, then?
Mr. M a r tin . I think it is a very desirable thing to do. Let’s put
it that way.
Mr. E o u sselo t. In his statement yesterday, the Secretary made the
following statement:
Since the countries concerned are in constant close communication regarding
their balance-of-payment positions, not only in the Fund—
referring to the International Monetary Fund—
but also through the Organization for Economic Cooperation and Development,
and bilaterally, a decision can be reached very rapidly.
Could you explain, rather briefly, your knowledge—I didn’t get a
chance to ask him—of this so-called cooperation between the Fund
and the Organization for Economic Cooperation and D evelop m en t,
and its relationships to our balance of payments ?
.
M r . M a r t i n . Well, there were 18 countries in this O rg an iza tion
before you gentlemen approved our joining it along with Canada?
about a year ago. The OECD has been having meetings in Paris quite
regularly. They are now a 20-nation group, which represents essen
tially the Western World as we know it. I have attended two mee:
ings of the Policy Committee of this group and we have discusser
monetary policy and other questions, not for any other p u r p o s e than
information and clearing ideas between us.
, r
Mr. E o u sselo t. Do you think the Organization for E c o n o m i c co
operation and Development is contributing to or taking away from
our ability to improve our position ?
M r. M a r tin . I think it is contributing to our ability. I think it i
very essential, through cooperative discussions, to impress upon gov
ernments, as well as central banks, that the payments mechanism, tn
gold exchange standard, which w^e now have is a privilege that also
carries with it a responsibility. I believe there is nothing better tlia
this type o f cooperation to emphasize that and to improve our opera
tions.
.
Mr. Young, who is with me, is head of our Foreign Department, an
has attended the working party meetings of the Organization for
nomic Cooperation and Development for the Federal Reserve. I
BRETTON WOODS AGREEMENTS ACT AMENDMENT
107
attended, with him, the Policy Committee meetings. I am sure he
would agree with me 011 this point.
Mr. R o u s s e l o t . Thank you.
Mr. S p e n c e . Mr. Stephens.
Mr. S t e p h e n s . Thank you, Mr. Chairman.
Mr. Martin, you have stated that, in your opinion, the idea of put
ting the $2 billion up will not cure the basic defect, and you have stated,
in your statement here, that the basic defect is that we are spending,
lending, and investing, more abroad than foreigners are spending,
lending, and investing here.
How will this stimulate or help that in any way ? Will this partic
ular thing help in creating that imbalance in our favor, 01*would it be
just something that would facilitate it if we do other things to reverse
the picture?
Mr. M artin . I think it is something that will facilitate it if we
do these things, but I think it is a major safeguard against our hav
ing a speculative foray o f some sort which would upset confidence
before we could take more drastic action that might be called for.
In other words, it is a defense that protects us from being put. into
a bind before we have a chance to really face up to a critical situa
tion that may develop.
Mr. S t e p h e n s . And the remedies which would assure that we would
spend, lend, and loan, and invest more abroad, would not necessarily
be in the Federal Reserve field, but would be in our field here in the
Congress, or in the executive department, to stimulate that?
Mr. M artin . That is correct.
Mr. S t e p h e n s . Thank you.
Mr. S p e n c e . Air. Scranton.
Mr. S c r a n t o n . Air. Martin, like the others, I certainly welcome
your testimony here this morning.
In answering one of Air. WidnalPs questions, you, as I understand
it, stated that the main, and perhaps the overall sole purpose of the
Federal Reserve's activities that you are discussing this morning, in
foreign exchange, are for the stabilization of the dollar; is that cor
rect?
Air. M a r t in . That is correct.
Air. S c r a n t o n . And not for the stabilization of foreign exchange:
is that correct ?
Air. ALvrtin . That is correct.
Air. S c r a n t o n . N o w , one thing which concerns me very deeply
about this problem, which has arisen because of the economic rise of
Western Europe, is the activity in the last couple of years with re
gard to short-term capital movements which affected us very ma
terially in 1060 and in the last quarter of 1901.
Is there any way in your judgment, besides what we are presently
doing, through agreement among nations or in any way, that some
thing can be done about holding down particularly the speculative
aspects of this unfortunate factor?
Air. AIartin. Well, that is what this is primarily directed at, and
I believe this will have some impact. I do not want to claim too much
for it, but I am hoping it will prove effective.
108
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr* S c r a n t o n . When Secretary Dillon was here I tried to get into
this with him, but we didn’t have enough time. It seems to me, and I
would like your judgment on this, that we can expect to have more of
this short-term movement rather than less in the future. Is this, in
your judgment, correct or not ?
Mr. M a r t i n . N o, I am hopeful that we are going to continue the
progress that I think we are making in other directions.
Let me cite one example that I think is encouraging. The Defense
Department, in its procurement activities, under Deputy Secretary
Gilpatric, has done a very good job of shifting procurement in such
a way that we will save substantial foreign exchange.
Now, we have to explore every possible way to correct our payments
deficit, but I believe for the moment that speculation has quieted
down because people have realized that this is so important to all of
the countries concerned, that they are going to intervene and also
take the necessary actions to put their houses in order.
Mr. S c r a n t o n . That is reassuring. Of course, there are other mo
tives in movements of short-term capital than speculation.
Mr. M a r t i n . That is correct.
Mr. S c r a n t o n . Interest rates and other things. I understand that
there is in this Nation today a little over $22 billion invested by for
eigners ; is that approximately correct ?
Mr. M ar tin . T hat is right.
Mr. S c r a n t o n . And now with the tremendous increase in the world
wide importance of the dollar in the sense that most foreign exchange
revolves around the dollar—as for example, with sterling in the last
century-----M r. M a r t in . That is right.
Mr. S c r a n t o n (continuing).
It would seem to me it would mean a
great deal of this kind of thing in the future. But you are firm &
your conviction that this kind of operation, which we are trying to
do now, which I thoroughly understand, is going to do the job ol
allaying this possibility?
Mr. M a r t i n . Well, I thing it is a first step in doing it. That is why
I think it is very important that we do it.
*
Mr. S c r a n t o n . What I am getting to is this: I am very intereste
in this short-term business that seems to be causing so much of a prop*
lem, but basically with regard to this particular oill it has been sal
over and over again by you and by Secretary Dillon and the Nationa
Advisory Council—and may I say that I respect your thinking, **''
cause all of you are experts m this field—that we have, therefore, every
reason to believe that m the next 4 years, the length of this a^eement,
that we will not be called upon for our share of it, and yet I feel tna
strong short-term movement is possible in the next 4 years, to tn
degree that it was in 1960, that we may have to borrow from the Fun ■
M r, M artin , I don’t want to mislead you. I hope we won’t be calie
on for it, but it is possible we may be. I am not minimizing that pon*
at all. I t is possible, too, that we may have to borrow from the
because we do need time to make the necessary adjustments, the nws
critical o f which is that Am erican business, technologically, must &6'
BRETTON WOODS AGREEMENTS ACT AMENDMENT
109
come more competitive in some aspects with foreigners than it is at
the present time.
Mr. S c r a x t o x . Now, just one other corollary to that: Could you
give us—I know that nobody in your position likes to comment on
another nation, but I was alarmed, as I am sure everybody was, by the
United Kingdom’s withdrawal of approximately $2 billion out of this
Fund last, summer—is it your opinion that they are now making such
progress in their financial situation that we should not anticipate their
tremendous use of this in the next 4 years to any such degree?
Mr. M a r t i n . Well, I think they are up against the gun more than
we are.
Mr. S c r a x t o x . I am sure.
Mr. M a r t i n . And I am hopeful that the austerity program they
are presently following will be successful. They are presently re
paying some of the funds that they withdrew from the Monetary
Fund. They have been making steady repayments on that, and they
have been making progress on their overall position, with the marked
difference between them and us that they have been running a deficit
on current account and we still have a substantial surplus on current
account.
Mr. S f e x c e . The gentleman’s time has expired.
Mr. St. Germain.
Mr. S t. G e r m a i x . Mr. Martin, getting down to the very simple
and basic aspects of this, in the letter of transmittal it is stated that
the reason for all of this is to strengthen the monetary system in
general of the countries of the free world ?
Mr. M a r tin . Y es, sir.
Mr. S t. G e r m a t x . N o w ,
one thing that I haven’t gotten clear dur
ing these hearings is, in proportion to the amount of money that the
United States is contributing to the Fund, what amount can we bor
row from the Fund, if this were to become necessary, shou1.* we be
in need of funds?
Mr. P a t m a x . Mr. Chairman, I suggest that the gentleman who
is with Mr. Martin get to the microphone with Mr. Martin if he is
going to testify. Is he with Mr. Martin ?
Mr. M a r t i n . Mr. Herbert Furth, of our Foreign Affairs Depart
ment, who is an expert in this. I will get him to give you the exact
figures.
Mr. F u r th . Our fund quota is $4.1 billion. Of that we can draw,
as a matter of right, approximately $1.7 billion without much for
mality. We could, under the Articles of Agreement, draw on the
Fund up to $6 billion. Now how much of that could be drawn with
out putting this mechanism into motion is a question which would
depend upon the judgment of the Managing Director, because ob
viously he may not want to use all the resources of the Fund before
invoking this arrangement.
At present the Fund has more than $2 billion in gold and several
hundred millions of other major convertible currencies, in addition
to a large amount of sterling. How much of that the Managing
Director would be willing to put at the disposal of the United States
80807 O—62----- 8
110
BRETTON WOODS AGREEMENTS ACT AMENDMENT
before invoking this arrangement, would be a matter for him to decide
in consultation, of course, with the Board of the Fund.
Mr. S t . G e rm a in . N o w I tried to take notes here. I understand
that at the present time we have $1.7 billion that we, the United
States, guarantee to the Fund, is that correct ?
Mr. F u r t h . We could draw this amount on the Fund.
Mr. St. G e r m a in . We could draw up to that ?
Mr. F u r t h . As a matter of right.
Mr. S t. Germ ain. Now how much money do we have invested in the
Fund at the present time, or have we guaranteed to the Fund?
Mr. F u r t h . Our contribution was $1.1 billion.
Mr. St. Germ ain. So out of the $4.1 we have put in as a matter of
right we could now look to $1.7 billion, that is prior to the possible
or probable enactment of the present legislation before us?
M r. M a r tin . That is correct.
Mr, F u r t h . The new arrangement does not increase our drawing
rights at all.
Mr. St. G erm ain. But it increases our guarantee, so to speak, by a $2
billion ?
(
Mr. F u r t h . It increases our guarantee by $2 billion and makes it
more likely that the Fund will have the resources to fulfill our draw
ing if we should need one.
Mr. S t. Germ ain. Our drawing of $1.7 billion ?
Mr. F u r t h . N o, our total drawings.
Mr. S t . G e r m a in . Our total drawings?
Mr. F u r t h . Yes, sir.
. .
Mr. S t . G e r m a in . N o w , should the time come w hen the Unite1!
States finds it necessary to draw upon the Fund, and o t h e r participat
ing countries have drawn upon the Fund, is there a possibility or prob
ability that there would be no funds to take care of our necessity, say,
3 years from now ?
Mr. F u r t h . Under this arrangement?
Mr. St. G erm ain. Yes, sir.
#
Mr. F u r t h . Very unlikely, because most other nations prob a b y
would be quite willing to draw dollars and sterling.
Mr. St. G e r m a in . That is all, Mr. Chairman.
Mr. S p e n ce . Mr. Gonzalez.
Mr. G on zalez. I have no questions, Mr. Chairman.
t
.
Mr. P a tm a n . Mr. Chairman, may we have an u n d ersta n d in g abou
the time now?
.i
. We have had 5 minutes for each member on the first round, whic
is perfectly all right. That gives all members an opportunity.
Now, is it all right to take 10 or 15 minutes the second time*
But, should there be any time when any member can ask any ge
mane question, I would suggest in going around it be 10 or 15
*
Mr. S p e n c e . The Chairman has not the power that the Court na •
The Court can say that a question is not really relevant or pertmen *
I can’t control it to that extent. But I do ask the m e m b e r s to iia
their questions relative and germane to the passage of this bill,
can’t explore the whole financial field this morning.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
111
Now, we are getting into the international field and that is even
wider. I think there ought to be some restraint exercised by the mem
bers themselves when we go around for additional time.
Mr. Patman is recognized for 10 minutes.
Mr. P a tm a n . Thank you, Mr. Chairman.
After we go around 10 minutes, if somebody like Mr. Reuss has
a number of questions to ask, and I happen to know that they are
very pertinent and important questions, I think he ought to have
unlimited time at a certain point.
Mr. Spence. Proceed with your 10 minutes.
Mr. Patm an. I would like to ask unanimous consent, Mr. Chair
man, to insert in the record at this point? a copy of the President’s
message of February 12, last year, on this particular question, and
also, Mr. Chairman, to insert in the record at this point----Mr. Spence. I would like to know—I don't have the time to in
vestigate—but I would like your assurance that it is all relevant to
this bill.
Mr. Patm an. Certainly, I say it is.
You know, in this message, Mr. Kennedy said this: He said:
The Federal Reserve Act should now be amended to permit the Federal Re
serve System to establish separate maximums for rates of interest paid by
member banks on time and savings deposits held in this country by foreign
governments or monetary authorities (sec. 19, par. 14). This authority, when
exercised would enable American banks to make a maximum competitive ef
fort to attract and hold dollar balances which might otherwise be converted
into gold. At the same time domestic rates, when desirable for reasons of
domestic policy, could be held at a lower level. I will shortly send to the Con
gress a draft of the needed legislation.
That was Februarv 11, last year, 1961.
Also, I would like to insert in the record at this point, Mr. Chair
man, a letter from the White House dated March 14, 1961, to the
Speaker, sending up a memorandum from the President about this
same subject, and also a copy of a bill to be introduced along this
line, and I ask unanimous consent that all this be inserted in the
record at this point.
M r. Spence. I don’t think that is relevant.
Mr. P atm an. Not relevant? Why this is what we are talking
about.
Why have a meeting, if you are not going to consider the bill ? This
is about this bill.
I ask unanimous consent to put this in the record, Mr. Chairman.
Mr. Spence. Well, without objection, it may be done.
Mr. R ou sselot. Reserving the right to object, is the statement con
cerning the President relevant ?
Mr. Patm an. Yes, sir; it is.
Mr. R ou sselot. Is it the speech that you have put in? Do you
have to put in the whole speech?
.
Mr. P atm an . It is a message, it is not a speech, on this very point.
Mr. R ou sselot. Thank you.
(Document No. 84 and memorandum, are as follows:)
87t h C o n g r e s s
1st Session
) HOUSE OF REPRESENTATIVES (
j
j
D ocu m en t
N0. 84
U.S. BALANCE OF PAYMENTS AND GOLD OUTFLOW
FROM UNITED STATES
MESSAGE
FROM
THE PRESIDENT OF THE UNITED STATES
R ELATIVE TO
U.S. BALANCE OF PAYMENTS AND THE GOLD OUTFLOW FROM
THE UNITED STATES
6, 1 9 6 1 .— Referred to the Committee of the Whole House on the
State of the Union and ordered to be printed; with illustrations
F ebru ary
To the Congress o f the United States:
The gold outflow of the past 3 years has dramatically focused
world attention on a fundamental change that has been occurring in
the economic position of the United States. Our balance of pay
ments—the accounting which shows the result of all of our trade and
financial relations with the outside world—has become one of the key
factors in our national economic life. Mainly because that balance
of payments has been in deficit we have lost gold.
This loss of gold is naturall}r important to us, but it also concerns
the whole free world. For we are the principal banker of the free
world and any potential weakness in our dollar spells trouble, not
only for us but also for our friends and allies who rely on the dollar to
finance a substantial portion of their trade. We must therefore
manage our balance of payments in accordance with our responsibil
ities. This means that the United States must in the decades ahead,
much more than at any time in the past, take its balance of payments
into account when formulating its economic policies and conducting
its economic affairs.
113
114
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
Economic progress at home is still the first requirement for economic
strength abroad. Accordingly, the first requirement for restoring
balance in our international payments is to take all possible steps to
insure the effective performance of our own economic system—to
improve our technology, lower our production and marketing costs,
and devise new and superior products, under conditions of price
stability. The real wealth of a nation resides in its farms and factories
and the people who man them. A dynamic economy producing goods
competitively priced in world markets will maintain the strength of
the dollar.
Thanks to our international reserves we have time, if we use it
wisely, in which to strengthen our domestic economy and make it
fully competitive with that of other nations. Our situation is one
that justifies concern but not panic or alarm.
In my message on February 2,1 dealt with the measures for reviving
our domestic economy. The steps I now propose will strengthen our
dollar position and insure that our gold reserves are employed effec
tively to facilitate the commerce of the free nations and to protect
the stability of their currencies. Because these steps supplement
the policies for strengthening our domestic economy, and because we
can take them calmly and deliberately, they are not for that reason
any less important or less urgent. Those that are within the present
authority of the Executive will be the subject of vigorous action.
Where action by the Congress is required I urge early consideration
and approval.
For the past decade our international transactions have resulted
in a deficit—payments that were in excess of receipts—in every year
except that of the Suez crisis, 1957. The surplus of our exports over
our imports, while substantial, has not been large enough to cover
our expenditures for U.S. military establishments abroad, for capital
invested abroad by private American businesses, and for Government
economic assistance and loan programs. All of these outlays are
essential. Our military establishments in foreign countries protect
the national security. Private investment promotes world economic
growth and trade and, through the return of
to our country,
will strengthen our balance of payments in future years. Our eco
nomic assistance programs, much the smallest of these three items
in its effect on payments balance, is vital in the continuing struggle
against tyranny and oppression, and the poverty on which they feed.
Over the period 1951 to 1957 the deficit in our balance of payments
averaged about $1 billion annually. These did not result in a net
outflow of gold from the United States; foreign
authorities,
banks, and private individuals held these earnings as dollars or claims
on dollars. Thus our gold reserves were $22.8 billions at the end oi
1950 and $22.9 at the end of 1957. But during these years the dollar
holdings by foreign countries increased from $8.4 billion at the end
of 1950 to almost $15 billion at the end of 1957.
. .
These earlier deficits in our balance of payments were, in iaw*
favorable in their world effect. They helped to restore ' foreign
monetary systems by enabling foreign countries to earn the
which ^they needed to rebuild their international reserves. They
made it possible for the industrialized countries of Western Europe
to restore the convertibility of their currencies, thus freeing worm
trade and payments from exchange control. This was of benefit to
the export trade of the United States. However, this growth m
p r o f it s
m
o n e t a r y
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
115
foreign dollar holdings placed upon the United States a special
responsibility—that of maintaining the dollar as the principal reserve
currency of the free world. This required that the dollar be con
sidered by many countries to be as good as gold. It is our responsi
bility to sustain this confidence.
In 1958 and 1959 the deficit in our balance of payments sharply
increased—to $3.5 billion in 1958 and to $3.8 billion in 1959. This
came about mainly because of lagging exports and rising imports.
There was no significant increase in our outlays for military expendi
tures, private investment, or Government economic assistance.
However in these years, unlike the period 1951-57, the deficit resulted
in large transfers of gold to foreign accounts as well as a further in
crease in foreign dollar holdings. For the 2 years together, 1958 and
1959, gold transfers to foreign accounts were $3.0 billion while foreign
dollar holdings by foreign countries increased by another $4.3 billion.
Th^se gold transfers did not make the underlying balance of pay
ments fundamentally worse. They did reflect a decision by foreigners
to take more of their earnings in gold and to hold less in dollars.
Last year, 1960, the surplus of our exports of goods and services
over our imports increased from $2.2 billion in 1959 to $5.8 billion.
This was caused, principally, by an increase—amounting to more than
$3 billion—in our exports. This once more reduced what may be
called our basic deficit—it was only about $1.5 billion for the year.
However^ during 1960 there was a large movement abroad of short
term capital, favorable interest rates abroad, a high rate of growth,
and good investment prospects in Europe and some speculative fears
concerning the future value of the dollar all played a part. It is esti
mated that this outward flow of short-term funds was between $2
and $2.5 billion, and this was the crucial factor in raising the overall
deficit to $3.8 billion. Of this, $1.7 billion were transferred in the
form of gold and $2.1 billion took the form of increased foreign dollar
holdings.
An outward movement of short-term funds such as that which
occurred in 1960 should not be considered a part of the basic deficit.
Such movements are quickly reversible in response to changes in
interest rates and other business factors here and abroad. Moreover,
insofar as short-term funds transferred to foreign financial centers
consist of U.S.-owned capital, they create U.S. claims against the
recipient country. In the new era of convertible currencies upon
which we have entered, we may expect that short-term money will
continue to flow back and forth. I have requested the Secretary of
State and the Secretary of the Treasury to work for still closer coopera
tion between the monetary and financial authorities of the industrial
ized free nations with a view toward avoiding excessive short-term
money flows which could be upsetting to the orderly development of
international trade and payments.
In sum our basic deficit of $1.5 billion is of manageable proportions.
And it is this basic deficit which affects the real strength of our cur
rency. But the time has come to end this deficit. It must be ended
by responsible, determined, and constructive measures.
There are other factors which lend basic support to our monetary
and financial position. Our gold reserve now stands at $17.5 billion.
This is more than \)i times foreign official dollar holdings ami more
than 90 percent of all foreign dollar holdings. It is some two-nftns of
the gold stock of the entire Free world.
116
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
Of this $17.5 billion, gold reserves not committed against either
currency or deposits account for nearly $6 billion. The remaining
$11.5 billion are held under existing regulations as a reserve against
Federal Reserve currency and deposits. But these, too, can be freed
to sustain the value of the dollar; and I have pledged that the full
strength of our total gold stocks and other international reserves
stands behind the value of the dollar for use if needed.
In addition, the United States has a quota in the International
Monetary Fund of $4.1 billion. This can be drawn upon if necessary
and our access to the Fund's resources must be regarded as part of
our international reserves.
Finally, beyond its liquid international reserves, the Government
and citizens of the United States hold large assets abroad. Western
European countries whose currencies are now strong owe us long-term
governmental debts of $2.9 billion. Our private short-term assets
abroad now are estimated at $4}£ billion. Our long-term private in
vestments in foreign countries—including both plants owned directly
by American companies and securities of foreign business and govern
ments owned by Americans—total over $44 billion, exceeding foreign
investments in the U.S. economy by some $28 billion. In any reckon
ing of international assets and liabilities, the United States has a
strong solvent position.
,
In short, powerful resources stand behind the dollar. Our gold ana
monetary reserves are large; so are the physical and m o n e ta r y assets
we hold throughout the world. And, in the years ahead, if ^
gram I previously outlined is pursued, the dollar will have the addea
strength of the reviving power of the American economy itself.
Certain firm conclusions follow:
, nu
I. The United States official dollar price of gold can and will M
maintained at $35 an ounce. Exchange controls over trade and in
vestment will not be invoked. Our national security and economi
assistance programs will be carried forward. Those who fear
ness in the dollar will find their fears unfounded. T h o s e who hop
for speculative reasons for an increase in the price of gold will nn
their hopes in vain. .
..
2; We must now gain control of our balance-of-payments Posltl°
so that we can achieve overall equilibrium in our international gar
ments. This means that any sustained fu tu re outflow o f
the monetary reserves o f other countries should come about
the result o f considered judgments as to the appropriate needs
dollar reserves.
, 3. In seeking overall equilibrium we must place m a x im u m eD?P u0
on expanding our exports. Our costs and prices must therefore
kept low; and the Government must play a more vigorous part
helping to enlarge foreign markets for Americn goods and services.
4. A return to protectionism is not a solution. Such a c o u r s e wo
provoke retaliation; and the balance of trade, which is now sub9 a
tially in our favor, could be turned against us with disastrous ette
to the dollar.
,
5. The flow of resources from the industrialized countries to
®
veloping countries must be increased. In all that we do to strengt
our balance of payments, we must be e s p e c ia lly m in d fu l that the ic
developed countries remain in a weak financial position. Help
the industrialized countries is more important than ever; we cann
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
117
strengthen our balance of payments at the expense of the developing
countries without incurring even greater dangers to our nation*3
security.
6.
The United States must take the lead in harmonizing the finan
cial and economic policies for growth and stability of those industrial
ized nations of the wTorld whose economic behavior significantly
influences the course of the world economy and the trend of inter
national payments.
To carry forward these policies I propose a program for action,
which may be divided into two parts. The first part describes those
measures which will improve domestic monetary arrangements and
strengthen international cooperation in economic and monetary policy.
These measures will help us better to meet short-term demands on
reserves such as those of recent years. The measures in the second
group are designed to correct the persisting basic deficit in our bal
ance of payments.
I. MEASURES TO EASE THE SHORT-TERM DEMAND PROBLEM
1. Measures to improve international monetary institutions
Increasing international monetary reserves will be required to sup
port the ever-growing volume of trade, services, and capital move
ments among the countries of the free world. Until now the free
nations have relied upon increased gold production and continued
growth in holdings of dollars and pounds sterling. In the future, it
may not always be desirable or appropriate to rely entirely on these
sources. We must nowT, in cooperation with other lending countries,
begin to consider ways in which international monetary institutions—
especially the International Monetary Fund—can be strengthened
and more effectively utilized, both in furnishing needed increases in
reserves, and in providing the flexibility required to support a healthy
and growing world economy. I am therefore directing that studies
to this end be initiated promptly by the Secretary of the Treasury.
Use of U.S. drawing rights in the International Monetary Fund
The United States has never made use of its drawing rights under
the International Monetary Fund to meet deficits in its balance of
payments. If and when appropriate, these rights should and will be
exercised within the framework of Fund policies. The United States
will also support continued efforts in the Fund to facilitate drawings
by other members in the currencies of industrialized countries whose
payments positions are in surplus and whose reserves are large. This
will help to reduce the burden now borne by the dollar.
S. Special interest rates for dollar holdings by foreign governments and
monetary authorities
{a) The Federal Reserve Act should now be amended to permit the
Federal Reserve System to establish separate maximums for rates of
interest paid by member banks on time and savings deposits held in
this country by foreign governments or monetary authorities (sec. 19,
par. 14). This authority, when exercised, would enable American
banks to make a maximum competitive effort to attract and hold
dollar balances which might otherwise be converted into
At
the same time domestic rates, when desirable for reasons of domestic
118
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
policy, could be held at a lower level. I will shortly send to the
Congress a draft of the needed legislation.
(i6) I have directed the Secretary of the Treasury to use, whenever
it appears desirable, the authority already extended to him by the
Second Liberty Bond Act to issue securities, at special rates of interest,
for subscription and holding exclusively by foreign governments or
monetary authorities. The exercise of this authority could provide
an additional inducement to hold foreign official balances in dollars.
(c) As a final means of holding or a ttr a c tin g , foreign dollars, the
Congress should enact a measure designed to unify the tax treatment
accorded the earning assets of foreign central banks. At present,
income derived by foreign central banks of issue from bankers accept
ances and bank deposits is exempt from tax under section 861 of the
code. Income from U.S. Government securities, however, is taxable
to foreign central banks in the absence of applicable tax treaty pro
visions or a special ruling exempting a particular bank from taxation
under particular circumstances. Suggested legislation will shortly be
forthcoming.
4* Prohibition on holding of gold abroad by Americans
The recent Executive order forbidding the holding of gold abroad
by Americans will be maintained. It was fully justified on grounds
of equity. It will also help to prevent speculation in the gold market.
I am directing the Secretary of the Treasury to keep me advised on
steps being taken for effective enforcement. I place everyone on
notice that those few American citizens who are tempted to speculate
against the dollar will not profit in this manner.
II. MEASURES TO CORRECT THE BASIC PAYMENTS DEFICIT AND ACHIEVE
LONGER TERM EQ U ILIBRIU M
1. Action by the Senate to approve the Organization for Economic Coop
eration and Development
I earnestly request early action by the Senate approving U.S.
membership in the Organization for Economic Cooperation an
Development. The OECD, in which the industrialized countries or
Western Europe, the United States, and Canada will be joined, is
vital importance for assisting, on a cooperative basis, the developing
countries of the free world. It will also provide a solid framewo
within which we can carry out intensive and frequent internation
consultations on the financial and monetary policies which
pursued in order to achieve and maintain better balance in the mte
national payments position.
2. Export promotion
The Department of Commerce will provide energetic leadership to
American industry in a drive to develop export markets. Finns a
industries will be encouraged to step up their efforts to develop expo
and given every assistance in doing so. As American industry
to realize the vital role of export earnings for our foreign policy, 1
little doubt of its response.
.
j
W e will promptly increase our commercial representatives
facilities abroad. This is a joint p r o g r a m of the D e p a r tm e n ts
Commerce and State which must proceed with drive and convicti
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
119
in order to produce effective results. The budget which has already
gone to Congress requests $1,250,000 for the State Department to add
41 Foreign Service commercial attaches overseas, together with 48
experienced foreign nationals and supporting American staff.
The new budget requests will also allow an increase in oversea
commercial facilities. The Commerce Department is doubling its
trade mission program from 11 to 18 per year and will provide more
useful information to our oversea posts. I am ordering rapid com
pletion of our two new foreign trade centers at London and Bangkok
and have requested the Departments to explore whether three more
could be added next year in Africa, Latin America, and Europe.
S. Cost and price stabilization
Our export promotion efforts, no matter , how well devised or
energetically pursued, will not be effective unless American goods are
competitively priced. Our domestic policies—of government, of
business, and of labor—must be directed to maintaining competitive
costs, improving productivity, and stabilizing or where possible
lowering prices. Measures to achieve these ends which are important
for the domestic economy are even more vital for our international
competitive position. I have already stated my intention of creating
an Advisory Committee on Labor and Management Policy to en
courage productivity gains, advance automation, and encourage sound
wage policies and price stability.
4* Export guarantees and financing
Our Export-Import Bank must play an increasingly important role
in our export promotion efforts. Last year the Export-Import Bank
announced a widening of the facilities which it offers for extending
credit to American exporters. Despite the improvements made, these
facilities are not yet adequate, nor are they comparable to those
offered by foreign countries, especially those offered to small- and
medium-sized exporting concerns and those offered for the financing
of consumer goods. I am directing the President of the Export-Import
Bank, by April 1, to prepare and submit to the Secretary of the
Treasury, as Chairman of the National Advisory Council on Inter
national Monetary and Financial Problems, a new program under
the Export-Import Bank to place our exporters on a basis of full
equality with their competitors in other countries. Also, I have asked
the Secretary of the Treasury to initiate and submit by the same
date a study of methods through which private financial institutions
can participate more broadly in providing export credit facilities.
Foreign travel to the United States
Foreign travel to the United States constitutes a large potential
market hitherto virtually untapped. American travelers annually
spend some $2 billion in foreign countries. Foreign travelers only
spend about $1 billion in this country. Economic conditions in many
foreign countries have improved to the point where a strong travel
promotion effort by this country can be expected to yield significant
results. The Department of Commerce, in cooperation with the
Departments of State and Treasury, will announce shortly a major
new program to encourage foreign travel in the United States along
the lines envisaged in S. 3102, introduced by Senator Magnuson at
the last session of. the Congress. This program will include the
120
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
establishment of travel offices abroad; new advertising campaigns;
action to simplify our visa and entry procedures for temporary
visitors; and efforts to relax foreign restrictions on travel to the
United States. The program will be energetically administered in
the Department of Commerce. I am asking the Secretary of Com
merce to report in full on plans and prospects by April 1.
6. Agricultural exports
Our agricultural industry, which is of unparalleled efficiency, must
make its full contribution to our payments balance. I am directing
the Secretary of Agriculture to report on all feasible and internation
ally desirable means of expanding our exports of farm products, and
to emphasize the need for export expansion as a primary objective of
our new farm programs.
7. Policy on economic assistance
Our foreign economic assistance programs are now being adminis
tered in such a way as to place primary emphasis on the procurement
of American goods. This assistance, accompanied as it is by the
export of American products, does not therefore have a significantly
adverse effect on our balance of payments. (Not more than 20
percent of the funds expended for economic grants, d ev elop m en t loan
assistance, technical assistance, and contributions to international
organizations, which amounted to $2.6 billion in 1960, is today avail
able for expenditures outside the United States, and we intend to
keep an even closer review of these items.) These restrictions will
be maintained until reasonable overall equilibrium has been achieved.
Then the United States will discuss with other capital-exporting
countries the desirability of instituting common policies for world
wide procurement in the administration of economic d evelopm en t or
assistance programs.
8. Tariffs, restrictions and discriminations against American exports
Quota discriminations against American exports, have largely dis
appeared with the return of currency convertibility. We will press
for prompt removal of the few restrictions that still exist, as well as
for the maximum liberalization of remaining nondiscriminatory quotas
in other industrialized countries, which apply mainly to agriculture
exports. In the tariff negotiations now going forward under G All
we shall seek the fullest possible measure of tariff reduction by foreign
countries to the benefit of our exports.
0. Promotion of foreign investment in the United States
We shall press those Western European countries with strong
reserve positions to eliminate the restrictions they still maintain
limiting the opportunities for their citizens to invest in the United
States and other foreign countries. Also, we are initiating, through
the Department of Commerce, a new program to bring investment
opportunities in the United States to the attention of foreign investors
in the industrialized countries.
10. Abuse of utax havens.” Taxation of American investment abroad
I shall recommend that the Congress enact legislation to prevent
the abuse of foreign “ tax havens” by American capital abroad *
means of tax avoidance. In addition, I have asked the Secretary oi
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
121
the Treasury to report by April 1 on whether present tax laws may
be stimulating in undue amounts the flow of American capital to the
industrial countries abroad through special preferential treatment,
and to report further on what remedial action may be required. But
we shall not penalize legitimate private investment abroad, which will
strengthen our trade and currency in future years.
11. Foreign assistance contribution to the less-developed countries and the
common defense
It is indispensable that the industrialized countries of the free world
join in undertaking systematic budgetary contributions for economic
assistance to the less-developed countries and the common defense.
These contributions should be fully commensurate with their economic
and financial positions. Some countries are fulfilling this responsi
bility; it is a matter of disappointment that others have not yet under
taken to do so. Such actions are important in the short run to
achieve a better balance in international trade and payments. Even
more important, they are essential to the continuing and effective
discharge of our common responsibilities for free world security,
economic growth, and stability.
12. Reduction of customs exemption for returning American travelers
After World War II, as part of our efforts to relieve the dollar
shortage which then plagued the world, Congress provided for two
additional increases of $300 and $10 0 in the duty-free allowance for
returning travelers, for a total of $500. The primary purpose for
this change having vanished, I am recommending legislation to with
draw this stimulus to American spending abroad and return to the
historic basic duty-free allowance of $ 10 0 .
13. Centralized review of dollar outlays
Through the Bureau of the Budget, it has long been our sound
financial practice to centralize the review of total spending of the
departments and agencies of the Government of the United States,
including their spending abroad. Under present circumstances,
foreign outlays must be examined in a new perspective. Accordingly,
I am instructing the Director of the Bureau of the Budget, in con
sultation with the Secretary of the Treasury, to develop special
procedures for analyzing that part of the requests of departments
and agencies for spending authority which will involve oversea
outlays to insure that our budgetary decisions will be taken with full
understanding of their projected impact on the country's balance
of payments.
H . L.S. military expenditures abroad
National security expenditures abroad constitute one of the largest
items in the outflow of dollars, amounting to about $3.0 billion a year.
We must maintain a fully effective military force wherever necessary
and for as long as needed. While it is clear that we must exercise
maximum prudence in our dollar outlays abroad, it has become clear
that the present limitation on dependents was not the best way to ac
complish this savings, and that this limitation was seriously hurting
morale and recruitment in the Armed Forces. At the same time, the
Secretary of Defense has informed me that equivalent^ dollar savings
could be made through other measures, including limitations on ex
122
BRETTON WOODS AGREEMENTS ACT AMENDMENTS
penditures abroad by military personnel for tourism and the purchase
of durable consumer goods. Accordingly I have directed him to re
scind the limitation on dependents and instead to put these measures
into effect immediately.
I have also asked him to review the possibilities for savings in the
logistic support of our forces, including the combined use of facilities
with our allies. We shall also, where appropriate, urge the purchase
of the newer weapons and weapons systems by those of our allies who
are financially capable of doing so. We shall continue the policy in
augurated last November of emphasizing U.S. procurement for our
military forces abroad wherever practicable, even though some in
creased budgetary cost may be incurred. Since foreign procurement
of this nature has amounted to almost $ 1 billion a year, significant sav
ings in dollar outflow can be expected—and I am asking the Secretary
of Defense to report on these and the other savings by no later than
April 1 , to see if further steps are needed then.
CONCLUSION
These measures, combined with increasing confidence in the dollar
abroad and steady economic growth at home, can cure the basic long
term deficit in our balance of payments and check the outflow of gold.
They symbolize a new dimension of this Nation’s foreign and domestic
economic policies—a new area of difficult problems—but they are
problems which can be met by forceful and timely legislative and
executive action.
■>
J o h n F. K e n n e d y .
The W h it e H o u s e , February 6, 1961.
U.S. BALANCE OF PAYMENTS, I960
$ Billions
Exports, Services
+26.9
Imports, Services
-
21.1
Short-term
Outflow
Econ. Aid
^ Priv. Invest.
Basic Deficit
Military Expend
p T J J .s
Basic
Oeflcit
*
1.5
(+)
Gold
3.8
m
LJ1
Surplus
Incr. in
Foreign $
Short
term i=) Overall
Deficit
Outflow
2.1-1
Loss of
(=) Gold and
Dollars
124
$ BILLIONS
9 .9
B
' 3.8
U.S. M ILITA RY
EXPEN D . A B R O A D
TRADE (E X C L .
G O V T . P R O G R A M S)
;
'
'
Wm
ill
LO N G -TERM CA PITA L
ill
If19 -8 it
________ iE M
NET RECEIPTS
TRA VEL
REM ITTANCES
AN D PEN SIO N S
ECO N O M IC AID
NET PAYMENTS
NO TES :
T r a d * t x t l u d t i o x p o r t s u n d i r P.1.4 8 0 , E x p o r t - l m p o r t B a n k , IC A a n d D I F p r o g r a m s .
E c o no m ic a i d c o v o r s o f f s h o r * • x p t n d i l u r a s of IC A a n d D I F.
O t h o r i n c l u d e s r t c t l p t i on g o v o m m o n t dtfat, t r a n s p o r t a t i o n , a n d misc. items.
MInw)
AMENDMENTS
OTH ER
4,
SH ORT-TERM CA P ITA L
ACT
IN CO M E FROM
PRJVATE IN VESTM EN T
2.3
, ^
AGREEMENTS
6.1
WOODS
O V ER A LL DEFICIT
9 .9
BRETTON
HOW MAIN ITEMS IN BALANCE OF PAYMENTS
AFFECTED OUR DEFICIT IN 1960
BRETTON WOODS AGREEMENTS ACT AMENDMENT
125
T h e W h i t e H ou se,
Washington, March 1 4,19 6 1 .
Hon. S a m R a y b u r n ,
Speaker o f the H ouse o f R epresentatives,
Washington, Z)X\
D e a r Me. S p e a k e r : X am transmitting herewith a draft of legislation which
would amend existing law by permitting banks in this country to pay different
rates of interest on time deposits held here by foreign governments than are
paid to domestic depositors. Also transmitted is a memorandum from the
Secretary of the Treasury describing the draft bill and its impact in detail.
The di*aft bill implements a recommendation contained in my message to the
Congress dated February 6, 1961, relating to the balance-of-payments problem.
It also complements and supports my directive to the Secretary of the Treasury
to issue securities at special rates for exclusive holding by foreign central banks
or governments.
If commercial banks are permitted to offer foreign governments higher rates
of interest in competition with those existing broad, those governments will be
encouraged to maintain dollar accounts in this country rather than require
the United States to convert their dollar accounts to gold for withdrawal. In
this connection, it is only these foreign governments and their agencies which
can directly purchase gold from the reserve stocks of the United States. How
ever, as stated in my message of February 6, the proposed amendment is but
one of a series of actions to be taken to alleviate the gold drain. Indeed, the
factors which influence any central bank or government to prefer dollar accounts
to gold are many and complex. Interest rates are only one. If we pursue
policies of stability and growth inspiring world confidence, foreign govern
ments should respond to higher interest rates on time deposits thereby aiding
our gold outflow problem.
,
This inducement to foreign central bank deposits will have practically rib
impact on domestic market rates of interest. Moreover, any such impact would
be confined to the short-term sector of the market and thus be consistent with
national policy objectives.
In the interest of orderly procedure, the draft bill also permits similar treat
ment of deposits of international financial institutions of which the United
States is a member.
I will appreciate it if you will lay the draft legislation before the House of
Representatives. A similar draft has been transmitted to the President of the
Senate. I urge that the Congress act promptly and favorably on the proposal.
Sincerely,
J o h n F. K e n n e d y .
A t t a c h m e n t to t h e P r e s id e n t ’s L etter of M a r c h
P r e s id e n t o f t h e S e n a t e a n d to t h e S p e a k e r
s e n t a t iv e s
14, 1961,
of
the
A d d r e sse d to t i i e
H o u se of R epre
M a r c h 8, 1961.
Memorandum fo r the President
There is attached a draft of legislation which is designed to implement the
recommendation contained in your message of February 6, 1961, that banks be
permitted to pay different rates of interest on time deposits held in this country
by foreign governments. The bill would accomplish this by waiving the ap
plication as to foreign central banks of present legislation which requires the
betting of the same limits as to both domestic and foreign depositors on the
rate of interest which may be paid by banks in this country on time deposits.
The proposed legislation would permit commercial banks greater freedom in
negotiating with foreign governments and central baijks concerning the rates of
interest to be paid on time deposits made by these foreign official bodies. It
would thus enable the commercial banks to make the fullest competitive effort
to attract and hold in dollar accounts in this country those blances which repre
sent a direct and immediate claim on the gold stocks of the United States.
This action will not, of course, directly affect the actual supply of dollars to
foreigners. That supply may result from a trade deficit, or an outflow of
American funds, or many other causes. But it is only if and when such dollars
pass from private hands into the holdings of foreign central banks and govern
ments that they become directly usable for the purchase of our gold. It is,
of course, essential for the operation of the international monetary system,
80807—62------9
BRETTON WOODS AGREEMENTS ACT AMENDMENT
126
hinged upon the interconvertibility of gold and dollars at the $35 fixed price,
that no arbitrary barrier or limitation be placed upon the free availability
of gold to any foreign government or central bank which presents dollars and
asks to receive gold instead. At the same time, it must be our responsibility as
banker for the world to “defend” our gold reserves through all forms of action
that can appropriately be exerted in the marketplace. That defense should
consist not only in spurring sales of our goods abroad, and in making competi
tive efforts to attract private funds here, but also in mobilizing the maximum
competitive effort to provide foreign official institutions with any appropriate
inducement to hold dollars in preference to gold.
The complex of considerations affecting the judgments o f any central bank
or government concerning its holdings of gold, or of dollars, includes many
factors. Interest rates are only one among these. I f the United States is not
pursuing policies of stability and growth that engender confidence around the
world, specific changes in particular rates of interest will have very little effect
The program announced by the administration on February 6 apparently has,
however, strengthened confidence abroad in this country’s recognition of what
must be done. As this recognition is carried forward in action, there will be
an environment in which changes in interest rates can play a part in causing
foreign central banks to choose to hold more dollars, and to hold less gold.
It is important for the United States, as the leading spokesman for private
enterprise in the world, to enable its commercial banks to make their maximum
contribution in this effort. At the same time, the Treasury should be prepared
to make a parallel effort to attract into U.S. Government securities some
part o f the growing dollar holdings o f foreign official bodies. Whenever appro
priate in relation to any action respecting Commercial banks, the Treasury
is prepared to utilize the authority you have already affirmed, in your message
to the Congress o f February 6, for the issuance o f special securities at attractive
rates to foreign central banks. The combined effect of these efforts, through
the private commercial banks and through the Treasury, should be to afford
foreign official holders o f dollars the strongest practicable inducement for
preferring dollar holdings to additional purchases o f gold, within the framework
of market conditions in the United States. This inducement to attract foreign
central banks deposits would have very little, if any, impact on domestic
market rates of interest. Any such impact would be confined to the short-term
sector of the market and thus consistent with national policy objectives.
The provisions in the draft bill are also extended to include the international
financial institutions of which the United States is a member. Because there
is, in many respects, a general comparability between the treatment accorded
these institutions and that extended to central banks, it seems desirable to
make these provisions available to international financial institutions through
the present amendment, in the interest of orderly procedure.
D ouglas D illon ,
S ecretary o f the Treasury.
Enclosure.
A ttachm ent
to
S ecretary D illo n ’ s M em oran du m
D ated M a r ch 8, 1961
to t h e
P resident
A B IL L T o amend section 19 o f the Federal Reserve A ct and section 18 o f the Federal
Deposit Insurance A ct to remove the authority to lim it the rate o f interest on time
deposits o f foreign governments and international financial insltutlons
B e it enacted by the Senate and House o f R epresentatives o f th e United States
of Am erica in Congress assembled , That the fourteenth paragraph o f section 1J
of the Federal Reserve Act, as amended (12 U.S.C. 371b), is further am ended by
adding at the end thereof the following sentence: “ The provisions of this para
graph shall not apply to the rate o f interest which may be paid by member banks
on tim e deposits of foreign governments, monetary and financial a u th o ritie s o f
foreign governments when acting as such, or international financial institutions
of which the United States is a member.”
S ec . 2. Subsection (g) of section 18 of the Federal Deposit Insurance Act (12
U.S.C. 1828(g)) is amended by adding at the end thereof the following sentence:
“ The provisions of this subsection shall not apply to the rate of interest which
may be paid by insured nonmember banks on time deposits o f foreign govern
ments, monetary and financial authorities of foreign governments when acting
as such, or international financial institutions of which the United States is a
member.”
BRETTON WOODS AGREEMENTS ACT AMENDMENT
127
Mr. P a t m a n . N ow , Mr. Martin, about these foreign exchange trans
actions. Perhaps I don't know too much about the Federal Reserve
Act and I don't claim to be an authority on it, but I would like you to
tell me exactly where in the Federal Reserve Act you get your au
thority for this?
Mr. M a r tin . Section 14 of the Federal Reserve Act, first paragraph
of section 14, which specifies that any Federal Reserve bank can pur
chase, or sell, at home or abroad, from or to domestic banks or foreign
banks, from corporations, firms or individuals, cable transfers, bills
of exchange or foreign exchange.
The House committee—this committee that I am before here now,
the House Banking and Currency Committee—at the time the Federal
Reserve Act was enacted, stated specifically in their report on the bill
that the reason for this was to give the Federal Reserve authority to
deal in foreign exchange or to regulate gold movements.
Mr. P a t m a n . That was the original act, 1914 ?
Mr. M a r t in . That is correct.
Mr. P a t m a n . I notice you have stated, and I think you were repeat
ing the text of the law— —
Mr. M ar t in . Approximately.
Mr. P a t m a n . And you said, “ Each Federal
Reserve bank” which of
course was right at that time, but subsequent to that time the Open
Market Committee lias been set up. Tell me where in the Open Mar
ket Committee law you have a right to do this?
Mr. M artin . The same principles apply to the Open Market Com
mittee. This activity is being conducted by the Federal Reserve
Board and the Open Market Committee, and we have an amendment
to our regulation “ N” so that this could be covered.
This activity is conducted on behalf of the entire System through
the Open Market Committee.
Mr. P a t m a n . Don’t you think, Mr. Martin, or have you had advice
of counsel on this, that the original act contemplated 12 separate
original banks ?
As you know we didirt have any central bank then. And then, in
1935, in the depths of the depression, of course, we had a different
situation and we changed it and we had an open market committee
consisting of the 12 governors.
And then, of course, 2 years later we created the Federal Open
Market Committee, as set up as it is now.
Don’t you think that you should have authority, in the text of the
law, that creates the Federal Open Market Committee, to do this.
Otherwise the Federal Open Market Committee does not have the
power to do it,
Mr. M a r t in . N o, Mr. Patman. I dont think so. M e went into
that very carefully. This was reviewed carefully by our counsel,
by other counsel in the Federal Reserve System. They decided we
had this authority under the existing law. It was taken up with
the counsel of the Treasury of the United States, and he concuned
m that opinion.
.
,
It was taken up with the Attorney General of the United States and
he also concurred.
You can always get lawyers to disagree, but I don’t know how many
more we should consult.
128
BRETTON WOODS AGREEMENTS ACT AMENDMENT :
Mr. P a t m a n . W e ll, somebody must have had a question about it or
you would not have gone to all that trouble.
Mr. R euss . Would the gentleman yield ?
M r. P a t m a n . I yield.
J I Mr. R euss . I just want to state that I am a lawyer, qualified to pracS/tice, and I disagree. I don’t think the Fed has the power to do
the things that are in here, and I join with the request of Mr. Patman
that you file with this committee the opinions, not only of your own
counsel which I have seen, but of the counsel of the Treasury and of
the Attorney General. I ask unanimous consent, Mr. Chairman, that
they be inserted at this point.
Mr. S pence . Without objection.
(The data referred to above may be found on pp. 142-160.)
Mr. M a r t i n . I will be glad to give you a brief summary statement
of the position. But I will say you can get many lawyers. We con
sulted our own lawyers, those of the Treasury and those of the Attorney
General.
Mr. P a t m a n . I don’t claim to be as good a lawyer as either one of
them, of course; I am just a lawyer from Texas, and have a license to
practice law, but I think Mr. Reuss is correct, and I believe that you
will, on further analysis of your statement, find some holes or weak
nesses in it.
.
Remember, the banks, when they were set up in 1913, your member
banks, were given authority, not collectively, but individually, as Fed
eral Reserve banks in 12 regions. They were given this power.
Now, you are assuming it for an entirely different agency-phe
Open Market Committee. You know they think they are out from
under, even the Federal Reserve Act and the law, and that they are
separate and independent, and being separate and independent as
they claim to be, it occurs to me that if they are going to exercise
this tremendous power in the new position they are in, that they
should have been given that power specifically, without a n y doiu>
at all, and I think on reevaluation of your statement, Mr. Martin,
that you will find that your position is a weak one in that respec.
M r. M artin . N o, Mr. Patman, I respectfully disagree with you on
H
that.
M r. P a t m a n .
I know you do.
Mr. M a r t i n . Each individual bank, let me point this out, section
14(a) of the Federal Reserve Act, clearly gives each Federal ®ese*7
bank and the Board of Governors, as the centralizing agency, tn
authority to buy or sell gold at home or abroad.
Now, that includes foreign exchange transactions also.
.
Mr. P a t m a n . There is a difference in the way I see it, Mr. Martu •
Mr. S p e n c e . The gentleman’s time has expired.
? ,
Mr. P a t m a n . You have as much right to your o p i n i o n as I have
mine.
Mr. M artin . Exactly.
Mr. P a t m a n . But there is a difference.
Mr. S pence . The gentleman’s time has expired.
Mr. M a r t i n . I agree with you that the world has changed.
.
Mr. Spence. This bill is merely for the purpose of ratifying a
international agreement. You haven’t gotten any additional au
thority, you don’t get any from the bill and none is taken awdy -ir°
you.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
129
Mr. M a r t in . That is correct.
Mr. S p e n c e . Any material amendment to this bill might have to
be ratified by the governments of the various contracting parties;
isn’t that so?
Mr. M artin . That is correct.
Mr. S p e n c e . And that is all that is involved here? These other
questions are not pertinent, because this is merely a ratification of an
agreement of nations.
Now, if you involve this in some irrelevant legislation, it may
have a very bad effect upon the ratification by the other nationsDont’ you think that is true ?
Mr. SIarttn. That is correct.
Mr. S p e n c e . Then why go into all this? Why not take this matter
up at some other time ? " Why go into all this discussion about some
thing that complicates and connisestheissue?
Sir. P a t m a n . Aren’t we entitled----Sir. S p e n c e . Any court sitting in this case would say that is ir
relevant and immaterial to this particular consideration.
Sir. R e u ss . Will the Chair yield?
Sir. S p e n c e . And I think it is immaterial.
And I think we ought to decide whether or not we want to pass
this bill* which ratifies this agreement which is essential to the stabili
zation of the American dollar. That is my point.
Srr. R eu ss . Will the Chair yield ?
Sir. S pence. I yield.
"
.
Sir. R euss. The only reason I went into these questions, which are
described by the Chair as being extraneous, was because the Chairman
of the Federal Reserve System in his testimony devoted a great por
tion of his testimony toward describing these things which the Fed
eral Reserve intends to do.
.
If the Federal Reserve will withdraw its assertion that it intends
to do thero tilings until Congress can have a chance to consider it, I
(certainly would not want to ask extraneous questions. But if we
; / don’t, it will be assumed that we approve of these things.
Sh-. S p e n c e . We are talking about ratifying this agreement.
Sir. R e u ss . That is riaht.
.
.
Sir. S p e n c e . Would you be willing to vote against the ratification
of these international agreements that everybody says mean so much
to America because there are extraneous issues which confuse ana
cloud the real question to be settled ?
,
Sir. R e u ss . Certainly not. I am enthusiastically for the proposal.
Sir. S p e n c e . That is the issue submitted to Congress.
Mr. SIuiiTER. Sir. Chairman, if I may interject at this point, I don t
think this committee can limit itself to what anyone, even most lespectfully the chairman, thinks is relevant or irrelevant to the
controversy.
.. . ,
,
We have to be practical. Any question of this kind that presents
itself to a member here 011 the committee will undoubtedly be raised
on the floor bv him or some other members and if we don t go to the
floor with a record that covers all these situations, we are going to
have difficulty getting this bill passed.
.
I am very much in favor of this bill. I want to see it passed. 1
want to see it passed with as little controversy about it, because con
130
BRETTON WOODS AGREEMENTS ACT AMENDMENT
troversy will only tend to impair the confidence in the dollar. But
at the same time I think we ought to make a record here, whether it
is relevant or irrelevant, that is going to meet these issues properly,
so we can make the argument that we have gone into these matters;
here is the record; here is the answer.
I think we ought to have a very full and complete record on this,
Mr. Chairman, or we will run into trouble on the floor with a very
good bill which should be passed.
I Mr. S p e n c e . Well, can’t we definitely decide what the Federal Re! serve’s authority is to engage in international exchange ?
Mr. M u l te r . Mr. Chairman, we cannot decide that with this bill,
iOnly a court can decide that, legalistically, if the issue was ever preisented, and I don’t see how any court can have the issue you presented
; to it with this bill. But we are going to the court of public opinion,
and I think that those who have one view of it ought to state it on
the record, and Mr. Martin ought to place his view on the record to
show that it is his opinion, or that of the Board.
Even if some may disagree, I think we ought to know his views.
Mr. S p e n c e . I have no objection to Mr. Martin expressing his opin
ion. I wanted to know whether that was going to interfere with the
passage of the bill.
Mr. M u l t e r . I am urging that we have this on the record so that
we don’t interfere with the passage of the bill. I am sure it doesn’t
matter how many of the lawyers here agree or disagree with Mr.
Martin’s lawyers’ opinions. We still need their substantiation in the
record so as to answer these questions that some other lawyers may
raise.
Mr. S p e n c e . Mr. Martin has said he will furnish it for the record.
Mr. M a r t in . My purpose in putting this in was so that you gentle
men would have all of the information which was germane to this
particular bill. I thought that I might be in the position of withhold
ing something from this committee if I testified only specifically on
the bill itself.
Mr. M u l te r . I am sure since there is some difference of opinion as to
whether you have a right to do what you are doing, that you were
very proper and forthright in setting forth what you did and your
position on it.
] Mr. S p e n c e . I thoroughly agree with that. I thoroughly agree with
/Mr. Martin stating his position, and stating his authority for the posi/ tion he takes. I have no objection to that at all.
Mr. R ousselot . I f the Chairman will yield, I think Mr. Martin has
answered the question himself. He says that the matter he and Mr.
Reuss wTere discussing is germane to the subject and I think that clari
fies the question of relevance. So, I think Mr. Multer and Mr. Reuss
are both sticking to the legislation before us.
a
Mr. M u l t e r . Mr. Chairman, may I take my 10 minutes at this time.
Mr. S p e n c e . Yes, sir.
M r . M u l ter . Thank you.
® ^ ore I get into that and without it coming out of my time, Mr.
Chairman, I think the record needs clarification.
,
In answer to Mr. St. Germain’s question, the statement was
that we have the right, the United States has the right, to draw
million from this Fund.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
131
That statement standing by itself is quite correct, but I think it
should be made very clear at that very point in the record, that we
have the right, the United States has the right, to draw from this Fund
up to the total amount of its gold payment, and an amount equal to
the amounts of the members’ currencies which have been drawn by
other countries.
Now, when we take into accord what they have drawn, then we
bring our right to draw up to $1,700 million. As other countries draw
more, we will have the right to draw more.
That is correct, is it not, Mr. Martin ?
Mr. M arthsl I will have a complete statement put in the record on
this, if you would like, Mr. Multer.
(The data referred to above has been submitted and is as follows:)
U.S,
D r a w in g
R ig h t s
on
the
I n t e r n a t io n a l M o n e t a r y F u n d
The U.S. Fund quota amounts to $4,125 million; of this amount, the United
States paid in $1,031 million in gold and $3,094 milUon in dollars, in the form
of non-interest-bearing nonnegotiable demand notes.
As of January 31, 1962, foreign countries had drawn dollars from the Fund
in a total of $639 million (net) which, together with Fund expenditures of $17
million, brought the Fund holdings of U.S. dollars down to $2,438 million.
In accordance with article VI of the Fund Agreement, a member has special
rights to draw currencies equivalent to the amount of its own currency in use
(639 million at present in the case of the United States, as indicated above).
In addition, under regular Fund procedure, members are given the overwhelming
benefit of the doubt in relation to requests for drawings beyond that amount,
provided they would bring the Fund’s holdings of the member’s currency to no
more than 100 percent of its quota. Accordingly, the United States has a vir
tually automatic drawing right comprising those two portions, which on January
31, 1962, amounted to $1,687 million, i.e., the difference between the quota of
$4,125 million and the actual dollar holdings of the Fund of $2,438 million.
The Fund’s attitude to requests for transactions involving the next 25 percent
of quota is a liberal one, provided that the member itself is making reasonable
efforts to solve its current balance of payments difficulties. This means that
the United States could draw an additional $1,031 million (one-fourth of its
quota) with little delay or discussion.
Finally, a member may request further drawings equivalent to 7o percent or
quota, provided it submits a sound program aimed at establishing or maintaining
the enduring stability of its currency. Under this provision, the United States
could draw an additional $3,094 million, since the United States certainly would
not request a large drawing without having decided on a sound stabilization
program. However, thorough discussion with the Fund management and subse
quent approval by the Fund’s executive directors would be necessary.
The sum of U.S. drawings possible according to the preceding paragraphs
would be $5,812 million (as of January 31,1962).
M r. M u l t e r . Yes, sir, that is important. And it is important to
note, also, that the Fund very liberally treats the requests for addi
tional withdrawals up to 25 percent of the quotas.
We are in the position of going there and drawing even more than
$1,700 million. If we go in and make the request, the Fund usually
will allow an additional 25 percent.
As the record stands now, people might think we are going to put an
additional $2 billion and can only draw $1,700 million. Is that right,
Mr. Martin ?
Mr. M artin . That is right.
,1
Mr. M u l t e r . N o w , I would like to refer back to the question that
was left pending when I was talking to Mr. Martin on the first goround, and that is with reference to the interest.
132
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Now, as indicated by the President’s message, arid I tried to indicate
too, that what we were trying to do was increase the interest rate the
commercial banks would pay on foreign funds so as to keep those
foreign funds here.
Now, since the Board has permitted commercial banks to increase
their interest payments to depositors to 4 percent, has the amount of
foreign funds in this country oeen increased? Deposits by foreigners
and central banks of foreign countries, have they increased?
Mr. M artin. Slightly, but not to a very large extent.
Mr. M ulter. On the other hand, is it fair to say that only about
10 percent of the commercial banks of the country have foreign de
posits? Is it much more than that?
Mr. M artin. I would not know how many. We would not know,
Mr. Multer.
' Mr. M ulter. At any rate, then, it is the big banks in California,
Texas, Massachusetts, Illinois, Pennsylvania, and New York?
Mr. M artin. It is largely the big banks; that is correct.
Mr. M ulter. N ow, since the permission to increase to 4: percent, at
least 40 percent of the commercial banks have increased their rates
beyond what they were paying, and at least 20 percent have gone all
the way to 4 percent?
Mr. M artin. That is correct.
Mr. M ulter. And in January alone, I think the time and thrift ac
counts of the commercial banks had increased in 1 month by $2%
billion.
Mr. M artin. That is about right, jes, sir.
Mr. Multer. Now, at the same time the mortgage market, particu
larly the dwelling mortgage market, has remained comparatively
steady ?
Mr. M artin. Correct.
Mr. M ulter. I think it is fair to assume that most of that $2% bil
lion has not gone into the residential mortgage market, but has gone
into either the short-term market or the long-term bond market. Isn t
that a fair assumption ?
Mr. M artin. I think the municipal market has benefited by it
greatly and you can see that in any chart on municipal security prices.
Mr. M ulter. Quite right.
And while that is important, municipalities must have that money
at- the lowest rate possible, at the same time you will agree that the
economy of this country requires that the home construction market
be kept at full strength, and that we continue to build the dwellings
that the country needs?
Mr. M artin. I have received from several mortgage lenders re
cently indications that the flow of mortgage funds has substantially
increased.
Mr. M ulter. Well, has it substantially increased?
Sir. M artin. Some of the commercial banks that did no mortgag6
business at all have begun to actively go out into the mortgage field as
a result of this.
Mr. M ulter. Well, I suggest that you must watch that closely, be
cause I am very fearful, having in mind the rate of increase in com
mercial banks on time and thrift accounts, and the falling off in the
rate of increase in savings, in mutual savings banks and in the sav
BRETTOX WOODS AGREEMENTS ACT AMENDMENT
133
ings and loan associations, when compared with the tremendous in
crease in commercial banks, that that indicates to me that the home
mortgage market is going to be hurt badly if this continues.
Mr. M a r t i n . I see no indication of that, Mr. Multer. Quite the
reverse, to date, and I believe the overall level of savings is being en
larged. I think we also should remember the other side of the coin,
that considering accounts in the Federal Reserve System alone, 50
million people are getting more for their savings than they got before
and that has given them an incentive to provide these funds for the
mortgage market.
Mr. M u l t e r . Are you intimating that these people who put this
additional money into the commercial banks, because the rate went
to 3% or 4 percent, would not have put that money into savings and
loans association at 4 or 4 ^ percent ?
Mr. M a r t i n . I am convinced that quite a number of them would
not.
I know of several cases where they would not. I think the over
all level of savings has been increased by this.
Mr. M u l t e r . Well, the overall savings have been increased, I agree
with you. I don't think that that money is going into the mortgage
market as heretofore.
Mr. M a r t i n . I think some of it is going into the mortgage market.
Mr. M u l t e r . Don’t you think if as much as $ 2 % billion in a month
went into the mortgage market, the interest on mortgages would have
dropped ?
Mr. Martin. No, T think the $2% billion figure is far too early to
draw any conclusions from. There are a good many shifts of many
accounts from demand deposits to time deposits, to savings accounts.
I would not take 1 month as a figure to lean very heavily on.
Mr. M ulter. That may be. But isivt this the danger signal ? Isn t
this the signal that we better take a careful look ?
Mr. M a r t i n . We are certainly going to watch this carefully, but
what. I am trying to say is that on the basis of preliminary data to
date, I think the move lias been beneficial to everybody..
Mr. M u l t e r . Isn’t it fair to say that if a commercial bank is get
ting in time deposits and thrift accounts that can be withdrawn on
demand, time accounts for less than a year, that they will not end up
with that kind of money in long-term mortgages?
Mr. M artin . W ell, they can’t pay 4 percent on anything held less
than a year.
M r .M u r .T E R .
Mr. M a r t i n .
That is right.
.
It has to be there for a year before they can pa\ -
percent.
So then %y2 would be the maximum up to that time.
#
Mr. M u lter. Is there any wav of telling how much of this <.- / 2
billion increase in time and thrift accounts was from foreign countries
or foreipn central banks, and how much was for 1 year and how much
for less than a year?
. _
_
Mr. M arttn. N o; we are trying to get. the best material we can. v\e
reported to the Joint Economic Committee—J can send you that testi
mony, and if we have any later figures I will be glad to make them
available—we reported ail the data we were able to accumulate up
to that time. That was January 30.
134
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Now, we have a little more data up to the end of February, but I
will be glad to send you what we have, Mr. Multer.
(The data referred to has been submitted and is as follows:)
B
G o v e r n o r s op t h e
F ed eral R eserve Sy s t e m ,
o ar d o f
'Washington, March IS, 1962.
Hon. A b r a h a m J . M u l t e r ,
House of Representatives, Washingtonr D.C.
D e a r M r . M u l t e r : During my testimony on February 2 8 , you asked if we
could tell how much of the increase in time and thrift accounts after the first
of the year was from foreign countries or foreign central banks, and how much
was for 1 year and how much for less. W e now have some data which enable
us to answer part of your question.
The figures in the attached tabulation indicate that time deposits of foreign
central banks, official institutions, etc., rose, but only slightly, after the first of
the year. The bulk o f the increase was in domestic accounts, as is normally
the case. Savings deposits o f individuals increased sharply. The rise in time
deposits was also unusually large; in fact, it was larger than the increase in
savings deposits. In addition to personal accounts, time deposits include ac
counts of businesses, State and local governments, and foreign central banks ana
official institutions.
With regard to the length of time the funds will remain on deposit, it appears
that the substantial increase in negotiable time certificates of deposits at nine
large New York City banks was concentrated in those maturing in from 6
to 9 months. We have no information on how much o f time and savings deposits
are or can be expected to be for 1 year or more. In the case of regular sayings
deposits, which constitute the bulk o f time and savings accounts, there is no
requirement that the depositor declare his intention at the time he makes the
deposit, so we will not get definitive information on this point.
Sincerely yours,
W m . McC. M a r t i n , Jr.
Time deposits at all commercial 'banks
[Amounts outstanding, in millions of dollars]
Total tim e and Time deposits
of foreign insti
savings de
tutions, central
posits at all
banks, Inter*
commercial
national insti
banks
tutions, etc.1
1961—N ov. 2 9...........
Dec. 27..................
1962—Jan..31....................
Feb. 14...............
Feb. 21....................
Change, Dec. 27-F eb. 14.
81,960
82,450
84,960
85,600
(s+3,410
)
2
,194
2.243
2,262
2.243
2,241
+5
1 Data for all commercial banks are not available; figures are foreign holdings at weekly reporting membe
Danks, which hold nearly all of these deposits.
3 N ot available.
Time deposits at weekly reporting meniber "banks in leading cities
Total time
and savings
deposits
1961—N ov. 29...........................
Dec. 27........... .
1962—Jan. 31..........
Feb. 14......... ....................
Feb. 21............................
Change, Dec. 27-Feb. 21__ _
.41,188
41,472
42,863
43,359
43,640
+2,168
Savings
deposits
OQ *771
**J-
30,082
On, Ow
AAf\
OU
Of|
QQQ
O
Uf Uuv
on OOfi
OU,uUO
-t-i7
O il
il
T
T im e deposits
Other time
deposits of Tim e deposits o f foreign
individuals, of State and official insti
tutions, cen
local gov
partnerships,
tral banks,
ernments
and corpora
etc.
tions
6,190
E yoy
QCQ
o,
6,553
6,764
6,943
+974
2 721
Oul
9
O, HAS
Uw
*3 infi
o,
lUo
3 112
+261
2,194
2,243
2,262
2,248
2,247
+*
------
135
BRETTON* WOODS AGREEMENTS ACT AMENDMENT
Negotiable time certificates of deposit (9 large New York City banks)
I Amounts outstanding, in millions of dollars]
1961:
Nov. 29-------------------------------------------------------------------------------- 1,166.6
Dec. 27--------------------------------------------------------------------------------- 1,004.3
1962:
JaiL 31--------------------------------------------------------------------------------- 1,101.9
Feb. 21--------------------------------------------------------------------------------- 1,141.3
Change, Dec. 27-Feb. 21________________________________________ +137.0
M r. M ulter . I would appreciate it. I feel a little better knowing
you are going to watch this very carefully, because I think you are
as concerned about it as we are here in this committee.
Now, let me revert to another question fo r a moment.
W hen we lend, that is the U nited States, lends money abroad, do
we provide that it is to be repaid in dollars, or in foreign currencies?
M r. M a r tin . I t is usually repayable in dollars.
M r. M u l t e r . W hen you take that into account, we are not as badly
off in our balance o f payments as it would seem ; is that not so ? I f you
take into account the lending that is goin g to be repaid, even though
it is g oin g to be repaid over a period o f years, we are not quite so bad
off on the balance o f payments ?
M r. M a r t i n . N o ; I don’t think we ought to paint too gloomv a
picture. I think the surplus we have on current account is favorable,
but I think that we cannot continue to run the overall deficits we have
been running fo r very lon g without endangering our overall posi
tion.
B ut we also have political stability in this country that I happen
to believe is superior to any country in the world.
Mr. M u l t e r . N o one can argue with you on either o f those two last
statements, M r. M artin. B u t I think we fail to show the true p ic
ture, w hich lends to some lack o f confidence, with people who read as
they run, when we don’t show that a large part o f tins money going
abroad is g o in g to come back to us, and in dollars.
Mr. S p e n c e . Are there any further questions ?
M r. R o u s s e l o t . Mr. Chairman.
M r. S pence , M r, Rousselot.
,
,
Mr. R o u s s e l o t . Mr. M artin, how much gold could the Fund demand
as a result o f this b ill? I n other words, i f in calling on all ° r part
o f the additional $ 2 billion which this bill authorizes, could the
demand a certain amount in gold ?
Mr. M ar tin . N o gold is involved.
#
M r. R o u s s e l o t . There would be no additional g o ld .
Mr.
M
a r t in
.
No additional gold.
.
.
T. ,
M r. R ousselot. Then this payment would be made just m Unitea
States currency?
____. fl .
Mr. M a r tin . That is right.
Mr. R o t js s e lo t . Y o u mentioned, on page 4 o f y o u r statement, that
the U nited States could then use these c u r r e n t s , referring to m ajor
foreign convertible currencies, to buy up dollars offered m 1 1
<.
b y private holders, and to redeem d o l l a r s acquired by
banks in excess o f amounts they are w illing to hold. W e y
suming they would be willing to allow us to buy th ese .
M r. M ah^ n . Y es, s ir ; I think that is one o f the tln n ^ t h a t w e h a v e
to w ork tow ard. W h a t the percentage o f gold and dollars that w ill
136
BRETTON WOODS AGREEMENTS ACT AMENDMENT
be held by a foreign bank is, has varied with different countries, and
there has been a tendency for some countries to keep almost all their
reserves in gold.
During the postwar period the dollar became virtually the same
as gold and they tended to have a larger percentage in dollars, and
at one point before the devaluation the pound was also the same way.
.Since the devaluation, the pound hasn’t had the same status, but I
am convinced that if the payments mechanism is going to be as
effective and useful as it should be, that people ought not to indis
criminately convert currencies into gold beyond what is a reasonable
proportion.
Mr. R o u s s e l o t . Thank you.
Mr. Spence. The AFL-CIO has requested permission to file a
statement in favor of the bill. Without objection, it will be filed.
(The statement referred to has been submitted and is as follows:)
S t ate m en t b y S t a n l e y H . R uttenberg , D irector op R e sear ch , A merican
F ederation of L abor a n d C onrgess of I n d u st r ia l O r g a n izatio n s , B efore
, t h e H ouse B a n k in g an d C u rrency C o m m it t e e on A u t h o r iza t io n for U nited
S tates P a r ticipat io n in S p e cial B orrowing A rrangem ents of t h e I nter
n a t io n a l M onetary F u n d (H.R. 10162)
This statement expresses the support of the American Federation of Labor and
Congress of Industrial Organizations for H.R. 10162, a bill to amend the
Bretton-Woods Agreements Act to authorize the United States to p a r t i c i p a t e in
loans to the International Monetary Fund to strengthen he i n e r n a t i o n a l mone
tary system. As the President indicated in his message of February 2, enact
ment of H.R. 10162 would permit the United States to participate in
borrowing arrangements which would strengthen the ability of the I n t e r n a t i o n a
Monetary Fund to deal with international payments problems.
•o* 1
in t e r n a tio n a l p a y m e n t s and our dom estic econom y
The AFL-CIO is, of course, concerned with the international aspects of thi,s
proposal for strengthening the international' monetary system. However,, we
are also mindful of the impact of the international payments situation on our
economy at home and on our domestic economic policies. This interrelations!!
between our domestic economy and our international payments was c o n s ia e r e a
in the resolution on the national economy adopted by the AFL-CIO conventio
last December. In a section of the resolution devoted to the balance of pay*
ments questions, the resolution said:
“
“ The United States must view the balance o f international payments P1^ '
lem on two fronts— the domestic front of building a strong e c o n o m y at home
within the context o f international economic relationships and the building
U.S. relations with the monetary and economic programs of other nations withi
the context of an expanding full-employment economy at home.
“ Solutions to the balance-of-payments problem cannot be developed by co centra ting on restrictive policies or on the wages of American working peopii •
Measures to sustain a healthy and growing economy are the only sound basi
for the longrun solution to this problem. At the same time, efforts should oe
made to reduce the outflow and to encourage the inflow of dollars and to cur
the^ outflow of gold, without dangerous recourse to isolationist o f protectioni
policies. Steps should also be taken toward the development of a n international
banking arrangement that would relieve the United States o f being the m ajor
world banker by reducing reliance on the U.S. dollar as an international
currency.”
T h e AFL-CIO is as interested as any group in America in the d e v e lo p m e n
of an appropriate and effective solution to our balance-of-payments problem.
W e recognize that this is a serious problem and that there are no easy solutions
to it. However, we insist that whatever ways are worked out for meeting
this problem, they must be measures which are fully consistent with the mainte
nance in the U nited States o f a healthy growing economy. Adoption of restrictionist trade, aid, travel, and financial measures would stifle our own econom ic
BRETTON WOODS AGREEMENTS ACT AMENDMENT
137
progress by constituting an extremely short-sighted approach to dealing with
our balance-of-payments situation. Pursuing a path of domestic retrogression
would not only threaten the well-being of all Americans but it would also jeop
ardize the growth and prosperity of the entire free world.
Aside from the intrinsic ill effects involved in restrictionist measures, such
measures, even though avowedly directed toward improving our balance-ofpayments situation, would actually have just the reverse effect. They would
worsen the problem.
The specific arrangements your committee are now considering are intended, in
the main, for meeting comparatively temporary payments imbalances arising
from sudden and largely unforeseen flows of short-term funds. If we can devise
means, such as the machinery provided for in this proposal, then our main ef
forts can be concentrated on restoring balance in what the financial experts
call our basic international accounts.
Some have suggested that we can deal with our basic accounts problem by
adopting restrictive economic policies at home. These people say the way to
restore confidence in the American dollar is to reduce the Government expendi
tures and balance the budget at whatever cost to our social welfare, to adopt
a tight monetary policy and to depress the wages of American workers.
Such suggestions are nothing more nor less than a prescription for stifling the
economic growth of our Nation. A declining America would shake the con
fidence of other nations in our economy and in our currency. Moreover, meas
ures which would depress our economy at home would inevitably weaken our
competitive stance abroad. We need high level production and full employment
to achieve the economies o f large-scale operations and to encourage continuing
capital investment. In this way, we will enhance our competitive position in
world markets, thereby increasing our exports and improving our basic balanceof-payments situation.
Such expansionist policies will also provide incentives for investment by for
eigners in the United States, rather than investment by Americans abroad. The
principal reason why the net flow of long-term investment in recent years has
been out of the United States is that the record o f economic growth in Western
Europe and Japan has so greatly exceeded our own. An America restored to
the path of rapid economic progress would attract investment from abroad and
would discourage American business from seeking investment outlets overseas.
This would not only reinforce the growth of our economy, but it would also help
to restore a balance in our international payments.
There are probably no international financial gimmicks for dealing with our
basic long-term balanee-of-payments situation. We are convinced, however,
that this problem can be met if we adopt and pursue the right kind of economic
policies at home. Indeed, it is fortunate that the same progressive economic
policies which would stimulate economic growth at home would also help us
achieve equilibrium in our basic economic payments. Because of the key role
of the United States in the world's economic and financial affairs, restoration
of a healthy growing economy in the United States and a reasonable balance in
our international payments would also help to strengthen the economy of the
entire free world.
M EE TIN G SH OR T-TE RM BALA>*CE-OF-PAYM EN TS PROBLEMS
If we meet the problem o f the basic balance-of-payments deficit, then the
proposal you are now considering will be helpful in dealing with the short-term
situations that may arise from time to time. The occurrence of such short
term situations, as vexing as they are, is in a real sense a measure and in evidence
of the postwar recovery of the war-ravaged economies of Western Europe. This
recovery made possible restoration of currency convertibility and helped to free
both trade and capital movements.
However, substantial removal of restrictions on the movement of capital has
made it easier for short-term funds to be transferred from one country to another
in response to such factors as interest differentials, currency speculation, and
other comparatively short-term developments. Such short-term movements ox
funds may have a considerable effect on a country's overall balance o f payments
even though they are essentially unrelated to its basic balance. Of course, it is
also true that if a country’s basic accounts are out of balance, especially coun
tries like the United States and United Kingdom whose currencies are widely
138
BBETTON WOODS AGREEMENTS ACT AMENDMENT
used in international transactions, this may make them particularly vulnerable
to such weakening, short-term movements.
The special borrowing arrangements which the IMF proposes to establish are
designed to provide additional resources to strengthen the international monetary
system. The new machinery would particularly help the IMF to cope with any
short-term drain on the balances of reserve currencies, especially the dollar.
Specifically, the 10 participating nations would make available on a standby
basis, $6 billion o f their currency to be used if needed to forestall or cope with
any impairment o f the international monetary system.
The U.S. share of this amount is $2 billion, one-third of the total. This
is approximately half of our existing quota in the Fund. However, the com*
nlitments of the five participating countries o f the European Economic Com
munity aggregating $2,450 million amount to almost as much as their present
quotas in the Fund. Even more important, however, is the fact that the lending
commitment of the five EEC countries under the proposed arrangements would
nearly triple the current amount of the Fund’s holdings of their currencies. As
o f November 30, 1961, the Fund held $889.5 million in the currencies of the five
EEC countries. The new credit arrangements would make available on a
standby basis an additional $2,450 million in those currencies.
The addition o f these available resources for strengthening the international
monetary system is primarily aimed at making possible a drawing by the United
States on the Fund should it ever become necessary. The Fund is now capable of
meeting drawings by other countries including, judging from recent experience,
even the United Kingdom. But it does not now have enough holdings of the other
major currencies to make possible a large U.S. drawing if it should become
necessary. The mere existence of such an enlarged borrowing fund in the
IMF may well be enough in itself to reduce speculation in the United States.
As long as such speculation is reduced short-term dollar outflow would be re
duced the U.S. balance-of-payments position would be improved.
The short-term flow of funds out of the United States was responsible for
almost $2 billion o f the U.S. balance-of-payments deficit in each of the last i
years. In 1960, this short-term flow was due, in the main, to differentials in
interest rates, while the differential in interest rates was much less responsibly
for the 1961 short-term outflow. The U.S. basic deficit was reduced from
billion in 1960 to almost $700 million in 1961.
The pressures upon domestic policy that may well interfere with the attain
ment of maximum employment, production and purchasing power are consider
ably greater as the U.S. balance of payments becomes larger. The average defi«
of $3.8 billion a year in the years 1958 through 1960 was reduced to $2.5 kdho
in. 1961. If, however, we were to remove the short-term money flow from tn
deficits in recent years, and talk in terms of the basic deficit, the complexion oi
our problem is changed substantially. The AFD-CIO has a strong feeling tnax
the short-term deficit could and would be reduced further if the mem ber cou tries of IMF realized that it no longer paid to speculate in cu rren cies of o ^
countries. With the increased IMF borrowing authority the United States wou
possess, countries would be deterred in moves to convert their U.S. holdings o
short-term securities into other currencies that eventually means gold outno
fro m the United States. The mere existence, we repeat, of such borrow in g au
thority would go a long way toward reducing short-term outflows from tn
United States. With this problem in hand, the United States could then co
centrate on improving its basic balance-of-payments deficit.
The United States would not assume any additional financial obligation cu rently by approving a $2 billion commitment to IMF. Only a standing commit
ment to make the funds available will be made. There would be no gold pay*
ments to the Fund and there would be no additional capital subscription. Or
standby commitment would not require us to make any loan to the Fund nn ^
we had achieved a substantial improvement in our balance-of-p aym en ts P031
tion. As a matter o f fact, the entire history o f the negotiations leading UP
this proposal makes it clear that for the foreseeable future, its main purpose
is to make possible a loan to the United States if it becomes n ecessa ry.
>
m
It may very well be, however, that the existence of this new m echanism w
help to assure that the United States will, in fact, never have to make a drawing
from the Fund. The knowledge that these supplementary resources exist s^01!
bolster confidence in the dollar and thereby limit short-term flows in specu
tive situations which might otherwise get out o f hand.
,
Thus, by providing resources to forestall or counteract movements of
adversely affecting the dollar, the new arrangements will make such m o v e m e n t s
BRETTON WOODS AGREEMENTS ACT AMENDMENT
139
less frequent and less drastic. This should help to ease that part of our balance-of-payments problem which results from short-term and essentially specula
tive movements of capital funds. This, in itself, will have at least psychological
value in helping us to deal with the more fundamental problem of restoring the
basic balance in our international accounts.
Mr.
Mr.
R euss. Mr. Chairman.
S pence . Mr. Reuss.
M r. R euss. Thank you, M r. Chairman.
Getting back to your testi
mony before us this m orning, M r. Martin, you pointed out in your
testimony that the System is now conducting operations not only fo r
the purposes o f the treasury stabilization fund, but fo r a broader
purpose, and you define that broader purpose as “ cooperative arrange
ments with foreig n central and reserve banks.”
D id the N ational A d v isory Council on International Monetary and
Financial Problem s make a decision authorizing the Federal Reserve
to enter into the sort o f transactions and cooperative arrangements
which you have described to us this m orning ?
M r. M ar t in . I referred that to Secretary D illon as Chairman o f
the N ational A d v isory Council, and it is my understanding that they
have.
Mr. R euss . Would you please hand me the decision of the National
Advisory Council ?
Mr. M a r tin . The National Advisory Council doesn’t hand down
written decisions on any of these things.
M r. R euss . Then I must cross-examine you on your “ understand
ing,” because it was this com m itte which set up, in the Bretton W oods
Agreem ents A c t o f 1945, the National A dvisory Council. A s you
know, it consists o f the Secretary o f the Treasury as Chairman, and
also consists o f the Secretaries o f State and Commerce, the Chairman
o f the B oard o f G overnors o f the Federal Reserve System, the Presi
dent o f the E x p ort-Im p ort Bank, and a fellow from F O A . W e set
up the Council and defined their duties as fo llo w s :
The Council shall coordinate the policies and operations of all agencies of the
Government to the extent that they engage in foreign financial, exchange, or
monetary transactions.
Well now, that described this to a “t”, does it not?
M r. M a r t in . And that will be done in this case.
Mr. R euss. But here you come up and tell us what you are doing and
I am confused. You said a moment ago that you understood you
had authority from the National Advisory Council.
M r. M a r t in . B efore we took any action this was referred to Secre
tary D illon fo r the N ational A dv isory C ouncil’s approval.
Mr. R euss . How was it referred?
Mr. M a r tin . By a letter from me to him.
Mr. R euss. Would you place a copy of that letter
Mr. M a r t in . I would be very glad to.
in
the record?
M r. R euss . A n d w ould you place in the record the response to your
letter from the National A dvisory Council, which led you to the
understanding you have just described to me, as saym g that they
are in accord w ith this?
.
_ , T
, .
Mr. M a r t in . I have n o response, but I will see what I can do m
getting one f o r you. I have no form al letter from them that 1 can
submit to you, but that w ould fall in Secretary Dillon s jurisdiction,
and I w ill ask him how he would like to handle that.
140
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. E eu ss . Well, Secretary Dillon is the Chairman of the Na
tional Advisory Council?
M r. M a r t in . T h a t is correct.
Mr. R eu ss . N o w , he either approved
your course of action, in con
sultation with the rest of the Council, or he did not. I am amazed
to find that sweeping changes in national policy like this are not
embodied in even a scrap of paper.
So I wish you would place the whole record before this committee
so that we can know how the operations o f the National Advisory
Council are conducted.
Mr. Martin, the bill before this committee, as the chairman has
said, is H.R. 10162, which, in meticulous and detailed terms, asks
the Congress to authorize the exposure of $2 billion o f American
governmental funds in aid of an arrangement to facilitate interna
tional monetary stability. Both the chairman and I, and some other
members, also think this is an excellent arrangement. We are all
for it and are going to try to see it through the House of
Representatives.
What beats me, however, is that while we strain at this statutory
arrangement, which relates only to $2 billion, and which sets forth
in the clearest and most meticulous way, exactly how these inter
national arrangements shall be made, you come in here and tell us
that you propose to go off on, if I may say so, a frolic of your own,
involving unspecified sums without the slightest statutory guidance
as to how you are going to make these, as you call them “ cooperative
arrangements.” They sound to me very much like what used to be
called a “ treaty,” or at least an “ executive agreement,” and when I
ask you whether you are going to tell us, the Banking and Currency
Committee, anything about this, you say, though in a good humored
way, you are going to tell us-what you think we ought to know, and
no more.
This seems to me, Mr. Chairman, an extraordinary procedure, and I
want to reiterate the sense of shock which I feel in hearing this. 1
would welcome your comment, or your distinguishing these two cases.
It seems to me the Treasury has behaved in a proper manner, by com
ing up here and {retting statutory authorization.
You, Mr. Martin, are attempting, in your own phrase, something
much, much broader; but you have come up here just to tell us that
you are doing it.
.,
Mr. M a r t in . The Monetary Fund had to have statutory authority*
Now, you may disagree as a iawyer with the lawyers for the Federal
Reserve Board, as to our existing authority on this, Mr. Reuss. But
as I reiterate, our lawyers said we had the authority, the Treasury
counsel concurred, and the Attorney General concurred with them.
And on the basis of that authority we have begun operations. I don t
want to withhold anything from you.
We thought that, in furtherance of what is being done here, with
no requirement for additional^ statutory authority, with rigid adher
ence to the law—so that we will not embark, for example, on buying
Treasury bills abroad, because it isn’t specifically authorized in tk®
law—we thought that we would be helpful in this operation,/!
thought it was wise to give you full disclosure under the existing
authority, and our reporting to you will be exactly the same as rt
BRETTON WOODS AGREEMENTS ACT AMENDMENT
141
is with respect to other operations of the system, in the procedures
which the Congress has set up for us.
^ •
Mr. R euss . Y ou speak of the opinions of the Treasury and Attor
ney General. 1 would like to look at those right now, if I may. May
1 have them ?
Mr. Mam in . You can get those from them, not from me. I don’t
run their departments.
Mr. R e u ss . Well, they assuredly gave you a copy, and you are the
witness liefore us, so I thought in response to Mr. Patina ns inquiry
that you agreed to submit those.
Mr. P a t m a n . He did agree to submit them.
Mr. R euss . I think at this point we should look at the record on
that.
Mr. M a r t in . X o, I said I would submit a statement, Mr. Patman.
Mr. P a t m a n . That is not my understanding at all. There is no
meeting of the minds at all there."
Mr. S p e n c e . I s the gentleman through ?
Mr. E eu ss . In just a minute.
I would like to make a formal request of you to furnish this com
mittee today, Mr. Martin, with the opinion of the General Counsel of
the Treasury Department and the opinion of the Attorney General of
the United States, which you say were the basis of this action on your
part. You have copies of those, and I would like to see a photostatic
or other copies of those opinions.
Mr. M a r t in . Mr. Reuss, I have no such opinions, and I will see
what the Attorney General wants to do on it and what the Treasury
wants to do on it. I have no control over them.
M r. M u l t e r . Will you yield ?
Mr. R e u ss . I will yield.
Mr. M u l t e r . Mr. Martin, let’s see if we can’t clarify this situation.
Did the Attorney General or Counsel for the Treasury, either or
both of them, render any written opinions to the Federal Reserve
Board on this subject?
. . .
Mr. M a r t in . The Attorney General did not render a written opinion
to the Board, but he concurred and I have his concurrence. .
The General Counsel of the Treasury has a written opinion that I
have in my files. What lie has in his files, I don’t know.
Mr. M u l t e r . I don’t think Mr. Reuss is asking you to deliver any
thing other than what was submitted to you, and I think with that
clarification, I think if you will agree that you will submit whatever
you have in your files, submitted by either Treasury or Justice, it will
meet his request.
Mr. M a r t i n . I will be glad to.
„ ,
.
j
1.
Mr. R eu ss . Specifically, if you will, with all deliberate speed, sub
mit to the Treasury and the Attorney General, your testimony this
morning, and perhaps show them a copy of the record which will be
ready later today. You could then ask them to put m writing what
Mr. Reuss, with nil 4 .
to the gentleman from Wisconsin.
M , E e ^ » »»t
to get
consent to put anything in. He is asking Mr. Martin to submit what
he received.
80807— 62------ 10
142
BRETTON WOODS AGREEMENTS ACT AMENDMENT
N ow , he is asking M r. M artin to request them to d o other things.
I w ould like to suggest to M r. Reuss that we ought to ask the
Treasury and the A ttorn ey General to subm it their background mate
rial on the basis o f w h ich they give their opinions. I don ’t think we
ou ght to ask it o f M r. M artin.
M r. P a t m a n . I w ant this plain about the understanding.
I asked that M r. M artin p u t in the record at that point, the opinion,
or opinions o f his law yers, the F ederal Reserve lawyers, upholding
his pow er and righ t to do w hat he is d oin g in these foreign exchange
transactions.
M r. M ulter . T h a t is w hat M r. Reuss is asking.
M r. P a t m a n . I know . A n d also the other opinions that he related
corroborating his law yers’ opinions.
M r. M ulter . M r. M artin is suggesting he can d o that only to the
extent o f what he received.
M r. P a t m a n . T h a t is all right. I understood you to say that you
went to a lot o f trouble to get these opinions, that they are all right,
and that bein g true I th ought y ou should subm it them.
M r. S pence . I think M r. M artin has been very fra n k in coming
here and stating his purpose in the future. W e w ould n ot have known
anything about it i f he had n ot divulged it tod ay .
I t is n ot involved in the b ill.
A n d I think that i f M r. M artin w ill give us w hat he has, that that
w ill be sufficient. I d on ’t think you ou gh t to p ut M r. M artin in the
position o f tryin g to evade o r misrepresent anything. I don’t think
he has done that.
M r. M ulter . T h a t is not w hat we have been try in g to do.
M r. P a t m a n . T h a t is n ot the object. I am not w illin g to accept a
statement from M r. M artin as to what he intended to do.
I wanted to see the opinions from these lawyers.
T h a t is what I asked to have put in the record.
. .
M r. M a r t in . I w ill be g la d to put the F ederal R e s e r v e l e g a l opinions
in the record.
M r. P a t m a n . A ls o , whatever you got from the Treasury and the
A ttorn ey General.
M r. M a r t i n . I cannot speak for the T reasury or the Attorney
General.
#5
«
M r. P a t m a n . Y o u have a written statement fro m them, don’t y ou .
M r. M a r tin . O nly o f concurrence.
M r. P a t m a n . T h a t is all right. P u t that in.
T h a t is all you can
p u t in.
M r. M a r t in . I w ill m ake the record p erfe ctly clear.
(T h e statement and data referred to above are as fo llo w s :)
B oard of G overn ors,
F ederal R eserve S y s t e m ,
O f f ic e o f t h e C h a ir m a n ,
Washington, March It 1962*
H o n. B r e n t
S pen ce,
Chairmant Committee on Banking and Currency, House o f R e p resen ta tiv es,
Washington, B.C.
D e a r Mr. C h a i r m a n : In response to requests made b y R e p r e s e n t a t i v e
and Representative Reuss, I enclose for inclusion in the record of the heari®£
o n H.R. 10162 five d o c u m e n t s relating t o foreign-exchange o p e r a t i o n s by
Federal Reserve System.
*
BRETTON WOODS AGREEMENTS ACT AMENDMENT
143
The first document is a memorandum from our General Counsel, Howard
Hackley, dated November 22, 1961, in which he expresses the opinion that such
operations are authorized by the Federal Reserve Act.
The second is a summary opinion to the same effect by Mr. Hackley.
The fchird is a letter from the General Counsel of the Treasury Department,
Robert H. Knight, to Mr. Hackley, expressing his concurrence and that of the
Attorney General in Mr. Hackley’s opinion, and enclosing a memorandum he
had submitted to the Secretary of ttte Treasury to the same effect
The fourth Is a coj>y of a letter 1 sent on February 16, 1962, to the Secretary
of the Treasury as Chairman of the National Advisory Council on International
Monetary and Financial Problems, in compliance with section 4 (c) of the Bretton
Woods Agreements Act, informing the Secretary of the action of the Federal
Open Market Committee, taken on February 13, 1962, authorizing such opera
tions, to which is attached a copy of the authorization.
The fifth item is a copy of an action by the National Advisory Council, dated
February 28, confirming the understanding I expressed at yesterday’s hearing
that the National Advisory Council was in accord with the System’s decision
to undertake foreign-currency operations.
Copies of this letter and the enclosures are being sent to Representatives
Patman and Reuss.
Sincerely yours,
W m . McC. M a rtin , Jr.
Enclosures.
M emorandum
Paper No. 6—Confidential (Fr)
Date: November 22,1961.
T o : Federal Open Market Committee.
From: Mr. Hackley, General Counsel.
Subject: legal aspects of proposed plan for Federal Reserve operations in foreign
currencies.
At the September 12, 1961, meeting of the Federal Open Market Committee,
legal questions were raised regarding a proposed plan under which the Federal
Reserve Bank of New York would open and maintain accounts in certain foreign
currencies with foreign central banks, acting pursuant to directions and regula
tions of the Committee and, to the extent legally necessary, in accordance with
regulations of the Board of Governors.
It is understood that in general the principal purposes o f operations in foreign
currencies through such accounts wTould be to promote international monetary
cooperation among the central banks of countries maintaining convertible cur
rencies, to foster orderly conditions in exchange markets for such currencies,
to facilitate the expansion and balanced growth of international trade, and to
supplement the activities o f the International Monetary Fund in this field. It
is assumed that the underlying basic objective would be to accommodate com
merce and business and maintain sound credit conditions in the United States,
in accordance w ith the governing princlpes stated in section 12A of the Federal
Reserve Act.
It is also understood that such accounts with foreign central banks would be
opened and maintained principally through the purchase o f cable transfers by
the Federal Reserve Bank o f New York, although they might also be created
through sales of gold to foreign central banks and the direct establishment of
cross credits. It is further understood that, while such accounts would be estab
lished primarily for the purposes above indicated, any amounts in excess of
minimum wrork'ing balances might be invested in foreign bills of exchange.
As the plan has been described, it gives rise to a number of legal questions,
some of basic importance and others that may be of only minor or secondary im
portance. In general, it appears that the questions may be regarded as falling
within the six categories indicated below, and they will be discussed here in
that order:
. , ,
.
I. Authority of a Federal Reserve bank to open and maintain accounts
with foreign central banks;
.__.
II. The legality of the proposed methods of acquiring foreign exchange,
III. Investments of foreign accounts;
144
BRETTON WOODS AGREEMENTS ACT AMENDMENT
IV. The respective jurisdictions of the Board of Governors and the Fed*
era! Open Market Committee;
V. The possible effects o f the Gold Reserve Act of 1934 and the Bretton
Woods Agreements A c t; and
VI. Administration o f the proposed plan, including delegations of au
thority with respect to day-to-day operations.
This memorandum does not consider policy questions that may be involved in
the present proposal.
CONCLUSIONS
For the reasons hereafter presented, my conclusions are as follows:
1. General.—The opening of accounts with foreign central banks by tlie Fed
eral Reserve Bank of New York for the purposes and through the methods con
templated by the proposed plan would be consistent with the law, provided ap
propriate actions are taken by the Board of Governors and the Federal Open
Market Committee within their respective jurisdictions. However, this mat
ter is admittedly subject to questions; and, while it is unlikely that the plan
would be challenged in court, there can be no assurance, in the absence of legis
lation, that it would not be criticized from some sources on legal grounds. Cer
tain suggested features of the plan (e.g., purchases of foreign Treasury bills)
would require specific legislation.
2. Opening o f accounts with foreign banks.— Pursuant to section 1 4 ( e ) or
the Federal Reserve Act, a Federal Reserve bank may open an account with a
foreign central bank even though such account is not opened for the p rin c ip a l
purpose o f purchasing foreign bills o f exchange and is not fully or e x te n s iv e ly
utilized for that purpose; but any questions as to such authority would be less
ened if some portion of the account was used to purchase foreign bills.
3. M ethods o f acquiring foreign currency accounts. — A Federal Reserve banK
may lawfully open and maintain such an account through cross-credits, sales
of gold to the foreign bank, or transfers of credit to the account through eitner
spot or forward purchases of cable transfers in the open market.
4. Purchases from Stabilisation Fund.— The purchase by a Federal Rese
bank of cable transfers directly from the Stabilization Fund of the Treasur.
w’ould constitute a purchase in the “ open market” as authorized by the fin1
paragraph of section 14 of the Federal Reserve A c t It is possible that su
purchases from the Stabilization Fund might be criticized as being inenns,
with section 14(b) of the act which indicates that direct purchases of Gover •
ment obligations from the Treasury are not purchases in the ‘‘open marKe
but, in my opinion, any such criticism would not have legal validity.
5. Dealings w ith International M onetary Fund .— Purchases of cable trans
by a Federal Reserve bank for its own account directly from the Internatio
Monetary Fund could be regarded as “ open market” transactions au'r or^nS
by section 14 of the a ct; but, unless otherwise interpreted by the Fund, it see questionable whether the Fund would have authority to sell cable tranfers t
Federal Reserve bank except in the Reserve bank’s capacity as fiscal agent
the United States.
^
6. Investment of foreign accounts.— Such foreign accounts could be
.
in foreign bills of exchange and acceptances that arise out of actual comI? r i nt
transactions and have maturities o f not more than 90 days. They couJJJ ®
in the absence of further legislation, be invested in foreign Treasury bu_
other obligations of foreign governments or central banks. Some portion or a
such account could lawfully be invested in a time deposit with a foreign cen
bank.
.
7. Jurisdictions o f Board and FOMC.— All o f the above actions
t
subject to regulations of the Board of Governors or the Federal Open AlarK
Committee, or both, as follow s: .
nd
(a) Open market purchases o f cable transfers, bills of exchange,
acceptances would be subject to direction and regulations o f the C o m m i t ’
(b ) The opening and maintenance o f accounts with foreign banks,
tiations and arrangements with foreign banks for this purpose, ana sa
of gold to foreign banks would be subject to the consent and regulation ___
the Board pursuant to sections 14(e). and 14(g) o f the Federal Keser*
A ct; and
,,
(c) The Board could not lawfully delegate to the Committee the Boa ,
statutory responsibilities with respect to supervision and regulartion
such f o r e i g n accounts and incidental transactions with f o r e i g n ban *
However, the Board could, by regulation, consent t o the m a i n t e n a n c e
BRETTON WOODS AGREEMENTS ACT AMENDMENT
145
such accounts and to such negotiations and arrangements with foreign banks
as may be authorized or directed by the FOMC in order to effectuate open
market transactions, subject, however, to such limitations and reporting
requirements as the Board may prescribe, and subject also to reservation in
the Board of the right to modify or revoke such authorizations.
8. Effect of other laws.—The authorities of the Committee and the Board, as
above described, would not be legally limited by the provisions of section 10
of the Gold Reserve Act with respect to the Stabilization Fund of the Treasury,
(Dealings in gold would, of course, continue to be subject to the licensing au
thority of the Secretary of the Treasury.) Nor would such authorities be legally
limited by provisions of the Bretton Woods Agreements Act, although it would
be desirable, in view of the language and purposes of that act, for any plan of
the kind proposed to be brought to the attention of the National Advisory
Council.
9. Administration.— I f the Board should take appropriate actions along the
lines indicated in paragraph 7 (c) above, it is believed that the Committee could
lawfully (a) direct the Federal Reserve Bank of New York to open accounts and
execute transactions pursuant to the plan, subject to limitations prescribed by
the Committee, and (b) delegate to a Subcommittee of the Committee authority
for supervision of day-to-day operations by the New York Bank, subject to
general policies established by the Committee.
i. authority to open foreign accounts
Section 14(e) of the Federal Reserve Act (12 U.S.C. 338) authorizes any
Federal Reserve bank
“* * * with the consent or upon the order and direction of the Board of Gov
ernors of the Federal Reserve System and under regulations to be prescribed
by said Board, to open and maintain accounts in foreign countries, appoint
correspondents, and establish agencies in such countries wheresoever it may be
deemed best for the purpose of purchasing, selling, and collecting bills of ex
change. * *
(Italic supplied.)
A basic legal question is whether the underscored “wheresoever” clause in
this provision has the effect of permitting a Reserve bank to open an account
with a foreign bank only for the purpose of “purchasing, selling, and collecting
bills of exchange” and as, therefore, forbidding the opening of such accounts
for the purposes contemplated by the present proposal.
Previous position of Board— In 1933, in a letter to the Federal Reserve Bank
of New York, the Federal Reserve Board stated:
* * Federal Reserve banks are authorized to establish and maintain ac
counts in foreign countries only with the consent of the Federal Reserve Board
and subject to such regulations as the Board may prescribe; and it is the
Board’s view that such accounts may be opened and maintained only for the
purpose of facilitating the purchase, sale, and collection of bills of exchange and
tne conduct of other open market transactions of the kind specified in section
£*of the Federal Reserve Act. * *
_7
ine same position was indicated hr the Board in another letter to the >ie\v
iofk Reserve Bank dated August 16.1934:
„ , .
* ^
the Board’s view that the deposit balance with the Bank for
international Settlements should be reduced as soon as practicable to tlie mini
mum amount which is actually needed for the purpose of facilitating the pur
chase, sale, and collection of bills of exchange and the conduct of orher open
market transactions of the kinds specified in section 14 of the Federal Reserve
Act. * *
Th**se letters have sometimes been referred to as reflecting the position of the
soard that a foreign account may not legally be opened except for the purpose
and collecting' bills of exchange. However, it is not clear
t e
in these letters intended to express such a legal conclusion: it
,!nve been indicating only its view as to policy. Moreover, even if the
t w r(] s *etters aro considered as interpretations of the statute, it may be arjrne
nat the present proposal would be entirely consistent with those letters since
tlmt one of the permissible purposes of a f o r e i g n account is to
acihtate “ the conduct of other open market transactions of the kinds
/T<J; lc?n 14” an<* since foreign accounts under the present proposal would be
• gned to facilitate purchases of cable transfers pursuant to that section.
Language of the statute.—Presumably, the Board’s 1933-34 position was based
construction of the language o f the statute under which the wheresoeve
146
BRETTON WOODS AGREEMENTS ACT AMENDMENT
clause was regarded as limiting not only the authority of a Reserve bank to
appoint correspondents and establish agencies but also its authority to
open foreign accounts. There is reasonable ground, however, for a contrary
construction.
While commas appear after the authorities “ to open and maintain accounts
in foreign countries” and to “ appoint correspondents,” there is no comma after
the authority to “ establish agencies in such countries” and, consequently, it
may be argued that, as a matter of grammatical construction, the “wheresoever”
clause modifies only the nearest antecedent, that is, the authority to establish
agencies. However, it seems unreasonable to suppose that Congress intended
to make an arbitrary distinction in this respect between correspondents and
agencies.
The so-called Aldrich bill, upon which the Federal Reserve Act was based,
contained a corresponding provision that appeared to limit the e s t a b lis h m e n t
of agencies to the purpose of buying and selling bills of exchange but n o t to
place such a limitation upon the opening of foreign accounts. The Aldrich
bill would have authorized a Reserve bank
“ * * * to open and maintain banking accounts in foreign countries, a n a to*
establish agenices in foreign countries for the purpose o f purchasing,
and collecting foreign bills of exchange, and * * * to buy and sell, with or
without its indorsement, through such correspondents or agencies. *
The provision of section 14(e) that authorizes the opening of accounts, tn?
appointment of correspondents, and the establishment of agencies is immediately
followed by language authorizing a Reserve bank to buy and sell bills 0
exchange or acceptances “ through such correspondents or agencies,” again sug
gesting, although not conclusively, that the purchase and sale of bills of exchange was intended to be linked with correspondents and agencies but no
with the maintenance of accounts with foreign banks.
,.
A final, and perhaps the strongest, argument for the more liberal c o n s t r u c t cio
of the statute may be based upon the ambiguous nature of the phrase
soever may be deemed best.” Even if that phrase is interpreted as appJiy J
not only to the appointment of correspondents and agencies but also to t
opening of foreign accounts, it does not expressly require such accounts, corre
pondents, or agencies to be utilized only for the purpose of buying and seiu s
bills of exchange. It is susceptible of the construction that such accounts
y
be opened wherever geographically it may be reasonably contemplated that
miff Jit be used at some time for such purpose but that they need not be lim
to that purpose.
*Some support for this construction may be derived from the last sentence
section 1 4(e). That sentence provides in effect that whenever a Reserve d
opens a foreign account or appoints or establishes a foreign correspondent
agency, any other Reserve bank may carry on, through such R e s e r v e bank,
/
transaction authorized by this section [section 14]” . In other words, wne
one Reserve bank opens foreign accounts or appoints foreign correspond*?
or agencies, other Reserve banks may conduct; through such accounts, corre pondents, or agencies not only transactions in bills of exchange but any trans
tions authorized by section 14—even non-open market transactions, siicn
dealings in gold. From this, it may be argued that it would be illogical ■
absurd to hold that the Reserve bank opening such accounts or a p p o i n t i n g
correspondents or agencies could use them only for the purpose of bu*yin£.jLn
selling bills of exchange. This argument, o f course, points to the conc:1
that the “ wheresoever” clause, even if it modifies the authority to open foreis
accounts, was not intended to limit the use of such accounts to the oil
and selling of bills of exchange. The argument is also entirely consistent
the language of the Board's letters of 1933 and 1934, which stated that torew
accounts could be opened, not only to purchase and sell bills of exc^an^ s nns
also in order to facilitate the conduct of any of the open market t r a n s a c t
authorized by section 14.
Intent of Congress.-—The intent of Congress in the enactment of the
in question is not crystal clear. However, legislative history tends in s
degree to support the conclusion that Congress contemplated that foreb
accounts opened by the Reserve banks might be used to influence foreign excniat
. and to control international movements of gold as well as to purchase ana ^
bills o f exchange. For example, the House Committee report on the origi
act contained the following statement with respect to this provision:
.s
“ The final power to open and maintain banking accounts in foreign count
for the purpose of dealing in exchange and o f buying foreign bills is necessary
BRETTON WOODS AGREEMENTS ACT AMENDMENT
147
order to enable a Reserve bank to exercise its full power in controlling gold move
ments and in facilitating payments and collections abroad.'*
Since it refers to “dealing in exchange” as well as “buying foreign bills,”
this statement might be interpreted as contemplating that foreign accounts
could be broadly used as a means o f dealing in foreign exchange, other than
through purchases of bills, in order to control gold movements and facilitate
payments and collections abroad. Admittedly, however, the statement is not
entirely convincing, since the phrase “dealing in exchange” might have been
used only as a loose phrase to cover dealings in foreign bills of exchange.
Administrative construction.— In 1925, the Federal Reserve Bank of New York
opened an account with the Bank of England which was clearly not for the
purpose of buying, selling, and collecting bills of exchange. Under that arrange
ment, the Reserve bank agreed to place $200 million of gold at the disposal of
the Bank of England, with the understanding that the proceeds of sales of such
gold would be deposited in an account in pounds sterling with the Bank of
England to the credit of the Reserve bank to be available for investment for the
account of the Reserve bank in sterling commercial bills guaranteed by the Bank
of England, and with the further understanding that, at the end of the standby
period, any amount outstanding was to be payable at the Reserve bank in gold
or its dollar equivalent. This arrangement was described by the Board in its
annual report to Congress for the year 1925, and as thus described it was made
clear that the account with the Bank of England might be used from time to
time for the purchase of commercial bills, but that this was not the principal
purpose of the arrangement.
Although the Board subsequently (in 1933 and 1934) construed section 14(e)
as limiting foreign accounts to the purchase of bills of exchange, the fact re
mains that the 1925 arrangement with the Bank of England did not conform
to this construction and that Congress, with full knowledge of that arrangement,,
did not then or subsequently amend the statute in any manner designed to pre
vent such an arrangement.
Conclusion.— For all of the reasons above indicated, it is my opinion that a
Federal Reserve bank may lawfully open and maintain an account in foreign
currency with a foreign central bank whether or not the account is maintained
and utilized for the purpose o f investing in foreign bills of exchange and that*
therefore, the opening of such accounts for the purposes now contemplated would
not be inconsistent with the statute. I do not believe that the “ wheresoever”
phrase was intended to limit the authority to open foreign accounts: but, even
if it may be so regarded, I believe that it can be construed as meaning only
that such accounts shall be established where it may reasonably be expected that
they might be used for the purchase and sale of bills of exchange. The present
proposal would comply with that requirement.
Consultation with Banking and Currency Committees.—Admittedly, the ques
tion is debatable, particularly in view o f the 1933--34 position of the Board.
Moreover, it may be noted that in 1932, Senator Glass had criticized certain
foreign operations of the Federal Reserve Bank of New York, which might be
considered as similar to those now contemplated, as being contrary to the law.
When the bill that subsequently became the Banking Act of 1933 was under
consideration by Congress, Senator Glass on the floor of the Senate referred to
Federal Reserve “ stabilization” operations under which credits had been ex
tended to European banks, and suggested that such operations were inconsistent
w*th the Federal Reserve Act. The pertinent portions of his statement were
the following:
. “ For a period of (5 years one of the Federal Reserve banks has apparently
Sjven more attention to ‘stabilizing’ Europe and to making enormous loans to
European institutions than it has given to stabilizing America. Accordingly,
we have a provision in this bill asserting, in somewhat plainer terms, the re
straint the Federal Reserve supervisory authority here at Washington should
exercise over the foreign and open market operations of banks which may assume
to be a ‘central bank of America.’
w
‘We did not think that we were having a central bank. We thought ^e 'Aere
paving 12 regional banks. The operations of the bank particularly referral
to were so extensive in the European field that it found itself liable for^hun
dreds; of millions of dollars of foreign acceptances which could no* be
^iiich had to be renewed at maturity—just a sort of revolv11^
‘
* *„
foreigri to the intent, and, as I contend, to the text of the lederal Resen e Act.
(75 Cong. Rec. 9S84, May 10,1932.)
148
BRETTON WOODS AGREEMENTS ACT AMENDMENT
For the reasons heretofore indicated, it is believed that the legal validity of
Senator Glass7 statement may be questioned. In any event, he was obviously
referring to instances in which the Federal Reserve had undertaken operations
to bolster the credit of foreign countries; and some distinction may be drawn
between those operations and the plan now proposed, which, in net effect, is
/designed to insure international monetary cooperation and convertibility of
currencies, as well as to protect the Ajnerican dollar.
Nevertheless, in view of the uncertainties as to the construction of the law
and the history o f this matter, it might be desirable, before instituting the plan
now proposed, to inform the Banking and Currency Committees of Congress.
Such action would not, o f course, have any legal significance; but it could help
to diminish the likelihood o f adverse criticism. On the other hand, of course,
such action might tend to generate criticism and controversy.
I I . M ET H O D S OF AC Q U IR IN G FOREIGN E X C H A N G E
A. Cross-credits and sales of gold
,
As indicated at the outset of this memorandum, it is understood that the pro
posed foreign currency operations would be effected principally through pur
chases o f cable transfers that would result in credits in accounts with foreign
.Central banks. However, such credits could be established also through direct
Yarrangements for cross-credits between the Federal Reserve Bank of New YorK
and foreign banks or through sales o f gold to foreign banks.
Opening of foreign accounts through straight cross-credit a r r a n g e m e n t s wouia
be authorized by section 14(e) of the Federal Reserve Act, subject to t h e con
sent of the Board and under regulations of the Board as provided in s e c tio i
14(e) and section 14(g). Unless such arrangements involved the p u r c h a s e
o f cable transfers or bills of exchange, they would not constitute open m arK er
operations.
As to the establishment of foreign accounts through sales of gold, it seem_
clear that this would be authorized by section 14(a) o f the Federal
Act (12 U.S.C. 354) which empowers the Reserve banks to “deal with gold coi
and bullion at home or abroad.” Again, such s a l e s of gold would not be ope
market operations and, as hereafter discussed, would be subject o n l y to sue
regulations as the Board might prescribe pursuant to sections 14(e)
1 4 0 7 )/
B. Purchase of cable transfers generally
The first paragraph of section 14 provides in part that:
, .T
“ Any Federal Reserve bank may, under rules and regulations p r e s c r i o e o r
the Board of Governors o f the Federal Reserve System, purchase and s e i
the open market, at home or abroad, either from or to domestic or f o r e i g n ban
firms, corporations, or individuals, cable transfers * *
(12 U.S.C.
To the extent that the proposed foreign exchange operations would b e enec:
through purchases of cable transfers in the open market from d o m e s t i c ha *
or dealers in foreign exchange or from foreign banks, there w o u l d , in m-v
ion, be no legal question of authority involved, whether the cable t r a n s f e r s
lated to spot or forward transactions.
C\ Dealings with Stabilization Fund
*
A more difficult question would be presented if the Federal Reserve Bank o
New York (or any other Federal Reserve bank) should purchase cable
from the Stabilization Fund administered by the Secretary o f the Trea
under section 10 of the Gold Reserve Act (31 U.S.C. 822a).
ronllla
First, it may be questioned whether such a purchase from the Treasury
1
be an open market” purchase within the meaning of the first paragrapn
section 14 of the Federal Reserve Act.
.
i^fb)
Doubt on this score might be engendered by the provisions of
of the act (12 U.S.C. 355), which clearly regard direct purchases of Go
ment obligations from the Treasury as not constituting “ open m a r k e t V
chases. However* for the reasons hereafter indicated, it is believed that
'
provisions are not inconsistent with holding that direct purchases of cable t
rers from the Treasury constitute “ open market” purchases within the ni .
ing of the first paragraph o f section 14. The same term may sometimes be
ferently construed in the light of different statutory contexts and p u n )°s ^ \ ,
'IS35, the Reserve banks under section 14(&) freely Pu^
u
Government obligations directly from the Treasury, even though section
BRETTOX WOODS AGREEMENTS ACT AMENDMENT
149
was designated as relating to “ open market operations/* By the Banking Act
of 1935, Congress prohibited such purchases of Government obligations except
in the “ open market.” In 1942, Congress permitted the “direct” purchase of
Government obligations from the Treasury for a temporary period and up to
a limited amount ; and this authorization has been extended by subsequent
amendments. It seems clear, however, that this limitation on direct purchases
of Government obligations was intended to prevent the Federal Reserve System
from lending its resources to the Treasury in a manner that might be incon
sistent with the System’s monetary and credit responsibilities. These consider
ations, of course, are not applicable to purchases of cable transfers from the
Treasury. In other words, an “open market” in cable transfers may be re
garded as embracing any person with whom a Reserve bank may feel free to
deal, including the United States Treasury, which is a part of that market;
whereas an “ open market’' in Government obligations may be regarded as ex*
eluding the United States Treasury, which issues such obligations and conse
quently is not a part of that market.
A further question arises as to whether the United States is a “corporation”
within the meaning of the first paragraph of section 14 from which a Reserve
bank may properly purchase cable transfers. Obviously, the United States is
not a corporation in the usual sense of a business corporation with stock out
standing: and it is probable that, in the original Federal Reserve Act, Congress
had in mind only such corporations. However, the courts have held that, de
pending upon the context, the United States may be regarded as a “corporation”
1Ja
sense envisaged by Chief Justice Marshall in the Dartmouth College case
(4 Wheat.
: “ an artificial being, invisible, intangible and existing only in
contemplation of law.”
On balance, it is my opinion that a Reserve bank’s purchases of cable trans
fers from the Stabilization Fund may reasonably be regarded as “open market”*
purchases from a “ domestic corporation” within the meaning of the first para
graph of section 14.
Admittedly, such purchases might be criticized on the ground that, like direct
purchases of Government obligations under section 14 ( ft), direct purchases
transfers from the Treasury should not be treated as “ open mar
k et’ transactions; but I would not regard any such criticism as having
legal validity, i f cable transfers purchased from the Treasury had previously
neen acquired by the Treasury from the International Monetary Fund solely
. purpose of sale to the Federal Reserve bank, such a transaction might be
^riticized as a device for accomplishing directly what could not be accomplished
directly, i.e., direct acquisition of cable transfers by the Reserve bank from
the IM F : but, again, anv such criticism would, in my opinion, relate to policy
and not to legal validity.
D. Dealings with International Monetary Fund
Section 1 of article V o f the Articles of Agreement of the International Mone
tary Fund provides:
“ Each member shall deal with the Fund only through its treasury, central
oank, stabilization fund, or other similar fiscal agency and the Fund shall deal
only with or through the same agencies.”
„
the assumption that the Federal Reserve System may be considered the
central bank” of the United States, the United States could purchase cable
transfers from the Fund through the Federal Reserve Bank of New York acting
under directions of the Board of Governors and the Federal Open Market Com
mittee; but obviously this would not constitute an “ open market” transaction
by the Reserve bank.
laterally, the first part of the above-quoted provision of the Articles of Agree
ment of the Fund would not prohibit a Reserve bank from dealing for its own
account with the IMF, and it might be argued that the second part of the pro
vision would permit the Fund to deal directly “with” the Reserve bank as
'veil as “ through” the Reserve bank. This is, of course, a question for deter
mination by the Fund; but it is mv opinion that the provision contemplates that
the Fund will deal only with a member country or with or thronjrli its feral
agencies” and that, therefore, it is seriously questionable whether
Jjroen the Fund and the Reserve bank in a capacity other than fiscal agent for
the Treasury w ould be permissible.
150
BRETTON WOODS AGREEMENTS ACT AMENDMENT
I I I. INVESTM ENT OF FOREIGN ACCOUNTS
Assuming that the proposed plan would not be impeded by lack of authority
of the Federal Reserve banks to open and maintain accounts with foreign central
p / banks or to purchase cable transfers, questions arise as to the types of instru
ments in which such accounts may lawfully be invested.
Bankers’ acceptance and Mils of exchange.— The first paragraph of section 14
of the Federal Reserve Act authorizes any Reserve bank, under rules and regu
lations prescribed by the Board, to purchase and sell in the open market, at home
or abroad, “bankers' acceptances and bills of exchange o f the kinds and maturities
by this act made eligible for rediscount, with or without the indorsement of a
member bank.” (12 U.S.C. 353.) Putting aside for the moment the question
whether such purchases are subject to regulations o f the Board ( to be discussed
hereafter), it seems clear that under this provision a Reserve bank could use
accounts with foreign banks only for investment in acceptances and bills of
exchange that would be eligible for rediscount under sections 13 and 13a of the
Federal Reserve Act. In general, this would limit such investments to 90-day
commercial paper, 9-months agricultural paper, and acceptances of the kinds
and maturities described in section 13.
In addition, section 14(e) authorizes a Reserve bank, with the consent or
upon the order and direction of the Board of Governors and under regulations
of the Board, to “buy and sell, with or without its indorsement/’ through foreign
correspondents or agencies, “ bills of exchange (or acceptances) arising out of
actual commercial transactions which have not more than 90 days to run,
exclusive of days of grace, and which bear the signature of two or more respon
sible parties.” Unlike the authority conferred by the first paragraph of section
14, section 14(e) does not require that paper purchased through foreign corre
spondents or agencies must comply with the eligibility requirements of the Fed
eral Reserve A ct; instead, section 14(e) sets its own requirements as to such
purchases through foreign correspondents or agencies. However, these require
ments, like those of section 13, limit purchases to paper arising out of “actual
commercial transactions” with maturities not exceeding 90 days.
Foreign treasury bills.—In view of the provisions o f law just discussed, it
seems clear that Federal Reserve banks would have no authority to purchase
through an account with a foreign central bank paper that does not arise from
actual commercial or agricultural transactions. Consequently, such accounts
could not be utilized for the purpose of investment in obligations of foreign
government, such as foreign treasury bills. I f the investment of foreign
accounts in such obligations is considered desirable, further legislation would
be necessary.
Time accounts.—Question has been raised as to whether any part o f an account
with a foreign bank could be invested in a time account with a foreign bank. If*
as heretofore concluded, the opening of accounts with foreign banks need not
be conditioned upon investment of such accounts in bills of exchange, there ap/ pears to be no reason for which a Reserve bank may not maintain a time deposit
with such a foreign bank. The authority conferred by section 14(e) is not
limited to the opening and maintenance of demand accounts with banks in
foreign countries.
IV. RESPECTIVE JURISDICTIONS OF BOARD OF GOVERNORS AND FEDERAL OPEN MA&KeT
COMMITTEE
-4. General
So far in this memorandum, the powers o f the Reserve banks with r e s p e c t to
the opening o f foreign accounts, the methods by which such accounts may J*
opened and maintained, and investments through such accounts, have been ais*
cussed without reference to the extent to which the exercise of those powers
*imite? or resta ted by the Board o f Governors or the F e d e r a l O pen
Market Committee or both. Discussion of this aspect o f the matter
deferred because, while it directly affects the exercise o f the powers of the
Reserve banks, it presents somewhat separate and distinct considerations.
In general, it is clear that the Committee lias regulatory authority with reSl^
to o p e n market” transactions of the Reserve banks a n d t h a t the B o a r d ha
supervisory and regulatory authority with respect to other operations of tne
Reserve banks. However, the exact boundaries between the jurisdictions of tb*
oard and the Committee are difficult to determine when, as in the p r e s e n t ma
ter, certain o f the operations of the Reserve banks appear to fall in both a r e a s
■or jurisdiction.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
15 1
All of the Reserve bank powers heretofore discussed are based upon provisions
of section 14 of the Federal Reserve Act which is entitled “ Open-Market Opera
tions,” and which was a part of the original Federal Reserve Act. As described
in section 14, some o f these powers, such as the powers to purchase cable trans
fers and bills of exchange and to open foreign accounts, are made subject to
regulation by the Board. However, section 12A of the act, as amended by the
Banking Act of 1935, provides that
“No Federal Reserve bank shall engage or decline to engage in open-market
operations under section 14 o f this Act except in accordance with the direction
of and regulations adopted by the [Federal Open Market] Committee * *
(12 U.S.C. 263.)
The jurisdictional question is complicated by the fact that the contemplated
operations involve both open market transactions and nonopen market transac
tions which are nevertheless closely interrelated.
B. Purchase of cable transfers, bankers* acceptances, and bills of exchange
The first paragraph of section 14 provides that a Federal Reserve bank—
“ * * * may, under rules and regulations prescribed by the Board of Governors
of the Federal Reserve System, purchase and sell in the open market, at home or
abroad * * * cable transfers and bankers’ acceptances and bills of exchange
of the kinds and maturities by this act made eligible for rediscount, with or with
out the indorsement of a member bank.” (12 U.S.C. 353.)
Although this provision, which was a part of the original Federal Reserve
Act, continues to refer to rules and regulations of the Board, it seems clear that,
since the transactions described are “ open market” operations, they are now
subject to the direction and regulation of the FOMC pursuant to section 12A
of the act.
Cable transfers.—When section 12A was first enacted by the Banking Act of
1933, it vested the Board with regulatory authority over open market operations
of the Reserve banks; and, pursuant to that authority, the Board issued its regu
lation M which, among other things, made purchases and sales of cable trans
fers subject to the Board’s approval. However, when section I2A was amended
in 1935 to vest regulation of open market operations in the FOMC, the Board with
drew that regulation.
The current regulation of the FOMC clearly assumes that open market pur
chases^ and sales of cable transfers by the Reserve banks are within the
Committee’s jurisdiction. Section 7 of that regulation provides:
“ (4) No Federal Reserve bank shall engage in the purchase or sale of cable
transfers for its own account except in accordance with the directions of the
Committee.”
apparently pursuant to this provision of its regulation, the Committee adopted
on November 20, 1936, a resolution which is still in effect authorizing the
Reserve banks to purchase and sell cable transfers “ to the extent that they
may be deemed necessary or advisable in connection with the establishment*
maintenance, operation, increase, reduction, or discontinuance of accounts of
Federal Reserve banks in foreign countries.” It may be noted that this reso
lution assumes that the FOMC has authority with respect to purchases and
sales of cable transfers even though they relate to the opening and maintenance
of foreign accounts.
of exchange and acceptances.—It seems clear that the Committee, rather
than the Board, now has regulatory authority with respect to the open market
Purchase and sale of bills of exchange and bankers’ acceptances pursuant to
the first paragraph of section 14.
,,
There is, however, a distinction to be noted between cable transfers on tne
one hand and bills of exchange and acceptances on the other. The former are
wot eligible for discount under the Federal Reserve Act, whereas acceptances
and bills of exchange are eligible for discount subject to certain requirements
° f the law and regulations o f the Board. Consequently, even though the Com
mittee has regulatory authority with respect to the open market pur?ha-
152
BRETTON WOODS AGREEMENTS ACT AMENDMENT
conflict of jurisdiction, however, is resolved by section 7 (2) of the Committee’s
regulation:
“ (2) Only acceptances and bills of exchange which are of the kinds made
eligible for purchase under the provisions of regulation B of the Board of
Governors of the Federal Reserve System may be purchased: Provided, That
no obligations payable in foreign currency shall be purchased and sold for the
account of the Federal Reserve bank except in accordance with directions of
the Committee.”
In addition to the authority contained in the first paragraph of section 14
for the open market purchase of bills of exchange and acceptances, authority for
the purchase of such obligations is also contained in subsection (e) of that
section. Subsection (e) of section 14 provides that “ with the consent or upon
the order and direction of the Board of Governors of the Federal Reserve System
and under regulations to be prescribed by said Board.” a Federal Reserve bank
may buy and sell, through foreign correspondents or agencies, “bills of exchange
(or acceptances) arising out of actual commercial transactions which have not
more than 90 days to run, exclusive of days o f grace * *
Even though here
again the law continues to refer to regulations of the Board, it is my opinion
that purchases of bills of exchange and acceptances through foreign corre
spondents and agencies under this provision are subject to regulation by the
Committee rather than the Board, despite the failure of Congress to repeal
the Board’s regulatory authority in this respect when in 1935 it transferred to
the FOMC authority over open market operations.
That such purchases through foreign correspondents and agencies, like other
open market operations, are subject to the jurisdiction of the Committee, was in*
dicated by the Board in a letter to the Federal Reserve Bank of Boston dated
May 15,1936 ( F.R.L.S. No. 4276), wherein the Board stated:
, .
“ * * * no Federal Reserve bank can open and maintain accounts in toreipi
countries, appoint correspondents or establish agencies in such countries
with the consent of the Board, nor can it engage in the purchase or sale of mu*
through such accounts, correspondents, or agencies without the consent also o
the Federal Open Market Committee * *
G. Dealings in gold
To the extent that the proposed plan may involve acquisitions of foreign
exchange through sales of gold by a Reserve bank it seems clear that such tr®11^
actions would not constitute open market transactions subject to regulaj0 .
authority of the Committee. Section 14(a) o f the Federal Reserve A ct author
izes the Reserve banks to “ deal in gold coin and bullion at home or abrna
(12 U.S.C. 354). Any such transactions would seem to be subject to supervisi
by the Board of Governors, under both its general power of supervision conferred
by section 11 (j) of the Federal Reserve A ct (12 U.S.C. 248( j ) ) and its special
supervisory powers over relationships with foreign banks conferred by section
14(g) of the act (12 U.S.C. 348a), to be discussed later in this memorandum.
D. Opening of foreign accounts
Section 14(e) authorizes a Federal Reserve bank—
r ~
<(* * * with the consent or upon the order and direction o f the Board of u
ernors of the Federal Reserve System and under regulations to be l)r^ f ri/-i*>
by said Board, to open and maintain accounts in foreign countries * * •
U.S.C.35S.)
#
,
The question whether such foreign accounts mav be opened and llia*n ^
only for the purpose of buying and selling bills of exchange has heretofore nee
discussed. At this point we are concerned only with the question wnet
regnlatory authority as to the opening of such accounts is vested in the
or in the FOMC. Clearly, the language of the statute seems to vest such aut
ity in the Board. However, it may be argued that, if such accounts are es
lished through the open-market purchase of cable transfers, the opening
maintenance of such foreign accounts is merely an incident to open^ma
operations and therefore subject to regulation bv the Committee. (Tbis arg
ment might be considered implicit in the Committee’s 1936 resolution
mentioned.) Conversely, however, it might be argued that the p u r c h a s e of cfl
transfers is merely a mechanical incident to the opening of foreign acco
and that, therefore, the authority of the Board is paramount.
■, or
It would not seem necessary, however, to determine whether the
t h e FOMC has paramount authority. The question seems to be r e s o l v e d by
BRETTOX WOODS AGREEMENTS ACT AMENDMENT
153
overall intent of Congress that tlie Board and the Committee shall have sepa
rate but coordinate jurisdictions. This intent. I believe, is clearly reflected in
rlie legislative history of the Banking Act of 1935 as hereafter discussed.
E. Authority \rith respert to foreign relationships
Section 14(g) of the Federal Reserve Act (12 U.S.C. 34Sa) provides in
t ft'ect that—
(1) the Board of Governors shall exercise "special supervision” over all
relationships and transactions of any kind between any Federal Reserve
bank and any foreign banks;
(2) all such relationships and transactions shall be subject to “ such regu
lations, conditions, and limitations as the Board may prescribe";
(3) no representative of a Reserve bank shall conduct negotiations with
representatives of a foreign bank without the Board’s permission;
(4) the Board shall have the right to be represented in any such nego
tiations; and
(u) a full report of any such negotiations shall be tiled with the Board.
When section 14<g» was added by the Banking Act of 1933. the same act
authorized the Board of Governors (in section 12A of the Federal Reserve Act)
to regulate not only the open-market operations of the Federal Reserve banks
but also “ the relations of the Federal Reserve System with foreign central or
other foreign banks.'*
Subsequently, the Banking Act of 1935 amended section 12A to vest authority
over open-market operations in the FOMC instead of the Board. Significantly,
oowever, the 193."> amendment to section 12A eliminated the reference to relation
ships with foreign banks, thus indicating the intent of Congress that the Board
should retain its authority with respect to this matter, despite the Open Market
Committee’s authority over open-market transactions.
it is my conclusion, therefore, that, whether or not the opening of foreign
accounts as the result of open-market purchases of cable transfers would be
subject to the “consent” and regulations of the Board under section 14(e) of
lue Federal Reserve Act, any such foreign accounts would be subject to super
vision and regulation by the Board under section 14(g) of the act, even though
|hey may also be subject to regulation by the FOMC to the extent that they
involve open market transactions.
P- Possible actions by Board and Committee
On the basis of the foregoing discussion, it is my opinion that effectuation of
*he plan here proposed would require actions by both the Board and the Com
mittee but that such actions may be coordinated without conflict. Such actions
might be taken along the following lines:
1. The Board could authorize the New York Reserve Bank (a) to open ac
counts with foreign banks in such foreign currencies, through such methods,
and in such amounts as may be determined by the FOMC to be necessary for
cflectuation of the proposed plan; and (b) to conduct such negotiations and
filter into such arrangements with foreign central banks as, in the judgment
°f the FOMC, mav be necessarv to effectuate or implement open-market trans
actions under the plan.
‘
.
Logically, any such action by the Board should be taken in the form of an
appropriate amendment to the Board’s regulation N, “Relations with Foreign
Banks and Bankers.”
.
,.
Such action would be based upon the Board’s authority under both sections
i**(e) and 14(g) and it should be in the form of an exercise, rather than a dele'jat-ion to the Committee, of the Board’s statutory responsibilities with respect
to foreign transactions of the Reserve banks. For this reason, it would be de
sirable for tlie action to include a requirement, in conformity with section
that reports of agreements with foreign banks and operations in such
foreign accounts be made to the Board at periodic intervals.
The Board’s action might also include consent to participation by other
>ervo banks in accounts opened by the New York Reserve Bank.
The Committee could issue appropriate regulations or directives, or b t ♦
regarding (a) the purchase and sale by the New York Reserve Bank of cable
transfers in connection with the opening and maintenance of ^counts \utii
foreign banks and (b) the purchase and sale o f bills of exchange aud acwptances
through such foreign accounts. Action as to these matters would be within
the Committee's own authority over open-market transactions; M d log^ U y
s«ch action might be taken through appropriate amendments to provisions reiat
BRETTON WOODS AGREEMENTS ACT AMENDMENT
154
ing to cable transfers and bills and acceptances now contained in section 7 of
the Committee’s; regulation.
3. The Committee could take action, in accordance with the action of the Board
described in paragraph 1 above, regarding the foreign currencies to be acquired,
limitations on aggregate amount and on the amounts of particular currencies,
the foreign banks with which accounts could be opened, minimum balances in
such accounts, etc.
4. To the extent that the operations of the plan might involve purchases and
sales of gold or borrowings or loans on gold by the New York Reserve Bank,
such transactions should have the approval of the Board.
The above or similar actions would, in my opinion, be consistent with the
law and would properly preserve the respective authorities o f the Board and
the Committee. It is necessary, however, to consider whether the authority
to take such actions would in any way be affected by other statutes that may
appear to give other Government agencies certain responsibilities in this field.
V. EFFECT OF OTHER LAW S
A . Gold R eserve A ct o f 1934
Section 10 of the Gold Reserve Act of 1934, as originally enacted (31 U.S.C.
822a) established a ‘‘stabilization fund” o f $2 billion under the Secretary of
the Treasury, for the purpose of “ stabilizing the exchange value of the dollar.”
Since the purposes of this provision were so obviously similar to the purposes
o f the plan now proposed, question arises whether Congress by the Gold Re
serve Act meant in any way to modify or supersede whatever powers the Fed
eral Reserve System might have had in this field.
In my opinion, there is no evidence that Congress had any such intent.
In the first place, the stabilization fund was originally designed as a tem
porary measure to expire 2 years after the date o f enactment. It is not reason
able to suppose, therefore, that it was intended as a substitute for whatever
powers the Federal Reserve System might have in this respect.
Secondly, when the fund was made permanent by the Bretton Wood Agre^;
ments Act o f 1945, it was reduced to $200 million, since the rest of the ftp*
was allocated for investment in the International Monetary Fund. This action
was hardly consistent with the exclusive use o f the fund as* a means for stabiliz
ing the exchange value o f the dollar.
.
Finally, section 3 of the Gold Reserve Act o f 1934 itself authorized the Federal
Reserve banks to hold gold for the purpose of settling international balances
or of maintaining the equal purchasing power o f U.S. currency: Such action,
again, would be inconsistent with any intent by Congress to repeal any
J
possessed by the Federal Reserve System to maintain the integrity of the dona .
Even though the provisions of section 10 of the Gold Reserve Act do not affec
Federal Reserve authority in this field, it would, of course^ be dfesirable as
matter of policy for Federal Reserve activities under the proposed plan to
coordinated with the utilization o f the stabilization funtl for related purpos
2?. B retton W oods A greem ents A ct o f 19^5
Section 4 of the Bretton Woods Agreements Act of 1945, rela tin g to the
Advisory Council on International Monetary and Financial Problems (of
the chairman of the board of governors is a member) provides in part
follow s:
“ S ec . 4. (a ) * ♦ *
*
*
*
*
*
*
*
.
“ (3) The Council shall coordinate, by consultation o r otherwise, so
practicable, the policies and operations of the rep resen ta tives of the
^
States on the Fund and the Bank, the Export-Import Bank of ^ r^s^ n^i?n*nate
all other agencies of the Government to the extent that they m a k e o r partial
in the making of foreign loans or engage in foreign financial, exchange or m
tary transactions.
*
*
*
*
*
*
*
“ (c) The representatives of the United States on the Fund and the Ba°^ *D
D.
the Export-Import Bank of Washington (and all other agencies o f tbe. loaDs
ment to the extent that they make or participate in the m a k in g o f foreign ‘ e,
or engage in foreign financial, exchange or monetary transactions) shall Ke i
Council fully informed of their activities and shall provide the Council wit
BRETTON WOODS AGREEMENTS ACT AMENDMENT
155
further information or data in their possession as the Council may deem neces
sary to the appropriate discharge of its responsibilities under this Act.”
While the Federal Reserve banks are qua si-governmental agencies exercising
public functions, they are not “ agencies of the Government” within the meaning
of these provisions. However, to the extent that the Board and the FOMC would
participate in the plan here proposed, it seems clear that they would be “agencies
of the Government” participating in “foreign financial, exchange or monetary
transactions.”
Nevertheless, the Bretton Woods Agreements Act refers only to coordination,
“by consultation or otherwise, so far as practicable.” It does not endow the
National Advisory Council with any enforceable authority. Consequently, there
would appear to be no legal respect in which activities by the Board and the
Committee would be subject to control by the Council. At the same time, it
would seem desirable as a matter of policy for any Federal Reserve operations
of the kind contemplated to be brought to the attention of the Council in advance,
particularly in view o f the related operations of the Stabilization Fund of the
Treasury and of the International Monetary Fund.
V I.
A D M IN IST R A T IO N
As the proposed plan has been described, it would contemplate that the Com
mittee would designate the Federal Reserve Bank of New York to execute the
transactions (opening of accounts with foreign banks, purchase of cable trans
fers, etc.) necessary to accomplish the purposes of the plan on behalf of the
System Open Market Account, pursuant to directions of the Committee. The plan
further contemplates that immediate direction and supervision of operations in
foreign exchange would be vested by the Committee in a subcommittee consisting
of the chairman and vice chairman of the Committee and the vice chairman of
the board of governors in his capacity as a member of the Committee; that the
^ ew York Reserve Bank would select an officer of that bank satisfactory to the
Committee who would act as “ special manager of the System Open Market
Account for Foreign Currency Operations” and would conduct day-to-day opera
tions in this field; and that the subcommittee would establish maximum amounts
of currencies to be purchased, rates of exchange, and other guidelines for such
day-to-day operations.
The proposed designation of the New York Reserve Bank and selection o f the
special manager would be consistent with section 5 of the present Regulations
of the Committee and with section 3(b) of the Committee’s rules on organiza
tion and information.
There would appear to be no legal objection to the proposed delegation to a
subcommittee of authority to supervise and direct day-to-day operations in for
eign currencies, provided, of course, that general policies are established by the
full committee. The Open Market Committee, unlike the Board of Governors,
“ ? o t a “full time” Government agency; and it is clear that Congress in section
^ did not expect that the committee would meet daily or exercise day-to-day
supervision over the implementation of policies formulated by the committee.
I his is evidenced by the fact that the committee was required to consist of the
seven members of the Board of Governors and five of the Federal Reserve bank
presidents—individuals who are obviously already fully occupied as a daily
matter, it is also significant that the committee is required to meet only at
least four times each year, a requirement scarcely consistent with any intent
tnat the committee should directly supervise day-to-day implementation of Its
policies. In addition, the presently proposed delegation of authority to a subn°^mittee *s sil*iilar (and perhaps not even as extensive) to the delegation of
authority to an “ Executive Committee” that existed with the knowledge of Con
gress for many years prior to 1955.
L e g a l A u t h o r i t y fo e F ed e r a l R eserve F oreign E x c h a n g e O pe r a t io n s
r w is. understood that the Executive Director of the staff of the Joint Economic
nf «,mi^ ee has orally requested a brief statement regarding the legal authnnty
of the Federal Reserve System to engage in foreign currency operations or, as
“ Jjyare sometimes called, foreign exchange operations.
.1 o n « r
„ J . he first paragraph o f section 14 of the Federal Reserve Act (JSU.S.C.
hom 0nzes any Federal Reserve bank to “purchase and sell in („he "Pen mnrket a
home or abroad, either from or to domestic or foreign banks, firms, corporati
,
156
BRETTON WOODS AGREEMENTS ACT AMENDMENT
or individuals, cable transfers and bankers’ acceptances and bills of exchange
* *
The term “cable transfers’* itself suggests dealings in foreign exchange,
since cable transfers are, of course, a medium through which the Reserve banks
may acquire or dispose o f holdings o f foreign currency in the form of balances
with foreign banks.
Section 14(a) of the Federal Reserve Act (12 U.S.C. 354) authorizes the
Federal Reserve banks to deal in gold at home or abroad and to make loans
on gold.
Section 14(e) of the act (12 U.S.C. 358) authorizes any Federal Reserve bank,
with the consent or upon the order and direction of the Board of Governors and
under regulations prescribed by the Board, to open and maintain accounts in
foreign countries, and to appoint correspondents and establish agencies in such
countries, and, through such foreign correspondents or agencies, to buy and seU
bills of exchange and acceptance. Whenever an account in a foreign country is
opened by a Federal Reserve bank, any other Federal Reserve bank may, with the
consent and approval of the Board, be permitted to carry on, through the Reserve
bank opening such account, any of the transactions authorized by section 14 of
the act.
All of these provisions were contained in substantially their present form in
section 14 of the original Federal Reserve Act. The report of the House Banking
and Currency Committee with respect to the original act stated that one of the
objectives of the provisions of section 14 was to provide an outlet through which
funds of the Federal Reserve banks might be used in order “ to facilitate trans
actions in foreign exchange or to regulate gold movements.”
Holdings of foreign currency by the Federal Reserve banks in the form of
accounts with foreign banks may arise through open market purchases of cable
transfers and bills of exchange, through sales of gold to foreign banks, and
through the establishment of cross-credits or reciprocal balances between a
Federal Reserve bank and a foreign bank.
To the extent that such transactions involve open market purchases and
sales, they are subject to direction and regulation by tlie Federal Open Market
Com m ittee under the provisions o f section 12A of the Federal Reserve Act
(12 U.S.C. 263) which provides that “no Federal Reserve bank shall engage
or decline to engage in open market operations under section 14 of the act
except in accordance with the direction of and regulations adopted by the
Committee.” Insofar as such transactions involve the opening and maintenance
of amounts with foreign banks, they are subject also to the consent and regula
tions of the Board of Governors of the Federal Reserve System.
There is, of course, no provision of present law that specifically refers to
foreign currency or foreign exchange operations by the Federal Reserve System:
and, accordingly, it cannot be said that there is explicit and clear authority
for such operations. However, in view of the provisions of law above mentioned,
and without attempting here to recite all o f the reasons that lead to such con
clusion, it is my opinion that the Federal Reserve banks are authorized
present law to engage in open market transactions in foreign exchange subject
to direction and regulation of the Federal Open Market Committee and, for
this purpose, to open and maintain accounts in foreign banks subject to tne
consent and under regulations of the Board of Governors of the Federal R e s e r v e
System.
In the course of consultations between the Board of Governors and the Treas
ury Department regarding this matter, the Treasury Department advised tne
Board that the above-stated opinion has been concurred in by the
Counsel for the Treasury Department and by the Attorney General of
United States.
H oward H . H acklet ,
General Counsel, Federal Open Market Cotiwiittec.
T h e G eneral C oun sel
of t h e
T reasury ,
Washington, January 8, lw*'
H on. H oward H . H a c k l e t ,
.
j
Oeneral Counsel, Board of Governors o f the Federal Reserve System , F e a e r
Reserve -Building, Washington, B.C.
...
D ear H o w a r d : With Secretary Dillon’s approval, I am forwarding
to you for transmittal to the Federal Open Market C om m ittee a copy o* *
opinion to Secretary Dillon with regard to the power under existing leg11s "^ er
of the Federal Reserve System to conduct operations in foreign currencies u
BRETTON WOODS AGREEMENTS ACT AMENDMENT
15 7
the proposed plan now being considered by the Federal Open Market Committee.
As you will note in this opinion, I am authorized to state that the Attorn**
General concurs in my opinion which in turn concurs generally in your opinion
of November 22, 1961, to the Federal Open Market Committee on the same
subject.
I should like to add my expression of appreciation for the superior job which
was performed in rendering your opinion, which greatly simplified my task
and, I am advised, the task of the Attorney General in our separate investiga
tions of the subject.
With best wishes.
Sincerely,
(S) Rob
Enclosure.
R obert H. K night .
Date: January (S. 1002.
Memorandum to the Secretary.
From: Robert H. Knight,
Subject: Opinion re power under existing legislation of Federal Reserve System
to conduct operations in foreign currencies under a proposed plan.
You have asked my opinion as to the power of the Federal Reserve System
to open and maintain accounts in foreign currencies in certain foreign countries
with foreign central banks or official agencies of foreign governments, and to
conduct operations in foreign currencies in accordance with a proposed plan
now being considered by the Federal Open Market Committee. More spe
cifically, you have asked if I concur in the opinion of the General Counsel of
the Board of Governors o f the Federal Reserve System (who is also General
Counsel of the Federal Open Market Committee) as set forth in his confidential
memorandum, denominated Paper No. 6, and dated November 22, 19G1.
I conclude that a Federal Reserve bank may under existing law open and
maintain accounts with foreign central banks, that it may do so through cross
credits, sales of gold under Treasury license to foreign central banks, or transfer
of credit to or from the accounts through either spot or forward purchases or
sales of cable transfers of foreign currencies in the open market, and through pur
chase or sale of foreign currencies direct from or to the Exchange Stabilization
Fund o f the Treasury. Additionally, in my opinion such foreign currencies held
in such accounts could be invested in foreign bills of exchange and acceptances
arising out of actual commercial transactions and having maturities of not
more than 00 days from date of purchase, and in time deposits with foreign
central banks. I have also ascertained that foreign currencies in such ac
counts may properly be utilized to purchase other currencies, e.g., francs may
be used to acquire deutsche marks.
I further agree with the General Counsel of the Board of Governors that,
should it be determined to be desirable for the Federal Reserve System to make
investments in bills having maturities over 00 days, or in foreign Treasury
bills or other .similar foreign government obligations, it would be necessary
to obtain specific legislative authority before such investments could legally
be made.
In sum. I concur with the conclusions reached by the General ^Counsel of the
Federal Reserve Board as set forth in conclusions 1, 2, 8, 4,
<>, and 8. I
have not thought it appropriate to investigate the legal conclusions of the
aforesaid General Counsel set forth in his conclusions 7 and 0 relating generally
to the division o f responsibilities between elements of the Federal Resen e
System.
Additionally, I have asked the Department of Justice as to whether the
Attorney General concurs in my position and am authorized by that Depart
ment to state that he does.
,
With your approval I will send a copy of this opinion to the General Counsel
of the Federal Reserve Board for transmittal to the Federal Open Market
Committee.
_
R obert H. K n ig h t .
S0S07— 62------ 11
158
BRETTON WOODS AGREEMENTS ACT AMENDMENT
[By messenger—For National Advisory Council use only]
F ebruary 16,1962.
Hon. D ouglas D illo n ,
Chairman, National Advisory Council on Internatioyial Monetary and Financial
Problems, Treasury Department, Washington, D.C.
D e a r D i l l o n : The Federal Open Market Committee, by action of February
13, 1962, has authorized Federal Reserve Bank operations in foreign currencies
for the System Open Market Account
In accordance with Section 4(c) of the Bretton Woods Agreements Act, I
attach a copy of that action.
Sincerely yours,
W i l l i a m McC. M a r t i n , Jr.
Enclosure.
[Confidential (F R )— Federal Open Market Committee— Approved February
13, 1962]
A uthorization R egarding Open M arket T ransactions
C urrencies
in
F oreign
Pursuant to section 12A of the Federal Reserve Act and in accordance with
section 214.5 of regulatoin N (as amended) of the Board of Governors of the
Federal Reserve System, the Federal Open Market Committee takes the following
action governing open market operations incident to the opening and maintenance
by the Federal Reserve Bank of New York (hereafter sometimes referred to
as the New York bank) of accounts with foreign central banks.
I.
role
of fe d e r a l
re ser ve
bank
of
new
YORK
The New York bank shall execute all transactions pursuant to this authoriza
tion (hereafter sometimes referred to as transactions in foreign currencies) for
the System Open Market Account, as defined in the Regulation of the Federal
Open Market Committee.
I I.
BASIC PURPOSES
OF OPERATIONS
The basic purposes o f System operations in and holding o f foreign c u r r e n c i e s
are:
(1) To help safeguard the value of the dollar in international exchange
markets;
(2) To aid in making the existing system of international payments more
efficient and in avoiding disorderly conditions in exchange markets;
(3) To further monetary cooperation w ith central banks of other coun
tries maintaining convertible currencies, with the International Monetary
Fund, and with other international payments institutions;
(4) Together with these banks and institutions, to help moderate tem
porary imbalances in international payments that may adversely affect
monetary reserve positions; and
n
(5) In the long run, to make possible growth in the liquid assets aJai*“
able to international money markets in accordance withi the needs of &
expanding world economy.
in .
specific a im s op operations
Within the basic purposes set forth in section II, the transactions shall be
conducted with a view to the following specific aim s:
^
(1) To offset or compensate, when appropriate, the effects on U.S. go
reserves or dollar liabilities of those fluctuations in the international nor*
o f payments to or from the United States that are deemed to reflect tem
porary disequilibrating forces or transitional market unsettlement;
(2) To temper and smooth out abrupt changes in spot exchange ra
and moderate forward premiums and discounts judged to be disequui
bra tin g;
(3) To supplement international exchange arrangements such as those
made through the International Monetary Fund; and
(4) In the long run, to provide a means whereby reciprocal lioldtng®
foreign currencies may contribute to meeting needs for international liquiai j
as required in terms o f an expanding world economy.
BRETTON WOODS AGREEMENTS ACT AMENDMENT
159
I V . ARRANG EM ENTS W IT H FOREIGN CENTRAL B A N K S
In making operating arrangements with foreign central banks on System
holdings of foreign currencies, the New York bank shall not commit itself
to maintain any specific balance, unless authorized by the Federal Open
Market Committee.
The bank shall instruct foreign central banks regarding the investment of
such holdings in excess of minimum working balances in accordance with
Section 14(e) of the Federal Reserve Act.
The bank shall consult with foreign central banks on coordination of exchange
operations.
Any agreements or understandings concerning the administration of the ac*
counts maintained by the New York bank with the central banks designated
by the Board of Governors under section 214.5 of regulation N (as amended)
are to be referred for review and approval to the Committee, subject to the
provision of section VIII, paragraph 1, below.
V. AUTH ORIZED CURRENCIES
The New York bank is authorized to conduct transactions for System Ac
count in such currencies and within the limits that the Federal Open Market
Committee may from time to time specify.
VI. M E T H O D S 0 F A C Q U IRIN G AN D SELLING FOREIGN CURRENCIES
The New York bank is authorized to purchase and sell foreign currencies
in the form of cable transfers through spot or forward transactions on the
open market at home and abroad, including transactions with the Stabilization
Fund of the Secretary of the Treasury established by section 10 of the Gold
Reserve Act o f 1934 and with foreign monetary authorities.
Unless the bank is otherwise authorized, all transactions shall be at prevail
ing market rates.
V II. PA R T IC IPA T IO N OF FEDERAL RESERVE B A N K S
All Federal Reserve banks shall participate in the foreign currency opera
tions for System Account in accordance with paragraph 8G(1) of the Board
of Governors’ State of Procedure With Respect to Foreign Relationships of
Federal Reserve Banks, dated January 1, 1944.
V I II. A D M IN IST R A T IV E PROCEDURES
The Federal Open Market Committee authorizes a Subcommittee consisting
of the Chairman and the Vice Chairman of the Committee and the Vice Chair
man of the Board o f Governors (or in the absence of the Chairman or of the
Vice Chairman of the Board of Governors the members of the Board designated
by the Chairman as alternates, and in the absence of the Vice Chairman of the
Committee his alternate) to give instructions to the Special Manager, within
the guidelines issued by the Committee, in cases in which it is necessary to
reach a decision on operations before the Committee can be consulted.
All actions authorized under the preceding paragraph shall be promptly
rePorted to the Committee.
The Committee authorizes the Chairman, and in his absence the Vice ^ a i r
man of the Committee, and in the absence of both, the Vice Chairman of the
Board of Governors:
(1) With the approval of the Committee, to enter into and needed agree
ment or understanding with the Secretary of the Treasury about the division
of responsibility for foreign currency operations between the System and
the Secretary;
(2) To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary on
such policy matters as may relate to the Secretary’s responsibilities;
(3) From time to time, to transmit appropriate reports and information
to the National Advisory Council on International Monetary and Financial
Problems.
160
BRETTON WOODS AGREEMENTS ACT AMENDMENT
I X . S P E C IA L , M A N A G E R OF S Y S T E M OPEN M A R K E T ACCO U N T
■ A Special Manager on the Open Market Account for foreign currency opera
tions shall be selected in accordance with the established procedures of the
Federal Open Market Committee for the selection o f the Manager of the System
Open Market Account.
The Special Manager shall direct that all transactions in foreign currencies
and the amounts of all holdings in each authorized foreign currency be reported
daily to designated staff officials of the Committee, and shall regularly consult
with the designated staff officials of the Committee on current tendencies in the
flow of international payments and on current developments in foreign exchange
markets.
■The Special Manager and the designated staff officials of the Committee shall
arrange for the prompt transmittal to the Committee of all statistical and other
information relating to the transactions in and the amounts o f holdings of for
eign currencies for review by the Committee as to conformity with its instructions.
The Special Manager shall include in his reports to the Committee a state
ment o f bank balances and investments payable in foreign currencies, a state
ment of net profit or loss on transactions to date, and a summary of outstanding
unmatured contracts in foreign currencies.
X . T R A N S M IT T A L OP IN F O R M A T IO N TO TR E A SU R Y D EPA RTM E N T
The staff officials of the Federal Open Market Committee shall transmit all
pertinent information on System foreign currency transactions to designated
officials of the Treasury Department.
X I . A M E N D M E N T OF A U T H O R IZ A T IO N
The Federal Open Market Committee may at any time amend or rescind this
authorization.
A c t io n
by
th e
N a t io n a l A d v is o r y C o u n c il , F e b r u a r y
FEDERAL RESERVE B A N K O PERATIO N S IN
28, 1962
FOREIGN CURRENCIES
The National Advisory Council notes with approval the decision o f the F e d e r a l
Reserve System to conduct operations in foreign currencies and the intention oi
the Federal Reserve System and the Treasury to submit periodic reports to tne
NAC on their foreign exchange operations.
Mr. S pence . I f they want the record amplified you can do that.
Mr. P a t m a n . Not at this late date.
Mr. M tjlter. Let’s not tie his hands; if Mr. Martin wants to give
us more than you asked for, let’s have it.
,
Mr. S pence . I f there are no further questions, the Committee
adjourn.
Mr. P a t m a n . Wait just a moment, Mr. Chairman. There are two
members waiting to interrogate the witness.
Mr. S pence . Do any members have any questions?
Mr. M oorhead o f Pennsylvania. I have a question, Mr. Chairman.
Mr. S pence . Please be brief, Mr. Moorhead. The House is w
session.
Mr. M oorhead of Pennsylvania. Mr. Martin, assume first, that you
do have the power to engage in these foreign market operations,
should the Congress pass H.R. 10162 ?
Mr. M a r t in . Yes, sir.
,.
Mr. M oorhead of Pennsylvania. Now, assume you do not have tin
power, should the Congress pass H.R. 10162 ?
! Mr. M a r t in . It should, yes, sir, quite aside from that.
Mr. M oorhead of Pennsylvania. That is all.
161
BRETTON WOODS AGREEMENTS ACT AMENDMENT
Mr. S pe n c e . I f there are no further questions, Mr. Martin, thank
you very much for your very lucid statement supporting the necessity
for passage of H.R. 1 0 1 G2 . We are very glad to have your test imony.
Gentlemen, before closing, I received a letter from Mr. George
Champion, chairman of the Chase Manhattan Bank of New York, re
garding his statement dealing with H.R. 10102 . Inasmuch as lie was
unable to appear and present his statement, without object ion, the
letter and statement will be entered into the record at this point as
well as a letter from the Xational Foreign Trade Council, Inc., of
JsTew York.
(The letters and statement referred to above are as follows:)
T he Chase M anhattan - B a n k ,
New York, N.Y. February 26,1062.
Hon. B rent Spence ,
Chairman, Committee on Banking and Currency, House of Representatives,
Washington, D.C.
My D ear Mr. Spence : You were kind indeed to allow me to present a written
statement to your distinguished committee in regard to H.R. 10102 and I am most
appreciative.
Unfortunately our directors’ meeting here at 2:15 p.m. on Wednesday makes
it necessary for me to be at the bank that afternoon. Consequently, the only
time I could be in Washington on that day would be the early part of the
morning.
This bill is important to the United States, particularly at this time and I
sincerely hope it will be favorably recommended by the Committee on Banking
and Currency.
With kindest personal regards,
Sincerely,
, . _.
.
George Cham pio n , Chairman, Board of Directors.
Statement Submitted b y George Cham pio n , C h air m an ,
M a n h a t t a n B a n k , N ew Y ork, N.Y.
the
Chase
The following statement is submitted in support of H.R. 10102. Ihis bill
would amend the Bretton Woods Agreement Act so as to authorize the i nited
States to participate in loans to the International Monetary Fund, with the
objective of strengthening the international monetary system.
The original Bretton Woods Act was passed in 1045 and the International
Monetary Fund first began operations in 1947. The Fund’s potential ('!llJ C1^
holdings at that time (including gold) totaled $7.7 billion, with the Lmtod Mates
contributing *2.75 billion. Since then additional members have joined the * unci,
and in 1900 subscriptions of members were enlarged by an average of ;j0 percent.
Today holdings o f gold and currency total $14.3 billion, including a subscription
by the United States o f $4.1 billion.
_. . .
Far-reaching changes have occurred in the world economy and m mteiihmonai
trade and financial relationships since the IMF was first organized in 1941. The
gross national products of most industrialized members have been doubled ana
even tripled in terms of current prices, and mouey supplies of tlie countries
concerned have in some instances grown even more rapidly. Liquidity nas in
creased enormously, and along with it supplies of short-term assets m all coun
tries have been greatly expanded.
..
. , AmU'lart rlnr, Likewise, on the international side, trade between nations about. doubted dur
ing the fifties and continues to grow at a rate of .» percent or■ m _ <« *
•
Moreover, since the early fifties a fundamental readjustr.oiit lias
the international reserve position of the industrialized <n;:utries of tne rre
world. Today the countries of Western Europe (
l ogo
gold and foreign exchange reserves amounting to around ^-3
TT .fprl
the total was only $6.8 billion. In the meantime, the gold s tw k irf the Ui _
States has been reduced from approximately $23 billion to
current
short-term liabilities to foreigners have increased by
J ? hr S a l
total of $22.4 billion. (This latter figure includes $10.6 billion held by ce
162
BRETTON WOODS AGREEMENTS ACT AMENDMENT
banks and official institutions; $3.8 billion owned by international organizations,
chiefly the I M F ; and some $8 billion owned by foreign private entities.)
The rise in foreign exchange reserves in Western Europe, then, has been
achieved in part at the expense of the United States, and it has been made pos
sible as a result of a persistent deficit in the international balance of payments of
the United States. Until 1958 the expansion of reserves in Western Europe
appeared desirable and the deficit in the U.S. balance o f payments did not
cause concern. Since early 1958, however, the continuance of large deficits in
the U.S. balance of payments has been recognized as highly undesirable and a
matter that must be corrected.
The restoration of the reserve position in Western Europe (and one should
also add Japan) finally made it possible for countries in that area to remove
restrictions on foreign exchange. By late 1958 full currency convertibility had
been adopted by both Britain and the countries of Western Europe for all inter
national transactions on current account. This development introduced for the
first time in the postwar period a long-neglected element in the international
exchange; namely, the possibility o f free movement of short-term funds between
countries.
Since 1958 both the potential and the actual movement of short-term funds
between countries has expanded greatly. In our own country, the outflow of
short-term funds appears to have exceeded $ l1/£ billion in both 1960 and 1961Perhaps a more dramatic example is the outflow from Great Britain following
the revaluation of the German mark and Dutch guilder in March 1961. In a
relatively short period following that event more than $1 billion moved from
British accounts to accounts o f continental countries.
No one should be surprised at these large movements of short-term funds.
They are facts of life and the free world must be prepared to cope with them.
In all countries the great economic growth o f recent years has been a c c o m p a n ie d
by a huge expansion of funds which seek investment in assets of relatively short
maturity. In the United States, leading outlets for such funds include U.S.
Treasury bills and other short-term Government obligations, the supply of which
currently amounts to about $79 billion. Comercial paper, bankers’ a c c e p t a n c e s ,
and time deposits of banks provide another outlet of $23 billion or more. Simujtf
outlets are available in Great Britain and to some extent on the Continent The
bulk of such assets, of course, are held by domestic investors. However, they
are available in many countries for foreign investors as well.
A variety of incentives act to induce funds to move from one country to
another, often on a temporary basis. One such incentive is the difference whicn
sometimes exists in interest rates. From time to time over the past several
years American investors, including corporations, have been able to obtain a
higher yield from British Treasury bills or other short-term obligations abroaa
than was available in the United States. In consequence, a sizable . v o l u m e o
funds has been transferred from the United States to Great Britain and tn
Continent, as well as to Canada.
Another motive which can be potent in some instances is speculative in chai^
acter. Anticipation of possible changes in exchange rates induces some invest?J!
to shift funds from one country to another (often on the basis of rumors tna
prove ill founded and capricious in nature). Still other elements that con
tribute to the international movement of funds include the availability of short
term credit at lower cost in one country rather than another, the existence m on
country o f certain types of short-term assets that meet peculiar needs of spec1
investors in another country, and the like.
re
The main point to be emphasized is that short-term capital m ovem en ts a
growing in size and diversity. Moreover, for a variety o f reasons the Umc
States may find itself unusually susceptible to such flows. The very size1?L jn
internal economy and financial resources is one contributing factor.
tanj;
addition, the United States occupies a unique position in several other import
respects.
world
For one thing, the dollar has become the leading reserve currency of the w
»
and it is highly important that it remain so. Today the dollar stands a
keystone in the free world's monetary structure— a fact which in itseu J" ^
the dollar susceptible to unusual pressure. The existence o f $22.4 bun ^
liquid assets held in the United States by foreigners provides a potential
for a sizable drain.
r^nects.
In addition, the dollar has become an international currency in otlier
transForeign institutions, businesses, and individuals often carry out financial
BRETTON WOODS AGREEMENTS ACT AMENDMENT
163
actions with the use of dollar deposits they maintain in the United States. The
so-called “ Euro-dollar” market presents one aspect of this—involving the use
of dollar deposits held by certain European institutions and individuals. This
market alone has been estimated to involve dollar deposits in excess of $1 bil
lion—deposits which could, in some circumstances, be transferred from the
United States.
The major objective of the changes authorized by H.R. 101G2 is to strengthen
the ability of the international monetary system to cope with these short-term
capital movements. I believe your committee has received a report from the
National Advisory Council which describes the nature of the proposed changes in
some detail, and I shall not go into them at great length here. Let me only repeat
that the proposal involves an agreement under which the International Mone
tary Fund may borrow, under certain stated conditions, additional currencies
from those countries which are signatories to the agreement; namely; the
United States, Canada, Great Britain, Sweden, Japan, and the countries which
are members of the European Economic Community (exclusive of Luxembourg).
It is contemplated that the IMF would borrow such currencies in order to relend
them to countries requiring them. In effect, the IMF could thereby make avail
able to countries experiencing a sizable outflow of funds, those currencies into
which funds are actually being transferred.
The aggregate of currencies which might be made available to the Inter
national Monetary Fund under the proposed agreement amounts to $6 billion.
Standby commitments for each of the signatories would, be as follow s:
I n m illions
In million*
United States________________ $2,000 Netherlands______________ ____$200
United Kingdom______________ 1,000 Canada_______________________
200
150
Germany_____________________
1, 000 Belgium______________________
100
France_______________________
550 Sweden_______________________
Italy_________________________
550
Japan________________________
250
6,000
It should be appreciated that the IMF is not likely to call upon the United
States for dollars under the proposed agreement in the foreseeable future. At
yearend the IMF already held 2.4 billion U.S. dollars and it had lent out to other
countries an additional 640 million U.S. dollars. The IMF also possesses large
holdings of British pounds. On the other hand, holdings of most Western Euro
pean currencies, which were relatively small initially, are now badly depleted.
As of December 31,1961, the total of such holdings amounted only to the equiva
lent of $976 million. As shown above, the proposed standby commitment would
make available to the IMF under certain conditions a further $2,550 million of
Western European currencies, if needed.
At this point, I believe it is important to emphasize that the possible availa
bility of additional funds to the IMF in no way provides a crutch for the United
States or any other country to avoid correcting a basic deficit in its international
balance of payments. Thus passage of H.R. 10162 would make it no less essen
tial for the United States in particular to take the steps necessary to get its own
balance of payments in order: to balance the Federal budget, to maintian a sound
dollar, and above all to keep our costs under control and improve our competitive
jjosition in world markets. Nor does adoption of this new arrangement relieve
other countries of the necessity of offsetting a larger proportion of U.S. mili
tary expenditures abroad, and providing greater economic aid for lesser-developed
countries. All these policies must be pursued vigorously by our own Government
and by others which must cooperate with us, whether or not the arrangements
contemplated under H.R. 10162 are adopted. Indeed, restoring a balance to
U.S. payments with other nations holds a top priority among all our problems
and nothing should deflect us from it.
The procedures governing the provision of funds under the proposed standby
commitments (outlined in the letter to Secretary Dillon from the French Min
ister of Finance) are designed to provide added assurance that the new facili
ties will in fact be properly used. There is no denying that circumstances could
arise where the existence of these new facilities could be a decided advantage
to the United States. If the United States were ever to be confronted, for any
reason, with a huge outflow of short-term funds, the ability of the International
Monetary Fund to assist under present circumstances would be severely limited—
especially if it desired to conserve its existing supply o f gold. Under the pro
posed standby commitment, however, the IMF would have access to substantial
164
'BRETTON WOODS AGREEMENTS ACT AMENDMENT
amounts of the currencies which undoubtedly would be in demand in exchange
for dollars. As a practcial matter, then, some arrangement o f the type contem
plated is necessary if the facilities of the IMP are to be regarded as of possible
future use to the United States.
It might be pointed out, also, that a number of -positive aspects exist for any
cotmtry which is called upon to make a loan under the agreement. For example,
such loans in effect carry a gold guarantee in the sense that the exchange rate is
fixed in terms of gold and cannot be altered by devaluation on the part of tne
borrower. Likewise, loans bear a 1'% percent rate of return, along with a flxea
payment of one-half of 1 percent at each borrowing. The maximum term of eacn
loan is 5 years; moreover, the lending country has the right to request early re
payment if its own balance of payments should so change as to make this oesirable. These and other aspects appear to make loans Under the agreement solid
assets for any lending country—a factor of significance if conditions should so
shift in the future that the United States were to be called upon to lend dollars
under the agreement.
In summary, the arrangements contemplated in H.R. 10162 for adding to tne
potential resources available to the International Monetary Fund a p p e a r to be
sound and desirable and I do not hesitate to support them. They are c o n s i s t e n t
with the existing international monetary mechanism and do not r e p r e s e n t a
radical departure. Along with other changes of the past several years (such as
closer and more effective cooperation between central banks) this added agree
ment should serve to strengthen the ability of the free world to cope with prob
lems that inevitably arise as a result of economic growth and the free e x c h a n g e
o f currency between industrialized nations.
At the same time, the limitations of these new arrangements must also be
recognized. They are not a panacea; they merely represent an added string to
the bow of the IMF, one which complements those already in existence. More
over, these new arrangements are designed to meet a specific problemj namely*
to offset temporary flows of short-term capital between countries which might
otherwise endanger the stability of the international monetary frameworK.
Above all, these new arrangements are not a substitute to any nation for tne
internal discipline, effort, and prudence required to maintain a balance in inter
national payments. These are qualities which the United States must itself now
exercise to get its own house in order.
N a t i o n a l F o r e ig n
TT
T rade
C o u n c i l , I n c .,
New Y w k tN .Y ., February 21,1962-
*
Hon. B r e n t S p e n c e ,
Chairman, Committee on Banking and Currency,
I.S. House of Representatives, Washington, B.C.
My D e a r C o n g r e s s m a n S p e n c e : Reference is made to H.R. 10162, which is
currently under consideration by your committee. This bill would amend the
Bretton u oods Agreement Act to authorize the United States to participate in
loans to the International Monetary Fund to strengthen the international mone
tary system.
w r tln c n r r ^ o im }1^ 1’! ? 0^
we should like to submit the f o l l o w s
last Novemberopte(1 b? the 4«th National Foreign T rade C o n v e n tio n
C urrency
„ * . *
*
and
M onetary
'•
P o l ic ie s
*
*
*
burdenT ^ l n ^ ^ ^ ta^ J )o? peratton' - ,s:ba convention has noted the added
world
!
' °n
international monetary system by the grow th o
X e S T v K
l“Ii ! , S, ^ rtlcularly mlndful o f the sudden strains that may be
that eon!1<1enr(' in
<! i'"^ movements of short-term capital funds. Believing
theproror ttarttan
8 ' T F * cu™ « e s is an indispensable element in
only safe foundnHnn
? existing system and that monetary stability is tfc
monetary authoritfw o f
?
economie growth, the convention calls on the
to pursue twlicieL
ns on whom 0x6 responsibility prim arily rests
deavor thp
insure such confidence and stability. In this enand as’ an effwtWe ^ h Z w i ^ T F Fnnd shotlld continue to serve as a leader
key role o f tte Fond C L « L l « e^ overainelltal cooperation. H e c o g n i z i n g ® e
. e convention supports the proposed strengthening ot its
BRETTON WOODS AGREEMENTS ACT AMENDMENT
165
resources through the establishment of suitable borrowing arrangements subject
to appropriate safeguards.”
Further and more specifically, subsequent to the announcement earlier this
year of the detailed arrangements and procedures governing the access by the
International Monetary Fund to supplementary resources, the relevant docu
ments were submitted to our International Finance Committee for study. On
the basis of their review, the members of the Committee expressed the view that
participation by the United States in the new arrangements would be in the
national interest and recommended that the proposal be supported.
It is respectfully requested that this communication be made a part of the
record of the hearings of your committee.
Very truly yours,
W illia m S. Swingle, President.
Mr. S pence . This concludes the hearings on this bill and the com
mittee will adjourn.
(Thereupon, the committee was adjourned, to reconvene at the call
of the Chair.)
o
@FedFRASER