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Treasury and Federal Reserve Foreign Exchange Operations*
By C h ar les A. C oo m bs

As noted in the previous report covering the period
March-August 1964, the Federal Reserve had completely
liquidated its outstanding swap drawings by the end
of June while drawings made by other central banks
amounted to no more than $65 million. Such diminished
use of international credit facilities reflected a reduced
deficit in the United States balance of payments and a
general narrowing of payments imbalances throughout the
world. This general movement toward international pay­
ments equilibrium suffered a setback during the second
half of 1964, however, mainly owing to the eruption of
the sterling crisis, heavy outflows of United States bank
credit and long-term investment, and the continuation and
even further tightening of the credit squeeze in continental
European markets. The risk of sudden, heavy strains upon
the gold exchange system had been well anticipated by
the central banks and treasuries of the major industrial
countries, but the severity of the pressures developing
in late 1964 required a further reinforcement of inter­
governmental defenses against currency speculation.
During the reporting period September 1964-February
1965, the Federal Reserve swap network was strengthened
by increases in the swap arrangement with the National
Bank of Belgium from $50 million to $100 million and in
the arrangement with the Bank of England from $500
million to $750 million. The swap network now covers
reciprocal credit lines totaling $2,350 million, as shown in
Table I. The short-term credits extended to the Bank of
England by the central banks of Europe, Canada, and
Japan in November 1964 provided further impressive evi­

* This is the sixth in a series of reports by the Vice President in
charge of the Foreign Department of the New York Reserve Bank
and Special Manager, System Open Market Account. The Federal
Reserve Bank of New York acts as agent for both the Treasury
and the Federal Open Market Committee of the Federal Reserve
System in the conduct of foreign exchange operations.

dence of the solidarity of central bank defenses when con­
fronted with a currency crisis. Also during the period, the
authority of the International Monetary Fund (IM F) to
borrow from its member countries was invoked for the
first time, and much progress was made toward the sched­
uled 25 per cent increase in IMF quotas during 1965. This
process of challenge and timely response will no doubt
continue to guide the further evolution of the international
financial system.
The sterling emergency necessitated sizable drawings
by the Bank of England upon the Federal Reserve which
more or less concurrently drew heavily upon its swap
lines with the continental European central banks in
order to cushion the impact of heavy dollar inflows arising
from both the British and United States deficits. Bank of

Table I
M arch 1,1965


Amount of
total facility
(in millions
of dollars)

Austrian National Bank ................................................
National Bank of Belgium ............................................
Bank of Canada ..............................................................
Bank of England ..............................................................
Bank of Franco ................................................................
German Federal Bank ..................................................
Bank of Italy .....................................................................
Bank of Japan ..................................................................
Netherlands Bank ..........................................................
Bank of Sweden ..............................................................
Swiss National Bank ......................................................
Bank for International Settlements ............................


T o ta l sw ap fa c ilitie s .................................................................


Term of
(in months)





Table n
England drawings on the Federal Reserve swap line rose
to a peak of $700 million on November 27 but have
subsequently been greatly reduced. To absorb part of
March 3,1965
the dollar flows to the continental European central banks,
the Federal Reserve made drawings upon the swap lines
Amount (in millions)
with the central banks of Switzerland, Germany, Belgium,
issued to
United States
the Netherlands, and Italy and with the Bank for Inter­
Foreign currency
national Settlements (BIS). Of these drawings, $380
million remained outstanding as of the end of February
2,600 Austrian schillings
Austrian National Bank ...............
1965. Further assisting the financing of both British and National Bank of Belgium ........ 1,500 Belgian francs
United States payments imbalances, the central banks German Federal Bank ................ 2,700 German marks
and governments of other countries provided short- and Swiss National Bank ..................... 1,112 Swiss francs
medium-term financing through accumulations of dollars, Bank for International
Settlements .......................................
300 Swiss francs
extension of credits to the United Kingdom, purchases of
T o ta l .......................................................
United States Treasury foreign currency securities, and
provision of credit through the IMF.
In addition to central bank swap operations, both the
Treasury and Federal Reserve also engaged in forward
operations in Dutch guilders and Swiss francs in order to Perhaps even more remarkable is the fact that the inter­
calm market fears and encourage an outward flow of national defense of sterling was accomplished in the face
short-term funds from Amsterdam and Zurich. The Swiss of a serious deterioration in the balance of payments of
National Bank took steps to help cushion the effects of the other major reserve currency center, the United States.
anticipated year-end pressures on the Swiss franc. The Such a rallying of governmental and central bank support
German Federal Bank also made available swap facilities for the present system depended, however, upon one basic
to German commercial banks for investments in United assumption: that both the British and the United States
States Treasury bills in order to reduce or offset temporary Governments would quickly put in motion forceful cor­
pressures on the exchange market resulting from short­ rective programs to eliminate their payments deficits.
term capital flows. Similarly, extensive use of forward These corrective programs are now under way and, if
operations was made by the Bank of England in December pursued with determination, will soon relieve the interna­
1964 to reassure the market and relieve pressure on the tional financial mechanism of the enormous pressures
generated by simultaneous deficits in the two major re­
spot rate.
The foreign currency bonds issued by the United States serve currency countries. Under such conditions, the
Treasury rose from a total of $1,035 million outstanding gold exchange standard, adapting as it has in the past to
as of the end of August 1964 to $1,137 million as of early changing world conditions, can efficiently facilitate a
March 1965 (see Table II). Additional issues of $50 continuing growth of world trade and payments.
The successful response to the challenge of the sterling
million were made to the German Federal Bank and
$50 million to the National Bank of Austria to absorb crisis has unfortunately been marred by the widespread
and exaggerated publicity given to the French Govern­
surplus dollars on the books of these central banks.
While these central bank and intergovernmental credit ment’s call for the return to the gold standard and the
operations provided partial and temporary financing of elimination of dollars and sterling from official reserves.
the payments imbalances developing during the period, This approach has found no support among central banks
gold continued to play its traditional role. During the and treasuries of other countries. The main effect has
third and fourth quarters of 1964, sales of gold by the been to stir up some previously dormant private specula­
United States Treasury amounted to $442 million, against tion in the London gold market, to the detriment of official
acquisitions of newly mined gold.
gold purchases of $338 million.
The international financial system was thus confronted
with a major challenge in late 1964 which was success­
fully countered. The unprecedented mobilization of $4
billion of international liquidity in defense of sterling was
Early in 1964 sterling showed weakening tendencies as
a striking illustration of the strength and flexibility of the a result of the deteriorating trade position of the United
central bank and IMF defenses against currency crises. Kingdom and various uncertainties connected with the



general election to be called sometime during the year.
A timely increase of the Bank of England discount rate
from 4 per cent to 5 per cent in late February tem­
porarily relieved market pressures, while delay of the gen­
eral election until October induced some short covering
by commercial interests.
Late in May, however, tight conditions in several Con­
tinental money markets exerted new pressure on sterling.
These pressures became strong toward the end of June
because of heavier-than-usual midyear window dressing by
Continental banks. To temper the impact of these move­
ments of funds on official reserves, the Bank of England
on June 30 drew $15 million against its $500 million swap
line with the Federal Reserve; it repaid the drawing on
July 13.
As the credit squeeze in the Continental money market
centers extended into July, moderate selling of sterling
continued, and the spot rate moved downward with a
minimum of official support to a low for the month of
$2.7874 on July 20. The decline in the spot rate was
taken in stride by the market without any speculative re­
action developing. Indeed, market confidence in the ster­
ling parity at that time was such that the discount on for­
ward sterling tended to narrow as the spot rate declined.
As the discount on forward sterling was reduced, the
covered interest-arbitrage differential on Treasury bills in
favor of London became correspondingly more attractive
and by July 13 had reached 0.44 per cent per annum. To
forestall private covered outflows in response to this ar­
bitrage inducement, the Federal Reserve, with the agree­
ment of the Bank of England, intervened in the market to
reduce the arbitrage differential. This intervention, amount­
ing to a total of $54 million equivalent in mid-July and
again in late August, was accomplished by swap transac­
tions in the New York market, with the Federal Reserve
buying sterling spot and selling sterling forward against
United States dollars. These operations had the dual effect
of protecting the dollar against short-term flows of funds
from New York to London while at the same time lending
useful support to the spot rate on sterling.
In September, sterling came under increased pressure,
mainly owing to increasingly widespread recognition of the
mounting balance-of-payments deficit of the United King­
dom, which became further aggravated by the usual sea­
sonal weakness during the autumn and early winter
months. Uncertainties connected with the general election
called for October 15 further unsettled the sterling ex­
change market, and the problem of maintaining confidence
in sterling seemed likely to become increasingly difficult.
In anticipation of reserve losses, the Bank of England in
mid-September made timely arrangements to supple­

ment the $500 million swap line with the Federal Reserve
by another $500 million of short-term credit facilities
with other central banks in Europe and with the Bank of
Canada. This reinforcement of the British reserve position
cushioned the impact of recurrent, and increasingly force­
ful, waves of selling during September and October. Net
drawings by the Bank of England on the Federal Reserve
swap line and on short-term facilities provided by other
central banks rose to $415 million by the end of October.
The new Labor Government elected on October 15 was
thus immediately confronted with a grave balance-ofpayments situation* The announcement on October 26 of
emergency surcharges of 15 per cent on a wide range of
imports brought only brief relief as critical reactions ap­
peared among Britain’s trading partners world wide,
more particularly the European Free Trade Association
(EFTA ) group. In a formal budget presented to Parlia­
ment on November 11, the government proposed certain
new welfare benefits, to be financed by tax increases, and
announced that it intended to introduce a capital gains tax
and to substitute a new corporation tax for the existing
application of the income tax to corporations. These pro­
posals created uncertainty in business circles, in part be­
cause the immediate deflationary influence of the increased
tax on fuel as well as the import surcharge was to some ex­
tent obscured by the other measures. These uncertainties
in domestic financial markets were, in turn, communicated
to the exchange market. During this period, the exchange
market began to anticipate bank rate action on each suc­
cessive Thursday, and thus a pattern developed of a
strengthening of sterling prior to Thursday of each week,
followed by a major selling wave on Friday as the bank
rate remained unchanged. When the bank rate remained
unchanged on Thursday, November 19, reserve losses by
the Bank of England on the following day reached such
proportions that action could no longer be postponed. On
Monday, November 23, the Bank of England raised its dis­
count rate from 5 per cent to 7 per cent.
Perversely enough, market reaction to such forceful use
of monetary policy by the Labor Government quickly
degenerated into fears that the threat to sterling must
have reached a truly crisis stage. Whether these reactions
might have been averted by earlier bank rate action, more
particularly on the usual Thursday date for bank rate an­
nouncements, may be debated for some time to come. In
any event, the market seized on rumors that the $1 billion
of short-term central bank credits at the disposal of the
Bank of England in September had now been exhausted;
that the $1 billion standby credit from the IMF secured
by the British Government in August had accordingly
been fully committed to repayment of such central bank



credits; and, hence, that the United Kingdom would have
to fall back in defense of sterling upon its reserves of
roughly $2 billion. (The still-substantial unused drawing
rights on the IMF would have required longer to mobilize
than events at that time allowed.)
This situation assumed increasingly grave significance
on the London afternoon-—and the New York morning—
of November 24 when a virtual avalanche of selling de­
veloped. If sterling were to be rescued, it was clear that a
major package of international credit assistance would be
required. On the afternoon of the 24th, the Federal Open
Market Committee— meeting through a telephone confer­
ence— committed itself to an increase in the Federal
Reserve-Bank of England swap line from $500 million to
$750 million if credit assistance on a roughly correspond­
ing scale could be secured from other central banks. That
evening the Export-Import Bank gave assurance of a $250
million standby facility. Beginning early on the morning
of November 25, the Bank of England, the Federal Re­
serve Bank of New York, and the central banks of other
major countries were in almost continuous telephone com­
munication. At 2 p.m., New York time, it was announced
that a $3 billion credit package provided by eleven coun­
tries and the BIS was at the disposal of the Bank of Eng­
As a result of the heavy reserve losses, the $500 mil­
lion Federal Reserve swap and the additional $500 million
of other central bank credit facilities made available to
the Bank of England in September were not only fully ex­
hausted, but immediate drawings of $200 million on the
new credit facilities were also required. From the endof-October figure of $415 million, recourse by the Bank
of England to central bank credit facilities thus rose by
$785 million during November to a total of $1.2 billion.
Of this total, the Federal Reserve share was $675 million.
In early December the British Government drew the
full amount of its $ 1 billion standby facility with the IMF
and so repaid an equivalent amount of the central bank
credits outstanding, including $500 million of the Federal
Reserve credit. At the same time, Switzerland, which, al­
though not a member of the IMF, is associated with the
General Arrangements to Borrow, provided the United
Kingdom with a three-year credit of $80 million; $50 mil­
lion of the Swiss credit was used to repay an earlier loan
from Switzerland, outstanding from the sterling crisis of
With its exchange reserves thus heavily reinforced, the
British Government could face with confidence further
temporary pressures on sterling during December. Selling
was particularly heavy just prior to the long Christmas
week end, and during the month the Bank of England in­

creased its use of short-term central bank credit facilities
from the $200 million outstanding early in December to
$525 million at the year end. Of this $325 million increase,
$25 million was secured by an increased use of the Fed­
eral Reserve swap line, raising the total outstanding from
$175 million to $200 million, while $300 million was
drawn from other central banks.
Beginning in late November heavy selling of sterling
appeared in the forward market, mainly by commercial
interests insuring their future exchange transactions. This
selling threatened to move the forward sterling rate to an
excessive discount and hence intensify sales of sterling in
the spot market. Accordingly, the Bank of England gave
firm support to the forward rate. This support not only
served to lessen the drain on reserves from spot trans­
actions at the time, but more generally helped to buttress
confidence in sterling by providing official reassurance that
the sterling parity would be maintained. The operation
was comparable to the determined stand taken in the for­
ward market by other central banks in recent years and
promised to achieve the same useful results.
After the turn of the year, both the spot and forward
markets for sterling returned to a more balanced position.
Since then, sterling has shown an increasingly buoyant
trend. On February 10 it was announced that those of the
central bank credit facilities made available last Novem­
ber which were shortly due to expire would be replaced
by new facilities, available to the end of May, thus re­
constituting the entire $3 billion credit package. By the
end of February the Bank of England was able to start
repaying these debts.
In addition to direct swap transactions with the Bank
of England, the Federal Reserve Bank of New York also
moved into the market at various times during the autumn
months to purchase sterling for both System and Treasury
account. These acquisitions were made on both an out­
right and a swap basis; the particular technique used was
determined by market conditions at the time, in consulta­
tion with the Bank of England.

At the beginning of 1964, Federal Reserve swap draw­
ings of Swiss francs under the swap lines of $150 million
equivalent with both the Swiss National Bank and the
BIS amounted to $220 million equivalent. By the end
of June, these drawings had been completely liquidated
through gold sales of $30 million to the Swiss National
Bank, purchase from the Bank of Italy of the Swiss franc
proceeds of a $100 million equivalent lira-Swiss franc swap,
issuance by the United States Treasury of a $70 million



equivalent Swiss franc bond to the BIS, and purchases of
Swiss francs from the Swiss National Bank. United States
Treasury market commitments in forward Swiss francs
were reduced during the course of the year from $121
million to $51.5 million. At the outset of 1964, the United
States Treasury and the Federal Reserve also had out­
standing a combined total of $53 million in swaps of
third currencies into Swiss francs. These contracts had
been reduced to $15 million by the end of February 1965.
Despite the progress thus made in liquidating Treasury
and Federal Reserve commitments in Swiss francs in­
curred in late 1963, new problems arose when sizable short­
term funds—mainly repatriated Swiss assets— again flowed
into Switzerland, both at midyear and particularly toward
the close of the year as the pound sterling came under
pressure. During the spring of 1964, interest rates in
Switzerland continued to rise as the heavy demands im­
posed on the Swiss money and capital markets by the
continuing high level of economic activity further squeezed
the liquidity position of Swiss banks and firms. The inter­
est rate on three-month deposits reached 3.50 per cent in
June, an increase of about 0.75 per cent per annum over
the previous year, while the average yield on government
bonds moved up to 4.05 per cent, compared with 3.15 per
cent a year earlier. To relieve the squeeze on their liquid­
ity positions, and to satisfy midyear window-dressing needs,
the Swiss commercial banks made sizable repatriations of
funds during June.
These commercial bank operations caused the Swiss
National Bank once again to take in substantial amounts of
dollars. In July the reversing of some window-dressing
operations and an easing of the Swiss money market
brought about only a partial reversal of the previous in­
flows. In these circumstances the United States Treasury
issued to the Swiss National Bank on August 4 an addi­
tional Swiss franc bond in the amount of $52 million
equivalent and used the proceeds to absorb an equivalent
amount of dollars on the books of the Swiss National
Bank. (This issue brought the outstanding amount of
United States Treasury securities denominated in Swiss
francs to $327 million equivalent.)
Generally easier conditions prevailed in the market for
Swiss francs from mid-August to mid-October, and the
Swiss franc declined from its ceiling for a while, only to
firm again in late October as the Swiss money market
tightened. Then in the early part of November, funds
began to move into Switzerland in quantity— some di­
rectly out of sterling, some through the Euro-currency
markets in response to the general uneasiness that per­
vaded the exchanges. Throughout the rest of the year,
sizable increases occurred in the dollar holdings of the

Swiss National Bank.
To absorb part of this intake of dollars, the Federal
Reserve reactivated its $150 million swap with the BIS
in early December by drawing $100 million of Swiss
francs, which was simultaneously employed to purchase
dollars from the Swiss National Bank. A further Swiss franc
drawing of $60 million equivalent on the Swiss National
Bank was made on January 19 for the same purpose. In
addition, to calm the market and to encourage Swiss banks
to invest abroad dollars that they might otherwise have
sold to the Swiss National Bank, the Federal Reserve began
in December to sell Swiss francs forward to the market
through the Swiss National Bank. By January 8, 1965,
such forward sales reached a peak of $32.5 million equiv­
alent. Most of these contracts had been paid off by the
end of February through spot purchases of Swiss francs.
(The Swiss franc began to ease shortly after the year end
as Swiss banks, finding themselves liquid, started to place
funds abroad.) During the second half of 1964, the dollar
acquisitions of the Swiss National Bank were further re­
duced by purchases of $51 million of gold from the
United States Treasury.

At the beginning of 1964, Federal Reserve commit­
ments in guilders amounted to $80 million equivalent, all
in the form of outstanding swap drawings. These were
fully repaid by early April, as earlier inflows of funds into
the Netherlands were reversed.
In May the Dutch money market began to tighten, and
in early June the Netherlands Bank raised its discount
rate from 4 per cent to W i per cent. In July Dutch com­
mercial banks began to repatriate funds in substantial
amounts. Moreover, the Netherlands balance of pay­
ments strengthened, owing to a better trade balance and
an inflow of long-term capital. By November the intensi­
fied pressures on sterling and the ensuing movement of
some funds out of sterling and into guilders helped push
the guilder to its ceiling.
Meanwhile, the Netherlands Bank had been taking in
dollars in an effort to moderate the rise in the guilder rate.
During the first week of August the Federal Reserve drew
$20 million equivalent of guilders under the swap line
and immediately used the guilders to absorb some of the
Netherlands Bank’s accruals of dollars. Further Federal
Reserve drawings and sales of guilders followed in rapid
sequence, and by mid-October the $100 million swap
facility had been fully drawn. Additional dollars were
purchased by the Federal Reserve and the United States
Treasury from the Netherlands Bank in September and



December with guilders acquired through three-month
swaps of sterling for guilders with the BIS, for a total of
$50 million equivalent. As intensified buying pressures
on the guilder developed in late December, a temporary
swap arrangement for $35 million between the Nether­
lands Bank and the United States Treasury was agreed upon
and fully employed.
In mid-December recourse was also had to forward
operations in Dutch guilders for both Federal Reserve
and Treasury account in order to provide reassurance to
the market and induce covered capital outflows from the
Netherlands. These operations, together with Dutch pro­
vision of dollar credits to the Bank of England and pur­
chases of gold from the United States Treasury, reduced
the dollar holdings of the Netherlands Bank sufficiently to
permit complete liquidation of the Treasury-Netherlands
Bank $35 million swap by early January and repayment
of $30 million of the Federal Reserve swap drawings in
early February. As of the end of February, Federal Re­
serve drawings upon the swap line with the Netherlands
Bank had thus been reduced to $70 million equivalent.
During the second half of 1964, gold purchases by the
Netherlands Bank from the United States Treasury
amounted to $60 million.

During 1963 and early 1964, there had been almost
continuous upward pressure on the German mark. This
pressure reflected a substantial increase in the German
foreign trade surplus, large inflows of long-term capital,
and occasional inflows of short-term funds in response to
tight money market conditions or hedging operations. To
ease the strain, the German Federal Bank, the Federal Re­
serve, and the United States Treasury jointly conducted
various spot and forward exchange operations, as outlined
in previous reports in this series.
On March 23, 1964, an important turning point oc­
curred, as the German Government announced its inten­
tion to propose to Parliament the imposition of a 25 per
cent withholding tax on income from German fixedinterest securities held by nonresidents. This action not
only checked the long-term capital inflow, but also actu­
ally induced liquidation of a considerable volume of for­
eign investments in flxed-interest securities. Earlier
surpluses on trade account also diminished as the year
progressed and helped to restore a stable equilibrium in
the exchange markets.
The effect on the exchange market of these basic shifts
in the German balance of payments was reinforced by a
number of technical measures initiated by the German

authorities to reduce temporary pressures on the exchange
market resulting from short-term capital flows. The spe­
cial swap facilities made available by the German Federal
Bank to German commercial banks for investments in
United States Treasury bills were used flexibly throughout
the second half of the year, with maturities provid­
ing the banks with liquidity at the year end. In addi­
tion, under a special temporary arrangement in December,
German commercial banks were permitted to borrow
against collateral from the central bank at an effective cost
lower than the posted rate. Nevertheless, the sterling crisis
led to some inflow of funds to Germany in late December.
Consequently, the Federal Reserve reactivated its $250
million swap facility with the German Federal Bank by
drawing $50 million equivalent of marks in order to ab­
sorb $50 million of German dollar reserves. This drawing
was reversed in late January 1965, as short-term outflows
from Germany combined with German military purchases
in the United States enabled the Federal Reserve to ac­
quire $50 million of marks from the German Federal
Bank. Another small drawing of $15 million equivalent
was made by the Federal Reserve on February 4 to help
control any speculative tendencies resulting from President
de Gaulle’s press conference on the same date.
During the six-month period through February, the United
States Treasury issued to the German Federal Bank in
October 1964 a $50 million equivalent mark-denominated
bond. This latest issue raised the total of such mark bonds
outstanding to $679 million equivalent. The mark proceeds
of this bond, together with $7 million of Treasury mark
balances remaining from United States drawings of marks
from the IMF, were sold to Canada to enable that country
to make an IMF repayment. Subsequently, in early De­
cember when the United States Treasury drew $125 million
equivalent of marks from the IMF, it used $50 million
equivalent to purchase excess dollars from the German
Federal Bank, in effect compensating for the fact that
marks derived from the earlier bond issue had been used
in conjunction with Canada’s repayment to the IMF.

Italy’s balance-of-payments deficit had assumed major
proportions in the fall of 1963, and the Federal Reserve
and United States Treasury joined forces with the Bank
of Italy in defense of the lira. As outlined in the previous
report, Federal Reserve and Treasury operations in the
autumn of 1963 and the first quarter of 1964 cushioned
the decline in the Bank of Italy’s reserves to the extent of
some $350 million and thereby helped to restrain specula­
tive pressures against the lira.



During the week of March 9 through March 14, 1964,
an Italian delegation headed by Governor Carli of the
Bank of Italy visited Washington to discuss with the World
Bank and the IMF various possible sources of financing
for Italy’s longer term investment requirements and its
expected further balance-of-payments deficits. In the
midst of these discussions, the lira was suddenly struck
by a burst of speculation. This brought heavy pressures
not only on the spot rate but also on the forward rate,
which for a three-month maturity moved to a discount of
7 per cent per annum. In this dangerous situation, an
immediate and massive reinforcement of the Italian re­
serve position was clearly called for. Within forty-eight
hours the Italian authorities were able to announce that
they had arranged for approximately $1 billion of exter­
nal assistance provided by the United States, the Bank of
England, and the German Federal Bank.
One of the most satisfactory aspects of this display of
international cooperation in beating back a speculative
attack on the Italian lira was that the provision of massive
credit assistance to Italy more or less coincided with a
turning point in the Italian economic and financial scene.
During the first quarter of 1964 the Italian balance of pay­
ments had registered a deficit of $436 million. A surplus
of $226 million was recorded in the second quarter, as
corrective policy measures initiated by the Italian authori­
ties began to take effect and as a reversal in the leads and
lags in payments brought about the covering of short posi­
tions in lire. In early July, a governmental crisis generated
a temporary speculative flurry, but forceful operations in
the forward market by the Bank of Italy through the
agency of the Federal Reserve Bank of New York pro­
vided reassurance, and the speculation quickly subsided.
Italy continued to run a payments surplus during the
third and fourth quarters of 1964, and by the year end
Italian official reserves, which had dipped $233 million
during the first quarter, were $389 million higher than at
the outset of 1964. The reappearance of political un­
certainties in the late summer triggered some selling of
forward lire, and discounts for three-month maturities
tended to widen at times to 4 per cent per annum. In
such instances, the Federal Reserve Bank of New York
again intervened for account of the Bank of Italy to sup­
port the forward lira in the New York market and thus
helped to relieve market uncertainties. By early October
the discount on the three-month forward lira had nar­
rowed to less than 1 per cent per annum.
Continuing heavy flows of dollars to Italy in the closing
months of 1964 and early 1965 may have partially re­
flected the sterling crisis. To absorb part of these dollar
inflows, the Federal Reserve on January 22 reactivated its

$250 million swap arrangement with the Bank of Italy by
drawing $50 million equivalent of lire.

The spot market for Canadian dollars was relatively
quiet through the first half of 1964, but there was con­
siderable activity in the forward market as a result of
grain sales to the Soviet Union beginning in the previous
autumn. These sales generated heavy demands on the
part of grain dealers for Canadian dollars for future
delivery against United States dollars. In order to offset
some of these pressures, the Bank of Canada sold United
States dollars spot and purchased them forward, thus
providing some counterpart to the commercial banks’
swap needs, while the Federal Reserve also intervened on
a small scale. By the end of July, Canadian grain ship­
ments to the Soviet Union had been fairly well completed,
and pressures on the forward market eased.
In August, heightening tensions in Vietnam generated
some buying of spot Canadian dollars by Continental
interests and, as the spot rate rose in a thin market,
Canadian exporters began to sell out United States dollar
balances. New grain purchases by several Eastern Euro­
pean countries exerted further upward pressure on the
spot rate. At about the same time there was a tightening
of the Canadian money market, which induced a tem­
porary flow of short-term funds into Canada from the
United States on a covered basis.
Substantial Canadian long-term borrowings in the
United States market, the sterling crisis, and fiscal-yearend positioning by Canadian banks in October and
November pushed the spot rate for the Canadian dollar
to its eSective ceiling by November. As the Canadian
dollar strengthened, the Bank of Canada intervened to
moderate the rise in the rate, with the result that Canadian
reserves increased by $210 million during the AugustNovember period despite repayments of $107 million to
the IMF in September and October. By December the
market had returned to a more balanced position.
In early February the Canadian dollar softened, as
press discussion of prospective United States balance-ofpayments measures lead to some apprehension in the
markets that Canada might be unfavorably affected. The
United States balance-of-payments program, announced on
February 10, made it clear that there was no United States
intention to deprive the Canadian economy of essential
inflows of capital. Nevertheless, the Canadian dollar weak­
ened somewhat further in the second half of the month,
reportedly reflecting Canadian commercial buying of
United States dollars and unfavorable seasonal factors.




Early in July 1964 the Belgian franc strengthened,
following the announcement of new measures designed to
curb the growth of credit in Belgium. On July 3 the Na­
tional Bank of Belgium raised its discount rate by Vi
percentage point to 4% per cent and announced that,
effective August 17, it would impose a cash reserve
requirement against commercial bank deposits for the
first time. Tighter money market conditions developed,
and, in conjunction with long-term investment in Belgium,
an improved trade balance beginning in the third quarter
and the sterling crisis later in the year contributed to
substantial dollar inflows into Belgium.
Early in August, the Federal Reserve used $7.5 million
equivalent of Belgian francs drawn under the $50 million
swap arrangement to absorb dollars on the books of the
National Bank of Belgium. By mid-October the entire
$50 million equivalent of franc balances had been so
utilized. Effective October 22 the Federal Reserve and
the National Bank of Belgium expanded the existing $50
million swap facility with an additional $50 million ar­
rangement to be available on a standby basis. As dollars
continued to flow into Belgium, the Federal Reserve
made further drawings on this additional swap and by
the end of November had used the full amount.
The Federal Reserve was able to reduce its swap com­
mitments to Belgium to $25 million equivalent in early
December, when the National Bank of Belgium pur­
chased $75 million from the Federal Reserve to make
special outpayments. On December 30, however, the
Federal Reserve again drew $20 million equivalent of
francs in order to absorb further inflows of dollars into
Belgium, and further utilization of $40 million equivalent
under the swap arrangement became necessary in Jan­
uary and February 1965. As of the end of February, total
Federal Reserve use of the $100 million swap arrange­
ment with the National Bank of Belgium amounted to
$85 million equivalent. Meanwhile, during the second
half of 1964, the National Bank of Belgium had pur­
chased $40 million of gold from the United States.
J a p a n e s e y e n . On April 30, the Bank of Japan drew
$50 million under the $150 million swap arrangement
with the Federal Reserve in order to cushion a decline in
Japanese reserves. This drawing was renewed on July 30,
as reserve pressures continued, and a further drawing of
$30 million was made on July 31. In August, however, do­
mestic restraint measures began to take effect: import de­

mand diminished and, with a continued growth in exports,
the trade balance improved considerably. With this im­
provement in Japan’s balance-of-payments and reserve
position, the Bank of Japan began repaying its swap ob­
ligations at the end of September and, by early November,
had liquidated them in full.
There were no System operations
in Austrian schillings during the period. Although the
Austrian balance of payments registered a considerable
deficit in the last quarter of 1964, the figures for 1964 as
a whole continued to show a surplus. Therefore, on Febru­
ary 23 and March 3, 1965, the Treasury issued to the
Austrian National Bank two $25 million equivalent
eighteen-month bonds denominated in Austrian schillings,
using the proceeds to absorb some of that bank’s dollar
holdings. These issues brought the outstanding total of
United States Treasury Austrian schilling-denominated
bonds to $100 million equivalent.
a u s t r ia n

s c h il l in g


s w e d i s h k r o n a a n d f r e n c h f r a n c . There were no Fed­
eral Reserve or Treasury operations in Swedish kronor
or French francs during the period under review.


Over the course of several years before 1964, foreign
countries had been repaying more dollars to the IMF than
the IMF had been paying out in new drawings. As a re­
sult, the IM F’s dollar holdings rose to a point where they
equaled the amount that the United States had paid into
the IMF as part of its quota. At this point the IMF, under
its rules, could no longer accept dollars in repurchase, and
countries having repurchase obligations could make re­
payments only with gold or with other eligible convertible
currencies. So as to be able to sell such currencies to
countries having repurchase obligations, the United States
Treasury on February 13 and June 1 made two drawings
on the IMF—predominantly in German marks and French
francs—in the amount of $125 million equivalent each
under the $500 million standby agreement with the IMF
announced by President Kennedy in July 1963. By Sep­
tember 1, the bulk of these currencies had been sold to
various countries effecting repayments to the IMF.
On July 23, 1964, the original standby arrangement
expired, and the Treasury announced that it had made a
further standby arrangement with the IMF for another
year. This restored the amount available to $500 million.
The first drawing under the new standby arrangement was
made on September 1, when the United States drew $50



million in five European currencies. Unlike the first two
drawings under the original arrangement, which were used
to cover a number of transactions that took place during
ensuing weeks, this drawing was occasioned by Italy’s re­
purchase of $65 million equivalent of lire from the IMF.
Again, on September 30, the United States Treasury drew
equal amounts of Dutch guilders and German marks total­
ing $100 million equivalent, half of which was immediately
sold to Canada in connection with a repayment to the IMF.
The remaining balances were disbursed in subsequent
weeks. On December 7 a third drawing of $125 million
equivalent was made, this time solely in German marks.
Since this program was initiated, the United States
Treasury has drawn $525 million equivalent of seven con­
tinental European currencies, of which some $15 million
equivalent remained undisbursed as of the end of Febru­
ary 1965. The effect of these drawings on the United States
position in the IMF has been offset to a considerable ex­
tent, however, by drawings of dollars by other countries.
The largest single dollar drawing was $200 million, under
the $1 billion equivalent multicurrency drawing in Decem­
ber by the United Kingdom., As a result, the United States
repayment obligation to the IMF as of the end of Febru­
ary 1965 had been reduced to $256 million.

Throughout the first eight months of 1964 the London
gold market was generally stable, with the gold-fixing
price ranging between $35.06 and $35.10. With the im­
provement in the United States balance of payments,
and consequent strengthening of confidence in the dollar,
speculative demand for gold receded and, as new pro­
duction also increased, the Gold Pool regularly absorbed
surpluses of output reaching the market. The Pool took
in further sizable amounts of gold from Russian sales
which were heavily concentrated over a few weeks’ span
in late March and early April.
Over the closing months of 1964, various political and
financial disturbances tended to rekindle speculative buy­
ing of gold. International tensions arising out of the
Vietnam conflict have continued to generate market ap­
prehension. But renewed speculation in the gold market
was also attributable to the increasing pressures on sterling
during the latter part of the year. In addition, the sharp
deterioration in the United States balance of payments
during the closing months of 1964 contributed to market
uncertainties, especially after the turn of the year. In Feb­

ruary, various pronouncements emanating from Paris
further stimulated speculative buying of gold by private
interests. Both the United Kingdom and the United States
have now taken forceful action to deal with their balanceof-payments deficits, and if these corrective programs are
vigorously pursued, speculative pressures in the gold mar­
ket may be expected to subside.
The Bank of England, on behalf of the Gold Pool,
continued to exert a stabilizing influence on the market
and to moderate price movements. Although private
demand for gold increased during the closing months of
1964, over the year as a whole the Pool once again ac­
quired and distributed to its members more than $600
During the fourth quarter of 1964, Continental central
banks took in sizable amounts of dollars and several sold
part of their acquisitions to the United States Treasury for
gold. These conversions, as well as the continued French
monthly gold purchases, more than offset United States
acquisitions from other sources. As a result, the United
States became a net seller of gold in its international
monetary transactions after having been a net purchaser
earlier in the year (see Table III). For 1964 as a whole,
taking into account sales of about $89 million to domestic
users, total United States gold holdings— including Stabili­
zation Fund holdings as well as the Treasury gold stock—
declined by $125 million. During the first two months of
1965, the Treasury gold stock declined by an additional
$450 million.
Table III
July-December 1964
In millions of dollars at $35 per fine troy ounce;
United States net sales(—), net purchases(+)



— 1.1
— 101.4
— 25.0

United Kingdom .........................................
All other ......................................................
Net sales or purchases........................

— 40.1
+ 28.2
— 101.4


— 60.0
— 30.0
— 51.0
— 12.5
+ 125.0


— 144.6




The Business Situation
Business activity expanded at a good rate in January,
and most newly available evidence, on balance, points to
further gains in the immediate months ahead. Reflecting
this upward momentum, such broad current indicators as
industrial production, nonfarm payroll employment, new
orders received by manufacturers of durable goods, and
outlays for residential construction all increased in Jan­
uary, while spending at retail outlets remained near its
advanced December level. Early returns for February
suggest that the automobile and steel industries were both
still straining their facilities to meet pressing demands
and that retail sales moved up somewhat. The unemploy­
ment rate, moreover, continued within the lower range
that has prevailed in recent months. With the economy
continuing to advance from already high levels, the price
indicators bear close watching. The consumer price index
increased again in January, while the industrial component
of the wholesale price index (seasonally adjusted) was un­
changed. However, weekly data for February suggest that
the industrial component moved up in that month.
Labor-management negotiations have continued to oc­
cupy much of the business news. In early February, East
and Gulf Coast longshoremen who had already signed
wage contracts returned to their jobs after an extended and
costly work stoppage. Although the strike continued at
some ports, activity in the opened ports immediately
surged as shippers sought to make up for the business lost
during the walkout. Meanwhile, with the results of the
presidential election in the steel union still being contested,
there is some question as to when meaningful contract
negotiations can be resumed. Indeed, the uncertainty over
the election was probably a contributing factor in the
breakdown of the union’s negotiations with major can
producers on March 1, which resulted in the first strike in
this industry in eleven years. Many observers have urged
that the present contract in the steel industry be extended

beyond its April 30 termination date. To do so would re­
move one significant short-term uncertainty but would also
prolong the period of inventory stockpiling as a hedge
against a possible strike.
PR O D U C T IO N , O R D E R S , AN D E M P L O Y M E N T

Industrial production rose further in January, as re­
sponse to broad-based demand brought a 0.7 percentage
point advance in the Federal Reserve’s seasonally ad­
justed index. Following on the heels of the unusually
large gains in November and December, which reflected
efforts to make up for production lost during the earlier
automobile strikes, the January advance brought the
index to 137.7 per cent of the 1957-59 average (see
chart), or 8 per cent higher than the reading a year
earlier. The production increase included advances in
consumer goods and materials output, which were all the
more significant since they did not depend on a further
push from the auto and steel industries.
In the steel industry, new bookings appear to have risen
only about seasonally in January. Trade sources, however,
reported that orders for some types of steel had to be
turned down because forward commitments made earlier
in response to strike-hedge ordering had already filled the
books at some mills for several months ahead. It was also
reported that steel shipments, although rising, have recently
tended to fall considerably behind delivery dates promised
earlier. Ingot production, which had been limited to levels
that could be handled by the industry’s finishing facilities
for flat-rolled products, edged up a bit further in February
in response to increased demand for pipe and wire prod­
ucts, but with operations already at such a high rate the
gain was less than is usual for that time of year. In the
auto industry, dealers continued to press manufacturers for
deliveries. However, a severe Midwest snowstorm that



S e a s o n a lly a d ju ste d
P er cent

Per cent

tinue to climb in the first half of 1965, A more up-to-date
reading of spending plans should be available in early
March with the publication of the results of the Govern­
ment’s February survey.
Although the absence of dock workers from their
jobs in January curtailed employment in transportation
industries, the expansion in over-all economic activity
helped push total nonfarm payroll employment (sea­
sonally adjusted) up by 93,000 persons in that month.
Except for the brief interval during the automobile strikes
last fall, payroll employment has risen virtually without
interruption for three years (see chart). The number of
persons at work in manufacturing rose to 17.7 million in
January, the highest level since mid-1953, and the aver­
age workweek clocked by manufacturing production
workers climbed to 41.4 hours. This represented an aver­
age of 3.3 hours of overtime per production worker, the
highest overtime rate for January since this series began
in 1956. According to the Census Bureau’s household sur­
vey, the unemployment rate was 5.0 per cent in February,
up slightly from 4.8 per cent in January, but close to the
range that has prevailed since mid-1964. Total employ­
ment was about unchanged in February, while the civilian
labor force rose somewhat.

S o u rc e s: B o a rd of G o v e r n o r s o f the F e d e ra l R e se rv e S y ste m ; U n ite d S t a t e s
D e p a r t m e n t s o f C o m m e r c e a n d L a b o r.

kept many automobile production workers off their jobs
for several days apparently caused assemblies in February
to edge off a bit from the unprecedented height of the
previous month.
Prospects for further gains in over-all production appear
good. Despite a lack of push from steel orders in January,
total new orders received by manufacturers of durable
goods (seasonally adjusted) advanced again (see chart).
Backlogs of unfilled orders also were up and currently
amount to more than two and a half times the monthly
rate of shipments. Orders booked by machinery- and
equipment-producing industries rose in January and
reached a level 8 per cent higher than a year ago. Increases
in such orders tend to confirm the indications of the No­
vember Commerce Department-Securities and Exchange
Commission survey that business capital spending will con­

Developments in the residential construction sector
continue to present a mixed picture. Vacancy rates for the
nation as a whole on both rental and for-sale units in the
fourth quarter of 1964 were exactly the same as a year
earlier. Building permits issued in January advanced
markedly and outlays for new buildings rose in February
for the third month in a row. On the other hand, the dollar
value of residential construction awards (seasonally ad­
justed) moved down in January after a two-month rise,
and the number of nonfarm housing units started in Janu­
ary dropped sharply after a surge in December. The
major area of weakness in starts, compared with the high
levels of about a year ago, apparently continues to be in
multifamily units on the West Coast.
Consumer spending at retail outlets eased a bit in Jan­
uary from the record December level, but remained never­
theless almost 7 per cent above the year-earlier perfor­
mance. Weekly data for February suggest that retail volume
in that month probably more than made up the decrease of
the month before. It should be noted that the sharp ad­
vance in personal income in January, partly reflecting early
payment of dividends to veterans holding Government life
insurance, buttressed consumers’ ability to spend. While
new car sales appear to have dipped a bit in February fol­


lowing their surge in January, they remain at a very high
The Census Bureau’s latest survey of consumer buying
plans, taken in January, suggests that auto sales will con­
tinue at a good rate over the near term. The January re­
sults do show a decline in the proportion of consumers
planning to buy new cars within the next six months, com­
pared with the results reported last October. However,


such plans are usually reduced in the interval between these
two surveys, with October plans probably biased upward
because of the introduction of the new car models. Plans
to buy a new car within six months were higher in January
1965 than a year earlier, and the 1964 survey was, of
course, followed by a year of record sales. Plans to pur­
chase household durables, on the other hand, were off
somewhat from their high level at the start of 1964.

The Money and Bond Markets in February
Attention in the money and bond markets during Feb­
ruary focused on the implications of the nation’s balanceof-payments problem and the official actions proposed to
deal with it. The money market’s tone became somewhat
firmer during the month and this, combined with the pub­
lication of lower average levels of nationwide reserve avail­
ability, led many observers to conclude that a slight shift
in monetary policy had taken place. In the firmer money
market atmosphere, Treasury bill rates edged upward and
at the end of the month the three-month bill was bid at
3.99 per cent, just under the discount rate.
In the market for Treasury notes and bonds, caution aris­
ing from the balance-of-payments problem and the situa­
tion in Vietnam led to a gradual decline in prices through
mid-February. Thereafter, prices steadied and moved
narrowly. Prices of corporate and tax-exempt bonds also
receded during the month, as investors resisted the lower
yield levels that had developed on new issues in January.

The tone of the money market gradually became slightly
firmer during February, reflecting in part the decline in
nationwide reserve availability from the levels prevailing
in December and January. Rates posted by the major
New York City banks on call loans to Government securi­
ties dealers rose a bit and generally fluctuated between 4Vs
per cent and 4Vi per cent. At the same time, offering

rates for new time certificates of deposit issued by the
leading New York City banks, and the range of rates at
which such certificates traded in the secondary market,
edged higher during the month. On February 4, dealers in
bankers’ acceptances raised their rates by Vs of a percent­
age point making the new offering rate on ninety-day un­
endorsed acceptances 4Vs per cent. In the course of the
month, the major sales finance companies increased their
offering rates on various categories of directly placed paper
by Vs to V4 of a percentage point. At the end of the period
they were offering 4Vs per cent on 30- to 59-day paper and
4V\ per cent on 60- to 270-day paper. Toward the end of
the month, commercial paper dealers raised their rates by
Vs of a percentage point, making the new rate on prime
four- to six-month paper 4% per cent (offered).
As the month opened, the money market continued to
exhibit about the same steady tone that had prevailed
toward the end of January. System open market opera­
tions about offset the effects of a withdrawal of reserves
stemming from movements in market forces. Although re­
serve positions at major money market banks as a group
came under slightly increased pressure, these banks were
able to cover a good part of their reserve needs in the Fed­
eral funds market where funds were readily available at 4
per cent. Subsequently, as nationwide reserve availability
contracted, pressures on the reserve positions at these
banks mounted, and the over-all tone of the money market
became slightly firmer. Banks bid strongly for Federal



funds and, on two days, funds traded predominantly at
AVs per cent. Total member bank borrowings at the Re­
serve Banks bulged over the February 5-7 week end, help­
ing to produce a temporary abundance of excess reserves,
and Federal funds became available below the discount rate
toward the close of the February 10 statement week. A
portion of these funds was purchased by “country” banks
and carried into the second week of their statement period.
Over the midmonth statement week, nationwide reserve
availability declined further as System open market op­
erations more than offset the reserves provided by market
factors. The money market was quite firm, but member
bank borrowings from the Reserve Banks declined when
the large reserve excesses built up by the country banks a
week earlier were redistributed. In the latter part of the
month, member bank borrowings from the Reserve Banks
once again rose substantially as many banks sought to

Table II
In millions of dollars
Daily averages— week ended
Factors affecting basic reserve positions







four weeks
Feb. 24*

Eight banks in New York City

Table I

In millions of dollars; (+ ) denotes increase,
(—) decrease in excess reserves






— 695

-3 6 4

-5 0 5




Reserve excess or deficiency(—)f
Less borrowings from Reserve Banks..
Less net interbank Federal funds
purchases or sales(—) .........................
Gross purchases.................................
755 1,000
Gross sales ........................................
Equals net basic reserve surplus
or deficit(—) ......................................... — 381 — 406 — 223 - 3 4 8
Net loans to Government
securities dealers ..................................




Reserve excess or deficiency(—)t
Less borrowings from Reserve Banks..
Less net interbank Federal funds
purchases or sales(—) .........................
925 1,061
Gross purchases .................................
Gross sales .........................................
Equals net basic reserve surplus
or deficit(—) ......................................... - 4 3 4 - 5 2 5
Net loans to Government
securities dealers ..................................

Thirty-eight banks outside New York City

- 340

* Estimated reserve figures have not been adjusted for so-called “ as of” debits
and credits. These items are taken into account in final data,
t Reserves held after all adjustments applicable to the reporting period less
required reserves and carry-over reserve deficiencies.

Daily averages— week ended










+ 205
— 687
— 139
— 116
— 320

4- 78
— 3
4- 68
— 91
— 97

4- 84
+ 354
4 - 190
4- 97
4- 84

4- 266
— 716
_ 111
4- 61
— 237
— 119

— 117

— 13

— 21

— 309
— 450


“ Market” factors
Member bank required reserves* ........... — 101
Operating transactions (subtotal) ........ — 380
Federal Reserve float ......................... — 230
+ 50
Gold and foreign account ................... — 27
Currency outside banks* ..................... — 14
Other Federal Reserve
— 158
Total ^market** factors ................... — 481

— 482



4- 438

— 45

_ 370
— 2
4- 31
— 44


D irect Federal Reserve credit
tra n s a c tio n s

Open market instruments
Outright holdings:
Government securities . . . . . . . . . . . .
Bankers’ acceptances ........... .
Repurchase agreements :

+ 435

4- 364






4- 32
4- 194


— 76
— 20
— 119

+ 522

4- 600

— 263

— 217

4- 642

-f- 41


— 188

4- 221

4- 192

Total reserves, including vault cash*. .. 21,401
Required reserves* ................................. 21,019
Excess reserves* .......................................
Borrowings ............. ................................
Free reserves* ...........................................
Nonborrowed reserves* ............................ 21,123


— 41


21,237 §
406 §
26 §

Bankers' accGptauces .......................
- f 75
Other loans, discounts, and advances... — 4

Excess reserves* ......................... ...............................
D aily average levels of m em ber b an k :



Note: Because of rounding, figures do not necessarily add to totals.
* These figures are estimated,
t Includes changes in Treasury currency and cash.
t Includes assets denominated in foreign currencies.
5 Average for four weeks ended February 24, 1965.

4- 384

— 42
— 4

avoid accumulating reserve deficiencies over the three-day
Washington’s Birthday week end. These heavy week-end
borrowings again led to an overabundance of reserves to­
ward the end of the statement week, and country banks
were once more buyers of Federal funds late in the Febru­
ary 24 reserve averaging period at rates below the discount
Over the month as a whole, market factors drained
$450 million of reserves while System open market op­
erations provided $329 million. The weekly average of
System outright holdings of Government securities in­
creased by $384 million from the final statement week in
January through the last week in February, while average
System holdings of Government securities under repurchase
agreements declined by $12 million. Average net Sys­
tem holdings of bankers’ acceptances, both outright and
under repurchase agreements, fell by $43 million during
the period. From Wednesday, January 27, through Wed­
nesday, February 24, System holdings of Government
securities maturing in less than one year rose by $1,631
million, while holdings of issues maturing in more than


one year contracted by $1,673 million. This shift in the
maturity structure of Federal Reserve holdings largely re­
flected the passage of time.

The cautious atmosphere which had developed in the
market for Treasury notes and bonds toward the end of
January continued in the early part of February. Growing
awareness and discussion of the nation’s balance-ofpayments problem and of possible measures to deal with it
— including the possibility of a shift in monetary policy—
led to a cautious approach to investment decisions on the
part of market participants. In this atmosphere, market pro­
fessionals became increasingly eager to lighten inventories
recently enlarged by the Treasury’s January advance re­
funding and the February cash financing. Thus, a modest
but general decline in prices of coupon issues took place,
with offerings concentrated in the 2 V2 per cent wartime
issues and the recently issued securities. Moderate invest­
ment demand was present throughout the period.
Subsequently, the market atmosphere improved for a
time, following press reports suggesting that higher long­
term interest rates would not be used in combating the
balance-of-payments deficit. The President’s February 10
message to Congress presenting a program to deal with
the balance-of-payments deficit was received favorably by
the market. However, increasing concern over the impli­
cations of unfolding developments in Vietnam, combined
with a further drain on the United States gold stock and
lower levels of free reserves published for the February
10 statement week, served to renew the market’s caution.
As a result, prices of most intermediate- and long-term
issues edged irregularly lower from February 9 through
midmonth, when a steadier tone reemerged in the market.
For most of the remainder of the month, the lower
price levels generated some professional short covering
and attracted additional investment demand. The improved
market tone also reflected a reiteration of the Adminis­
tration’s view that long-term borrowing costs are not likely
to rise significantly this year. Toward the end of the month,
renewed hesitancy appeared in the market, based partly
on official indications that monetary policy would be em­
ployed, as necessary, to correct the balance-of-payments
deficit. However, moderate investment demand remained
in evidence, and the distribution of recently issued Treas­
ury securities continued.
The market for Treasury bills also had a hesitant under­
tone in early February, as market participants expressed
uneasiness over the possibility of a shift in monetary policy
to deal with the balance-of-payments problem. While


moderate investment demand persisted throughout this
period, widespread uncertainty generated an expansion
in offerings from professional and other sources and bill
rates moved irregularly higher through February 5. Offer­
ings then contracted, and bill rates held generally steady
from February 8 through midmonth in quiet trading. In
the latter part of the month, the continuation of lower
levels of net reserve availability tended to confirm the
feeling among market participants that there had been a
slight firming in monetary policy. Dealers in Treasury
bills were willing sellers as rates edged higher but there
was good demand, especially from public funds. Toward
the end of the month, the approach of the March corpo­
rate dividend and tax dates contributed to the caution
evident in the market.
At the last regular weekly auction of the month, held
on February 19, average issuing rates were 3.989 per cent
for the new three-month issue and 4.043 per cent for the
new six-month bill— 14 and 10 basis points higher, re­
spectively, than the average rates at the final weekly
auction in January. The February 23 auction of $1 bil­
lion of new one-year bills resulted in an average issuing
rate of 4.062 per cent, compared with 3.945 per cent on
the comparable issue sold a month earlier. The newest
outstanding three- and six-month bills closed the month at
bid rates of 3.99 per cent and 4.04 per cent, respectively.

Some apprehension was also present in the markets for
corporate and tax-exempt bonds in February. Prices
declined in both sectors during this period, with a con­
tinuing heavy flow of new tax-exempt flotations and
rather large inventories of older tax-exempt issues con­
tributing to the hesitant atmosphere in that sector. De­
clines in corporate bond prices were accompanied by the
termination of syndicate price restrictions on a number of
recent issues, with resultant yield increases of about 3 to
9 basis points. In the tax-exempt market, dealers’ ad­
vertised inventories reached a record level of $827 mil­
lion on the final business day of the month, and a heavy
atmosphere prevailed. Over the month as a whole, the
average yield on Moody’s seasoned Aaa-rated corporate
bonds declined by 1 basis point to 4.41 per cent while the
average yield on similarly rated tax-exempt bonds rose by
7 basis points to 3.03 per cent. (These indexes are based
on only a limited number of issues and therefore do not
necessarily reflect market movements fully.)
The volume of new corporate bonds publicly floated
in February amounted to an estimated $185 million, com­
pared with $160 million in January and $270 million in



February 1964. The largest publicly offered new corpor­
ate bond issue during the month consisted of $60 million
of Aa-rated AVi per cent first and refunding mortgage
bonds maturing in 1990. The bonds which will not be
refundable for five years were reoffered to yield 4.44 per
cent and encountered some investor resistance. Syndicate
price restrictions on this issue were terminated late in
the month, and prices subsequently adjusted to somewhat
lower levels. New tax-exempt flotations in February
totaled about $850 million, as against $735 million in Jan­

uary 1965 and $740 million in February 1964. The Blue
List of tax-exempt securities advertised for sale closed the
month at a record $827 million, compared with $679 mil­
lion on January 29. The largest new tax-exempt bond flota­
tion during the period was a $100 million issue of state
water bonds reoffered to yield from 2.90 per cent in 1975
to 3.58 per cent in 2012. The bonds, which were Aa-rated,
were well received. Other new corporate and tax-exempt
bonds publicly offered during the period were accorded
mixed investor receptions.


The Federal Reserve Bank of New York has just
published its fiftieth Annual Report, reviewing the
economic and financial developments of 1964. It
was transmitted to member banks by Alfred Hayes,
President of the Bank, on March 1. The sixty-page
Report tells of solid progress on the domestic front.
However, the United States balance-of-payments
deficit was again too large and remains a serious prob­
lem. Monetary policy during 1964 is described as
essentially easy. The four major sections of the Re­
port are: “Progress in 1964 and the Challenge of
the Future”, “The United States Economy and Fi­
nancial Markets in 1964”, “The International Econ­
omy in 1964”, and “This Bank’s Operations”.
Copies of the Annual Report are available from
the Publications Section, Federal Reserve Bank of
New York, 33 Liberty Street, New York, N.Y.


The President’s Balance-of-Payments Program
On February 10, 1965, the President sent to Congress a message on the
United States balance of payments in which he presented a program aimed at
quickly achieving a substantial improvement in our balance-of-payments position.
This program is clearly of major importance since the balance-of-payments deficit
is a serious national problem.
A major responsibility in carrying out the President's program was placed on
the Federal Reserve System and on the banking and financial community. The
System has already taken the first measures in carrying out the program. On the
day the Presidential message was delivered, the Federal Reserve Banks issued a
circular soliciting the cooperation of the commercial banks and outlining specific
steps to be taken by the banks. On February 18, in Washington, Chairman Martin
and Governor Robertson discussed the request in detail with representatives of the
banking and financial community, following a meeting of these representatives
with the President of the United States. On March 3, Chairman Martin, in a letter
to the chief executive officers of approximately 750 nonbank financial organizations,
set forth tentative guidelines proposed by the Board for the foreign lending activities
of these institutions. Because of the importance of these developments, this Bank's
circular, the remarks of Chairman Martin and Governor Robertson, and Chairman
Martin's letter to the nonbank financial organizations are reprinted below.

C I R C U L A R N O . 5 6 1 6 —F E B R U A R Y l O , 1 9 6 5

To All Member and Nonmember Banks
in the Second Federal Reserve District:
The President of the United States has today sent to
Congress a message setting forth his program to improve
the United States balance of payments.
In addition to stressing the vital importance of stability
of domestic costs and prices, the President’s program in­
(1) Legislation to continue the interest equali­
zation tax through December 31, 1967;
(2) Immediate action under the existing statute
to impose the interest equalization tax on bank loans
with maturity of one year or more;
(3) Legislation to apply the interest equaliza­
tion tax, retroactive to February 10, 1965, to non­
bank credits to foreigners if such credits have a

maturity of one year or more;
(4) A call on the Federal Reserve System— in
cooperation with the Treasury—to work with all
banks to limit lending to foreigners;
(5) Legislation to provide immunity from anti­
trust laws for specified voluntary programs, if
needed, with respect to foreign loans by banks;
(6) A call on the Department of Commerce to
work with corporations with business interests
abroad to effectuate a reduction of their capital out­
(7) A more vigorous export promotion drive;
(8) Encouragement of foreign investment in the
United States through appropriate tax legislation;
(9) Legislation to reduce from $100 to $50 the
duty-free allowance of tourists returning from
abroad, and a “See the U.S.A. First” program de­
signed to increase tourism in the United States;




(10) An intensified effort to reduce military ex­
penditures abroad;
(11) Continued action to minimize adverse
balance-of-payments effects of the foreign aid pro­
The Federal Reserve System shares the President’s
concern about the deterioration in our balance of pay­
ments and his determination to improve our payments
position and to strengthen confidence in the dollar. The
System and the banking and financial community have
been assigned major roles in the President’s program.
The central focus of the program is on measures that
will reduce the outflow of United States capital. Such
flows have been heavy in recent years, and were par­
ticularly so in recent months. In the fourth quarter of
1964, for example, bank credit to foreigners expanded by
$1 billion.
To assure the success of the program, the System is
requesting all banks to limit credits to foreigners that are
not clearly and directly for the purpose of financing ex­
ports of United States goods and services. Over all, the
objective is to hold outstanding credits (including export
credits) to foreigners during 1965 to a level not over 5
per cent above the December 31, 1964 outstandings. In
most instances, this should be the minimum goal for in­
dividual banks. Within the over-all limits, certain coun­
tries may need to be given preferential treatment. You
will be advised later concerning this.
Outstanding credit to foreigners includes loans, accept­
ance credits, deposits with foreign banks (including for­
eign branches and subsidiaries of United States banks),
and investments and acquisitions of assets abroad regard­
less of maturity, whether or not they are subject to the
interest equalization tax.

The Federal Reserve program will be further explained
under the following procedures:
(1) The President is asking representatives of
the financial community to meet with him to discuss
the program set forth in his message to the Con­
(2) The Chairman of the Board of Governors is
asking the bank representatives present at the Pres­
ident’s meeting to confer with him and the other
members of the Board of Governors, and presidents
of the Reserve Banks following that meeting;
(3) Each bank that has foreign loans and invest­
ments outstanding in excess of $5 million will be
requested to meet individually with representatives
of the Reserve Bank of its District for further dis­
cussion of the program;
(4) Technical advisory committees may be in­
vited to meet with Federal Reserve officials concern­
ing problems that arise under the System’s program.
Implementation of the program limiting lending to for­
eigners will result inevitably in some hardships for in­
dividual lenders and borrowers. This is unfortunate, but
the overriding long-run international position of the dol­
lar is dependent upon your wholehearted cooperation.
I am confident that the financial community stands
prepared to join with the Federal Reserve System in this
urgent national effort to restore balance-of-payments
equilibrium and to maintain the dollar “as good as gold”.
In good part, the success of the President’s program de­
pends on us.
A l f r e d H ay e s ,


R E M A R K S BY W IL L IA M M c C . M A R T IN , JR .
C H A IR M A N , B O A R D O F G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M

The Board has invited you here so that we can present
in more detail the part the Federal Reserve and the bank­
ing system as a whole have to play in helping to achieve
the very important balance-of-payments objectives that
President Johnson talked about to you earlier today.
Since you are, for the most part, bankers, let me speak
in bankers’ terms. As a reserve currency country, the
United States occupies a financial position very similar to
that of a bank. On the whole, the position is a good one,
like that of a very solvent bank, with an enviable capital

structure. Over all, we have international assets amount­
ing to about $96 billion. Our total liabilities amount to
only $56 billion, leaving an equity position of $40 billion,
or a ratio of more than 40 per cent. Our reserve position
also is strong. We have gold reserves of $15 billion,
against liquid claims of about $32 billion, the equivalent
of almost 50 cents of cash in the till for every dollar of
“demand” deposits.
On the other hand, we are having a problem that is,
basically, one of secondary liquidity. Our loans and in­


vestments have increased more rapidly than has the de­
sire of others to hold with us “deposits” or dollar claims.
We are therefore faced with “adverse clearing balances”,
and the international liquidity position of our country has
worsened, particularly in the period since 1957. Over the
seven years ending with 1964, our monetary reserves de­
clined by $7 billion and our net position in the Inter­
national Monetary Fund by $1 billion. At the same time,
our short-term liabilities to foreign central banks and gov­
ernments—liabilities we must always be ready to redeem
in gold on demand— rose more than $6 billion, while our
liquid liabilities to private foreigners rose by nearly $5
In the circumstances we, like a bank faced with a sim­
ilar problem, can do either or both of two things. We
can try to increase the willingness of depositors to leave
money with us by offering higher interest rates and other
inducements, or we can cut back, for the time being, on
our lending and investing, or we can do both. We have
already done quite a bit to enhance rate and other attrac­
tions. Since 1960, United States bill rates have moved up
from around 2.25 per cent to nearly 4 per cent, and rates
paid by commercial banks on foreign deposits and other
short-term rates have increased correspondingly. We have
offered foreign central banks the so-called “Roosa Bonds”,
payable in foreign currencies, to afford them protection
against any fluctuation in the dollar’s exchange rate.
When it comes to lending and investing, however, we
have not so far made any move toward curtailment. The
fact is our loans and investments, already at a high level
following a long climb, began showing a further marked
rise a few months ago. It is a sharp but necessary reduc­
tion in the elevation of this rate which the President now
proposes, and which we should like to work with you to


effect. I think you will all agree that this course would
be a sound and prudent one for any bank to follow in
similar circumstances.
It is in the interest of all of us to explore new means of
dealing with the problem before us so that we can find a
correction that is reasonable and workable and that will
not start us down a path whose course and end we cannot
foresee. Perhaps there is no form of action feasible, in­
cluding that the Administration is urging, that is without
pitfalls. The President’s balance-of-payments proposals,
on the other hand, have been chosen in part because they
will not impinge severely on the functions of the market
as the final regulator of business, and also because they
will not burden unduly our domestic prosperity and
growth nor be disruptive of international trade.
Under the President’s new program, the banks are
being asked to assume a central responsibility for restraint.
This has not been an arbitrary decision. It necessarily fol­
lows from the relationship that bank lending has to the
persistent redundancy of dollars in international markets
and the consequent deterioration in our international
I’m sure that all of you here will agree with me that
unless we preserve the integrity and strength of the dollar
throughout the world we cannot possibly sustain the
prosperous economies here and abroad that depend upon
the dollar and the trade it finances. And I’m also sure that
we can count upon your aid in our efforts to see to it that
confidence in the dollar is maintained the world over.
Let us now come down to some particulars of what the
President’s program means for your institutions. For that,
I am going to turn the meeting over to Governor J. L.
Robertson, to whom the Board has delegated responsibil­
ity for the day-to-day conduct of our program.


Let me discuss more closely what the President’s pro­
gram means for banks and other financial institutions—
bearing in mind, of course, that what is asked of them
is only part of the over-all attack on the balance-ofpayments problem.
Given the urgent need for a decisive cutback in capital
outflows this year, what is an appropriate and realistic
target for the banking community? After a great deal of
thought, the Federal Reserve has concluded that any ex­
pansion of bank lending abroad in 1965 should not be
greater— and preferably should be less— than the rate of

growth of domestic lending. Last year, in contrast, foreign
bank lending rose three times as rapidly as domestic loans
and investments.
More dollars are needed abroad day by day, month
by month, to finance trade throughout the free world—
but not as many dollars as we have been providing. Hence
the need for voluntary restraint on dollar outflows— the
need for a curtailment of the rate of expansion of the
outflow. Here is a situation in which we can make prog­
ress by standing still awhile— as the need for dollars
abroad increases.



Therefore, we have asked all banks to restrict credits to expect that extensions or renewals of nonexport credits
to foreigners that are not clearly and directly for the could be cut back to zero, in theory you could (within
purpose of financing exports of United States goods and the Federal Reserve target) increase your export credits
services. While all exports must be financed, we seek to outstanding from $3 billion to $7 billion— enough to
have outstanding credits to foreigners (including export finance an export expansion of 133 per cent!
You will understand, therefore, that I do not intend
credits) held during 1965 to a level not over 5 per cent
above the amount outstanding on December 31, 1964. to lose any sleep about the possibility that our target
In most instances, individual banks should do better— might prove to be too restrictive to permit the granting of
especially the larger ones— to offset the fact that some all bona fide export credits. You will have plenty of
bona fide export credits to foreigners may be granted by opportunity to cut down your nonexport credits, if that
banks that had no outstanding foreign credits at all last should prove necessary in order to make room for any
imaginable expansion of export credits. We recognize
This target must apply to all foreign credits—loans and that in some cases this adjustment cannot be made over­
investments, acceptances, and deposits. And the target night, especially if the credits granted or committed dur­
must be aimed at by all banks. The institutions repre­ ing the first six weeks of this year have already taken you
sented in this room account for most of the outstanding over the target. But you should be able to get within the
United States bank credit to foreigners, but of course we ex­ limit in a reasonably short period of time. In fact, you
pect the smaller banks also to participate in this program. will probably be able to maintain your nonexport credits
This target will take care of any possible increase in to foreigners at a level which will not impose a serious
bona fide export credits. The National Foreign Trade burden either on you or on your domestic or foreign
Council has estimated that United States exports in 1965 customers, since the target level will be one-third higher
will be about 5 per cent higher than the rate for the than your outstanding credits were at the end of 1963.
Within the limits set, we must avoid creating more prob­
fourth quarter of 1964. Hence, an increase in export
credits by 5 per cent of the amount outstanding at the lems than we can solve. Hence, it is assumed that, while
year end should cover the requirements of export expan­ abiding by the target, you will exercise discretion in allo­
sion, assuming no change in the proportion of exports cating loans. Since it would be in your own best interest,
financed by credit. Thus, even if all credits granted by undoubtedly you will concentrate on credits that are
banks to foreigners were export credits, the 5 per cent exempt from the interest equalization tax. This would
mean that in the medium- and long-term field you will
target would still be realistic.
Actually, as you know, only a fraction of bank credits give preference to the less developed nations. Moreover,
to foreigners are used to finance exports of United States again in your own interest as well as in that of the United
goods and services. In the case of long-term credits, we States economy at large, you will presumably avoid any
know that this fraction is only around 15 per cent. In cutback that would inflict a serious burden on less de­
the case of acceptances, it is about 40 per cent. In the veloped countries, whose economic growth is especially
case of other short-term credits, it may well be less than in our national interest, or on such developed countries
in acceptances, but assuming for argument’s sake that the as Canada or Japan (both of which are heavily dependent
fraction were equally high, this would mean that alto­ on United States finance) and the United Kingdom
gether only $3 billion of the total of $10 billion of bank (which, as we all know, is going through a difficult period
credits to foreigners outstanding on December 31, 1964 in its own balance of payments). But again, I am sure
was for the purpose of financing exports of United States this problem will hardly arise in practice since you will
goods and services. An increase of $500 million in such be able to stay within the target limit and still meet the
credits would thus finance an export expansion, not by 5 real needs of these countries.
per cent, but by more than 15 per cent— an expansion
The 5 per cent target is simple and straightforward. It
that, unfortunately, is highly improbable.
requires a minimum of interference with your operations
And in fact, this calculation is still too conservative. and no elaborate machinery or detailed supervision. With
All of your short-term credits and a substantial part of the understanding that bona fide export financing is to be
your long-term credits will be repaid in 1965. Assuming given priority and met adequately, and that serious cut­
— quite conservatively— that only half of your total non­ backs in other credits may need to be avoided for certain
export credits outstanding will fall due this year, an countries, within this 5 per cent target each bank would
additional $3V2 billion would become available this year be free— subject only to any guidelines that may be
to expand your export credits. Although it is unrealistic developed—-to use its resources as it thinks best.


We will need some informational reporting, mainly
of a kind already supplied to the Treasury. Without ade­
quate information, we could not spot points at which
threats to the effectiveness of the program or problems
of its equitable execution might arise; we could not gauge
the success of the program and hence the possibility of
relaxation; and we could not become aware that an un­
cooperative institution was taking advantage of the volun­
tary character of the program to compete unfairly with
other banks. But let me emphasize that we have no desire
to burden you with unnecessary reporting.
We are aware that a number of difficult problems are
likely to arise in carrying out the program. For instance,
relationships with your foreign branches will certainly pose
complicated questions. Another major problem will be
domestic credits which would affect the United States pay­
ments balance as much as credits to foreigners. I am
thinking, for example, of credits to domestic borrowers
that the borrower is going to use for financing operations
abroad other than those directly connected with exports.
Or some of your customers may be eager to increase the
amount of their borrowings for export financing so as to
free their own funds for uses inconsistent with our pro­
gram. These are areas in which we will be working closely
with you, and with the Department of Commerce in its
efforts to limit foreign credits and investments of nonfinancial corporations.
In the case of the so-called Edge Act and Agreement
corporations, the guiding principle, of course, is that banks
with such subsidiaries be neither favored nor penalized in
comparison with other banks. The most equitable solu­
tion, as a rule, seems to be to combine the parent bank
and its subsidiaries for the purpose of calculating the 5
per cent target. Equity investments abroad, which are not
available to banks without Edge Act subsidiaries, may re­
quire special treatment, but we are in a position to deal
with that problem.
In connection with these investments and with banks’
holdings of foreign securities or other foreign assets, prob­
lems may arise with respect to the disposition of those
assets. It would obviously undermine the program if
banks were to sell such assets domestically so as to free
more of their own funds for investment abroad.
Transactions of banks for account of their customers
and fiduciary accounts will also require attention.
I am sure that you will avoid encouraging customers to
extend any credit to foreigners that you could not extend
yourself within the target limits, and that you will avoid
acting as brokers or intermediaries by diverting to them
credits that you would normally finance out of your own
funds in the usual course of business.


We will endeavor to develop, very soon, appropriate
guidelines to deal with these and other problems. In doing
so, we may request representatives of the banking com­
munity to serve on a small technical advisory committee
to assist us. In any event—whether or not we issue guide­
lines or have an advisory committee— officers of our Re­
serve Banks will be in touch with you on an individual
basis to assist in working out problems that you encounter.
As you know, this is not the only group that is being
asked to make a strenuous voluntary effort to implement
the President’s program. You were joined at the White
House today by representatives of leading business cor­
porations that are being asked to make similar efforts.
But the contribution that the banking system itself can
make is crucial. And your economic interest in the suc­
cess of the whole program and in the consequent continu­
ing strength of the dollar is particularly strong.
The place of nonbank financial institutions in the Pres­
ident’s program is somewhat different. To the best of my
knowledge—which is admittedly imperfect in this field—
most of these institutions have played a minor role in the
recent expansion of credits to foreigners, although some of
them have purchased large amounts of IET-exempt for­
eign bonds and also have placed part of their liquid funds
abroad. What we must ask from them, at this time, is
that their foreign credits and investments in 1965 also be
kept within limits comparable to those we are suggesting
for the banking community, and that no additional liquid
funds be placed abroad.
Obviously, any potential foreign borrower whose credit
application must be rejected by a commercial bank on
account of the voluntary restraint program will be tempted
to tap other credit sources. The pressure on investment
houses, finance companies, insurance companies, and pen­
sion funds to extend foreign credits not subject to the IET
—perhaps even credits that are— will no doubt increase
considerably. Many if not most of these potential bor­
rowers will be excellent risks and will offer excellent terms.
It is asking a great deal when we request these institutions
to resist the temptation. But, of course, we must do so.
If such credits were granted, restraint by the banking sys­
tem would be in vain. From the point of view of our pay­
ments balance, it makes no difference at all whether a
credit to a foreigner is extended by a bank or by some
other lender.
One problem involved in charting a course for non­
bank financial institutions is the relative lack of data re­
garding their foreign lending. Only a few of them have
undertaken transactions that are reportable on Treasury
foreign exchange forms. We shall certainly have to re­
quest additional reports from these institutions.



Moreover, in the case of some nonbank institutions the
problem of customer accounts will probably be even more
troublesome than in the case of banks. And in the case
of insurance companies, obvious exceptions must be made
for foreign investments connected with foreign coverage
requirements— exceptions that will have to be analogous
to those made for the same reason in the IET legislation.
But there is no denying that the Federal Reserve is far
less conversant with the practices and problems of non­
bank lenders than with those of banks. Hence, discussion
of doubtful points with us in the System by the repre­
sentatives of these financial institutions will be particularly

As you see, the success of this entire sector of the Pres­
ident’s program depends on your acceptance, your dedi­
cation, and your unremitting effort to achieve its purpose.
Given the present circumstances of our nation’s economy
— and the desire of all of us to avoid rigid controls—the
Government believes that, in this area, it would be in the
best interest of all to rely on voluntary restraint— rather
than on laws and regulations—to reduce the outflow of
dollars on capital account. With your cooperation, the
country’s balance of payments in 1965 can be leveled in
the direction of full equilibrium. Your actions could have
a decisive effect, and world confidence in the dollar would
reflect it.


As you know, the President has launched a program
designed to improve our international balance-of-payments
position. An important element of the program is the
President’s request that banks, other financial institutions,
and business corporations exercise all practicable restraint
in their foreign lending and investment activities. The De­
partment of Commerce has the responsibility for admin­
istering this voluntary program, so far as business corpo­
rations are concerned. And the Federal Reserve System,
in cooperation with the Treasury, has been asked to carry
the program to the financial institutions of the country.
Governor J. L. Robertson is coordinating the System’s
activities in this matter here at the Board.
The purpose of my letter is to acquaint you with the
tentative guidelines on foreign lending that we are pro­
posing for 1965. These are detailed in the attached cir­
cular. In addition, within a few days you will receive a
statistical questionnaire from the Federal Reserve Bank
in your District designed to supply some bench-mark in­
formation on the extent of your foreign lending and in­
vestment activities, if any. This information will help us
judge the appropriateness of our guideline objectives.
If you have questions concerning the actions that can
be taken to effectuate the program, we urge you to con­
tact the Federal Reserve Bank. Its officers will be glad to
counsel with you. Your support in achieving the Presi­
dent’s goal— one which is essential to the continued
strength of the dollar at home and abroad— will be deeply

Sincerely yours,
(Signed) W m . McC. M a r t in , J r .


1. Deposits and money market instruments. Holdings
of liquid funds abroad should be limited to the 1964 yearend total, and the longer term objective is to reduce such
investments in a gradual and orderly manner to the De­
cember 31. 1963 level. Included in this category of liquid
investments are dollar-denominated deposits held in for­
eign banks and foreign branches of United States banks;
short-term securities of foreign governments and their in­
strumentalities; foreign commercial paper, finance com­
pany credits, and bankers’ acceptances; and all other nego­
tiable instruments maturing in one year or less. Foreign
bank deposits denominated in local currencies may be
maintained to the extent needed to support ordinary busi­
ness operations in that country.
2. Foreign credits with original maturities of five years
or less. Holdings of investments other than those listed
above, and written to have final maturities in five years or
less, should not be increased by more than 5 per cent dur­
ing calendar 1965. Included in this category are securi­
ties, mortgage and other loans, and credits of all other
types. The 5 per cent growth ceiling is to be measured
against the total of all such holdings at the end of 1964,
without regard to type of instrument or country of origin.
Priority should be given to credits that directly finance
United States exports, however, and special care should
be taken to avoid the extension of credit to borrowers who
would have been accommodated by commercial banks in
the absence of the voluntary restraint program.


3. Foreign credits with original maturities over five
years. In the area of long-term financing, there would
seem to be no present need for a guideline under the vol­
untary restraint program. Developments in the long-term
credit area will be followed closely, however, so that we
may be alert to excessive foreign financing demands if
they should materialize. The issues of industrialized coun­
tries are subject to the Interest Equalization Tax, and have
been very small in volume since that tax became effective.
Borrowing by the less developed countries has been rela­
tively light also, and in any event should not be substan­
tially restricted in view of our national policy encouraging
productive investment in these countries. In the case of
Canada and Japan, separate agreements will serve to limit
aggregate financing in United States capital markets.
4. Direct investment in foreign branches and subsidi­


aries. Some types of financial institutions may conduct
operations abroad through foreign offices, branches, and
subsidiaries. In such cases, institutions are urged to limit
their additional investment in these operations to the full­
est extent practicable during 1965. Particular care should
be taken to restrict any increase in net loans and advances
outstanding to foreign branches and subsidiaries; ordi­
narily, expansion in such credit during 1965 should be
held within 5 per cent.
In the case of insurance carriers doing business abroad,
these guidelines are not applicable to holdings of foreign
investments in amounts up to 110 per cent of foreign policy
Board of Governors,
Federal Reserve System.
March 3, 1965.